[Federal Register Volume 88, Number 20 (Tuesday, January 31, 2023)]
[Notices]
[Pages 6328-6346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01983]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96751; File No. SR-CboeBZX-2022-031]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Disapproving a Proposed Rule Change to List and Trade Shares of the ARK 
21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares

January 26, 2023.

I. Introduction

    On May 13, 2022, 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 ARK 21Shares 
Bitcoin ETF (``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares. The proposed rule change was published for comment in the 
Federal Register on June 1, 2022.\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. 94982 (May 25, 
2022), 87 FR 33250 (``Notice''). BZX previously filed, and the 
Commission disapproved, a substantially similar proposal to list and 
trade the Shares of the Trust. See Notice of Filing of Amendment No. 
1 to a Proposed Rule Change To List and Trade Shares of the ARK 
21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93822 (Dec. 17, 
2021), 86 FR 73360 (Dec. 27, 2021) (``Previous ARK Filing''); Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
To List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 94571 (Mar. 31, 2022), 87 FR 20014 (Apr. 6, 2022) 
(SR-CboeBZX-2021-051) (``ARK 21Shares Order'').
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    On July 12, 2022, 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 August 29, 2022, 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\ and on November 15, 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. 95257, 87 FR 42530 
(July 15, 2022).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 95622, 87 FR 54270 
(Sept. 2, 2022).
    \8\ See Securities Exchange Act Release No. 96312, 87 FR 70886 
(Nov. 21, 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), which 
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.'' \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 analytical framework used in 
its orders considering previous proposals to list bitcoin \10\-based 
commodity trusts and

[[Page 6329]]

bitcoin-based trust issued receipts to assess whether a listing 
exchange of an exchange-traded product (``ETP'') can meet its 
obligations under Exchange Act Section 6(b)(5).\11\ As the Commission 
has explained, an exchange that lists bitcoin-based ETPs \12\ 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.\13\
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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, 87 FR at 33251-52.
    \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, Securities Exchange Act Release No. 94006 
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37) 
(``SkyBridge Order''); 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''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin 
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), 
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR 
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); 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, Securities Exchange Act Release No. 94396 (Mar. 10, 
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X 
Order''); ARK 21Shares Order; Order Disapproving a Proposed Rule 
Change To List and Trade Shares of the One River Carbon Neutral 
Bitcoin Trust Under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares), Securities Exchange Act Release No. 94999 (May 27, 2022), 
87 FR 33548 (June 2, 2022) (SR-NYSEArca-2021-67) (``One River 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 95179 (June 29, 2022), 87 FR 40282 (July 6, 2022) (SR-
NYSEArca-2021-89) (``Bitwise Order''); Order Disapproving a Proposed 
Rule Change, as Modified by Amendment No. 1, To List and Trade 
Shares of Grayscale Bitcoin Trust under NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares), Securities Exchange Act Release No. 
95180 (June 29, 2022), 87 FR 40299 (July 6, 2022) (SR-NYSEArca-2021-
90) (``Grayscale 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. 96011 (Oct. 11, 2022), 87 FR 62466 (Oct. 14, 2022) 
(SR-CboeBZX-2022-006) (``WisdomTree Order II''). In addition, orders 
were issued by delegated authority on the following matters: 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''); 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''); Order Granting Approval of a Proposed Rule 
Change, as Modified by Amendment No. 2, To List and Trade Shares of 
the Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E, 
Commentary .02 (Trust Issued Receipts), Securities Exchange Act 
Release No. 94620 (Apr. 6, 2022), 87 FR 21676 (Apr. 12, 2022) (SR-
NYSEArca-2021-53) (``Teucrium Order''); Order Granting Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List 
and Trade Shares of the Valkyrie XBTO Bitcoin Futures Fund Under 
Nasdaq Rule 5711(g), Securities Exchange Act Release No. 94853 (May 
5, 2022), 87 FR 28848 (May 11, 2022) (SR-NASDAQ-2021-066) 
(``Valkyrie XBTO Order'').
    \12\ As used in this order, the term ``ETFs'' refers to open-end 
exchange-traded funds that register the offer and sale of their 
shares under the Securities Act of 1933 (``Securities Act'') and are 
regulated as investment companies under the Investment Company Act 
of 1940 (``1940 Act''). The term ``ETPs'' refers to exchange-traded 
products that register the offer and sale of their shares under the 
Securities Act but are not regulated under the 1940 Act, such as 
commodity trusts and trust issued receipts. Although the name of the 
Trust is the ARK 21Shares Bitcoin ETF, the Trust is a commodity-
based ETP. The Trust is not an ETF and is not subject to regulation 
under the 1940 Act.
    \13\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
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    In this context, 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.\14\ A surveillance-sharing 
agreement entered into with a ``significant market'' assists 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.'' \15\
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    \14\ See Winklevoss Order, 83 FR at 37594. See also USBT Order, 
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322; ARK 21Shares 
Order, 87 FR at 20015.
    \15\ See USBT Order, 85 FR at 12597.
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    Although surveillance-sharing agreements are not the exclusive 
means by which a listing exchange of a commodity-trust ETP can meet its 
obligations under Exchange Act Section 6(b)(5), such agreements have 
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has 
historically recognized their importance. And where, as here, a listing 
exchange fails to establish that other means to prevent fraudulent and 
manipulative acts and practices will be sufficient, the listing 
exchange must enter into a surveillance-sharing agreement with a 
regulated market of significant size because such agreements detect and 
deter fraudulent and manipulative activity.\16\
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    \16\ 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, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98) 
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at 
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43924; USBT Order, 85 FR at 12596.
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    The Commission has long recognized that surveillance-sharing 
agreements ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur'' and thus ``enable the Commission 
to continue to effectively protect investors and promote the public 
interest.'' \17\ As the Commission

[[Page 6330]]

has emphasized, it is essential for an exchange listing a derivative 
securities product to have the ability that surveillance-sharing 
agreements provide 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.\18\ The hallmarks of a surveillance-sharing agreement are that 
the agreement provides for the sharing of information about market 
trading activity, clearing activity, and customer identity; that the 
parties to the agreement have reasonable ability to obtain access to 
and produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining this 
information from, or producing it to, the other party.\19\
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    \17\ NDSP Adopting Release, 63 FR at 70954, 70959. See also id. 
at 70959 (``It is essential that the SRO [self-regulatory 
organization] have the ability to obtain the information necessary 
to detect and deter market manipulation, illegal trading and other 
abuses involving the new derivative securities product. 
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative 
securities product and its underlying securities in place between 
the SRO listing or trading a derivative product and the markets 
trading the securities underlying the new derivative securities 
product.'').
    \18\ See NDSP Adopting Release, 63 FR at 70959.
    \19\ See Winklevoss Order, 83 FR at 37592-93 (discussing 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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    The Commission has explained that the ability of a national 
securities exchange to enter into surveillance-sharing agreements 
``furthers the protection of investors and the public interest because 
it will enable the [e]xchange to conduct prompt investigations into 
possible trading violations and other regulatory improprieties.'' \20\ 
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of 
derivative security products, such as equity options, because a 
surveillance-sharing agreement ``permits the sharing of information'' 
that is ``necessary to detect'' manipulation and ``provide[s] an 
important deterrent to manipulation because [it] facilitate[s] the 
availability of information needed to fully investigate a potential 
manipulation if it were to occur.'' \21\ With respect to ETPs, when 
approving the listing and trading of one of the first commodity-linked 
ETPs--a commodity-linked exchange-traded note--on a national securities 
exchange, the Commission continued to emphasize the importance of 
surveillance-sharing agreements, stating that the listing exchange had 
entered into surveillance-sharing agreements with each of the futures 
markets on which pricing of the ETP would be based and stating that 
``[t]hese agreements should help to ensure the availability of 
information necessary to detect and deter potential manipulations and 
other trading abuses, thereby making [the commodity-linked notes] less 
readily susceptible to manipulation.'' \22\
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    \20\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990), 
55 FR 13344 (Apr. 10, 1990) (Notice of Filing and Order Granting 
Accelerated Approval to Proposed Rule Change Regarding Cooperative 
Agreements With Domestic and Foreign Self-Regulatory Organizations) 
(SR-NYSE-90-14).
    \21\ 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 Depositary Receipts (``ADR'')) (``ADR 
Option Order''). The Commission further stated that it ``generally 
believes that having a comprehensive surveillance sharing agreement 
in place, between the exchange where the ADR option trades and the 
exchange where the foreign security underlying the ADR primarily 
trades, will ensure the integrity of the marketplace. The Commission 
further believes that the ability to obtain relevant surveillance 
information, including, among other things, the identity of the 
ultimate purchasers and sellers of securities, is an essential and 
necessary component of a comprehensive surveillance sharing 
agreement.'' Id.
    \22\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995), 
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also 
Winklevoss Order, 83 FR at 37593 n.206.
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    Consistent with these statements, 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 and the ETP listing exchange has entered into 
surveillance-sharing agreements with, or held Intermarket Surveillance 
Group (``ISG'') membership in common with, that market.\23\ 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.\24\
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    \23\ See Winklevoss Order, 83 FR at 37594. See also SolidX 
Order, 82 FR at 16254-55 n.125 for a discussion of the 
representations the Commission has received from listing exchanges 
in connection with proposals to list commodity-trust ETPs about the 
existence of a significant, regulated market for trading futures on 
the underlying commodity and the listing exchanges' ability to 
obtain trading information with respect to such market. Furthermore, 
the Commission notes that each of those cases dealt with a futures 
market that had been trading for a long period of time before an 
exchange proposed a commodity-trust ETP based on the asset 
underlying those futures. For example, silver futures and gold 
futures began trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETPs based on spot silver and gold were approved for 
listing and trading in 2006 and 2004. See Securities Exchange Act 
Release No. 53521 (Mar. 20, 2006), 71 FR 14967 (Mar. 24, 2006) (SR-
Amex-2005-072) (order approving iShares Silver Trust); Securities 
Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 
2004) (SR-NYSE-2004-22) (order approving streetTRACKS Gold Shares). 
Platinum futures and palladium futures began trading in 1956 and 
1968, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on spot 
platinum and palladium were approved for listing and trading in 
2009. See Securities Exchange Act Release No. 61220 (Dec. 22, 2009), 
74 FR 68895 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (order approving 
ETFS Palladium Trust); Securities Exchange Act Release No. 61219 
(Dec. 22, 2009), 74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95) 
(order approving ETFS Platinum Trust). Copper futures began trading 
in 1988, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html#metals, and the first ETPs based on spot copper 
were approved for listing and trading in 2012. See Securities 
Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468 (Dec. 
20, 2012) (SR-NYSEArca-2012-28) (order approving JPM XF Physical 
Copper Trust).
    \24\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at 
5621. The Commission has also recognized that surveillance-sharing 
agreements provide a necessary deterrent to fraud and manipulation 
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 were 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 explained that surveillance-sharing agreements 
``ensure the availability of information necessary to detect and 
deter potential manipulations and other trading abuses'' 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).
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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.\25\ In response, the Commission has stated 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

[[Page 6331]]

commodity or securities markets, the listing market would not 
necessarily need to enter into a surveillance-sharing agreement with a 
regulated significant market.\26\ Such resistance to fraud and 
manipulation, however, must be novel and beyond those protections that 
exist in traditional commodity markets or securities markets for which 
surveillance-sharing agreements in the context of listing derivative 
securities products have been consistently present.\27\
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    \25\ See USBT Order, 85 FR at 12597.
    \26\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and [spot] bitcoin markets,'' generally, 
as well as one bitcoin trading platform, specifically, have unique 
resistance to fraud and manipulation). See also USBT Order, 85 FR at 
12597.
    \27\ See USBT Order, 85 FR at 12597, 12599.
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    Here, BZX contends that approval of the proposal is consistent with 
Section 6(b)(5) of the Exchange Act, and, 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.\28\ 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,\29\ and there exist other means to prevent fraudulent 
and manipulative acts and practices that are sufficient to justify 
dispensing with the detection and deterrence of fraud and manipulation 
provided by a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to spot bitcoin.\30\
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    \28\ See Notice, 87 FR at 33261-68; 33272-33280.
    \29\ See id. at 33262; 33273.
    \30\ See id. at 33262-33268; 33273-80.
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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 spot bitcoin; in Section III.B.3 assertions that the Commission must 
approve the proposal because the Commission has approved the listing 
and trading of ETFs and ETPs that hold Chicago Mercantile Exchange 
(``CME'') bitcoin futures; 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 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin. 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 spot bitcoin, the underlying bitcoin assets that would 
be held by the Trust. As discussed further below, BZX repeats various 
assertions made in prior bitcoin-based ETP proposals, including in the 
Previous ARK Filing, that the Commission has previously addressed and 
rejected, including in the prior ARK 21Shares Order--and more 
importantly, BZX does not respond to many of the Commission's reasons 
for rejecting those assertions. 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 emphasizes that its disapproval of this proposed 
rule change does not rest on an evaluation of the relative investment 
quality of a product holding spot bitcoin versus a product holding CME 
bitcoin futures, or an assessment 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,\31\ 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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    \31\ See supra note 3. According to the Exchange, the Sponsor 
(as defined herein), on behalf of the Trust, submitted a draft 
registration statement on Form S-1 under the Securities Act dated 
June 28, 2021 (``Registration Statement''). See Notice, 87 FR at 
33250 n.7.
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    The investment objective of the Trust is to seek to track the 
performance of bitcoin, as measured by the performance of the S&P 
Bitcoin Index (``Index''), adjusted for the Trust's expenses and other 
liabilities.\32\ 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 would 
unexpectedly hold cash on a temporary basis.\33\
---------------------------------------------------------------------------

    \32\ See id. at 33269. 21Shares US LLC (``Sponsor'') is the 
sponsor of the Trust, Delaware Trust Company is the trustee, and The 
Bank of New York Mellon would be the administrator 
(``Administrator'') and transfer agent. Foreside Global Services, 
LLC would be the marketing agent in connection with the creation and 
redemption of Shares. ARK Investment Management LLC would provide 
assistance in the marketing of the Shares. Coinbase Custody Trust 
Company, LLC (``Custodian''), would be responsible for custody of 
the Trust's bitcoin. See id. at 33250, 33268.
    \33\ See id. at 33268-69.
---------------------------------------------------------------------------

    In seeking to achieve its investment objective, the Trust would 
hold bitcoin and would value the Shares daily based on the Index. The 
Index is a U.S. dollar-denominated composite reference rate for the 
price of bitcoin. The Index price is currently sourced from the 
following platforms: Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, 
Coinbase Pro, Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.\34\ 
The Index methodology is intended to determine the fair market value 
for bitcoin by determining the principal market for bitcoin as of 4:00 
p.m. E.T. daily.\35\
---------------------------------------------------------------------------

    \34\ The underlying platforms are sourced by Lukka Inc. (``Data 
Provider''), an independent third-party digital asset data company 
engaged by the Sponsor, based on a combination of qualitative and 
quantitative metrics to analyze a comprehensive data set and 
evaluate factors including legal/regulation, Know-Your-Customer/
transaction risk, data provision, security, team/exchange, asset 
quality/diversity, market quality, and negative events. As the 
digital ecosystem continues to evolve, the Data Provider can add or 
remove platforms based on the processes established by Lukka's 
Pricing Integrity Oversight Board. See id. at 33269 and n.72.
    \35\ The Index methodology uses a ranking approach that 
considers several characteristics of the trading platforms, 
including oversight and intra-day trading volume. Specifically, to 
rank the credibility and quality of each trading platform, the Data 
Provider dynamically assigns a Base Exchange Score (``BES'') to the 
key characteristics for each platform. The BES reflects the 
fundamentals of a platform and determines which platform should be 
designated as the principal market at a given point of time. This 
score is determined by computing a weighted average of the values 
assigned to four different trading platform characteristics: (i) 
oversight; (ii) microstructure efficiency; (iii) data transparency; 
and (iv) data integrity. The methodology then applies a five-step 
weighting process for identifying a principal trading platform and 
the last price on that platform. Following this weighting process, 
an executed trading platform price is assigned for bitcoin as of 
4:00 p.m. E.T. See id. at 33269.
---------------------------------------------------------------------------

    The Net Asset Value (``NAV'') of the Trust means the total assets 
of the Trust including, but not limited to, all bitcoin

[[Page 6332]]

and cash, if any, less total liabilities of the Trust, each determined 
on the basis of generally accepted accounting principles. The NAV of 
the Trust is the aggregate value of the Trust's assets less its 
estimated accrued but unpaid liabilities (which include accrued 
expenses). In determining the Trust's NAV, the Administrator would 
value the bitcoin held by the Trust based on the price set by the Index 
as of 4:00 p.m. E.T. The Administrator would determine the NAV of the 
Trust on each day that the Exchange is open for regular trading, as 
promptly as practical after 4:00 p.m. E.T.\36\
---------------------------------------------------------------------------

    \36\ See id. at 33271.
---------------------------------------------------------------------------

    The Trust would provide information regarding the Trust's bitcoin 
holdings, as well as an Intraday Indicative Value (``IIV'') per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading 
Hours (9:30 a.m. E.T. to 4:00 p.m. E.T.). The IIV would 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\
---------------------------------------------------------------------------

    \37\ See id. at 33270.
---------------------------------------------------------------------------

    When the Trust sells or redeems its Shares, it would do so in ``in-
kind'' transactions in blocks of 5,000 Shares. Authorized participants 
will deliver, or facilitate the delivery of, bitcoin to the Trust's 
account with the Custodian in exchange for Shares when they purchase 
Shares, and the Trust, through the Custodian, will deliver bitcoin to 
such authorized participants when they redeem Shares with the 
Trust.\38\
---------------------------------------------------------------------------

    \38\ See id. at 33269.
---------------------------------------------------------------------------

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\ 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

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
(i) Assertions Regarding the Bitcoin Market
    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 the detection and deterrence of fraud and manipulation provided by 
a comprehensive surveillance-sharing agreement with a regulated market 
of significant size related to the underlying bitcoin assets, 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, 
however, must be novel and beyond those protections that exist in 
traditional commodities or securities markets.\45\
---------------------------------------------------------------------------

    \44\ See USBT Order, 85 FR at 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.
---------------------------------------------------------------------------

(a) BZX's Assertions
    BZX asserts that bitcoin is resistant to price manipulation.\46\ 
According to BZX, the geographically diverse and continuous nature of 
bitcoin trading render it difficult and prohibitively costly to 
manipulate the price of bitcoin.\47\ BZX asserts that 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.\48\ In addition, BZX states that, to the 
extent that there are bitcoin platforms engaged in or allowing wash 
trading \49\ or other activity intended to manipulate the price of 
bitcoin on other markets, such activity does not normally impact prices 
on other platforms because participants will generally ignore markets 
with quotes that they deem non-executable.\50\ BZX further

[[Page 6333]]

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.\51\ According to BZX, 
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.\52\ 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.\53\
---------------------------------------------------------------------------

    \46\ See Notice, 87 FR at 33261 n.62 & 33272 n.84.
    \47\ See id.
    \48\ See id.
    \49\ A ``wash trade'' is a transaction such as a purchase and 
sale simultaneously or within a short period of time, that involves 
no changes in beneficial ownership, and is a means of creating 
artificial market activity. See Silseth, Admin. Proc. File No. 3-
9001, Securities Act Release No. 7317, Securities Exchange Act 
Release No. 37493, at 2 and n.3 (July 30, 1996); Reddy v. CFTC, 191 
F.3d 109, 115 (2d Cir. 1999). Wash trading is manipulative and 
defrauds investors. See id. See also Santa Fe Indus. v. Green, 430 
U.S. 462, 476-77 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 
199 (1976). Bitcoin spot markets are subject to such ``usual market 
manipulation tactics.'' Kevin Dowd & Martin Hutchinson, Bitcoin Will 
Bite the Dust, 35 Cato J. 357, 374 n.13 (2015), available at https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2015/5/cj-v35n2-12.pdf.
    \50\ See Notice, 87 FR at 33261 n.62. According to BZX, the 
reason why wash trading does not normally impact prices on other 
platforms is because wash trading aims to manipulate the volume 
rather than the price of an asset to give the impression of 
heightened market activity in hopes of attracting investors to that 
asset. According to BZX, wash trades are executed within a bitcoin 
platform rather than cross platform ``since the entity executing the 
wash trades would aim to trade against itself, and as such, this can 
only happen within [a bitcoin platform].'' Should the wash trades of 
that entity result in a deviation of the price on that platform 
relative to others, BZX argues that arbitrageurs would then be able 
to capitalize on this mispricing, and bring the manipulated price 
back to equilibrium, resulting in a loss to the entity executing the 
wash trades. See id. at 33272 n.84.
    \51\ See id. at 33261 n.62 & 33272 n.84.
    \52\ See id.
    \53\ See id.
---------------------------------------------------------------------------

    In addition, BZX provides results of statistical analysis by the 
Sponsor in support of its assertions regarding linkages between bitcoin 
markets and efficient arbitrage across such markets.\54\ First, 
according to BZX, using daily bitcoin prices from January 1, 2018, to 
October 1, 2021,\55\ the Sponsor calculated the Pearson correlation 
\56\ of returns across certain bitcoin spot markets, non-U.S. bitcoin 
ETPs, and the CME, and concluded that there is a high degree of 
correlation across these markets.\57\ BZX argues that, in markets that 
are globally and efficiently integrated, one would expect changes in 
prices of an asset across all markets to be highly correlated, and that 
``the rationale behind this is that quick and efficient arbitrageurs 
would capture potentially profitable opportunities, consequently 
converging prices to the average intrinsic value very rapidly.'' \58\ 
Further, BZX states that pair-wise correlations of bitcoin returns were 
also calculated on hourly and minute-by-minute sampling frequencies in 
order to estimate the intra-day associations across the different 
bitcoin markets, and that the results remain largely the same, with 
correlations ranging between 70% and 97% among the centralized markets, 
and between 55% and 72% between non-U.S. bitcoin ETPs and centralized 
markets. BZX asserts that this suggests that bitcoin prices across all 
considered markets move very similarly and in a very efficient manner 
to quickly reflect changes in market conditions, not only on a daily 
basis, but also at much higher intra-day frequencies.\59\
---------------------------------------------------------------------------

    \54\ See id. at 33256-61.
    \55\ The Previous ARK Filing provided similar statistical 
analysis using data from January 1, 2018, to December 1, 2021. See 
Previous ARK Filing, 86 FR at 73368. In this filing, BZX does not 
explain the Sponsor's use of the sample period of January 1, 2018, 
to October 1, 2021, or why the Sponsor used a more limited time 
period for the current proposal.
    \56\ The Pearson correlation is a measure of linear association 
between two variables and indicates the magnitude as well as 
direction of this relationship. See Notice, 87 FR at 33256 n.56.
    \57\ See id. at 33256. BZX represents that correlations are 
between 57% and 99%, with the latter found mainly across centralized 
market venues due to their higher level of interconnectedness and 
the lower correlations pertaining mainly to the non-U.S. bitcoin 
ETPs, which are relatively newer products and are mainly offered by 
a few competing market makers who are required to trade in large 
blocks, thus making it, according to BZX, economically infeasible to 
capture small mispricings. According to BZX, as additional investors 
and arbitrageurs enter the market and capture the mispricing 
opportunities between these markets, it is likely that there will be 
much higher levels of correlations across all markets. See id.
    \58\ See id.
    \59\ See id. at 33257-59.
---------------------------------------------------------------------------

    Second, BZX asserts that, according to the Sponsor's research, this 
high correlation holds true during periods of extreme price 
volatility.\60\ Employing a ``statistical comoment called cokurtosis,'' 
which, according to BZX, measures to what extent two random variables 
change together,\61\ the Sponsor found, using hourly bitcoin returns 
and minute-by-minute returns, that the bitcoin markets tend to move 
very similarly, especially for extreme price deviations.\62\ BZX states 
that this is evidence of a robust global bitcoin market ``that quickly 
reacts in a unanimous manner to extreme price movements across both the 
spot markets, futures and [non-U.S.] ETP markets.'' \63\ According to 
BZX, this implies that ``no single [b]itcoin market can deviate 
significantly from the consensus, such that the market is sufficiently 
large and has an inherent unique resistance to manipulation.'' \64\
---------------------------------------------------------------------------

    \60\ See id. at 33259.
    \61\ According to BZX: ``Coskewness and Cokurtosis are higher 
order cross-moments used in finance to examine how assets move 
together. Coskewness measures the extent to which two variables 
undergo extreme deviations at the same time, whereby a positive 
(negative) value means that both values exhibit positive (negative) 
values simultaneously. While this measure is useful for estimating 
comovements in one direction or the other, it does not allow us to 
test whether two variables comove similarly in either direction. For 
that, we apply the cokurtosis, which measures the extent to which 
two variables undergo both extreme positive and negative deviations 
at the same time.'' Id. at 33259 n.57.
    \62\ See id. at 33259-61.
    \63\ Id. at 33261. According to BZX, if two returns series 
exhibit a high degree of cokurtosis, this means that they tend to 
undergo extreme positive and negative changes simultaneously. A 
cokurtosis value larger than +3 or less than -3 is considered 
statistically significant. See id. at 33259.
    \64\ Id. at 33259.
---------------------------------------------------------------------------

    Third, based on the Sponsor's research using daily bitcoin price 
series, BZX argues that cross-platform spreads in bitcoin have been 
declining consistently over the past several years.\65\ BZX contends 
that the ``clear and sharp'' decline in the spread indicates that the 
bitcoin market has become more efficient over time.\66\ In addition, 
based on the Sponsor's research, BZX argues that the magnitude of 
outlier spreads have also declined over time, and that the market has 
experienced a 38% year-on-year decline in the annual median spread, 
indicating ``a greater degree of [b]itcoin price convergence across 
[platforms] and a more efficient market.'' \67\ Further, based on the 
Sponsor's calculations of a 7-day rolling standard deviation of the 
spread from January 1, 2017, to October 1, 2021,\68\ BZX asserts that 
the dispersion in bitcoin prices across all platforms has decreased 
over time, indicating that prices on all the considered platforms 
converge towards the ``intrinsic average'' much more efficiently, and 
suggesting that the market has become better at quickly reaching a 
``consensus price'' for bitcoin.\69\ BZX posits that, as the pricing of 
the ``crypto market'' becomes increasingly efficient, pricing 
methodologies become ``more accurate and less susceptible to 
manipulation.'' \70\ BZX further asserts that the ``clustering of 
prices across a variety of sources within the primary market'' points 
towards robust price discovery mechanisms and efficient arbitrage.\71\ 
BZX states that the cross-platform spreads, and therefore the process 
of price discovery in the bitcoin

[[Page 6334]]

market, ``has improved significantly over time despite the market 
experiencing rather uniform albeit sinusoidal volatility.'' \72\ BZX 
argues that this further supports the argument that the bitcoin market 
has exhibited significant improvements in terms of price discovery over 
time, irrespective of and despite the volatility of the asset itself, 
which can be attributed to efficient arbitrage operations.\73\
---------------------------------------------------------------------------

    \65\ Id. at 33262-63; 33273-74. According to BZX, the Sponsor 
calculated the largest cross-platform percentage spread (defined as 
``%C-Spread'') at a given time by subtracting the highest price 
across all platforms at that time from the lowest price across all 
platforms at that time, and dividing the result by that lowest 
price. BZX represents that, for this calculation, the Sponsor used 
daily bitcoin price series from Binance, Bitfinex, Bithumb, 
Bitstamp, Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, 
Kraken, Kucoin, and OKEX. See id. at 33263 & n.69; 33273 & n.91.
    \66\ See id. at 33263; 33274.
    \67\ See id.
    \68\ The Previous ARK Filing provided similar statistical 
analysis using data from January 1, 2017, to December 1, 2021. See 
Previous ARK Filing, 86 FR at 73374. BZX does not explain the 
Sponsor's use of the sample period of January 1, 2018, to October 1, 
2021, or why the Sponsor used a more limited time period for the 
current proposal.
    \69\ See Notice, 87 FR at 33264-65; 33275-76.
    \70\ See id. at 33264; 33275.
    \71\ Id.
    \72\ Id. at 33276.
    \73\ See id. at 33276-77.
---------------------------------------------------------------------------

    Fourth, BZX asserts that one factor that has contributed to the 
overall efficiency of, and improved price discovery within, the bitcoin 
market is the increase in the number of participants, and subsequently, 
``the total dollar amount allocated to this market.'' \74\ BZX's 
measure of participation is based on the increase from January 2016 to 
June 2021 in the number of wallet addresses holding bitcoin.\75\
---------------------------------------------------------------------------

    \74\ Id. at 33265; 33277.
    \75\ See id.
---------------------------------------------------------------------------

    Finally, BZX contends that this increase in the number of 
participants has resulted in higher liquidity in the bitcoin market, as 
exhibited by the ``daily aggregated dollar notional of the bid and ask 
order books within the first 100 price levels across several of the 
largest centralized crypto [platforms] from October 2020 to April 
2021.'' \76\ According to BZX, ``the dollar notional that is allocated 
closest to the mid price has increased from around $230 million to $860 
million over that period, representing a 270% increase in half a 
year.'' \77\ BZX states that the ``increased notional order book'' 
indicates that there is a ``higher degree of consensus'' among 
investors regarding the price of bitcoin, and that this ``hampers any 
attempt of price manipulation by any single large entity.'' \78\ 
Additionally, according to BZX, the Sponsor found that movements in the 
bid and ask dollar notional of the ``bitcoin order book'' within a six-
hour window around ``extreme'' \79\ price events were indicative of an 
efficient market, whereby large market movements are ``quickly and 
dynamically absorbed'' by a ``thick order book'' and market 
participants' reactions are ``quick to restore the market back to its 
equilibrium level.'' \80\
---------------------------------------------------------------------------

    \76\ See id. at 33265-66; 33277-78.
    \77\ See id. at 33265; 33277.
    \78\ See id. at 33266; 33278.
    \79\ According to BZX, the Sponsor used the top and bottom 0.1% 
of hourly price changes from October 2020 to April 2021 as events of 
extreme upward and downward market movements. See id.
    \80\ See id. at 33266-68; 33278-80.
---------------------------------------------------------------------------

(b) Analysis
    As with the previous proposals, including the Previous ARK Filing, 
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 such that the Commission can dispense with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying bitcoin assets.
    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 also provides various statistics from the Sponsor, including 
pairwise correlations and cokurtosis estimates using minute-level data, 
which purport to show that bitcoin prices are closely and increasingly 
aligned across markets and that any price disparities are quickly 
arbitraged away. However, even accepting at face value the Sponsor's 
statistical results that, through October 1, 2021, spot bitcoin prices 
exhibited high correlation \81\ and high cokurtosis on a pairwise basis 
across the selected spot bitcoin markets, this would only indicate that 
spot bitcoin prices during the sample period tended to move in tandem. 
Such data do not provide any information on how large price disparities 
typically are among such markets, or on how long price disparities 
typically persist. Nor do the Sponsor's statistics or BZX's assertions 
provide any insight into what size or duration of price disparities 
would be profitable for a would-be manipulator, and thus they do not 
inform BZX's conclusion that bitcoin pricing has become ``less 
susceptible to manipulation.'' \82\ The Commission is thus unable to 
conclude from the evidence provided that arbitrage across bitcoin 
markets is efficient, let alone so efficient as to make the markets 
inherently resistant to fraud and manipulation.\83\
---------------------------------------------------------------------------

    \81\ The Exchange states that the hourly and minute-by-minute 
Pearson correlations ranged between 70% and 97% among the 
``centralized'' platforms. While the Notice provides a graphical 
representation of each pairwise result, the Notice does not indicate 
what the particular correlation is for any particular pair. In 
addition, the Exchange does not explain why those correlations 
around 70% are evidence of ``highly'' correlated markets.
    \82\ See Notice, 87 FR at 33264. Several other deficiencies in 
the Sponsor's methodological choices prevent the Commission from 
agreeing with the Exchange's conclusions. The Commission raised 
these issues in the ARK 21Shares Order, but the Exchange does not 
address them in the Notice. For example, one measure of cokurtosis 
uses the square of the difference of two random variables from their 
means, and the squares of the two variables' standard deviations, 
and as such, the statistic calculates magnitude, but not direction. 
If this is the cokurtosis statistic that was used by the Sponsor 
(the Notice does not specify), then while the results may show that 
the two variables move together, it would not necessarily mean that 
the two variables move in the same direction ``in a unanimous 
manner'' (see id. at 33261). In addition, by design, the Sponsor's 
``%C-Spread'' statistic measures the maximum difference among prices 
(i.e., the highest and lowest) across bitcoin platforms at a given 
point in time. However, such statistic does not provide any 
information about the extent of price dispersion among the 
intermediary prices across bitcoin platforms or whether there is any 
``intrinsic average'' or ``consensus price'' of bitcoin towards 
which prices are converging (see id. at 33264). Moreover, the 
Commission is not able to assess the validity of the Sponsor's 
claims regarding ``higher liquidity'' in the bitcoin market, based 
upon the Sponsor's calculations of ``increased notional order book'' 
and reactions to ``extreme'' price events, because of insufficient 
detail in the proposal on the process the Sponsor used to calculate 
the ``dollar notional'' of a bitcoin platform's order book, the 
``mid price'' on a bitcoin platform, and the ``first 100 price 
levels'' across bitcoin platforms (see id. at 33265-66). Further, 
even if the calculations performed by the Sponsor show, as BZX 
claims, that ``there is a higher degree of consensus among investors 
regarding the price of [b]itcoin'' and that ``market participants' 
reactions are quick to restore the market back to its equilibrium 
level,'' the Exchange has not demonstrated how either purported 
showing leads to its conclusion that this ``hampers any attempt of 
price manipulation by any single large entity'' (see id. at 33266). 
In particular, the Exchange has not addressed the concerns raised by 
the Commission in previous proposals, including in the ARK 21Shares 
Order, as well as risk factors raised by the Sponsor in the 
Registration Statement, that actions by a single large, dominant 
market participant could ``have an adverse effect on the market 
price of bitcoin'' (see Registration Statement at 25). That is, even 
if, as the Exchange claims, there is a ``high degree of consensus'' 
among investors and market participants are ``quick to restore'' the 
market back to its equilibrium level, the trading activity of a 
dominant market participant could, itself, impact what that 
consensus/equilibrium will be. These deficiencies undermine the 
Exchange's arguments that linkages between bitcoin markets, and 
increasingly efficient arbitrage across such markets, make such 
markets less susceptible to manipulation.
    \83\ In addition, the Registration Statement states: ``As the 
use of digital asset networks increases without a corresponding 
increase in transaction processing speed of the networks, average 
fees and settlement times can increase significantly. Bitcoin's 
network has been, at times, at capacity, which has led to increased 
transaction fees. . . . Increased fees and decreased settlement 
speeds . . . could adversely impact the value of the Shares.'' See 
Registration Statement at 21. The Registration Statement further 
states that ``the [b]itcoin network faces significant obstacles to 
increasing the usage of bitcoin without resulting in higher fees or 
slower transaction settlement times, and attempts to increase the 
volume of transactions may not be effective . . . . which may 
adversely affect the price of bitcoin and therefore an investment in 
the Shares.'' See Registration Statement at 14. BZX does not provide 
data or analysis to address, among other things, whether such risks 
of increased fees and bitcoin transaction settlement times may 
affect the arbitrage effectiveness that BZX asserts. See also infra 
note 97 and accompanying text (referencing statements made in the 
Registration Statement that contradict assertions made by BZX). And 
without such data or analysis, the Commission cannot accept BZX's 
assertions. See Susquehanna, 866 F.3d at 447.

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

[[Page 6335]]

    In any event, the Commission has explained that efficient price 
arbitrage is not sufficient to support the finding that a market is 
uniquely or inherently resistant to manipulation such that the 
Commission can dispense with surveillance-sharing agreements.\84\ 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.\85\ Equities that underlie such options trade on U.S. 
equity markets that are deep, liquid, and highly interconnected.\86\ 
Moreover, BZX's data regarding the increase in the number of wallet 
addresses holding bitcoin do not provide any information on the 
concentration of bitcoin within or among such wallets, or take into 
account that a market participant with a dominant ownership position 
would not find it prohibitively expensive to overcome the liquidity 
supplied by arbitrageurs and could use dominant market share to engage 
in manipulation.\87\
---------------------------------------------------------------------------

    \84\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR 
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at 
74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 FR 
at 20019; Grayscale Order, 87 FR at 40306.
    \85\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86 
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR 
at 74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 
FR at 20019; Grayscale Order, 87 FR at 40306-07.
    \86\ See Market Data Infrastructure Adopting Release, Securities 
Exchange Act Release No. 90610 (Dec. 9, 2020); 86 FR 18596, 18606-07 
(Apr. 9, 2021); Market Data Infrastructure Proposing Release, 
Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 
16726, 16728 (Mar. 24, 2020); Concept Release on Equity Market 
Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 
2010), 75 FR 3594 (Jan. 21, 2010). See also ARK 21Shares Order, 87 
FR at 20019 n.70.
    \87\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01; WisdomTree Order, 86 FR at 69325.
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that, 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, market participants will generally ignore those 
platforms.\88\ However, the record does not demonstrate that wash 
trading and other possible sources of fraud and manipulation in the 
broader bitcoin spot market will be ignored by market participants.\89\ 
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.\90\ 
Indeed, the notion that a platform would be insulated from prices on 
other platforms is contradicted by the Exchange's assertions and the 
Sponsor's statistical evidence that bitcoin markets are ``highly 
correlated,'' including during periods of extreme price volatility.\91\
---------------------------------------------------------------------------

    \88\ See supra note 50 and accompanying text.
    \89\ See infra note 115 and accompanying text. In addition, the 
Exchange claims that wash trading on one platform does not normally 
impact prices on other platforms because wash trading aims to 
manipulate the volume rather than the price of an asset to give the 
impression of heightened market activity in hopes of attracting 
investors to that asset. See supra note 50. As discussed, the 
Exchange provides no data or evidence to support this assertion. 
Moreover, wash trading, which can have the effect of distorting the 
volume with respect to a particular security or instrument, can also 
induce others to trade by giving false impression of demand, which 
can affect prices in such security or instrument. Further, contrary 
to the Exchange's premise that wash trading only ``aims to 
manipulate volume,'' wash trading can also involve a series of 
trades between related persons to increase the value of a particular 
security or instrument, which can also induce others to trade. See, 
e.g., Aggarwal, R. K., and Wu, G. (2006), ``Stock Market 
Manipulations,'' The Journal of Business, 79, 1915-1953 (available 
at: https://www.jstor.org/stable/10.1086/503652).
    \90\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69325.
    \91\ See supra notes 58-63 and accompanying text.
---------------------------------------------------------------------------

    Further, the continuous nature of bitcoin trading does not support 
the finding that the bitcoin market is uniquely or inherently resistant 
to manipulation, and neither do linkages among markets, as BZX 
asserts.\92\ 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.\93\
---------------------------------------------------------------------------

    \92\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying 
text.
    \93\ See id. at 37585. See also, e.g., WisdomTree Order, 86 FR 
at 69325-26; ARK 21Shares Order, 87 FR at 20019.
---------------------------------------------------------------------------

    In addition, BZX does not sufficiently contest the presence of 
possible sources of fraud and manipulation in the spot bitcoin market 
that the Commission has identified in previous orders, including: (1) 
as discussed above, ``wash'' trading; \94\ (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 
(for example, plans of market participants to significantly increase or 
decrease their holdings in bitcoin, new sources of demand for bitcoin, 
or 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 based on the 
dissemination of false and misleading information; (6) manipulative 
activity involving purported ``stablecoins,'' including Tether (USDT); 
and (7) fraud and manipulation at bitcoin trading platforms.\95\
---------------------------------------------------------------------------

    \94\ See supra notes 88 to 91 and accompanying text. See also 
CFTC v. Gemini Trust Co., LLC, No. 22-cv-4563 (S.D.N.Y. filed June 
2, 2022) (alleging, among other things, failure by Gemini personnel 
to disclose to the Commodity Futures Trading Commission (``CFTC'') 
that Gemini customers could and did engage in collusive or wash 
trading).
    \95\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (Oct. 28, 2019), 
available at https://ssrn.com/abstract=3195066 and published in 75 
J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86; 
WisdomTree Order, 86 FR at 69326; Global X Order, 87 FR at 14916; 
ARK 21Shares Order, 87 FR at 20019; One River Order, 87 FR at 33554; 
Bitwise Order, 87 FR at 40283-84; Grayscale Order, 87 FR at 40305.
---------------------------------------------------------------------------

    Finally, 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.\96\ For example, the 
Registration Statement acknowledges that ``it may be possible for a bad 
actor to manipulate the [b]itcoin network and hinder transactions''; 
that ``[s]pot markets on which bitcoin trades are relatively new and 
largely unregulated, and, therefore, may be more exposed to fraud and 
security breaches than established, regulated exchanges for other 
financial assets or instruments, which could have a negative impact on 
the performance of the Trust''; that ``[o]ver the past several years, a 
number of bitcoin spot markets have been closed or faced issues due to 
fraud, failure, security breaches or governmental regulations''; that 
``[t]he nature of the assets held at bitcoin spot markets makes them 
appealing targets for hackers and a number of bitcoin spot markets have 
been victims of cybercrimes'' and ``[n]o bitcoin [platform] is immune 
from these risks''; that ``[t]he potential consequences of a spot 
market's failure or failure to prevent market manipulation could 
adversely affect the value of the Shares[,] . . . . [t]he blockchain 
infrastructure could be used by certain

[[Page 6336]]

market participants to exploit arbitrage opportunities through schemes 
such as front-running, spoofing, pump-and-dump and fraud across 
different systems, platforms or geographic locations'' . . . . and 
``[a]s a result of reduced oversight, these schemes may be more 
prevalent in digital asset markets than in the general market for 
financial products''; that ``many [bitcoin] spot markets and over-the-
counter market venues . . . do not provide the public with significant 
information regarding their ownership structure, management teams, 
corporate practices or oversight of customer trading'' and ``many 
[bitcoin] spot markets lack certain safeguards put in place by more 
traditional exchanges to enhance the stability of trading on the 
exchange''; that ``[s]ecurity breaches, cyber-attacks, computer malware 
and computer hacking attacks have been a prevalent concern in relation 
to digital assets''; and that the bitcoin blockchain could be 
vulnerable to a ``51% attack,'' in which a bad actor or actors that 
control a majority of the processing power dedicated to mining on the 
bitcoin network may be able to alter the bitcoin blockchain on which 
the bitcoin network and bitcoin transactions rely.\97\ The Exchange 
also acknowledges in the proposed rule change that ``largely 
unregulated currency and spot commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight.'' \98\
---------------------------------------------------------------------------

    \96\ See ARK 21Shares Order, 87 FR at 20019-20.
    \97\ See Registration Statement at 4, 12-14, 18-20, 28. See also 
Winklevoss Order, 83 FR at 37585.
    \98\ Notice, 87 FR at 33251.
---------------------------------------------------------------------------

(ii) Assertions Regarding the Index and the Create/Redeem Process
(a) BZX's Assertions
    BZX also argues that the Index, which would be used to value the 
Trust's bitcoin, is itself resistant to manipulation based on the 
Index's methodology.\99\ BZX states that the Index is a U.S. dollar-
denominated composite reference rate for the price of bitcoin. The 
Index price is currently sourced from the following bitcoin platforms 
selected by the Data Provider based on a combination of qualitative and 
quantitative metrics: Binance, Bitfinex, Bitfiyer, Bittrex, Bitstamp, 
Coinbase Pro, Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.\100\ 
According to BZX, the Index methodology is intended to determine the 
fair market value for bitcoin by determining the ``principal market'' 
for bitcoin as of 4:00 p.m. E.T. daily. To rank the credibility and 
quality of each underlying bitcoin platform, the Data Provider 
dynamically assigns a score to the key characteristics for each 
platform.\101\ BZX states that the score determines which platform 
should be designated as the ``principal market'' at a given point of 
time by computing a weighted average of the values assigned to four 
different platform characteristics: (i) oversight; (ii) microstructure 
efficiency; (iii) data transparency; and (iv) data integrity.\102\ The 
methodology then applies a five-step weighting process for identifying 
a principal market and the last price on that market.\103\ Following 
this weighting process, an ``executed exchange price'' is assigned for 
bitcoin as of 4:00 p.m. E.T. The Data Provider takes the last traded 
prices at that moment in time on that trading venue for the relevant 
pair (bitcoin/USD) when determining the Index price.\104\
---------------------------------------------------------------------------

    \99\ See id. at 33268, 33280.
    \100\ See id. at 33269.
    \101\ See id.
    \102\ See id.
    \103\ See id.
    \104\ See id. at 33269-70.
---------------------------------------------------------------------------

    BZX asserts that, because there are multiple bitcoin spot markets 
that may contribute prices to the Index price, in a well-arbitraged and 
fractured market, manipulation is more difficult as a malicious actor 
would need to manipulate multiple spot markets simultaneously to impact 
the Index price or dramatically skew the historical distribution of 
volume between the various platforms.\105\ In addition, BZX asserts 
that the Data Provider has dedicated resources and established 
committees to ensure all prices are representative of the market, and 
that any price challenges will result in an independent analysis of the 
price. This includes assessing whether the price from the selected 
platform is biased according to analyses designed to recognize patterns 
consistent with manipulative activity, such as a quick reversion to 
previous traded levels following a sharp price change or any 
significant deviations from the volume weighted average price on a 
particular platform or pricing on any other eligible platform.\106\ BZX 
further represents that, after the ``Lukka Prime price'' \107\ is 
generated, the S&P DJI (``Index Provider'') performs independent 
quality checks as a second layer of validation to those employed by the 
Data Provider, and may submit a price challenge to the Data Provider. 
In such circumstances, according to BZX, the Data Provider will 
``perform an independent review of the price challenge to ensure the 
price is representative of the fair value of a particular 
cryptocurrency.'' \108\
---------------------------------------------------------------------------

    \105\ See id. at 33270.
    \106\ See id. BZX states that, upon detection or external 
referral of suspect manipulative activities, the case is raised to 
the Price Integrity Oversight Board. These checks occur on an on-
going, intraday basis, and any investigations are typically resolved 
promptly, in clear cases within minutes and in more complex cases 
same business day. According to BZX, the evidence uncovered will be 
turned over to the Data Provider's Price Integrity Oversight Board 
for final decision and action. The Price Integrity Oversight Board 
may choose to pick an alternative ``primary market'' and may exclude 
such market from future inclusion in the Index methodology or choose 
to stand by the original published price upon fully evaluating all 
available evidence. It may also initiate an investigation of prior 
prices from such markets and shall evaluate evidence presented on a 
case-by-case basis. See id.
    \107\ The Exchange appears to use the terms ``Lukka Prime 
price,'' ``Lukka price,'' and ``Index price'' interchangeably. The 
Commission understands these terms to be interchangeable.
    \108\ See Notice, 87 FR at 33270. BZX also notes that the Index 
Provider provides certain quality assurance mechanisms with respect 
to ``crypto price validation'' based on current market conditions, 
internal system processes, and other assessments. See id.
---------------------------------------------------------------------------

    Simultaneously with its assertions regarding the Index, BZX also 
states that, because the Trust will engage in in-kind creations and 
redemptions only, the ``manipulability of the Index [is] significantly 
less important.'' \109\ The Exchange elaborates that, ``because the 
Trust will not accept cash to buy bitcoin in order to create new shares 
or . . . be forced to sell bitcoin to pay cash for redeemed shares, the 
price that the Sponsor uses to value the Trust's bitcoin is not 
particularly important.'' \110\ 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.\111\ 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.\112\ 
This, according to BZX, not only mitigates the risk associated with 
potential manipulation, but also discourages and disincentivizes 
manipulation of the Index because there is little financial incentive 
to do so.\113\
---------------------------------------------------------------------------

    \109\ See id. at 33268; 33280.
    \110\ See id.
    \111\ See id.
    \112\ See id.
    \113\ See id.
---------------------------------------------------------------------------

(b) Analysis
    Based on the assertions made and the information provided with 
respect to the Index and the create/redeem process, the record is 
inadequate to

[[Page 6337]]

conclude that BZX has articulated other means to prevent fraud and 
manipulation that are sufficient to justify dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin.
    The record does not demonstrate that the proposed methodology for 
calculating the Index would make the proposed ETP resistant to fraud or 
manipulation sufficient to dispense with the ability to detect and 
deter fraud and manipulation that is provided by a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to spot bitcoin. Specifically, BZX has not assessed the 
possible influence that spot platforms not included among the Index's 
underlying platforms would have on bitcoin prices used to calculate the 
Index.\114\ As discussed above, BZX does not sufficiently contest the 
presence of possible sources of fraud and manipulation in the spot 
bitcoin market generally.\115\ Instead, BZX focuses its analysis on the 
eligibility and attributes of the Index's underlying platforms, the 
Index's methodology for identifying a ``principal market,'' and the 
procedures for determining whether an Index pricing input was subject 
to manipulation. In doing so, what the Exchange does not address is 
that, to the extent that trading on spot bitcoin platforms not directly 
used to calculate the Index affects prices on the Index's underlying 
platforms, the activities on those other platforms--where various kinds 
of fraud and manipulation from a variety of sources may be present and 
persist--may affect whether the Index is resistant to manipulation. 
Importantly, the record does not demonstrate that these possible 
sources of fraud and manipulation in the broader spot bitcoin market do 
not affect the Index's underlying platforms that represent a portion of 
the spot bitcoin market. To the extent that fraudulent and manipulative 
trading on the broader bitcoin market could influence prices or trading 
activity on the platforms underlying the Index, the platforms 
underlying the Index (and thus the Index) would not be inherently 
resistant to manipulation.\116\
---------------------------------------------------------------------------

    \114\ 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 would generally be 
ignored, 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 note 90 and accompanying 
text.
    \115\ See supra notes 89-90 and accompanying text.
    \116\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69327; Kryptoin Order, 86 FR at 74172; Valkyrie Order, 86 FR at 
74161; SkyBridge Order, 87 FR at 3873; Ark 21Shares Order, 87 FR at 
20021; Grayscale Order, 87 FR at 40309.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the Index's methodology 
helps make the Index resistant to manipulation conflict with the 
Registration Statement. Specifically, the Registration Statement 
represents, among other things, that ``[s]pot markets on which bitcoin 
trades are relatively new and largely unregulated, and, therefore, may 
be more exposed to fraud and security breaches than established, 
regulated exchanges for other financial assets or instruments''; and 
that ``[t]he potential consequences of a spot market's failure or 
failure to prevent market manipulation could adversely affect the value 
of the Shares[,] . . . . [t]he blockchain infrastructure could be used 
by certain market participants to exploit arbitrage opportunities 
through schemes such as front-running, spoofing, pump-and-dump and 
fraud across different systems, platforms or geographic locations'' . . 
. . and ``[a]s a result of reduced oversight, these schemes may be more 
prevalent in digital asset markets than in the general market for 
financial products.'' \117\ The Index's underlying bitcoin platforms 
are a subset of the bitcoin trading venues currently in existence.
---------------------------------------------------------------------------

    \117\ See Registration Statement at 4, 12-13.
---------------------------------------------------------------------------

    The Registration Statement also states, specifically with respect 
to the Index, that ``[p]ricing sources used by the Index are digital 
asset spot markets that facilitate the buying and selling of bitcoin 
and other digital assets'' and that ``[a]lthough many pricing sources 
refer to themselves as `exchanges,' they are not registered with, or 
supervised by, the [Commission] or [Commodity Futures Trading 
Commission] and do not meet the regulatory standards of a national 
securities exchange or designated contract market,'' and ``[f]or these 
reasons, among others, purchases and sales of bitcoin may be subject to 
temporary distortions or other disruptions . . . . [which] could affect 
the price of bitcoin used in Index calculations and, therefore, could 
adversely affect the bitcoin price as reflected by the Index.'' \118\ 
The Sponsor further states in the Registration Statement that ``[t]he 
Index is based on various inputs which include price data from various 
third-party bitcoin spot markets'' and that ``[t]he Index Provider does 
not guarantee the validity of any of these inputs, which may be subject 
to technological error, manipulative activity, or fraudulent reporting 
from their initial source.'' \119\ Moreover, the Exchange describes a 
process through which the Data Provider may select an ``alternative 
primary market'' upon detection or referral of suspect manipulative 
activities.\120\ Although the Sponsor raises concerns regarding fraud 
and security of bitcoin platforms in the Registration Statement, as 
well as concerns specific to the Index's underlying bitcoin platforms, 
leading to the potential need for an ``alternative'' basis for the 
Index price, the Exchange does not explain how or why such concerns are 
consistent with its assertion that the Index is resistant to fraud and 
manipulation.
---------------------------------------------------------------------------

    \118\ See id. at 32.
    \119\ See id.
    \120\ See Notice, 87 FR at 33270.
---------------------------------------------------------------------------

    In addition, BZX represents that, to rank the credibility and 
quality of each underlying bitcoin platform, the Data Provider 
dynamically assigns a score to the key characteristics for each 
platform, namely: (i) oversight; (ii) microstructure efficiency; (iii) 
data transparency; and (iv) data integrity. BZX states that the score 
determines which platform should be designated as the ``principal 
market'' and derives the Index price from such market. However, the 
existing level of oversight of the Index's underlying bitcoin 
platforms, whose trade flows might contribute to the Index, is not 
equivalent to the obligations, authority, and oversight of national 
securities exchanges or futures exchanges and therefore is not an 
appropriate substitute.\121\ For example, the Commission's market 
oversight of national securities exchanges includes substantial 
requirements, including the requirement 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.'' \122\ Moreover, national securities exchanges must file 
proposed rules with the Commission regarding certain material aspects 
of their operations,\123\ and the Commission has the authority to 
disapprove any such

[[Page 6338]]

rule that is not consistent with the requirements of the Exchange 
Act.\124\ Thus, national securities exchanges are subject to Commission 
oversight of, among other things, their governance, membership 
qualifications, trading rules, disciplinary procedures, recordkeeping, 
and fees.\125\ The Index's underlying spot bitcoin platforms have none 
of these requirements--none are registered as a national securities 
exchange and none are comparable to a national securities exchange or 
futures exchange.\126\
---------------------------------------------------------------------------

    \121\ See also USBT Order, 85 FR at 12603-05; VanEck Order, 86 
FR at 64545; WisdomTree Order, 86 FR at 69328; Kryptoin Order, 86 FR 
at 74173.
    \122\ 15 U.S.C. 78f(b)(5).
    \123\ 17 CFR 240.19b-4(a)(6)(i).
    \124\ 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 rule 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 
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.
    \125\ See Winklevoss Order, 83 FR at 37597. The Commission notes 
that the New York State Department of Financial Services 
(``NYSDFS'') has issued ``guidance'' to supervised virtual currency 
business entities, stating that these entities must ``implement 
measures designed to effectively detect, prevent, and respond to 
fraud, attempted fraud, and similar wrongdoing.'' See Maria T. 
Vullo, Superintendent of Financial Services, NYSDFS, Guidance on 
Prevention of Market Manipulation and Other Wrongful Activity (Feb. 
7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS recognizes that its ``guidance is not 
intended to limit the scope or applicability of any law or 
regulation'' (id.), which would include the Exchange Act. Nothing in 
the record evidences whether the Index's underlying bitcoin 
platforms have complied with this NYSDFS guidance. 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 at 12603 n.101. See also, e.g., WisdomTree Order, 86 FR at 69328 
n.95; Kryptoin Order, 86 FR at 74173 n.98.
    \126\ See USBT Order, 85 FR at 12603-05 and n.101; VanEck Order, 
86 FR at 64545 and n.89; WisdomTree Order, 86 FR at 69328 and n.95; 
Kryptoin Order, 86 FR at 74173 and n.98; ARK 21Shares Order, 87 FR 
at 20021-22 and n.107; Grayscale Order, 87 FR at 40308 and n.110.
---------------------------------------------------------------------------

    In addition, although BZX argues that the Data Provider's various 
procedures of Index oversight helps to identify patterns consistent 
with manipulative activity, the record does not suggest that the 
purported oversight represents a unique measure to resist or prevent 
fraud or manipulation beyond protections that exist in traditional 
securities or commodities markets.\127\ Rather, the oversight performed 
by the Data Provider of the Index's underlying bitcoin platforms 
appears to be for the purpose of ensuring the accuracy and integrity of 
the Index. Such Index accuracy and integrity oversight serves a 
fundamentally different purpose as compared to the regulation of 
national securities exchanges and the requirements of the Exchange Act. 
While the Commission recognizes that this may be an important function 
in ensuring the integrity of the Index, such requirements do not imbue 
the Data Provider or the Index's underlying platforms with regulatory 
authority similar to that which the Exchange Act confers upon self-
regulatory organizations such as national securities exchanges.\128\ 
Furthermore, other commodity-based ETPs approved by the Commission for 
listing and trading utilize reference rates or indices administered by 
similar data providers or benchmark administrators,\129\ and the 
Commission has not, in those instances, dispensed with the detection 
and deterrence of fraud and manipulation provided by a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to the underlying assets.
---------------------------------------------------------------------------

    \127\ See, e.g., WisdomTree Order, 86 FR at 69328; Valkyrie 
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022.
    \128\ See WisdomTree Order, 86 FR at 69329; One River Order, 87 
FR at 33556; Grayscale Order, 87 FR at 40310. The Data Provider does 
not itself exercise governmental regulatory authority. Rather, the 
Data Provider is a privately-held company that provides crypto asset 
data products. See https://lukka.tech/. The Sponsor has engaged the 
Data Provider in a commercial relationship to provide inputs for the 
Index. See Notice, 87 FR at 33269 n.72.
    \129\ See, e.g., Securities Exchange Act Release Nos. 80840 
(June 1, 2017) 82 FR 26534 (June 7, 2017) (SR-NYSEArca-2017-33) 
(approving the listing and trading of shares of certain trusts 
seeking to track the Solactive GLD EUR Gold Index, Solactive GLD GBP 
Gold Index, and the Solactive GLD JPY Gold Index).
---------------------------------------------------------------------------

    The Commission thus concludes that the Exchange has not 
demonstrated that its Index methodology makes the proposed ETP 
resistant to manipulation. While the proposed procedures for 
calculating the Index using only prices from the Index's underlying 
platforms are intended to provide some degree of protection against 
attempts to manipulate the Index, these procedures are not sufficient 
for the Commission to dispense with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to spot 
bitcoin.\130\
---------------------------------------------------------------------------

    \130\ See WisdomTree Order, 86 FR at 69327-28; ARK 21Shares 
Order, 87 FR at 20021-22.
---------------------------------------------------------------------------

    Further, BZX does not explain the significance of the Index'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.\131\ To the extent that BZX's argument is that the 
price of the Trust's Shares would be resistant to manipulation if the 
Index is resistant to manipulation, BZX has not established in the 
record a basis for this conclusion because BZX has not established a 
link between the price of the Shares and the Index, either in the 
primary or secondary market. The Trust uses the Index to calculate the 
value of the bitcoin it holds according to the methodology discussed 
above.\132\ However, the Trust will create or redeem baskets in the 
primary market only upon the receipt or distribution of bitcoins from/
to authorized participants, and only for the amount of bitcoin 
represented by the Shares in such baskets, without reference to the 
value of such bitcoin as determined by the Index or otherwise.\133\ In 
the secondary market, the Shares would trade at market-based prices, 
and market participants may or may not take into account the value of 
bitcoin as measured by the Index in determining such prices. The 
Exchange provides no information on the relationship between the Index 
and secondary market prices generally, or how the use of the Index 
would mitigate fraud and manipulation

[[Page 6339]]

of the Shares in the secondary market.\134\
---------------------------------------------------------------------------

    \131\ The Commission has previously considered and rejected 
similar arguments about the valuation of bitcoin according to a 
benchmark or reference price. See, e.g., SolidX Order, 82 FR at 
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at 
12599-601; WisdomTree Order, 86 FR at 69327-29;Valkyrie Order, 86 FR 
at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale Order, 87 FR 
at 40310.
    \132\ See supra note 36 and accompanying text.
    \133\ See Notice, 87 FR at 33271. According to the Exchange, to 
create, ``the total deposit of bitcoin required is an amount of 
bitcoin that is in the same proportion to the total assets of the 
Trust, net of accrued expenses and other liabilities, on the date 
the order to purchase is properly received, as the number of Shares 
to be created under the purchase order is in proportion to the total 
number of Shares outstanding on the date the order is received.'' 
The required deposit is determined ``for a given day by dividing the 
number of bitcoin held by the Trust as of the opening of business on 
that business day, adjusted for the amount of bitcoin constituting 
estimated accrued but unpaid fees and expenses of the Trust as of 
the opening of business on that business day, by the quotient of the 
number of Shares outstanding at the opening of business divided by 
5,000.''
    \134\ See WisdomTree Order, 86 FR at 69329 and n.108; Valkyrie 
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale 
Order, 87 FR at 40310.
---------------------------------------------------------------------------

    Moreover, the Exchange's arguments are contradictory. While arguing 
that the Index is resistant to manipulation, the Exchange 
simultaneously downplays the importance of the Index in light of the 
Trust's in-kind creation and redemption mechanism.\135\ The Exchange 
points out that the Trust will create and redeem Shares in-kind, not in 
cash, which renders the NAV calculation, and thereby the ability to 
manipulate NAV, ``significantly less important.'' \136\ 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.'' \137\ If the Index that the Trust uses to 
value the Trust's bitcoin ``is not particularly important,'' it follows 
that the Index'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 Index aids in the determination 
that the proposal to list and trade the Shares is designed to prevent 
fraudulent and manipulative acts and practices.\138\
---------------------------------------------------------------------------

    \135\ See supra notes 109-113 and accompanying text.
    \136\ Notice, 87 FR at 33280 (``While the Sponsor believes that 
the Index which it uses to value the Trust's bitcoin is itself 
resistant to manipulation based on the methodology further described 
below, the fact that creations and redemptions are only available 
in-kind makes the manipulability of the Index significantly less 
important.'').
    \137\ Id. (concluding that ``because the Trust will not accept 
cash to buy bitcoin in order to create new shares or, barring a 
forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin 
is not particularly important'').
    \138\ See WisdomTree Order, 86 FR at 69329; ARK 21Shares Order, 
87 FR at 20022.
---------------------------------------------------------------------------

    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.\139\ 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.\140\ Accordingly, 
the Commission is not persuaded here that the Trust's in-kind creations 
and redemptions afford it a unique resistance to manipulation.\141\
---------------------------------------------------------------------------

    \139\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08; WisdomTree Order, 86 FR at 69329; ARK 21Shares Order, 
87 FR at 20022.
    \140\ 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).
    \141\ Putting aside the Exchange's various assertions about the 
nature of bitcoin and the bitcoin market, the Index, 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 at 37585. See also USBT Order, 85 FR at 12600-01.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size Related 
to the Underlying Bitcoin Assets
    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 related to the underlying bitcoin assets. In this 
context, the term ``market of significant size'' includes a market (or 
group of markets) as to which (i) there is a reasonable likelihood that 
a person attempting to manipulate the ETP would also have to trade on 
that market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (ii) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\142\
---------------------------------------------------------------------------

    \142\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------

    As the Commission has explained, 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.\143\ Accordingly, based on 
the common membership of BZX and the CME in the ISG,\144\ 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,\145\ 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'' 
related to spot bitcoin, the underlying bitcoin assets that would be 
held by the Trust.
---------------------------------------------------------------------------

    \143\ See id. at 37580 n.19.
    \144\ See Notice, 87 FR at 33262.
    \145\ While the Commission recognizes that the CFTC regulates 
the CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying spot bitcoin market. See Winklevoss 
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at 
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; SkyBridge Order, 
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93; ARK 
21Shares Order, 87 FR at 20023 n.121; Bitwise Order, 87 FR at 40286 
n.54; Grayscale Order, 87 FR at 40311 n.138.
---------------------------------------------------------------------------

(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'' related to spot 
bitcoin 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. In 
previous Commission orders, the Commission explained that the lead-lag 
relationship between the bitcoin futures market and the spot market is 
``central'' to understanding this first prong.\146\
---------------------------------------------------------------------------

    \146\ See, e.g., USBT Order, 85 FR at 12612 (``[E]stablishing a 
lead-lag relationship between the bitcoin futures market and the 
spot market is central to understanding whether it is reasonably 
likely that a would-be manipulator of the ETP would need to trade on 
the bitcoin futures market to successfully manipulate prices on 
those spot platforms that feed into the proposed ETP's pricing 
mechanism. In particular, if the spot market leads the futures 
market, this would indicate that it would not be necessary to trade 
on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move 
to meet the spot price.''). When considering past proposals for spot 
bitcoin ETPs, the Commission has discussed whether there is a lead-
lag relationship between the regulated market (e.g., the CME) and 
the market on which the assets held by the ETP would have traded 
(i.e., spot bitcoin platforms), as part of an analysis of whether a 
would-be manipulator of the spot bitcoin ETP would need to trade on 
the regulated market to effect such manipulation. See, e.g., USBT 
Order, 85 FR at 12612. See also VanEck Order, 86 FR at 64547; 
WisdomTree Order, 86 FR at 69330-31; Kryptoin Order, 86 FR at 74175-
76; SkyBridge Order, 87 FR at 3875-76; Wise Origin Order, 87 FR at 
5535-36, 5539-40; ARK 21Shares Order, 87 FR at 20023-24; Bitwise 
Order, 87 FR at 40287-89; Grayscale Order, 87 FR at 40311-13.

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

[[Page 6340]]

(a) BZX's Assertions
    According to the Exchange, ``academic research . . . supports the 
thesis that [CME bitcoin futures] pricing leads the spot market and, 
thus, a person attempting to manipulate the Shares would also have to 
trade on that market to manipulate the ETP.'' \147\ The Exchange 
further asserts that, ``[a]ccording to the Sponsor's research presented 
above,'' \148\ the CME bitcoin futures market ``is the leading market 
for bitcoin price formation.'' \149\ BZX argues that, where CME bitcoin 
futures lead the price in the spot market such that a potential 
manipulator of the bitcoin spot market (beyond just the constituents of 
the Index) 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 Index 
is based on spot prices.'' \150\ Further, BZX asserts that the Trust 
only allows for in-kind creation and redemption, which reduces the 
potential for manipulation of the Shares through manipulation of the 
Index or any of its individual constituents, again emphasizing that a 
potential manipulator of the Shares would have to manipulate the 
entirety of the bitcoin spot market, which is led by the CME bitcoin 
futures market.\151\ As such, BZX believes that the significant market 
test outlined above is satisfied and that common membership in ISG 
between the Exchange and the CME would assist the listing exchange in 
detecting and deterring misconduct in the Shares.\152\
---------------------------------------------------------------------------

    \147\ See Notice, 87 FR at 33261 (citing to Hu, Y., Hou, Y. and 
Oxley, L. (2019), ``What role do futures markets play in Bitcoin 
pricing? Causality, cointegration and price discovery from a time-
varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu, Hou & Oxley'')). The Exchange 
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.'' Id. 
at n.59.
    \148\ Although it is unclear in the filing, the Commission 
believes the Exchange is referring to the Sponsor's research 
discussed above relating to correlation of the bitcoin markets (see 
supra notes 54-64 and accompanying text).
    \149\ See Notice, 87 FR at 33262; 33273.
    \150\ See id.
    \151\ See id.
    \152\ Id.
---------------------------------------------------------------------------

(b) Analysis
    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 the proposed ETP. First, the econometric evidence in the 
record for the proposal does not support the conclusion that an 
interrelationship exists between the CME bitcoin futures market and the 
spot bitcoin 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.\153\ The Exchange and the Sponsor 
exclusively rely on the findings of one section of the Hu, Hou & Oxley 
paper; \154\ however, they do not address issues that the Commission 
has previously raised with respect to this single paper.\155\ As the 
Commission previously explained, including in the ARK 21Shares Order, 
the findings of this paper's Granger causality analysis, which is 
widely used to formally test for lead-lag relationships, are concededly 
mixed.\156\
---------------------------------------------------------------------------

    \153\ See also USBT Order, 85 FR at 12611; WisdomTree Order, 86 
FR at 69330-31; Wise Origin Order, 87 FR at 5535; NYDIG Order, 87 FR 
at 14938; Global X Order, 87 FR at 14920; ARK 21Shares, 87 FR at 
20024; Bitwise Order, 87 FR at 40288-89; Grayscale Order, 87 FR at 
40312-13.
    \154\ See supra note 147.
    \155\ See, e.g., WisdomTree Order, 86 FR at 69331 (discussing 
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; and discussing that the paper found inconclusive 
evidence that futures prices lead spot bitcoin prices--in 
particular, that the months at the end of the paper's sample period 
showed, using Granger causality methodology, that the spot market 
was the leading market--and 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). See also USBT Order, 85 FR at 12613 n.244.
    \156\ See ARK 21Shares Order, 87 FR at 20024; WisdomTree Order, 
86 FR at 69331. 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 
130.
---------------------------------------------------------------------------

    Moreover, BZX does not present any other data supporting its 
conclusion. Specifically, the Exchange does not provide any additional 
evidence of an interrelationship between the CME bitcoin futures 
market, which is the regulated market, and spot bitcoin platforms, 
which are the markets on which the assets held by the proposed ETP 
would trade.\157\ As discussed in previous disapprovals, including the 
ARK 21Shares Order, analyses regarding whether the CME bitcoin futures 
market leads the spot market remain inconclusive.\158\ Thus, as in 
previous disapprovals, because the lead-lag analysis regarding whether 
the CME bitcoin futures market leads the spot market is ``central'' to 
understanding the first prong,\159\ the Commission determines that the 
evidence in the record is inadequate to conclude that an 
interrelationship exists between the CME bitcoin futures market and the 
spot bitcoin market such that it is reasonably likely that a person 
attempting to manipulate the proposed ETP would have to trade on the 
CME bitcoin futures market to successfully manipulate the proposed 
ETP.\160\
---------------------------------------------------------------------------

    \157\ Although the Exchange points to the Sponsor's research 
discussed above relating to correlation of the bitcoin markets (see 
supra notes 54-64 and accompanying text) to support the conclusion 
that the CME bitcoin futures market ``is the leading market for 
bitcoin price formation,'' (see Notice, 87 FR at 33262) the 
Sponsor's analysis does not appear to reach any conclusions 
regarding the lead-lag relationship between the CME bitcoin futures 
market and the spot bitcoin market. Moreover, as discussed above, 
even accepting at face value the Sponsor's statistical results, such 
results would only indicate that spot bitcoin prices during the 
sample period tended to move in tandem, not that the CME bitcoin 
futures market leads bitcoin price formation. See supra notes 81-82 
and accompanying text. See also infra note 198 and accompanying 
paragraph regarding the contradictory conclusions that the Exchange 
appears to make with the Sponsor's statistical results.
    \158\ As the academic literature and listing exchanges' analyses 
pertaining to the pricing relationship between the CME bitcoin 
futures market and spot bitcoin market have developed, the 
Commission has critically reviewed those materials. See WisdomTree 
Order II, 87 FR at 62476-77; Grayscale Order, 87 FR at 40311-13; 
Bitwise Order, 87 FR at 40286-89; ARK 21Shares Order, 87 FR at 
20024; Global X Order, 87 FR at 14920; Wise Origin Order, 87 FR at 
5535-36, 5539-40; Kryptoin Order, 86 FR at 74176; WisdomTree Order, 
86 FR at 69330-32; VanEck Order, 86 FR at 64547-48; USBT Order, 85 
FR at 12613.
    \159\ See supra note 146.
    \160\ In addition, BZX 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 the bitcoin 
platforms underlying the Index, or where price formation occurs when 
the entirety of bitcoin futures markets, not just the CME, is 
considered. See ARK 21Shares Order, 87 FR at 20024 n.147; VanEck 
Order, 86 FR at 64547-48; WisdomTree Order, 86 FR at 69331; Kryptoin 
Order, 86 FR at 74176; Wise Origin Order, 87 FR at 5535.
---------------------------------------------------------------------------

    The Exchange also makes additional assertions \161\ that are 
conclusory and presuppose, without additional supporting evidence, that 
the CME bitcoin futures market leads the price in the spot bitcoin 
market. For example,

[[Page 6341]]

the Exchange's assertion that ``a potential manipulator of the Shares 
would. . . have to transact in the CME [b]itcoin [f]utures market 
because the Index is based on spot prices'' \162\ presupposes that 
``[CME] [b]itcoin [f]utures lead the price in the spot market'' \163\ 
and assumes a link between the Index and the Shares that, as discussed 
above,\164\ the Exchange has not established. Likewise, the Exchange 
states that the Trust's in-kind create/redeem process supports the 
conclusion that a would-be manipulator would have to trade on the CME 
bitcoin futures market to successfully manipulate the proposed ETP 
because the spot bitcoin market ``is led by the CME [b]itcoin [f]utures 
market.'' \165\ However, as discussed already, the evidence in the 
record is inadequate to conclude that CME bitcoin futures prices lead 
spot bitcoin prices, and, as also discussed further above, BZX has not 
demonstrated that in-kind creations and redemptions provide the Shares 
with a unique resistance to manipulation.
---------------------------------------------------------------------------

    \161\ See supra notes 149-152.
    \162\ Notice, 87 FR at 33262.
    \163\ See id.
    \164\ See supra notes 131-134 and accompanying text.
    \165\ Notice, 87 FR at 33262 (``the Trust only allows for in-
kind creation and redemption, which reduces the potential for 
manipulation of the Shares through manipulation of the Index or any 
of its individual constituents, again emphasizing that a potential 
manipulator of the Shares would have to manipulate the entirety of 
the bitcoin spot market, which is led by the [CME] [b]itcoin 
[f]utures market.'').
---------------------------------------------------------------------------

    The Commission thus concludes that the information that BZX 
provides is not sufficient 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 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'' related to the assets to be held by 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'' related to spot 
bitcoin 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.\166\
---------------------------------------------------------------------------

    \166\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

(a) BZX's Assertions
    BZX asserts that trading in the Shares would not be the predominant 
force on prices in the CME bitcoin futures market (or spot market) 
because of the significant volume in the CME bitcoin futures 
market,\167\ the size of bitcoin's market capitalization,\168\ and the 
significant liquidity available in the spot market.\169\ BZX further 
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.\170\ 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. According to the Exchange, ``[s]tated 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%.'' \171\ BZX further 
asserts that more strategic purchases or sales (such as using limit 
orders and executing through over-the-counter (``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.\172\ 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.\173\
---------------------------------------------------------------------------

    \167\ BZX states that the CME began to offer trading in bitcoin 
futures in 2017. See Notice, 87 FR at 33256. 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.'' See 
id. For example, according to BZX, from March 28, 2022, through 
April 22, 2022, there was approximately $1.3 billion in notional 
trading volume in CME bitcoin futures on a daily basis, and notional 
volume was never below $670 million. See id. at 33252. Additionally, 
BZX states that open interest was over $2 billion for the entirety 
of the period, and at one point was over $3 billion. See id. 
According to the Sponsor, the increase in the volume on the CME is 
reflected in a higher proportion of the bitcoin market share, based 
on the proportion of the total monthly volume of bitcoin futures 
traded on the CME in relation to the total spot bitcoin volume on 
digital asset platforms. See id. at 33256. BZX states that that 
proportion of volume traded on CME has increased from less than 5% 
at inception, to more than 20% over three and a half years. See id.
    \168\ According to BZX, as of December 1, 2021, the total market 
cap of all bitcoin in circulation was approximately $1.08 trillion. 
See id. at 33250 n.25.
    \169\ See id. at 33262, 33273.
    \170\ 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 33262 n.68; 33273 n.90.
    \171\ Id. at 33262, 33273.
    \172\ See id.
    \173\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission does not agree with BZX's assertions, which are 
substantially the same assertions that BZX made, and the Commission 
discussed, in the ARK 21Shares Order. Now, as then, 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 lead price discovery 
\174\--the Commission will only address below the other two bases: the 
overall size of, and the impact of buys and sells on, the bitcoin 
market.
---------------------------------------------------------------------------

    \174\ See supra Section III.B.2.i.b.
---------------------------------------------------------------------------

    BZX's assertions about the potential effect of trading in the 
Shares on the CME bitcoin futures market and spot bitcoin market are 
general and conclusory, citing to the aforementioned trade volume of 
the CME bitcoin futures market and the size and liquidity of the spot 
bitcoin market, as well as the market impact of a single transaction in 
spot bitcoin, 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.\175\
---------------------------------------------------------------------------

    \175\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86 
FR at 69332-33; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87 
FR at 3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87 
FR at 20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    The Commission also is not persuaded by BZX's assertions about the 
minimal effect a market order to buy or sell bitcoin would have on the 
bitcoin

[[Page 6342]]

market.\176\ While BZX concludes by way of an example of a $10 million 
market order 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 or the CME bitcoin 
futures market's prices. Accordingly, such statistics, without more, 
are not relevant to the Commission's consideration of whether trading 
in the ETP would be the predominant influence on prices in the CME 
bitcoin futures market.
---------------------------------------------------------------------------

    \176\ See Notice, 87 FR at 33262 (``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%.'').
---------------------------------------------------------------------------

    To the extent 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, the Exchange has not adequately explained why a 
single market order in spot bitcoin is an appropriate proxy for trading 
in the Shares. As stated above, 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. While authorized participants 
of the Trust might transact in the spot bitcoin market as part of their 
creation or redemption of Shares, the Shares themselves would be traded 
in the secondary market on BZX. Furthermore, 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.\177\
---------------------------------------------------------------------------

    \177\ See VanEck Order, 86 FR at 64549; WisdomTree Order, 86 FR 
at 69333; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87 FR at 
3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87 FR at 
20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    Thus, the Commission cannot conclude, based on the assertions in 
the filing and absent sufficient evidence or analysis in support of 
these assertions, that it is unlikely that trading in the proposed ETP 
would be the predominant influence on prices in the CME bitcoin futures 
market.
    Therefore, 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'' related to spot 
bitcoin 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.
(3) Assertions That the Proposed Spot Bitcoin ETP Is Comparable to 
Bitcoin Futures-Based ETFs
(i) BZX's Assertions
    BZX asserts that, after allowing the listing and trading of bitcoin 
futures ETFs and ETPs that hold primarily CME bitcoin futures, 
disapproving spot bitcoin ETPs ``seems. . . arbitrary and capricious.'' 
\178\ BZX asserts that CME bitcoin futures pricing is based on pricing 
from spot bitcoin markets and that the pricing mechanism applicable to 
the Shares is similar to that of CME bitcoin futures.\179\ BZX argues 
that a statement in the Commission's prior approval of CME bitcoin 
futures ETPs ``makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of CME [b]itcoin [f]utures.'' \180\ BZX asserts 
that it is ``not logically possible'' for the Commission to conclude 
that the CME bitcoin futures market represents a significant market for 
CME bitcoin futures ETPs, but also conclude that the CME bitcoin 
futures market does not represent a significant market for a spot 
bitcoin ETP.\181\ BZX also states that CME bitcoin futures ETFs and 
ETPs are potentially more susceptible to potential manipulation than a 
spot bitcoin ETP that offers only in-kind creation and redemption.\182\ 
BZX asserts that any objective review of the proposals to list spot 
bitcoin ETPs compared to the CME bitcoin futures ETFs and ETPs would 
lead to the conclusion that spot bitcoin ETPs should be available to 
U.S. investors because ``any concerns related to preventing fraudulent 
and manipulative acts and practices related to [s]pot [b]itcoin ETPs 
would apply equally to the spot markets underlying the futures 
contracts held by a [CME] [b]itcoin [f]utures ETF.'' \183\
---------------------------------------------------------------------------

    \178\ See Notice, 87 FR at 33255.
    \179\ See id. at 33254.
    \180\ Id. (citing Teucrium Order, 87 FR at 21679 (``The CME 
`comprehensively surveils futures market conditions and price 
movements on a real-time and ongoing basis in order to detect and 
prevent price distortions, including price distortions caused by 
manipulative efforts.' Thus the CME's surveillance can reasonably be 
relied upon to capture the effects on the CME bitcoin futures market 
caused by a person attempting to manipulate the proposed futures ETP 
by manipulating the price of CME bitcoin futures contracts, whether 
that attempt is made by directly trading on the CME bitcoin futures 
market or indirectly by trading outside of the CME bitcoin futures 
market. As such, when the CME shares its surveillance information 
with Arca, the information would assist in detecting and deterring 
fraudulent or manipulative misconduct related to the non-cash assets 
held by the proposed ETP.'')).
    \181\ See id. at 33254-55.
    \182\ See id. at 33254. BZX states that settlement of CME 
bitcoin futures (and thus the value of the underlying holdings of a 
bitcoin futures ETF/ETP) occurs at a single price derived from spot 
bitcoin pricing, while shares of a spot bitcoin ETP would represent 
interest in bitcoin directly, and that authorized participants for a 
spot bitcoin ETP would be able to source bitcoin from any exchange 
and create or redeem with the applicable trust regardless of the 
price of the underlying index. See id. BZX also argues that ``the 
structure of [CME] [b]itcoin [f]utures ETFs provides negative 
outcomes for buy and hold investors as compared to a [s]pot 
[b]itcoin ETP'' and that any concerns about the custody of physical 
bitcoin that a spot bitcoin ETP would hold (as compared to cash-
settled futures contracts that a CME bitcoin futures ETF/ETP would 
hold) is mitigated by the custodial arrangements the Trust has in 
place. See id. at 33255.
    \183\ Id. at 33255. BZX states that while the 1940 Act ``does 
offer certain investor protections, those protections do not relate 
to mitigating potential manipulation of the holdings of an ETF in a 
way that warrants distinction between [CME] [b]itcoin [f]utures ETFs 
and [s]pot [b]itcoin ETPs.'' Id.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission disagrees with these assertions and conclusions. The 
proposed rule change does not relate to the same underlying holdings as 
ETFs regulated under the 1940 Act that provide exposure to bitcoin 
through CME bitcoin futures, or CME bitcoin futures-based ETPs that 
have registered their offerings under the Securities Act but are not 
regulated under the 1940 Act. The Commission considers the proposed 
rule change on its own merits and under the standards applicable to it. 
Namely, with respect to this proposed rule change, the Commission must 
apply the standards as provided by Section 6(b)(5) of the Exchange Act, 
which it has applied in connection with its orders considering previous 
proposals to list bitcoin-based commodity trusts and bitcoin-based 
trust issued receipts.\184\
---------------------------------------------------------------------------

    \184\ See supra note 11 and accompanying text.
---------------------------------------------------------------------------

    In focusing on whether ``concerns related to preventing fraudulent 
and manipulative acts and practices related to [s]pot [b]itcoin ETPs 
would apply equally to the spot markets underlying the futures 
contracts held by a [CME] [b]itcoin [f]utures ETF,'' \185\ the Exchange 
mischaracterizes the

[[Page 6343]]

framework that the Commission has articulated in the Winklevoss Order. 
As stated in the Winklevoss Order, the Commission is not applying a 
``cannot be manipulated'' approach--either on the CME bitcoin futures 
market or the spot bitcoin markets. Rather, as the Commission has 
repeatedly emphasized, and also summarized above, the Commission is 
examining whether the proposal meets the requirements of the Exchange 
Act and, pursuant to its Rules of Practice, is placing the burden on 
BZX to demonstrate the validity of its contention that other means to 
prevent fraudulent and manipulative acts and practices are sufficient 
to justify dispensing with the detection and deterrence of fraud and 
manipulation provided by a comprehensive surveillance-sharing agreement 
with a regulated market of significant size related to spot 
bitcoin,\186\ or to establish that it has entered into such a 
surveillance-sharing agreement.
---------------------------------------------------------------------------

    \185\ See Notice, 87 FR at 33255.
    \186\ See supra notes 39-42 and accompanying text.
---------------------------------------------------------------------------

    Consistent with this approach, the Commission's consideration (and 
thus far, disapproval) of proposals to list and trade spot bitcoin ETPs 
does not focus on an assessment of the overall risk of fraud and 
manipulation in the spot bitcoin or futures markets, or on the extent 
to which such risks are similar.\187\ Rather, the Commission's focus 
has been consistently on whether the listing exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying bitcoin assets of the ETP 
under consideration, so that it would have the ability to detect and 
deter manipulative activity. For reasons articulated in the orders 
approving proposals to list and trade CME bitcoin futures-based ETPs 
(i.e., the Teucrium Order and the Valkyrie XBTO Order), the Commission 
found that in each such case the listing exchange has entered into such 
a surveillance-sharing agreement.\188\ Applying the same framework to 
this proposed spot bitcoin ETP, however, as discussed and explained 
above, the Commission finds that BZX has not.
---------------------------------------------------------------------------

    \187\ The Commission's past general discussion on the risk of 
fraud and manipulation in the spot bitcoin or futures markets is 
only in response to arguments raised by the proposing listing 
exchanges (or commenters) that mitigating factors against fraud and 
manipulation in the spot bitcoin or futures markets should compel 
the Commission to dispense with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size 
related to the underlying bitcoin assets. See, e.g., Winklevoss 
Order, 83 FR at 37580, 37582-91 (addressing assertions that 
``bitcoin and [spot] bitcoin markets,'' generally, as well as one 
bitcoin trading platform, specifically, have unique resistance to 
fraud and manipulation). See also USBT Order, 85 FR at 12597, 12599-
12608. But even in such instance, the central issue was about the 
need for such a surveillance-sharing agreement, not the overall risk 
of fraud and manipulation in the spot bitcoin or futures markets, or 
the extent to which such risks are similar.
    \188\ See Teucrium Order, 87 FR at 21678-81; Valkyrie XBTO 
Order, 87 FR at 28850-53.
---------------------------------------------------------------------------

    Moreover, for the CME bitcoin futures ETPs under consideration in 
the Teucrium Order and the Valkyrie XBTO Order, the proposed 
``significant'' regulated market (i.e., the CME) with which the listing 
exchange has a surveillance-sharing agreement is the same market on 
which the underlying bitcoin assets (i.e., CME bitcoin futures 
contracts) trade. Thus, the CME's surveillance can reasonably be relied 
upon to detect and deter manipulative activity caused by a person 
attempting to manipulate the CME bitcoin futures ETP through directly 
trading on the CME bitcoin futures market. Additionally, as explained 
in the Teucrium and the Valkyrie XBTO Orders, the CME's surveillance 
can also reasonably be relied upon to capture the effects on the CME 
bitcoin futures market caused by a person attempting to manipulate the 
CME bitcoin futures ETP by manipulating the price of CME bitcoin 
futures contracts when that attempt is made indirectly by trading 
outside of the CME bitcoin futures market.\189\ Regarding the approved 
Teucrium Bitcoin Futures Fund in the Teucrium Order (``Teucrium 
Fund''), for example, when the CME shares its surveillance information 
with the listing exchange, the information would assist in detecting 
and deterring fraudulent or manipulative misconduct related to the non-
cash assets held by the Teucrium Fund.\190\ Accordingly, the Commission 
explains in the Teucrium Order and the Valkyrie XBTO Order that it is 
unnecessary for a listing exchange to establish a reasonable likelihood 
that a would-be manipulator would have to trade on the CME itself to 
manipulate a proposed ETP whose only non-cash holdings would be CME 
bitcoin futures contracts.\191\
---------------------------------------------------------------------------

    \189\ See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order, 
87 FR at 28851.
    \190\ See Teucrium Order, 87 FR at 21679.
    \191\ See id.
---------------------------------------------------------------------------

    However, as the Commission also states in those Orders, this 
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets 
are not currently ``regulated.'' \192\ If an exchange seeking to list a 
spot bitcoin ETP relies on the CME as the regulated market with which 
it has a comprehensive surveillance-sharing agreement, the assets held 
by the spot bitcoin ETP would not be traded on the CME. Because of this 
significant difference, with respect to a spot bitcoin ETP, there would 
be reason to question whether a surveillance-sharing agreement with the 
CME would, in fact, assist in detecting and deterring fraudulent and 
manipulative misconduct affecting the price of the spot bitcoin held by 
that ETP. If, however, an exchange proposing to list and trade a spot 
bitcoin ETP identifies the CME as the regulated market with which it 
has a comprehensive surveillance-sharing agreement, the exchange could 
overcome the Commission's concern by demonstrating that there is a 
reasonable likelihood that a person attempting to manipulate the spot 
bitcoin ETP would have to trade on the CME in order to manipulate the 
ETP, because such demonstration would help establish that the 
exchange's surveillance-sharing agreement with the CME would have the 
intended effect of aiding in the detection and deterrence of fraudulent 
and manipulative misconduct related to the spot bitcoin held by the 
ETP.\193\
---------------------------------------------------------------------------

    \192\ See id. at 21679 n.46 (citing USBT Order, 85 FR at 12604; 
NYDIG Order, 87 FR at 14936 nn.65-67). See also Valkyrie XBTO Order, 
87 FR at 28851 n.42.
    \193\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
---------------------------------------------------------------------------

    Because, here, BZX is seeking to list a spot bitcoin ETP that 
relies on the CME as the purported ``significant'' regulated market 
with which it has a comprehensive surveillance-sharing agreement, the 
assets held by the proposed ETP would not be traded on the CME. Thus 
there is reason to question whether a surveillance-sharing agreement 
with the CME would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct affecting the price of the spot 
bitcoin held by the proposed ETP.\194\ An exchange can overcome this

[[Page 6344]]

concern by demonstrating that there is a reasonable likelihood that a 
person attempting to manipulate the proposed ETP would have to trade on 
the CME in order to manipulate the ETP because such demonstration would 
help establish that an exchange's surveillance-sharing agreement with 
the CME would have the intended effect of aiding in the detection and 
deterrence of fraudulent and manipulative misconduct related to the 
spot bitcoin held by the proposed ETP.\195\ As discussed and explained 
above,\196\ the Commission finds that BZX has not made such 
demonstration.
---------------------------------------------------------------------------

    \194\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42. The Exchange mischaracterizes the 
Commission's statement in the Teucrium Order when the Exchange 
asserts that ``the Commission believes that CME's surveillance can 
capture the effects of trading on the relevant spot markets on the 
pricing of CME [b]itcoin [f]utures.'' Notice, 87 FR at 33254. What 
the Commission stated in the Teucrium Order is that for the Teucrium 
Fund (1) the proposed ``significant'' regulated market (i.e., the 
CME) with which the listing exchange has a surveillance-sharing 
agreement is the same market on which the underlying assets trade; 
and (2) therefore that the CME's surveillance can reasonably be 
relied upon to capture the effects on the CME bitcoin futures market 
(i.e., its own market) caused by a person attempting to manipulate 
the CME bitcoin futures ETP by manipulating the price of CME bitcoin 
futures contracts, whether that attempt is made by directly trading 
on the CME bitcoin futures market or indirectly by trading outside 
of the CME bitcoin futures market. See Teucrium Order, 87 FR at 
21679. Importantly, the Commission did not state that, for spot 
bitcoin ETPs such as the one proposed here, where the underlying 
asset would not trade on the CME, the CME's surveillance can be 
similarly relied upon to capture the effects of a person attempting 
to manipulate a spot bitcoin ETP by manipulating the price of spot 
bitcoin when the attempt is made by trading outside of the CME 
bitcoin futures market. Indeed, there is reason to question whether 
the CME's surveillance would capture manipulation of spot bitcoin 
that occurs off of the CME, if, for example, off-CME manipulation of 
spot bitcoin does not also similarly impact CME bitcoin futures 
contracts. And as discussed below, the Exchange has not provided any 
data or analysis to show that CME bitcoin futures would be impacted 
by instances of fraud and manipulation in the spot bitcoin market 
that occurs off of the CME.
    \195\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
    \196\ See supra Section III.B.2.i.
---------------------------------------------------------------------------

    To the extent that the Exchange is arguing that the CME's 
surveillance would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct that impacts spot bitcoin ETPs 
in the same way as it would for misconduct that impacts the CME bitcoin 
futures ETFs/ETPs, the information in the record for this filing does 
not support such a claim. BZX asserts that CME bitcoin futures pricing 
``is based on pricing from spot bitcoin markets;'' that ``the pricing 
mechanism applicable to the Shares is similar to that of the CME 
[b]itcoin [f]utures;'' and that ``this view is also consistent with the 
Advisor's research,'' which the Commission assumes is a reference to 
the Sponsor's statistical claims that crypto markets are ``highly 
correlated.'' \197\ However, even accepting at face value the Sponsor's 
statistical claim that, minute-by-minute, CME bitcoin futures prices 
are highly correlated with spot bitcoin prices, such a result provides 
no support for the causal connection that the Exchange asserts here--
namely, that CME bitcoin futures pricing ``is based on'' pricing from 
spot bitcoin markets. Moreover, if, as the Exchange claims here in the 
context of its arbitrary/capricious argument, CME bitcoin futures 
prices are ``based on'' spot bitcoin prices, the Exchange does not 
explain how this is consistent with, and indeed how it does not 
contradict, the Exchange's claims in the context of its ``significant 
market'' arguments that CME bitcoin futures prices ``lead'' spot 
bitcoin prices.\198\
---------------------------------------------------------------------------

    \197\ See Notice, 87 FR at 33254; 33256. The Commission assumes 
that the Exchange means the Sponsor when it uses the term 
``Advisor'' as that latter term is not defined and mentioned only 
once.
    \198\ In addition, to the extent the Exchange is asserting that 
CME bitcoin futures pricing ``is based on'' spot bitcoin pricing 
because of the CME CF Bitcoin Reference Rate (BRR), this is also not 
supported by the evidence in the record for this proposal. While the 
BRR is used to value the final cash settlement of CME bitcoin 
futures contracts, it is not generally used for daily cash 
settlement of such contracts, nor is it claimed to be used for any 
intra-day trading of such contracts. See, e.g., Grayscale Order, 87 
FR at 40317-18. Moreover, the shares of CME bitcoin futures ETFs/
ETPs trade in secondary markets, as would the Shares, and there is 
no evidence in the record for this filing that such intra-day, 
secondary market trading prices are, or would be, determined by the 
BRR. Further, the Commission's determination in the Teucrium Order 
and the Valkyrie XBTO Order to approve the listing and trading of 
the relevant CME bitcoin futures ETPs was not based on either the 
ETPs' or the underlying CME bitcoin futures contracts' pricing 
mechanism. Rather, as discussed above, the Commission approved the 
listing and trading of such CME bitcoin futures ETPs because the 
Commission found that the listing exchanges have a surveillance-
sharing agreement with a regulated market of significant size 
related to the underlying bitcoin assets--which for such ETPs are 
CME bitcoin futures contracts, not spot bitcoin.
---------------------------------------------------------------------------

    Moreover, even if the Exchange had demonstrated, statistically, a 
causal connection between spot bitcoin prices and CME bitcoin futures 
prices, which it has not, it does not necessarily follow that the CME's 
surveillance would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct that impacts spot bitcoin ETPs 
in the same way as it would for misconduct that impacts the CME bitcoin 
futures ETFs/ETPs--particularly when such misconduct occurs off of the 
CME itself.\199\ This is because it does not--absent supporting data--
necessarily follow that any manipulation that impacts spot bitcoin also 
similarly impacts CME bitcoin futures contracts. The Exchange has not 
provided analysis or data that assesses the reaction (if any) of CME 
bitcoin futures contracts to instances of fraud and manipulation in 
spot bitcoin markets.
---------------------------------------------------------------------------

    \199\ See also supra note 194.
---------------------------------------------------------------------------

    In addition, the disapproval of the proposal would not constitute 
an ``arbitrary and capricious'' administrative action in violation of 
the Administrative Procedure Act.\200\ Importantly, the issuers are not 
similarly situated. The issuers of CME bitcoin futures-based ETFs/ETPs 
propose to hold only CME bitcoin futures contracts (which are traded on 
the CME itself) as their only non-cash holdings, and the Trust proposes 
to hold only spot bitcoin (which is not traded on the CME). As 
explained in detail above, and in the Teucrium Order, the Valkyrie XBTO 
Order, and the Grayscale Order, because of this important difference, 
for a spot bitcoin ETP, there is reason to question whether a 
surveillance-sharing agreement with the CME would, in fact, assist in 
detecting and deterring fraudulent and manipulative misconduct 
affecting the price of the spot bitcoin held by that ETP.\201\ And as 
discussed above, neither the Exchange nor any other evidence in the 
record for this filing, sufficiently demonstrates that the CME's 
surveillance can be reasonably relied upon to capture the effects of 
manipulation of the spot bitcoin assets underlying the proposed ETP 
when such manipulation is not attempted on the CME itself.
---------------------------------------------------------------------------

    \200\ The Commission is disapproving this proposed rule change 
because BZX has not met its burden to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5). 
The Commission's disapproval of this proposed rule change does not 
rest on an evaluation of the relative investment quality of a 
product holding spot bitcoin versus a product holding CME bitcoin 
futures, or an assessment of whether bitcoin, or blockchain 
technology more generally, has utility or value as an innovation or 
an investment. See, e.g., Winklevoss Order, 83 FR at 37580; USBT 
Order, 85 FR at 12597; One River Order, 87 FR at 33550; Grayscale 
Order, 87 FR at 40318 n.227.
    \201\ See supra note 194 and accompanying text.
---------------------------------------------------------------------------

    Moreover, the analytical framework for assessing compliance with 
the requirements of Exchange Act Section 6(b)(5) that the Commission 
applies here (i.e., comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to the underlying bitcoin 
assets) is the same one that the Commission has applied in each of its 
orders considering previous proposals to list bitcoin-based commodity 
trusts and trust issued receipts.\202\ The Commission has applied this 
framework to each proposal by analyzing the evidence presented by the 
listing exchange and statements made by commenters.\203\ Exchange Act 
Section 6(b)(5) can be satisfied by a proper showing; the Commission 
has in fact recently approved proposals by NYSE Arca, Inc. and the 
Nasdaq Stock Market to list and trade shares of ETPs holding CME 
bitcoin futures as their only non-cash holdings.\204\ And in the orders 
approving the CME bitcoin futures-based ETPs, the Commission explicitly 
discussed how an exchange seeking to list and trade a spot bitcoin ETP 
could overcome the lack of a one-

[[Page 6345]]

to-one relationship between the regulated market with which it has a 
surveillance-sharing agreement and the market(s) on which the assets 
held by a spot bitcoin ETP could be traded: by demonstrating that there 
is a reasonable likelihood that a person attempting to manipulate the 
spot bitcoin ETP would have to trade on the regulated market (i.e., on 
the CME) to manipulate the spot bitcoin ETP.\205\
---------------------------------------------------------------------------

    \202\ See supra notes 11-24 and accompanying text.
    \203\ See supra note 11.
    \204\ See Teucrium Order and Valkyrie XBTO Order, supra note 11.
    \205\ See supra note 193 and accompanying text.
---------------------------------------------------------------------------

    When considering past proposals for spot bitcoin ETPs, the 
Commission has, in particular, reviewed the econometric and/or 
statistical evidence in the record to determine whether the listing 
exchange's proposal has met the applicable standard.\206\ The 
Commission's assessment fundamentally presents quantitative, empirical 
questions, but, as discussed above, the Exchange has not provided 
evidence sufficient to support its arguments.\207\
---------------------------------------------------------------------------

    \206\ See, e.g., USBT Order, 85 FR at 12612-13; VanEck Order, 86 
FR at 64547-48; WisdomTree Order, 86 FR at 69330-32; Kryptoin Order, 
86 FR at 74175-76; NYDIG Order, 87 FR at 14938-39; Wise Origin 
Order, 87 FR at 5534-36; Global X Order, 87 FR at 14919-20; ARK 
21Shares Order, 87 FR at 20023-24; Bitwise Order, 87 FR at 40286-92; 
Grayscale Order, 87 FR at 40311-14.
    \207\ See supra Sections III.B.1 & III.B.2.
---------------------------------------------------------------------------

    The requirements of Section 6(b)(5) of the Exchange Act apply to 
the rules of national securities exchanges. Accordingly, the relevant 
obligation to have a comprehensive surveillance-sharing agreement with 
a regulated market of significant size related to spot bitcoin, or 
other means to prevent fraudulent and manipulative acts and practices 
that are sufficient to justify dispensing with such a 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.\208\ 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.
---------------------------------------------------------------------------

    \208\ See Winklevoss Order, 83 FR at 37602. See also 
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at 
43941; USBT Order, 85 FR at 12615; WisdomTree Order, 86 FR at 69333; 
Valkyrie Order, 86 FR at 74163; Kryptoin Order, 86 FR at 74178; 
SkyBridge Order, 87 FR at 3880; Wise Origin Order, 87 FR at 5537; 
ARK 21Shares Order, 87 FR at 20026; Global X Order, 87 FR at 14921; 
Bitwise Order, 87 FR at 40292; Grayscale Order, 87 FR at 40319.
---------------------------------------------------------------------------

(1) BZX's Assertions
    The Exchange states that the proposal is designed to protect 
investors and the public interest. BZX asserts that access for U.S. 
retail investors to gain exposure to bitcoin via a transparent and U.S. 
regulated, exchange-traded vehicle remains limited.\209\ According to 
the Exchange, current options include: (i) OTC bitcoin funds with high 
management fees and potentially volatile premiums and discounts; \210\ 
(ii) facing the technical risk, complexity, and generally high fees 
associated with buying spot bitcoin; (iii) purchasing shares of 
operating companies that they believe will provide proxy exposure to 
bitcoin with limited disclosure about the associated risks; or (iv) 
purchasing CME bitcoin futures ETFs that represent a sub-optimal 
investment for long-term investors.\211\ BZX explains that over the 
past several years, U.S. investor exposure to bitcoin through OTC 
bitcoin funds has grown into the tens of billions of dollars and more 
than a billion dollars of exposure through CME bitcoin futures 
ETFs.\212\ BZX states that with that growth, so too has grown the 
quantifiable investor protection issues to U.S. investors through roll 
costs for bitcoin futures ETFs and premium/discount volatility and 
management fees for OTC bitcoin funds. BZX asserts that the concerns 
related to the prevention of fraudulent and manipulative acts and 
practices have been sufficiently addressed to be consistent with the 
Exchange Act and, as such, approving the proposal (and comparable 
proposals) would provide 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) reducing risks and costs associated with investing 
in CME bitcoin futures ETFs and operating companies that are imperfect 
proxies for bitcoin exposure; and (iv) providing an alternative to 
custodying spot bitcoin.\213\
---------------------------------------------------------------------------

    \209\ See Notice, 87 FR at 33253.
    \210\ BZX states that ``[t]he largest OTC [b]itcoin [f]und has 
an [assets under management or ``AUM''] of $23 billion.'' See id. at 
33253 n.42. According to BZX, ``investors are buying shares of a 
fund that experiences significant volatility in its premium and 
discount outside of the fluctuations in price of the underlying 
asset.'' See id.
    \211\ See id. at 33253-54.
    \212\ See id. at 33268; 33280.
    \213\ See id.
---------------------------------------------------------------------------

    BZX states that a number of operating companies engaged in 
unrelated businesses have announced investments as large as $5.3 
billion in bitcoin.\214\ BZX argues that, without access to bitcoin 
ETPs, retail investors seeking investment exposure to bitcoin may 
purchase shares in these companies in order to gain exposure to 
bitcoin.\215\ 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.\216\
---------------------------------------------------------------------------

    \214\ See id. at 33253 n.43.
    \215\ See id.
    \216\ See id.
---------------------------------------------------------------------------

    BZX also states that investors in many other countries, including 
Canada and Brazil, are able to use more traditional exchange-listed and 
traded products (including exchange-traded funds holding spot bitcoin) 
to gain exposure to bitcoin, disadvantaging U.S. investors and leaving 
them with more risky means of getting bitcoin exposure.\217\
---------------------------------------------------------------------------

    \217\ See id. at 33254. BZX represents that investors in other 
countries, specifically Canada, generally pay lower fees than U.S. 
retail investors that invest in OTC bitcoin funds due to the fee 
pressure that results from increased competition among available 
bitcoin investment options. BZX also argues that, without an 
approved spot bitcoin ETP in the U.S. as a viable alternative, U.S. 
investors could seek to purchase shares of non-U.S. bitcoin vehicles 
in order to gain 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. BZX further contends 
that the lack of a U.S.-listed spot bitcoin ETP is not preventing 
U.S. funds from gaining exposure to bitcoin--several U.S. exchange-
traded funds are using Canadian bitcoin ETPs to gain exposure to 
spot bitcoin--and that approving this proposal ``would provide U.S. 
exchange-traded funds and mutual funds with a U.S.-listed and 
regulated product to provide such access rather than relying on 
either flawed products or products listed and primarily regulated in 
other countries.'' See id. BZX also states that regulators in other 
countries have either approved or otherwise allowed the listing and 
trading of bitcoin-based ETPs. See id. at 33254 n.44.
---------------------------------------------------------------------------

(2) Analysis
    The Commission disagrees that the proposal should be approved 
because it is designed to protect investors and the

[[Page 6346]]

public interest. Here, even if it were true that, compared to trading 
in unregulated spot bitcoin markets or OTC bitcoin funds, trading a 
spot bitcoin-based ETP on a national securities exchange could provide 
some additional protection to investors, or that the Shares would 
provide more efficient exposure to bitcoin than other products on the 
market such as CME bitcoin futures ETFs/ETPs, 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.\218\ Pursuant to Section 19(b)(2) of the Exchange Act, the 
Commission must approve a proposed rule change filed by a national 
securities exchange if it finds that the proposed rule change is 
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices--and it must disapprove the filing if 
it does not make such a finding.\219\ Thus, even if a proposed rule 
change purports to protect investors from a particular type of 
investment risk--such as experiencing a potentially high premium/
discount by investing in OTC bitcoin funds or roll costs by investing 
in bitcoin futures ETFs/ETPs--or purports to provide benefits to 
investors and the public interest--such as enhancing competition--the 
proposed rule change may still fail to meet the requirements under the 
Exchange Act.\220\
---------------------------------------------------------------------------

    \218\ See supra note 208.
    \219\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C). See also Affiliated Ute Citizens of Utah v. United 
States, 406 U.S. 128, 151 (1972) (Congress enacted the Exchange Act 
largely ``for the purpose of avoiding frauds''); Gabelli v. SEC, 568 
U.S. 442, 451 (2013) (The ``SEC's very purpose'' is to detect and 
mitigate fraud.).
    \220\ See SolidX Order, 82 FR at 16259; VanEck Order, 86 FR at 
54550-51; WisdomTree Order, 86 FR at 69344; Kryptoin Order, 86 FR at 
74179; Valkyrie Order, 86 FR at 74163; SkyBridge Order, 87 FR at 
3881; Wise Origin Order, 87 FR at 5538.
---------------------------------------------------------------------------

    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),\221\ and, accordingly, the Commission must disapprove the 
proposal.\222\
---------------------------------------------------------------------------

    \221\ 15 U.S.C. 78f(b)(5).
    \222\ 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).
---------------------------------------------------------------------------

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-2022-031 be, and it 
hereby is, disapproved.

By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-01983 Filed 1-30-23; 8:45 am]
BILLING CODE 8011-01-P