Federal Register, Volume 88 Issue 20 (Tuesday, January 31, 2023)

[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