[Federal Register Volume 83, Number 167 (Tuesday, August 28, 2018)]
[Notices]
[Pages 43923-43932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18578]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83913; File No. SR-CboeBZX-2018-001]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Disapproving a Proposed Rule Change To List and Trade the Shares of the 
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF

August 22, 2018.

I. Introduction

    On January 5, 2018, Cboe BZX Exchange, Inc. (``BZX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade the shares 
(``Shares'') of the GraniteShares Bitcoin ETF (``Long Fund'') and the 
GraniteShares Short Bitcoin ETF (``Short Fund'') (each a ``Fund'' and, 
collectively, ``Funds'') issued by the GraniteShares ETP Trust 
(``Trust'') \3\ under BZX Rule 14.11(f)(4).\4\ The proposed rule change 
was published for comment in the Federal Register on January 18, 
2018.\5\ The comment period for the Notice of Proposed Rule Change 
closed on February 8, 2018.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Trust filed a registration statement with the Commission 
on December 15, 2017. See Registration Statement on Form S-1, dated 
December 15, 2017 (File No. 333-222109) (``Registration 
Statement''). The Registration Statement ``will be effective as of 
the date of any offer and sale pursuant to the Registration 
Statement.'' Notice, infra note 5, 83 FR at 2705 n.7.
    \4\ On August 21, 2018, the Exchange filed Amendment No. 1 to 
the proposal, and on August 22, 2018, the Exchange filed Amendment 
No. 2 to the proposal. As discussed below, however, see Section 
III.E, infra, the Commission views these amendments as untimely. 
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 id.
    \5\ See Securities Exchange Act Release No. 82484 (Jan. 11, 
2018), 83 FR 2704 (Jan. 18, 2018) (``Notice'').
---------------------------------------------------------------------------

    On February 22, 2018, pursuant to Section 19(b)(2) of the Exchange 
Act,\6\ 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 approve or disapprove 
the proposed rule change.\7\ On April 5, 2018, the Commission 
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 
\8\ to determine whether to approve or disapprove the proposed rule 
change.\9\ The comment period and rebuttal comment period for the Order 
Instituting Proceedings closed on May 1, 2018, and May 15, 2018, 
respectively.\10\ Finally, on June 28, 2018, the Commission extended 
the period for consideration of the proposed rule change to September 
15, 2018.\11\ As of August 21, 2018, the Commission had received 15 
comments on the proposed rule change.\12\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 82759 (Feb. 22, 
2018), 83 FR 8719 (Feb. 28, 2018).
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 82995 (Apr. 5, 
2018), 83 FR 15425 (Apr. 10, 2018) (``Order Instituting 
Proceedings'').
    \10\ See id. at 15426.
    \11\ See Securities Exchange Act Release No. 83548 (June 28, 
2018), 83 FR 31246 (July 3, 2018).
    \12\ See Letters from Anita Desai (Apr. 6, 2018) (``Desai 
Letter''); Ed Kaleda (Apr. 6, 2018) (``Kaleda Letter''); Don Krohn 
(Apr. 7, 2018) (``Krohn Letter''); Adam Malkin (Apr. 8, 2018) 
(``Malkin Letter''); Shravan Kumar (Apr. 11, 2018) (``Kumar 
Letter''); David Barnwell (Apr. 12, 2018) (``Barnwell Letter''); 
Louise Fitzgerald (Apr. 18, 2018) (``Fitzgerald Letter''); Sharon 
Brown-Hruska, Managing Director, and Trevor Wagener, Consultant, 
NERA Economic Consulting (May 18, 2018) (``NERA Letter''); Alex 
Hales (July 8, 2018) (``Hales Letter''); Anthony C. Otenyi (July 18, 
2018) (``Otenyi Letter''); V.K. Bhat (July 28, 2018) (``Bhat 
Letter''); Sami Santos (Aug. 7, 2018) (``Santos Letter''); Arthur 
Netto (Aug. 9, 2018) (``Netto Letter''); Sam M. Ahn (Aug. 17, 2018) 
(``Ahn Letter''); and William Rhind, CEO, GraniteShares (Aug. 20, 
2018) (``GraniteShares Letter''). All comments on the proposed rule 
change are available on the Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2018-001/cboebzx2018001.htm.
---------------------------------------------------------------------------

    This order disapproves the proposed rule change. Although the 
Commission is disapproving this proposed rule change, the Commission 
emphasizes that its disapproval 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, the 
Exchange 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 the Exchange Act Section 6(b)(5), 
in particular the requirement that a national securities exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices.\13\ Among other things, the Exchange has offered no record 
evidence to demonstrate that bitcoin futures markets are ``markets of 
significant size.'' That failure is critical because, as explained 
below, the Exchange has failed to establish that other means to prevent 
fraudulent and manipulative acts and practices will be sufficient, and 
therefore surveillance-sharing with a regulated market of significant 
size related to bitcoin is necessary to satisfy the statutory 
requirement that the Exchange's rules be designed to prevent fraudulent 
and manipulative acts and practices.\14\
---------------------------------------------------------------------------

    \13\ See 15 U.S.C. 78f(b)(5).
    \14\ See infra notes 31-33 and accompanying text.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(f)(4), which governs the listing and trading of Trust Issued 
Receipts on the Exchange.\15\ Each Fund will be a series of the Trust, 
and the Trust and the Funds will be managed and controlled by 
GraniteShares Advisors LLC (``Sponsor''). Bank of New York Mellon will 
serve as administrator, custodian, and transfer agent for the Funds. 
Foreside Fund Services, LLC will serve as the distributor of the Shares 
(``Distributor''). The Trust will offer Shares of the Funds for sale 
through the Distributor in ``Creation Units'' in transactions with 
``Authorized Participants'' who have entered into agreements with the 
Distributor.\16\
---------------------------------------------------------------------------

    \15\ BZX Rule 14.11(f)(4) applies to Trust Issued Receipts that 
invest in ``Financial Instruments.'' The term ``Financial 
Instruments,'' as defined in BZX Rule 14.11(f)(4)(A)(iv), means any 
combination of investments, including cash; securities; options on 
securities and indices; futures contracts; options on futures 
contracts; forward contracts; equity caps, collars, and floors; and 
swap agreements.
    \16\ See Notice, supra note 5, 83 FR at 2707.
---------------------------------------------------------------------------

    According to the Exchange, the Long Fund's investment objective 
will be to seek results (before fees and expenses) that, both for a 
single day and over time, correspond to the performance of lead month 
bitcoin futures contracts listed and traded on the Cboe Futures 
Exchange, Inc. (``CFE'') (``Benchmark Futures Contracts''). Conversely, 
the Short Fund's investment objective will be to seek results (before 
fees and expenses) that, on a daily basis, correspond to the inverse (-
1x) of the daily performance of the Benchmark Futures Contracts for a 
single day. Each Fund generally intends to invest substantially all of 
its assets in the Benchmark Futures Contracts and cash and cash 
equivalents (which would be used to collateralize the Benchmark Futures 
Contracts), but may invest in other U.S. exchange listed bitcoin 
futures contracts, as available (together

[[Page 43924]]

with Benchmark Futures Contracts, collectively, ``Bitcoin Futures 
Contracts'').\17\
---------------------------------------------------------------------------

    \17\ See id. at 2705-06. The Bitcoin Futures Contracts include 
the bitcoin futures contracts listed and traded on the Chicago 
Mercantile Exchange, Inc. (``CME''). See id. at 2705.
---------------------------------------------------------------------------

    The Exchange represents that no more than 10% of the net assets of 
a Fund in the aggregate invested in Bitcoin Futures Contracts shall 
consist of Bitcoin Futures Contracts whose principal market is neither 
a member of the Intermarket Surveillance Group nor a market with which 
the Exchange does not have a comprehensive surveillance-sharing 
agreement.\18\ Further, according to the Notice, in the event that 
position, price, or accountability limits are reached with respect to 
Bitcoin Futures Contracts, each Fund may invest in U.S. listed swaps on 
bitcoin or the Benchmark Futures Contracts (``Listed Bitcoin Swaps''). 
The Notice also states that, in the event that position, price, or 
accountability limits are reached with respect to Listed Bitcoin Swaps, 
each Fund may invest in over-the-counter swaps on bitcoin or the 
Benchmark Futures Contracts (``OTC Bitcoin Swaps,'' and together with 
Listed Bitcoin Swaps, collectively, ``Bitcoin Swaps'').\19\
---------------------------------------------------------------------------

    \18\ See id. at 2709 n.26.
    \19\ See id. at 2706.
---------------------------------------------------------------------------

    The Exchange asserts that ``policy concerns related to an 
underlying reference asset and its susceptibility to manipulation are 
mitigated as it relates to bitcoin because the very nature of the 
bitcoin ecosystem makes manipulation of bitcoin difficult.'' \20\ 
According to the Exchange:
---------------------------------------------------------------------------

    \20\ Notice, supra note 5, 83 FR at 2706.

    The geographically diverse and continuous nature of bitcoin 
trading makes it difficult and prohibitively costly to manipulate 
the price of bitcoin and, in many instances, that the bitcoin market 
is generally less susceptible to manipulation than the equity, fixed 
income, and commodity futures markets. There are a number of reasons 
this is the case, including that there is not inside information 
about revenue, earnings, corporate activities, or sources of supply; 
it is generally not possible to disseminate false or misleading 
information about bitcoin in order to manipulate; manipulation of 
the price on any single venue would require manipulation of the 
global bitcoin price in order to be effective; a substantial over-
the-counter market provides liquidity and shock-absorbing capacity; 
bitcoin's 24/7/365 nature provides constant arbitrage opportunities 
across all trading venues; and it is unlikely that any one actor 
could obtain a dominant market share.
    Further, bitcoin is arguably less susceptible to manipulation 
than other commodities that underlie ETPs; there may be inside 
information relating to the supply of the physical commodity such as 
the discovery of new sources of supply or significant disruptions at 
mining facilities that supply the commodity that simply are 
inapplicable as it relates to bitcoin. Further, the Exchange 
believes that the fragmentation across bitcoin exchanges, the 
relatively slow speed of transactions, and the capital necessary to 
maintain a significant presence on each exchange make manipulation 
of bitcoin prices through continuous trading activity unlikely. 
Moreover, the linkage between the bitcoin markets and the presence 
of arbitrageurs in those markets means that the manipulation of the 
price of bitcoin price on any single venue would require 
manipulation of the global bitcoin price in order to be effective. 
Arbitrageurs must have funds distributed across multiple bitcoin 
exchanges in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular bitcoin exchange. As a 
result, the potential for manipulation on a particular bitcoin 
exchange would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences. For all of these reasons, bitcoin is not 
particularly susceptible to manipulation, especially as compared to 
other approved ETP reference assets.\21\
---------------------------------------------------------------------------

    \21\ Id.

    The Notice also asserts that the susceptibility of the underlying 
futures contracts to manipulation is mitigated by the ``significant 
liquidity that the Exchange expects to exist in the market for Bitcoin 
Futures Contracts.'' \22\ The Notice asserts that the market for 
bitcoin futures will be ``sufficiently liquid to support numerous ETPs 
shortly after launch,'' citing ``numerous conversations with market 
participants, issuers, and discussions with personnel of CFE.''\23\
---------------------------------------------------------------------------

    \22\ Id.
    \23\ Id. at 2710.
---------------------------------------------------------------------------

III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether the Exchange's proposal is 
consistent with Exchange Act Section 6(b)(5), which requires, in 
relevant part, that the rules of a national securities exchange be 
designed ``to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \24\ 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.'' \25\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 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,\26\ 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.\27\ 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.\28\
---------------------------------------------------------------------------

    \26\ See id.
    \27\ See id.
    \28\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
---------------------------------------------------------------------------

B. Preventing Fraudulent and Manipulative Practices

1. Applicable Legal Standard
    To approve the Exchange's proposal to list the Shares, the 
Commission must be able to find that the proposal is, consistent with 
Exchange Act Section 6(b)(5), ``designed to prevent fraudulent and 
manipulative acts and practices.'' \29\ As the Commission recently 
explained in an order disapproving a listing proposal for the 
Winklevoss Bitcoin Trust (``Winklevoss Order''), although surveillance-
sharing agreements are not the exclusive means by which an exchange-
traded product (``ETP'') listing exchange can meet its obligations 
under Exchange Act Section 6(b)(5), such agreements are a widely used 
means for exchanges that list ETPs to meet their obligations, and the 
Commission has historically recognized their importance.\30\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 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, 37580 (Aug. 1, 2018) (SR-BatsBZX-2018-30).
---------------------------------------------------------------------------

    The Commission has therefore determined that, if the listing 
exchange for an ETP fails to establish that other means to prevent 
fraudulent and manipulative acts and practices will be sufficient, the 
listing exchange must enter into a surveillance-sharing agreement with 
a regulated market of significant size because ``[s]uch agreements 
provide a necessary deterrent to manipulation because they facilitate 
the availability of information needed to fully investigate a 
manipulation if it were to occur.'' \31\

[[Page 43925]]

Accordingly, a surveillance-sharing agreement with a regulated market 
of significant size is required to ensure that, in compliance with the 
Exchange Act, the proposal is ``designed to prevent fraudulent and 
manipulative acts and practices.'' \32\ In this context, the Commission 
has interpreted the terms ``significant market'' and ``market of 
significant size'' to 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 the ETP listing market 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.\33\ Thus, 
a surveillance-sharing agreement must be entered into with a 
``significant market'' to assist in detecting and deterring 
manipulation of the ETP, because someone attempting to manipulate the 
ETP is reasonably likely to also engage in trading activity on that 
``significant market.''
---------------------------------------------------------------------------

    \31\ Id. (citing Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ See Winklevoss Order, supra note 30, 83 FR at 37594. This 
definition is illustrative and not exclusive. There could be other 
types of ``significant markets'' and ``markets of significant 
size,'' but this definition is an example that will provide guidance 
to market participants. See id.
---------------------------------------------------------------------------

    Although the Winklevoss Order applied these standards to a 
commodity-trust ETP based on bitcoin, the Commission believes that 
these standards are also appropriate for an ETP based on bitcoin 
futures. When approving the first commodity-futures ETP, the Commission 
specifically noted that ``[i]nformation sharing agreements with primary 
markets trading index components underlying a derivative product are an 
important part of a self-regulatory organization's ability to monitor 
for trading abuses in derivative products.'' \34\ And the Commission's 
approval orders for commodity-futures ETPs consistently note the 
ability of an ETP listing exchange to share surveillance information 
either through surveillance-sharing agreements or through membership by 
the listing exchange and the relevant futures exchanges in the 
Intermarket Surveillance Group.\35\ While the Commission in those 
orders did not explicitly undertake an analysis of whether the related 
futures markets were of ``significant size,'' the exchanges proposing 
commodity-futures ETPs on a single reference asset or benchmark 
generally made representations regarding the trading volume of the

[[Page 43926]]

underlying futures markets,\36\ and the

[[Page 43927]]

Commission was in each of those cases dealing with a large futures 
market that had been trading for a number of years before an exchange 
proposed an ETP based on those futures.\37\ And where the Commission 
has considered a proposed ETP based on futures that had only recently 
begun trading,\38\ the Commission specifically addressed whether the 
futures on which the ETP was based--which were futures on an index of 
well-established commodity futures--were illiquid or susceptible to 
manipulation.\39\
---------------------------------------------------------------------------

    \34\ Securities Exchange Act Release No. 53105 (Jan. 11, 2006), 
71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059). Additionally, 
the Winklevoss Order discusses the broader history and importance of 
surveillance-sharing agreements relating to derivative securities 
products, quoting Commission statements dating from 1990 on. See 
Winklevoss Order, supra note 30, 83 FR at 37592-94.
    \35\ See, e.g., Securities Exchange Act Release No. 53105 (Jan. 
11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059) 
(approval order noted that Amex's ``Information Sharing Agreement 
with the NYMEX and the CBOT and [Amex's] Memorandum of Understanding 
with the LME, along with the Exchange's participation in the ISG, in 
which the CBOT participates . . . create the basis for the Amex to 
monitor for fraudulent and manipulative practices in the trading of 
the Shares''); Securities Exchange Act Release No. 53582 (Mar. 31, 
2006), 71 FR 17510, 17518 (Apr. 6, 2006) (SR-Amex-2005-127) 
(approval order noted that Amex's ``comprehensive surveillance 
sharing agreements with the NYMEX and ICE Futures . . . create the 
basis for the Amex to monitor for fraudulent and manipulative 
practices in the trading of the Units'' and that ``[s]hould the USOF 
invest in oil derivatives traded on markets such as the Singapore 
Oil Market, the Exchange represents that it will file a proposed 
rule change pursuant to Section 19(b) of the [Exchange] Act, seeking 
Commission approval of [Amex's] surveillance agreement with such 
market''); Securities Exchange Act Release No. 54013 (June 16, 
2006), 71 FR 36372, 36378-79 (June 26, 2006) (NYSE-2006-17) 
(approval order noted that NYSE's ``comprehensive surveillance 
sharing agreements with the NYMEX, the Kansas City Board of Trade, 
ICE Futures, and the LME . . . create the basis for the NYSE to 
monitor for fraudulent and manipulative trading practices'' and that 
``all of the other trading venues on which current Index components 
and CERFs are traded are members of the ISG''); Securities Exchange 
Act Release No. 54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept. 
21, 2006) (SR-Amex-2006-44) (approval order noted that ``CME, where 
the futures contract for each of the current Index components is 
traded, is a member of the ISG'' and that in the event of new fund 
investments in ``foreign currency futures contracts traded on 
futures exchanges other than CME, [Amex] must have a CSSA with that 
futures exchange or the futures exchange must be an ISG member''); 
Securities Exchange Act Release No. 55029 (Dec. 29, 2006), 72 FR 
806, 809-10 (Jan. 8, 2007) (SR-Amex-2006-76) (approval order noted 
that Amex's ``Comprehensive Surveillance Sharing Agreement with the 
ICE Futures, LME, and NYMEX, . . . and membership in the Intermarket 
Surveillance Group (`ISG') creates the basis for the Amex to monitor 
fraudulent and manipulative practices in the trading of the 
Shares''); Securities Exchange Act Release No. 56880 (Dec. 3, 2007), 
72 FR 69259, 69261 (Dec. 7, 2007) (SR-Amex-2006-96) (approval order 
noted that Amex has ``information sharing agreements with the 
InterContinental Exchange, the Chicago Mercantile Exchange, and the 
New York Mercantile Exchange and may obtain market surveillance 
information from other exchanges, including the Chicago Board of 
Trade, London Metals Exchange, and the New York Board of Trade 
through the Intermarket Surveillance Group''); Securities Exchange 
Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987, 19988 (Apr. 20, 
2007) (SR-Amex-2006-112) (approval order noted that Amex ``currently 
has in place an Information Sharing Agreement with the NYMEX and ICE 
Futures'' and that if ``USNG invests in Natural Gas Interests traded 
on other exchanges, the Amex represented that it will seek to enter 
into Information Sharing arrangements with those particular 
exchanges''); Securities Exchange Act Release No. 57456 (Mar. 7, 
2008), 73 FR 13599, 13601 (Mar. 13, 2008) (NYSEArca-2007-91) 
(approval order noted that NYSEArca ``can obtain market surveillance 
information, including customer identity information, with respect 
to transactions occurring on the NYM, the Kansas City Board of 
Trade, ICE, and the LME, pursuant to its comprehensive information 
sharing agreements with each of those exchanges'' and that ``[a]ll 
of the other trading venues on which current Index components are 
traded are members of the ISG''); Securities Exchange Act Release 
No. 57838 (May 20, 2008), 73 FR 30649, 30652, (May 28, 2008) (SR-
NYSEArca-2008-09) (approval order noted that NYSEArca ``may obtain 
information via the ISG from other exchanges who are members or 
affiliate members of the ISG,'' that NYSEArca ``has an information 
sharing agreement in place with ICE Futures,'' and that NYSEArca 
will file a proposed rule change ``if the Fund invests in EUAs . . . 
that constitute more than 10% of the weight of the Fund where the 
principal trading market for such component is not a member or 
affiliate member of the ISG or where the Exchange does not have a 
comprehensive surveillance sharing agreement with such market''); 
Securities Exchange Act Release No. 63635 (Jan. 3, 2011), 76 FR 
1489, 1491 (Jan. 10, 2011) (NYSEArca-2010-103) (approval order noted 
that ``with respect to Fund components traded on exchanges, not more 
than 10% of the weight of such components in the aggregate will 
consist of components whose principal trading market is not a member 
of the Intermarket Surveillance Group or is a market with which 
[NYSEArca] does not have a comprehensive surveillance sharing 
agreement''); Securities Exchange Act Release No. 66553 (Mar. 9, 
2012), 77 FR 15440, 15444 (Mar. 15, 2012) (SR-NYSEArca-2012-04) 
(approval order noted that NYSEArca ``can obtain market surveillance 
information, including customer identity information, from ICE 
[Futures] and CME, which are members of the Intermarket Surveillance 
Group''); Securities Exchange Act Release No. 67223 (June 20, 2012), 
77 FR 38117, 38124 (June 26, 2012) (NYSEAmex-2012-24) (approval 
order noted that NYSEAmex ``can obtain market surveillance 
information, including customer identity information, with respect 
to transactions occurring on exchanges that are members of ISG, 
including CME, CBOT, COMEX, NYMEX . . . and ICE Futures US,'' that 
NYSEAmex ``currently has in place a comprehensive surveillance 
sharing agreement with each of CME, NYMEX, ICE Futures Europe, and 
KCBOT,'' and that ``while the Fund may invest in futures contracts 
or options on futures contracts which trade on markets that are not 
members of ISG or with which [NYSEAmex] does not have in place a 
comprehensive surveillance sharing agreement, such instruments will 
never represent more than 10% of the Fund's holdings''); Securities 
Exchange Act Release No. 73561 (Nov. 7, 2014), 79 FR 68329, 68330 
(Nov. 14, 2014) (NYSEArca-2014-102) (approval order noted that 
``FINRA may obtain trading information regarding trading in the 
Shares and Coal Futures from such markets and other entities that 
are members of ISG or with which [NYSEArca] has in place a 
comprehensive surveillance sharing agreement'' and that ``CME is a 
member of the ISG''); Securities Exchange Act Release No. 82390 
(Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec. 28, 2017) 
(NYSEArca-2017-107) (approval order noted that NYSEArca ``may obtain 
information regarding trading in the Shares and Freight Futures from 
markets and other entities that are members of ISG or with which 
[NYSEArca] has in place a CSSA'' and that ``not more than 10% of the 
net assets of the Fund in the aggregate invested in Freight Futures 
or options on Freight Futures shall consist of derivatives whose 
principal market is not a member of the ISG or is a market with 
which [NYSEArca] does not have a CSSA'').
    \36\ See, e.g., Securities Exchange Act Release No. 62213 (June 
3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010-22) (notice 
of proposed rule change included NYSE Arca's representations that: 
(i) Corn futures volume on Chicago Board of Trade (``CBOT'') for 
2008 and 2009 (through November 30, 2009) was 59,934,739 contracts 
and 47,754,866 contracts, respectively, and as of March 16, 2010, 
CBOT open interest for corn futures was 1,118,103 contracts, and 
open interest for near month futures was 447,554 contracts; (ii) the 
corn futures contract price was $18,337.50 ($3.6675 per bushel and 
5,000 bushels per contract), and the approximate value of all 
outstanding contracts was $20.5 billion; (iii) as of March 16, 2010, 
open interest in corn swaps cleared on CBOT was approximately 2,100 
contracts, with an approximate value of $38.5 million; and (iv) the 
position limits for all months is 22,000 corn contracts, and the 
total value of contracts if position limits were reached would be 
approximately $403.5 million (based on the $18,337.50 contract 
price), Securities Exchange Act Release No. 61954 (Apr. 21, 2010), 
75 FR 22663, 22664 n.10 (Apr. 29, 2010)); Securities Exchange Act 
Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR-
NYSEArca-2010-101) (notice of proposed rule change included NYSE 
Arca's representations that: (i) As of June 14, 2010, there was VIX 
futures contracts open interest on CFE of 88,366 contracts, with a 
contract price of $25.55 and value of open interest of 
$2,257,751,300; (ii) total CFE trading volume in 2009 in VIX futures 
contracts was 1,143,612 contracts, with average daily volume of 
4,538 contracts; and (iii) total volume year-to-date (through May 
31, 2010) was 1,399,709 contracts, with average daily volume of 
13,458 contracts, Securities Exchange Act Release No. 63317 (Nov. 
16, 2010), 75 FR 71158, 71159 n.9 (Nov. 22, 2010)); Securities 
Exchange Act Release No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27, 
2011) (SR-NYSEArca-2010-110) (notice of proposed rule change 
included NYSE Arca's representations that: (i) Natural gas futures 
volume on New York Mercantile Exchange (``NYMEX'') for 2009 and 2010 
(through October 29, 2010) was 47,864,639 contracts and 52,490,180 
contracts, respectively; (ii) as of October 29, 2010, NYMEX open 
interest for natural gas futures was 794,741 contracts, and open 
interest for near month futures was 47,313 contracts; (iii) the 
contract price was $40,380 ($4.038 per MMBtu and 10,000 MMBtu per 
contract), and the approximate value of all outstanding contracts 
was $32.1 billion; (iv) the position limits for all months is 12,000 
natural gas contracts and the total value of contracts if position 
limits were reached would be approximately $484.56 million (based on 
the $40,380 contract price); and (v) as of October 29, 2010, open 
interest in natural gas swaps cleared on NYMEX was approximately 
2,618,092 contracts, with an approximate value of $26.4 billion 
($4.038 per MMBtu and 2,500 MMBtu per contract), Securities Exchange 
Act Release No. 63493 (Dec. 9, 2010), 75 FR 78290, 78291 n.11 (Dec. 
15, 2010)); Securities Exchange Act Release No. 63869 (Feb. 8, 
2011), 76 FR 8799 (Feb. 15, 2011) (SR-NYSEArca-2010-119) (notice of 
proposed rule change included NYSE Arca's representations that: (i) 
WTI crude oil futures volume on NYMEX for 2009 and 2010 (through 
November 30, 2010) was 137,352,118 contracts and 156,155,620 
contracts, respectively; (ii) as of November 30, 2010, NYMEX open 
interest for WTI crude oil was 1,342,325 contracts, and open 
interest for near month futures was 323,184 contracts; (iii) the 
position limits for all months is 20,000 WTI crude oil contracts and 
the total value of contracts if position limits were reached would 
be approximately $1.68 billion (based on the $84.11 contract price); 
and (iv) the contract price was $84,110 ($84.11 USD per barrel and 
1,000 barrels per contract), and the approximate value of all 
outstanding contracts was $112.9 billion, Securities Exchange Act 
Release No. 63625 (Dec. 30, 2010), 76 FR 807, 808 n.11 (Jan. 6, 
2011)); Securities Exchange Act Release No. 65134 (Aug. 15, 2011), 
76 FR 52034 (Aug. 19, 2011) (SR-NYSEArca-2011-23) (notice of 
proposed rule change included NYSE Arca's representations that: (i) 
As of January 31, 2011, there was VIX futures contracts open 
interest on CFE of 163,396 contracts with a value of open interest 
of $3,461,984,900; (ii) total CFE trading volume in 2010 in VIX 
futures contracts was 4,402,616 contracts, with average daily volume 
of 17,741 contracts; and (iii) total volume year-to-date (through 
January 31, 2011) was 779,493 contracts, with average daily volume 
of 38,975 contracts, Securities Exchange Act Release No. 64470 (May 
11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011)); Securities 
Exchange Act Release No. 65136 (Aug. 15, 2011), 76 FR 52037 (Aug. 
19, 2011) (SR-NYSEArca-2011-24) (notice of proposed rule change 
included NYSE Arca's representations that: (i) Natural gas futures 
volume on NYMEX for 2009 and 2010 (through December 31, 2010) was 
47,864,639 contracts and 64,350,673 contracts, respectively; (ii) as 
of December 31, 2010, NYMEX open interest for all natural gas 
futures was 772,104 contracts, and the approximate value of all 
outstanding contracts was $35,664,257,310 billion [sic]; (iii) open 
interest as of December 31, 2010 for the near month contract was 
166,757 contracts and the near month contract value was 
$7,345,645,850 ($4.405 per MMBtu and 10,000 MMBtu per contract); 
(iv) the position accountability limits for all months is 12,000 
natural gas contracts and the total value of contracts if position 
accountability limits were reached would be approximately 
$528,600,000 million (based on the $4.405 contract price); and (v) 
as of December 31, 2010, open interest in natural gas swaps cleared 
on NYMEX was approximately 1,493,013 contracts, with an approximate 
value of $16,463,384,003 ($4.411 per MMBtu and 2,500 MMBtu per 
contract), Securities Exchange Act Release No. 64464 (May 11, 2011), 
76 FR 28483, 28484 n.11 (May 17, 2011)); Securities Exchange Act 
Release No. 65344 (Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011) 
(SR-NYSEArca-2011-48) (notice of proposed rule change included NYSE 
Arca's representations that: (i) Wheat futures volume on CBOT for 
2010 and 2011 (through April 29, 2011) was 23,058,783 contracts and 
8,860,135 contracts, respectively; (ii) as of April 29, 2011, open 
interest for wheat futures was 456,851 contracts; (iii) the wheat 
contract price was $40,062.50 (801.25 cents per bushel and 5,000 
bushels per contract), and the approximate value of all outstanding 
contracts was $18.3 billion; (iv) the position limits for all months 
was 6,500 wheat contracts and the total value of contracts if 
position limits were reached would be approximately $260.4 million 
(based on the $40,062.50 contract price); (v) soybean futures volume 
on CBOT for 2010 and 2011 (through April 29, 2011) was 36,962,868 
contracts and 16,197,385 contracts, respectively; (vi) as of April 
29, 2011, open interest for soybean futures was 572,959 contracts; 
(vii) the soybean contract price was $69,700.00 (1394 cents per 
bushel and 5,000 bushels per contract), and the approximate value of 
all outstanding contracts was $39.9 billion; (viii) the position 
limits for all months is 6,500 soybean contracts and the total value 
of contracts if position limits were reached would be approximately 
$453 million (based on the $69,700.00 contract price); (ix) sugar 
futures volume on ICE Futures for 2010 and 2011 (through April 29, 
2011) was 27,848,391 contracts and 9,045,069 contracts, 
respectively; (x) as of April 29, 2011, open interest for sugar 
futures was 570,948 contracts; (xi) the sugar contract price was 
$24,920.00 (22.25 cents per pound and 112,000 pounds per contract), 
and the approximate value of all outstanding contracts was $14.2 
billion; and (xii) the position limits for all months is 15,000 
sugar contracts and the total value of contracts if position limits 
were reached would be approximately $373.8 million (based on the 
$24,920.00 contract price), Securities Exchange Act Release No. 
64967 (July 26, 2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890 
n.24 (Aug. 1, 2011)); Securities Exchange Act Release No. 66553 
(Mar. 9, 2012), 77 FR 15440 (Mar. 15, 2012) (SR-NYSEArca-2012-04) 
(notice of proposed rule change included NYSE Arca's representations 
that: (i) As of December 30, 2011, open interest in AUD/USD futures 
contracts traded on CME was $11.56 billion, and AUD/USD futures 
contracts had an average daily trading volume in 2011 of 123,006 
contracts; (ii) as of December 30, 2011, open interest in CAD/USD 
futures contracts traded on CME was $11.66 billion, and CAD/USD 
futures contracts had an average daily trading volume in 2011 of 
89,667 contracts; (iii) as of December 30, 2011, open interest in 
CHF/USD futures contracts traded on CME was $4.99 billion, and CHF/
USD futures contracts had an average daily trading volume in 2011 of 
40,955 contracts; (iv) futures contracts based on the U.S. Dollar 
Index (``USDX'') were listed on November 20, 1985, and options on 
the USDX futures contracts began trading on September 3, 1986; (v) 
as of December 30, 2011, open interest in USDX futures contracts 
traded on ICE Futures was $5.44 billion, and USDX futures contracts 
had an average daily trading volume in 2011 of 30,341 contracts; 
(vi) as of December 30, 2011, open interest in EUR/USD futures 
contracts traded on CME was $46.12 billion, and EUR/USD futures 
contracts had an average daily trading volume in 2011 of 336,947 
contracts; and (vii) as of December 30, 2011, open interest in JPY/
USD futures contracts traded on CME was $25.75 billion, and JPY/USD 
futures contracts had an average daily trading volume in 2011 of 
113,476 contracts, Securities Exchange Act Release No. 66180 (Jan. 
18, 2012), 77 FR 3532, 3534-35 (Jan. 24, 2012)); Securities Exchange 
Act Release No. 68165 (Nov. 6, 2012), 77 FR 67707 (Nov. 13, 2012) 
(SR-NYSEArca-2012-102) (notice of proposed rule change included NYSE 
Arca's representations that: (i) Gold and silver futures contracts 
traded on Commodity Exchange, Inc. (``COMEX'') are the global 
benchmark contracts and most liquid futures contracts in the world 
for each respective commodity; (ii) as of March 15, 2012, open 
interest in gold futures contracts and silver futures contracts 
traded on CME was $23.7 billion and $8.5 billion, respectively; 
(iii) gold futures contracts and silver futures contracts had an 
average daily trading volume in 2011 of 138,964 contracts and 63,913 
contracts, respectively; (iv) CME constitutes the largest regulated 
foreign exchange marketplace in the world, with over $100 billion in 
daily liquidity; (v) as of March 15, 2012, open interest in Euro 
futures contracts and Yen futures contracts traded on CME and, for 
Dollar futures contracts, on ICE Futures, were $42.7 billion, $20.8 
billion, and $4.8 billion, respectively; and (vi) Euro futures 
contracts, Yen futures contracts, and Dollar futures contracts had 
an average daily trading volume in 2011 of 325,103, 106,824, and 
27,258 contracts, respectively, Securities Exchange Act Release No. 
67882 (Sept. 18, 2012), 77 FR 58881, 58883 n.10, 58883 n.14 (Sept. 
24, 2012)); Securities Exchange Act Release No. 81686 (Sept. 22, 
2017), 82 FR 45643, 45646 (Sept. 29, 2017) (SR-NYSEArca-2017-05) 
(order approving the listing and trading of the Direxion Daily Crude 
Oil Bull 3x Shares and Direxion Daily Crude Oil Bear 3x Shares, 
citing to NYSE Arca's representations that: (i) The oil contract 
market was of significant size and liquidity, and had average daily 
volume of 650,000 contracts and daily open interest of 450,000 
contracts; (ii) the Sponsor is registered as a commodity pool 
operator with the CFTC and is a member of the National Futures 
Association, and (iii) the CFTC has regulatory jurisdiction over the 
trading of futures contracts traded on U.S. markets); Securities 
Exchange Act Release No. 82390 (Dec. 22, 2017), 82 FR 61625 (Dec. 
28, 2017) (SR-NYSEArca-2017-107) (notice of proposed rule change 
included NYSE Arca's representations that: (i) Freight futures 
liquidity has remained relatively constant, in lot terms, over the 
last five years with approximately 1.1 million lots trading 
annually; (ii) open interest currently stood at approximately 
290,000 lots across all asset classes representing an estimated 
value of more than $3 billion, and, of such open interest, Capesize 
contracts accounted for approximately 50%, Panamax for approximately 
40%, and Handymax for approximately 10%, Securities Exchange Act 
Release No. 81681 (Sept. 22, 2017), 82 FR 45342, 45345 (Sept. 28, 
2017)). See also Securities Exchange Act Release No. 53582 (Mar. 31, 
2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127) (notice of 
proposed rule change included Amex's representations that: (i) WTI 
light, sweet crude oil contract, listed and traded at NYMEX, trades 
in units of 42,000 gallons (1,000 barrels), and annual daily 
contract volume on NYMEX from 2001 through October 2005 was 149,028, 
182,718, 181,748, 212,382 and 242,262, respectively; (ii) annual 
daily contract volume on ICE Futures for Brent crude contracts from 
2001 through October 2005 was 74,011, 86,499, 96,767, 102,361 and 
120,695 respectively; (iii) annual daily contract volume on NYMEX 
for heating oil futures from 2001 through October 2005 was 41,710, 
42,781, 46,327, 51,745 and 52,334, respectively; (iv) annual daily 
contract volume on NYMEX for natural gas contracts from 2001 through 
October 2005 was 47,457, 97,431, 76,148, 70,048 and 77,149, 
respectively; and (v) annual daily contract volume on NYMEX for 
gasoline contracts from 2001 through October 2005 was 38,033, 
43,919, 44,688, 51,315 and 53,577, respectively, Securities Exchange 
Act Release No. 53324 (Feb. 16, 2006), 71 FR 9614, 9618 (Feb. 24, 
2006)); Securities Exchange Act Release No. 55632 (Apr. 13, 2007), 
72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006-112) (notice of proposed 
rule change included Amex's representations that annual daily 
contract volume on NYMEX for natural gas contracts from 2001 through 
October 2006 was 47,457, 97,431, 76,148, 70,048, 76,265, and 
102,097, respectively, Securities Exchange Act Release No. 55372 
(Feb. 28, 2007), 72 FR 10267, 10268 (Mar. 7, 2007)).
    \37\ For example, corn futures began trading in 1877, see 
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on corn futures was approved for 
listing and trading in 2010. See Securities Exchange Act Release No. 
62213 (June 3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010-
22). VIX futures began trading in 2004, see http://cfe.cboe.com/cfe-products/vx-cboe-volatility-index-vix-futures/contract-specifications, and the first ETPs based on VIX futures were 
approved for listing and trading in 2010. See Securities Exchange 
Act Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR-
NYSEArca-2010-10). Natural gas futures began trading in 1990, see 
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on natural gas was approved for 
listing and trading in 2007. See Securities Exchange Act Release No. 
55632 (Apr. 13, 2007), 72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006-
112). Crude oil futures began trading in 1983, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETP based on crude oil futures was approved for listing 
and trading in 2006. See Securities Exchange Act Release No. 53582 
(Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127). 
Wheat futures, sugar futures, and soybean futures began trading in 
1877, 1914, and 1936, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html and https://www.theice.com/publicdocs/ICE_Sugar_Brochure.pdf, and the first ETPs 
based on each of these commodity futures were approved for listing 
and trading in 2011. See Securities Exchange Act Release No. 65344 
(Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR-NYSEArca-2011-
48). U.S. Dollar Index futures began trading in 1985, https://www.theice.com/publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf, and 
the first ETPs based on U.S. Dollar Index futures was approved for 
listing and trading in 2007. See Securities Exchange Act Release No. 
55292 (Feb. 14, 2007), 72 FR 8406 (Feb. 26, 2007) (SR-Amex-2006-86). 
Australian Dollar futures and Euro futures began trading in 1987 and 
1999, respectively, and Canadian Dollar futures, Swiss Franc 
futures, and Yen futures began trading in 2002, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETPs based on each of these individual currency futures 
were approved for listing and trading in 2012. See Securities 
Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440 (Mar. 15, 
2012) (SR-NYSEArca-2012-04). Silver futures and gold futures began 
trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETPs based on each of these commodity futures were 
approved for listing and trading in 2006. See Securities Exchange 
Act Release No. 55029 (Dec. 29, 2006), 72 FR 806 (Jan. 8, 2007) (SR-
Amex-2006-76). Freight futures have been cleared since 2005, and the 
first ETP based on freight futures was approved for listing and 
trading in 2017. See Securities Exchange Act Release No. 82390 (Dec. 
22, 2017), 82 FR 61625, 61626 n.6 (Dec. 28, 2017) (SR-NYSEArca-2017-
107) (noting that ``Freight Futures have been cleared since 2005'').
    \38\ The Exchange filed its proposal less than one month after 
bitcoin futures began trading on either CME or CFE.
    \39\ At issue were futures on an index comprising futures on 
crude oil, Brent crude oil, natural gas, heating oil, gasoline, gas 
oil, live cattle, wheat, aluminum, corn, copper, soybeans, lean 
hogs, gold, sugar, cotton, red wheat, coffee, standard lead, feeder 
cattle, zinc, primary nickel, cocoa, and silver. See Securities 
Exchange Act Release No. 53659 (Apr. 17, 2006), 71 FR 21074, 21080 
(Apr. 24, 2006) (SR-NYSE-2006-17) (notice of proposed rule change to 
list shares of iShares GSCI Commodity-Indexed Trust). The Commission 
concluded that requirements of Exchange Act Section 6(b)(5) had been 
met because concerns about manipulation would be addressed by the 
arbitrage relationship between the new index futures and the 
existing component futures, as well as the ETP listing exchange's 
comprehensive surveillance-sharing agreements not only with the 
market for the index futures, but also with the markets for the 
component futures. See Securities Exchange Act Release No. 54013 
(June 16, 2006), 71 FR 36372, 36379 (June 26, 2006) (SR-NYSE-2006-
17) (order approving listing of shares of iShares GSCI Commodity-
Indexed Trust). Additionally, the approval order for the ETP noted 
that, if the volume in any futures contract that was part of the 
reference index fell below a specified multiple of production of the 
underlying commodity, that contract's weight in the index would 
decrease. See id. at 36374.
---------------------------------------------------------------------------

    Accordingly, the Commission examines below whether the 
representations by the Exchange, and the comments received from the 
public, support a finding that the Exchange has entered into a 
surveillance-sharing agreement with a market of significant size 
relating to bitcoin, the asset underlying the proposed ETPs, or that 
alternative means of preventing fraud and manipulation would be 
sufficient to satisfy the requirement of Exchange Act Section 6(b)(5) 
that the proposed rule change be designed to prevent fraudulent and 
manipulative acts and practices.
2. Comments Received
    One commenter asserts that data on a week's activity on the Gemini 
exchange, which provides a critical input for the CFE bitcoin futures, 
show substantial quantities of bitcoin are bought and sold all at once. 
The commenter believes that this behavior does not appear to be the 
result of natural trading and in the long run would prevent true price 
discovery.\40\
---------------------------------------------------------------------------

    \40\ See Malkin Letter, supra note 12, at 1-2.
---------------------------------------------------------------------------

    One commenter states that commencing an ETP without allowing the 
market to adjust to the cash-settled futures products would be akin to 
``putting the cart before the horse'' and seems to be an attempt to 
appease institutional investors.\41\
---------------------------------------------------------------------------

    \41\ See Desai Letter, supra note 12, at 1.
---------------------------------------------------------------------------

    One commenter states that the market for bitcoin derivatives other 
than bitcoin exchange-traded futures appears to be developing and that 
financial institutions are reportedly moving toward launching bitcoin-
related trading desks and other operations. This commenter believes 
that the proposed offering of both long and short ETPs raises the 
possibility that market makers in bitcoin-related derivatives could 
make two-sided markets if interest in the long and short ETPs is 
similar in magnitude. The commenter further believes that interest 
outside of the bitcoin ETPs may be sufficient to motivate market makers 
to maintain bitcoin derivatives desks.\42\ In addition, the commenter 
suggests that questions about bitcoin derivatives markets can be 
addressed through market depth analyses, discussions with potential 
bitcoin derivatives liquidity providers, and analyses of order and 
trade data across CME and CFE to determine the plausibility of 
simultaneous liquidity collapses on both bitcoin future markets.\43\
---------------------------------------------------------------------------

    \42\ See NERA Letter, supra note 12, at 2.
    \43\ See id.
---------------------------------------------------------------------------

    Six commenters assert that there is manipulation in the bitcoin 
market.\44\ One commenter states that it is widely known in the 
cryptocurrency

[[Page 43928]]

community that volatility in the bitcoin market is the result of 
manipulation through the coordinated use of high-frequency trading 
across multiple exchanges.\45\ Another commenter asserts that it is 
common knowledge that the bitcoin market is being manipulated and 
asserts that BitConnect, which was recently shut down and had promised 
risk-free annual returns of up to 120%, is an example of Ponzi and 
multi-level marketing schemes that are too common. This commenter 
argues that the Commission should not send the wrong signal to bitcoin 
manipulators--who, the commenter asserts, currently operate with 
impunity--by approving a bitcoin ETP.\46\
---------------------------------------------------------------------------

    \44\ See Desai Letter, supra note 12, at 1; Fitzgerald Letter, 
supra note 12, at 1; Kumar Letter, supra note 12; Krohn Letter, 
supra note 12; Barnwell Letter, supra note 12, at 2; Bhat Letter, 
supra note 12.
    \45\ See Barnwell Letter, supra note 12, at 2.
    \46\ See Kumar Letter, supra note 12.
---------------------------------------------------------------------------

    One commenter asserts that, in an unregulated market, a small 
minority can manipulate the price of bitcoin and other ``altcoins'' and 
that bitcoin and other cryptocurrencies are freely manipulated by 
players who hold a disproportionate amount of cryptocurrencies or 
access to fiat currencies. This commenter cites data showing that 4.11% 
of bitcoin addresses own 96.53% of all the bitcoin in circulation, that 
the top four addresses control 3.13% of all bitcoin currently in 
distribution (worth over $4 billion), and that 115 individuals control 
bitcoin worth over $24 billion.\47\
---------------------------------------------------------------------------

    \47\ See Fitzgerald Letter, supra note 12, at 1-2.
---------------------------------------------------------------------------

    One commenter asserts that widespread pump-and-dump schemes 
organized through the messaging platform ``Telegram'' are evidence of 
manipulation.\48\ This commenter further cites an inquiry by then-New 
York Attorney General Eric Schneiderman into cryptocurrency exchanges 
and the use of trading ``bots'' on those exchanges to manipulate the 
market, and asserts that such activity can drive prices above fair 
market value by over 300%. The commenter notes the Kraken exchange's 
refusal to cooperate with this inquiry and believes that this refusal 
should pose serious questions for investors and the Commission about 
the Kraken exchange's operations, particularly after the Kraken 
exchange recently exited the Japanese market due to regulatory 
requirements.\49\
---------------------------------------------------------------------------

    \48\ See id. at 2.
    \49\ See id.
---------------------------------------------------------------------------

    One commenter states that a commonly cited factor mitigating 
possible susceptibility to manipulation is the securities exchanges' 
own surveillance procedures, in addition to the futures exchanges' 
surveillance procedures and market surveillance and oversight by the 
Commodity Futures Trading Commission (``CFTC''). This commenter cites 
statements by the CFTC that it has the legal authority and means to 
police certain spot markets for fraud and manipulation through 
``heightened review'' collaboration with exchanges, that exchanges will 
provide the CFTC surveillance team with trade settlement data upon 
request, and that the exchanges will enter into information-sharing 
agreements with spot market platforms and monitor trading activity on 
the spot markets. The commenter also states that the Gemini exchange 
has announced that it would use Nasdaq's market surveillance system to 
monitor its marketplace.\50\
---------------------------------------------------------------------------

    \50\ See NERA Letter, supra note 12, at 4-5.
---------------------------------------------------------------------------

    This commenter further asserts that market surveillance is 
generally a prerequisite to identifying potential market manipulation 
and discourages market manipulation. The commenter believes that the 
emergence of institutionalized market surveillance on both futures and 
spot markets is a positive sign for the long-term future of bitcoin 
markets.\51\ The commenter suggests that the Commission, in 
coordination with the CFTC, self-regulatory organizations, bitcoin 
futures exchanges, and bitcoin spot market platforms, could gather 
market surveillance data to conduct an independent analysis of trade 
and settlement patterns and determine whether potentially manipulative 
trading practices occur on bitcoin spot and futures markets.\52\
---------------------------------------------------------------------------

    \51\ See id. at 5.
    \52\ See id.
---------------------------------------------------------------------------

    A commenter asserts that bitcoin ETPs should be structured in such 
a way that the funds own bitcoin directly, because this commenter 
believes that cryptocurrency ETPs that are based on futures or other 
derivatives would invite manipulation of prices. A bitcoin ETP that 
holds the underlying cryptocurrency directly, this commenter states, 
would be simpler, more transparent, and less subject to complex and 
destabilizing trading strategies.\53\
---------------------------------------------------------------------------

    \53\ See Krohn Letter, supra note 12.
---------------------------------------------------------------------------

    The Sponsor asserts that the operation of, and risks posed by, an 
ETP that seeks to track the performance of a bitcoin futures contract, 
are relatively straightforward and similar to the operation and risks 
involved with many existing commodity-futures-based ETPs, and that the 
Commission has not raised concerns about the risk of market 
manipulation in the underlying commodity markets, even when the risk is 
disclosed in the offering document for a commodity-futures-based ETP, 
or when the production of the underlying commodity is dominated by 
relatively few players operating under a common organization.\54\ The 
Sponsor also asserts that CFE and CME surveil their markets to ensure 
that they are free from manipulation, other price distortion, or 
disorderly trading or expiration of futures contracts and that it is 
not necessary for the Exchange to enter into surveillance-sharing 
agreements with the underlying bitcoin spot markets.\55\ The Sponsor 
states that investors should only consider the price of the Bitcoin 
Futures Contracts, rather than the price of bitcoin itself,\56\ but 
also concedes that, to the extent price manipulation is possible in the 
underlying market and affects the price of the futures contracts, the 
NAV of the Funds would be affected as well.\57\
---------------------------------------------------------------------------

    \54\ See GraniteShares Letter, supra note 12, at 1-2. The 
Commission notes that the Sponsor did not submit its comment letter 
until 97 days after the close of the comment period under the Order 
Instituting Proceedings.
    \55\ See id. at 2 & n.2, 6.
    \56\ See id. at 8.
    \57\ See id. at 6, 8.
---------------------------------------------------------------------------

    The Sponsor asserts that CFE and CME have specific and well-
established trading and clearing rules to maintain an orderly and 
continuous market for bitcoin futures contracts that is supported by 
market makers providing continuous two-sided markets throughout the 
day.\58\ The Sponsor concedes that bitcoin futures contracts have 
limited operating histories, but asserts that the market infrastructure 
for these contracts is at least as advanced as that underlying the 
futures contracts used by a previously approved ETP that invests in 
freight futures contracts, noting that bitcoin futures trade with an 
electronic order book, while freight futures trade by voice orders, and 
asserting that the daily dollar volume in bitcoin futures contracts 
over a two-month period exceeds that of freight futures contracts.\59\ 
The Sponsor asserts that CFE and CME are significant markets based on 
the existing market as well as the trading infrastructure.\60\ The 
Sponsor further concedes that, if the Funds hit position limits in 
Bitcoin Futures Contracts, this would potentially affect the trading 
and liquidity of the Shares, but asserts that this risk is disclosed to 
investors in the Registration Statement, that other commodity-futures-
based ETPs face similar risks, and that interest from investors in the 
Shares would support

[[Page 43929]]

development of the bitcoin futures market.\61\
---------------------------------------------------------------------------

    \58\ See id. at 2-3, 8-9.
    \59\ See id. at 3.
    \60\ See id. at 8-9.
    \61\ See id. at 7.
---------------------------------------------------------------------------

3. Analysis
    The Exchange asserts that the price of bitcoin is inherently 
resistant to manipulation,\62\ offering, in summary fashion, a list of 
arguments that are exactly the same as arguments that it or commenters 
already raised with respect to previous proposals for bitcoin-based 
ETPs.\63\ The Commission comprehensively addressed each of these 
arguments in the Winklevoss Order, finding in each case that the 
Exchange had failed to carry its burden to demonstrate that the 
argument was correct,\64\ and finding overall that the Exchange ``ha[d] 
not demonstrated that the structure of the spot market for bitcoin is 
uniquely resistant to manipulation.'' \65\ Given that the Exchange has 
merely repeated these arguments, providing no elaboration or support, 
the Commission would have no basis--other than ``unquestioning 
reliance'' on the Exchange's representations--on which to come to a 
different conclusion here.\66\
---------------------------------------------------------------------------

    \62\ See supra notes 20-21 and accompanying text.
    \63\ See Winklevoss Order, supra note 30, 83 FR at 37582-84 
(Section III.B.1(a) of the order).
    \64\ See id. at 37584-87 (Section III.B.1(b) of the order).
    \65\ See id. at 37584.
    \66\ See supra note 28 and accompanying text (discussing the 
holding of Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission). Additionally, the Trust's Registration Statement 
acknowledges that bitcoin spot markets have been the subject of 
fraud and security breaches, that the ``nature of the assets held at 
Bitcoin Exchanges make them appealing targets for hackers,'' and 
that the bitcoin spot markets' exposure to ``fraud and security 
breaches . . . could have a negative impact on the Bitcoin Futures 
Contracts in which the Funds invest.'' See Registration Statement, 
supra note 3, at 9.
---------------------------------------------------------------------------

    The Sponsor concedes that manipulation of the underlying bitcoin 
markets may affect the value of the Shares,\67\ but argues that the 
risk of manipulation has been disclosed to investors and that the 
Commission has not raised similar concerns in connection with 
previously approved commodity-futures ETPs, even when the risk of 
manipulation has been disclosed to investors or when the underlying 
commodity market was controlled by relatively few players.\68\ But the 
Commission, as it stated in the Winklevoss Order, is not applying a 
``cannot be manipulated'' standard to ETPs.\69\ Rather, the Commission 
has held that--absent a showing that the underlying assets for an ETP 
are inherently resistant to manipulation, or that other means of 
surveillance will suffice--a listing exchange must demonstrate that it 
has entered into a surveillance-sharing agreement with a regulated 
market of significant size relating to the underlying asset.\70\
---------------------------------------------------------------------------

    \67\ See supra note 57 and accompanying text.
    \68\ See supra note 54 and accompanying text.
    \69\ See Winklevoss Order, supra note 30, 83 FR at 37582.
    \70\ See id. The Sponsor argues that it is not necessary for the 
Exchange to enter into a surveillance-sharing agreement with an 
underlying bitcoin trading venue, but the Commission has not 
asserted that such a surveillance-sharing agreement is necessary. 
Instead, the Commission has held in the Winklevoss Order ``that--
when the spot market is unregulated--the requirement of preventing 
fraudulent and manipulative acts may possibly be satisfied by 
showing that the ETP listing market has entered into a surveillance-
sharing agreement with a regulated market of significant size in 
derivatives related to the underlying asset.'' Id. at 37600 
(emphasis added).
---------------------------------------------------------------------------

    The Exchange asserts that its existing surveillance procedures and 
its ability to share surveillance information with U.S. futures 
exchanges are sufficient to meet the requirements of Exchange Act 
Section 6(b)(5).\71\ One commenter also asserts that the exchange's own 
surveillance procedures, along with market surveillance and oversight 
by the CFTC, can mitigate manipulation.\72\
---------------------------------------------------------------------------

    \71\ See Notice, supra note 5, 83 FR at 2709.
    \72\ See supra notes 50-51 and accompanying text. This commenter 
also suggests that the Commission--in coordination with the CFTC, 
SROs, futures markets, and bitcoin spot platforms--could gather 
market surveillance data to independently analyze whether 
manipulative practices occur on bitcoin spot and futures platforms. 
See supra note 52 and accompanying text. As noted above, however, it 
is the Exchange that bears the burden to demonstrate that its 
proposal is designed to ``prevent fraudulent and manipulative acts 
and practices.'' See supra notes 25-28 and accompanying text.
---------------------------------------------------------------------------

    While the Exchange would, pursuant to its listing rules, be able to 
obtain certain information regarding trading in the Shares and in the 
underlying bitcoin or any bitcoin derivative through registered market 
makers,\73\ this trade information would be limited to the activities 
of market participants who trade on the Exchange. Furthermore, neither 
the Exchange's ability to surveil trading in the Shares nor its ability 
to share surveillance information with other securities exchanges 
trading the Shares would give the Exchange insight into the activity 
and identity of market participants who trade in bitcoin futures 
contracts or other bitcoin derivatives or who trade in the underlying 
bitcoin spot markets, where a substantial majority of trading, the 
Commission concluded in the Winklevoss Order, ``occurs on unregulated 
venues overseas that are relatively new and that, generally, appear to 
trade only digital assets.'' \74\ Thus, consistent with its 
determination in the Winklevoss Order,\75\ and with the Commission's 
previous orders approving commodity-futures ETPs,\76\ the Commission 
believes that the Exchange must demonstrate that it has in place a 
surveillance-sharing agreement with a regulated market of significant 
size related to bitcoin, because ``[s]uch agreements provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a manipulation 
if it were to occur.'' \77\
---------------------------------------------------------------------------

    \73\ See Notice, supra note 5, 83 FR at 2709 (``In addition to 
the existing obligations under Exchange rules regarding the 
production of books and records . . ., the registered Market Maker 
in Trust Issued Receipts shall make available to the Exchange such 
books, records or other information pertaining to transactions by 
such entity or registered or non-registered employee affiliated with 
such entity for its or their own accounts for trading the underlying 
physical commodity, related commodity futures or options on 
commodity futures, or any other related commodity derivatives, as 
may be requested by the Exchange.'').
    \74\ Winklevoss Order, supra note 30, 83 FR at 37580.
    \75\ See id. at 37591 (finding that ``traditional means'' of 
surveillance were not sufficient in the absence of a surveillance-
sharing agreement with a regulated market of significant size 
related to the underlying asset).
    \76\ See supra note 35 and accompanying text (noting previous 
commodity-futures ETPs where surveillance sharing in place between 
ETP listing exchange and underlying futures exchanges).
    \77\ Winklevoss Order, supra note 30, 83 FR at 37580 (quoting 
Amendment to Rule Filing Requirements for Self-Regulatory 
Organizations Regarding New Derivative Securities Products, 
Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 
70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)).
---------------------------------------------------------------------------

    The Exchange represents that it is able to share surveillance 
information with CME and CFE, which are bitcoin futures markets 
regulated by the CFTC, through membership in the Intermarket 
Surveillance Group.\78\ And the Sponsor asserts that CFE and CME 
surveil their markets to ensure that they are free from manipulation, 
other price distortion, or disorderly trading,\79\ and that CFE and CME 
are ``significant markets'' based on their structure and volume.\80\ 
Nonetheless, the Commission must disapprove the proposal, because the 
evidence in the record does not support a conclusion that CME's and 
CFE's bitcoin futures markets are markets of significant size.
---------------------------------------------------------------------------

    \78\ See https://www.isgportal.org/isgPortal/public/members.htm 
(listing the current members and affiliate members of the 
Intermarket Surveillance Group).
    \79\ See supra note 55 and accompanying text.
    \80\ See supra notes 59-60 and accompanying text.
---------------------------------------------------------------------------

    The Order Instituting Proceedings sought comment on whether the CME 
and CFE bitcoin futures markets are markets of significant size,\81\ 
but the Exchange has not responded to any of the questions in the Order 
Instituting Proceedings, and the only analysis of

[[Page 43930]]

the underlying futures markets the Notice provides is the generic 
statement that, ``based on numerous conversations with market 
participants, issuers, and discussions with personnel of CFE,'' the 
Exchange ``expects that the market for Bitcoin Futures Contracts will 
be sufficiently liquid to support numerous ETPs shortly after launch.'' 
\82\ The Sponsor argues that the daily volume in the Bitcoin Futures 
Contracts, based on a two-month sample period, exceeds that of the 
futures contracts underlying a previously approved commodity-futures 
ETP investing in freight futures, adding that the Bitcoin Futures 
Contracts trade on an electronic order book, whereas the freight 
futures trade by voice, and that the trading infrastructure of the CME 
and CFE makes them significant markets.\83\ The Sponsor further asserts 
that, if the Funds hit position limits in the Bitcoin Futures 
Contracts, although it could impact trading and liquidity in the 
Shares, the interest in the Shares would support further development of 
the bitcoin futures market.\84\
---------------------------------------------------------------------------

    \81\ See Order Instituting Proceedings, supra note 9, 83 FR at 
15427.
    \82\ Notice, supra note 5, 83 FR at 2710; see also supra note 23 
and accompanying text. The Exchange sought to remove this 
representation from its proposal in Amendment No. 2. See infra note 
128.
    \83\ See supra notes 59-60 and accompanying text.
    \84\ See supra note 61 and accompanying text.
---------------------------------------------------------------------------

    Whether an underlying market is a ``market of significant size,'' 
however, does not depend on whether a market operates by electronic or 
voice trading, and it does not depend solely on trading volume in 
isolation from the broader context of the underlying market. Moreover, 
to the extent that isolated trading volume is relevant, the Commission 
does not believe that a two-month sample is sufficient to establish 
that a market is of significant size. Instead, as noted above and 
stated in the Winklevoss Order, the Commission interprets a 
``significant market'' or ``market of significant size'' to be ``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 the ETP listing 
market 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.'' \85\ Neither the Exchange nor the Sponsor has provided 
an analysis of whether the CME or CFE meets this standard, and the 
Sponsor's assertion that the bitcoin futures markets will grow to 
accommodate demand for the Funds (which are two of nine recently 
proposed bitcoin futures ETPs),\86\ this speculative statement does not 
provide a basis for the Commission to conclude that CME and CFE are 
currently markets of significant size.\87\ Thus, there is no basis in 
the record on which the Commission can conclude that the bitcoin 
futures markets are markets of significant size.
---------------------------------------------------------------------------

    \85\ See supra note 33 and accompanying text (quoting Winklevoss 
Order, supra note 30, 83 FR at 37594).
    \86\ See Notice, supra note 5 (proposing two GraniteShares 
bitcoin-futures ETPs); Securities Exchange Act Release No. 82350 
(Dec. 19, 2017), 82 FR 61100 (Dec. 26, 2017) (SR-NYSEArca-2017-139) 
(proposing two ProShares bitcoin-futures ETPS); Securities Exchange 
Act Release No. 82532 (Jan. 18, 2018), 83 FR 3380 (Jan. 24, 2018) 
(SR-NYSEArca-2018-02) (proposing five Direxion bitcoin-futures 
ETPs).
    \87\ With respect to the Sponsor's argument that daily volume in 
the Bitcoin Futures Contracts over a two-month period exceeds that 
of futures contracts underlying a previously approved commodity-
futures ETP, the Breakwave Dry Bulk Shipping ETF, the Commission 
notes that the futures in question had been trading for at least a 
dozen years before the ETP was proposed, see supra note 37 (SR-
NYSEArca-2017-107), and that the exchange proposing that ETP had 
provided not just daily volume figures, but had provided statistics 
on open interest, yearly volume, and distribution of open interest 
across contract types and had represented that liquidity had 
remained relatively constant over a five-year period. See supra note 
36. Moreover, in approving the Breakwave Dry Bulk Shipping ETF, the 
Commission noted that the listing exchange had represented that 
``the Freight Futures trade on well-established, regulated markets 
that are members of the ISG'' and found that the exchange would be 
able to ``share surveillance information with a significant 
regulated market for trading futures on dry bulk freight.'' 
Securities Exchange Act Release No. 82390, supra note 35, 82 FR at 
61633.
---------------------------------------------------------------------------

    Publicly available data show that the median daily notional trading 
volume, from inception through August 10, 2018, has been 14,185 
bitcoins on CME and 5,184 bitcoins on CFE, and that the median daily 
notional value of open interest on CME and CFE during the same period 
has been 10,145 bitcoins and 5,601 bitcoins, respectively.\88\ But 
while these futures contract figures are readily available, meaningful 
analysis of the size of the CME or CFE markets relative to the 
underlying bitcoin spot market is challenging, because reliable data 
about the spot market, including its overall size, are unavailable.\89\
---------------------------------------------------------------------------

    \88\ These volume figures were calculated by Commission staff 
using data published by CME and CFE on their websites.
    \89\ See Winklevoss Order, supra note 30, 83 FR at 37601.
---------------------------------------------------------------------------

    The Commission also notes that in recent testimony CFTC Chairman 
Giancarlo characterized the volume of the bitcoin futures markets as 
``quite small.'' \90\ Additionally, the President and COO of CFE, 
recently acknowledged in a letter to the Commission staff that ``the 
current bitcoin futures trading volumes on Cboe Futures Exchange and 
CME may not currently be sufficient to support ETPs seeking 100% long 
or short exposure to bitcoin.'' \91\ These statements reinforce the 
Commission's conclusion that there is insufficient evidence to 
determine that the CME and CFE bitcoin futures markets are markets of 
significant size.
---------------------------------------------------------------------------

    \90\ CFTC Chairman Giancarlo testified: ``It is important to put 
the new Bitcoin futures market in perspective. It is quite small 
with open interest at the CME of 6,695 bitcoin and at Cboe Futures 
Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 2018). At a price of 
approximately $7,700 per Bitcoin, this represents a notional amount 
of about $94 million. In comparison, the notional amount of the open 
interest in CME's WTI crude oil futures was more than one thousand 
times greater, about $170 billion (2,600,000 contracts) as of Feb[.] 
2, 2018 and the notional amount represented by the open interest of 
Comex gold futures was about $74 billion (549,000 contracts).'' See 
Written Testimony of J. Christopher Giancarlo, Chairman, Commodity 
Futures Trading Commission, Before the Senate Banking Committee at 
text accompanying nn. 14-15 (Feb. 6, 2018). See also Winklevoss 
Order, supra note 30, 83 FR at 37601 (citing Giancarlo testimony).
    \91\ Letter from Chris Concannon, President and COO, Cboe Global 
Markets, to Dalia Blass, Director, Division of Investment 
Management, Commission, at 5 (Mar. 23, 2018), available at https://www.sec.gov/divisions/investment/cboe-global-markets-innovation-cryptocurrency.pdf.
---------------------------------------------------------------------------

    Although this conclusion is dispositive with respect to the 
Exchange's proposal, the Commission will also address the Exchange's 
representation that no more than 10% of the net assets of a Fund in the 
aggregate invested in bitcoin futures contracts will be invested in 
contracts whose principal market is neither a member of the Intermarket 
Surveillance Group nor a market with whom the Exchange has a 
comprehensive surveillance-sharing agreement.\92\ The Commission does 
not believe that this representation would function as a meaningful 
limitation when, according to the Notice, there is no minimum amount of 
a Fund that must be invested in such contracts. According to the 
Notice, in the event position, price, or accountability limits are 
reached with respect to bitcoin futures contracts, each Fund may invest 
in listed and OTC swaps on bitcoin or the Benchmark Futures 
Contracts.\93\ The Notice does not establish any limit on the Funds' 
holdings of these other bitcoin-related derivatives; it provides no 
analysis of the size and liquidity of markets for those derivatives; 
and it does not discuss whether the Exchange has the ability to share 
surveillance information with the markets for these derivatives. Thus, 
as to what might be a substantial proportion of the Funds' portfolios 
under the Notice, the

[[Page 43931]]

Commission cannot conclude that surveillance-sharing would be 
available, that the related markets would be regulated, or that the 
related markets would be of significant size.\94\
---------------------------------------------------------------------------

    \92\ See supra note 18 and accompanying text.
    \93\ See Notice, supra note 5, 83 FR 2706; see also supra note 
19 and accompanying text.
    \94\ As discussed below, see Section III.E, infra the exchange 
has filed two untimely amendments to the proposal, each of which 
would have limited the Funds' investments to the Bitcoin Futures 
Contracts. Even if these amendments had been timely, however, the 
Commission would still determine that the proposal was not 
consistent with the Exchange Act. See id.
---------------------------------------------------------------------------

    Additionally, while one commenter suggests that the market for 
bitcoin derivatives other than exchange-traded futures appears to be 
developing--and that the offering of long and short bitcoin ETPs 
``raises the possibility that market makers in Bitcoin derivatives 
could make two-sided markets if interest in the long and short ETFs is 
similar in magnitude'' \95\--these speculative statements do not 
provide a basis for the Commission to conclude that the non-exchange-
traded bitcoin derivatives market is now, or may eventually be, of 
significant size.
---------------------------------------------------------------------------

    \95\ See supra notes 42-43 and accompanying text.
---------------------------------------------------------------------------

    The Commission therefore concludes that Exchange has not 
demonstrated that it has entered into a surveillance-sharing agreement 
with a regulated market of significant size related to bitcoin, or 
that, given the current absence of such an agreement, the exchange's 
own surveillance procedures described above would, by themselves, be 
sufficient to satisfy the requirement of Exchange Act Section 6(b)(5) 
that an exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices.\96\ While CME and CFE are regulated 
markets for bitcoin derivatives, there is no basis in the record for 
the Commission to conclude that these markets are of significant size. 
Additionally, because bitcoin futures have been trading on CME and CFE 
only since December 2017, the Commission has no basis on which to 
predict how these markets may grow or develop over time, or whether or 
when they may reach significant size.
---------------------------------------------------------------------------

    \96\ See 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Although the Exchange has not demonstrated that a regulated bitcoin 
futures market of significant size currently exists, the Commission is 
not suggesting that the development of such a market would 
automatically require approval of a proposed rule change seeking to 
list and trade shares of an ETP holding bitcoins as an asset. The 
Commission would need to analyze the facts and circumstances of any 
particular proposal and examine whether any unique features of a 
bitcoin futures market would warrant further analysis before approval.

C. Protecting Investors and the Public Interest

1. Comments Received
    One commenter believes that, while the Commission should deny the 
proposed ETPs, it should regulate this environment to stop individual 
consumers from coming to financial harm.\97\
---------------------------------------------------------------------------

    \97\ See Fitzgerald Letter, supra note 12, at 2.
---------------------------------------------------------------------------

    One commenter suggests that the Commission could address some of 
its concerns about the proposed ETPs by working with self-regulatory 
organizations, and in particular FINRA, to create bitcoin and 
cryptocurrency-related asset suitability requirements. In addition, 
this commenter suggests that targeted disclosure requirements could 
make investors aware of volatility, discourage retail investors from 
investing more than a small portion of their portfolio in 
cryptocurrency-related assets, and present historical scenarios to 
retail investors to demonstrate how an instrument such as a particular 
bitcoin ETP would have performed over time. This commenter believes 
that suitability requirements are less prescriptive than an effective 
ban on a class of product and that they could balance the Commission's 
interest in protecting retail investors against its interest in 
allowing cryptocurrency-related asset markets to continue to develop in 
regulated markets where the Commission can observe their performance 
closely.\98\
---------------------------------------------------------------------------

    \98\ See NERA Letter, supra note 12, at 5-6.
---------------------------------------------------------------------------

    Several commenters assert that the Commission should deny the 
proposed ETPs to help protect the public from exposure to financial 
risk from an unregulated market.\99\ One commenter asserts that, while 
the risk posed by the cash-settled futures products is mostly 
contained, a bitcoin ETP would expose the public to significant 
financial risk due to a highly volatile, unregulated, and manipulated 
market in bitcoin as well as cryptocurrencies in general.\100\ Several 
commenters further believe that before the Commission approves a 
bitcoin ETP, there should be a proper legal and regulatory framework 
put in place by a suitable governmental body to prevent manipulation 
and protect the public.\101\
---------------------------------------------------------------------------

    \99\ See Desai Letter, supra note 12, at 1; Kumar Letter, supra 
note 12; Malkin Letter, supra note 12, at 2.
    \100\ See Desai Letter, supra note 12, at 1.
    \101\ See Desai Letter, supra note 12, at 1, 2; Kumar Letter, 
supra note 12; Malkin Letter, supra note 12, at 2.
---------------------------------------------------------------------------

2. Analysis
    The Exchange asserts that approval of the proposal would enhance 
competition among market participants, to the benefit of investors and 
that it would protect investors by permitting them to seek exposure to 
bitcoin through efficient and transparent ETPs.\102\ The Exchange also 
states that the Funds would enhance the security afforded to investors 
as compared to a direct investment in bitcoin.\103\ Other commenters 
suggest that the Commission should either seek to regulate the 
underlying bitcoin markets,\104\ or should seek to protect investors 
through disclosure requirements or suitability standards, rather than 
disapproving a bitcoin-ETP proposal.\105\ Several other commenters, 
however, assert that approval of a bitcoin-based ETP would expose 
investors to risks from unregulated bitcoin markets.\106\
---------------------------------------------------------------------------

    \102\ See Notice, supra note 5, 83 FR at 2710-11.
    \103\ See id. at 2710.
    \104\ See supra note 97 and accompanying text.
    \105\ See supra note 98 and accompanying text.
    \106\ See supra notes 99-101 and accompanying text.
---------------------------------------------------------------------------

    The Commission acknowledges that, compared to trading in 
unregulated bitcoin spot markets, trading a bitcoin-based ETP on a 
national securities exchange may provide some additional protection to 
investors, but 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. 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.
    Thus, even if a proposed rule change would provide certain benefits 
to investors and the markets, the proposed rule change may still fail 
to meet other requirements under the Exchange Act. For the reasons 
discussed above, the Exchange has not met its burden of demonstrating 
an adequate basis in the record for the Commission to find that the 
proposal is consistent with Exchange Act Section 6(b)(5), and, 
accordingly, the Commission must disapprove the proposal.

[[Page 43932]]

D. Other Comments

    Comment letters also addressed the following topics:
     The desire of investors to gain access to bitcoin through 
an ETP; \107\
---------------------------------------------------------------------------

    \107\ See Kaleda Letter, supra note 12; Santos Letter, supra 
note 12; Netto Letter, supra note 12.
---------------------------------------------------------------------------

     investor understanding about bitcoin; \108\
---------------------------------------------------------------------------

    \108\ See Desai Letter, supra note 12, at 1; Kumar Letter, supra 
note 12.
---------------------------------------------------------------------------

     the valuation of bitcoin and price differentials across 
bitcoin trading venues; \109\
---------------------------------------------------------------------------

    \109\ See Kumar Letter, supra note 12; Malkin Letter, supra note 
12; Bhat Letter, supra note 12; GraniteShares Letter, supra note 12, 
at 6-7, 10-11.
---------------------------------------------------------------------------

     the intrinsic value of bitcoin; \110\
---------------------------------------------------------------------------

    \110\ See Ahn Letter, supra note 12.
---------------------------------------------------------------------------

     the reliability of bitcoin as a store of value; \111\
---------------------------------------------------------------------------

    \111\ See Otenyi Letter, supra note 12; Desai Letter, supra note 
12, at 1.
---------------------------------------------------------------------------

     the volatility of bitcoin prices; \112\
---------------------------------------------------------------------------

    \112\ See Desai Letter, supra note 12, at 1; Malkin Letter, 
supra note 12, at 1; Bhat Letter, supra note 12.
---------------------------------------------------------------------------

     the regulation of bitcoin spot markets; \113\
---------------------------------------------------------------------------

    \113\ See Barnwell Letter, supra note 12, at 2; Desai Letter, 
supra note 12, at 1; Fitzgerald Letter, supra note 12, at 1; Kumar 
Letter, supra note 12; Malkin Letter, supra note 12, at 1.
---------------------------------------------------------------------------

     the operation and valuation of the proposed ETPs; \114\
---------------------------------------------------------------------------

    \114\ See NERA Letter, supra note 12, at 1-3, 5; GraniteShares 
Letter, supra note 12, at 3, 5-6.
---------------------------------------------------------------------------

     arbitrage between the price of the Shares and the 
underlying portfolio instruments; \115\
---------------------------------------------------------------------------

    \115\ See GraniteShares Letter, supra note 12, at 8.
---------------------------------------------------------------------------

     the ability of the Funds to meet redemption orders; \116\
---------------------------------------------------------------------------

    \116\ See id. at 7.
---------------------------------------------------------------------------

     the custody of the assets of the Funds; \117\
---------------------------------------------------------------------------

    \117\ See id. at 3.
---------------------------------------------------------------------------

     the effect on the Funds of a fork in the bitcoin 
blockchain; \118\
---------------------------------------------------------------------------

    \118\ See id. at 6.
---------------------------------------------------------------------------

     the potential impact of Commission approval of the 
proposed ETP on the price of bitcoin and on the U.S. economy; \119\
---------------------------------------------------------------------------

    \119\ See Krohn Letter, supra note 12; Hales Letter, supra note 
12; Santos Letter, supra note 12.
---------------------------------------------------------------------------

     the leadership role that the United States might play in 
the cryptocurrency space if the Commission were to approve the proposed 
ETP; \120\
---------------------------------------------------------------------------

    \120\ See Hales Letter, supra note 12.
---------------------------------------------------------------------------

     the utility of a bitcoin ETP as a global tool for wealth 
distribution; \121\ and
---------------------------------------------------------------------------

    \121\ See Otenyi Letter, supra note 12.
---------------------------------------------------------------------------

     the legitimacy that Commission approval of the proposed 
ETP might confer upon bitcoin as a digital asset.\122\
---------------------------------------------------------------------------

    \122\ See Desai Letter, supra note 12, at 1, 2; Kumar Letter, 
supra note 12; Santos Letter, supra note 12.
---------------------------------------------------------------------------

    Ultimately, however, additional discussion of these tangential 
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

    As noted above, the deadline for rebuttal comments in response to 
the Order Instituting Proceedings was May 15, 2018.\123\ On August 21, 
2018, however, the Exchange filed Amendment No. 1 with the Commission, 
stating that the amendment ``amends and replaces in its entirety the 
proposal as originally submitted on January 5, 2018.'' Then, on August 
22, 2018, the Exchange filed Amendment No. 2 with the Commission, 
stating that the amendment ``amends and replaces in its entirety 
Amendment No. 1 as submitted on August 21, 2018, which amended and 
replaced in its entirety the proposal as originally submitted on 
January 5, 2018.'' Because these amendments were filed months after the 
deadline for comments on the proposed rule change, the Commission deems 
Amendment No. 1 and Amendment No. 2 to have been untimely filed.
---------------------------------------------------------------------------

    \123\ See supra note 10 and accompanying text.
---------------------------------------------------------------------------

    Even if these amendments had been timely filed, however, the 
Commission would still conclude that the Exchange had not met its 
burden to demonstrate that its proposal is consistent with Exchange Act 
Section 6(b)(5). The change that the amendments made to the proposal 
was to limit the investments of the Funds to Bitcoin Futures Contracts, 
which trade on CFE and CME, eliminating the Funds' ability to invest in 
listed or unlisted swaps on bitcoin or on the Benchmark Futures 
Contracts.\124\ Although CFE and CME are ``regulated markets,'' the 
record, as discussed above, does not provide a basis for the Commission 
to conclude that CFE and CME are regulated markets ``of significant 
size'' in Bitcoin Futures Contracts.\125\ Therefore, even if the 
Exchange's amendments were timely filed, the Commission would be unable 
to find, based on the record, that the Exchange had entered into a 
surveillance-sharing agreement with a regulated market of significant 
size related to bitcoin.\126\
---------------------------------------------------------------------------

    \124\ The Sponsor also represents in its August 20, 2018, 
comment letter that the Funds would invest only in Bitcoin Futures 
Contracts. See GraniteShares Letter, supra note 12, at 5.
    \125\ See supra notes 78-91 and accompanying text.
    \126\ Additionally, even though the Exchange's amendments would 
have removed the representation in the Notice that the Exchange 
expects significant liquidity to exist in the market for Bitcoin 
Futures Contracts, based on numerous conversations with market 
participants, issuers, and discussions with personnel of CFE, see 
supra notes 23 & 82 and accompanying text, the elimination of this 
representation would not alter the Commission's conclusion that the 
Exchange has not met its burden to demonstrate that CFE and CME are 
markets ``of significant size.''
---------------------------------------------------------------------------

F. Basis for Disapproval

    The record before the Commission does not provide a basis for the 
Commission to conclude that the Exchange has met its burden under the 
Exchange Act and the Commission's Rules of Practice to demonstrate that 
its proposed rule change is consistent with Exchange Act Section 
6(b)(5).\127\
---------------------------------------------------------------------------

    \127\ 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).
---------------------------------------------------------------------------

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-2018-001 is 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\128\
---------------------------------------------------------------------------

    \128\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2018-18578 Filed 8-27-18; 8:45 am]
 BILLING CODE 8011-01-P