
[Federal Register Volume 81, Number 212 (Wednesday, November 2, 2016)]
[Notices]
[Pages 76400-76403]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79171; File No. SR-NYSEArca-2016-101]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change Relating to the Listing and Trading of Shares of SolidX 
Bitcoin Trust Under NYSE Arca Equities Rule 8.201

October 27, 2016.
    On July 13, 2016, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares (``Shares'') of the SolidX Bitcoin Trust 
(``Trust'') under NYSE Arca Equities Rule 8.201. The proposed rule 
change was published for comment in the Federal Register on August 2, 
2016.\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. 78426 (Jul. 27, 
2016), 81 FR 50763 (``Notice'').
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    On September 6, 2016, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission has received no comments on the proposed rule 
change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78770, 81 FR 62780 
(Sept. 12, 2016). The Commission designated October 31, 2016, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
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    This order institutes proceedings under Section 19(b)(2)(B) of the 
Act \6\ to determine whether to approve or disapprove the proposed rule 
change.
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    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal 7
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    \7\ The Commission notes that additional information regarding 
the Trust and the Shares can be found in the Notice (see supra note 
3) and the registration statement filed with the Commission on Form 
S-1 on July 11, 2016 under the Securities Act of 1933 
(``Registration Statement''), as applicable. This additional 
information addresses the Trust's investment objectives, risks, 
creation and redemption procedures, fees, portfolio holdings 
disclosure policies, calculation of NAV, distributions, and taxes, 
as well as additional background information about bitcoins and the 
``Bitcoin Network,'' including information relating to Bitcoin 
Network operations, bitcoin transfers and transactions, 
cryptographic security used in the Bitcoin Network, bitcoin mining 
and creation of new bitcoins, the mathematically controlled supply 
of bitcoins, and modifications to the bitcoin protocol, among other 
things.
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    The Exchange proposes to list and trade the Shares under NYSE Arca

[[Page 76401]]

Equities Rule 8.201, which governs the listing and trading of 
Commodity-Based Trust Shares on the Exchange.\8\ Each Share will 
represent a fractional undivided beneficial interest in the Trust's net 
assets. SolidX Management LLC will be the sponsor of the Trust 
(``Sponsor''). The Bank of New York Mellon will be the administrator 
and the custodian, with respect to cash, for the Trust.
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    \8\ See NYSE Arca Equities Rule 8.201 (permitting the listing 
and trading of ``Commodity-Based Trust Shares,'' defined as a 
security ``(a) that is issued by a trust that holds a specified 
commodity deposited with the Trust; (b) that is issued by such Trust 
in a specified aggregate minimum number in return for a deposit of a 
quantity of the underlying commodity; and (c) that, when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request by such Trust which will deliver to the redeeming holder the 
quantity of the underlying commodity'').
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    According to the Exchange, the Trust will normally hold only 
bitcoins as an asset, but may hold a limited amount of cash in 
connection with the creation and redemption process and to pay Trust 
expenses. The investment objective of the Trust is to provide investors 
with exposure to the daily change in the U.S. dollar price of bitcoin, 
before expenses and liabilities of the Trust, as measured by the 
TradeBlock XBX Index (``XBX'').
    The Trust intends to achieve this objective by investing 
substantially all of its assets in bitcoin traded on various domestic 
and international bitcoin exchanges and OTC markets, depending on 
liquidity and other factors at the Sponsor's discretion. The Trust is 
not actively managed and will not engage in activities designed to 
obtain a profit from, or to ameliorate losses caused by, changes in the 
price of bitcoin. The Trust will generally use the XBX to calculate the 
Trust's net asset value (``NAV'') on each business day that the NYSE 
Arca is open for regular trading, as promptly as practicable after 4:00 
p.m., Eastern time (``E.T.'').\9\
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    \9\ See Notice, supra note 3 (describing in greater detail the 
alternative procedures if the XBX cannot be utilized as the basis 
for NAV calculations).
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    According to the proposal, given the novelty and unique digital 
characteristics of bitcoin as an innovative asset class, traditional 
custodians who normally custody assets do not currently offer custodial 
services for bitcoin. Accordingly, the Sponsor will secure the bitcoin 
held by the Trust using multi-signature ``cold storage wallets,'' which 
the Exchange describes as an industry best practice.\10\
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    \10\ According to the Exchange, the Sponsor will employ security 
procedures, described in greater detail in the Notice and the 
Registration Statement, to safeguard the bitcoin assets of the 
Trust. See Notice and Registration Statement, supra notes 3 and 7, 
respectively.
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    The Trust will issue and redeem the Shares in ``Baskets'' only to 
certain Authorized Participants.\11\ According to the Exchange, the 
creation and redemption of Baskets will principally be made in exchange 
for the delivery to the Trust, or the distribution by the Trust, of the 
amount of cash or bitcoin represented by the combined NAV of the 
Baskets being created or redeemed. This combined NAV will be based on 
the aggregate number of bitcoins represented by the Shares included in 
a Basket, as determined on the day an order to create or redeem the 
Basket is properly received.
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    \11\ Each Basket will consist of 10,000 Shares, and the value of 
the Basket will be equal to the value of 10,000 Shares at their NAV 
per Share on that day.
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    According to the Exchange, Authorized Participants and market 
makers can hedge their exposure to bitcoin, whether creating and 
redeeming baskets in-kind or for cash, by using non-deliverable forward 
contracts (``NDFs'') or swap contracts that will create synthetic long 
or short exposure to bitcoin. NDFs will be offered by several 
participants, including the Sponsor itself, operating on a principal 
basis. Such arrangements, according to the Exchange, will make it 
possible for Authorized Participants that lack the trading 
infrastructure to transact in bitcoin to be able to hedge their 
exposure by entering into an NDF or a swap contract. In addition, 
according to the Exchange, the Sponsor will, to the extent requested by 
Authorized Participants and market makers, act as agent by buying and 
selling bitcoin on behalf of the Authorized Participants and market 
makers, including-short sale orders for hedging purposes.\12\
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    \12\ See Notice, supra note 3, 81 FR at 50771.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-101 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \13\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \13\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\14\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \15\
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    \14\ Id.
    \15\ 15 U.S.C. 78f(b)(5).
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\16\
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    \16\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 23, 2016.

[[Page 76402]]

Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by December 7, 2016. The Commission 
asks that commenters address the sufficiency of the Exchange's 
statements in support of the proposal, which are set forth in the 
Notice,\17\ in addition to any other comments they may wish to submit 
about the proposed rule change. In particular, the Commission seeks 
comment on the following:
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    \17\ See supra note 3.
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    1. There are currently no exchange-traded products (``ETPs'') 
available on U.S. markets that hold a digital asset such as bitcoins, 
which have neither a physical form (unlike commodities) nor an issuer 
that is currently registered with any regulatory body (unlike 
securities, futures, or derivatives), and whose fundamental properties 
and ownership can, by coordination among a majority of its network 
processing power, be changed (unlike any of the above). What are 
commenters' views about the current stability, resilience, fairness, 
and efficiency of the markets on which bitcoins are traded? What are 
commenters' views on whether an asset with the novel and unique 
properties of a bitcoin is an appropriate underlying asset for a 
product that will be traded on a national securities exchange? What are 
commenters' views on the risk of loss via computer hacking posed by 
such an asset? What are commenters' views on whether an ETP based on 
such an asset would be susceptible to manipulation?
    2. According to the Exchange, the logic utilized for the derivation 
of the daily closing index level for the XBX is intended to analyze 
actual bitcoin transactional data, verify and refine the data set, and 
yield an objective, fair-market value of one bitcoin as of 4:00 p.m., 
E.T., each weekday, priced in U.S. dollars. What are commenters' views 
on the Trust's proposal to value its holdings based on XBX and on the 
methodology used by XBX? What are commenters' views on the alternative 
and sequential manner in which the Trust proposes to value its holdings 
in the event that the Sponsor determines that a rule has failed if a 
pricing source is unavailable or, in the judgment of the Sponsor, is 
deemed unreliable?
    3. Given the novelty and unique digital characteristics of bitcoin 
as an asset class, and in the interest of adequate security and 
investor confidence in bitcoin control, what are commenters' views 
regarding the Trust's proposed security, control, and insurance 
measures?
    4. The proposal states that bitcoin trades on more than 30 
exchanges globally on a 24-hour basis and that, therefore, it is 
difficult for attempted market manipulation on any one exchange to 
affect the global market price of bitcoin. The proposal further states 
that any attempt to manipulate the price would result in an arbitrage 
opportunity among exchanges, which typically would be acted upon by 
market participants. What are commenters views on the cost and the 
efficiency of the arbitrage among the various global markets for 
bitcoin? What are commenters' views generally with respect to the 
liquidity and transparency of the bitcoin market, susceptibility to 
manipulation, and thus the suitability of bitcoins as an underlying 
asset for an ETP?
    5. The proposal states that the dissemination of information on the 
Trust's Web site, along with quotations for and last-sale prices of 
transactions in the Shares and the intra-day indicative value and NAV 
of the Trust will help to reduce the ability of market participants to 
manipulate the bitcoin market or the price of the Shares. The proposal 
further states that the Trust's arbitrage mechanism will facilitate the 
correction of price discrepancies in bitcoin and the Shares and that 
demand from new investors accessing bitcoin through investment in the 
Shares will broaden the investor base in bitcoin, which could further 
reduce the possibility of collusion among market participants to 
manipulate the bitcoin market. What are commenters' views regarding 
these statements? Do commenters' agree or disagree with the assertion 
that Authorized Participants and other market makers will be able to 
make efficient and liquid markets in the Shares at prices generally in 
line with the NAV?
    6. The proposal states that the Sponsor of the Fund may engage in 
principal trades of NDFs with market makers and Authorized Participants 
in order to facilitate hedging for Authorized Participants who do not 
possess the technical abilities to transact directly in bitcoin. In 
addition, to the extent requested by Authorized Participants and market 
makers, the Sponsor would act as agent by buying and selling bitcoin on 
behalf of the Authorized Participants and market makers. What are 
commenters' views on any potential conflict of interest that may be 
created by this arrangement, which would involve the Sponsor acting in 
a capacity other than as agent for the Fund? Would this arrangement 
affect the effectiveness and efficiency of the arbitrage mechanism and, 
if so, how? What other effects, if any, might this activity by the 
Sponsor have on the operation of the Fund?
    7. Under the proposal, Baskets may be created or redeemed utilizing 
bitcoin or cash.\18\ What are commenters' views on whether cash 
creations and redemptions are consistent with the requirements under 
NYSE Arca Rule 8.201, which governs the listing and trading of 
Commodity-Based Trust Shares on the Exchange?
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    \18\ See supra note 8; see also NYSE Arca Equities Rule 8.201 
(specifically defining Commodity-Based Trust Shares as a security 
that is issued in a specified aggregate minimum number in return for 
a deposit of a quantity of the underlying commodity, and that, when 
aggregated in the same specified minimum number, may be redeemed at 
a holder's request by such Trust which will deliver to the redeeming 
holder the quantity of the underlying commodity).
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    8. Under the proposal, creation or redemption orders for the Fund 
would have to be submitted by 1:00 p.m. E.T. to be effected the same 
business day. The proposal also sets forth conditions under which the 
Fund's administrator may reject Basket purchase orders. One such 
condition would be ``if the Sponsor thinks it is necessary or advisable 
for any reason, which the Sponsor determines is in the best interests 
of the Trust or shareholders.'' Similarly, the proposal states that the 
Fund's administrator ``may, in its discretion, suspend the right of 
redemption or postpone the redemption settlement date (1) for any 
period during which an emergency exists as a result of which the 
redemption distribution is not reasonably practicable or (2) for such 
other period as the Sponsor determines to be necessary for the 
protection of the shareholders.'' What are commenters' views on the 
1:00 p.m. cut-off for order submission and on the necessity and scope 
of the discretion to reject creation or redemption orders? Are these 
provisions likely to have an effect on the arbitrage mechanisms and, if 
so, how?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2016-101 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Numbers SR-NYSEArca-2016-101.

[[Page 76403]]

This file number should be included on the subject line if email is 
used. To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE., Washington, DC 20549, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of these filings also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSEArca-2016-101 and should be submitted on or before November 23, 
2016. Rebuttal comments should be submitted by December 7, 2016.
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    \19\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Brent J. Fields,
Secretary.
[FR Doc. 2016-26405 Filed 11-1-16; 8:45 am]
 BILLING CODE 8011-01-P


