Federal Register, Volume 85 Issue 15 (Thursday, January 23, 2020)

[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Notices]
[Pages 4040-4045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01041]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88002; File No. SR-BOX-2019-19]

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Amendment No. 1 and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt Rules Governing the Trading of Equity
Securities on the Exchange Through a Facility of the Exchange Known as
the Boston Security Token Exchange LLC

January 16, 2020.
On September 27, 2019, BOX Exchange LLC (``Exchange'' or ``BOX'')
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 adopt rules governing the listing and trading of equity
securities that would be NMS stocks on the Exchange through a facility
of the Exchange known as the Boston Security Token Exchange LLC
(``BSTX''). The proposed rule change was published for comment in the
Federal Register on October 18, 2019.\3\ On November 29, 2019, pursuant
to Section 19(b)(2) of the Exchange Act,\4\ the Commission designated a
longer period within which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change.\5\
On December 26, 2019, the Exchange filed Amendment No. 1 to the
proposed rule change, which amended the proposed rule change as
originally filed.\6\ The Commission has received one comment letter on
the proposed rule change.\7\ The Commission is publishing this notice
and order to

[[Page 4041]]

solicit comments on the proposed rule change, as modified by Amendment
No. 1, from interested persons and to institute proceedings pursuant to
Section 19(b)(2)(B) of the Exchange Act \8\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87287 (October 11,
2019), 84 FR 56022 (October 18, 2019) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 87641 (November 29,
2019), 84 FR 66701 (December 5, 2019). The Commission designated
January 16, 2020, as the date by which the Commission shall approve
or disapprove, or institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
\6\ In Amendment No. 1, the Exchange revised the proposal to:
(1) Adopt listing standards that are similar to those of NYSE
American, rather than quantitative listing standards that are 20%
lower than those of NYSE American as initially proposed; (2) remove
the requirement that, for a period of one year from the commencement
of trading in security tokens on BSTX, non-BSTX Participants must
obtain a wallet address from the Exchange and agree to report their
end-of-day security token balances to BSTX; (3) provide for an
omnibus wallet address to which the Exchange would instruct Wallet
Managers to allocate unreported end-of-day balances for a given type
of security token, resulting either from security tokens held by
non-BSTX Participants who are not subject to the end-of-day balance
reporting requirement or from any missing end-of-day balance reports
among BSTX Participants; (4) state that a BSTX Participant who fails
to obtain a wallet address prior to acquiring a position in a
security token, fails to report the end-of-day balances in a timely
manner, or inaccurately reports such balances would be subject to
disciplinary action; (5) add additional listing requirements for
security tokens issued by affiliates of the Exchange; (6) require at
least three market makers upon initial listing for a security token
that does not utilize a designated market maker (``DMM''); (7) state
that the Ethereum blockchain serves as ancillary records that would
not create or convey any ownership of security tokens or shareholder
equity in the issuer; and (8) make technical and conforming changes.
See text accompanying infra note 12 for the Exchange's definition of
``security tokens,'' infra note 15 for the definition of ``BSTX
Participant,'' and infra note 18 for the definition of ``Wallet
Manager.'' When the Exchange filed Amendment No. 1 to BOX-2019-19,
it also submitted the text of the partial amendment as a comment
letter to the filing, which the Commission made publicly available
at https://www.sec.gov/comments/sr-box-2019-19/srbox201919-6613675-202939.pdf (``Amendment No. 1'').
\7\ See Letter from Ellen Greene, Managing Director, SIFMA, to
Vanessa Countryman, Secretary, Commission, dated January 13, 2020,
available at https://www.sec.gov/comments/sr-box-2019-19/srbox201919-6640676-203567.pdf (``SIFMA Letter'').
\8\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

I. Summary of the Proposal, as Modified by Amendment No. 1

As described in the Notice and Amendment No. 1,\9\ the Exchange
proposes to adopt rules governing the trading of equity securities
through a facility of the Exchange known as BSTX.\10\ BSTX proposes to
operate a fully automated, price-time priority execution system to
trade equity securities that are NMS stocks and meet BSTX listing
standards.\11\ These securities would have ancillary records of
ownership reflecting certain end-of-day security token balances as
reported by market participants that would be created and maintained
using distributed ledger technology (such securities to be referred to
as ``security tokens'').\12\ According to the Exchange, official
records of security ownership would be maintained by participants at
The Depository Trust Company (``DTC''), and attribution of a security
token on the Ethereum blockchain would not convey ownership of
shareholder equity in the issuer.\13\
---------------------------------------------------------------------------

\9\ See Notice, supra note 3; Amendment No. 1, supra note 6.
\10\ See Notice, supra note 3, 84 FR at 56022.
\11\ See id.
\12\ See id.
\13\ See id. at 56026.
---------------------------------------------------------------------------

According to the Exchange, security tokens would have their
ancillary record of ownership recorded on the Ethereum blockchain using
a protocol standard determined by BSTX (the ``BSTX Security Token
Protocol'').\14\ The Exchange proposes that each BSTX Participant \15\
would be required to establish, either directly or through a carrying
firm, a whitelisted wallet address to which its end-of-day security
token ownership balances may be recorded.\16\ The Exchange proposes
that each business day, each BSTX Participant would be required to
report to BSTX certain end-of-day security token ownership balances in
a manner and form acceptable to BSTX.\17\ The Exchange would then, in
coordination with a Wallet Manager,\18\ cause the Ethereum blockchain
to be updated as an ancillary recordkeeping mechanism to reflect
changes in ownership of security tokens.\19\ According to the Exchange,
non-BSTX Participants that may trade security tokens would not be
subject to the requirement to obtain a wallet address or to the end-of-
day ownership reporting requirements.\20\
---------------------------------------------------------------------------

\14\ See id. at 56025.
\15\ A ``BSTX Participant'' would be a participant that is
authorized to trade security tokens on the Exchange. See proposed
BSTX Rule 17000(a)(11).
\16\ See Notice, supra note 3, 84 FR at 56027. According to the
Exchange, a whitelisted wallet address would be a permissioned
number associated with a particular market participant to which
security tokens may be sent. The Registry Smart Contract, which is
an ancillary smart contract within the BSTX Security Token Protocol,
contains a list of whitelisted addresses. See id. at 56026-27.
\17\ See id. at 56027.
\18\ The Exchange proposes to define a ``Wallet Manager'' as a
party approved by BSTX to operate software compatible with the BSTX
Security Token Protocol. See proposed Rule 17000(a)(31). According
to the Exchange, the Wallet Manager would act as a third-party
service provider for the Exchange that would facilitate establishing
wallet addresses and updating the Ethereum blockchain. See Notice,
supra note 3, 84 FR at 56027 n.44.
\19\ See Notice, supra note 3, 84 FR at 56027-28.
\20\ See Amendment No. 1, supra note 6, at 5.
---------------------------------------------------------------------------

According to the Exchange, to account for instances in which a BSTX
Participant fails to report or inaccurately reports its end-of-day
ownership balance and the position of security tokens held by non-BSTX
Participants who are not subject to the end-of-day ownership reporting
requirement, the Exchange would require the Wallet Mangers to allocate
all such unreported security token balances for a given security token
to a single omnibus wallet address.\21\ The Exchange states that the
Ethereum blockchain would display security token balances that would
reflect end-of-day ownership balances reported to BSTX pursuant to
proposed BSTX Rule 17020 \22\ and a balance allocated to the omnibus
wallet address for any type of security token for which the sum of the
reported positions is less than the number of security tokens known by
the Exchange to be issued and outstanding. Thus, according to the
Exchange, the Ethereum blockchain may not reflect the precise
distribution of a security token among holders, and may also display
inaccurate information to the extent that BSTX Participants
inaccurately report their end-of-day ownership balances to BSTX.\23\
---------------------------------------------------------------------------

\21\ See id. at 6.
\22\ Proposed BSTX Rule 17020 sets forth the proposed end-of-day
reporting requirements for BSTX Participants. See proposed BSTX Rule
17020.
\23\ See Amendment No. 1, supra note 6, at 6.
---------------------------------------------------------------------------

The Exchange proposes that security tokens would be only eligible
for trading on another national securities exchange if that exchange is
able to support trading in security tokens \24\ and has in effect rules
providing for the trading of security tokens on that exchange,
including rules requiring that exchange members obtain a wallet address
compatible with the BSTX Security Token Protocol and adopt some
mechanism to report end-of-day security token ownership balances to
BSTX.\25\
---------------------------------------------------------------------------

\24\ See Notice, supra note 3, 84 FR at 56029.
\25\ See id.
---------------------------------------------------------------------------

The Exchange also proposes rules for participation on BSTX,
business conduct for BSTX Participants, financial and operational rules
for BSTX Participants, supervision, trading practices, discipline,
trading rules, and market making.\26\ In addition, the Exchange
proposes listing standards that, according to the Exchange, are similar
to the listing standards of NYSE American.\27\ The Exchange proposes
that these listing standards would also specify that all listed
security tokens must comply with the BSTX Security Token Protocol.\28\
---------------------------------------------------------------------------

\26\ See id. at 56030-43. The trading rules that the Exchange
proposes include provisions for primary distributions of securities
to be made through the Exchange, including using an auction process.
See id. at 56035-36.
\27\ See Amendment No. 1, supra note 6, at 10-11.
\28\ See Notice, supra note 3, 84 FR at 56025.
---------------------------------------------------------------------------

According to the Exchange, all transactions in security tokens
would clear and settle in accordance with the rules, policies, and
procedures of registered clearing agencies.\29\ The Exchange states
that BSTX anticipates that DTC would serve as the securities depository
for security tokens and that confirmed trades in securities tokens on
BSTX would be transmitted to National Securities Clearing Corporation
(``NSCC'') for clearing.\30\
---------------------------------------------------------------------------

\29\ See id. at 56023.
\30\ See id.
---------------------------------------------------------------------------

II. Summary of the Comment

To date the Commission has received one comment letter on the
proposal.\31\ The commenter notes that the proposal was only recently
brought to its attention because it did not anticipate that a filing by
an options exchange to create a facility could impact the U.S. equities
markets.\32\ The commenter expresses concern that the approval of the
proposal ``could be a significant change for the equities market.''
\33\ The

[[Page 4042]]

commenter requests an extension of the comment period to consider the
proposal, particularly on the implications of the characterization of
security tokens as NMS stocks, the use of blockchain, and the potential
impact on unlisted trading privileges.\34\
---------------------------------------------------------------------------

\31\ See SIFMA Letter, supra note 7.
\32\ Id. at 2.
\33\ Id. The commenter's letter also references another filing
by the Exchange, SR-BOX-2019-37, which also relates to the
commencement of operations of BSTX. Id. at 1 (referencing Securities
Exchange Act Release No. 87868 (December 30, 2019), 85 FR 345
(January 3, 2020) (SR-BOX-2019-37) (``BSTX Corporate Governance
Proposal'')). With the BSTX Corporate Governance Proposal, BSTX
proposes the corporate governance documents for the BSTX facility,
and describes the proposed initial ownership structure for the
facility, which would be 50% owned by BOX Digital Markets LLC, a
subsidiary of BOX Holdings Group LLC--an affiliate of the Exchange,
and 50% owned by tZERO Group, Inc., an indirect subsidiary of
Overstock.com, Inc. See id. The commenter also requests more time to
provide feedback on the BSTX Corporate Governance Proposal. See
SIFMA Letter, supra note 7, at 2.
\34\ See SIFMA Letter, supra note 7, at 2.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-BOX-
2019-19 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act \35\ 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
additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
---------------------------------------------------------------------------

\35\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B) of the Exchange Act,\36\ the
Commission is providing notice of the grounds for disapproval under
consideration:
---------------------------------------------------------------------------

\36\ Id.
---------------------------------------------------------------------------

Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(1) of the Exchange Act, which requires,
among other things, that a national securities exchange be so organized
and have the capacity to be able to carry out the purposes of the
Exchange Act and to comply, and enforce compliance by its members and
persons associated with its members, with the provisions of the
Exchange Act, the rules and regulations thereunder, and the rules of
the Exchange; \37\
---------------------------------------------------------------------------

\37\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(5) of the Exchange 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, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
to protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers; \38\
---------------------------------------------------------------------------

\38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(7) of the Exchange Act, which requires
that the rules of the exchange provide a fair procedure for the
prohibition or limitation by the exchange of any person with respect to
access to services offered by the exchange; \39\
---------------------------------------------------------------------------

\39\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(8) of the Exchange Act, which requires
that the rules of the exchange do not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Exchange Act; \40\
---------------------------------------------------------------------------

\40\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

Whether the Exchange has demonstrated how the proposal is
consistent with Section 11A of the Exchange Act, which provides the
Commission's authority to establish and maintain a national market
system; \41\
---------------------------------------------------------------------------

\41\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

Whether the Exchange has demonstrated how the proposal is
consistent with Section 12 of the Exchange Act, which provides, among
other things, certain requirements that a national securities exchange
must comply with to extend unlisted trading privileges to securities
originally listed on another national securities exchange; \42\ and
---------------------------------------------------------------------------

\42\ 15 U.S.C. 78l.
---------------------------------------------------------------------------

Whether the Exchange has demonstrated how the proposal is
consistent with Section 17A of the Exchange Act, which provides, among
other things, the Commission's authority to establish linked or
coordinated facilities for the clearance and settlement of transactions
in securities.\43\
---------------------------------------------------------------------------

\43\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

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
[SRO] that proposed the rule change.'' \44\ 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,\45\ 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.\46\
---------------------------------------------------------------------------

\44\ 17 CFR 201.700(b)(3).
\45\ See id.
\46\ See id.
---------------------------------------------------------------------------

The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposal is consistent with the Exchange Act.

IV. 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, as
modified by Amendment No. 1, is consistent with Sections 6(b)(1),\47\
6(b)(5),\48\ 6(b)(7),\49\ 6(b)(8),\50\ 11A,\51\ 12,\52\ and 17A \53\ of
the Exchange Act or any other provision of the Securities Act of 1933
(``Securities Act'') or the Exchange Act, or 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 under the Exchange Act,\54\ any
request for an opportunity to make an oral presentation.\55\
---------------------------------------------------------------------------

\47\ 15 U.S.C. 78f(b)(1).
\48\ 15 U.S.C. 78f(b)(5).
\49\ 15 U.S.C. 78f(b)(7).
\50\ 15 U.S.C. 78f(b)(8).
\51\ 15 U.S.C. 78k-1.
\52\ 15 U.S.C. 78l.
\53\ 15 U.S.C. 78q-1.
\54\ 17 CFR 240.19b-4.
\55\ Section 19(b)(2) of the Exchange 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).
---------------------------------------------------------------------------

Interested persons are invited to submit written data, views, and
arguments regarding whether the

[[Page 4043]]

proposal should be approved or disapproved by February 13, 2020. Any
person who wishes to file a rebuttal to any other person's submission
must file that rebuttal by February 27, 2020.
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 and Amendment No. 1,\56\ 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:
---------------------------------------------------------------------------

\56\ See Notice, supra note 3; Amendment No. 1, supra note 6.
---------------------------------------------------------------------------

What are commenters' views on the use of distributed
ledger technology to create and maintain unofficial ancillary records
of ownership reflecting certain end-of-day security token ownership
balances as reported by market participants, and the use of the
Ethereum blockchain in particular? What are commenters' views on
whether the use of the Ethereum blockchain for an ancillary record of
ownership is consistent with referring to the security as a ``token''?
What are commenters' views on advantages and disadvantages of having an
unofficial ancillary record of a security's ownership on the Ethereum
blockchain, in addition to an official record of such security's
ownership through DTC, including costs and benefit to investors or the
integrity of the securities markets?
What are commenters' views on potential discrepancies that
may exist between the official records of ownership and the unofficial
ancillary records maintained on the Ethereum blockchain, how erroneous
entries of transactions on the Ethereum blockchain would be identified
and addressed, and how the unofficial ancillary record would be updated
after events such as dividends and stock splits? Do commenters believe
that potential discrepancies between the official records of ownership
and the unofficial ancillary records maintained on the Ethereum
blockchain could pose risks to investors, other market participants,
the securities market, or the national clearance and settlement system?
Please explain why or why not.
What are commenters' views on whether the ancillary
recordkeeping mechanism is inconsistent with Section 17A(a)(2)(A)(ii)
of the Exchange Act,\57\ which directs the Commission to facilitate the
establishment of linked or coordinated facilities for clearance and
settlement of securities transactions, or any other provision of the
Exchange Act, or the rules and regulations thereunder?
---------------------------------------------------------------------------

\57\ 15 U.S.C. 78q-1(a)(2)(A)(ii).
---------------------------------------------------------------------------

The Exchange states that ``[p]ursuant to Rule 12f-5 under
the Exchange Act,\58\ an exchange may not extend unlisted trading
privileges to any security unless the national securities exchange has
in effect rules providing for transactions in the class or type of
security to which the exchange extends unlisted trading privileges''
\59\ and that to be able to extend unlisted trading privileges to BSTX-
listed security tokens, another national security exchanges would need
rules that would ``(i) requir[e] that exchange members obtain a wallet
address compatible with the BSTX Security Token Protocol in order to
attribute security token balances with that exchange member; and (ii)
adopt[] some mechanism to report end-of-day security token [ownership]
balances to BSTX in order to facilitate updates of ownership to the
Ethereum blockchain as an ancillary recordkeeping mechanism.'' \60\
What are commenters' views on how a national securities exchange
seeking to extend unlisted trading privileges to a BSTX-listed security
token might fulfill these requirements and whether doing so would
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act? Do commenters agree
with the Exchange's assertion that the burden on another exchange of
adopting additional rules to extend unlisted trading privileges to
trade BSTX-listed security tokens is no different than the burden on an
exchange that only trades equities having to first adopt rules to
govern options trading prior to offering trading in options? \61\ Why
or why not?
---------------------------------------------------------------------------

\58\ 17 CFR 240.12f-5 (citation in original).
\59\ Notice, supra note 3, 84 FR at 56029.
\60\ Id.
\61\ See id. at 56055.
---------------------------------------------------------------------------

Do commenters believe that the proposal, including the
proposed requirement that the BSTX Participants report their end-of-day
ownership balances to BSTX to be recorded to the Ethereum blockchain,
is designed to remove impediments to and perfect the mechanism of a
free and open market and a national market system for NMS stock? \62\
Why or why not? Do commenters believe that the proposal is in the
public interest and appropriate for the protection of investors and is
designed to maintain fair and orderly markets to assure, among other
things, fair competition among brokers and dealers, among exchange
markets, and between exchange markets and markets other than exchange
markets; and the practicability of brokers executing investors' orders
in the best market? \63\ Why or why not?
---------------------------------------------------------------------------

\62\ See 15 U.S.C. 78f(b)(5).
\63\ See 15 U.S.C. 78k-1(a)(1)(C)(ii), (iv).
---------------------------------------------------------------------------

Do commenters agree with the Exchange's assertion that
requiring BSTX Participants to report their end-of-day ownership
balances to the Exchange, while non-BSTX Participants would not be
subject to the same requirement, would ``impose only a minimal burden
on BSTX Participants''? \64\ Why or why not? Do commenters believe that
the requirements imposed by the end-of-day ownership reporting
requirements would result in a burden or impact on competition between
BSTX Participants and non-BSTX Participants or otherwise, that would be
necessary or appropriate in furtherance of the Exchange Act? Why or why
not?
---------------------------------------------------------------------------

\64\ Amendment No. 1, supra note 6, at 15.
---------------------------------------------------------------------------

What are commenters' views on the Exchange's proposal to
disseminate end-of-day ownership information, potential inaccuracies in
that information, how and when that information would be disseminated,
and how market participants would have access to view this information
on the Ethereum blockchain? What are commenters' views on any
advantages or disadvantages with the Exchange's proposal to disseminate
end-of-day ownership information?
What are commenters' views on the use of an omnibus
account to reflect discrepancies between the sum of end-of-day balances
reported by BSTX Participants and the number of security tokens known
by the Exchange to be issued and outstanding? Do commenters have
concerns about how and when the balances attributed to the omnibus
wallet address would be calculated and by whom? What are commenters'
views on how the number of securities for a given security token
attributed to the omnibus wallet address may change over time and the
potential for the total number of securities for a security token
attributed to the omnibus wallet address to exceed the number of
disseminated whitelisted address for that security token? What are
commenters' views on whether they would have access to the information
necessary to differentiate the balances attributed to the omnibus
wallet address from the balances attributed to whitelisted addresses in
the information disseminated on the Ethereum blockchain and, if not,
the potential for confusion by investors or other market participants?

[[Page 4044]]

What are commenters' views on the proposed requirement
that end-of-day security token balances must be reported to BSTX each
business day when the securities depository is also open for business,
after such time as the securities depository has completed its end-of-
day settlement process? Do commenters agree with ``BSTX's belie[f] that
the proposed end-of-day security token balance reporting requirement
would be consistent with authority that the Commission has already
approved regarding furnishment of records by members of exchanges''?
\65\ Why or why not? What are commenters' view on how the Exchange will
enforce compliance with the end-of-day ownership reporting requirement
on BSTX Participants?
---------------------------------------------------------------------------

\65\ Notice, supra note 3, 84 FR at 56028.
---------------------------------------------------------------------------

What are commenters' views on the Exchange's proposal to
require each BSTX Participant to, either directly or through its
carrying firm, establish a whitelisted wallet address to which its end-
of-day security token ownership balances may be recorded by contacting
BSTX or a Wallet Manager? \66\ What are commenters' views on the
function and activities of the Exchange Wallet Manager and how the
Wallet Manager will assist a BSTX Participant with establishing a
wallet address? What are commenters' views on the standard the Exchange
will use to select a Wallet Manager, the standard that the Wallet
Manager will use to approve or deny applications to establish a wallet
address, Exchange's oversight of the Wallet Manager's activities,
including the Wallet Manager's approval or denial of applications to
establish a wallet address, and the Exchange's rules and procedures to
ensure that a Wallet Manager does not act in an unfair or
discriminatory manner in performing its function?
---------------------------------------------------------------------------

\66\ See id. at 56027.
---------------------------------------------------------------------------

What are commenters' views on whether it would be feasible
for third parties not affiliated with BSTX to serve as a Wallet
Manager? What are commenters' views on the Exchange's representation
that the BSTX Security Token Protocol is based on open source code,
that the Exchange would not require the use of a particular version of
Wallet Manager software, and that anyone would be eligible to serve or
operate as a Wallet Manager provided they are capable of facilitating
effective updates to the Ethereum blockchain to reflect changes in
security token ownership? \67\ What are commenters' views on
competition to be a Wallet Manager and any potential for conflicts of
interest that may arise between or among national securities exchange
and Wallet Managers for trading BSTX-listed security tokens?
---------------------------------------------------------------------------

\67\ See id. at 56055.
---------------------------------------------------------------------------

While the Exchange proposes that the Exchange and Wallet
Manager will not charge a fee for obtaining a wallet address, what are
commenters' views on the costs that may be incurred because of the end-
of-day security token balance reporting process to investors, issuers,
broker-dealers, including BSTX Participants and non-BSTX Participants,
Wallet Managers, and trading centers, such as national securities
exchanges and alternative trading systems? \68\
---------------------------------------------------------------------------

\68\ See id. at 56046 n.286.
---------------------------------------------------------------------------

Do commenters agree with the Exchange's assertion that
``[o]wnership of security tokens would be able to be transferred
without regard to the blockchain-based ancillary recordkeeping
functionality''? \69\ Why or why not? What are commenters' views on
whether or not having a security token attributed to a wallet address
could mean that the holder of the wallet address has a shareholder
equity interest in the issuer? What are commenters' views on how
disputes over ownership of security token would be enforced by the
Exchange or any other party?
---------------------------------------------------------------------------

\69\ Id. at 56023.
---------------------------------------------------------------------------

The proposed trading rules include provisions providing
for primary distributions of securities be made through the Exchange,
including using an auction process.\70\ Do commenters agree with the
Exchange's assertion that the proposed method of opening trading in
securities, including with respect to initial security token offerings,
``provides a simple and clear method for opening transactions that is
consistent with the protection of investors and the public interest''?
\71\ Why are why not? Do commenters understand from the Exchange's
proposal how primary offerings of security tokens could be made through
the Exchange in compliance with the Securities Act, including the
registration and prospective delivery provisions, and the related rules
thereunder? If not, what information would be helpful? Do commenters
understand from the Exchange's proposal how broker-dealers using the
Exchange to engage in primary offerings of securities would be able to
comply with their obligations under the Securities Act and the Exchange
Act, and the respective rules thereunder? If so, please describe how a
broker-dealer could comply.
---------------------------------------------------------------------------

\70\ See id. at 56035-36.
\71\ Id. at 56037.
---------------------------------------------------------------------------

The Exchange states that ``NSCC already has authority
under its rules, policies and procedures to clear certain trades on a
T+1 or T+0 basis.'' \72\ What are commenters' views on the NSCC process
for clearing security tokens? Do commenters believe that the Exchange
has adequately explained why BSTX Participants may agree to shorter or
longer settlement cycles than T+1,\73\ and the potential effects of
such shorter or longer settlement cycles?
---------------------------------------------------------------------------

\72\ Id. at 56025.
\73\ See id. at 56024-25, 56039.
---------------------------------------------------------------------------

What are commenters' views on the rules the Exchange is
proposing for short sales of security tokens? Do commenters believe
that the proposed short selling rules are appropriately designed for
the ancillary recordkeeping on the Ethereum blockchain and the T+1
reporting? Why or why not?
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-BOX-2019-19 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

[[Page 4045]]

All submissions should refer to File Number SR-BOX-2019-19. 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-BOX-2019-19 and should be submitted by
February 13, 2020. Rebuttal comments should be submitted by February
27, 2020.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
---------------------------------------------------------------------------

\74\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01041 Filed 1-22-20; 8:45 am]
BILLING CODE 8011-01-P