[Federal Register Volume 86, Number 213 (Monday, November 8, 2021)]
[Notices]
[Pages 61820-61822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24326]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93510; File No. SR-CboeBZX-2021-051]
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 ARK 21Shares
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares
November 2, 2021.
On July 20, 2021, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of the ARK 21Shares Bitcoin ETF
(``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 August 6, 2021.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 92543 (Aug. 2,
2021), 86 FR 43289 (``Notice''). Comments on the proposed rule
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-051/srcboebzx2021051.htm.
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On September 15, 2021, 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\ This order institutes proceedings under Section 19(b)(2)(B)
of the Act \6\ 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. 92989, 86 FR 52530
(Sept. 21, 2021). The Commission designated November 4, 2021, as the
date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change.
\6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal
As described in more detail in the Notice,\7\ the Exchange proposes
to list and trade the Shares of the Trust under BZX Rule 14.11(e)(4),
which governs the listing and trading of Commodity-Based Trust Shares
on the Exchange.
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\7\ See Notice, supra note 3.
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The investment objective of the Trust would be to seek to track the
performance of bitcoin, as measured by the performance of the S&P
Bitcoin Index (``Index''), adjusted for the Trust's expenses and other
liabilities.\8\ Each Share will represent a fractional undivided
beneficial interest in the bitcoin held by the Trust. The Trust's
assets will consist of bitcoin held by the Custodian on behalf of the
Trust. The Trust generally does not intend to hold cash or cash
equivalents. However, there may be situations where the Trust will
unexpectedly hold cash on a temporary basis.\9\
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\8\ See id. at 43298. 21SharesUS LLC (``Sponsor'') is the
sponsor of the Trust, Delaware Trust Company is the trustee, The
Bank of New York Mellon will be the administrator and transfer
agent. Foreside Global Services, LLC will be the marketing agent in
connection with the creation and redemption of Shares. ARK
Investment Management LLC will provide assistance in the marketing
of the Shares. Coinbase Custody Trust Company, LLC (``Custodian''),
will be responsible for custody of the Trust's bitcoin. See id. at
43290, 43297.
\9\ See id. at 43297.
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In seeking to achieve its investment objective, the Trust would
hold bitcoin and would value the Shares daily based on the Index. The
Index is a U.S. dollar-denominated composite reference rate for the
price of bitcoin. The current platform composition of the Index is
Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, Gemini,
HitBTC, Huobi, Kraken, KuCoin, and Poloniex.\10\ The Index methodology
is intended to determine the fair market value for bitcoin by
determining the principal market for bitcoin as of 4:00 p.m. E.T.
daily.\11\
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\10\ The underlying platforms are sourced by Lukka Inc. (``Data
Provider'') based on a combination of qualitative and quantitative
metrics to analyze a comprehensive data set and evaluate factors
including legal/regulation, Know-Your-Customer/transaction risk,
data provision, security, team/exchange, asset quality/diversity,
market quality and negative events. See id. at 43298.
\11\ The Index methodology uses a ranking approach that
considers several exchange characteristics including oversight and
intra-day trading volume. Specifically, to rank the credibility and
quality of each exchange, the Data Provider dynamically assigns a
Base Exchange Score (``BES'') score to the key characteristics for
each exchange. The BES reflects the fundamentals of an exchange and
determines which exchange should be designated as the principal
market at a given point of time. This score is determined by
computing a weighted average of the values assigned to four
different exchange characteristics: (i) oversight; (ii)
microstructure efficiency; (iii) data transparency; and (iv) data
integrity. The methodology then applies a five-step weighting
process for identifying a principal exchange and the last price on
that exchange. Following this weighting process, an executed
exchange price is assigned for bitcoin as of 4:00 p.m. E.T. See id.
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The Net Asset Value (``NAV'') of the Trust means the total assets
of the Trust including, but not limited to, all bitcoin and cash, if
any, less total liabilities of the Trust, each determined on the basis
of generally accepted accounting principles. The NAV of the Trust is
the aggregate value of the Trust's assets less its estimated accrued
but unpaid liabilities (which include accrued expenses). In determining
the Trust's NAV, the Administrator values the bitcoin held by the Trust
based on the price set by the Index as of 4:00 p.m. E.T. The
Administrator determines the NAV of the Trust on each day that the
Exchange is open for regular trading, as promptly as practical after
4:00 p.m. E.T.\12\
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\12\ See id. at 43299.
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The Trust will provide information regarding the Trust's bitcoin
holdings, as well as an Intraday Indicative Value (``IIV'') per Share
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading
Hours (9:30 a.m. E.T. to 4:00 p.m. E.T.). The IIV will be calculated by
using the prior day's closing NAV per Share as a
[[Page 61821]]
base and updating that value during Regular Trading Hours to reflect
changes in the value of the Trust's bitcoin holdings during the trading
day.\13\
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\13\ See id.
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When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 Shares. Authorized participants
will deliver, or facilitate the delivery of, bitcoin to the Trust's
account with the Custodian in exchange for Shares when they purchase
Shares, and the Trust, through the Custodian, will deliver bitcoin to
such authorized participants when they redeem Shares with the
Trust.\14\
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\14\ See id. at 43297-98.
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II. Proceedings to Determine Whether to Approve or Disapprove SR-
CboeBZX-2021-051 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \15\ to determine whether the proposed rule
change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change, as discussed below. 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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\15\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\16\ 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'' and ``to protect investors and the
public interest.'' \17\
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\16\ Id.
\17\ 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,\18\ 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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\18\ See Notice, supra note 3.
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1. What are commenters' views on whether the proposed Trust and
Shares would be susceptible to manipulation? What are commenters' views
generally on whether the Exchange's proposal is designed to prevent
fraudulent and manipulative acts and practices? What are commenters'
views generally with respect to the liquidity and transparency of the
bitcoin markets, the bitcoin markets' susceptibility to manipulation,
and thus the suitability of bitcoin as an underlying asset for an
exchange-traded product?
2. What are commenters' views of the Exchange's assertion that the
regulatory and financial landscapes relating to bitcoin and other
digital assets have changed significantly since 2016? \19\ Are the
changes that the Exchange identifies sufficient to support the
determination that the proposal to list and trade the Shares is
designed to protect investors and the public interest and is consistent
with the other applicable requirements of Section 6(b)(5) of the Act?
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\19\ See id. at 43291-92.
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3. The Exchange states that ``approving this proposal . . . [would]
allow U.S. investors with access to bitcoin in a regulated and
transparent exchange-traded vehicle that would act to limit risk''
associated with exposure through other means.\20\ Further, the Exchange
asserts that ``the manipulation concerns previously articulated by the
Commission are sufficiently mitigated to the point that they are
outweighed by quantifiable investor protection issues that would be
resolved by approving this proposal.'' \21\ What are commenters' views
regarding such assertions?
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\20\ See id. at 43292.
\21\ See id. at 43296.
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4. According to the Exchange, ``[n]early every measurable metric
related to [Chicago Mercantile Exchange's] Bitcoin Futures has trended
consistently up since launch and/or accelerated upward in the past
year.'' \22\ Based on data provided and the academic research cited by
the Exchange, do commenters agree that the Chicago Mercantile Exchange
(``CME'')'s bitcoin futures market now represents a regulated market of
significant size? \23\ What are commenters' views on whether there is a
reasonable likelihood that a person attempting to manipulate the Shares
would also have to trade on CME to manipulate the Shares? What are
commenters' views on the Exchange's assertion that the combination of
(a) CME bitcoin futures leading price discovery; (b) the overall size
of the bitcoin market; and (c) the ability for market participants to
buy or sell large amounts of bitcoin without significant market impact
would help to prevent the Shares from becoming the predominant force on
pricing in either the bitcoin spot or CME bitcoin futures markets? \24\
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\22\ See id. at 43294.
\23\ See id. at 43291, 43294-96.
\24\ See id. at 43297.
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5. What are commenters' views on the Exchange's statement,
generally, that bitcoin is resistant to price manipulation and that
other means to prevent fraudulent and manipulative acts and practices
exist to justify dispensing with the requisite surveillance sharing
agreement with a regulated market of significant size related to
bitcoin? \25\ What are commenters' views on the Exchange's assertion in
support of such statement that significant liquidity in the spot market
and the impact of market orders on the overall price of bitcoin mean
that attempting to move the price of bitcoin is costly? \26\ What are
commenters' views on the assertion that offering only in-kind creations
and redemptions provides unique protections against potential attempts
to manipulate the Shares and that the price the Sponsor uses to value
the Trust's bitcoin ``is not particularly important''? \27\
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\25\ See id. at 43296 n.54.
\26\ See id. at 43297.
\27\ See id.
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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.\28\
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\28\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Pub. L. 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 November 29, 2021. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
December 13, 2021.
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-2021-051 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2021-051. 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-2021-051 and should be submitted
by November 29, 2021. Rebuttal comments should be submitted by December
13, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-24326 Filed 11-5-21; 8:45 am]
BILLING CODE 8011-01-P