Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; 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, 64539-64552 [2021-25129]

Download as PDF Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Pursuant to Section 19(b)(3)(A)(ii) of the Act,8 the Exchange has designated this proposal as establishing or changing a due, fee, or other charge imposed by the self-regulatory organization on any person, whether or not the person is a member of the self-regulatory organization, which renders the proposed rule change effective upon filing. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. 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– NASDAQ–2021–088 on the subject line. khammond on DSKJM1Z7X2PROD with NOTICES 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–NASDAQ–2021–088. 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 8 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 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–NASDAQ–2021–088 and should be submitted on or before December 9, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–25130 Filed 11–17–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–93559; File No. SR– CboeBZX–2021–019] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; 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 November 12, 2021. I. Introduction On March 1, 2021, 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 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of the VanEck 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 March 19, 2021.3 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 91326 (Mar. 15, 2021), 86 FR 14987 (‘‘Notice’’). Comments 1 15 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 64539 On April 28, 2021, pursuant to Section 19(b)(2) of the Exchange Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 On June 16, 2021, the Commission instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 6 to determine whether to approve or disapprove the proposed rule change.7 On September 8, 2021, the Commission designated a longer period for Commission action on the proposed rule change.8 This order disapproves the proposed rule change. The Commission concludes that BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), in particular, the requirement 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.’’ 9 When considering whether BZX’s proposal to list and trade the Shares is designed to prevent fraudulent and manipulative acts and practices, the Commission applies the same standard used in its orders considering previous proposals to list bitcoin 10-based on the proposed rule change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021019/srcboebzx2021019.htm. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 91695, 86 FR 24066 (May 5, 2021). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 92196, 86 FR 32985 (June 23, 2021). 8 See Securities Exchange Act Release No. 92894, 86 FR 51203 (Sept. 14, 2021). On September 30, 2021, the Exchange filed Amendment No. 1 to the proposed rule change and withdrew it on October 1, 2021. On October 1, 2021, the Exchange filed Amendment No. 2 to the proposed rule change; and on November 4, 2021, the Exchange filed Amendment No. 3 to the proposed rule change. As discussed below, see Section III.E, infra, the Commission views these amendments as untimely. These amendments also do not materially alter the substance of the proposed rule change, and therefore they are not subject to notice and comment. Furthermore, even if these amendments had been timely filed, they would not alter the Commission’s conclusion that the Exchange’s proposal is not consistent with the Exchange Act. See Section III.E. 9 15 U.S.C. 78f(b)(5). 10 Bitcoins are digital assets that are issued and transferred via a decentralized, open-source protocol used by a peer-to-peer computer network through which transactions are recorded on a public transaction ledger known as the ‘‘bitcoin blockchain.’’ The bitcoin protocol governs the creation of new bitcoins and the cryptographic system that secures and verifies bitcoin transactions. See, e.g., Notice, 86 FR 14988. E:\FR\FM\18NON1.SGM 18NON1 64540 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES commodity trusts and bitcoin-based trust issued receipts.11 As the Commission has explained, an exchange that lists bitcoin-based exchange-traded products (‘‘ETPs’’) can meet its obligations under Exchange Act Section 6(b)(5) by demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets.12 The standard requires such surveillance-sharing agreements since they ‘‘provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ 13 The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillancesharing agreement with markets trading the underlying assets for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market 11 See Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (Aug. 1, 2018) (SR– BatsBZX–2016–30) (‘‘Winklevoss Order’’); Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, To Amend NYSE Arca Rule 8.201–E (Commodity-Based Trust Shares) and To List and Trade Shares of the United States Bitcoin and Treasury Investment Trust Under NYSE Arca Rule 8.201–E, Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 12595 (Mar. 3, 2020) (SR–NYSEArca–2019–39) (‘‘USBT Order’’). See also Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR– NYSEArca–2016–101) (‘‘SolidX Order’’). The Commission also notes that orders were issued by delegated authority on the following matters: Order Disapproving a Proposed Rule Change To List and Trade the Shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF, Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (NYSEArca–2017–139) (‘‘ProShares Order’’); Order Disapproving a Proposed Rule Change To List and Trade the Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR–CboeBZX–2018– 001) (‘‘GraniteShares Order’’). 12 See USBT Order, 85 FR 12596. See also Winklevoss Order, 83 FR 37592 n.202 and accompanying text (discussing previous Commission approvals of commodity-trust ETPs); GraniteShares Order, 83 FR 43925–27 nn.35–39 and accompanying text (discussing previous Commission approvals of commodity-futures ETPs). 13 See Amendment to Rule Filing Requirements for Self-Regulatory Organizations Regarding New Derivative Securities Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70959 (Dec. 22, 1998) (‘‘NDSP Adopting Release’’). See also Winklevoss Order, 83 FR 37594; ProShares Order, 83 FR 43936; GraniteShares Order, 83 FR 43924; USBT Order, 85 FR 12596. VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 manipulation, as well as violations of exchange rules and applicable federal securities laws and rules.14 The hallmarks of a surveillance-sharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.15 In the context of this standard, the terms ‘‘significant market’’ and ‘‘market of significant size’’ include a market (or group of markets) as to which (a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist in detecting and deterring misconduct, and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.16 A surveillance-sharing agreement must be entered into with a ‘‘significant market’’ to assist in detecting and deterring manipulation of the ETP, because a person attempting to manipulate the ETP is reasonably likely to also engage in trading activity on that ‘‘significant market.’’ 17 Consistent with this standard, for the commodity-trust ETPs approved to date for listing and trading, there has been in every case at least one significant, regulated market for trading futures on the underlying commodity—whether gold, silver, platinum, palladium, or copper—and the ETP listing exchange has entered into surveillance-sharing agreements with, or held Intermarket Surveillance Group (‘‘ISG’’) membership in common with, that market.18 Moreover, the surveillance-sharing agreements have been consistently present whenever the Commission has approved the listing and trading of derivative securities, even where the underlying securities were also listed on national securities exchanges—such as 14 See NDSP Adopting Release, 63 FR 70959. Winklevoss Order, 83 FR 37592–93; Letter from Brandon Becker, Director, Division of Market Regulation, Commission, to Gerard D. O’Connell, Chairman, Intermarket Surveillance Group (June 3, 1994), available at https://www.sec.gov/divisions/ marketreg/mr-noaction/isg060394.htm. 16 See Winklevoss Order, 83 FR 37594. This definition is illustrative and not exclusive. There could be other types of ‘‘significant markets’’ and ‘‘markets of significant size,’’ but this definition is an example that will provide guidance to market participants. See id. 17 See USBT Order, 85 FR 12597. 18 See Winklevoss Order, 83 FR 37594. 15 See PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 options based on an index of stocks traded on a national securities exchange—and were thus subject to the Commission’s direct regulatory authority.19 Listing exchanges have also attempted to demonstrate that other means besides surveillance-sharing agreements will be sufficient to prevent fraudulent and manipulative acts and practices, including that the bitcoin market as a whole or the relevant underlying bitcoin market is ‘‘uniquely’’ and ‘‘inherently’’ resistant to fraud and manipulation.20 In response, the Commission has agreed that, if a listing exchange could establish that the underlying market inherently possesses a unique resistance to manipulation beyond the protections that are utilized by traditional commodity or securities markets, it would not necessarily need to enter into a surveillance-sharing agreement with a regulated significant market.21 Such resistance to fraud and manipulation, however, must be novel and beyond those protections that exist in traditional commodity markets or equity markets for which the Commission has long required surveillance-sharing agreements in the context of listing 19 See USBT Order, 85 FR 12597; Securities Exchange Act Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) (SR–Amex–93–28) (order approving listing of options on American Depository Receipts). The Commission has also required a surveillance-sharing agreement in the context of index options even when (i) all of the underlying index component stocks were either registered with the Commission or exempt from registration under the Exchange Act; (ii) all of the underlying index component stocks traded in the U.S. either directly or as ADRs on a national securities exchange; and (iii) effective international ADR arbitrage alleviated concerns over the relatively smaller ADR trading volume, helped to ensure that ADR prices reflected the pricing on the home market, and helped to ensure more reliable price determinations for settlement purposes, due to the unique composition of the index and reliance on ADR prices. See Securities Exchange Act Release No. 26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR–Amex–87–25) (stating that ‘‘surveillance-sharing agreements between the exchange on which the index option trades and the markets that trade the underlying securities are necessary’’ and that ‘‘[t]he exchange of surveillance data by the exchange trading a stock index option and the markets for the securities comprising the index is important to the detection and deterrence of intermarket manipulation.’’). And the Commission has required a surveillance-sharing agreement even when approving options based on an index of stocks traded on a national securities exchange. See Securities Exchange Act Release No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR–Amex–91–22) (stating that surveillancesharing agreements ‘‘ensure the availability of information necessary to detect and deter potential manipulations and other trading abuses’’). 20 See USBT Order, 85 FR 12597. 21 See Winklevoss Order, 83 FR 37580, 37582–91 (addressing assertions that ‘‘bitcoin and bitcoin [spot] markets’’ generally, as well as one bitcoin trading platform specifically, have unique resistance to fraud and manipulation); see also USBT Order, 85 FR 12597. E:\FR\FM\18NON1.SGM 18NON1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices derivative securities products. No listing exchange has satisfied its burden to make such demonstration.22 Here, BZX contends that approval of the proposal is consistent with Section 6(b)(5) of the Exchange Act, in particular Section 6(b)(5)’s requirement 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.23 As discussed in more detail below, BZX asserts that the proposal is consistent with Section 6(b)(5) of the Exchange Act because the Exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size,24 and there exist other means to prevent fraudulent and manipulative acts and practices that are sufficient to justify dispensing with the requisite surveillance-sharing agreement.25 Although BZX recognizes the Commission’s focus on potential manipulation of bitcoin ETPs in prior disapproval orders, BZX argues that such manipulation concerns have been sufficiently mitigated, and that the growing and quantifiable investor protection concerns should be the central consideration of the Commission.26 Specifically, as discussed in more detail below, the Exchange asserts that the significant increase in trading volume in bitcoin futures on the Chicago Mercantile Exchange (‘‘CME’’), the growth of liquidity in the spot market for bitcoin, and certain features of the Shares and the Benchmark (as defined herein) mitigate potential manipulation concerns to the point that the investor protection issues that have arisen from the rapid growth of over-the-counter (‘‘OTC’’) bitcoin funds, including premium volatility and management fees, should be the central consideration as the Commission determines whether to approve this proposal.27 Further, BZX believes that the proposal would give U.S. investors access to bitcoin in a regulated and transparent exchange-traded vehicle that would act to limit risk to U.S. investors. According to BZX, the proposed listing and trading of the Shares would mitigate risk by: (i) Reducing premium volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks associated with investing in 22 See supra note 11. Notice, 86 FR 14993–95. 24 See id. at 14994–95. 25 See id. at 14995. 26 See id. at 14990. 27 See id. at 14994. 17:11 Nov 17, 2021 II. Description of the Proposed Rule Change As described in more detail in the Notice,29 the Exchange proposes to list 28 See id. at 14990. Notice, supra note 3. See also draft Registration Statement on Form S–1, dated December 30, 2020, submitted to the Commission by VanEck Digital Assets, LLC (‘‘Sponsor’’) on behalf of the Trust, and Amendment No. 1 thereto, 23 See VerDate Sep<11>2014 operating companies that are imperfect proxies for bitcoin exposure; and (iv) providing an alternative to custodying spot bitcoin.28 In the analysis that follows, the Commission examines whether the proposed rule change is consistent with Section 6(b)(5) of the Exchange Act by addressing: In Section III.B.1 assertions that other means besides surveillancesharing agreements will be sufficient to prevent fraudulent and manipulative acts and practices; in Section III.B.2 assertions that BZX has entered into a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin; and in Section III.C assertions that the proposal is consistent with the protection of investors and the public interest. As discussed further below, BZX repeats various assertions made in prior bitcoinbased ETP proposals that the Commission has previously addressed and rejected—and more importantly, BZX does not respond to the Commission’s reasons for rejecting those assertions but merely repeats them. The Commission concludes that BZX has not established that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The Commission further concludes that BZX has not established that it has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin. As a result, the Commission is unable to find that the proposed rule change is consistent with the statutory requirements of Exchange Act Section 6(b)(5). The Commission again emphasizes that its disapproval of this proposed rule change does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment. Rather, the Commission is disapproving this proposed rule change because, as discussed below, BZX has not met its burden to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5). 29 See Jkt 256001 PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 64541 and trade the Shares of the Trust under BZX Rule 14.11(e)(4), which governs the listing and trading of Commodity-Based Trust Shares on the Exchange. The investment objective of the Trust is for the Shares to reflect the performance of the MVIS® CryptoCompare Bitcoin Benchmark Rate (‘‘Benchmark’’), less the expenses of the Trust’s operations.30 The Benchmark will be used to calculate the Trust’s net asset value (‘‘NAV’’). The Benchmark is designed to be a U.S. dollar price for bitcoin, and there is no component other than bitcoin in the Benchmark.31 The Benchmark is derived from trade prices of bitcoin on certain bitcoin spot platforms. The current platform composition of the Benchmark is Bitstamp, Coinbase, Gemini, itBit, and Kraken.32 The Benchmark is calculated using a methodology that captures trade prices and sizes from the aforementioned platforms. The methodology examines twenty threeminute periods leading up to 4:00 p.m. E.T. and calculates an equal-weighted average of the volume-weighted median price of these twenty three-minute periods, removing the highest and lowest contributed prices.33 Each Share represents a fractional undivided beneficial interest in the Trust’s net assets. The Trust’s assets will consist of bitcoin held by the Custodian on behalf of the Trust. The Trust generally does not intend to hold cash or cash equivalents. However, there may be situations where the Trust will unexpectedly hold cash on a temporary basis.34 filed June 4, 2021 (‘‘Amended Registration Statement’’). 30 Delaware Trust Company is the trustee, and State Street Bank and Trust Company will be the administrator (‘‘Administrator’’) and transfer agent. Van Eck Securities Corporation will be the marketing agent in connection with the creation and redemption of Shares. Van Eck Securities Corporation provides assistance in the marketing of the Shares. A third-party regulated custodian (‘‘Custodian’’) will be responsible for custody of the Trust’s bitcoin. See Notice, 86 FR 14995. The Amended Registration Statement indicates that Gemini Trust Company, LLC is the Custodian. See Amended Registration Statement at (i). 31 See Notice, 86 FR 14995–96. 32 According to BZX, the Benchmark constituents are the same constituent platforms as the CME CF Bitcoin Reference Rate and are selected using a methodology that utilizes a combination of qualitative and quantitative metrics to analyze a data set across eight categories of evaluation: Legal/ regulation, ‘‘know-your-customer’’/transaction risk, data provision, security, team/platform, asset quality/diversity, market quality, and negative events. Based on these evaluations, the top five platforms by rank are selected for inclusion in the Benchmark, and the constituent platforms are reassessed on a semi-annual basis. See id. at 14996 n.65. 33 See id. at 14996. 34 See id. at 14995. E:\FR\FM\18NON1.SGM 18NON1 64542 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices The Administrator will determine the NAV and NAV per Share of the Trust on each day that the Exchange is open for regular trading, as promptly as practical after 4:00 p.m. E.T. The NAV of the Trust is the aggregate value of the Trust’s assets less its estimated accrued but unpaid liabilities (which include accrued expenses). In determining the Trust’s NAV, the Administrator values the bitcoin held by the Trust based on the price set by the Benchmark as of 4:00 p.m. E.T.35 The Trust will provide information regarding the Trust’s bitcoin holdings, as well as an Intraday Indicative Value (‘‘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.). The IIV will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Trust’s bitcoin holdings during the trading day.36 When the Trust sells or redeems its Shares, it will do so in ‘‘in-kind’’ transactions in blocks of 50,000 Shares. When creating the Shares, authorized participants will deliver, or facilitate the delivery of, bitcoin to the Trust’s account with the Custodian in exchange for the Shares, and, when redeeming the Shares, the Trust, through the Custodian, will deliver bitcoin to such authorized participants.37 III. Discussion A. The Applicable Standard for Review The Commission must consider whether BZX’s proposal is consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act 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.’’ 38 khammond on DSKJM1Z7X2PROD with NOTICES 35 See id. at 14996. 36 See id. 37 See id. at 14995. 38 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a proposed rule change filed by a national securities exchange if it does not find that the proposed rule change is consistent with the applicable requirements of the Exchange Act. Exchange Act Section 6(b)(5) states that an exchange shall not be registered as a national securities exchange unless the Commission determines that ‘‘[t]he rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 Under the Commission’s Rules of Practice, the ‘‘burden to demonstrate that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization [‘SRO’] that proposed the rule change.’’ 39 The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding,40 and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the applicable rules and regulations.41 Moreover, ‘‘unquestioning reliance’’ on an SRO’s representations in a proposed rule change is not sufficient to justify Commission approval of a proposed rule change.42 B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and Practices (1) Assertions That Other Means Besides Surveillance-Sharing Agreements Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and Practices As stated above, the Commission has recognized that a listing exchange could demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with a comprehensive surveillance-sharing agreement with a regulated market of significant size, including by demonstrating that the bitcoin market as a whole or the relevant underlying bitcoin market is uniquely and inherently resistant to fraud and manipulation.43 Such national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this title matters not related to the purposes of this title or the administration of the exchange.’’ 15 U.S.C. 78f(b)(5). 39 Rule 700(b)(3), Commission Rules of Practice, 17 CFR 201.700(b)(3). 40 See id. 41 See id. 42 Susquehanna Int’l Group, LLP v. Securities and Exchange Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (‘‘Susquehanna’’). 43 See USBT Order, 85 FR 12597 n.23. The Commission is not applying a ‘‘cannot be manipulated’’ standard. Instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 resistance to fraud and manipulation must be novel and beyond those protections that exist in traditional commodities or securities markets.44 BZX asserts that bitcoin is resistant to price manipulation. According to BZX, the geographically diverse and continuous nature of bitcoin trading render it difficult and prohibitively costly to manipulate the price of bitcoin.45 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 challenging.46 To the extent that there are bitcoin platforms engaged in or allowing wash trading or other activity intended to manipulate the price of bitcoin on other markets, such pricing does not normally impact prices on other platforms because participants will generally ignore markets with quotes that they deem non-executable.47 BZX further argues that 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.48 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 trading venue.49 As a result, BZX concludes that the potential for manipulation on a bitcoin trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences.50 Several commenters share BZX’s view that the nature of the bitcoin market makes it resistant to price manipulation.51 One commenter, in contentions and to establish that the requirements of the Exchange Act have been met. See id. 44 See id. at 12597. 45 See Notice, 86 FR 14994 n.54. 46 See id. 47 See id. 48 See id. 49 See id. 50 See id. 51 See letters from: Bryan B. Solstin, dated June 17, 2021; Anthony Ellis, dated June 17, 2021 (‘‘Ellis Letter’’); Courtney Rye, dated June 17, 2021 (‘‘Rye Letter’’); and Frank Rose, dated June 17, 2021 (‘‘Rose Letter’’). These commenters assert that, in addition to arbitrage, bitcoin’s large market capitalization, liquidity, decentralized design, finite quantity, and transparent public ledger make it less susceptible to fraud and manipulation. Another commenter remarks that, unlike other commodities on which exchange-traded funds are based, bitcoin E:\FR\FM\18NON1.SGM 18NON1 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES particular, agrees that arbitrage would very quickly close any bitcoin price disparities between trading platforms.52 As with the previous proposals, the Commission here concludes that the record does not support a finding that the bitcoin market is inherently and uniquely resistant to fraud and manipulation. BZX asserts that, because of how bitcoin trades occur, including through continuous means and through fragmented platforms, arbitrage across the bitcoin platforms essentially helps to keep global bitcoin prices aligned with one another, thus hindering manipulation. The Exchange, however, does not provide any data or analysis to support its assertions, either in terms of how closely bitcoin prices are aligned across different bitcoin trading venues or how quickly price disparities may be arbitraged away.53 Likewise, the has a non-manipulable monetary supply. See letter from Erik Aronesty, dated June 17, 2021 (‘‘Aronesty Letter’’). The Custodian, in a comment letter, asserts that the growth of the overall bitcoin market and related growth of regulated bitcoin derivatives demonstrate that the depth of the market prevents manipulation of the price of bitcoin in a manner that could affect the share price of an ETP. See letter from Gemini Trust Company, LLC, dated October 15, 2021 (‘‘Gemini Letter’’), at 2. Other commenters disagree. These commenters view the bitcoin market to be prone to fraud and manipulation. These commenters described the bitcoin market as: Fraught with manipulation from memes and tweets that can move its price significantly (see letter from Eddie, dated March 28, 2021 (‘‘Eddie Letter’’)); a haven for money laundering, wash trading, and other criminal and/ or collusive activity (see letters from: Anonymous, dated June 16, 2021; A. Peterson, dated June 17, 2021 (‘‘Peterson Letter’’)); a pyramid scheme that is heavily rigged (see Peterson Letter) and from which the only way to profit is to sell to a ‘‘greater fool’’ who comes later at a higher price (see letter from Mark Pile, dated June 17, 2021 (‘‘Pile Letter’’)); fraught with accounting and liquidity irregularities (see Pile Letter); leading to prices pumped up by fraudulent tokens (see Peterson Letter ) and questionable ‘‘stablecoin’’ (see Petterson Letter; Pile Letter; letter from Michael Mims, dated June 17, 2021); and, along with other digital assets and the blockchains on which they rely, as having complexity that makes users vulnerable to fraud (see letter from Lourdes Ciao, dated June 24, 2021 (‘‘Ciao Letter’’), at 1). Finally, some commenters acknowledged that bitcoin prices are susceptible to attempted influence, but no more than other highly volatile stocks, and thus they contend that bitcoin is suitable as an underlying asset for an ETP (see letters from: Mike Bofman, dated June 16, 2021 (‘‘Bofman Letter’’); Matthew Apodaca, dated July 13, 2021 (‘‘Apodaca Letter’’)). 52 See Ellis Letter. 53 For example, the Amended Registration Statement states that ‘‘[i]f increases in throughput on the Bitcoin network lag behind growth in usage of bitcoin, average fees and settlement times may increase considerably . . . . which could adversely impact the value of the Shares.’’ See Amended Registration Statement at 20. BZX does not provide data or analysis to address, among other things, whether such risks of increased fees and bitcoin transaction settlement times may affect the arbitrage effectiveness that BZX asserts. See also infra note 70 and accompanying text (referencing statements made in the Amended Registration Statement that contradict assertions made by BZX). VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 commenter who concurs with BZX that arbitrage would very quickly close any bitcoin price disparities between trading platforms provides no empirical evidence to substantiate the commenter’s claim. As stated above, ‘‘unquestioning reliance’’ on an SRO’s representations in a proposed rule change is not sufficient to justify Commission approval of a proposed rule change.54 Further, efficient price arbitrage is not sufficient to support the finding that a market is uniquely and inherently resistant to manipulation such that the Commission can dispense with surveillance-sharing agreements.55 The Commission has stated, for example, that even for equity options based on securities listed on national securities exchanges, the Commission relies on surveillance-sharing agreements to detect and deter fraud and manipulation.56 Here, the Exchange provides no evidence to support its assertion of efficient price arbitrage across bitcoin platforms, let alone any evidence that price arbitrage in the bitcoin market is novel or unique so as to warrant the Commission dispensing with the requirement of a surveillancesharing agreement. Moreover, BZX does not take into account that a market participant with a dominant ownership position would not find it prohibitively expensive to overcome the liquidity supplied by arbitrageurs and could use dominant market share to engage in manipulation.57 In addition, the Exchange makes the unsupported claim that bitcoin prices on platforms with fake volume do not influence the real price of bitcoin. The Exchange also asserts that, to the extent that there are bitcoin platforms engaged in or allowing wash trading or other manipulative activities, market participants will generally ignore those platforms. However, without the necessary data, such as lead-lag or other similar analyses, or other evidence, the Commission has no basis on which to conclude that bitcoin platforms are insulated from prices of others that engage in or permit fraud or manipulation.58 54 See supra note 42. 55 See Winklevoss Order, 83 FR 37586; SolidX Order, 82 FR 16256–57; USBT Order, 85 FR 12601. 56 See, e.g., USBT Order, 85 FR 12601. 57 See, e.g., Winklevoss Order, 83 FR 37584; USBT Order, 85 FR 12600–01. 58 See USBT Order, 85 FR 12601. See also infra notes 114–115 and accompanying text (explaining the lead-lag analysis as central to understanding whether it is reasonably likely that a would-be manipulator of the proposed ETP would have to trade on the CME bitcoin futures market to successfully manipulate the proposed ETP). PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 64543 Additionally, the continuous nature of bitcoin trading does not eliminate manipulation risk, and neither does linkages among markets, as BZX asserts.59 Even in the presence of continuous trading or linkages among markets, formal (such as those with consolidated quotations or routing requirements) or otherwise (such as in the context of the fragmented, global bitcoin markets), manipulation of asset prices, as a general matter, can occur simply through trading activity that creates a false impression of supply or demand.60 BZX also argues that the significant liquidity in the bitcoin spot market and the impact of market orders on the overall price of bitcoin mean that attempting to move the price of bitcoin is costly and has grown more expensive over the past year.61 According to BZX, in January 2020, for example, the cost to buy or sell $5 million worth of bitcoin averaged roughly 30 basis points (compared to 10 basis points in February 2021) with a market impact of 50 basis points (compared to 30 basis points in February 2021). For a $10 million market order, the cost to buy or sell was roughly 50 basis points (compared to 20 basis points in February 2021) with a market impact of 80 basis points (compared to 50 basis points in February 2021).62 BZX contends that as the liquidity in the bitcoin spot market increases, it follows that the impact of $5 million and $10 million orders will continue to decrease.63 One commenter concurs with BZX. The commenter asserts that the amount of money it would take to actually manipulate the bitcoin spot market would be ‘‘unfathomable’’ and so costprohibitive that it would be a losing strategy. The commenter also asserts that, given the daily trading volume of bitcoin futures, including those traded on CME, it would be extraordinarily difficult for a single entity to manipulate the market.64 However, the data furnished by BZX regarding the cost to move the price of bitcoin, and the market impact of such attempts, are incomplete. BZX does not 59 See Winklevoss Order, 83 FR 37585 n.92 and accompanying text. 60 See id. at 37585. 61 See Notice, 86 FR 14995. 62 On the other hand, regarding the amounts needed to move the bitcoin spot price, one commenter cites a Bank of America March 2021 research report that provides that $93 million in net inflows increases the bitcoin price by one percent, compared with nearly $1.87 billion for a corresponding increase in the price of gold. See Eddie Letter. 63 See Notice, 86 FR 14995. 64 See Ellis Letter. E:\FR\FM\18NON1.SGM 18NON1 64544 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES provide meaningful analysis pertaining to how these figures compare to other markets 65 or why one must conclude, based on the numbers provided, that the bitcoin market is costly to manipulate. Further, BZX’s analysis of the market impact of a mere two sample transactions is not sufficient evidence to conclude that the bitcoin market is resistant to manipulation.66 Even assuming that the Commission agreed with BZX’s premise, that it is costly to manipulate the bitcoin market, and it is becoming increasingly so, any such evidence speaks only to establish that there is some resistance to manipulation, not that it establishes unique resistance to manipulation to warrant dispensing with the standard surveillance-sharing agreement.67 The Commission thus concludes that the record does not demonstrate that the nature of bitcoin trading renders the bitcoin market inherently and uniquely resistant to fraud and manipulation. Moreover, BZX does not sufficiently contest the presence of possible sources of fraud and manipulation in the bitcoin spot market generally that the Commission has raised in previous orders, which have included (1) ‘‘wash’’ trading,68 (2) persons with a dominant position in bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin network and trading platforms, (4) malicious control of the bitcoin network, (5) trading based on material, non-public information, including the dissemination of false and misleading information, (6) manipulative activity involving the purported ‘‘stablecoin’’ Tether (USDT), and (7) fraud and manipulation at bitcoin trading platforms.69 In addition, BZX does not address risk factors specific to the bitcoin blockchain and bitcoin platforms, described in the Trust’s Amended Registration 65 While one commenter makes a comparison to the gold market (see Eddie Letter and supra note 62), this comparison undercuts BZX’s argument that the bitcoin market is costly to manipulate by citing to a report that purports to show that it is far less costly to move the price of bitcoin than gold. 66 Aside from stating that the ‘‘statistics are based on samples of bitcoin liquidity in USD (excluding stablecoins or Euro liquidity) based on executable quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during February 2021,’’ the Exchange provides no other information pertaining to the methodology used to enable the Commission to evaluate these findings or their significance. See Notice, 86 FR 14494–95 nn.60–61. 67 See USBT Order, 85 FR 12601. 68 See supra note 58 and accompanying text. 69 See USBT Order, 85 FR 12600–01 & nn.66–67 (discussing J. Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28, 2019), available at https:// ssrn.com/abstract=3195066 and published in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR 37585–86. VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 Statement, that undermine the argument that the bitcoin market is inherently resistant to fraud and manipulation. For example, the Amended Registration Statement acknowledges that ‘‘bitcoin [platforms] on which bitcoin trades are relatively new and, in some cases, unregulated, and, therefore, may be more exposed to fraud and security breaches than established, regulated exchanges for other financial assets or instruments’’; that ‘‘[t]he trading for spot bitcoin occurs on multiple trading venues that have various levels and types of regulation, but are not regulated in the same manner as traditional stock and bond exchanges’’ and if these spot markets ‘‘do not operate smoothly or face technical, security or regulatory issues, that could impact the ability of Authorized Participants to make markets in the Shares’’ which could lead to ‘‘trading in the Shares [to] occur at a material premium or discount against the NAV’’; that the bitcoin network ‘‘is at risk of vulnerabilities and bugs that can potentially be exploited by malicious actors’’; that the bitcoin blockchain could be vulnerable to a ‘‘51% attack,’’ in which a bad actor that controls a majority of the processing power dedicated to mining on the bitcoin network may be able to alter the bitcoin blockchain on which the bitcoin network and bitcoin transactions rely; that the nature of the assets held at bitcoin platforms makes them ‘‘appealing targets for hackers’’ and that ‘‘a number of bitcoin platforms have been victims of cybercrimes’’; and that bitcoin trading platforms ‘‘have been closed or faced issues due to fraud, failure’’ and ‘‘security breaches.’’ 70 BZX also asserts that other means to prevent fraud and manipulation are sufficient to justify dispensing with the requisite surveillance-sharing agreement. First, the Exchange mentions that the Benchmark, which is used to value the Trust’s bitcoin, is itself resistant to manipulation based on the Benchmark’s methodology.71 The Exchange states that the Benchmark is calculated by capturing twenty threeminute periods of trade prices and sizes leading up to 4:00 p.m. E.T. from the constituent platforms. An equalweighted average of the volumeweighted median price of these twenty three-minute periods is then calculated, removing the highest and lowest contributed prices.72 According to BZX, ‘‘[u]sing twenty consecutive three70 See Amended Registration Statement at 7, 13, 17, 19 and 31. See also Winklevoss Order, 83 FR 37585. 71 See Notice, 86 FR 14995. 72 See id. at 14996. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 minute segments over a sixty-minute period means malicious actors would need to sustain efforts to manipulate the market over an extended period of time, or would need to replicate efforts multiple times across exchanges, potentially triggering review.’’ 73 Further, according to BZX, the ‘‘use of a median price reduces the ability of outlier prices to impact the NAV,’’ and the ‘‘use of a volume-weighted median (as opposed to a traditional median) serves as an additional protection against attempts to manipulate the NAV by executing a large number of lowdollar trades, because any manipulation attempt would have to involve a majority of global spot bitcoin volume in a three-minute window to have any influence on the NAV.’’ 74 BZX also asserts that ‘‘removing the highest and lowest prices further protects against attempts to manipulate the NAV, requiring bad actors to act on multiple [platforms] at once to have any ability to influence the price.’’ 75 The Custodian, in a comment letter, agrees that BZX’s choice of the Benchmark, which includes a composite of bitcoin prices from underlying spot bitcoin platforms, including the Custodian’s platform, is a further factor in support of the proposed ETP.76 The Custodian asserts that it and other ‘‘regulated digital asset exchanges’’ and custodians have a history of operations in compliance with a regulatory framework developed specifically to address activities in digital assets, including guidance by the New York State Department of Financial Services (‘‘NYSDFS’’) regarding the implementation of anti-fraud measures. The Custodian states that it meets this obligation through automated systems and robust internal controls and surveillance, and that the growing sophistication of market surveillance tools and strategies in the bitcoin market as well as the growing proportion of bitcoin activity occurring on ‘‘regulated exchanges’’ is a key development to mollify concerns about price manipulation or other manipulative practices in the bitcoin market.77 Simultaneously with the Exchange’s and the Custodian’s assertions regarding the Benchmark, the Exchange also states 73 See id. id. 75 See id. 76 See Gemini Letter at 2. 77 See id. But see infra note 148 and accompanying text. The Custodian also states that it is registered with FinCEN as a money service business and maintains money transmitter licenses (or the statutory equivalent) in all states where this is required. See Gemini Letter at 3 and infra note 89. 74 See E:\FR\FM\18NON1.SGM 18NON1 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices that, because the Trust will engage in inkind creations and redemptions only, the ‘‘manipulability of the Benchmark [is] significantly less important.’’ 78 The Exchange elaborates further that, ‘‘because the Trust will not accept cash to buy bitcoin in order to create new shares or . . . be forced to sell bitcoin to pay cash for redeemed shares, the price that the Sponsor uses to value the Trust’s bitcoin is not particularly important.’’ 79 According to BZX, when authorized participants create Shares with the Trust, they would need to deliver a certain number of bitcoin per share (regardless of the valuation used), and when they redeem with the Trust, they would similarly expect to receive a certain number of bitcoin per share.80 As such, BZX argues that, even if the price used to value the Trust’s bitcoin is manipulated, the ratio of bitcoin per Share does not change, and the Trust will either accept (for creations) or distribute (for redemptions) the same number of bitcoin regardless of the value.81 This, according to BZX, not only mitigates the risk associated with potential manipulation, but also discourages and disincentivizes manipulation of the Benchmark because there is little financial incentive to do so.82 Based on assertions made and the information provided, the Commission can find no basis to conclude that BZX has articulated other means to prevent fraud and manipulation that are sufficient to justify dispensing with the requisite surveillance-sharing agreement. First, the Exchange’s assertions that the Benchmark’s methodology helps make the Benchmark resistant to manipulation are contradicted by the Amended Registration Statement’s own statements. In the Amended Registration Statement, the Sponsor states that the Benchmark is ‘‘based on various inputs which may include price data from various third-party exchanges and markets’’ and that these inputs may be subject to ‘‘technological error, manipulative activity, or fraudulent reporting from their initial source.’’ 83 Second, the Custodian asserts that the growing sophistication of market 78 See Notice, 86 FR 14999. id. 80 See id. at 15000. 81 See id. 82 See id. 83 See Amended Registration Statement at 23. The Amended Registration Statement further states that ‘‘[b]itcoin [platforms] on which bitcoin trades . . . may be more exposed to fraud and security breaches than established, regulated exchanges for other financial assets or instruments, which could have a negative impact on the performance of the Trust.’’ See id. at 7 and 19. khammond on DSKJM1Z7X2PROD with NOTICES 79 See VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 surveillance tools and strategies used by the Benchmark’s constituent platforms, as well as the growing proportion of bitcoin activity occurring on ‘‘regulated exchanges,’’ ‘‘mollify concerns about price manipulation or other manipulative practices.’’ 84 However, the level of regulation on the Benchmark’s constituent platforms is not equivalent to the obligations, authority, and oversight of national securities exchanges or futures exchanges and therefore is not an appropriate substitute.85 National securities exchanges are required to have rules that are ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.’’ 86 Moreover, national securities exchanges must file proposed rules with the Commission regarding certain material aspects of their operations,87 and the Commission has the authority to disapprove any such rule that is not consistent with the requirements of the Exchange Act.88 Thus, national securities exchanges are subject to Commission oversight of, among other things, their governance, membership qualifications, trading rules, disciplinary procedures, recordkeeping, and fees.89 Gemini Letter at 2. also USBT Order, 85 FR 12603–05. 86 See 15 U.S.C. 78f(b)(5) 87 17 CFR 240.19b-4(a)(6)(i). 88 Section 6 of the Exchange Act, 15 U.S.C. 78f, requires national securities exchanges to register with the Commission and requires an exchange’s registration to be approved by the Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), requires national securities exchanges to file proposed rules changes with the Commission and provides the Commission with the authority to disapprove proposed rule changes that are not consistent with the Exchange Act. Designated contract markets (‘‘DCMs’’) (commonly called ‘‘futures markets’’) registered with and regulated by the Commodity Futures Trading Commission (‘‘CFTC’’) must comply with, among other things, a similarly comprehensive range of regulatory principles and must file rule changes with the CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available at https://www.cftc.gov/ IndustryOversight/TradingOrganizations/DCMs/ index.htm. 89 See Winklevoss Order, 83 FR 37597. The Commission notes that the NYSDFS has issued ‘‘guidance’’ to supervised virtual currency business entities, stating that these entities must ‘‘implement measures designed to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing.’’ See Maria T. Vullo, Superintendent 64545 The Benchmark’s constituent platforms, on the other hand, have none of these requirements (none are registered as a national securities exchange).90 Further, although the Custodian claims that the constituent platforms have market surveillance tools and strategies that are growing in sophistication, the Custodian provides no supporting evidence. Moreover, even assuming that the constituent platforms are as vigilant towards fraud and manipulation as the Custodian describes, neither the Exchange nor the Custodian attempts to establish that only the Benchmark constituent platforms’ ability to detect and deter fraud and manipulation would matter, exclusive of other bitcoin spot markets. In other words, neither addresses how fraud and manipulation on other bitcoin spot markets may influence the price of bitcoin. Third, the Exchange does not explain the significance of the Benchmark’s purported resistance to manipulation to the overall analysis of whether the proposal to list and trade the Shares is designed to prevent fraud and manipulation. Even assuming that the Exchange’s argument is that, if the Benchmark is resistant to manipulation, the Trust’s NAV, and thereby the Shares as well, would be resistant to manipulation, the Exchange has not established in the record a basis for such conclusion. That assumption aside, the Commission notes that the Shares would trade at market-based prices in the secondary market, not at NAV, which then raises the question of the significance of the NAV calculation to the manipulation of the Shares. 84 See 85 See PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 of Financial Services, NYSDFS, Guidance on Prevention of Market Manipulation and Other Wrongful Activity (Feb. 7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/ il180207.pdf. The NYSDFS recognizes that its ‘‘guidance is not intended to limit the scope or applicability of any law or regulation’’ (id.), which would include the Exchange Act. Nothing in the record evidences whether the Benchmark’s constituent platforms have complied with this NYSDFS guidance. Further, as stated previously, there are substantial differences between the NYSDFS and FinCEN versus the Commission’s regulation. AML and KYC policies and procedures, for example, have been referenced in other bitcoin-based ETP proposals as a purportedly alternative means by which such ETPs would be uniquely resistant to manipulation. The Commission has previously concluded that such AML and KYC policies and procedures do not serve as a substitute for, and are not otherwise dispositive in the analysis regarding the importance of, having a surveillance sharing agreement with a regulated market of significant size relating to bitcoin. For example, AML and KYC policies and procedures do not substitute for the sharing of information about market trading activity or clearing activity and do not substitute for regulation of a national securities exchange. See USBT Order, 85 FR 12603 n.101. 90 See 15 U.S.C. 78e, 78f. E:\FR\FM\18NON1.SGM 18NON1 64546 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices Fourth, the Exchange’s arguments are contradictory. While arguing that the Benchmark is resistant to manipulation, the Exchange simultaneously downplays the importance of the Benchmark in light of the Trust’s inkind creation and redemption mechanism.91 The Exchange points out that the Trust will create and redeem Shares in-kind, not in cash, which renders the NAV calculation, and thereby the ability to manipulate NAV, ‘‘significantly less important.’’ 92 In BZX’s own words, the Trust will not accept cash to buy bitcoin in order to create shares or sell bitcoin to pay cash for redeemed shares, so the price that the Sponsor uses to value the Trust’s bitcoin ‘‘is not particularly important.’’ 93 If the Benchmark that the Trust uses to value the Trust’s bitcoin ‘‘is not particularly important,’’ it follows that the Benchmark’s resistance to manipulation is not material to the Shares’ susceptibility to fraud and manipulation. As the Exchange does not address or provide any analysis with respect to these issues, the Commission cannot conclude that the Benchmark aids in the determination that the proposal to list and trade the Shares is designed to prevent fraudulent and manipulative acts and practices.94 Finally, the Commission finds that BZX has not demonstrated that in-kind creations and redemptions provide the Shares with a unique resistance to manipulation. The Commission has previously addressed similar assertions.95 As the Commission stated before, in-kind creations and redemptions are a common feature of 91 See supra notes 78–82 and accompanying text. Notice, 86 FR 14995 and 14999 (‘‘While the Sponsor believes that the Benchmark which it uses to value the Trust’s bitcoin is itself resistant to manipulation based on the methodology further described below, the fact that creations and redemptions are only available in-kind makes the manipulability of the Benchmark significantly less important.’’). 93 See id. (concluding that ‘‘because the Trust will not accept cash to buy bitcoin in order to create new shares or, barring a forced redemption of the Trust or under other extraordinary circumstances, be forced to sell bitcoin to pay cash for redeemed shares, the price that the Sponsor uses to value the Trust’s bitcoin is not particularly important.’’). 94 In addition, with respect to the valuation of bitcoin according to a benchmark or a reference price, the Commission has previously considered and rejected similar arguments. See SolidX Order, 82 FR 16258; Winklevoss Order, 83 FR 37589–90. Among other things, the Exchange fails to explain why prices and volumes of bitcoin platforms that are not constituents of the Benchmark do not affect the prices of the constituent platforms. Likewise, the Exchange also fails to establish how the Benchmark’s methodology eliminates fraudulent or manipulative activity that is not transient. See USBT Order, 85 FR 12607. 95 See Winklevoss Order, 83 FR 37589–90; USBT Order, 85 FR 12607–08. khammond on DSKJM1Z7X2PROD with NOTICES 92 See VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 ETPs, and the Commission has not previously relied on the in-kind creation and redemption mechanism as a basis for excusing exchanges that list ETPs from entering into surveillance-sharing agreements with significant, regulated markets related to the portfolio’s assets.96 Accordingly, the Commission is not persuaded here that the Trust’s inkind creations and redemptions afford it a unique resistance to manipulation.97 (2) Assertions That BZX Has Entered Into a Comprehensive SurveillanceSharing Agreement With a Regulated Market of Significant Size As BZX has not demonstrated that other means besides surveillancesharing agreements will be sufficient to prevent fraudulent and manipulative acts and practices, the Commission next examines whether the record supports the conclusion that BZX has entered into a comprehensive surveillancesharing agreement with a regulated market of significant size relating to the underlying assets. In this context, the term ‘‘market of significant size’’ includes a market (or group of markets) as to which (i) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist in detecting and deterring misconduct, and (ii) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.98 As the Commission has stated in the past, it considers two markets that are members of the ISG to have a comprehensive surveillance-sharing agreement with one another, even if 96 See, e.g., iShares COMEX Gold Trust, Securities Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751–55 (Jan. 26, 2005) (SR–Amex–2004– 38); iShares Silver Trust, Securities Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24, 2006) (SR–Amex–2005–072). 97 Putting aside the Exchange’s various assertions about the nature of bitcoin and the bitcoin market, the Benchmark, and the Shares, the Exchange also does not address concerns the Commission has previously identified, including the susceptibility of bitcoin markets to potential trading on material, non-public information (such as plans of market participants to significantly increase or decrease their holdings in bitcoin; new sources of demand for bitcoin; the decision of a bitcoin-based investment vehicle on how to respond to a ‘‘fork’’ in the bitcoin blockchain, which would create two different, non-interchangeable types of bitcoin), or to the dissemination of false or misleading information. See Winklevoss Order, 83 FR 37585. See also USBT Order, 85 FR 12600–01. 98 See Winklevoss Order, 83 FR 37594. This definition is illustrative and not exclusive. There could be other types of ‘‘significant markets’’ and ‘‘markets of significant size,’’ but this definition is an example that provides guidance to market participants. See id. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 they do not have a separate bilateral surveillance-sharing agreement.99 Accordingly, based on the common membership of BZX and CME in the ISG,100 BZX has the equivalent of a comprehensive surveillance-sharing agreement with CME. However, while the Commission recognizes that the CFTC regulates the CME futures market,101 including the CME bitcoin futures market, and thus such market is ‘‘regulated,’’ in the context of the proposed ETP, the record does not, as explained further below, establish that the CME bitcoin futures market is a ‘‘market of significant size’’ as that term is used in the context of the applicable standard here.102 (i) Whether There Is a Reasonable Likelihood That a Person Attempting To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin Futures Market to Successfully Manipulate the ETP The first prong in establishing whether the CME bitcoin futures market constitutes a ‘‘market of significant size’’ is the determination that there is a reasonable likelihood that a person attempting to manipulate the ETP would have to trade on the CME bitcoin futures market to successfully manipulate the ETP. BZX notes that CME began to offer trading in bitcoin futures in 2017.103 According to BZX, nearly every measurable metric related to CME bitcoin futures contracts, which trade and settle like other cash-settled commodity futures contracts, has ‘‘trended consistently up since launch and/or accelerated upward in the past year.’’ 104 For example, according to BZX, there was approximately $28 billion in trading in CME bitcoin futures in December 2020 compared to $737 million, $1.4 billion, and $3.9 billion in total trading in December 2017, December 2018, and December 2019, respectively.105 Additionally, CME 99 See id. at 37580 n.19. Notice, 86 FR 14994 n.56 and accompanying text. 101 While the Commission recognizes that the CFTC regulates the CME, the CFTC is not responsible for direct, comprehensive regulation of the underlying bitcoin spot market. See Winklevoss Order, 83 FR 37587, 37599. 102 As described above (see supra notes 85–90 and accompanying text), in the context of the proposed ETP, the Benchmark’s constituent platforms are not ‘‘regulated.’’ They are not registered as ‘‘exchanges’’ and lack the obligations, authority, and oversight of national securities exchanges. 103 According to BZX, each contract represents five bitcoin and is based on the CME CF Bitcoin Reference Rate. See Notice, 86 FR 14991. 104 See id. 105 See id. 100 See E:\FR\FM\18NON1.SGM 18NON1 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices bitcoin futures traded over $1.2 billion per day in December 2020 and represented $1.6 billion in open interest compared to $115 million in December 2019.106 Similarly, BZX contends that the number of large open interest holders 107 has continued to increase, even as the price of bitcoin has risen, as have the number of unique accounts trading CME bitcoin futures.108 BZX argues that the significant growth in CME bitcoin futures across each of trading volumes, open interest, large open interest holders, and total market participants since the USBT Order was issued is reflective of that market’s growing influence on the spot price. BZX asserts that where CME bitcoin futures lead the price in the spot market such that a potential manipulator of the bitcoin spot market (beyond just the constituents of the Benchmark) would have to participate in the CME bitcoin futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the CME bitcoin futures market.109 BZX further states that academic research corroborates the overall trend outlined above and supports the thesis that CME bitcoin futures pricing leads the spot market. BZX asserts that academic research demonstrates that the CME bitcoin futures market was already leading the spot price in 2018 and 2019.110 BZX concludes that a person attempting to manipulate the Shares would also have to trade on that market to manipulate the ETP.111 The Commission disagrees. The record does not demonstrate that there is a reasonable likelihood that a person attempting to manipulate the proposed ETP would have to trade on the CME bitcoin futures market to successfully manipulate it. Specifically, BZX’s assertions about the general upward trends from 2018 to February 2021 in trading volume and open interest of, and in the number of large open interest holders and number of unique accounts trading in, CME bitcoin futures do not establish that the CME bitcoin futures market is of significant size. As the Commission has previously articulated, the interpretation of the term ‘‘market of significant size’’ or ‘‘significant market’’ depends on the interrelationship between the market with which the listing exchange has a surveillancesharing agreement and the proposed ETP.112 BZX’s recitation of data reflecting the size of the CME bitcoin futures market, alone, either currently or in relation to previous years, is not sufficient to establish an interrelationship between the CME bitcoin futures market and the proposed ETP.113 Further, the evidence in the record also does not support a conclusion that the CME bitcoin futures market leads the bitcoin spot market in such a manner that the CME bitcoin futures market is a ‘‘market of significant size.’’ As the Commission has previously explained, establishing a lead-lag relationship between the bitcoin futures market and the spot market is ‘‘central to understanding whether it is reasonably likely that a would-be manipulator of the ETP would need to trade on the bitcoin futures market to successfully manipulate prices on those spot platforms that feed into the proposed ETP’s pricing mechanism.’’ 114 The Commission has previously stated that, in particular, if the spot market leads the futures market, this would indicate that it would not be necessary to trade on the futures market to manipulate the proposed ETP, because the futures price would move to meet the spot price.115 While BZX states that CME bitcoin futures pricing leads the spot market,116 it relies on the findings of a price discovery analysis in one section of a single academic paper to support the overall thesis.117 However, the findings of that paper’s Granger causality analysis, which is widely used to formally test for lead-lag relationships, 112 See khammond on DSKJM1Z7X2PROD with NOTICES 106 See id. 107 BZX represents that a large open interest holder in CME bitcoin futures is an entity that holds at least 25 contracts, which is the equivalent of 125 bitcoin. According to BZX, at a price of approximately $30,000 per bitcoin on December 31, 2020, more than 80 firms had outstanding positions of greater than $3.8 million in CME bitcoin futures. See id. at 14992 n.50. 108 See id. at 14992. 109 See id. at 14994. 110 See id. at 14994 and 14993 n.51 (citing Y. Hu, Y. Hou & L. Oxley, What role do futures markets play in Bitcoin pricing? Causality, cointegration and price discovery from a time-varying perspective, 72 Int’l Rev. of Fin. Analysis 101569 (2020) (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/ PMC7481826/) (‘‘Hu, Hou & Oxley’’). 111 See id. at 14994. VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 USBT Order, 85 FR 12611. id. at 12612. 114 See id. 115 See id. 116 See Notice, 86 FR 14993. 117 See supra note 110 and accompanying text. BZX references the following conclusion from the ‘‘time-varying price discovery’’ section of Hu, Hou & Oxley: ‘‘There exist no episodes where the Bitcoin spot markets dominates the price discovery processes with regard to Bitcoin futures. This points to a conclusion that the price formation originates solely in the Bitcoin futures market. We can, therefore, conclude that the Bitcoin futures markets dominate the dynamic price discovery process based upon time-varying information share measures. Overall, price discovery seems to occur in the Bitcoin futures markets rather than the underlying spot market based upon a time-varying perspective . . .’’ See Notice, 86 FR 14993 n.51. 113 See PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 64547 are concededly mixed.118 In addition, the Commission considered an unpublished version of the paper in the USBT Order, as well as a comment letter submitted by the authors on that record.119 In the USBT Order, as part of the Commission’s conclusion that ‘‘mixed results’’ in academic studies failed to demonstrate that the CME bitcoin futures market constitutes a market of significant size, the Commission noted the paper’s inconclusive evidence that CME bitcoin futures prices lead spot prices—in particular that the months at the end of the paper’s sample period showed that the spot market was the leading market—and stated that the record did not include evidence to explain why this would not indicate a shift towards prices in the spot market leading the futures market that would be expected to persist into the future.120 The Commission also stated that the paper’s use of daily price data, as opposed to intraday prices, may not be able to distinguish which market incorporates new information faster.121 BZX has not addressed either issue. Moreover, BZX does not provide results of its own analysis and does not present any other data supporting its conclusion. BZX’s unsupported representations constitute an insufficient basis for approving a proposed rule change in circumstances where, as here, the Exchange’s assertion would form such an integral role in the Commission’s analysis and the assertion is subject to several challenges.122 In this context, BZX’s reliance on a single paper, whose own lead-lag results are inconclusive, is especially lacking because the academic literature on the lead-lag relationship and price discovery between bitcoin spot and futures markets is unsettled.123 In the 118 The paper finds that the CME bitcoin futures market dominates the spot markets in terms of Granger causality, but that the causal relationship is bi-directional, and a Granger causality episode from March 2019 to June/July 2019 runs from bitcoin spot prices to CME bitcoin futures prices. The paper concludes: ‘‘[T]he Granger causality episodes are not constant throughout the whole sample period. Via our causality detection methods, market participants can identify when markets are being led by futures prices and when they might not be.’’ See Hu, Hou & Oxley, supra note 110. 119 See USBT Order, 85 FR 12609. 120 See id. at 12613 n.244. 121 See id. 122 See Susquehanna, 866 F.3d at 447. 123 See, e.g., D. Baur & T. Dimpfl, Price discovery in bitcoin spot or futures?, 39 J. Futures Mkts. 803 (2019) (finding that the bitcoin spot market leads price discovery); O. Entrop, B. Frijns & M. Seruset, The determinants of price discovery on bitcoin markets, 40 J. Futures Mkts. 816 (2020) (finding that price discovery measures vary significantly over time without one market being clearly dominant E:\FR\FM\18NON1.SGM Continued 18NON1 64548 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES USBT Order, the Commission responded to multiple academic papers that were cited and concluded that, in light of the mixed results found, the exchange there had not demonstrated that it is reasonably likely that a wouldbe manipulator of the proposed ETP would transact on the CME bitcoin futures market.124 Likewise, here, given the body of academic literature to indicate to the contrary, the Commission concludes that the information that BZX provides is not a sufficient basis to support a determination that it is reasonably likely that a would-be manipulator of the proposed ETP would have to trade on the CME bitcoin futures market.125 The Commission accordingly concludes that the information provided in the record does not establish a reasonable likelihood that a would-be manipulator of the proposed ETP would over the other); J. Hung, H. Liu & J. Yang, Trading activity and price discovery in Bitcoin futures markets, 62 J. Empirical Finance 107 (2021) (finding that the bitcoin spot market dominates price discovery); B. Kapar & J. Olmo, An analysis of price discovery between Bitcoin futures and spot markets, 174 Econ. Letters 62 (2019) (finding that bitcoin futures dominate price discovery); E. Akyildirim, S. Corbet, P. Katsiampa, N. Kellard & A. Sensoy, The development of Bitcoin futures: Exploring the interactions between cryptocurrency derivatives, 34 Fin. Res. Letters 101234 (2020) (finding that bitcoin futures dominate price discovery); A. Fassas, S. Papadamou, & A. Koulis, Price discovery in bitcoin futures, 52 Res. Int’l Bus. Fin. 101116 (2020) (finding that bitcoin futures play a more important role in price discovery); S. Aleti & B. Mizrach, Bitcoin spot and futures market microstructure, 41 J. Futures Mkts. 194 (2021) (finding that relatively more price discovery occurs on CME as compared to four spot exchanges); J. Wu, K. Xu, X. Zheng & J. Chen, Fractional cointegration in bitcoin spot and futures markets, 41 J. Futures Mkts. 1478 (2021) (finding that CME bitcoin futures dominate price discovery). See also C. Alexander & D. Heck, Price discovery in Bitcoin: The impact of unregulated markets, 50 J. Financial Stability 100776 (2020) (finding that, in a multi-dimensional setting, including the main price leaders within futures, perpetuals, and spot markets, CME bitcoin futures have a very minor effect on price discovery; and that faster speed of adjustment and information absorption occurs on the unregulated spot and derivatives platforms than on CME bitcoin futures) (‘‘Alexander & Heck’’). One commenter states they have updated the Alexander & Heck study using data from June 1, 2020 to April 30, 2021, and they found that CME bitcoin futures now have a far more pronounced price leadership role, but also that, similar to Alexander & Heck’s findings, Huobi and OKEx futures are the leading instruments in bitcoin’s price discovery. See letter from Vetle Andreas Gusgaard Lunde, dated July 2, 2021, and weblink cited therein: https:// www.research.arcane.no/blog/the-regulated-tailthat-wags-the-honey-badger. 124 See USBT Order, 85 FR 12613 nn.239–244 and accompanying text. 125 In addition, the Exchange fails to address the lead-lag relationship (if any) between prices on other bitcoin futures markets and the CME bitcoin futures market, the bitcoin spot market, and/or the particular Benchmark constituent platforms, or where price formation occurs when the entirety of bitcoin futures markets, not just CME, is considered. VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 have to trade on the CME bitcoin futures market to successfully manipulate the proposed ETP. Therefore, the information in the record also does not establish that the CME bitcoin futures market is a ‘‘market of significant size’’ with respect to the proposed ETP. (ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be the Predominant Influence on Prices in the CME Bitcoin Futures Market The second prong in establishing whether the CME bitcoin futures market constitutes a ‘‘market of significant size’’ is the determination that it is unlikely that trading in the proposed ETP would be the predominant influence on prices in the CME bitcoin futures market.126 BZX asserts that trading in the Shares would not be the predominant force on prices in the CME bitcoin futures market (or spot market) because of the significant volume in the CME bitcoin futures market, the size of bitcoin’s market capitalization, which is approximately $1 trillion, and the significant liquidity available in the spot market.127 BZX provides that, according to February 2021 data, the cost to buy or sell $5 million worth of bitcoin averages roughly 10 basis points with a market impact of 30 basis points.128 For a $10 million market order, the cost to buy or sell is roughly 20 basis points with a market impact of 50 basis points. Stated another way, BZX states that a market participant could enter a market buy or sell order for $10 million of bitcoin and only move the market 0.5 percent.129 BZX further asserts that more strategic purchases or sales (such as using limit orders and executing through OTC bitcoin trade desks) would likely have less obvious impact on the market, which is consistent with MicroStrategy, Tesla, and Square being able to collectively purchase billions of dollars in bitcoin.130 Thus, BZX concludes that the combination of CME bitcoin futures leading price discovery, the overall size of the bitcoin market, and the ability for market participants (including authorized participants creating and redeeming in-kind with the Trust) to buy or sell large amounts of bitcoin without significant market impact, will help prevent the Shares 126 See Winklevoss Order, 83 FR 37594; USBT Order, 85 FR 12596–97. 127 See Notice, 86 FR 14999. 128 See id. According to BZX, these statistics are based on samples of bitcoin liquidity in U.S. dollars (excluding stablecoins or Euro liquidity) based on executable quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during February 2021. See id. at 14999 n.80. 129 See id. at 14999. 130 See id. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 from becoming the predominant force on pricing in either the bitcoin spot or the CME bitcoin futures market.131 The Commission does not agree. The record does not demonstrate that it is unlikely that trading in the proposed ETP would be the predominant influence on prices in the CME bitcoin futures market. As the Commission has already addressed and rejected one of the bases of BZX’s assertion—that CME bitcoin futures leads price discovery 132—it will only address below the other two bases—the overall size of, and the impact of buys and sells on, the bitcoin market. BZX’s assertions about the potential effect of trading in the Shares on the CME bitcoin futures market and bitcoin spot market are general and conclusory, repeating the aforementioned trade volume of the CME bitcoin futures market and the size and liquidity of the bitcoin spot market, as well as the market impact of a large transaction, without any analysis or evidence to support these assertions. For example, there is no limit on the amount of mined bitcoin that the Trust may hold. Yet BZX does not provide any information on the expected growth in the size of the Trust and the resultant increase in the amount of bitcoin held by the Trust over time, or on the overall expected number, size, and frequency of creations and redemptions—or how any of the foregoing could (if at all) influence prices in the CME bitcoin futures market. Moreover, in the Trust’s Amended Registration Statement, the Sponsor acknowledges that the Trust may acquire large size positions in bitcoin, which would increase the risk of illiquidity in the underlying bitcoin. Specifically, the Sponsor, in the Amended Registration Statement, states that the Trust may acquire large size positions in bitcoin, which will increase the risk of illiquidity by both making the positions more difficult to liquidate and increasing the losses incurred while trying to do so, or by making it more difficult for authorized participants to acquire or liquidate bitcoin as part of the creation and/or redemption of Shares of the Trust.133 Although the Trust’s Amended Registration Statement concedes that the Trust could negatively affect the liquidity of bitcoin, BZX does not address this in the proposal or discuss how impacting the liquidity of bitcoin can be consistent with the assertion that the Shares are unlikely to be the predominant influence on the 131 See 132 See id. supra notes 123–125 and accompanying text. 133 See E:\FR\FM\18NON1.SGM Amended Registration Statement at 26. 18NON1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices prices of the CME bitcoin futures market. Thus, the Commission cannot conclude, based on BZX’s statements alone and absent any evidence or analysis in support of BZX’s assertions, that it is unlikely that trading in the ETP would be the predominant influence on prices in the CME bitcoin futures market. The Commission also is not persuaded by BZX’s assertions about the minimal effect a large market order to buy or sell bitcoin would have on the bitcoin market.134 While BZX concludes by way of a $10 million market order example that buying or selling large amounts of bitcoin would have insignificant market impact, the conclusion does not analyze the extent of any impact on the CME bitcoin futures market. Even assuming that BZX is suggesting that a single $10 million order in bitcoin would have immaterial impact on the prices in the CME bitcoin futures market, this prong of the ‘‘market of significant size’’ determination concerns the influence on prices from trading in the proposed ETP, which is broader than just trading by the proposed ETP. While authorized participants of the Trust might only transact in the bitcoin spot market as part of their creation or redemption of Shares, the Shares themselves would be traded in the secondary market on BZX. The record does not discuss the expected number or trading volume of the Shares, or establish the potential effect of the Shares’ trade prices on CME bitcoin futures prices. For example, BZX does not provide any data or analysis about the potential effect the quotations or trade prices of the Shares might have on market-maker quotations in CME bitcoin futures contracts and whether those effects would constitute a predominant influence on the prices of those futures contracts. Thus, because BZX has not provided sufficient information to establish both prongs of the ‘‘market of significant size’’ determination, the Commission cannot conclude that the CME bitcoin futures market is a ‘‘market of significant size’’ such that BZX would be able to rely on a surveillance-sharing agreement with the CME to provide sufficient protection against fraudulent and manipulative acts and practices. The requirements of Section 6(b)(5) of the Exchange Act apply to the rules of 134 See Notice, 86 FR 14994–95 (‘‘For a $10 million market order, the cost to buy or sell is roughly 20 basis points with a market impact of 50 basis points. Stated another way, a market participant could enter a market buy or sell order for $10 million of bitcoin and only move the market 0.5%.’’). VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 national securities exchanges. Accordingly, the relevant obligation for a comprehensive surveillance-sharing agreement with a regulated market of significant size, or other means to prevent fraudulent and manipulative acts and practices that are sufficient to justify dispensing with the requisite surveillance-sharing agreement, resides with the listing exchange. Because there is insufficient evidence in the record demonstrating that BZX has satisfied this obligation, the Commission cannot approve the proposed ETP for listing and trading on BZX. 64549 companies that are imperfect proxies for bitcoin exposure.138 According to BZX, OTC bitcoin funds are generally designed to provide exposure to bitcoin in a manner similar to the Shares. However, unlike the Shares, BZX states that ‘‘OTC bitcoin funds are unable to freely offer creation and redemption in a way that incentivizes market participants to keep their shares trading in line with their NAV and, as such, frequently trade at a price that is out-of-line with the value of their assets held.’’ 139 BZX represents that, historically, OTC bitcoin funds C. Whether BZX has met its Burden To have traded at a significant premium to Demonstrate That the Proposal Is NAV.140 Although the Exchange Designed To Protect Investors and the concedes that trading at a premium (or Public Interest potentially a discount) is not unique to OTC bitcoin funds and not inherently BZX contends that, if approved, the proposed ETP would protect investors problematic, BZX believes that it raises and the public interest. However, the certain investor protections issues. First, Commission must consider these according to BZX, investors are buying potential benefits in the broader context shares of a fund for a price in excess of of whether the proposal meets each of the per-share value of the fund’s the applicable requirements of the underlying assets; the price of bitcoin Exchange Act.135 Because BZX has not could stay exactly the same from market demonstrated that its proposed rule close on one day to market open the change is designed to prevent next, yet the value of the shares held by fraudulent and manipulative acts and the investor could decrease only practices, the Commission must because of the fluctuation of the disapprove the proposal. premium.141 Second, according to BZX, BZX asserts that, with the growth of only accredited investors, generally, are U.S. investor exposure to bitcoin able to create new shares with the OTC through OTC bitcoin funds, so too has bitcoin fund and can purchase the grown the potential risk to U.S. shares at NAV. While they are forced to investors.136 Specifically, BZX argues hold the shares for at least six months that premium volatility, high fees, before selling, in reality they can insufficient disclosures, and technical immediately hedge any exposure to the hurdles are putting U.S. investor money at risk on a daily basis and that such risk price of bitcoin and simply wait six could potentially be eliminated through months to sell the shares to a retail142 investor and collect the premium. access to a bitcoin ETP.137 As such, the Exchange believes that approving this Several commenters also express proposal (and comparable proposals support for the approval of bitcoin ETPs submitted hereafter) would give U.S. because they believe such ETPs would investors access to bitcoin in a regulated have lower premium/discount and transparent exchange-traded vehicle that would act to limit risk to U.S. 138 See id. investors by: (i) Reducing premium 139 See id. BZX also states that, unlike the Shares, volatility; (ii) reducing management fees because OTC bitcoin funds are not listed on an through meaningful competition; (iii) exchange, they are not subject to the same transparency and regulatory oversight by a listing providing an alternative to custodying exchange. BZX further asserts that the existence of spot bitcoin; and (iv) reducing risks a surveillance-sharing agreement between BZX and associated with investing in operating the CME bitcoin futures market would result in 135 See Winklevoss Order, 83 FR 37601. See also GraniteShares Order, 83 FR 43931; ProShares Order, 83 FR 43941; USBT Order, 85 FR 12615. 136 See Notice, 86 FR 14990. 137 See id. BZX states that while it understands the Commission’s previous focus on potential manipulation of a bitcoin ETP in prior disapproval orders, it now believes that ‘‘such concerns have been sufficiently mitigated and that the growing and quantifiable investor protection concerns should be the central consideration as the Commission reviews this proposal.’’ See id. PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 increased investor protections for the Shares compared to OTC bitcoin funds. See id. at 14990 n.38. 140 See id. at 14990. BZX further represents that the inability to trade in line with NAV may at some point result in OTC bitcoin funds trading at a discount to their NAV. According to BZX, while that has not historically been the case, trading at a discount would give rise to nearly identical potential issues related to trading at a premium. See id. at 14990 n.39. 141 See id. at 14990. 142 See id. E:\FR\FM\18NON1.SGM 18NON1 64550 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES volatility 143 and lower management fees 144 than an OTC bitcoin fund. Another commenter argues that a bitcoin ETP has the potential to reduce volatility in the price of bitcoin itself, which the commenter believes would generate positive externalities for existing investors and ultimately for financial stability. The commenter asserts, with no supporting evidence, that marginal demand for a bitcoin ETP is likely to come from relatively more conservative investors—for example, retail traders unwilling to trade on unregulated markets, as well as institutional traders who lack a ‘‘mandate’’ or the risk tolerance to do so. The commenter states that a shift in the marginal investor’s risk aversion, as well as increased attention from sophisticated institutions, would lead to a bitcoin price that is less susceptible to wild swings that are often driven by social media.145 BZX also asserts that exposure to bitcoin through an ETP also presents advantages for retail investors compared to buying spot bitcoin directly.146 BZX asserts that, without the advantages of an ETP, an individual retail investor holding bitcoin through a cryptocurrency trading platform lacks protections.147 BZX explains that, typically, retail platforms hold most, if not all, retail investors’ bitcoin in ‘‘hot’’ (internet-connected) storage and do not make any commitments to indemnify retail investors or to observe any particular cybersecurity standard.148 Meanwhile, a retail investor holding spot bitcoin directly in a self-hosted wallet may suffer from inexperience in private key management (e.g., insufficient password protection, lost key, etc.), which could cause them to lose some or all of their bitcoin 143 See Ellis Letter; Apodaca Letter; letters from: Anonymous, dated June 16, 2021 (‘‘Anonymous 6 Letter’’); Anonymous, dated June 17, 2021 (‘‘Anonymous 9 Letter’’); Brian Havermann, dated July 6, 2021 (‘‘Havermann Letter’’). 144 See Anonymous 6 Letter; Anonymous 9 Letter; Havermann Letter; Apodaca Letter; letter from Chris Kim, dated June 17, 2021 (‘‘Kim Letter’’). 145 See letter from Marius Zoican, Assistant Professor of Finance, University of Toronto Mississauga, Rotman School of Management, dated June 17, 2021 (‘‘Zoican Letter’’). Another commenter puts forward a different reason why an approval of a bitcoin ETP could reduce bitcoin price volatility. This other commenter asserts that bitcoin ETPs (and other crypto ETPs) would allow non-institutional investors to more easily take ‘‘short’’ positions on crypto assets. The commenter believes some of the price volatility is caused by asymmetric buy/sell-side access in crypto markets that has added unnecessary tailwind to a standard asset bubble. See letter from Christian Lewis, dated June 16, 2021. 146 See Notice, 86 FR 14991. 147 See id. 148 See id. VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 holdings.149 BZX represents that the Custodian would, by contrast, use ‘‘cold’’ (offline) storage to hold private keys, employ a certain degree of cybersecurity measures and operational best practices, be highly experienced in bitcoin custody, and be accountable for failures.150 Thus, with respect to custody of the Trust’s bitcoin assets, BZX concludes that, compared to owning spot bitcoin directly, the Trust presents advantages from an investment protection standpoint for retail investors.151 The Custodian, in a comment letter, echoes some of the descriptions of the custodial arrangement.152 The Custodian also specifies that it employs a multi-signature system which requires a quorum of unique private key signatures before transactions can be effectuated on the bitcoin blockchain and that this approach allows for constant monitoring and auditability of the Trust’s holdings.153 Also, according to the Custodian, it maintains digital asset insurance, is regularly audited by major financial and audit firms, and is subject to independent third-party verification that the Custodian’s operations and security compliance structures meet the most robust of industry standards.154 BZX further asserts that a number of operating companies engaged in unrelated businesses have announced investments as large as $1.5 billion in bitcoin.155 Without access to bitcoin ETPs, BZX argues that retail investors seeking investment exposure to bitcoin may purchase shares in these companies in order to gain the exposure to bitcoin that they seek.156 BZX contends that such operating companies, however, are imperfect bitcoin proxies and provide investors with partial bitcoin exposure paired with additional risks associated with whichever operating company they decide to purchase. BZX concludes that investors seeking bitcoin exposure 149 See id. id. 151 See id. Likewise, several commenters cite risks and difficulties associated with the self-custody of bitcoin as part of the basis for their support for the proposed ETP. See Ellis Letter; Havermann Letter; Apodaca Letter; letters from: Michael Anderson, dated June 16, 2021; Joshua Park, dated June 16, 2021; John, dated June 17, 2021; Taylor Ailshie, dated June 17, 2021 (‘‘Ailshie Letter’’); Sebastian Aroca, dated July 6, 2021 (‘‘Aroca Letter’’); Michael Althaus, dated June 24, 2021 and June 28, 2021. 152 See Gemini Letter at 3–4. 153 See id. at 3. 154 See id. at 3–4. 155 See Notice, 86 FR 14991. 156 See id. One commenter disagrees with the contention that investors would pay a premium to gain exposure to bitcoin by investing in companies that have decided to invest in bitcoin. See Eddie Letter. 150 See PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 through publicly traded companies are gaining only partial exposure to bitcoin and are not fully benefitting from the risk disclosures and associated investor protections that come from the securities registration process.157 BZX also states that investors in many other countries, including Canada, are able to use more traditional exchange listed and traded products to gain exposure to bitcoin, disadvantaging U.S. investors and leaving them with more risky means of getting bitcoin exposure.158 In essence, BZX asserts that the risky nature of direct investment in the underlying bitcoin and the unregulated markets on which bitcoin and OTC bitcoin funds trade compel approval of the proposed rule change. BZX, however, offers no limiting principle to this argument, under which, by logical extension, the Commission would be required to approve the listing and trading of any ETP that arguably presents marginally less risk to investors than a direct investment in the underlying asset or in an OTC-traded product. The Commission disagrees with this reading of the Exchange Act. Pursuant to Section 19(b)(2) of the Exchange Act, the Commission must approve a proposed rule change filed by a national securities exchange if it finds that the proposed rule change is consistent with the applicable requirements of the Exchange Act—including the requirement under Section 6(b)(5) that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices—and it must disapprove the filing if it does not make such a finding.159 Thus, even if a proposed rule change purports to protect investors from a particular type of investment 157 See Notice, 86 FR 14991. The Custodian, in its comment letter, agrees that the proposed ETP would offer greater customer protection and transparency than existing alternatives for retail customers to gain proxy exposure to bitcoin. See Gemini Letter at 2. 158 See Notice, 86 FR 14990. BZX represents that the Purpose Bitcoin ETF, a retail bitcoin-based ETP launched in Canada, reportedly reached $421.8 million in assets under management in two days, demonstrating the demand for a North American market listed bitcoin ETP. BZX contends that the Purpose Bitcoin ETF also offers a class of units that is U.S. dollar denominated, which could appeal to U.S. investors. BZX also argues that without an approved bitcoin ETP in the U.S. as a viable alternative, U.S. investors could seek to purchase these shares in order to get access to bitcoin exposure. BZX believes that, given the separate regulatory regime and the potential difficulties associated with any international litigation, such an arrangement would create more risk exposure for U.S. investors than they would otherwise have with a U.S. exchange-listed ETP. See id. at 14990 n.36. 159 See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 78s(b)(2)(C). E:\FR\FM\18NON1.SGM 18NON1 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices risk—such as the susceptibility of an asset to loss or theft—the proposed rule change may still fail to meet the requirements under the Exchange Act.160 Here, even if it were true that, compared to trading in unregulated bitcoin spot markets, trading a bitcoinbased ETP on a national securities exchange provides some additional protection to investors, the Commission must consider this potential benefit in the broader context of whether the proposal meets each of the applicable requirements of the Exchange Act.161 As explained above, for bitcoin-based ETPs, the Commission has consistently required that the listing exchange have a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin, or demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The listing exchange has not met that requirement here. Therefore the Commission is unable to find that the proposed rule change is consistent with the statutory standard. Pursuant to Section 19(b)(2) of the Exchange Act, the Commission must disapprove a proposed rule change filed by a national securities exchange if it does not find that the proposed rule change is consistent with the applicable requirements of the Exchange Act— including the requirement under Section 6(b)(5) that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices.162 For the reasons discussed above, BZX has not met its burden of demonstrating that the proposal is consistent with Exchange Act Section 6(b)(5),163 and, accordingly, the Commission must disapprove the proposal.164 160 See SolidX Order, 82 FR 16259. supra note 135. 162 See 15 U.S.C. 78s(b)(2)(C). 163 15 U.S.C. 78f(b)(5). 164 In disapproving the proposed rule change the Commission has considered its impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). Three commenters argue that, for competitive reasons, the Commission should approve several bitcoin-based ETPs together. See Zoican Letter; letters from: Jared Henry, dated March 18, 2021 (‘‘Henry Letter’’); Ge De, dated July 4, 2021 (‘‘Ge De Letter’’). The Zoican Letter states that network externalities are particularly strong for exchange-traded funds with identical underlying portfolios, conferring large advantages to the first mover by enabling it to command higher management fees than subsequent entrants. According to this commenter, this effect leads to segmentation of investors, with short-horizon traders preferring liquid products and long-horizon investors focusing on cheaper products. This commenter believes that allowing for several khammond on DSKJM1Z7X2PROD with NOTICES 161 See VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 D. Other Comments Comment letters also address the general nature and uses of bitcoin; 165 the state of development of bitcoin as a digital asset; 166 the state of regulation of bitcoin markets; 167 the inherent value of, and risks of investing in, bitcoin; 168 the desire (or not) of investors to gain access to bitcoin through an ETP; 169 the potential impact of Commission approval of the proposed ETP on the price of bitcoin and on bitcoin markets; 170 the potential impact of Commission approval of bitcoin ETPs on the economy, jobs, U.S. monetary policy, U.S. innovation, and/or U.S. geopolitical position; 171 the tax and/or retirement investment benefits or risks products to be launched simultaneously would help investors coordinate on the product with the lowest fees, stimulating both liquidity and competition on management fees between issuers. Another commenter argues, for efficiency reasons, against approving a bitcoin ETP. This commenter asserts that the adoption of multiple digital assets would force merchants to deal with ‘‘complexity [that] doesn’t foster [the] modularity which is needed to gain economic efficiency.’’ See Ciao Letter at 1. For the reasons discussed throughout, however, see supra note 38, the Commission is disapproving the proposed rule change because it does not find that the proposed rule change is consistent with the Exchange Act. See also USBT Order, 85 FR 12615. 165 See, e.g., Eddie Letter; Anonymous 6 Letter; Pile Letter; Ciao Letter; Ge De Letter; letters from: Anonymous, dated March 27, 2021 (‘‘Anonymous 1 Letter’’); Sam Ahn, dated April 8, 2021; Darrin Donithorne, dated April 10, 2021 (‘‘Donithorne Letter’’); JC, dated May 16, 2021 (‘‘JC Letter’’); Lourdes Ciao, dated June 2, 2021; Anonymous, dated June 10, 2021; Roger Lowenstein, dated June 28, 2021 (‘‘Lowenstein Letter’’). 166 See, e.g., Ellis Letter; Gemini Letter at 1–2; letters from: Courtney, dated April 1, 2021; Nicolas Casal, dated June 9, 2021; James Cook, dated June 17, 2021 (‘‘Cook Letter’’); Jason Green, dated June 17, 2021 (‘‘Green Letter’’). 167 See, e.g., Bofman Letter; Aronesty Letter; Pile Letter. 168 See, e.g., Bofman Letter; Rye Letter; Lowenstein Letter; Havermann Letter; Apodaca Letter; letters from: Bradley M. Kuhn, dated April 15, 2021 (‘‘Kuhn Letter’’); Anonymous, dated May 7, 2021 (‘‘Anonymous 2 Letter’’); James Monroe, dated June 7, 2021; Ken Morgan, dated June 17, 2021; Sam Ahn, dated July 14, 2021. 169 See, e.g., Henry Letter; Anonymous 1 Letter; Kuhn Letter; Bofman Letter; Cook Letter; Ailshie Letter; Gemini Letter at 1–2; letters from: Michael Ort, dated April 10, 2021; Chez, dated June 16, 2021; Anonymous, dated June 16, 2021 (‘‘Anonymous 8 Letter’’); Bill Meyers, dated June 16, 2021; Jarron Jackson, dated June 16, 2021; Jacob, dated June 16, 2021 (‘‘Jacob Letter’’); Charles E. Haluska, dated June 17, 2021; Travis, dated June 17, 2021; Scott Davis, dated June 23, 2021; Ryan I, dated June 27, 2021. 170 See, e.g., Green Letter; Ailshie Letter; Aronesty Letter; letter from Steve Condrill, dated July 4, 2021. 171 See, e.g., Donithorne Letter; Anonymous 2 Letter; Bofman Letter; Anonymous 8 Letter; Jacob Letter; Kim Letter; Ciao Letter; Aroca Letter; Apodaca Letter; letters from: Chris McMurphy, dated April 2, 2021 (‘‘McMurphy Letter’’); Praveen Javali, dated April 9, 2021; Khaled Khan, dated April 20, 2021; Ramesh Patel, dated June 16, 2021; Anonymous, dated June 21, 2021. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 64551 of a bitcoin ETP; 172 and the bitcoin network’s effect on the environment.173 Ultimately, however, additional discussion of these topics is unnecessary, as they do not bear on the basis for the Commission’s decision to disapprove the proposal. E. The Exchange’s Untimely Amendments to the Proposal The deadline for rebuttal comments in response to the Order Instituting Proceedings was July 28, 2021.174 On September 30, 2021, the Exchange filed Amendment No. 1 to the proposed rule change and withdrew it on October 1, 2021. On October 1, 2021, the Exchange filed Amendment No. 2 with the Commission to amend and replace in its entirety Amendment No. 1 to the proposal as submitted on September 30, 2021, and as originally submitted on March 1, 2021. Subsequently, on November 4, 2021, the Exchange filed Amendment No. 3 with the Commission to amend and replace in its entirety Amendment No. 2 to the proposal as submitted on October 1, 2021, and as originally submitted on March 1, 2021. Because these amendments were filed months after the deadline for comments on the proposed rule change, the Commission deems Amendments No. 1, 2, and 3 to have been untimely filed. Even if these amendments had been timely filed, the Commission would still conclude that the Exchange has not met its burden to demonstrate that its proposal is consistent with Exchange Act Section 6(b)(5). The primary change that the Exchange makes in the amendments is to argue that it would be inconsistent for the Commission to allow the launch of exchange-traded funds registered under the Investment Company Act of 1940 (‘‘1940 Act’’) that provide exposure to bitcoin through CME bitcoin futures (‘‘Bitcoin Futures ETFs’’) while disapproving this proposal. In the amendments, the Exchange asserts that, if the Commission does not deem the CME bitcoin futures market a regulated market of significant size, permitting Bitcoin Futures ETFs to list and trade would be inconsistent with the requirement under the Exchange Act—namely, the requirement that the listing and trading of the Bitcoin Futures ETFs be designed to prevent fraudulent and manipulative acts and practices as articulated in the 172 See, e.g., Kuhn Letter; JC Letter; Rose Letter; Ciao Letter; Lowenstein Letter; Havermann Letter; Apodaca Letter. 173 See, e.g., Eddie Letter; Donithorne Letter; McMurphy Letter; Ge De Letter; letter from Anonymous, dated June 10, 2021. 174 See supra note 7. E:\FR\FM\18NON1.SGM 18NON1 64552 Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / Notices Winklevoss Order and other disapproval orders. The Exchange states that, while one may argue that the 1940 Act provides certain investor protections, those protections relate primarily to the composition of board of directors, limitations on leverage, and transactions with affiliates, among others, and thus do not confer additional protections to investors in relation to the underlying CME bitcoin futures market to justify different regulatory outcomes for Bitcoin Futures ETFs and non-1940 Actregulated ETPs that hold spot bitcoin. The Exchange also adds that the largest Bitcoin Futures ETF has contracts representing about 37 percent of open interest in CME bitcoin futures, which, according to the Exchange, ‘‘seems to directly contradict’’ the ‘‘predominant influence’’ prong in establishing whether the CME bitcoin futures market constitutes a market of significant size. The Commission disagrees with the premise of the Exchange’s argument. The proposed rule change does not relate to a product regulated under the 1940 Act, nor does it relate to the same underlying holdings as the Bitcoin Futures ETFs. The Commission considers the proposed rule change on its own merits and under the standards applicable to it. Namely, with respect to this proposed rule change, the Commission must apply the standards as provided by Section 6(b)(5) of the Exchange Act, which it has applied in connection with its orders considering previous proposals to list bitcoin-based commodity trusts and bitcoin-based trust issued receipts.175 Accordingly, even if the Exchange’s Amendments No. 1, 2, and 3 had been timely filed, there is no additional information in such amendments that would enable the Commission to approve the proposed rule change as amended. khammond on DSKJM1Z7X2PROD with NOTICES IV. Conclusion For the reasons set forth above, the Commission does not find, pursuant to Section 19(b)(2) of the Exchange Act, that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with Section 6(b)(5) of the Exchange Act. It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act, that proposed rule change SR– CboeBZX–2021–019 be, and hereby is, disapproved. 175 See supra note 11. VerDate Sep<11>2014 17:11 Nov 17, 2021 Jkt 256001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.176 J. Matthew DeLesDernier, Assistant Secretary. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [FR Doc. 2021–25129 Filed 11–17–21; 8:45 am] In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statement may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–93560; File No. SR–IEX– 2021–15] Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Make Juneteenth National Independence Day a Holiday of the Exchange November 12, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 9, 2021, the Investors Exchange LLC (‘‘IEX’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change Pursuant to the provisions of Section 19(b)(1) under the Act,3 and Rule 19b– 4 thereunder,4 IEX is filing with the Commission a proposed rule change to amend IEX Rule 11.110 (Hours of Trading and Trading Days) to make Juneteenth National Independence Day a holiday of the Exchange. Juneteenth National Independence Day was designated a legal public holiday in June 2021. The Exchange has designated this rule change as ‘‘non-controversial’’ under Section 19(b)(3)(A) of the Act 5 and provided the Commission with the notice required by Rule 19b–4(f)(6) thereunder.6 The text of the proposed rule change is available at the Exchange’s website at www.iextrading.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 176 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(1). 4 17 CFR 240.19b–4. 5 15 U.S.C. 78s(b)(3)(A). 6 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend IEX Rule 11.110 (Hours of Trading and Trading Days) to make Juneteenth National Independence Day a holiday of the Exchange. This rule filing is based on a proposal recently submitted by the New York Stock Exchange LLC (‘‘NYSE’’) and its affiliated exchanges.7 On June 17, 2021, Juneteenth National Independence Day was designated a legal public holiday.8 Consistent with industry sentiment,9 the approach recommended by the Securities Industry and Financial Markets Association (‘‘SIFMA’’),10 and IEX’s own determination that IEX’s rules should recognize this important date in American history, the Exchange proposes to add ‘‘Juneteenth National Independence Day’’ to the existing list of holidays in paragraph (b) of IEX Rule 11.110. As a result, the Exchange will not be open for business on Juneteenth National Independence Day, which falls on June 19 of each year. In accordance with paragraph (b) of IEX Rule 11.110, when the holiday falls on a Saturday, the Exchange will not be open for business on the preceding Friday, and when it falls on a Sunday, the Exchange will not be open for business on the 7 See Securities Exchange Act Release No. 93183 (September 30, 2021), 86 FR 55068 (October 5, 2021) (SR–NYSE–2021–56) (amending NYSE Rule 7.2 to include Juneteenth as an exchange holiday). 8 Public Law 117–17. 9 See, e.g., Bank of America Makes Juneteenth a Holiday, Joining JPMorgan, Wells Fargo. 10 SIFMA recommends a full market close in observance of Juneteenth National Independence Day. See SIFMA Revises 2022 Fixed Income Market Close Recommendations in the U.S. to Include Full Close for Juneteenth National Independence Day. E:\FR\FM\18NON1.SGM 18NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 220 (Thursday, November 18, 2021)]
[Notices]
[Pages 64539-64552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25129]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93559; File No. SR-CboeBZX-2021-019]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; 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

November 12, 2021.

I. Introduction

On March 1, 2021, 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
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the VanEck 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 March 19, 2021.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 91326 (Mar. 15,
2021), 86 FR 14987 (``Notice''). Comments on the proposed rule
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-019/srcboebzx2021019.htm.
---------------------------------------------------------------------------

On April 28, 2021, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On June 16, 2021, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On September 8, 2021, the Commission designated a longer period for
Commission action on the proposed rule change.\8\
---------------------------------------------------------------------------

\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 91695, 86 FR 24066
(May 5, 2021).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 92196, 86 FR 32985
(June 23, 2021).
\8\ See Securities Exchange Act Release No. 92894, 86 FR 51203
(Sept. 14, 2021). On September 30, 2021, the Exchange filed
Amendment No. 1 to the proposed rule change and withdrew it on
October 1, 2021. On October 1, 2021, the Exchange filed Amendment
No. 2 to the proposed rule change; and on November 4, 2021, the
Exchange filed Amendment No. 3 to the proposed rule change. As
discussed below, see Section III.E, infra, the Commission views
these amendments as untimely. These amendments also do not
materially alter the substance of the proposed rule change, and
therefore they are not subject to notice and comment. Furthermore,
even if these amendments had been timely filed, they would not alter
the Commission's conclusion that the Exchange's proposal is not
consistent with the Exchange Act. See Section III.E.
---------------------------------------------------------------------------

This order disapproves the proposed rule change. The Commission
concludes that BZX has not met its burden under the Exchange Act and
the Commission's Rules of Practice to demonstrate that its proposal is
consistent with the requirements of Exchange Act Section 6(b)(5), in
particular, the requirement 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.'' \9\
---------------------------------------------------------------------------

\9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

When considering whether BZX's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same standard used in its orders
considering previous proposals to list bitcoin \10\-based

[[Page 64540]]

commodity trusts and bitcoin-based trust issued receipts.\11\ As the
Commission has explained, an exchange that lists bitcoin-based
exchange-traded products (``ETPs'') can meet its obligations under
Exchange Act Section 6(b)(5) by demonstrating that the exchange has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to the underlying or reference bitcoin
assets.\12\
---------------------------------------------------------------------------

\10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Notice, 86 FR 14988.
\11\ See Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) and To List and Trade Shares of the United States Bitcoin
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E,
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''). See
also Order Disapproving a Proposed Rule Change, as Modified by
Amendment No. 1, Relating to the Listing and Trading of Shares of
the SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201,
Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR
16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order''). The
Commission also notes that orders were issued by delegated authority
on the following matters: Order Disapproving a Proposed Rule Change
To List and Trade the Shares of the ProShares Bitcoin ETF and the
ProShares Short Bitcoin ETF, Securities Exchange Act Release No.
83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (NYSEArca-2017-
139) (``ProShares Order''); Order Disapproving a Proposed Rule
Change To List and Trade the Shares of the GraniteShares Bitcoin ETF
and the GraniteShares Short Bitcoin ETF, Securities Exchange Act
Release No. 83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-
CboeBZX-2018-001) (``GraniteShares Order'').
\12\ See USBT Order, 85 FR 12596. See also Winklevoss Order, 83
FR 37592 n.202 and accompanying text (discussing previous Commission
approvals of commodity-trust ETPs); GraniteShares Order, 83 FR
43925-27 nn.35-39 and accompanying text (discussing previous
Commission approvals of commodity-futures ETPs).
---------------------------------------------------------------------------

The standard requires such surveillance-sharing agreements since
they ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur.'' \13\ The Commission has
emphasized that it is essential for an exchange listing a derivative
securities product to enter into a surveillance-sharing agreement with
markets trading the underlying assets for the listing exchange to have
the ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of exchange
rules and applicable federal securities laws and rules.\14\ The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading activity,
clearing activity, and customer identity; that the parties to the
agreement have reasonable ability to obtain access to and produce
requested information; and that no existing rules, laws, or practices
would impede one party to the agreement from obtaining this information
from, or producing it to, the other party.\15\
---------------------------------------------------------------------------

\13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See
also Winklevoss Order, 83 FR 37594; ProShares Order, 83 FR 43936;
GraniteShares Order, 83 FR 43924; USBT Order, 85 FR 12596.
\14\ See NDSP Adopting Release, 63 FR 70959.
\15\ See Winklevoss Order, 83 FR 37592-93; Letter from Brandon
Becker, Director, Division of Market Regulation, Commission, to
Gerard D. O'Connell, Chairman, Intermarket Surveillance Group (June
3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
---------------------------------------------------------------------------

In the context of this standard, the terms ``significant market''
and ``market of significant size'' include a market (or group of
markets) as to which (a) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (b) it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\16\ A surveillance-sharing
agreement must be entered into with a ``significant market'' to assist
in detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to also engage in
trading activity on that ``significant market.'' \17\
---------------------------------------------------------------------------

\16\ See Winklevoss Order, 83 FR 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that will provide guidance to market
participants. See id.
\17\ See USBT Order, 85 FR 12597.
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Consistent with this standard, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity--whether gold, silver, platinum, palladium, or
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group
(``ISG'') membership in common with, that market.\18\ Moreover, the
surveillance-sharing agreements have been consistently present whenever
the Commission has approved the listing and trading of derivative
securities, even where the underlying securities were also listed on
national securities exchanges--such as options based on an index of
stocks traded on a national securities exchange--and were thus subject
to the Commission's direct regulatory authority.\19\
---------------------------------------------------------------------------

\18\ See Winklevoss Order, 83 FR 37594.
\19\ See USBT Order, 85 FR 12597; Securities Exchange Act
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994)
(SR-Amex-93-28) (order approving listing of options on American
Depository Receipts). The Commission has also required a
surveillance-sharing agreement in the context of index options even
when (i) all of the underlying index component stocks were either
registered with the Commission or exempt from registration under the
Exchange Act; (ii) all of the underlying index component stocks
traded in the U.S. either directly or as ADRs on a national
securities exchange; and (iii) effective international ADR arbitrage
alleviated concerns over the relatively smaller ADR trading volume,
helped to ensure that ADR prices reflected the pricing on the home
market, and helped to ensure more reliable price determinations for
settlement purposes, due to the unique composition of the index and
reliance on ADR prices. See Securities Exchange Act Release No.
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the
exchange on which the index option trades and the markets that trade
the underlying securities are necessary'' and that ``[t]he exchange
of surveillance data by the exchange trading a stock index option
and the markets for the securities comprising the index is important
to the detection and deterrence of intermarket manipulation.''). And
the Commission has required a surveillance-sharing agreement even
when approving options based on an index of stocks traded on a
national securities exchange. See Securities Exchange Act Release
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure
the availability of information necessary to detect and deter
potential manipulations and other trading abuses'').
---------------------------------------------------------------------------

Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin market
is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\20\ In response, the Commission has agreed that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, it
would not necessarily need to enter into a surveillance-sharing
agreement with a regulated significant market.\21\ Such resistance to
fraud and manipulation, however, must be novel and beyond those
protections that exist in traditional commodity markets or equity
markets for which the Commission has long required surveillance-sharing
agreements in the context of listing

[[Page 64541]]

derivative securities products. No listing exchange has satisfied its
burden to make such demonstration.\22\
---------------------------------------------------------------------------

\20\ See USBT Order, 85 FR 12597.
\21\ See Winklevoss Order, 83 FR 37580, 37582-91 (addressing
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation); see also USBT Order, 85 FR
12597.
\22\ See supra note 11.
---------------------------------------------------------------------------

Here, BZX contends that approval of the proposal is consistent with
Section 6(b)(5) of the Exchange Act, in particular Section 6(b)(5)'s
requirement 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.\23\ As discussed in more
detail below, BZX asserts that the proposal is consistent with Section
6(b)(5) of the Exchange Act because the Exchange has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size,\24\ and there exist other means to prevent fraudulent and
manipulative acts and practices that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement.\25\
---------------------------------------------------------------------------

\23\ See Notice, 86 FR 14993-95.
\24\ See id. at 14994-95.
\25\ See id. at 14995.
---------------------------------------------------------------------------

Although BZX recognizes the Commission's focus on potential
manipulation of bitcoin ETPs in prior disapproval orders, BZX argues
that such manipulation concerns have been sufficiently mitigated, and
that the growing and quantifiable investor protection concerns should
be the central consideration of the Commission.\26\ Specifically, as
discussed in more detail below, the Exchange asserts that the
significant increase in trading volume in bitcoin futures on the
Chicago Mercantile Exchange (``CME''), the growth of liquidity in the
spot market for bitcoin, and certain features of the Shares and the
Benchmark (as defined herein) mitigate potential manipulation concerns
to the point that the investor protection issues that have arisen from
the rapid growth of over-the-counter (``OTC'') bitcoin funds, including
premium volatility and management fees, should be the central
consideration as the Commission determines whether to approve this
proposal.\27\
---------------------------------------------------------------------------

\26\ See id. at 14990.
\27\ See id. at 14994.
---------------------------------------------------------------------------

Further, BZX believes that the proposal would give U.S. investors
access to bitcoin in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors. According to
BZX, the proposed listing and trading of the Shares would mitigate risk
by: (i) Reducing premium volatility; (ii) reducing management fees
through meaningful competition; (iii) reducing risks associated with
investing in operating companies that are imperfect proxies for bitcoin
exposure; and (iv) providing an alternative to custodying spot
bitcoin.\28\
---------------------------------------------------------------------------

\28\ See id. at 14990.
---------------------------------------------------------------------------

In the analysis that follows, the Commission examines whether the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act by addressing: In Section III.B.1 assertions that other means
besides surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices; in Section III.B.2
assertions that BZX has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to bitcoin; and in Section III.C assertions that the proposal is
consistent with the protection of investors and the public interest. As
discussed further below, BZX repeats various assertions made in prior
bitcoin-based ETP proposals that the Commission has previously
addressed and rejected--and more importantly, BZX does not respond to
the Commission's reasons for rejecting those assertions but merely
repeats them. The Commission concludes that BZX has not established
that other means to prevent fraudulent and manipulative acts and
practices are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The Commission further concludes that
BZX has not established that it has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to bitcoin. As a result, the Commission is unable to find that the
proposed rule change is consistent with the statutory requirements of
Exchange Act Section 6(b)(5).
The Commission again emphasizes that its disapproval of this
proposed rule change does not rest on an evaluation of whether bitcoin,
or blockchain technology more generally, has utility or value as an
innovation or an investment. Rather, the Commission is disapproving
this proposed rule change because, as discussed below, BZX has not met
its burden to demonstrate that its proposal is consistent with the
requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

As described in more detail in the Notice,\29\ the Exchange
proposes to list and trade the Shares of the Trust under BZX Rule
14.11(e)(4), which governs the listing and trading of Commodity-Based
Trust Shares on the Exchange.
---------------------------------------------------------------------------

\29\ See Notice, supra note 3. See also draft Registration
Statement on Form S-1, dated December 30, 2020, submitted to the
Commission by VanEck Digital Assets, LLC (``Sponsor'') on behalf of
the Trust, and Amendment No. 1 thereto, filed June 4, 2021
(``Amended Registration Statement'').
---------------------------------------------------------------------------

The investment objective of the Trust is for the Shares to reflect
the performance of the MVIS[supreg] CryptoCompare Bitcoin Benchmark
Rate (``Benchmark''), less the expenses of the Trust's operations.\30\
The Benchmark will be used to calculate the Trust's net asset value
(``NAV''). The Benchmark is designed to be a U.S. dollar price for
bitcoin, and there is no component other than bitcoin in the
Benchmark.\31\
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\30\ Delaware Trust Company is the trustee, and State Street
Bank and Trust Company will be the administrator (``Administrator'')
and transfer agent. Van Eck Securities Corporation will be the
marketing agent in connection with the creation and redemption of
Shares. Van Eck Securities Corporation provides assistance in the
marketing of the Shares. A third-party regulated custodian
(``Custodian'') will be responsible for custody of the Trust's
bitcoin. See Notice, 86 FR 14995. The Amended Registration Statement
indicates that Gemini Trust Company, LLC is the Custodian. See
Amended Registration Statement at (i).
\31\ See Notice, 86 FR 14995-96.
---------------------------------------------------------------------------

The Benchmark is derived from trade prices of bitcoin on certain
bitcoin spot platforms. The current platform composition of the
Benchmark is Bitstamp, Coinbase, Gemini, itBit, and Kraken.\32\ The
Benchmark is calculated using a methodology that captures trade prices
and sizes from the aforementioned platforms. The methodology examines
twenty three-minute periods leading up to 4:00 p.m. E.T. and calculates
an equal-weighted average of the volume-weighted median price of these
twenty three-minute periods, removing the highest and lowest
contributed prices.\33\
---------------------------------------------------------------------------

\32\ According to BZX, the Benchmark constituents are the same
constituent platforms as the CME CF Bitcoin Reference Rate and are
selected using a methodology that utilizes a combination of
qualitative and quantitative metrics to analyze a data set across
eight categories of evaluation: Legal/regulation, ``know-your-
customer''/transaction risk, data provision, security, team/
platform, asset quality/diversity, market quality, and negative
events. Based on these evaluations, the top five platforms by rank
are selected for inclusion in the Benchmark, and the constituent
platforms are reassessed on a semi-annual basis. See id. at 14996
n.65.
\33\ See id. at 14996.
---------------------------------------------------------------------------

Each Share represents a fractional undivided beneficial interest in
the Trust's net assets. The Trust's assets will consist of bitcoin held
by the Custodian on behalf of the Trust. The Trust generally does not
intend to hold cash or cash equivalents. However, there may be
situations where the Trust will unexpectedly hold cash on a temporary
basis.\34\
---------------------------------------------------------------------------

\34\ See id. at 14995.

---------------------------------------------------------------------------

[[Page 64542]]

The Administrator will determine the NAV and NAV per Share of the
Trust on each day that the Exchange is open for regular trading, as
promptly as practical after 4:00 p.m. E.T. The NAV of the Trust is the
aggregate value of the Trust's assets less its estimated accrued but
unpaid liabilities (which include accrued expenses). In determining the
Trust's NAV, the Administrator values the bitcoin held by the Trust
based on the price set by the Benchmark as of 4:00 p.m. E.T.\35\
---------------------------------------------------------------------------

\35\ See id. at 14996.
---------------------------------------------------------------------------

The Trust will provide information regarding the Trust's bitcoin
holdings, as well as an Intraday Indicative Value (``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.). The IIV will be calculated by
using the prior day's closing NAV per Share as a base and updating that
value during Regular Trading Hours to reflect changes in the value of
the Trust's bitcoin holdings during the trading day.\36\
---------------------------------------------------------------------------

\36\ See id.
---------------------------------------------------------------------------

When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 50,000 Shares. When creating the
Shares, authorized participants will deliver, or facilitate the
delivery of, bitcoin to the Trust's account with the Custodian in
exchange for the Shares, and, when redeeming the Shares, the Trust,
through the Custodian, will deliver bitcoin to such authorized
participants.\37\
---------------------------------------------------------------------------

\37\ See id. at 14995.
---------------------------------------------------------------------------

III. Discussion

A. The Applicable Standard for Review

The Commission must consider whether BZX's proposal is consistent
with the Exchange Act. Section 6(b)(5) of the Exchange Act 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.'' \38\ Under the
Commission's Rules of Practice, the ``burden to demonstrate that a
proposed rule change is consistent with the Exchange Act and the rules
and regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \39\
---------------------------------------------------------------------------

\38\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
\39\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------

The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\40\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\41\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\42\
---------------------------------------------------------------------------

\40\ See id.
\41\ See id.
\42\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is
Designed To Prevent Fraudulent and Manipulative Acts and Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and
Practices
As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with a comprehensive surveillance-sharing agreement with a regulated
market of significant size, including by demonstrating that the bitcoin
market as a whole or the relevant underlying bitcoin market is uniquely
and inherently resistant to fraud and manipulation.\43\ Such resistance
to fraud and manipulation must be novel and beyond those protections
that exist in traditional commodities or securities markets.\44\
---------------------------------------------------------------------------

\43\ See USBT Order, 85 FR 12597 n.23. The Commission is not
applying a ``cannot be manipulated'' standard. Instead, the
Commission is examining whether the proposal meets the requirements
of the Exchange Act and, pursuant to its Rules of Practice, places
the burden on the listing exchange to demonstrate the validity of
its contentions and to establish that the requirements of the
Exchange Act have been met. See id.
\44\ See id. at 12597.
---------------------------------------------------------------------------

BZX asserts that bitcoin is resistant to price manipulation.
According to BZX, the geographically diverse and continuous nature of
bitcoin trading render it difficult and prohibitively costly to
manipulate the price of bitcoin.\45\ 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
challenging.\46\ To the extent that there are bitcoin platforms engaged
in or allowing wash trading or other activity intended to manipulate
the price of bitcoin on other markets, such pricing does not normally
impact prices on other platforms because participants will generally
ignore markets with quotes that they deem non-executable.\47\ BZX
further argues that 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.\48\ 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 trading venue.\49\ As a result, BZX concludes that
the potential for manipulation on a bitcoin trading platform would
require overcoming the liquidity supply of such arbitrageurs who are
effectively eliminating any cross-market pricing differences.\50\
---------------------------------------------------------------------------

\45\ See Notice, 86 FR 14994 n.54.
\46\ See id.
\47\ See id.
\48\ See id.
\49\ See id.
\50\ See id.
---------------------------------------------------------------------------

Several commenters share BZX's view that the nature of the bitcoin
market makes it resistant to price manipulation.\51\ One commenter, in

[[Page 64543]]

particular, agrees that arbitrage would very quickly close any bitcoin
price disparities between trading platforms.\52\
---------------------------------------------------------------------------

\51\ See letters from: Bryan B. Solstin, dated June 17, 2021;
Anthony Ellis, dated June 17, 2021 (``Ellis Letter''); Courtney Rye,
dated June 17, 2021 (``Rye Letter''); and Frank Rose, dated June 17,
2021 (``Rose Letter''). These commenters assert that, in addition to
arbitrage, bitcoin's large market capitalization, liquidity,
decentralized design, finite quantity, and transparent public ledger
make it less susceptible to fraud and manipulation. Another
commenter remarks that, unlike other commodities on which exchange-
traded funds are based, bitcoin has a non-manipulable monetary
supply. See letter from Erik Aronesty, dated June 17, 2021
(``Aronesty Letter''). The Custodian, in a comment letter, asserts
that the growth of the overall bitcoin market and related growth of
regulated bitcoin derivatives demonstrate that the depth of the
market prevents manipulation of the price of bitcoin in a manner
that could affect the share price of an ETP. See letter from Gemini
Trust Company, LLC, dated October 15, 2021 (``Gemini Letter''), at
2.
Other commenters disagree. These commenters view the bitcoin
market to be prone to fraud and manipulation. These commenters
described the bitcoin market as: Fraught with manipulation from
memes and tweets that can move its price significantly (see letter
from Eddie, dated March 28, 2021 (``Eddie Letter'')); a haven for
money laundering, wash trading, and other criminal and/or collusive
activity (see letters from: Anonymous, dated June 16, 2021; A.
Peterson, dated June 17, 2021 (``Peterson Letter'')); a pyramid
scheme that is heavily rigged (see Peterson Letter) and from which
the only way to profit is to sell to a ``greater fool'' who comes
later at a higher price (see letter from Mark Pile, dated June 17,
2021 (``Pile Letter'')); fraught with accounting and liquidity
irregularities (see Pile Letter); leading to prices pumped up by
fraudulent tokens (see Peterson Letter ) and questionable
``stablecoin'' (see Petterson Letter; Pile Letter; letter from
Michael Mims, dated June 17, 2021); and, along with other digital
assets and the blockchains on which they rely, as having complexity
that makes users vulnerable to fraud (see letter from Lourdes Ciao,
dated June 24, 2021 (``Ciao Letter''), at 1). Finally, some
commenters acknowledged that bitcoin prices are susceptible to
attempted influence, but no more than other highly volatile stocks,
and thus they contend that bitcoin is suitable as an underlying
asset for an ETP (see letters from: Mike Bofman, dated June 16, 2021
(``Bofman Letter''); Matthew Apodaca, dated July 13, 2021 (``Apodaca
Letter'')).
\52\ See Ellis Letter.
---------------------------------------------------------------------------

As with the previous proposals, the Commission here concludes that
the record does not support a finding that the bitcoin market is
inherently and uniquely resistant to fraud and manipulation. BZX
asserts that, because of how bitcoin trades occur, including through
continuous means and through fragmented platforms, arbitrage across the
bitcoin platforms essentially helps to keep global bitcoin prices
aligned with one another, thus hindering manipulation. The Exchange,
however, does not provide any data or analysis to support its
assertions, either in terms of how closely bitcoin prices are aligned
across different bitcoin trading venues or how quickly price
disparities may be arbitraged away.\53\ Likewise, the commenter who
concurs with BZX that arbitrage would very quickly close any bitcoin
price disparities between trading platforms provides no empirical
evidence to substantiate the commenter's claim. As stated above,
``unquestioning reliance'' on an SRO's representations in a proposed
rule change is not sufficient to justify Commission approval of a
proposed rule change.\54\
---------------------------------------------------------------------------

\53\ For example, the Amended Registration Statement states that
``[i]f increases in throughput on the Bitcoin network lag behind
growth in usage of bitcoin, average fees and settlement times may
increase considerably . . . . which could adversely impact the value
of the Shares.'' See Amended Registration Statement at 20. BZX does
not provide data or analysis to address, among other things, whether
such risks of increased fees and bitcoin transaction settlement
times may affect the arbitrage effectiveness that BZX asserts. See
also infra note 70 and accompanying text (referencing statements
made in the Amended Registration Statement that contradict
assertions made by BZX).
\54\ See supra note 42.
---------------------------------------------------------------------------

Further, efficient price arbitrage is not sufficient to support the
finding that a market is uniquely and inherently resistant to
manipulation such that the Commission can dispense with surveillance-
sharing agreements.\55\ The Commission has stated, for example, that
even for equity options based on securities listed on national
securities exchanges, the Commission relies on surveillance-sharing
agreements to detect and deter fraud and manipulation.\56\ Here, the
Exchange provides no evidence to support its assertion of efficient
price arbitrage across bitcoin platforms, let alone any evidence that
price arbitrage in the bitcoin market is novel or unique so as to
warrant the Commission dispensing with the requirement of a
surveillance-sharing agreement. Moreover, BZX does not take into
account that a market participant with a dominant ownership position
would not find it prohibitively expensive to overcome the liquidity
supplied by arbitrageurs and could use dominant market share to engage
in manipulation.\57\
---------------------------------------------------------------------------

\55\ See Winklevoss Order, 83 FR 37586; SolidX Order, 82 FR
16256-57; USBT Order, 85 FR 12601.
\56\ See, e.g., USBT Order, 85 FR 12601.
\57\ See, e.g., Winklevoss Order, 83 FR 37584; USBT Order, 85 FR
12600-01.
---------------------------------------------------------------------------

In addition, the Exchange makes the unsupported claim that bitcoin
prices on platforms with fake volume do not influence the real price of
bitcoin. The Exchange also asserts that, to the extent that there are
bitcoin platforms engaged in or allowing wash trading or other
manipulative activities, market participants will generally ignore
those platforms. However, without the necessary data, such as lead-lag
or other similar analyses, or other evidence, the Commission has no
basis on which to conclude that bitcoin platforms are insulated from
prices of others that engage in or permit fraud or manipulation.\58\
---------------------------------------------------------------------------

\58\ See USBT Order, 85 FR 12601. See also infra notes 114-115
and accompanying text (explaining the lead-lag analysis as central
to understanding whether it is reasonably likely that a would-be
manipulator of the proposed ETP would have to trade on the CME
bitcoin futures market to successfully manipulate the proposed ETP).
---------------------------------------------------------------------------

Additionally, the continuous nature of bitcoin trading does not
eliminate manipulation risk, and neither does linkages among markets,
as BZX asserts.\59\ Even in the presence of continuous trading or
linkages among markets, formal (such as those with consolidated
quotations or routing requirements) or otherwise (such as in the
context of the fragmented, global bitcoin markets), manipulation of
asset prices, as a general matter, can occur simply through trading
activity that creates a false impression of supply or demand.\60\
---------------------------------------------------------------------------

\59\ See Winklevoss Order, 83 FR 37585 n.92 and accompanying
text.
\60\ See id. at 37585.
---------------------------------------------------------------------------

BZX also argues that the significant liquidity in the bitcoin spot
market and the impact of market orders on the overall price of bitcoin
mean that attempting to move the price of bitcoin is costly and has
grown more expensive over the past year.\61\ According to BZX, in
January 2020, for example, the cost to buy or sell $5 million worth of
bitcoin averaged roughly 30 basis points (compared to 10 basis points
in February 2021) with a market impact of 50 basis points (compared to
30 basis points in February 2021). For a $10 million market order, the
cost to buy or sell was roughly 50 basis points (compared to 20 basis
points in February 2021) with a market impact of 80 basis points
(compared to 50 basis points in February 2021).\62\ BZX contends that
as the liquidity in the bitcoin spot market increases, it follows that
the impact of $5 million and $10 million orders will continue to
decrease.\63\
---------------------------------------------------------------------------

\61\ See Notice, 86 FR 14995.
\62\ On the other hand, regarding the amounts needed to move the
bitcoin spot price, one commenter cites a Bank of America March 2021
research report that provides that $93 million in net inflows
increases the bitcoin price by one percent, compared with nearly
$1.87 billion for a corresponding increase in the price of gold. See
Eddie Letter.
\63\ See Notice, 86 FR 14995.
---------------------------------------------------------------------------

One commenter concurs with BZX. The commenter asserts that the
amount of money it would take to actually manipulate the bitcoin spot
market would be ``unfathomable'' and so cost-prohibitive that it would
be a losing strategy. The commenter also asserts that, given the daily
trading volume of bitcoin futures, including those traded on CME, it
would be extraordinarily difficult for a single entity to manipulate
the market.\64\
---------------------------------------------------------------------------

\64\ See Ellis Letter.
---------------------------------------------------------------------------

However, the data furnished by BZX regarding the cost to move the
price of bitcoin, and the market impact of such attempts, are
incomplete. BZX does not

[[Page 64544]]

provide meaningful analysis pertaining to how these figures compare to
other markets \65\ or why one must conclude, based on the numbers
provided, that the bitcoin market is costly to manipulate. Further,
BZX's analysis of the market impact of a mere two sample transactions
is not sufficient evidence to conclude that the bitcoin market is
resistant to manipulation.\66\ Even assuming that the Commission agreed
with BZX's premise, that it is costly to manipulate the bitcoin market,
and it is becoming increasingly so, any such evidence speaks only to
establish that there is some resistance to manipulation, not that it
establishes unique resistance to manipulation to warrant dispensing
with the standard surveillance-sharing agreement.\67\ The Commission
thus concludes that the record does not demonstrate that the nature of
bitcoin trading renders the bitcoin market inherently and uniquely
resistant to fraud and manipulation.
---------------------------------------------------------------------------

\65\ While one commenter makes a comparison to the gold market
(see Eddie Letter and supra note 62), this comparison undercuts
BZX's argument that the bitcoin market is costly to manipulate by
citing to a report that purports to show that it is far less costly
to move the price of bitcoin than gold.
\66\ Aside from stating that the ``statistics are based on
samples of bitcoin liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase Pro, Gemini,
Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during
February 2021,'' the Exchange provides no other information
pertaining to the methodology used to enable the Commission to
evaluate these findings or their significance. See Notice, 86 FR
14494-95 nn.60-61.
\67\ See USBT Order, 85 FR 12601.
---------------------------------------------------------------------------

Moreover, BZX does not sufficiently contest the presence of
possible sources of fraud and manipulation in the bitcoin spot market
generally that the Commission has raised in previous orders, which have
included (1) ``wash'' trading,\68\ (2) persons with a dominant position
in bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin
network and trading platforms, (4) malicious control of the bitcoin
network, (5) trading based on material, non-public information,
including the dissemination of false and misleading information, (6)
manipulative activity involving the purported ``stablecoin'' Tether
(USDT), and (7) fraud and manipulation at bitcoin trading
platforms.\69\
---------------------------------------------------------------------------

\68\ See supra note 58 and accompanying text.
\69\ See USBT Order, 85 FR 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28,
2019), available at https://ssrn.com/abstract=3195066 and published
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR 37585-86.
---------------------------------------------------------------------------

In addition, BZX does not address risk factors specific to the
bitcoin blockchain and bitcoin platforms, described in the Trust's
Amended Registration Statement, that undermine the argument that the
bitcoin market is inherently resistant to fraud and manipulation. For
example, the Amended Registration Statement acknowledges that ``bitcoin
[platforms] on which bitcoin trades are relatively new and, in some
cases, unregulated, and, therefore, may be more exposed to fraud and
security breaches than established, regulated exchanges for other
financial assets or instruments''; that ``[t]he trading for spot
bitcoin occurs on multiple trading venues that have various levels and
types of regulation, but are not regulated in the same manner as
traditional stock and bond exchanges'' and if these spot markets ``do
not operate smoothly or face technical, security or regulatory issues,
that could impact the ability of Authorized Participants to make
markets in the Shares'' which could lead to ``trading in the Shares
[to] occur at a material premium or discount against the NAV''; that
the bitcoin network ``is at risk of vulnerabilities and bugs that can
potentially be exploited by malicious actors''; that the bitcoin
blockchain could be vulnerable to a ``51% attack,'' in which a bad
actor that controls a majority of the processing power dedicated to
mining on the bitcoin network may be able to alter the bitcoin
blockchain on which the bitcoin network and bitcoin transactions rely;
that the nature of the assets held at bitcoin platforms makes them
``appealing targets for hackers'' and that ``a number of bitcoin
platforms have been victims of cybercrimes''; and that bitcoin trading
platforms ``have been closed or faced issues due to fraud, failure''
and ``security breaches.'' \70\
---------------------------------------------------------------------------

\70\ See Amended Registration Statement at 7, 13, 17, 19 and 31.
See also Winklevoss Order, 83 FR 37585.
---------------------------------------------------------------------------

BZX also asserts that other means to prevent fraud and manipulation
are sufficient to justify dispensing with the requisite surveillance-
sharing agreement. First, the Exchange mentions that the Benchmark,
which is used to value the Trust's bitcoin, is itself resistant to
manipulation based on the Benchmark's methodology.\71\ The Exchange
states that the Benchmark is calculated by capturing twenty three-
minute periods of trade prices and sizes leading up to 4:00 p.m. E.T.
from the constituent platforms. An equal-weighted average of the
volume-weighted median price of these twenty three-minute periods is
then calculated, removing the highest and lowest contributed
prices.\72\ According to BZX, ``[u]sing twenty consecutive three-minute
segments over a sixty-minute period means malicious actors would need
to sustain efforts to manipulate the market over an extended period of
time, or would need to replicate efforts multiple times across
exchanges, potentially triggering review.'' \73\ Further, according to
BZX, the ``use of a median price reduces the ability of outlier prices
to impact the NAV,'' and the ``use of a volume-weighted median (as
opposed to a traditional median) serves as an additional protection
against attempts to manipulate the NAV by executing a large number of
low-dollar trades, because any manipulation attempt would have to
involve a majority of global spot bitcoin volume in a three-minute
window to have any influence on the NAV.'' \74\ BZX also asserts that
``removing the highest and lowest prices further protects against
attempts to manipulate the NAV, requiring bad actors to act on multiple
[platforms] at once to have any ability to influence the price.'' \75\
---------------------------------------------------------------------------

\71\ See Notice, 86 FR 14995.
\72\ See id. at 14996.
\73\ See id.
\74\ See id.
\75\ See id.
---------------------------------------------------------------------------

The Custodian, in a comment letter, agrees that BZX's choice of the
Benchmark, which includes a composite of bitcoin prices from underlying
spot bitcoin platforms, including the Custodian's platform, is a
further factor in support of the proposed ETP.\76\ The Custodian
asserts that it and other ``regulated digital asset exchanges'' and
custodians have a history of operations in compliance with a regulatory
framework developed specifically to address activities in digital
assets, including guidance by the New York State Department of
Financial Services (``NYSDFS'') regarding the implementation of anti-
fraud measures. The Custodian states that it meets this obligation
through automated systems and robust internal controls and
surveillance, and that the growing sophistication of market
surveillance tools and strategies in the bitcoin market as well as the
growing proportion of bitcoin activity occurring on ``regulated
exchanges'' is a key development to mollify concerns about price
manipulation or other manipulative practices in the bitcoin market.\77\
---------------------------------------------------------------------------

\76\ See Gemini Letter at 2.
\77\ See id. But see infra note 148 and accompanying text. The
Custodian also states that it is registered with FinCEN as a money
service business and maintains money transmitter licenses (or the
statutory equivalent) in all states where this is required. See
Gemini Letter at 3 and infra note 89.
---------------------------------------------------------------------------

Simultaneously with the Exchange's and the Custodian's assertions
regarding the Benchmark, the Exchange also states

[[Page 64545]]

that, because the Trust will engage in in-kind creations and
redemptions only, the ``manipulability of the Benchmark [is]
significantly less important.'' \78\ The Exchange elaborates further
that, ``because the Trust will not accept cash to buy bitcoin in order
to create new shares or . . . be forced to sell bitcoin to pay cash for
redeemed shares, the price that the Sponsor uses to value the Trust's
bitcoin is not particularly important.'' \79\ According to BZX, when
authorized participants create Shares with the Trust, they would need
to deliver a certain number of bitcoin per share (regardless of the
valuation used), and when they redeem with the Trust, they would
similarly expect to receive a certain number of bitcoin per share.\80\
As such, BZX argues that, even if the price used to value the Trust's
bitcoin is manipulated, the ratio of bitcoin per Share does not change,
and the Trust will either accept (for creations) or distribute (for
redemptions) the same number of bitcoin regardless of the value.\81\
This, according to BZX, not only mitigates the risk associated with
potential manipulation, but also discourages and disincentivizes
manipulation of the Benchmark because there is little financial
incentive to do so.\82\
---------------------------------------------------------------------------

\78\ See Notice, 86 FR 14999.
\79\ See id.
\80\ See id. at 15000.
\81\ See id.
\82\ See id.
---------------------------------------------------------------------------

Based on assertions made and the information provided, the
Commission can find no basis to conclude that BZX has articulated other
means to prevent fraud and manipulation that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement. First,
the Exchange's assertions that the Benchmark's methodology helps make
the Benchmark resistant to manipulation are contradicted by the Amended
Registration Statement's own statements. In the Amended Registration
Statement, the Sponsor states that the Benchmark is ``based on various
inputs which may include price data from various third-party exchanges
and markets'' and that these inputs may be subject to ``technological
error, manipulative activity, or fraudulent reporting from their
initial source.'' \83\
---------------------------------------------------------------------------

\83\ See Amended Registration Statement at 23. The Amended
Registration Statement further states that ``[b]itcoin [platforms]
on which bitcoin trades . . . may be more exposed to fraud and
security breaches than established, regulated exchanges for other
financial assets or instruments, which could have a negative impact
on the performance of the Trust.'' See id. at 7 and 19.
---------------------------------------------------------------------------

Second, the Custodian asserts that the growing sophistication of
market surveillance tools and strategies used by the Benchmark's
constituent platforms, as well as the growing proportion of bitcoin
activity occurring on ``regulated exchanges,'' ``mollify concerns about
price manipulation or other manipulative practices.'' \84\ However, the
level of regulation on the Benchmark's constituent platforms is not
equivalent to the obligations, authority, and oversight of national
securities exchanges or futures exchanges and therefore is not an
appropriate substitute.\85\ National securities exchanges are required
to have rules that are ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.'' \86\ Moreover, national
securities exchanges must file proposed rules with the Commission
regarding certain material aspects of their operations,\87\ and the
Commission has the authority to disapprove any such rule that is not
consistent with the requirements of the Exchange Act.\88\ Thus,
national securities exchanges are subject to Commission oversight of,
among other things, their governance, membership qualifications,
trading rules, disciplinary procedures, recordkeeping, and fees.\89\
---------------------------------------------------------------------------

\84\ See Gemini Letter at 2.
\85\ See also USBT Order, 85 FR 12603-05.
\86\ See 15 U.S.C. 78f(b)(5)
\87\ 17 CFR 240.19b-4(a)(6)(i).
\88\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rules
changes with the Commission and provides the Commission with the
authority to disapprove proposed rule changes that are not
consistent with the Exchange Act. Designated contract markets
(``DCMs'') (commonly called ``futures markets'') registered with and
regulated by the Commodity Futures Trading Commission (``CFTC'')
must comply with, among other things, a similarly comprehensive
range of regulatory principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available
at https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
\89\ See Winklevoss Order, 83 FR 37597. The Commission notes
that the NYSDFS has issued ``guidance'' to supervised virtual
currency business entities, stating that these entities must
``implement measures designed to effectively detect, prevent, and
respond to fraud, attempted fraud, and similar wrongdoing.'' See
Maria T. Vullo, Superintendent of Financial Services, NYSDFS,
Guidance on Prevention of Market Manipulation and Other Wrongful
Activity (Feb. 7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS recognizes that its
``guidance is not intended to limit the scope or applicability of
any law or regulation'' (id.), which would include the Exchange Act.
Nothing in the record evidences whether the Benchmark's constituent
platforms have complied with this NYSDFS guidance.
Further, as stated previously, there are substantial
differences between the NYSDFS and FinCEN versus the Commission's
regulation. AML and KYC policies and procedures, for example, have
been referenced in other bitcoin-based ETP proposals as a
purportedly alternative means by which such ETPs would be uniquely
resistant to manipulation. The Commission has previously concluded
that such AML and KYC policies and procedures do not serve as a
substitute for, and are not otherwise dispositive in the analysis
regarding the importance of, having a surveillance sharing agreement
with a regulated market of significant size relating to bitcoin. For
example, AML and KYC policies and procedures do not substitute for
the sharing of information about market trading activity or clearing
activity and do not substitute for regulation of a national
securities exchange. See USBT Order, 85 FR 12603 n.101.
---------------------------------------------------------------------------

The Benchmark's constituent platforms, on the other hand, have none
of these requirements (none are registered as a national securities
exchange).\90\ Further, although the Custodian claims that the
constituent platforms have market surveillance tools and strategies
that are growing in sophistication, the Custodian provides no
supporting evidence. Moreover, even assuming that the constituent
platforms are as vigilant towards fraud and manipulation as the
Custodian describes, neither the Exchange nor the Custodian attempts to
establish that only the Benchmark constituent platforms' ability to
detect and deter fraud and manipulation would matter, exclusive of
other bitcoin spot markets. In other words, neither addresses how fraud
and manipulation on other bitcoin spot markets may influence the price
of bitcoin.
---------------------------------------------------------------------------

\90\ See 15 U.S.C. 78e, 78f.
---------------------------------------------------------------------------

Third, the Exchange does not explain the significance of the
Benchmark's purported resistance to manipulation to the overall
analysis of whether the proposal to list and trade the Shares is
designed to prevent fraud and manipulation. Even assuming that the
Exchange's argument is that, if the Benchmark is resistant to
manipulation, the Trust's NAV, and thereby the Shares as well, would be
resistant to manipulation, the Exchange has not established in the
record a basis for such conclusion. That assumption aside, the
Commission notes that the Shares would trade at market-based prices in
the secondary market, not at NAV, which then raises the question of the
significance of the NAV calculation to the manipulation of the Shares.

[[Page 64546]]

Fourth, the Exchange's arguments are contradictory. While arguing
that the Benchmark is resistant to manipulation, the Exchange
simultaneously downplays the importance of the Benchmark in light of
the Trust's in-kind creation and redemption mechanism.\91\ The Exchange
points out that the Trust will create and redeem Shares in-kind, not in
cash, which renders the NAV calculation, and thereby the ability to
manipulate NAV, ``significantly less important.'' \92\ In BZX's own
words, the Trust will not accept cash to buy bitcoin in order to create
shares or sell bitcoin to pay cash for redeemed shares, so the price
that the Sponsor uses to value the Trust's bitcoin ``is not
particularly important.'' \93\ If the Benchmark that the Trust uses to
value the Trust's bitcoin ``is not particularly important,'' it follows
that the Benchmark's resistance to manipulation is not material to the
Shares' susceptibility to fraud and manipulation. As the Exchange does
not address or provide any analysis with respect to these issues, the
Commission cannot conclude that the Benchmark aids in the determination
that the proposal to list and trade the Shares is designed to prevent
fraudulent and manipulative acts and practices.\94\
---------------------------------------------------------------------------

\91\ See supra notes 78-82 and accompanying text.
\92\ See Notice, 86 FR 14995 and 14999 (``While the Sponsor
believes that the Benchmark which it uses to value the Trust's
bitcoin is itself resistant to manipulation based on the methodology
further described below, the fact that creations and redemptions are
only available in-kind makes the manipulability of the Benchmark
significantly less important.'').
\93\ See id. (concluding that ``because the Trust will not
accept cash to buy bitcoin in order to create new shares or, barring
a forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses to value the Trust's bitcoin
is not particularly important.'').
\94\ In addition, with respect to the valuation of bitcoin
according to a benchmark or a reference price, the Commission has
previously considered and rejected similar arguments. See SolidX
Order, 82 FR 16258; Winklevoss Order, 83 FR 37589-90. Among other
things, the Exchange fails to explain why prices and volumes of
bitcoin platforms that are not constituents of the Benchmark do not
affect the prices of the constituent platforms. Likewise, the
Exchange also fails to establish how the Benchmark's methodology
eliminates fraudulent or manipulative activity that is not
transient. See USBT Order, 85 FR 12607.
---------------------------------------------------------------------------

Finally, the Commission finds that BZX has not demonstrated that
in-kind creations and redemptions provide the Shares with a unique
resistance to manipulation. The Commission has previously addressed
similar assertions.\95\ As the Commission stated before, in-kind
creations and redemptions are a common feature of ETPs, and the
Commission has not previously relied on the in-kind creation and
redemption mechanism as a basis for excusing exchanges that list ETPs
from entering into surveillance-sharing agreements with significant,
regulated markets related to the portfolio's assets.\96\ Accordingly,
the Commission is not persuaded here that the Trust's in-kind creations
and redemptions afford it a unique resistance to manipulation.\97\
---------------------------------------------------------------------------

\95\ See Winklevoss Order, 83 FR 37589-90; USBT Order, 85 FR
12607-08.
\96\ See, e.g., iShares COMEX Gold Trust, Securities Exchange
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26,
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24,
2006) (SR-Amex-2005-072).
\97\ Putting aside the Exchange's various assertions about the
nature of bitcoin and the bitcoin market, the Benchmark, and the
Shares, the Exchange also does not address concerns the Commission
has previously identified, including the susceptibility of bitcoin
markets to potential trading on material, non-public information
(such as plans of market participants to significantly increase or
decrease their holdings in bitcoin; new sources of demand for
bitcoin; the decision of a bitcoin-based investment vehicle on how
to respond to a ``fork'' in the bitcoin blockchain, which would
create two different, non-interchangeable types of bitcoin), or to
the dissemination of false or misleading information. See Winklevoss
Order, 83 FR 37585. See also USBT Order, 85 FR 12600-01.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size
As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and
manipulative acts and practices, the Commission next examines whether
the record supports the conclusion that BZX has entered into a
comprehensive surveillance-sharing agreement with a regulated market of
significant size relating to the underlying assets. In this context,
the term ``market of significant size'' includes a market (or group of
markets) as to which (i) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (ii) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\98\
---------------------------------------------------------------------------

\98\ See Winklevoss Order, 83 FR 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that provides guidance to market
participants. See id.
---------------------------------------------------------------------------

As the Commission has stated in the past, it considers two markets
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate
bilateral surveillance-sharing agreement.\99\ Accordingly, based on the
common membership of BZX and CME in the ISG,\100\ BZX has the
equivalent of a comprehensive surveillance-sharing agreement with CME.
However, while the Commission recognizes that the CFTC regulates the
CME futures market,\101\ including the CME bitcoin futures market, and
thus such market is ``regulated,'' in the context of the proposed ETP,
the record does not, as explained further below, establish that the CME
bitcoin futures market is a ``market of significant size'' as that term
is used in the context of the applicable standard here.\102\
---------------------------------------------------------------------------

\99\ See id. at 37580 n.19.
\100\ See Notice, 86 FR 14994 n.56 and accompanying text.
\101\ While the Commission recognizes that the CFTC regulates
the CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying bitcoin spot market. See Winklevoss
Order, 83 FR 37587, 37599.
\102\ As described above (see supra notes 85-90 and accompanying
text), in the context of the proposed ETP, the Benchmark's
constituent platforms are not ``regulated.'' They are not registered
as ``exchanges'' and lack the obligations, authority, and oversight
of national securities exchanges.
---------------------------------------------------------------------------

(i) Whether There Is a Reasonable Likelihood That a Person Attempting
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin
Futures Market to Successfully Manipulate the ETP
The first prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that there is a reasonable likelihood that a person
attempting to manipulate the ETP would have to trade on the CME bitcoin
futures market to successfully manipulate the ETP.
BZX notes that CME began to offer trading in bitcoin futures in
2017.\103\ According to BZX, nearly every measurable metric related to
CME bitcoin futures contracts, which trade and settle like other cash-
settled commodity futures contracts, has ``trended consistently up
since launch and/or accelerated upward in the past year.'' \104\ For
example, according to BZX, there was approximately $28 billion in
trading in CME bitcoin futures in December 2020 compared to $737
million, $1.4 billion, and $3.9 billion in total trading in December
2017, December 2018, and December 2019, respectively.\105\
Additionally, CME

[[Page 64547]]

bitcoin futures traded over $1.2 billion per day in December 2020 and
represented $1.6 billion in open interest compared to $115 million in
December 2019.\106\ Similarly, BZX contends that the number of large
open interest holders \107\ has continued to increase, even as the
price of bitcoin has risen, as have the number of unique accounts
trading CME bitcoin futures.\108\
---------------------------------------------------------------------------

\103\ According to BZX, each contract represents five bitcoin
and is based on the CME CF Bitcoin Reference Rate. See Notice, 86 FR
14991.
\104\ See id.
\105\ See id.
\106\ See id.
\107\ BZX represents that a large open interest holder in CME
bitcoin futures is an entity that holds at least 25 contracts, which
is the equivalent of 125 bitcoin. According to BZX, at a price of
approximately $30,000 per bitcoin on December 31, 2020, more than 80
firms had outstanding positions of greater than $3.8 million in CME
bitcoin futures. See id. at 14992 n.50.
\108\ See id. at 14992.
---------------------------------------------------------------------------

BZX argues that the significant growth in CME bitcoin futures
across each of trading volumes, open interest, large open interest
holders, and total market participants since the USBT Order was issued
is reflective of that market's growing influence on the spot price. BZX
asserts that where CME bitcoin futures lead the price in the spot
market such that a potential manipulator of the bitcoin spot market
(beyond just the constituents of the Benchmark) would have to
participate in the CME bitcoin futures market, it follows that a
potential manipulator of the Shares would similarly have to transact in
the CME bitcoin futures market.\109\
---------------------------------------------------------------------------

\109\ See id. at 14994.
---------------------------------------------------------------------------

BZX further states that academic research corroborates the overall
trend outlined above and supports the thesis that CME bitcoin futures
pricing leads the spot market. BZX asserts that academic research
demonstrates that the CME bitcoin futures market was already leading
the spot price in 2018 and 2019.\110\ BZX concludes that a person
attempting to manipulate the Shares would also have to trade on that
market to manipulate the ETP.\111\
---------------------------------------------------------------------------

\110\ See id. at 14994 and 14993 n.51 (citing Y. Hu, Y. Hou & L.
Oxley, What role do futures markets play in Bitcoin pricing?
Causality, cointegration and price discovery from a time-varying
perspective, 72 Int'l Rev. of Fin. Analysis 101569 (2020) (available
at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu,
Hou & Oxley'').
\111\ See id. at 14994.
---------------------------------------------------------------------------

The Commission disagrees. The record does not demonstrate that
there is a reasonable likelihood that a person attempting to manipulate
the proposed ETP would have to trade on the CME bitcoin futures market
to successfully manipulate it. Specifically, BZX's assertions about the
general upward trends from 2018 to February 2021 in trading volume and
open interest of, and in the number of large open interest holders and
number of unique accounts trading in, CME bitcoin futures do not
establish that the CME bitcoin futures market is of significant size.
As the Commission has previously articulated, the interpretation of the
term ``market of significant size'' or ``significant market'' depends
on the interrelationship between the market with which the listing
exchange has a surveillance-sharing agreement and the proposed
ETP.\112\ BZX's recitation of data reflecting the size of the CME
bitcoin futures market, alone, either currently or in relation to
previous years, is not sufficient to establish an interrelationship
between the CME bitcoin futures market and the proposed ETP.\113\
---------------------------------------------------------------------------

\112\ See USBT Order, 85 FR 12611.
\113\ See id. at 12612.
---------------------------------------------------------------------------

Further, the evidence in the record also does not support a
conclusion that the CME bitcoin futures market leads the bitcoin spot
market in such a manner that the CME bitcoin futures market is a
``market of significant size.'' As the Commission has previously
explained, establishing a lead-lag relationship between the bitcoin
futures market and the spot market is ``central to understanding
whether it is reasonably likely that a would-be manipulator of the ETP
would need to trade on the bitcoin futures market to successfully
manipulate prices on those spot platforms that feed into the proposed
ETP's pricing mechanism.'' \114\ The Commission has previously stated
that, in particular, if the spot market leads the futures market, this
would indicate that it would not be necessary to trade on the futures
market to manipulate the proposed ETP, because the futures price would
move to meet the spot price.\115\
---------------------------------------------------------------------------

\114\ See id.
\115\ See id.
---------------------------------------------------------------------------

While BZX states that CME bitcoin futures pricing leads the spot
market,\116\ it relies on the findings of a price discovery analysis in
one section of a single academic paper to support the overall
thesis.\117\ However, the findings of that paper's Granger causality
analysis, which is widely used to formally test for lead-lag
relationships, are concededly mixed.\118\ In addition, the Commission
considered an unpublished version of the paper in the USBT Order, as
well as a comment letter submitted by the authors on that record.\119\
In the USBT Order, as part of the Commission's conclusion that ``mixed
results'' in academic studies failed to demonstrate that the CME
bitcoin futures market constitutes a market of significant size, the
Commission noted the paper's inconclusive evidence that CME bitcoin
futures prices lead spot prices--in particular that the months at the
end of the paper's sample period showed that the spot market was the
leading market--and stated that the record did not include evidence to
explain why this would not indicate a shift towards prices in the spot
market leading the futures market that would be expected to persist
into the future.\120\ The Commission also stated that the paper's use
of daily price data, as opposed to intraday prices, may not be able to
distinguish which market incorporates new information faster.\121\ BZX
has not addressed either issue.
---------------------------------------------------------------------------

\116\ See Notice, 86 FR 14993.
\117\ See supra note 110 and accompanying text. BZX references
the following conclusion from the ``time-varying price discovery''
section of Hu, Hou & Oxley: ``There exist no episodes where the
Bitcoin spot markets dominates the price discovery processes with
regard to Bitcoin futures. This points to a conclusion that the
price formation originates solely in the Bitcoin futures market. We
can, therefore, conclude that the Bitcoin futures markets dominate
the dynamic price discovery process based upon time-varying
information share measures. Overall, price discovery seems to occur
in the Bitcoin futures markets rather than the underlying spot
market based upon a time-varying perspective . . .'' See Notice, 86
FR 14993 n.51.
\118\ The paper finds that the CME bitcoin futures market
dominates the spot markets in terms of Granger causality, but that
the causal relationship is bi-directional, and a Granger causality
episode from March 2019 to June/July 2019 runs from bitcoin spot
prices to CME bitcoin futures prices. The paper concludes: ``[T]he
Granger causality episodes are not constant throughout the whole
sample period. Via our causality detection methods, market
participants can identify when markets are being led by futures
prices and when they might not be.'' See Hu, Hou & Oxley, supra note
110.
\119\ See USBT Order, 85 FR 12609.
\120\ See id. at 12613 n.244.
\121\ See id.
---------------------------------------------------------------------------

Moreover, BZX does not provide results of its own analysis and does
not present any other data supporting its conclusion. BZX's unsupported
representations constitute an insufficient basis for approving a
proposed rule change in circumstances where, as here, the Exchange's
assertion would form such an integral role in the Commission's analysis
and the assertion is subject to several challenges.\122\ In this
context, BZX's reliance on a single paper, whose own lead-lag results
are inconclusive, is especially lacking because the academic literature
on the lead-lag relationship and price discovery between bitcoin spot
and futures markets is unsettled.\123\ In the

[[Page 64548]]

USBT Order, the Commission responded to multiple academic papers that
were cited and concluded that, in light of the mixed results found, the
exchange there had not demonstrated that it is reasonably likely that a
would-be manipulator of the proposed ETP would transact on the CME
bitcoin futures market.\124\ Likewise, here, given the body of academic
literature to indicate to the contrary, the Commission concludes that
the information that BZX provides is not a sufficient basis to support
a determination that it is reasonably likely that a would-be
manipulator of the proposed ETP would have to trade on the CME bitcoin
futures market.\125\
---------------------------------------------------------------------------

\122\ See Susquehanna, 866 F.3d at 447.
\123\ See, e.g., D. Baur & T. Dimpfl, Price discovery in bitcoin
spot or futures?, 39 J. Futures Mkts. 803 (2019) (finding that the
bitcoin spot market leads price discovery); O. Entrop, B. Frijns &
M. Seruset, The determinants of price discovery on bitcoin markets,
40 J. Futures Mkts. 816 (2020) (finding that price discovery
measures vary significantly over time without one market being
clearly dominant over the other); J. Hung, H. Liu & J. Yang, Trading
activity and price discovery in Bitcoin futures markets, 62 J.
Empirical Finance 107 (2021) (finding that the bitcoin spot market
dominates price discovery); B. Kapar & J. Olmo, An analysis of price
discovery between Bitcoin futures and spot markets, 174 Econ.
Letters 62 (2019) (finding that bitcoin futures dominate price
discovery); E. Akyildirim, S. Corbet, P. Katsiampa, N. Kellard & A.
Sensoy, The development of Bitcoin futures: Exploring the
interactions between cryptocurrency derivatives, 34 Fin. Res.
Letters 101234 (2020) (finding that bitcoin futures dominate price
discovery); A. Fassas, S. Papadamou, & A. Koulis, Price discovery in
bitcoin futures, 52 Res. Int'l Bus. Fin. 101116 (2020) (finding that
bitcoin futures play a more important role in price discovery); S.
Aleti & B. Mizrach, Bitcoin spot and futures market microstructure,
41 J. Futures Mkts. 194 (2021) (finding that relatively more price
discovery occurs on CME as compared to four spot exchanges); J. Wu,
K. Xu, X. Zheng & J. Chen, Fractional cointegration in bitcoin spot
and futures markets, 41 J. Futures Mkts. 1478 (2021) (finding that
CME bitcoin futures dominate price discovery). See also C. Alexander
& D. Heck, Price discovery in Bitcoin: The impact of unregulated
markets, 50 J. Financial Stability 100776 (2020) (finding that, in a
multi-dimensional setting, including the main price leaders within
futures, perpetuals, and spot markets, CME bitcoin futures have a
very minor effect on price discovery; and that faster speed of
adjustment and information absorption occurs on the unregulated spot
and derivatives platforms than on CME bitcoin futures) (``Alexander
& Heck''). One commenter states they have updated the Alexander &
Heck study using data from June 1, 2020 to April 30, 2021, and they
found that CME bitcoin futures now have a far more pronounced price
leadership role, but also that, similar to Alexander & Heck's
findings, Huobi and OKEx futures are the leading instruments in
bitcoin's price discovery. See letter from Vetle Andreas Gusgaard
Lunde, dated July 2, 2021, and weblink cited therein: https://www.research.arcane.no/blog/the-regulated-tail-that-wags-the-honey-badger.
\124\ See USBT Order, 85 FR 12613 nn.239-244 and accompanying
text.
\125\ In addition, the Exchange fails to address the lead-lag
relationship (if any) between prices on other bitcoin futures
markets and the CME bitcoin futures market, the bitcoin spot market,
and/or the particular Benchmark constituent platforms, or where
price formation occurs when the entirety of bitcoin futures markets,
not just CME, is considered.
---------------------------------------------------------------------------

The Commission accordingly concludes that the information provided
in the record does not establish a reasonable likelihood that a would-
be manipulator of the proposed ETP would have to trade on the CME
bitcoin futures market to successfully manipulate the proposed ETP.
Therefore, the information in the record also does not establish that
the CME bitcoin futures market is a ``market of significant size'' with
respect to the proposed ETP.
(ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be
the Predominant Influence on Prices in the CME Bitcoin Futures Market
The second prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that it is unlikely that trading in the proposed ETP
would be the predominant influence on prices in the CME bitcoin futures
market.\126\
---------------------------------------------------------------------------

\126\ See Winklevoss Order, 83 FR 37594; USBT Order, 85 FR
12596-97.
---------------------------------------------------------------------------

BZX asserts that trading in the Shares would not be the predominant
force on prices in the CME bitcoin futures market (or spot market)
because of the significant volume in the CME bitcoin futures market,
the size of bitcoin's market capitalization, which is approximately $1
trillion, and the significant liquidity available in the spot
market.\127\ BZX provides that, according to February 2021 data, the
cost to buy or sell $5 million worth of bitcoin averages roughly 10
basis points with a market impact of 30 basis points.\128\ For a $10
million market order, the cost to buy or sell is roughly 20 basis
points with a market impact of 50 basis points. Stated another way, BZX
states that a market participant could enter a market buy or sell order
for $10 million of bitcoin and only move the market 0.5 percent.\129\
BZX further asserts that more strategic purchases or sales (such as
using limit orders and executing through OTC bitcoin trade desks) would
likely have less obvious impact on the market, which is consistent with
MicroStrategy, Tesla, and Square being able to collectively purchase
billions of dollars in bitcoin.\130\ Thus, BZX concludes that the
combination of CME bitcoin futures leading price discovery, the overall
size of the bitcoin market, and the ability for market participants
(including authorized participants creating and redeeming in-kind with
the Trust) to buy or sell large amounts of bitcoin without significant
market impact, will help prevent the Shares from becoming the
predominant force on pricing in either the bitcoin spot or the CME
bitcoin futures market.\131\
---------------------------------------------------------------------------

\127\ See Notice, 86 FR 14999.
\128\ See id. According to BZX, these statistics are based on
samples of bitcoin liquidity in U.S. dollars (excluding stablecoins
or Euro liquidity) based on executable quotes on Coinbase Pro,
Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin
during February 2021. See id. at 14999 n.80.
\129\ See id. at 14999.
\130\ See id.
\131\ See id.
---------------------------------------------------------------------------

The Commission does not agree. The record does not demonstrate that
it is unlikely that trading in the proposed ETP would be the
predominant influence on prices in the CME bitcoin futures market. As
the Commission has already addressed and rejected one of the bases of
BZX's assertion--that CME bitcoin futures leads price discovery \132\--
it will only address below the other two bases--the overall size of,
and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

\132\ See supra notes 123-125 and accompanying text.
---------------------------------------------------------------------------

BZX's assertions about the potential effect of trading in the
Shares on the CME bitcoin futures market and bitcoin spot market are
general and conclusory, repeating the aforementioned trade volume of
the CME bitcoin futures market and the size and liquidity of the
bitcoin spot market, as well as the market impact of a large
transaction, without any analysis or evidence to support these
assertions. For example, there is no limit on the amount of mined
bitcoin that the Trust may hold. Yet BZX does not provide any
information on the expected growth in the size of the Trust and the
resultant increase in the amount of bitcoin held by the Trust over
time, or on the overall expected number, size, and frequency of
creations and redemptions--or how any of the foregoing could (if at
all) influence prices in the CME bitcoin futures market. Moreover, in
the Trust's Amended Registration Statement, the Sponsor acknowledges
that the Trust may acquire large size positions in bitcoin, which would
increase the risk of illiquidity in the underlying bitcoin.
Specifically, the Sponsor, in the Amended Registration Statement,
states that the Trust may acquire large size positions in bitcoin,
which will increase the risk of illiquidity by both making the
positions more difficult to liquidate and increasing the losses
incurred while trying to do so, or by making it more difficult for
authorized participants to acquire or liquidate bitcoin as part of the
creation and/or redemption of Shares of the Trust.\133\ Although the
Trust's Amended Registration Statement concedes that the Trust could
negatively affect the liquidity of bitcoin, BZX does not address this
in the proposal or discuss how impacting the liquidity of bitcoin can
be consistent with the assertion that the Shares are unlikely to be the
predominant influence on the

[[Page 64549]]

prices of the CME bitcoin futures market. Thus, the Commission cannot
conclude, based on BZX's statements alone and absent any evidence or
analysis in support of BZX's assertions, that it is unlikely that
trading in the ETP would be the predominant influence on prices in the
CME bitcoin futures market.
---------------------------------------------------------------------------

\133\ See Amended Registration Statement at 26.
---------------------------------------------------------------------------

The Commission also is not persuaded by BZX's assertions about the
minimal effect a large market order to buy or sell bitcoin would have
on the bitcoin market.\134\ While BZX concludes by way of a $10 million
market order example that buying or selling large amounts of bitcoin
would have insignificant market impact, the conclusion does not analyze
the extent of any impact on the CME bitcoin futures market. Even
assuming that BZX is suggesting that a single $10 million order in
bitcoin would have immaterial impact on the prices in the CME bitcoin
futures market, this prong of the ``market of significant size''
determination concerns the influence on prices from trading in the
proposed ETP, which is broader than just trading by the proposed ETP.
While authorized participants of the Trust might only transact in the
bitcoin spot market as part of their creation or redemption of Shares,
the Shares themselves would be traded in the secondary market on BZX.
The record does not discuss the expected number or trading volume of
the Shares, or establish the potential effect of the Shares' trade
prices on CME bitcoin futures prices. For example, BZX does not provide
any data or analysis about the potential effect the quotations or trade
prices of the Shares might have on market-maker quotations in CME
bitcoin futures contracts and whether those effects would constitute a
predominant influence on the prices of those futures contracts.
---------------------------------------------------------------------------

\134\ See Notice, 86 FR 14994-95 (``For a $10 million market
order, the cost to buy or sell is roughly 20 basis points with a
market impact of 50 basis points. Stated another way, a market
participant could enter a market buy or sell order for $10 million
of bitcoin and only move the market 0.5%.'').
---------------------------------------------------------------------------

Thus, because BZX has not provided sufficient information to
establish both prongs of the ``market of significant size''
determination, the Commission cannot conclude that the CME bitcoin
futures market is a ``market of significant size'' such that BZX would
be able to rely on a surveillance-sharing agreement with the CME to
provide sufficient protection against fraudulent and manipulative acts
and practices.
The requirements of Section 6(b)(5) of the Exchange Act apply to
the rules of national securities exchanges. Accordingly, the relevant
obligation for a comprehensive surveillance-sharing agreement with a
regulated market of significant size, or other means to prevent
fraudulent and manipulative acts and practices that are sufficient to
justify dispensing with the requisite surveillance-sharing agreement,
resides with the listing exchange. Because there is insufficient
evidence in the record demonstrating that BZX has satisfied this
obligation, the Commission cannot approve the proposed ETP for listing
and trading on BZX.

C. Whether BZX has met its Burden To Demonstrate That the Proposal Is
Designed To Protect Investors and the Public Interest

BZX contends that, if approved, the proposed ETP would protect
investors and the public interest. However, the Commission must
consider these potential benefits in the broader context of whether the
proposal meets each of the applicable requirements of the Exchange
Act.\135\ Because BZX has not demonstrated that its proposed rule
change is designed to prevent fraudulent and manipulative acts and
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

\135\ See Winklevoss Order, 83 FR 37601. See also GraniteShares
Order, 83 FR 43931; ProShares Order, 83 FR 43941; USBT Order, 85 FR
12615.
---------------------------------------------------------------------------

BZX asserts that, with the growth of U.S. investor exposure to
bitcoin through OTC bitcoin funds, so too has grown the potential risk
to U.S. investors.\136\ Specifically, BZX argues that premium
volatility, high fees, insufficient disclosures, and technical hurdles
are putting U.S. investor money at risk on a daily basis and that such
risk could potentially be eliminated through access to a bitcoin
ETP.\137\ As such, the Exchange believes that approving this proposal
(and comparable proposals submitted hereafter) would give U.S.
investors access to bitcoin in a regulated and transparent exchange-
traded vehicle that would act to limit risk to U.S. investors by: (i)
Reducing premium volatility; (ii) reducing management fees through
meaningful competition; (iii) providing an alternative to custodying
spot bitcoin; and (iv) reducing risks associated with investing in
operating companies that are imperfect proxies for bitcoin
exposure.\138\
---------------------------------------------------------------------------

\136\ See Notice, 86 FR 14990.
\137\ See id. BZX states that while it understands the
Commission's previous focus on potential manipulation of a bitcoin
ETP in prior disapproval orders, it now believes that ``such
concerns have been sufficiently mitigated and that the growing and
quantifiable investor protection concerns should be the central
consideration as the Commission reviews this proposal.'' See id.
\138\ See id.
---------------------------------------------------------------------------

According to BZX, OTC bitcoin funds are generally designed to
provide exposure to bitcoin in a manner similar to the Shares. However,
unlike the Shares, BZX states that ``OTC bitcoin funds are unable to
freely offer creation and redemption in a way that incentivizes market
participants to keep their shares trading in line with their NAV and,
as such, frequently trade at a price that is out-of-line with the value
of their assets held.'' \139\ BZX represents that, historically, OTC
bitcoin funds have traded at a significant premium to NAV.\140\
Although the Exchange concedes that trading at a premium (or
potentially a discount) is not unique to OTC bitcoin funds and not
inherently problematic, BZX believes that it raises certain investor
protections issues. First, according to BZX, investors are buying
shares of a fund for a price in excess of the per-share value of the
fund's underlying assets; the price of bitcoin could stay exactly the
same from market close on one day to market open the next, yet the
value of the shares held by the investor could decrease only because of
the fluctuation of the premium.\141\ Second, according to BZX, only
accredited investors, generally, are able to create new shares with the
OTC bitcoin fund and can purchase the shares at NAV. While they are
forced to hold the shares for at least six months before selling, in
reality they can immediately hedge any exposure to the price of bitcoin
and simply wait six months to sell the shares to a retail investor and
collect the premium.\142\
---------------------------------------------------------------------------

\139\ See id. BZX also states that, unlike the Shares, because
OTC bitcoin funds are not listed on an exchange, they are not
subject to the same transparency and regulatory oversight by a
listing exchange. BZX further asserts that the existence of a
surveillance-sharing agreement between BZX and the CME bitcoin
futures market would result in increased investor protections for
the Shares compared to OTC bitcoin funds. See id. at 14990 n.38.
\140\ See id. at 14990. BZX further represents that the
inability to trade in line with NAV may at some point result in OTC
bitcoin funds trading at a discount to their NAV. According to BZX,
while that has not historically been the case, trading at a discount
would give rise to nearly identical potential issues related to
trading at a premium. See id. at 14990 n.39.
\141\ See id. at 14990.
\142\ See id.
---------------------------------------------------------------------------

Several commenters also express support for the approval of bitcoin
ETPs because they believe such ETPs would have lower premium/discount

[[Page 64550]]

volatility \143\ and lower management fees \144\ than an OTC bitcoin
fund.
---------------------------------------------------------------------------

\143\ See Ellis Letter; Apodaca Letter; letters from: Anonymous,
dated June 16, 2021 (``Anonymous 6 Letter''); Anonymous, dated June
17, 2021 (``Anonymous 9 Letter''); Brian Havermann, dated July 6,
2021 (``Havermann Letter'').
\144\ See Anonymous 6 Letter; Anonymous 9 Letter; Havermann
Letter; Apodaca Letter; letter from Chris Kim, dated June 17, 2021
(``Kim Letter'').
---------------------------------------------------------------------------

Another commenter argues that a bitcoin ETP has the potential to
reduce volatility in the price of bitcoin itself, which the commenter
believes would generate positive externalities for existing investors
and ultimately for financial stability. The commenter asserts, with no
supporting evidence, that marginal demand for a bitcoin ETP is likely
to come from relatively more conservative investors--for example,
retail traders unwilling to trade on unregulated markets, as well as
institutional traders who lack a ``mandate'' or the risk tolerance to
do so. The commenter states that a shift in the marginal investor's
risk aversion, as well as increased attention from sophisticated
institutions, would lead to a bitcoin price that is less susceptible to
wild swings that are often driven by social media.\145\
---------------------------------------------------------------------------

\145\ See letter from Marius Zoican, Assistant Professor of
Finance, University of Toronto Mississauga, Rotman School of
Management, dated June 17, 2021 (``Zoican Letter''). Another
commenter puts forward a different reason why an approval of a
bitcoin ETP could reduce bitcoin price volatility. This other
commenter asserts that bitcoin ETPs (and other crypto ETPs) would
allow non-institutional investors to more easily take ``short''
positions on crypto assets. The commenter believes some of the price
volatility is caused by asymmetric buy/sell-side access in crypto
markets that has added unnecessary tailwind to a standard asset
bubble. See letter from Christian Lewis, dated June 16, 2021.
---------------------------------------------------------------------------

BZX also asserts that exposure to bitcoin through an ETP also
presents advantages for retail investors compared to buying spot
bitcoin directly.\146\ BZX asserts that, without the advantages of an
ETP, an individual retail investor holding bitcoin through a
cryptocurrency trading platform lacks protections.\147\ BZX explains
that, typically, retail platforms hold most, if not all, retail
investors' bitcoin in ``hot'' (internet-connected) storage and do not
make any commitments to indemnify retail investors or to observe any
particular cybersecurity standard.\148\ Meanwhile, a retail investor
holding spot bitcoin directly in a self-hosted wallet may suffer from
inexperience in private key management (e.g., insufficient password
protection, lost key, etc.), which could cause them to lose some or all
of their bitcoin holdings.\149\ BZX represents that the Custodian
would, by contrast, use ``cold'' (offline) storage to hold private
keys, employ a certain degree of cybersecurity measures and operational
best practices, be highly experienced in bitcoin custody, and be
accountable for failures.\150\ Thus, with respect to custody of the
Trust's bitcoin assets, BZX concludes that, compared to owning spot
bitcoin directly, the Trust presents advantages from an investment
protection standpoint for retail investors.\151\
---------------------------------------------------------------------------

\146\ See Notice, 86 FR 14991.
\147\ See id.
\148\ See id.
\149\ See id.
\150\ See id.
\151\ See id. Likewise, several commenters cite risks and
difficulties associated with the self-custody of bitcoin as part of
the basis for their support for the proposed ETP. See Ellis Letter;
Havermann Letter; Apodaca Letter; letters from: Michael Anderson,
dated June 16, 2021; Joshua Park, dated June 16, 2021; John, dated
June 17, 2021; Taylor Ailshie, dated June 17, 2021 (``Ailshie
Letter''); Sebastian Aroca, dated July 6, 2021 (``Aroca Letter'');
Michael Althaus, dated June 24, 2021 and June 28, 2021.
---------------------------------------------------------------------------

The Custodian, in a comment letter, echoes some of the descriptions
of the custodial arrangement.\152\ The Custodian also specifies that it
employs a multi-signature system which requires a quorum of unique
private key signatures before transactions can be effectuated on the
bitcoin blockchain and that this approach allows for constant
monitoring and auditability of the Trust's holdings.\153\ Also,
according to the Custodian, it maintains digital asset insurance, is
regularly audited by major financial and audit firms, and is subject to
independent third-party verification that the Custodian's operations
and security compliance structures meet the most robust of industry
standards.\154\
---------------------------------------------------------------------------

\152\ See Gemini Letter at 3-4.
\153\ See id. at 3.
\154\ See id. at 3-4.
---------------------------------------------------------------------------

BZX further asserts that a number of operating companies engaged in
unrelated businesses have announced investments as large as $1.5
billion in bitcoin.\155\ Without access to bitcoin ETPs, BZX argues
that retail investors seeking investment exposure to bitcoin may
purchase shares in these companies in order to gain the exposure to
bitcoin that they seek.\156\ BZX contends that such operating
companies, however, are imperfect bitcoin proxies and provide investors
with partial bitcoin exposure paired with additional risks associated
with whichever operating company they decide to purchase. BZX concludes
that investors seeking bitcoin exposure through publicly traded
companies are gaining only partial exposure to bitcoin and are not
fully benefitting from the risk disclosures and associated investor
protections that come from the securities registration process.\157\
---------------------------------------------------------------------------

\155\ See Notice, 86 FR 14991.
\156\ See id. One commenter disagrees with the contention that
investors would pay a premium to gain exposure to bitcoin by
investing in companies that have decided to invest in bitcoin. See
Eddie Letter.
\157\ See Notice, 86 FR 14991. The Custodian, in its comment
letter, agrees that the proposed ETP would offer greater customer
protection and transparency than existing alternatives for retail
customers to gain proxy exposure to bitcoin. See Gemini Letter at 2.
---------------------------------------------------------------------------

BZX also states that investors in many other countries, including
Canada, are able to use more traditional exchange listed and traded
products to gain exposure to bitcoin, disadvantaging U.S. investors and
leaving them with more risky means of getting bitcoin exposure.\158\
---------------------------------------------------------------------------

\158\ See Notice, 86 FR 14990. BZX represents that the Purpose
Bitcoin ETF, a retail bitcoin-based ETP launched in Canada,
reportedly reached $421.8 million in assets under management in two
days, demonstrating the demand for a North American market listed
bitcoin ETP. BZX contends that the Purpose Bitcoin ETF also offers a
class of units that is U.S. dollar denominated, which could appeal
to U.S. investors. BZX also argues that without an approved bitcoin
ETP in the U.S. as a viable alternative, U.S. investors could seek
to purchase these shares in order to get access to bitcoin exposure.
BZX believes that, given the separate regulatory regime and the
potential difficulties associated with any international litigation,
such an arrangement would create more risk exposure for U.S.
investors than they would otherwise have with a U.S. exchange-listed
ETP. See id. at 14990 n.36.
---------------------------------------------------------------------------

In essence, BZX asserts that the risky nature of direct investment
in the underlying bitcoin and the unregulated markets on which bitcoin
and OTC bitcoin funds trade compel approval of the proposed rule
change. BZX, however, offers no limiting principle to this argument,
under which, by logical extension, the Commission would be required to
approve the listing and trading of any ETP that arguably presents
marginally less risk to investors than a direct investment in the
underlying asset or in an OTC-traded product.
The Commission disagrees with this reading of the Exchange Act.
Pursuant to Section 19(b)(2) of the Exchange Act, the Commission must
approve a proposed rule change filed by a national securities exchange
if it finds that the proposed rule change is consistent with the
applicable requirements of the Exchange Act--including the requirement
under Section 6(b)(5) that the rules of a national securities exchange
be designed to prevent fraudulent and manipulative acts and practices--
and it must disapprove the filing if it does not make such a
finding.\159\ Thus, even if a proposed rule change purports to protect
investors from a particular type of investment

[[Page 64551]]

risk--such as the susceptibility of an asset to loss or theft--the
proposed rule change may still fail to meet the requirements under the
Exchange Act.\160\
---------------------------------------------------------------------------

\159\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
\160\ See SolidX Order, 82 FR 16259.
---------------------------------------------------------------------------

Here, even if it were true that, compared to trading in unregulated
bitcoin spot markets, trading a bitcoin-based ETP on a national
securities exchange provides some additional protection to investors,
the Commission must consider this potential benefit in the broader
context of whether the proposal meets each of the applicable
requirements of the Exchange Act.\161\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing
exchange have a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to bitcoin, or demonstrate
that other means to prevent fraudulent and manipulative acts and
practices are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The listing exchange has not met that
requirement here. Therefore the Commission is unable to find that the
proposed rule change is consistent with the statutory standard.
---------------------------------------------------------------------------

\161\ See supra note 135.
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2) of the Exchange Act, the Commission
must disapprove a proposed rule change filed by a national securities
exchange if it does not find that the proposed rule change is
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices.\162\
---------------------------------------------------------------------------

\162\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

For the reasons discussed above, BZX has not met its burden of
demonstrating that the proposal is consistent with Exchange Act Section
6(b)(5),\163\ and, accordingly, the Commission must disapprove the
proposal.\164\
---------------------------------------------------------------------------

\163\ 15 U.S.C. 78f(b)(5).
\164\ In disapproving the proposed rule change the Commission
has considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f). Three commenters argue that, for
competitive reasons, the Commission should approve several bitcoin-
based ETPs together. See Zoican Letter; letters from: Jared Henry,
dated March 18, 2021 (``Henry Letter''); Ge De, dated July 4, 2021
(``Ge De Letter''). The Zoican Letter states that network
externalities are particularly strong for exchange-traded funds with
identical underlying portfolios, conferring large advantages to the
first mover by enabling it to command higher management fees than
subsequent entrants. According to this commenter, this effect leads
to segmentation of investors, with short-horizon traders preferring
liquid products and long-horizon investors focusing on cheaper
products. This commenter believes that allowing for several products
to be launched simultaneously would help investors coordinate on the
product with the lowest fees, stimulating both liquidity and
competition on management fees between issuers.
Another commenter argues, for efficiency reasons, against
approving a bitcoin ETP. This commenter asserts that the adoption of
multiple digital assets would force merchants to deal with
``complexity [that] doesn't foster [the] modularity which is needed
to gain economic efficiency.'' See Ciao Letter at 1.
For the reasons discussed throughout, however, see supra note
38, the Commission is disapproving the proposed rule change because
it does not find that the proposed rule change is consistent with
the Exchange Act. See also USBT Order, 85 FR 12615.
---------------------------------------------------------------------------

D. Other Comments

Comment letters also address the general nature and uses of
bitcoin; \165\ the state of development of bitcoin as a digital asset;
\166\ the state of regulation of bitcoin markets; \167\ the inherent
value of, and risks of investing in, bitcoin; \168\ the desire (or not)
of investors to gain access to bitcoin through an ETP; \169\ the
potential impact of Commission approval of the proposed ETP on the
price of bitcoin and on bitcoin markets; \170\ the potential impact of
Commission approval of bitcoin ETPs on the economy, jobs, U.S. monetary
policy, U.S. innovation, and/or U.S. geopolitical position; \171\ the
tax and/or retirement investment benefits or risks of a bitcoin ETP;
\172\ and the bitcoin network's effect on the environment.\173\
Ultimately, however, additional discussion of these topics is
unnecessary, as they do not bear on the basis for the Commission's
decision to disapprove the proposal.
---------------------------------------------------------------------------

\165\ See, e.g., Eddie Letter; Anonymous 6 Letter; Pile Letter;
Ciao Letter; Ge De Letter; letters from: Anonymous, dated March 27,
2021 (``Anonymous 1 Letter''); Sam Ahn, dated April 8, 2021; Darrin
Donithorne, dated April 10, 2021 (``Donithorne Letter''); JC, dated
May 16, 2021 (``JC Letter''); Lourdes Ciao, dated June 2, 2021;
Anonymous, dated June 10, 2021; Roger Lowenstein, dated June 28,
2021 (``Lowenstein Letter'').
\166\ See, e.g., Ellis Letter; Gemini Letter at 1-2; letters
from: Courtney, dated April 1, 2021; Nicolas Casal, dated June 9,
2021; James Cook, dated June 17, 2021 (``Cook Letter''); Jason
Green, dated June 17, 2021 (``Green Letter'').
\167\ See, e.g., Bofman Letter; Aronesty Letter; Pile Letter.
\168\ See, e.g., Bofman Letter; Rye Letter; Lowenstein Letter;
Havermann Letter; Apodaca Letter; letters from: Bradley M. Kuhn,
dated April 15, 2021 (``Kuhn Letter''); Anonymous, dated May 7, 2021
(``Anonymous 2 Letter''); James Monroe, dated June 7, 2021; Ken
Morgan, dated June 17, 2021; Sam Ahn, dated July 14, 2021.
\169\ See, e.g., Henry Letter; Anonymous 1 Letter; Kuhn Letter;
Bofman Letter; Cook Letter; Ailshie Letter; Gemini Letter at 1-2;
letters from: Michael Ort, dated April 10, 2021; Chez, dated June
16, 2021; Anonymous, dated June 16, 2021 (``Anonymous 8 Letter'');
Bill Meyers, dated June 16, 2021; Jarron Jackson, dated June 16,
2021; Jacob, dated June 16, 2021 (``Jacob Letter''); Charles E.
Haluska, dated June 17, 2021; Travis, dated June 17, 2021; Scott
Davis, dated June 23, 2021; Ryan I, dated June 27, 2021.
\170\ See, e.g., Green Letter; Ailshie Letter; Aronesty Letter;
letter from Steve Condrill, dated July 4, 2021.
\171\ See, e.g., Donithorne Letter; Anonymous 2 Letter; Bofman
Letter; Anonymous 8 Letter; Jacob Letter; Kim Letter; Ciao Letter;
Aroca Letter; Apodaca Letter; letters from: Chris McMurphy, dated
April 2, 2021 (``McMurphy Letter''); Praveen Javali, dated April 9,
2021; Khaled Khan, dated April 20, 2021; Ramesh Patel, dated June
16, 2021; Anonymous, dated June 21, 2021.
\172\ See, e.g., Kuhn Letter; JC Letter; Rose Letter; Ciao
Letter; Lowenstein Letter; Havermann Letter; Apodaca Letter.
\173\ See, e.g., Eddie Letter; Donithorne Letter; McMurphy
Letter; Ge De Letter; letter from Anonymous, dated June 10, 2021.
---------------------------------------------------------------------------

E. The Exchange's Untimely Amendments to the Proposal

The deadline for rebuttal comments in response to the Order
Instituting Proceedings was July 28, 2021.\174\ On September 30, 2021,
the Exchange filed Amendment No. 1 to the proposed rule change and
withdrew it on October 1, 2021. On October 1, 2021, the Exchange filed
Amendment No. 2 with the Commission to amend and replace in its
entirety Amendment No. 1 to the proposal as submitted on September 30,
2021, and as originally submitted on March 1, 2021. Subsequently, on
November 4, 2021, the Exchange filed Amendment No. 3 with the
Commission to amend and replace in its entirety Amendment No. 2 to the
proposal as submitted on October 1, 2021, and as originally submitted
on March 1, 2021. Because these amendments were filed months after the
deadline for comments on the proposed rule change, the Commission deems
Amendments No. 1, 2, and 3 to have been untimely filed.
---------------------------------------------------------------------------

\174\ See supra note 7.
---------------------------------------------------------------------------

Even if these amendments had been timely filed, the Commission
would still conclude that the Exchange has not met its burden to
demonstrate that its proposal is consistent with Exchange Act Section
6(b)(5). The primary change that the Exchange makes in the amendments
is to argue that it would be inconsistent for the Commission to allow
the launch of exchange-traded funds registered under the Investment
Company Act of 1940 (``1940 Act'') that provide exposure to bitcoin
through CME bitcoin futures (``Bitcoin Futures ETFs'') while
disapproving this proposal.
In the amendments, the Exchange asserts that, if the Commission
does not deem the CME bitcoin futures market a regulated market of
significant size, permitting Bitcoin Futures ETFs to list and trade
would be inconsistent with the requirement under the Exchange Act--
namely, the requirement that the listing and trading of the Bitcoin
Futures ETFs be designed to prevent fraudulent and manipulative acts
and practices as articulated in the

[[Page 64552]]

Winklevoss Order and other disapproval orders. The Exchange states
that, while one may argue that the 1940 Act provides certain investor
protections, those protections relate primarily to the composition of
board of directors, limitations on leverage, and transactions with
affiliates, among others, and thus do not confer additional protections
to investors in relation to the underlying CME bitcoin futures market
to justify different regulatory outcomes for Bitcoin Futures ETFs and
non-1940 Act-regulated ETPs that hold spot bitcoin. The Exchange also
adds that the largest Bitcoin Futures ETF has contracts representing
about 37 percent of open interest in CME bitcoin futures, which,
according to the Exchange, ``seems to directly contradict'' the
``predominant influence'' prong in establishing whether the CME bitcoin
futures market constitutes a market of significant size.
The Commission disagrees with the premise of the Exchange's
argument. The proposed rule change does not relate to a product
regulated under the 1940 Act, nor does it relate to the same underlying
holdings as the Bitcoin Futures ETFs. The Commission considers the
proposed rule change on its own merits and under the standards
applicable to it. Namely, with respect to this proposed rule change,
the Commission must apply the standards as provided by Section 6(b)(5)
of the Exchange Act, which it has applied in connection with its orders
considering previous proposals to list bitcoin-based commodity trusts
and bitcoin-based trust issued receipts.\175\ Accordingly, even if the
Exchange's Amendments No. 1, 2, and 3 had been timely filed, there is
no additional information in such amendments that would enable the
Commission to approve the proposed rule change as amended.
---------------------------------------------------------------------------

\175\ See supra note 11.
---------------------------------------------------------------------------

IV. Conclusion

For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and in particular, with Section 6(b)(5) of the
Exchange Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that proposed rule change SR-CboeBZX-2021-019 be, and
hereby is, disapproved.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\176\
---------------------------------------------------------------------------

\176\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25129 Filed 11-17-21; 8:45 am]
BILLING CODE 8011-01-P

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