[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Notices]
[Pages 14912-14923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-05500]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94396; File No. SR-CboeBZX-2021-052]


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

March 10, 2022.

I. Introduction

    On August 3, 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 Global X 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 August 23, 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. 92689 (Aug. 17, 
2021), 86 FR 47176 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-052/srcboebzx2021052.htm.
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    On September 29, 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 November 18, 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 February 9, 2022, 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. 93174, 86 FR 55043 
(Oct. 5, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 93608, 86 FR 67094 
(Nov. 24, 2021).
    \8\ See Securities Exchange Act Release No. 94202, 87 FR 8628 
(Feb. 15, 2022).
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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), and 
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 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 47177.
    \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''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change to 
List and Trade Shares of the Valkyrie Bitcoin Fund under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a 
Proposed Rule Change to List and Trade Shares of the Kryptoin 
Bitcoin ETF Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021), 
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin 
Order''); Order Disapproving a Proposed Rule Change to List and 
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities 
Exchange Act Release No. 94006 (Jan. 20, 2022), 87 FR 3869 (Jan. 25, 
2022) (SR-NYSEArca-2021-37) (``SkyBridge Order''); and Order 
Disapproving a Proposed Rule Change to List and Trade Shares of the 
Wise Origin Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-
Based Trust Shares, Securities Exchange Act Release No. 94080 (Jan. 
27, 2022), 87 FR 5527 (Feb. 1, 2022) (SR-CboeBZX-2021-039) (``Wise 
Origin 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) (SR-
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''); 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, Securities Exchange Act Release No. 
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019) (``VanEck 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

[[Page 14913]]

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 (``ADRs'')). 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 derivative securities 
products.\22\ No listing exchange has satisfied its burden to make such 
demonstration.\23\
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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 USBT Order, 85 FR 12597.
    \23\ 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.\24\ 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,\25\ 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.\26\
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    \24\ See Notice, 86 FR 47183.
    \25\ See id. at 47183-84.
    \26\ See id. at 47184.
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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.\27\ 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 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/discount volatility 
and management fees, should be the central consideration as the 
Commission determines whether to approve this proposal.\28\
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    \27\ See id. at 47179.
    \28\ See id. at 47183.
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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 and discount volatility; (ii) reducing 
management fees through meaningful competition; (iii) reducing risks 
associated with investing in operating companies that are

[[Page 14914]]

imperfect proxies for bitcoin exposure; and (iv) providing an 
alternative to custodying spot bitcoin.\29\
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    \29\ See id. at 47179.
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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.
    Based on its analysis, 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 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. 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,\30\ 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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    \30\ See Notice, supra note 3. See also Registration Statement 
on Form S-1, dated July 21, 2021, submitted to the Commission by 
Global X Digital Assets, LLC (``Sponsor'') on behalf of the Trust 
(``Registration Statement'').
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    The investment objective of the Trust is to reflect the performance 
of the price of bitcoin less the expenses of the Trust's operations. 
The Trust would not be actively managed and would not seek to reflect 
the performance of any benchmark or index.\31\ Each Share would 
represent a fractional undivided beneficial interest in the bitcoin 
held by the Trust. The Trust's assets would 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 hold cash on a temporary basis.\32\ In 
seeking to achieve its investment objective, the Trust would hold 
bitcoin and value its assets daily in accordance with Generally 
Accepted Accounting Principles (``GAAP''), which generally value 
bitcoin by reference to orderly transactions in the principal active 
market for bitcoin.\33\
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    \31\ See Notice, 86 FR 47184-85. Delaware Trust Company is the 
trustee. The Sponsor will select the administrator, transfer agent, 
and marketing agent in connection with the creation and redemption 
of the Shares, and a third-party regulated custodian that will be 
responsible for custody of the Trust's bitcoin. See id. at 47184.
    \32\ See id. at 47184.
    \33\ See id. at 47185.
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    The net asset value (``NAV'') for the Trust would be calculated by 
the administrator once a day and would be disseminated daily to all 
market participants at the same time.\34\ The Sponsor would use fair 
value standards according to GAAP to value the assets and liabilities 
of the Trust. According to the Exchange, the fair value of an asset 
that is traded on a market would be generally measured by reference to 
the orderly transactions on an active market. Among all active markets 
with orderly transactions, the market that is used to determine the 
fair value of an asset is the principal market (with exceptions), which 
is either the market on which the Trust actually transacts or, if there 
is sufficient evidence, the market with the most trading volume and 
level of activity for the asset.\35\ Where there is no active market 
with orderly transactions for an asset, the Sponsor's valuation 
committee would follow policies and procedures to determine the fair 
value.\36\
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    \34\ See id. at 47186.
    \35\ The Sponsor would first determine which markets are likely 
to be active markets with orderly transactions for bitcoin. 
Currently, the Sponsor has determined that such markets are those 
that provide relevant and reliable price and volume information 
because the venues that support such markets: (1) Conduct trading 
for bitcoin in U.S. dollars; (2) are appropriately licensed to 
engage in bitcoin trading involving New York-based customers; and 
(3) otherwise have sufficient indicia of an active market with 
orderly transactions. Next, among the venues supporting active 
markets with orderly transactions, the Sponsor would determine to 
which such venues the Trust has access, and refer to these as 
eligible venues. Eligible venues consist of eligible OTC venues and 
eligible exchanges. The Sponsor would then determine the principal 
market for bitcoin as either the market that the Trust normally 
transacts in for bitcoin, or, if the Trust does not normally 
transact in any market or the Sponsor has sufficient evidence that a 
particular market has the highest trading volume and level of 
activity, such market. The Trust will not purchase or, barring the 
liquidation of the Trust or the Trust incurring certain 
extraordinary expenses or liabilities not contractually assumed by 
the Sponsor, sell bitcoin directly. As a result, the Sponsor expects 
that the principal market will generally be the market with the 
highest trading volume and level of activity, which the Sponsor 
expects will typically be an eligible exchange. The Sponsor would 
determine the principal market for bitcoin at least quarterly and 
more frequently as circumstances warrant. See id. at 47185.
    \36\ See id.
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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.\37\
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    \37\ See id. at 47185-86.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of Shares (in an amount to be 
determined). 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 Shares, and when redeeming the 
Shares, the Trust, through the custodian, will deliver bitcoin to such 
authorized participants.\38\
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    \38\ See id. at 47184.
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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.'' \39\

[[Page 14915]]

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.'' \40\
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    \39\ 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).
    \40\ 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,\41\ 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.\42\ 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.\43\
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    \41\ See id.
    \42\ See id.
    \43\ 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.\44\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\45\
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    \44\ 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.
    \45\ 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.\46\ 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.\47\ 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.\48\ 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.\49\ 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.\50\ 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.'' \51\
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    \46\ See Notice, 86 FR 47183 n.54.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
    \51\ See id.
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    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.\52\ 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.\53\
---------------------------------------------------------------------------

    \52\ Indeed, the Registration Statement states that ``[b]itcoin 
faces significant scaling obstacles that can lead to high fees or 
slow settlement times, and attempts to increase the volume of 
transactions may not be effective.'' See Registration Statement at 
14. BZX does not, however, 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 67 and accompanying text 
(referencing statements made in the Registration Statement that 
contradict assertions made by BZX).
    \53\ See supra note 43.
---------------------------------------------------------------------------

    Efficient price arbitrage, moreover, 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.\54\ 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.\55\ 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

[[Page 14916]]

dominant market share to engage in manipulation.\56\
---------------------------------------------------------------------------

    \54\ See Winklevoss Order, 83 FR 37586; SolidX Order, 82 FR 
16256-57; USBT Order, 85 FR 12601; WisdomTree Order, 86 FR 69325; 
Valkyrie Order, 86 FR 74159-60; Kryptoin Order, 86 FR 74170; Wise 
Origin Order, 87 FR 5531.
    \55\ See, e.g., USBT Order, 85 FR 12601; WisdomTree Order, 86 FR 
69329; Valkyrie Order, 86 FR 74160; Kryptoin Order, 86 FR 74170; 
Wise Origin Order, 87 FR 5531.
    \56\ See, e.g., Winklevoss Order, 83 FR 37584; USBT Order, 85 FR 
12600-01; WisdomTree Order, 86 FR 69325; Valkyrie Order, 86 FR 
74160; Kryptoin Order, 86 FR 74170; SkyBridge Order, 87 FR 3783-84; 
Wise Origin Order, 87 FR 5531. See also Registration Statement at 29 
(stating that ``[i]t is possible, and in fact, reasonably likely, 
that a small group of early bitcoin adopters hold a significant 
proportion of the bitcoin that has been created to date. There are 
no regulations in place that would prevent a large holder of bitcoin 
from selling bitcoin it holds. To the extent such large holders of 
bitcoin engage in large-scale sales or distributions . . . it could 
result in a reduction in the price of bitcoin and adversely affect 
an investment in the Shares.'').
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that bitcoin 
prices on platforms with wash trades or other activity intended to 
manipulate the price of bitcoin 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.\57\ However, without the necessary data 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\
---------------------------------------------------------------------------

    \57\ See Notice, 86 FR 47183 n.54.
    \58\ See USBT Order, 85 FR 12601. See also WisdomTree Order, 86 
FR 69325; Kryptoin Order, 86 FR 74170; Wise Origin Order, 87 FR 
5531.
---------------------------------------------------------------------------

    Additionally, the continuous nature of bitcoin trading does not 
eliminate manipulation risk, and neither do 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. See also WisdomTree Order, 86 FR 69325-26; Kryptoin Order, 86 
FR 74170; SkyBridge Order, 87 FR 3783-84; Wise Origin Order, 87 FR 
5531.
    \60\ See Winklevoss Order, 83 FR 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). 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.\62\
---------------------------------------------------------------------------

    \61\ See Notice, 86 FR 47184.
    \62\ See id.
---------------------------------------------------------------------------

    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 provide meaningful analysis pertaining to how 
these figures compare to other markets 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.\63\ 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.\64\ 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.
---------------------------------------------------------------------------

    \63\ 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 id. at 47184 
nn.59-60.
    \64\ See USBT Order, 85 FR 12601. See also Kryptoin Order, 86 FR 
74171.
---------------------------------------------------------------------------

    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,\65\ (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.\66\
---------------------------------------------------------------------------

    \65\ See supra notes 57-58 and accompanying text.
    \66\ 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; 
Valkyrie Order, 86 FR 74160; SkyBridge Order, 87 FR 3872.
---------------------------------------------------------------------------

    In addition, BZX does not address risk factors specific to the 
bitcoin blockchain and bitcoin platforms, described in the Trust's 
Registration Statement, that undermine the argument that the bitcoin 
market is inherently resistant to fraud and manipulation. For example, 
the Registration Statement acknowledges that ``[t]he venues through 
which bitcoin trades are relatively new and may be more exposed to 
operational problems or failure''; that ``[o]ver the past several 
years, a number of bitcoin exchangs have been closed due to fraud, 
failure or security breaches''; that ``[s]ecurity breaches, computer 
malware, ransomware and computer hacking attacks have been a prevalent 
concern in relation to digital assets''; that ``the Trust's bitcoin 
held in the Trust's account with the [custodian] will be an appealing 
target to hackers or malware distributors seeking to destroy, damage or 
steal the Trust's bitcoin and will only become more appealing as the 
Trust's assets grow''; that the bitcoin blockchain could be vulnerable: 
To exploitation of flaws in the bitcoin source code, to a ``51% 
attack,'' in which a malicious actor or actors that control a majority 
of the processing power on the bitcoin network would be able to gain 
full control of the network and the ability to alter the blockchain, to 
``cancer nodes,'' through which a malicious actor can disconnect users 
from the bitcoin network, and to ``double-spend'' attacks; that it is 
``reasonably likely'' that a ``small group of early bitcoin adopters 
hold a signficiant proportion of the bitcoin that has been created to 
date,'' there are ``no regulations in place that would prevent a large 
holder from selling the bitcoin it holds,'' and such large holders 
could engage in ``large-scale sales'' that would affect the ``price of 
bitcoin''; and 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

[[Page 14917]]

lead to ``trading in the Shares [to] occur at a material premium or 
discount against the NAV.'' \67\
---------------------------------------------------------------------------

    \67\ See Registration Statement at 21, 27, 29, 34, 44-45. 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. The Exchange mentions that the methodology that it 
uses to value the Trust's bitcoin \68\ is itself resistant to 
manipulation.\69\ Simultaneously, the Exchange also states that, 
because the Trust will engage in in-kind creations and redemptions 
only, ``the valuation methodology [is] significantly less important.'' 
\70\ The Exchange elaborates further that, ``because the Trust will not 
accept cash to buy bitcoin in order to create new shares, will charge 
fees as a percentage of the Trust's bitcoin holdings measure[d] in 
bitcoin and not in dollars, and . . . will not 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.'' \71\ 
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.\72\ 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.\73\ This, according to BZX, not only mitigates the risk 
associated with potential manipulation, but also discourages and 
disincentivizes manipulation of the valuation methodology because there 
is little financial incentive to do so.\74\
---------------------------------------------------------------------------

    \68\ See supra notes 34-36 and accompanying text.
    \69\ See Notice, 86 FR 47184.
    \70\ See id.
    \71\ See id.
    \72\ See id.
    \73\ See id.
    \74\ 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 record does not demonstrate that the proposed valuation methodology 
would make the proposed ETP resistant to fraud or manipulation such 
that a surveillance-sharing agreement with a regulated market of 
significant size is unnecessary. The Exchange states that both 
``certain'' bitcoin venues and ``the OTC market'' have met the 
Sponsor's criteria to be considered ``active markets with orderly 
transactions for bitcoin'' and thus to potentially be deemed the 
``principal market'' whose prices the Sponsor will, generally, use to 
value its bitcoin.\75\ However, the Exchange does not identify which 
bitcoin venues, or what portions of ``the OTC market,'' meet its 
criteria, nor does the Exchange assess the possible influence that spot 
platforms that do not meet the Sponsor's criteria would have on the 
``principal market'' that is ultimately used for valuation.\76\ In 
addition, as discussed above, the record does not establish that the 
broader bitcoin market is inherently and uniquely resistant to fraud 
and manipulation. Accordingly, to the extent that trading on platforms 
not directly used to value the Trust's bitcoin affects prices on the 
market(s) that the Sponsor does use for such valuation, the 
characteristics of those other platforms--where various kinds of fraud 
and manipulation from a variety of sources may be present and persist--
may affect whether the valuation methodology is resistant to 
manipulation.
---------------------------------------------------------------------------

    \75\ See id. at 47185.
    \76\ As discussed above, while the Exchange asserts that bitcoin 
prices on platforms with wash trades or other activity intended to 
manipulate the price of bitcoin do not influence the ``real'' price 
of bitcoin, 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. See supra notes 57-58 and 
accompanying text.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the valuation methodology 
is resistant to manipulation are contradicted by the Registration 
Statement's own statements. Specifically, the Registration Statement 
states that ``[o]ver the past several years, a number of bitcoin 
exchanges have been closed due to fraud, failure or security 
breaches.'' \77\ And both the Registration Statement and the Exchange 
acknowledge that: ``[W]hether the principal market for bitcoin is an 
eligible exchange or the OTC market, the price on such principal market 
may not always represent fair value or the transactions on such market 
may not always represent orderly transactions.'' \78\ As such, the 
valuation methodology allows for ``subjective determinations'' by the 
Sponsor's valuation committee \79\ ``based on consideration of any 
information or factors the Sponsor's valuation committee deems 
appropriate.'' \80\ Although the Sponsor raises concerns regarding 
fraud and security of bitcoin platforms in the Registration Statement, 
leading to the potential need for ``subjective'' fair value 
determinations, the Exchange does not explain how or why such concerns 
are consistent with its assertion that the valuation methodology is 
resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \77\ See Registration Statement at 27.
    \78\ See Registration Statement at 48; Notice, 86 FR 47185.
    \79\ See Registration Statement at 49.
    \80\ See Registration Statement at 48; Notice, 86 FR 47185.
---------------------------------------------------------------------------

    In addition, among the criteria that the Sponsor would use to 
identify ``active markets with orderly transactions'' is whether a 
venue is ``appropriately licensed to engage in bitcoin trading 
involving New York-based customers (and therefore, among other things, 
have programs to effectively detect, prevent, and respond to fraud).'' 
\81\ However, even assuming that this means that the venue would be 
regulated by the New York State Department of Financial Services 
(``NYSDFS''), the level of oversight of bitcoin spot platforms is not 
equivalent to the obligations, authority, and oversight of national 
securities exchanges or futures exchanges and therefore is not an 
appropriate substitute.\82\ 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.'' \83\ Moreover, national 
securities exchanges must file proposed rules with the Commission 
regarding certain material aspects of their operations,\84\ and the 
Commission has the authority to disapprove any such rule that is not 
consistent with the requirements of the Exchange Act.\85\

[[Page 14918]]

Thus, national securities exchanges are subject to Commission oversight 
of, among other things, their governance, membership qualifications, 
trading rules, disciplinary procedures, recordkeeping, and fees.\86\ 
Bitcoin spot trading platforms, on the other hand, have none of these 
requirements (none are registered as a national securities exchange) 
\87\--even if they may be ``licensed to engage in bitcoin trading 
involving New York-based customers.'' \88\
---------------------------------------------------------------------------

    \81\ See Notice, 86 FR 47185.
    \82\ See also USBT Order, 85 FR 12603-05; VanEck Order, 86 FR 
64545; WisdomTree Order, 86 FR 69328; Kryptoin Order, 86 FR 74173.
    \83\ See 15 U.S.C. 78f(b)(5).
    \84\ 17 CFR 240.19b-4(a)(6)(i).
    \85\ 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.
    \86\ 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. 
Further, as stated previously, there are substantial differences 
between the NYSDFS and the Commission's regulation. Anti-Money 
Laundering (``AML'') and Know-Your-Customer (``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. See also, e.g., WisdomTree Order, 86 FR 69328 n.95; 
Kryptoin Order, 86 FR 74173 n.98.
    \87\ See 15 U.S.C. 78e, 78f.
    \88\ See Notice, 86 FR 47185.
---------------------------------------------------------------------------

    The Commission thus concludes that the Exchange has not 
demonstrated that the proposed valuation methodology makes the proposed 
ETP resistant to manipulation. While the proposed valuation methodology 
may be intended to provide some degree of protection against 
manipulation in bitcoin markets, the methodology is not sufficient for 
the Commission to dispense with the requisite surveillance-sharing 
agreement with a regulated market of significant size.
    Second, the Exchange does not explain the significance of the 
valuation methodology'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 valuation methodology 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.
    Third, the Exchange's arguments are contradictory. While arguing 
that the valuation methodology is resistant to manipulation, the 
Exchange simultaneously downplays its importance in light of the 
Trust's in-kind creation and redemption mechanism.\89\ The Exchange 
points out that the Trust will create and redeem Shares in-kind, not in 
cash, which renders the valuation methodology, and thereby the ability 
to manipulate NAV, ``significantly less important.'' \90\ 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.'' \91\ If the methodology that the Trust uses 
to value the Trust's bitcoin ``is not particularly important,'' it 
follows that the methodology'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 valuation 
methodology aids in the determination that the proposal to list and 
trade the Shares is designed to prevent fraudulent and manipulative 
acts and practices.
---------------------------------------------------------------------------

    \89\ See supra notes 70-74 and accompanying text.
    \90\ See Notice, 86 FR 47184 (``While the Sponsor believes that 
the methodology 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 valuation methodology significantly less 
important.'').
    \91\ See id. (concluding that ``because the Trust will not 
accept cash to buy bitcoin in order to create new shares, will 
charge fees as a percentage of the Trust's bitcoin holdings 
measure[d] in bitcoin and not in dollars, and, barring a forced 
redemption of the Trust or under other extraordinary circumstances, 
will not 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.'').
---------------------------------------------------------------------------

    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.\92\ 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.\93\ Accordingly, 
the Commission is not persuaded here that the Trust's in-kind creations 
and redemptions afford it a unique resistance to manipulation.\94\
---------------------------------------------------------------------------

    \92\ See Winklevoss Order, 83 FR 37589-90; USBT Order, 85 FR 
12607-08; VanEck Order, 86 FR 64546; WisdomTree Order, 86 FR 69329; 
Kryptoin Order, 86 FR 74174; SkyBridge Order, 87 FR 3874; Wise 
Origin Order, 87 FR 5533.
    \93\ 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).
    \94\ Putting aside the Exchange's various assertions about the 
nature of bitcoin and the bitcoin market, the valuation methodology, 
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; WisdomTree Order, 86 FR 69329 n.114; Kryptoin Order, 
86 FR 74174 n.107; SkyBridge Order, 87 FR 3872; Wise Origin Order, 
87 FR 5533 n.89.
---------------------------------------------------------------------------

(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

[[Page 14919]]

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.\95\
---------------------------------------------------------------------------

    \95\ 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.\96\ Accordingly, based on the 
common membership of BZX and the CME in the ISG,\97\ BZX has the 
equivalent of a comprehensive surveillance-sharing agreement with the 
CME. However, while the Commission recognizes that the CFTC regulates 
the CME futures market,\98\ 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.
---------------------------------------------------------------------------

    \96\ See id. at 37580 n.19.
    \97\ See Notice, 86 FR 47183 n.56 and accompanying text. BZX 
also states that it has surveillance-sharing agreements with 
``several spot bitcoin exchanges'' with ``material volume.'' See id. 
at 47183 & n.55. BZX does not identify the platforms with which it 
has such agreements and does not provide any information on the 
scope, terms, or enforcement authority for such surveillance-sharing 
agreements. Further, as described above, spot bitcoin platforms are 
not ``regulated.'' They are not registered as ``exchanges'' and lack 
the obligations, authority, and oversight of national securities 
exchanges. See supra notes 82-88 and accompanying text.
    \98\ 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. See also WisdomTree Order, 86 FR 69330 
n.118; Kryptoin Order, 86 FR 74174 n.119; SkyBridge Order, 87 FR 
3874 n.80; Wise Origin Order, 87 FR 5534 n.93.
---------------------------------------------------------------------------

(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 the CME began to offer trading in bitcoin futures in 
2017.\99\ 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.'' \100\ 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.\101\ 
Additionally, CME 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.\102\ Similarly, BZX contends that the 
number of large open interest holders \103\ has continued to increase, 
even as the price of bitcoin has risen, as have the number of unique 
accounts trading CME bitcoin futures.\104\
---------------------------------------------------------------------------

    \99\ According to BZX, each contract represents five bitcoin and 
is based on the CME CF Bitcoin Reference Rate. See Notice, 86 FR 
47181.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ 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 47181 n.50.
    \104\ See id. at 47181.
---------------------------------------------------------------------------

    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 
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 ``because the NAV is based 
on the price of bitcoin on the principal market, which identified 
market must be an active market with orderly transactions.'' \105\
---------------------------------------------------------------------------

    \105\ See id. at 47183.
---------------------------------------------------------------------------

    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.\106\ BZX concludes that a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP.\107\
---------------------------------------------------------------------------

    \106\ See id. at 47182 & 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'')).
    \107\ See id. at 47183.
---------------------------------------------------------------------------

    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. 
While BZX provides data showing absolute growth in the size of the CME 
bitcoin futures market, it provides no data relative to the concomitant 
growth in either the bitcoin spot markets or other bitcoin futures 
markets (including unregulated futures markets). Moreover, even if the 
CME has grown in relative 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.\108\ 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.\109\
---------------------------------------------------------------------------

    \108\ See USBT Order, 85 FR 12611. See also WisdomTree Order, 86 
FR 69330; Kryptoin Order, 86 FR 74175; SkyBridge Order, 87 FR 3875; 
Wise Origin Order, 87 FR 5534.
    \109\ See USBT Order, 85 FR 12612. The Commission has previously 
considered and rejected similar arguments. See, e.g., VanEck Order, 
86 FR 64547; Kryptoin Order, 86 FR 74175-76; SkyBridge Order, 87 FR 
3875-76; Wise Origin Order, 87 FR 5534-35. As for the Exchange's 
statement that a potential manipulator of the Shares would have to 
transact in the CME bitcoin futures market ``because the NAV is 
based on the price of bitcoin on the principal market, which 
identified market must be an active market with orderly 
transactions,'' the Exchange does not elaborate further, and the 
statement is nonsensical. The Exchange does not explain, for 
example, the connection between the CME bitcoin futures market and 
the principal market or the NAV. Moreover, the Trust does not create 
or redeem in cash based on NAV and the Shares do not trade based on 
NAV but on market-based prices in the secondary market.

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

[[Page 14920]]

    Further, the econometric evidence in the record for this proposal 
also does not support a conclusion that an interrelationship exists 
between the CME bitcoin futures market and the bitcoin spot market such 
that it is reasonably likely that a person attempting to manipulate the 
proposed ETP would also have to trade on the CME bitcoin futures market 
to successfully manipulate the proposed ETP.\110\ While BZX states that 
CME bitcoin futures pricing leads the spot market,\111\ it relies on 
the findings of a price discovery analysis in one section of a single 
academic paper to support the overall thesis.\112\ However, the 
findings of that paper's Granger causality analysis, which is widely 
used to formally test for lead-lag relationships, are concededly 
mixed.\113\ 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.\114\ 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.\115\ 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.\116\ BZX has not addressed either 
issue.\117\
---------------------------------------------------------------------------

    \110\ See USBT Order, 85 FR 12611. Listing exchanges have 
attempted to demonstrate such an ``interrelationship'' by presenting 
the results of various econometric ``lead-lag'' analyses. The 
Commission considers such analyses to be central to understanding 
whether it is reasonably likely that a would-be manipulator of the 
ETP would need to trade on the CME bitcoin futures market. See id. 
at 12612. See also VanEck Order, 86 FR 64547; WisdomTree Order, 86 
FR 69330-31; Kryptoin Order, 86 FR 74176 n.144; SkyBridge Order, 87 
FR 3876 n.101; Wise Origin Order, 87 FR 5535 n.107.
    \111\ See Notice, 86 FR 47182.
    \112\ See supra note 106 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 47182 n.51.
    \113\ 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 
106.
    \114\ See USBT Order, 85 FR 12609.
    \115\ See id. at 12613 n.244.
    \116\ See id.
    \117\ See VanEck Order, 86 FR 64547; WisdomTree Order, 86 FR 
69331; Kryptoin Order, 86 FR 74176; Wise Origin Order, 87 FR 5535.
---------------------------------------------------------------------------

    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.\118\ 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.\119\ In the 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.\120\ 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.\121\
---------------------------------------------------------------------------

    \118\ See Susquehanna, 866 F.3d at 447.
    \119\ 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 the 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).
    \120\ See USBT Order, 85 FR 12613 nn.239-244 and accompanying 
text.
    \121\ In addition, the Exchange fails to address the 
relationship (if any) between prices on other bitcoin futures 
markets and the CME bitcoin futures market, the bitcoin spot market, 
and/or any particular spot platform that could be the ``principal 
market'' for purposes of the Trust's valuation methodology, or where 
price formation occurs when the entirety of bitcoin futures markets, 
not just CME, is considered. See VanEck Order, 86 FR 64547-48; 
WisdomTree Order, 86 FR 69331; Kryptoin Order, 86 FR 74176; Wise 
Origin Order, 87 FR 5535.
---------------------------------------------------------------------------

    The Commission accordingly concludes that the information provided 
in the record for this proposal 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.\122\
---------------------------------------------------------------------------

    \122\ 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

[[Page 14921]]

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.\123\ 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.\124\ 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.\125\ 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.\126\ 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.\127\
---------------------------------------------------------------------------

    \123\ See Notice, 86 FR 47184.
    \124\ 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 47184 nn.59-60.
    \125\ See id. at 47184.
    \126\ See id.
    \127\ 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 \128\--
it will only address below the other two bases: The overall size of, 
and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

    \128\ See supra notes 110-121 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. 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.\129\
---------------------------------------------------------------------------

    \129\ See VanEck Order, 86 FR 64548-59; WisdomTree Order, 86 FR 
69332-33; Kryptoin Order, 86 FR 74177; SkyBridge Order, 87 FR 3879; 
Wise Origin Order, 87 FR 5537.
---------------------------------------------------------------------------

    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.\130\ 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.\131\
---------------------------------------------------------------------------

    \130\ See Notice, 86 FR 47184 (``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%.'').
    \131\ See VanEck Order, 86 FR 64549; WisdomTree Order, 86 FR 
69333; Kryptoin Order, 86 FR 74177; SkyBridge Order, 87 FR 3879; 
Wise Origin Order, 87 FR 5537.
---------------------------------------------------------------------------

    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.\132\ 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.
---------------------------------------------------------------------------

    \132\ See Winklevoss Order, 83 FR 37602. See also GraniteShares 
Order, 83 FR 43931; ProShares Order, 83 FR 43941; USBT Order, 85 FR 
12615. See also WisdomTree Order, 86 FR 69333; Valkyrie Order, 86 FR 
74163; Kryptoin Order, 86 FR 74178; SkyBridge Order, 87 FR 3880; 
Wise Origin Order, 87 FR 5537.
---------------------------------------------------------------------------

    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.\133\ Specifically, BZX argues

[[Page 14922]]

that premium and discount 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.\134\ 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 and discount 
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.\135\
---------------------------------------------------------------------------

    \133\ See Notice, 86 FR 47179.
    \134\ 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.
    \135\ 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.'' \136\ BZX represents that, historically, OTC 
bitcoin funds have traded at a significant premium to NAV.\137\ 
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 that is not reflective of the per share 
value of the fund's underlying assets.\138\ Second, according to BZX, 
because only accredited investors, generally, are able to create or 
redeem shares with the issuing trust and can buy or sell shares 
directly with the trust at NAV (in exchange for either cash or bitcoin) 
without having to pay the premium or sell into the discount, these 
investors that are allowed to interact directly with the trust are able 
to hedge their bitcoin exposure as needed to satisfy holding 
requirements and collect on the premium or discount opportunity. BZX 
argues, therefore, that the premium in OTC bitcoin funds essentially 
creates a direct payment from retail investors to more sophisticated 
investors.\139\
---------------------------------------------------------------------------

    \136\ 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 47179 n.38.
    \137\ See id. at 47179. 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 47179 n.39.
    \138\ See id. at 47180.
    \139\ See id.
---------------------------------------------------------------------------

    BZX also asserts that exposure to bitcoin through an ETP also 
presents advantages for retail investors compared to buying spot 
bitcoin directly.\140\ BZX asserts that, without the advantages of an 
ETP, an individual retail investor holding bitcoin through a 
cryptocurrency trading platform lacks protections.\141\ 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.\142\ 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.\143\ 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.\144\ In addition, BZX represents that the 
custodian would be a chartered trust company that carries insurance 
covering both hot and cold storage, and ``will custody the Trust's 
bitcoin assets in a manner so that it meets the definition of qualified 
custodian'' under the Investment Advisers Act of 1940, as amended.\145\ 
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.\146\
---------------------------------------------------------------------------

    \140\ See id.
    \141\ See id.
    \142\ See id.
    \143\ See id.
    \144\ See id.
    \145\ See id.
    \146\ See id.
---------------------------------------------------------------------------

    BZX further asserts that a number of operating companies engaged in 
unrelated businesses have announced investments as large as $1.5 
billion in bitcoin.\147\ 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.\148\ 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.\149\
---------------------------------------------------------------------------

    \147\ See id.
    \148\ See id.
    \149\ See id. at 47181.
---------------------------------------------------------------------------

    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 and more expensive means of getting 
bitcoin exposure.\150\
---------------------------------------------------------------------------

    \150\ See id. at 47179. 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 47179 n.36. BZX also notes that regulators in other 
countries have either approved or otherwise allowed the listing and 
trading of bitcoin-based ETPs. See id. at 47179 n.37.
---------------------------------------------------------------------------

    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. The Commission disagrees. 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

[[Page 14923]]

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.\151\ Thus, even if a 
proposed rule change purports to protect investors from a particular 
type of investment 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.\152\
---------------------------------------------------------------------------

    \151\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \152\ See SolidX Order, 82 FR 16259; VanEck Order, 86 FR 54550-
51; WisdomTree Order, 86 FR 69344; Kryptoin Order, 86 FR 74179; 
Valkyrie Order, 86 FR 74163; SkyBridge Order, 87 FR 3881; Wise 
Origin Order, 87 FR 5538.
---------------------------------------------------------------------------

    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.\153\ 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.
---------------------------------------------------------------------------

    \153\ See supra note 132.
---------------------------------------------------------------------------

    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.\154\
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    \154\ 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),\155\ and, accordingly, the Commission must disapprove the 
proposal.\156\
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    \155\ 15 U.S.C. 78f(b)(5).
    \156\ 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).
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D. Other Comments

    One comment letter also addresses the general nature and uses of 
bitcoin.\157\ 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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    \157\ See letter from Sam Ahn (Aug. 31, 2021).
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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-2021-052 be, and 
hereby is, disapproved.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2022-05500 Filed 3-15-22; 8:45 am]
BILLING CODE 8011-01-P