[Federal Register Volume 84, Number 101 (Friday, May 24, 2019)]
[Notices]
[Pages 24188-24191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10858]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85896; File No. SR-CboeBZX-2019-004]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To List and Trade Shares of the VanEck SolidX
Bitcoin Trust
May 20, 2019.
On January 30, 2019, Cboe BZX Exchange, Inc. (``BZX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares of SolidX Bitcoin Shares
(``Shares'') issued by the VanEck SolidX Bitcoin Trust (``Trust'')
under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The proposed
rule change was published for comment in the Federal Register on
February 20, 2019.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 85119 (Feb. 13,
2019), 84 FR 5140 (Feb. 20, 2019) (``Notice'').
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On March 29, 2019, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ The Commission has received 25 comment letters on the
proposed rule change.\6\ This order institutes proceedings under
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 85475 (Mar. 29,
2019), 84 FR 13345 (Apr. 4, 2019). The Commission designated May 21,
2019, as the date by which it should approve, disapprove, or
institute proceedings to determine whether to disapprove the
proposed rule change.
\6\ Comments on the proposed rule change can be found at:
https://www.sec.gov/comments/sr-cboebzx-2019-004/srcboebzx2019004.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal
As described in detail in the Notice,\8\ the Exchange proposes to
list and trade the Shares under BZX Rule 14.11(e)(4), which governs the
listing and trading of Commodity-Based Trust Shares on the Exchange.\9\
Each Share would represent a fractional undivided beneficial interest
in the Trust's net assets. The Trust's assets would consist of bitcoin,
and the Trust would be responsible for custody of the Trust's
bitcoin.\10\ SolidX Management LLC would be the sponsor of the Trust
(``Sponsor''). The Bank of New York Mellon would be the Administrator,
transfer agent, and the custodian with respect to cash of the Trust.
Foreside Fund Services, LLC would be the marketing agent in connection
with the creation and redemption of baskets of Shares. Van Eck
Securities Corporation would provide assistance in the marketing of the
Shares.\11\
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\8\ See Notice, supra note 3.
\9\ See BZX Rule 14.11(e)(4) (permitting the listing and trading
of ``Commodity-Based Trust Shares,'' defined as a security (a) that
is used by a trust which holds a specified commodity deposited with
the trust; (b) that is issued by such trust in a specified aggregate
minimum number in return for a deposit of a quantity of the
underlying commodity; and (c) that, when aggregated in the same
specified minimum number, may be redeemed at a holder's request by
such trust which will deliver to the redeeming holder the quantity
of the underlying commodity).
\10\ See Notice, supra note 3, 84 FR at 5141.
\11\ See id.
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According to the Exchange, the investment objective of the Trust
would be for the Shares to reflect the performance of the price of
bitcoin, less the expenses of the Trust's operations. The Trust would
not be actively managed and would not engage in activities designed to
obtain a profit from, or to ameliorate losses caused by, changes in the
price of bitcoin.\12\ The Administrator would generally use the closing
price set for bitcoin by the MVIS Bitcoin OTC Index (``MVBTCO'') to
calculate the Fund's net asset value (``NAV'') on each business day
that the Exchange is open for regular trading, as promptly as
practicable after 4:00 p.m. E.T.\13\
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\12\ See id.
\13\ See id. at 5147. In the event that the Sponsor determines
that this valuation method has failed, the Sponsor will determine
the bitcoin market price on the valuation date according to a set of
alternative methods to be used in the following order: (a) The mid-
point price of the bid/ask spread as of 4:00 p.m. E.T. obtained by
the Sponsor from any bitcoin over-the-counter (``OTC'') platform
that is part of the MVBTCO index; (b) the volume-weighted average
price over the 24-hour period ending at 4:00 p.m. E.T. as published
by a public data feed that is calculated based upon a volume-
weighted average bitcoin price obtained from the major U.S. dollar-
denominated bitcoin exchanges and that the Sponsor determines is
reasonably reliable; and (c) the Sponsor's best judgment of a good
faith estimate of the bitcoin market price. Greater detail
concerning the alternative pricing procedures if the MVBTCO cannot
be utilized as the basis for NAV calculations can be found in the
Notice. See id.
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According to the Exchange, the MVBTCO represents the value of one
bitcoin in U.S. dollars at any point in time. The Exchange represents
that the MVBTCO calculates the intra-day price of bitcoin every 15
seconds and a closing price as of 4:00 p.m. E.T., each
[[Page 24189]]
weekday and that the intra-day levels of the MVBTCO incorporate the
real-time price of bitcoin based on executable bids and asks derived
from constituent bitcoin OTC platforms that have entered into an
agreement with MV Index Solutions GmbH to provide such information.\14\
According to the Exchange, the intra-day price and closing level of the
MVBTCO are calculated using a proprietary methodology collecting
executable bid/ask spreads and calculating a mid-point price from these
U.S.-based bitcoin OTC platforms.\15\
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\14\ According to the Exchange, each OTC constituent platform or
``OTC Trading Desk'' will offer constant, executable bids and offers
of at least $250,000 worth of bitcoin, and the MVBTCO value will be
based on these bids and offers. The Exchange represents that it will
have in place a comprehensive surveillance sharing agreement with
each of these OTC Trading Desks prior to the Shares listing on the
Exchange. See id. at 5145, n.35.
\15\ According to the Sponsor, the MVBTCO's methodology
decreases the influence on the MVBTCO of any particular OTC platform
that diverges from the rest of the data points used by the MVBTCO,
which reduces the possibility of an attempt to manipulate the price
of bitcoin as reflected by the MVBTCO. See id. at 5146.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2019-004 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \16\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\16\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\17\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \18\
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\17\ Id.
\18\ 15 U.S.C. 78f(b)(5).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice,\19\ in addition to any other comments they may wish to
submit about the proposed rule change. In particular, the Commission
seeks comment on the following questions and asks commenters to submit
data where appropriate to support their views:
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\19\ See Notice, supra note 3.
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1. What are commenters' views on whether the Exchange has entered
into a surveillance-sharing agreement with a regulated market of
significant size related to bitcoin? What are commenters' views of the
Exchange's assertion that the trading volume in bitcoin futures makes
the market for bitcoin futures a regulated market of significant size
related to bitcoin? What are commenters' views on whether there is a
reasonable likelihood that a person attempting to manipulate the Shares
would also have to trade in the bitcoin futures market to manipulate
the Shares? What are commenters' views on whether it is likely that
trading in the Shares would be the predominant influence on prices in
the bitcoin futures market?
2. What are commenters' views on the relationship between the
bitcoin futures market and the bitcoin spot market? For example, what
is the relative size of these markets, and where does bitcoin price
formation occur? Does the market, spot or futures, in which price
formation occurs affect commenters' analysis of whether it is
reasonably likely that someone attempting to manipulate the Shares
would have to trade in the bitcoin futures market, or that trading in
the Shares would be the predominant influence on prices in the bitcoin
futures market? To what extent, if at all, do recent developments in
the bitcoin futures market--namely, the cessation of new bitcoin
futures contract trading on the Chicago Futures Exchange--affect
commenters' analysis of these questions?
3. What are commenters' views on whether the trading relationship
between the market for bitcoin futures contracts and the proposed
Trust, which would hold physical bitcoins, would be similar to, or
different from, the relationship between the market for freight futures
contracts and the Breakwave Dry Bulk Shipping ETF (cited by the
Exchange in the Notice),\20\ which directly holds futures contracts
traded on that market? What are commenters' views on how these
similarities or differences might affect an analysis of whether it is
reasonably likely that someone attempting to manipulate the Shares
would have to trade in the bitcoin futures market, or that trading in
the Shares would be the predominant influence on prices in the bitcoin
futures market?
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\20\ See id. at 5142-45.
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4. What are commenters' views on the Trust's proposal to value its
bitcoin holdings based on an index--the MVBTCO--that is calculated
through a proprietary, non-public methodology that uses the privately
reported bid/ask spreads of an unidentified set of U.S.-based market-
makers in the OTC marketplace, which, the Exchange says, has no formal
structure and no open-outcry meeting place? Is the use of a non-public,
proprietary index to value holdings based on OTC activity an
appropriate means to calculate the NAV of an exchange-traded product
(``ETP'')? What are commenters' views on whether determining NAV based
on the index value at 4:00 p.m. E.T. might, or might not, create an
opportunity for manipulation of the NAV or of the Shares? What are
commenters' views on the assertion in the Notice that, according to the
Sponsor, the MVBTCO's methodology reduces the possibility of an attempt
to manipulate the price of bitcoin as reflected by the MVBTCO? What are
commenters' views on the Sponsor's assertion, as described by the
Exchange in the Notice, that ``the OTC desks have a better measure of
the market than any exchange-specific reference price, whether
individually or indexed across multiple exchanges''?
5. What are commenters' views on the Exchange's representation that
it will have in place a comprehensive surveillance sharing agreement
with each of the OTC platforms that constitute the MVBTCO prior to the
Shares listing on the Exchange? What are commenters' views on the
Exchange's assertion that the regulated nature of each of the OTC
platforms that make up the MVBTCO, the notional volume of trading and
liquidity available on these platforms, the principal-to-principal
nature of these platforms, and comprehensive surveillance sharing
agreements with each of the OTC platforms (in addition to the
Exchange's standard surveillance procedures) are sufficient to prevent
fraudulent and manipulative acts and practices in the Shares? What are
commenters' views on the extent to which each of these OTC platforms is
regulated? What are commenters' views on the extent to which each of
these OTC platforms can, or does, conduct surveillance of bitcoin
trading activity?
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6. What are commenters' views on the size, liquidity, transparency,
number and nature of market participants, and price discovery in the
OTC market for bitcoin, both on an absolute basis and relative to the
bitcoin spot market as a whole? What are commenters' views on whether
the volume of U.S. dollar trading of bitcoin--which excludes bitcoin
trading against other sovereign currencies or digital assets--is a
meaningful or appropriate measure of bitcoin market volume?
7. The Exchange states that the Trust does not intend to report its
OTC trading. What are commenters' views on how the Trust's unreported
OTC trades may affect the calculation of the Trust's NAV and the
ability of market makers to engage in arbitrage?
8. What are commenters' views on each of the set of alternative
means by which the Trust proposes to value its holdings in the event
that the Sponsor determines that the MVBTCO, or another alternate
pricing mechanism, has failed, is unavailable, or is deemed unreliable?
What are commenters' views on whether any of these pricing mechanisms,
primary or alternate, would be affected by, or resistant to,
manipulative activity in bitcoin markets?
9. What are commenters' views on the assertion by the Exchange that
the dissemination of information on the Trust's website, along with
quotations for and last-sale prices of transactions in the Shares and
the intra-day indicative value (or ``IIV'') and NAV of the Trust, will
help to reduce the ability of market participants to manipulate the
bitcoin market or the price of the Shares and that the Trust's
arbitrage mechanism will facilitate the correction of price
discrepancies in bitcoin and the Shares? What are commenters' views on
whether the liquidity of the OTC bitcoin market is sufficient to
support efficient arbitrage between the price of the Shares and the
spot price of bitcoin?
10. The Exchange represents that it has entered into a
comprehensive surveillance-sharing agreement with the Gemini Exchange
and is working to establish similar agreements with other bitcoin
venues. What are commenters' views on whether the Gemini Exchange is a
regulated market of significant size? What are commenters' views on
whether there is a reasonable likelihood that a person attempting to
manipulate the proposed ETP would also have to trade on the Gemini
Exchange? What are commenters' views on whether trading in the proposed
ETP would be the predominant influence on prices in the Gemini
Exchange? What are commenters' views on whether the Exchange could
enter into surveillance-sharing agreements with regulated spot markets
of significant size related to bitcoin?
11. What are commenters' views of the Exchange's assertions that
bitcoin is arguably less susceptible to manipulation than other
commodities that underlie ETPs; that the geographically diverse and
continuous nature of bitcoin trading makes it difficult and
prohibitively costly to manipulate the price of bitcoin; that trading
on inside information regarding bitcoin is unlikely; that the
fragmentation across bitcoin markets, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of bitcoin prices
through continuous trading activity unlikely; that manipulation of the
price on any single venue would require manipulation of the global
bitcoin price to be effective; that a substantial OTC bitcoin market
provides liquidity and shock-absorbing capacity; that bitcoin's ``24/7/
365 nature'' \21\ provides constant arbitrage opportunities across all
trading venues; and that it is unlikely that any one actor could obtain
a dominant market share?
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\21\ See id. at 5142 n.11, 5156 n.46.
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12. What are commenters' views of the Exchange's assertions that
transacting in the Shares will be geared toward more sophisticated
institutional investors and will be cost-prohibitive for smaller retail
investors? What are commenters' views regarding whether broker-dealers
are likely to offer fractional shares in the Trust to retail investors,
permitting retail investment with a smaller financial commitment? What
are commenters' views of the Exchange's assertions that the Sponsor
believes that demand from new, larger investors accessing bitcoin
through investment in the Shares will broaden the investor base in
bitcoin, which could further reduce the possibility of collusion among
market participants to manipulate the bitcoin market, in light of the
possibility that broker-dealers may offer fractional shares to their
customers?
13. What are commenters' views on the Exchange's assertion that a
minimum of 100 Shares outstanding at the time of commencement of
trading will be sufficient to provide adequate market liquidity? What
are commenters' views on whether the 100-share minimum would affect the
arbitrage mechanism? What are commenters' views on the Exchange's
assertion that, even though the Trust would not comply with the minimum
number of shares outstanding required by Exchange rules, the policy
concerns underlying that requirement would be otherwise mitigated in
the case of the Trust, because the lower number of Shares is merely a
function of the price of the Shares and will have no effect on the
creation and redemption process or on arbitrage?
14. What are commenters' views of whether the Trust's proposed
insurance coverage would affect trading in the Shares or in the
underlying bitcoins? What are commenters' views regarding the Trust's
proposed security, control, and insurance measures?
III. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, and
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\22\
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\22\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by June 14, 2019. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 28,
2019.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2019-004 on the subject line.
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Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2019-004. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2019-004 and should be submitted
by June 14, 2019. Rebuttal comments should be submitted by June 28,
2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10858 Filed 5-23-19; 8:45 am]
BILLING CODE 8011-01-P