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


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SECURITIES AND EXCHANGE COMMISSION

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


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares

November 12, 2021.

I. Introduction

    On March 1, 2021, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares (``Shares'') of the VanEck Bitcoin 
Trust (``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares. The proposed rule change was published for comment in the 
Federal Register on March 19, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 91326 (Mar. 15, 
2021), 86 FR 14987 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-019/srcboebzx2021019.htm.
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    On April 28, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On June 16, 2021, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On September 8, 2021, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 91695, 86 FR 24066 
(May 5, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 92196, 86 FR 32985 
(June 23, 2021).
    \8\ See Securities Exchange Act Release No. 92894, 86 FR 51203 
(Sept. 14, 2021). On September 30, 2021, the Exchange filed 
Amendment No. 1 to the proposed rule change and withdrew it on 
October 1, 2021. On October 1, 2021, the Exchange filed Amendment 
No. 2 to the proposed rule change; and on November 4, 2021, the 
Exchange filed Amendment No. 3 to the proposed rule change. As 
discussed below, see Section III.E, infra, the Commission views 
these amendments as untimely. These amendments also do not 
materially alter the substance of the proposed rule change, and 
therefore they are not subject to notice and comment. Furthermore, 
even if these amendments had been timely filed, they would not alter 
the Commission's conclusion that the Exchange's proposal is not 
consistent with the Exchange Act. See Section III.E.
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    This order disapproves the proposed rule change. The Commission 
concludes that BZX has not met its burden under the Exchange Act and 
the Commission's Rules of Practice to demonstrate that its proposal is 
consistent with the requirements of Exchange Act Section 6(b)(5), in 
particular, the requirement that the rules of a national securities 
exchange be ``designed to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether BZX's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same standard used in its orders 
considering previous proposals to list bitcoin \10\-based

[[Page 64540]]

commodity trusts and bitcoin-based trust issued receipts.\11\ As the 
Commission has explained, an exchange that lists bitcoin-based 
exchange-traded products (``ETPs'') can meet its obligations under 
Exchange Act Section 6(b)(5) by demonstrating that the exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying or reference bitcoin 
assets.\12\
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    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Notice, 86 FR 14988.
    \11\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''). See 
also Order Disapproving a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to the Listing and Trading of Shares of 
the SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201, 
Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 
16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order''). The 
Commission also notes that orders were issued by delegated authority 
on the following matters: Order Disapproving a Proposed Rule Change 
To List and Trade the Shares of the ProShares Bitcoin ETF and the 
ProShares Short Bitcoin ETF, Securities Exchange Act Release No. 
83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (NYSEArca-2017-
139) (``ProShares Order''); Order Disapproving a Proposed Rule 
Change To List and Trade the Shares of the GraniteShares Bitcoin ETF 
and the GraniteShares Short Bitcoin ETF, Securities Exchange Act 
Release No. 83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-
CboeBZX-2018-001) (``GraniteShares Order'').
    \12\ See USBT Order, 85 FR 12596. See also Winklevoss Order, 83 
FR 37592 n.202 and accompanying text (discussing previous Commission 
approvals of commodity-trust ETPs); GraniteShares Order, 83 FR 
43925-27 nn.35-39 and accompanying text (discussing previous 
Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since 
they ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur.'' \13\ The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading the underlying assets for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\14\ The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading activity, 
clearing activity, and customer identity; that the parties to the 
agreement have reasonable ability to obtain access to and produce 
requested information; and that no existing rules, laws, or practices 
would impede one party to the agreement from obtaining this information 
from, or producing it to, the other party.\15\
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    \13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See 
also Winklevoss Order, 83 FR 37594; ProShares Order, 83 FR 43936; 
GraniteShares Order, 83 FR 43924; USBT Order, 85 FR 12596.
    \14\ See NDSP Adopting Release, 63 FR 70959.
    \15\ See Winklevoss Order, 83 FR 37592-93; Letter from Brandon 
Becker, Director, Division of Market Regulation, Commission, to 
Gerard D. O'Connell, Chairman, Intermarket Surveillance Group (June 
3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
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    In the context of this standard, the terms ``significant market'' 
and ``market of significant size'' include a market (or group of 
markets) as to which (a) there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (b) it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\16\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \17\
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    \16\ See Winklevoss Order, 83 FR 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that will provide guidance to market 
participants. See id.
    \17\ See USBT Order, 85 FR 12597.
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    Consistent with this standard, for the commodity-trust ETPs 
approved to date for listing and trading, there has been in every case 
at least one significant, regulated market for trading futures on the 
underlying commodity--whether gold, silver, platinum, palladium, or 
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group 
(``ISG'') membership in common with, that market.\18\ Moreover, the 
surveillance-sharing agreements have been consistently present whenever 
the Commission has approved the listing and trading of derivative 
securities, even where the underlying securities were also listed on 
national securities exchanges--such as options based on an index of 
stocks traded on a national securities exchange--and were thus subject 
to the Commission's direct regulatory authority.\19\
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    \18\ See Winklevoss Order, 83 FR 37594.
    \19\ See USBT Order, 85 FR 12597; Securities Exchange Act 
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) 
(SR-Amex-93-28) (order approving listing of options on American 
Depository Receipts). The Commission has also required a 
surveillance-sharing agreement in the context of index options even 
when (i) all of the underlying index component stocks were either 
registered with the Commission or exempt from registration under the 
Exchange Act; (ii) all of the underlying index component stocks 
traded in the U.S. either directly or as ADRs on a national 
securities exchange; and (iii) effective international ADR arbitrage 
alleviated concerns over the relatively smaller ADR trading volume, 
helped to ensure that ADR prices reflected the pricing on the home 
market, and helped to ensure more reliable price determinations for 
settlement purposes, due to the unique composition of the index and 
reliance on ADR prices. See Securities Exchange Act Release No. 
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the 
exchange on which the index option trades and the markets that trade 
the underlying securities are necessary'' and that ``[t]he exchange 
of surveillance data by the exchange trading a stock index option 
and the markets for the securities comprising the index is important 
to the detection and deterrence of intermarket manipulation.''). And 
the Commission has required a surveillance-sharing agreement even 
when approving options based on an index of stocks traded on a 
national securities exchange. See Securities Exchange Act Release 
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure 
the availability of information necessary to detect and deter 
potential manipulations and other trading abuses'').
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    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin market 
is ``uniquely'' and ``inherently'' resistant to fraud and 
manipulation.\20\ In response, the Commission has agreed that, if a 
listing exchange could establish that the underlying market inherently 
possesses a unique resistance to manipulation beyond the protections 
that are utilized by traditional commodity or securities markets, it 
would not necessarily need to enter into a surveillance-sharing 
agreement with a regulated significant market.\21\ Such resistance to 
fraud and manipulation, however, must be novel and beyond those 
protections that exist in traditional commodity markets or equity 
markets for which the Commission has long required surveillance-sharing 
agreements in the context of listing

[[Page 64541]]

derivative securities products. No listing exchange has satisfied its 
burden to make such demonstration.\22\
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    \20\ See USBT Order, 85 FR 12597.
    \21\ See Winklevoss Order, 83 FR 37580, 37582-91 (addressing 
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation); see also USBT Order, 85 FR 
12597.
    \22\ See supra note 11.
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    Here, BZX contends that approval of the proposal is consistent with 
Section 6(b)(5) of the Exchange Act, in particular Section 6(b)(5)'s 
requirement that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest.\23\ As discussed in more 
detail below, BZX asserts that the proposal is consistent with Section 
6(b)(5) of the Exchange Act because the Exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size,\24\ and there exist other means to prevent fraudulent and 
manipulative acts and practices that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement.\25\
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    \23\ See Notice, 86 FR 14993-95.
    \24\ See id. at 14994-95.
    \25\ See id. at 14995.
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    Although BZX recognizes the Commission's focus on potential 
manipulation of bitcoin ETPs in prior disapproval orders, BZX argues 
that such manipulation concerns have been sufficiently mitigated, and 
that the growing and quantifiable investor protection concerns should 
be the central consideration of the Commission.\26\ Specifically, as 
discussed in more detail below, the Exchange asserts that the 
significant increase in trading volume in bitcoin futures on the 
Chicago Mercantile Exchange (``CME''), the growth of liquidity in the 
spot market for bitcoin, and certain features of the Shares and the 
Benchmark (as defined herein) mitigate potential manipulation concerns 
to the point that the investor protection issues that have arisen from 
the rapid growth of over-the-counter (``OTC'') bitcoin funds, including 
premium volatility and management fees, should be the central 
consideration as the Commission determines whether to approve this 
proposal.\27\
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    \26\ See id. at 14990.
    \27\ See id. at 14994.
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    Further, BZX believes that the proposal would give U.S. investors 
access to bitcoin in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors. According to 
BZX, the proposed listing and trading of the Shares would mitigate risk 
by: (i) Reducing premium volatility; (ii) reducing management fees 
through meaningful competition; (iii) reducing risks associated with 
investing in operating companies that are imperfect proxies for bitcoin 
exposure; and (iv) providing an alternative to custodying spot 
bitcoin.\28\
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    \28\ See id. at 14990.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act by addressing: In Section III.B.1 assertions that other means 
besides surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices; in Section III.B.2 
assertions that BZX has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to bitcoin; and in Section III.C assertions that the proposal is 
consistent with the protection of investors and the public interest. As 
discussed further below, BZX repeats various assertions made in prior 
bitcoin-based ETP proposals that the Commission has previously 
addressed and rejected--and more importantly, BZX does not respond to 
the Commission's reasons for rejecting those assertions but merely 
repeats them. The Commission concludes that BZX has not established 
that other means to prevent fraudulent and manipulative acts and 
practices are sufficient to justify dispensing with the requisite 
surveillance-sharing agreement. The Commission further concludes that 
BZX has not established that it has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to bitcoin. As a result, the Commission is unable to find that the 
proposed rule change is consistent with the statutory requirements of 
Exchange Act Section 6(b)(5).
    The Commission again emphasizes that its disapproval of this 
proposed rule change does not rest on an evaluation of whether bitcoin, 
or blockchain technology more generally, has utility or value as an 
innovation or an investment. Rather, the Commission is disapproving 
this proposed rule change because, as discussed below, BZX has not met 
its burden to demonstrate that its proposal is consistent with the 
requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\29\ the Exchange 
proposes to list and trade the Shares of the Trust under BZX Rule 
14.11(e)(4), which governs the listing and trading of Commodity-Based 
Trust Shares on the Exchange.
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    \29\ See Notice, supra note 3. See also draft Registration 
Statement on Form S-1, dated December 30, 2020, submitted to the 
Commission by VanEck Digital Assets, LLC (``Sponsor'') on behalf of 
the Trust, and Amendment No. 1 thereto, filed June 4, 2021 
(``Amended Registration Statement'').
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    The investment objective of the Trust is for the Shares to reflect 
the performance of the MVIS[supreg] CryptoCompare Bitcoin Benchmark 
Rate (``Benchmark''), less the expenses of the Trust's operations.\30\ 
The Benchmark will be used to calculate the Trust's net asset value 
(``NAV''). The Benchmark is designed to be a U.S. dollar price for 
bitcoin, and there is no component other than bitcoin in the 
Benchmark.\31\
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    \30\ Delaware Trust Company is the trustee, and State Street 
Bank and Trust Company will be the administrator (``Administrator'') 
and transfer agent. Van Eck Securities Corporation will be the 
marketing agent in connection with the creation and redemption of 
Shares. Van Eck Securities Corporation provides assistance in the 
marketing of the Shares. A third-party regulated custodian 
(``Custodian'') will be responsible for custody of the Trust's 
bitcoin. See Notice, 86 FR 14995. The Amended Registration Statement 
indicates that Gemini Trust Company, LLC is the Custodian. See 
Amended Registration Statement at (i).
    \31\ See Notice, 86 FR 14995-96.
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    The Benchmark is derived from trade prices of bitcoin on certain 
bitcoin spot platforms. The current platform composition of the 
Benchmark is Bitstamp, Coinbase, Gemini, itBit, and Kraken.\32\ The 
Benchmark is calculated using a methodology that captures trade prices 
and sizes from the aforementioned platforms. The methodology examines 
twenty three-minute periods leading up to 4:00 p.m. E.T. and calculates 
an equal-weighted average of the volume-weighted median price of these 
twenty three-minute periods, removing the highest and lowest 
contributed prices.\33\
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    \32\ According to BZX, the Benchmark constituents are the same 
constituent platforms as the CME CF Bitcoin Reference Rate and are 
selected using a methodology that utilizes a combination of 
qualitative and quantitative metrics to analyze a data set across 
eight categories of evaluation: Legal/regulation, ``know-your-
customer''/transaction risk, data provision, security, team/
platform, asset quality/diversity, market quality, and negative 
events. Based on these evaluations, the top five platforms by rank 
are selected for inclusion in the Benchmark, and the constituent 
platforms are reassessed on a semi-annual basis. See id. at 14996 
n.65.
    \33\ See id. at 14996.
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    Each Share represents a fractional undivided beneficial interest in 
the Trust's net assets. The Trust's assets will consist of bitcoin held 
by the Custodian on behalf of the Trust. The Trust generally does not 
intend to hold cash or cash equivalents. However, there may be 
situations where the Trust will unexpectedly hold cash on a temporary 
basis.\34\
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    \34\ See id. at 14995.

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[[Page 64542]]

    The Administrator will determine the NAV and NAV per Share of the 
Trust on each day that the Exchange is open for regular trading, as 
promptly as practical after 4:00 p.m. E.T. The NAV of the Trust is the 
aggregate value of the Trust's assets less its estimated accrued but 
unpaid liabilities (which include accrued expenses). In determining the 
Trust's NAV, the Administrator values the bitcoin held by the Trust 
based on the price set by the Benchmark as of 4:00 p.m. E.T.\35\
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    \35\ See id. at 14996.
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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. to 4:00 p.m. E.T.). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during Regular Trading Hours to reflect changes in the value of 
the Trust's bitcoin holdings during the trading day.\36\
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    \36\ 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 50,000 Shares. When creating the 
Shares, authorized participants will deliver, or facilitate the 
delivery of, bitcoin to the Trust's account with the Custodian in 
exchange for the Shares, and, when redeeming the Shares, the Trust, 
through the Custodian, will deliver bitcoin to such authorized 
participants.\37\
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    \37\ See id. at 14995.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether BZX's proposal is consistent 
with the Exchange Act. Section 6(b)(5) of the Exchange Act requires, in 
relevant part, that the rules of a national securities exchange be 
designed ``to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \38\ Under the 
Commission's Rules of Practice, the ``burden to demonstrate that a 
proposed rule change is consistent with the Exchange Act and the rules 
and regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \39\
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    \38\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \39\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\40\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\41\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\42\
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    \40\ See id.
    \41\ See id.
    \42\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is 
Designed To Prevent Fraudulent and Manipulative Acts and Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and 
Practices
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with a comprehensive surveillance-sharing agreement with a regulated 
market of significant size, including by demonstrating that the bitcoin 
market as a whole or the relevant underlying bitcoin market is uniquely 
and inherently resistant to fraud and manipulation.\43\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\44\
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    \43\ See USBT Order, 85 FR 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \44\ See id. at 12597.
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    BZX asserts that bitcoin is resistant to price manipulation. 
According to BZX, the geographically diverse and continuous nature of 
bitcoin trading render it difficult and prohibitively costly to 
manipulate the price of bitcoin.\45\ Fragmentation across bitcoin 
platforms, the relatively slow speed of transactions, and the capital 
necessary to maintain a significant presence on each trading platform 
make manipulation of bitcoin prices through continuous trading activity 
challenging.\46\ To the extent that there are bitcoin platforms engaged 
in or allowing wash trading or other activity intended to manipulate 
the price of bitcoin on other markets, such pricing does not normally 
impact prices on other platforms because participants will generally 
ignore markets with quotes that they deem non-executable.\47\ BZX 
further argues that the linkage between the bitcoin markets and the 
presence of arbitrageurs in those markets means that the manipulation 
of the price of bitcoin on any single venue would require manipulation 
of the global bitcoin price in order to be effective.\48\ Arbitrageurs 
must have funds distributed across multiple trading platforms in order 
to take advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin trading venue.\49\ As a result, BZX concludes that 
the potential for manipulation on a bitcoin trading platform would 
require overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.\50\
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    \45\ See Notice, 86 FR 14994 n.54.
    \46\ See id.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
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    Several commenters share BZX's view that the nature of the bitcoin 
market makes it resistant to price manipulation.\51\ One commenter, in

[[Page 64543]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 64544]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 64545]]

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

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

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

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

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

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

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

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

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

[[Page 64546]]

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

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

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

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

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

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

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

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

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

[[Page 64547]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 64548]]

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

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

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

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

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

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

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

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

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

[[Page 64549]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 64550]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 64551]]

risk--such as the susceptibility of an asset to loss or theft--the 
proposed rule change may still fail to meet the requirements under the 
Exchange Act.\160\
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    \159\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \160\ See SolidX Order, 82 FR 16259.
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    Here, even if it were true that, compared to trading in unregulated 
bitcoin spot markets, trading a bitcoin-based ETP on a national 
securities exchange provides some additional protection to investors, 
the Commission must consider this potential benefit in the broader 
context of whether the proposal meets each of the applicable 
requirements of the Exchange Act.\161\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing 
exchange have a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to bitcoin, or demonstrate 
that other means to prevent fraudulent and manipulative acts and 
practices are sufficient to justify dispensing with the requisite 
surveillance-sharing agreement. The listing exchange has not met that 
requirement here. Therefore the Commission is unable to find that the 
proposed rule change is consistent with the statutory standard.
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    \161\ See supra note 135.
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    Pursuant to Section 19(b)(2) of the Exchange Act, the Commission 
must disapprove a proposed rule change filed by a national securities 
exchange if it does not find that the proposed rule change is 
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices.\162\
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    \162\ See 15 U.S.C. 78s(b)(2)(C).
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    For the reasons discussed above, BZX has not met its burden of 
demonstrating that the proposal is consistent with Exchange Act Section 
6(b)(5),\163\ and, accordingly, the Commission must disapprove the 
proposal.\164\
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    \163\ 15 U.S.C. 78f(b)(5).
    \164\ In disapproving the proposed rule change the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f). Three commenters argue that, for 
competitive reasons, the Commission should approve several bitcoin-
based ETPs together. See Zoican Letter; letters from: Jared Henry, 
dated March 18, 2021 (``Henry Letter''); Ge De, dated July 4, 2021 
(``Ge De Letter''). The Zoican Letter states that network 
externalities are particularly strong for exchange-traded funds with 
identical underlying portfolios, conferring large advantages to the 
first mover by enabling it to command higher management fees than 
subsequent entrants. According to this commenter, this effect leads 
to segmentation of investors, with short-horizon traders preferring 
liquid products and long-horizon investors focusing on cheaper 
products. This commenter believes that allowing for several products 
to be launched simultaneously would help investors coordinate on the 
product with the lowest fees, stimulating both liquidity and 
competition on management fees between issuers.
    Another commenter argues, for efficiency reasons, against 
approving a bitcoin ETP. This commenter asserts that the adoption of 
multiple digital assets would force merchants to deal with 
``complexity [that] doesn't foster [the] modularity which is needed 
to gain economic efficiency.'' See Ciao Letter at 1.
    For the reasons discussed throughout, however, see supra note 
38, the Commission is disapproving the proposed rule change because 
it does not find that the proposed rule change is consistent with 
the Exchange Act. See also USBT Order, 85 FR 12615.
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D. Other Comments

    Comment letters also address the general nature and uses of 
bitcoin; \165\ the state of development of bitcoin as a digital asset; 
\166\ the state of regulation of bitcoin markets; \167\ the inherent 
value of, and risks of investing in, bitcoin; \168\ the desire (or not) 
of investors to gain access to bitcoin through an ETP; \169\ the 
potential impact of Commission approval of the proposed ETP on the 
price of bitcoin and on bitcoin markets; \170\ the potential impact of 
Commission approval of bitcoin ETPs on the economy, jobs, U.S. monetary 
policy, U.S. innovation, and/or U.S. geopolitical position; \171\ the 
tax and/or retirement investment benefits or risks of a bitcoin ETP; 
\172\ and the bitcoin network's effect on the environment.\173\ 
Ultimately, however, additional discussion of these topics is 
unnecessary, as they do not bear on the basis for the Commission's 
decision to disapprove the proposal.
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    \165\ See, e.g., Eddie Letter; Anonymous 6 Letter; Pile Letter; 
Ciao Letter; Ge De Letter; letters from: Anonymous, dated March 27, 
2021 (``Anonymous 1 Letter''); Sam Ahn, dated April 8, 2021; Darrin 
Donithorne, dated April 10, 2021 (``Donithorne Letter''); JC, dated 
May 16, 2021 (``JC Letter''); Lourdes Ciao, dated June 2, 2021; 
Anonymous, dated June 10, 2021; Roger Lowenstein, dated June 28, 
2021 (``Lowenstein Letter'').
    \166\ See, e.g., Ellis Letter; Gemini Letter at 1-2; letters 
from: Courtney, dated April 1, 2021; Nicolas Casal, dated June 9, 
2021; James Cook, dated June 17, 2021 (``Cook Letter''); Jason 
Green, dated June 17, 2021 (``Green Letter'').
    \167\ See, e.g., Bofman Letter; Aronesty Letter; Pile Letter.
    \168\ See, e.g., Bofman Letter; Rye Letter; Lowenstein Letter; 
Havermann Letter; Apodaca Letter; letters from: Bradley M. Kuhn, 
dated April 15, 2021 (``Kuhn Letter''); Anonymous, dated May 7, 2021 
(``Anonymous 2 Letter''); James Monroe, dated June 7, 2021; Ken 
Morgan, dated June 17, 2021; Sam Ahn, dated July 14, 2021.
    \169\ See, e.g., Henry Letter; Anonymous 1 Letter; Kuhn Letter; 
Bofman Letter; Cook Letter; Ailshie Letter; Gemini Letter at 1-2; 
letters from: Michael Ort, dated April 10, 2021; Chez, dated June 
16, 2021; Anonymous, dated June 16, 2021 (``Anonymous 8 Letter''); 
Bill Meyers, dated June 16, 2021; Jarron Jackson, dated June 16, 
2021; Jacob, dated June 16, 2021 (``Jacob Letter''); Charles E. 
Haluska, dated June 17, 2021; Travis, dated June 17, 2021; Scott 
Davis, dated June 23, 2021; Ryan I, dated June 27, 2021.
    \170\ See, e.g., Green Letter; Ailshie Letter; Aronesty Letter; 
letter from Steve Condrill, dated July 4, 2021.
    \171\ See, e.g., Donithorne Letter; Anonymous 2 Letter; Bofman 
Letter; Anonymous 8 Letter; Jacob Letter; Kim Letter; Ciao Letter; 
Aroca Letter; Apodaca Letter; letters from: Chris McMurphy, dated 
April 2, 2021 (``McMurphy Letter''); Praveen Javali, dated April 9, 
2021; Khaled Khan, dated April 20, 2021; Ramesh Patel, dated June 
16, 2021; Anonymous, dated June 21, 2021.
    \172\ See, e.g., Kuhn Letter; JC Letter; Rose Letter; Ciao 
Letter; Lowenstein Letter; Havermann Letter; Apodaca Letter.
    \173\ See, e.g., Eddie Letter; Donithorne Letter; McMurphy 
Letter; Ge De Letter; letter from Anonymous, dated June 10, 2021.
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E. The Exchange's Untimely Amendments to the Proposal

    The deadline for rebuttal comments in response to the Order 
Instituting Proceedings was July 28, 2021.\174\ On September 30, 2021, 
the Exchange filed Amendment No. 1 to the proposed rule change and 
withdrew it on October 1, 2021. On October 1, 2021, the Exchange filed 
Amendment No. 2 with the Commission to amend and replace in its 
entirety Amendment No. 1 to the proposal as submitted on September 30, 
2021, and as originally submitted on March 1, 2021. Subsequently, on 
November 4, 2021, the Exchange filed Amendment No. 3 with the 
Commission to amend and replace in its entirety Amendment No. 2 to the 
proposal as submitted on October 1, 2021, and as originally submitted 
on March 1, 2021. Because these amendments were filed months after the 
deadline for comments on the proposed rule change, the Commission deems 
Amendments No. 1, 2, and 3 to have been untimely filed.
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    \174\ See supra note 7.
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    Even if these amendments had been timely filed, the Commission 
would still conclude that the Exchange has not met its burden to 
demonstrate that its proposal is consistent with Exchange Act Section 
6(b)(5). The primary change that the Exchange makes in the amendments 
is to argue that it would be inconsistent for the Commission to allow 
the launch of exchange-traded funds registered under the Investment 
Company Act of 1940 (``1940 Act'') that provide exposure to bitcoin 
through CME bitcoin futures (``Bitcoin Futures ETFs'') while 
disapproving this proposal.
    In the amendments, the Exchange asserts that, if the Commission 
does not deem the CME bitcoin futures market a regulated market of 
significant size, permitting Bitcoin Futures ETFs to list and trade 
would be inconsistent with the requirement under the Exchange Act--
namely, the requirement that the listing and trading of the Bitcoin 
Futures ETFs be designed to prevent fraudulent and manipulative acts 
and practices as articulated in the

[[Page 64552]]

Winklevoss Order and other disapproval orders. The Exchange states 
that, while one may argue that the 1940 Act provides certain investor 
protections, those protections relate primarily to the composition of 
board of directors, limitations on leverage, and transactions with 
affiliates, among others, and thus do not confer additional protections 
to investors in relation to the underlying CME bitcoin futures market 
to justify different regulatory outcomes for Bitcoin Futures ETFs and 
non-1940 Act-regulated ETPs that hold spot bitcoin. The Exchange also 
adds that the largest Bitcoin Futures ETF has contracts representing 
about 37 percent of open interest in CME bitcoin futures, which, 
according to the Exchange, ``seems to directly contradict'' the 
``predominant influence'' prong in establishing whether the CME bitcoin 
futures market constitutes a market of significant size.
    The Commission disagrees with the premise of the Exchange's 
argument. The proposed rule change does not relate to a product 
regulated under the 1940 Act, nor does it relate to the same underlying 
holdings as the Bitcoin Futures ETFs. The Commission considers the 
proposed rule change on its own merits and under the standards 
applicable to it. Namely, with respect to this proposed rule change, 
the Commission must apply the standards as provided by Section 6(b)(5) 
of the Exchange Act, which it has applied in connection with its orders 
considering previous proposals to list bitcoin-based commodity trusts 
and bitcoin-based trust issued receipts.\175\ Accordingly, even if the 
Exchange's Amendments No. 1, 2, and 3 had been timely filed, there is 
no additional information in such amendments that would enable the 
Commission to approve the proposed rule change as amended.
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    \175\ See supra note 11.
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IV. Conclusion

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\176\
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    \176\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25129 Filed 11-17-21; 8:45 am]
BILLING CODE 8011-01-P