
[Federal Register Volume 82, Number 62 (Monday, April 3, 2017)]
[Notices]
[Pages 16247-16260]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-06441]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80319; File No. SR-NYSEArca-2016-101]


Self-Regulatory Organizations; NYSE Arca, Inc.; 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

March 28, 2017.
    NYSE Arca (``Exchange'' or ``NYSE Arca'') has filed a proposed rule 
change to list and trade shares of the SolidX Bitcoin Trust.\1\ When an 
exchange makes such a filing,\2\ the Commission must determine whether 
the proposed rule change is consistent with the statutory provisions, 
and the rules and regulations, that apply to national securities 
exchanges.\3\ The Commission must approve the filing if it finds that 
the proposed rule change is consistent with these legal requirements, 
and it must disapprove the filing if it does not make such a 
finding.\4\
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    \1\ The Exchange filed the proposed rule change on July 13, 
2016, and the Commission published notice of the proposed rule 
change in the Federal Register on August 2, 2016. See Exchange Act 
Release No. 78426 (July 27, 2016), 81 FR 50763 (Aug. 2, 2016) 
(``Notice''). On September 6, 2016, the Commission designated a 
longer period within which to act on the proposed rule change. See 
Exchange Act Release No. 78770 (Sept. 6, 2016), 81 FR 62780 (Sept. 
12, 2016). On October 27, 2016, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Securities Exchange Act 
of 1934 (``Exchange Act''), 15 U.S.C. 78s(b)(2)(B), to determine 
whether to approve or disapprove the proposed rule change. See 
Exchange Act Release No. 79171 (Oct. 27, 2016), 81 FR 76400 (Nov. 2, 
2016) (``Order Instituting Proceedings''). On January 3, 2017, the 
Commission designated a longer period for Commission action on the 
proposed rule change. See Exchange Act Release No. 79726 (Jan. 3, 
2017), 82 FR 2426 (Jan. 9, 2017) (designating March 30, 2017, as the 
date by which the Commission must either approve or disapprove the 
proposed rule change). On February 15, 2017, the Exchange filed 
Amendment No. 1 to the proposed rule change, amending and replacing 
the original filing in its entirety, and Amendment No. 1 was 
published for comment in the Federal Register on March 1, 2017, with 
a 15-day comment period that ended on March 16, 2017. See Exchange 
Act Release No. 80099 (Feb. 24, 2017), 82 FR 12253 (Mar. 1, 2017) 
(``Amendment No. 1'').
    \2\ Such filings are made under Section 19(b)(1) of the Exchange 
Act, 15 U.S.C. 78s(b)(1), and Exchange Act Rule 19b-4, 17 CFR 
240.19b-4.
    \3\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \4\ See id.
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    As discussed further below, the Commission is disapproving this 
proposed rule change because it does not find the proposal to be 
consistent with Section 6(b)(5) of the Exchange Act, which requires, 
among other things, 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.\5\ The Commission 
believes that, in order to meet this standard, an exchange that lists 
and trades shares of commodity-trust exchange-traded products 
(``ETPs'') must, in addition to other applicable requirements, satisfy 
two requirements that are dispositive in this matter.\6\ First, the 
exchange must have surveillance-sharing agreements with significant 
markets for trading the underlying commodity or derivatives on that 
commodity. And second, those markets must be regulated.\7\
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    \5\ 15 U.S.C. 78f(b)(5).
    \6\ This approach is consistent with standards the Commission 
has applied to previous commodity-trust ETPs as well as the 
Commission's recent action disapproving the proposed rule change of 
Bats BZX Exchange to list and trade shares issued by the Winklevoss 
Bitcoin Trust. See, e.g., Exchange Act Release No. 80206 (Mar. 10, 
2017), 82 FR 14076, 14077 n.6 (Mar. 16, 2017) (``Bats BZX Order'').
    \7\ As discussed below, infra notes 125-126 and accompanying 
text, the significant markets relating to the commodity-trust ETPs 
approved to date have been well-established regulated futures 
markets for the underlying commodity.
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    Based on the record before it, the Commission believes that the 
significant markets for bitcoin are unregulated. Therefore, as the 
Exchange has not entered into, and would currently be unable to enter 
into, the type of surveillance-sharing agreement that has been in place 
with respect to all previously approved commodity-trust ETPs--
agreements that help address concerns about the potential for 
fraudulent or manipulative acts and practices in this market--the 
Commission does not find the proposed rule change to be consistent with 
the Exchange Act.

I. Description of the Proposal

    The Exchange proposes to list and trade shares (``Shares'') of the 
SolidX Bitcoin Trust (``Trust'') as Commodity-Based Trust Shares under 
NYSE Arca Equities Rule 8.201.\8\
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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 the 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 the trust, which will deliver to the redeeming holder the 
quantity of the underlying commodity). Other national securities 
exchanges that list and trade shares of commodity-trust ETPs have 
similar rules. See, e.g., BZX Rule 14.11(e)(4)(C) (permitting the 
listing and trading of Commodity-Based Trust Shares) and Nasdaq Rule 
5711(d) (permitting the listing and trading of Commodity-Based Trust 
Shares). Commodity-trust ETPs differ from exchange-traded funds 
(ETFs) in a number of ways, including that they hold as an asset a 
single commodity, rather than a portfolio of multiple securities, 
and that they are not regulated under the Investment Company Act of 
1940.
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    The Trust would hold bitcoins as its primary asset,\9\ along with 
smaller amounts of cash, and the bitcoins would be in the custody of, 
and secured by, the Trust's bitcoin custodian, SolidX Management LLC, 
which would also serve as the sponsor (``Sponsor'') of the Trust.\10\ 
The Bank of New York Mellon would serve as the Trust's cash custodian 
and its administrator (``Administrator'').\11\ According to the 
Exchange, the Sponsor has arranged for insurance coverage to protect 
investors against loss or theft of the Trust's bitcoins.\12\
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    \9\ According to the Exchange, bitcoin is ``an asset that can be 
transferred among parties via the Internet, but without the use of a 
central administrator or clearing agency.'' Amendment No. 1, supra 
note 1, 82 FR at 12254 n.14. The Exchange also states that ``[t]he 
Bitcoin Network (i.e., the network of computers running the software 
protocol underlying bitcoin involved in maintaining the database of 
bitcoin ownership and facilitating the transfer of bitcoin among 
parties) and the asset, bitcoin, are intrinsically linked and 
inseparable.'' Id. at 12255. For the purpose of considering this 
proposal, this order describes bitcoin as a ``digital asset'' and a 
``commodity.''
    \10\ See id. at 12254.
    \11\ See id.
    \12\ See id. at 12261.
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    The investment objective of the Trust would be for the Shares to 
track the price of bitcoins as measured by the TradeBlock XBX Index 
(``XBX Index'').\13\ The XBX Index is licensed by the Sponsor from 
Schvey, Inc., d/b/a TradeBlock, the index sponsor and calculation 
agent.\14\ As of January 15,

[[Page 16248]]

2017, the eligible bitcoin exchanges for inclusion in the XBX Index are 
Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), itBit, and OKCoin 
International.\15\ According to the Exchange:
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    \13\ See id. at 12255.
    \14\ See id. at 12257.
    \15\ See id. at 12258.

    [T]he XBX represents the value of one bitcoin in U.S. dollars at 
any point in time and closes as of 4:00 p.m. Eastern time (``E.T.'') 
each weekday. The intra-day levels of the XBX incorporate the real-
time price of bitcoin based on trading activity derived from 
constituent exchanges throughout each trading day. The closing level 
of the XBX is calculated using a proprietary methodology utilizing 
bitcoin trading data from constituent exchanges and is published at 
or after 4:00 p.m. E.T. each weekday. The XBX is published to two 
decimal places rounded on the last digit.\16\
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    \16\ Id. at 12257. The Exchange represents that, according to 
the Sponsor, the XBX Index's price variance weighting decreases the 
influence on the XBX Index of any particular exchange that diverges 
from the rest of the data points used by the XBX Index and thereby 
reduces the possibility of an attempt to manipulate the price of 
bitcoin as reflected by the XBX Index. See id. at 12259.

    The Net Asset Value (``NAV'') of the Trust would be calculated each 
business day by the Administrator, as promptly as practicable after 
4:00 p.m. E.T., using the price set for bitcoin by the XBX Index.\17\ 
The Intraday Indicative Value (``IIV'') of the Trust would be 
calculated and disseminated by the Sponsor every 15 seconds during the 
Exchange's regular trading session. The IIV would be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during the regular trading session on the Exchange to reflect 
intraday changes in the value of the Trust's bitcoin holdings.\18\
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    \17\ See id. at 12262. If for any reason, and as determined by 
the Sponsor, the Administrator is unable to value the Trust's 
bitcoin using the XBX Index price, the Exchange's proposal provides 
that the Administrator may use other specified criteria to value the 
holdings of the Trust. Id. at 12261.
    \18\ See id. at 12265.
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    The Trust would issue and redeem the Shares only in baskets of 
100,000 Shares and only to authorized participants (``Authorized 
Participants''), and these transactions would be conducted ``in-kind'' 
for bitcoin or for cash.\19\ The Exchange states that for creating and 
redeeming baskets in-kind or for cash, Authorized Participants and 
market makers would be able to hedge their exposure to bitcoin using 
non-deliverable forward contracts (``NDFs'') and swap contracts that 
would create synthetic long or short exposure to bitcoin for 
hedging.\20\
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    \19\ See id. at 12263.
    \20\ See id. The Exchange states that the Sponsor expects that 
NDFs or swaps will be offered by several participants in the bitcoin 
marketplace, including bitcoin exchanges and bitcoin over-the-
counter (``OTC'') market participants, and that the Sponsor itself 
(operating on a principal basis) also may offer NDFs and swaps in 
order to provide Authorized Participants and market makers with 
additional options for hedging their exposure to bitcoin. See id.
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    According to the Exchange, the underlying bitcoin marketplace 
operates 24 hours per day, 365 days per year. The Exchange cites the 
Trust's registration statement (``Registration Statement'') for the 
proposition that the majority of bitcoin transactions are executed on 
public bitcoin exchanges where bitcoins are bought and sold daily for 
value in U.S. dollar (``USD''), euro, and other government-issued 
currencies,\21\ and the Exchange states that there are currently 30 
bitcoin exchanges across the world.\22\ According to the Exchange, the 
various bitcoin exchanges are generally available to the public through 
online web portals, and trading information (including pricing, volume, 
and pending orders) is available on the exchanges' Web sites, with most 
of this information publicly available to anyone who visits the Web 
sites.\23\
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    \21\ See Registration Statement on Form S-1, as amended, dated 
February 3, 2017 (File No. 333-212479), at 38.
    \22\ See id. at 12257. According to the Exchange, the Sponsor 
estimates that, in the global USD-bitcoin market, trading volume in 
the OTC market averages about half of the trading volume on 
exchanges. See id. at 12259-60.
    \23\ See id. at 12256-67. The Exchange represents that, 
according to the Sponsor, Bitfinex, one of the bitcoin exchanges 
included in the Trust's underlying XBX Index, does not conduct 
business in New York or with New York residents and that another XBX 
Index component bitcoin exchange, OKCoin International, is open only 
to non-U.S. persons. See also id. at 12258 (acknowledging that 
certain spot bitcoin exchanges are open only to non-U.S. persons or 
do not conduct business with New York residents and that, as a 
result, the Sponsor must conduct some of its bitcoin trading on 
behalf of the Trust through a wholly-owned subsidiary, SolidX 
Management Ltd., an exempted limited company organized in the Cayman 
Islands specifically established to buy and sell bitcoin on behalf 
of the Trust on these bitcoin exchanges).
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    The Exchange states that, according to the Registration Statement, 
there are currently several U.S.-based regulated entities that 
facilitate bitcoin trading and that comply with anti-money laundering 
(``AML'') and know your customer (``KYC'') regulatory requirements: 
\24\
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    \24\ See id. at 12257.
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     GDAX, which is based in California, is a bitcoin exchange 
that maintains money transmitter licenses in over 30 states, the 
District of Columbia, and Puerto Rico. GDAX is subject to the 
regulations enforced by the various state agencies that issued their 
respective money transmitter licenses to GDAX. In New York, GDAX 
applied for a BitLicense, a regulatory framework created by the New 
York Department of Financial Services (``NYSDFS'') that sets forth 
consumer protection, AML compliance, and cybersecurity rules tailored 
for digital currency companies operating and transacting business in 
New York. The NYSDFS granted a BitLicense to GDAX in January 2017.\25\
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    \25\ See id.
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     itBit is a bitcoin exchange that was granted a limited-
purpose-trust-company charter by the NYSDFS in May 2015. Limited-
purpose trusts, according to the NYSDFS, are permitted to undertake 
certain activities, such as transfer agency, securities clearance, 
investment management, and custodial services, but without the power to 
take deposits or make loans.\26\
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    \26\ See id.
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     Gemini is a bitcoin exchange that is also regulated by the 
NYSDFS. In October 2015, the NYSDFS granted Gemini authorization to 
operate as a limited-purpose trust company.\27\
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    \27\ See id.
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     SecondMarket, Inc., d/b/a Genesis Global Trading, is a 
member firm of the Financial Industry Regulatory Authority (``FINRA'') 
that makes a market in bitcoin by offering two-sided liquidity.\28\
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    \28\ See id.

The Exchange notes that the CFTC has stated that bitcoins and other 
virtual currencies are encompassed in the definition of ``commodity'' 
under the Commodity Exchange Act and are thus within the regulatory 
jurisdiction of the CFTC.\29\
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    \29\ See id. at 12261. The Exchange also cites views expressed 
by individual CFTC Commissioners for the proposition that 
derivatives based on bitcoin are subject to oversight by the CFTC, 
including oversight to prevent market manipulation of the price of 
bitcoin. Id.
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    According to the Exchange, the exchanges with the most significant 
bitcoin trading by volume--Bitfinex, Bitstamp, BTCC, BTC-e, GDAX, 
Huobi, itBit, Kraken, LakeBTC, OKCoin Exchange China, and OKCoin 
International--traded approximately 1.34 billion bitcoins, at USD-
converted prices ranging between $199 and $1,203, for a total trade 
volume of over $784 billion from February 2014 through January 2017. 
The Sponsor represents that average global daily trading volume during 
this period was approximately $693 million.\30\
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    \30\ See id. at 12257.
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    According to the Exchange, between January 16, 2016, and January 
15, 2017 (including weekends and holidays), average daily bitcoin 
trading on Bitfinex, Bitstamp, GDAX, Gemini, itBit, and OKCoin 
International totaled approximately 44,000 bitcoins across all of those 
exchanges at prices that ranged between $371 and $1,161. Of that

[[Page 16249]]

trading, Bitfinex accounted for 39%, Bitstamp accounted for 13%, GDAX 
accounted for 14%, Gemini accounted for 4%, itBit accounted for 9%, 
Kraken accounted for 3%, and OKCoin International accounted for 17% of 
bitcoins traded.\31\ The Exchange represents that, during the twelve-
month period from January 2016 through January 2017, the aggregate 
trading volume on the five constituent exchanges of the XBX Index as of 
January 15, 2017--Bitfinex, Bitstamp, GDAX, itBit, and OKCoin 
International--represented approximately 77% of the entire global USD-
denominated bitcoin exchange market.\32\
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    \31\ See id. at 12259.
    \32\ See id. at 12259-61. The Exchange further notes that, in 
addition to the five constituent exchanges of the XBX Index as of 
January 15, 2017, the global USD-denominated bitcoin exchange market 
also includes BTC-e, Gemini, LakeBTC, and Kraken. The Exchange 
represents that, although BTC-e is a USD-denominated bitcoin 
exchange with significant trading volume, BTC-e does not comply with 
certain of the Sponsor's internal criteria regarding the exchanges 
on which the Sponsor will trade and that, therefore, the Sponsor 
will not transact with BTC-e. According to the Exchange, the Sponsor 
is aware of other smaller USD-denominated bitcoin exchanges, but the 
trading volume on these exchanges is insignificant, and the Sponsor 
does not intend to conduct business with these smaller exchanges. 
See id. at 12259 n.30. The Commission notes that, as of March 20, 
2017, the TradeBlock Web site indicated that the XBX Index weighting 
assigned to the OKCoin International exchange was zero percent. See 
TradeBlock, https://tradeblock.com/markets/index/ (last visited Mar. 
20, 2017).
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    According to the Exchange, although each bitcoin exchange has its 
own market price, it is expected that most bitcoin exchanges' market 
prices should be relatively consistent with the bitcoin-exchange market 
average, since market participants can choose the bitcoin exchange on 
which they buy or sell bitcoin. The Exchange also represents that, 
according to the Registration Statement, price differentials across 
bitcoin exchanges enable arbitrage between bitcoin prices on the 
various exchanges.\33\ As a result, according to the Exchange, the 
prices on bitcoin exchanges are the most accurate expression of the 
value of bitcoins.
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    \33\ According to the Exchange, the Sponsor represents that, 
because bitcoin trades on more than 30 exchanges globally on a 24-
hour basis, it is difficult for attempted market manipulation on any 
one exchange to affect the global market price of bitcoin, and that 
any attempt to manipulate the price would result in an arbitrage 
opportunity among exchanges, which would typically be acted upon by 
market participants. See id. at 12259.
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    With respect to derivatives on bitcoin, the Exchange states that 
certain non-U.S.-bitcoin exchanges offer derivative products on bitcoin 
such as options, swaps, and futures.\34\ The Exchange refers to the 
Registration Statement and notes that BitMex (based in the Republic of 
Seychelles), CryptoFacilites (based in the United Kingdom), 796 
Exchange (based in China), and OKCoin Exchange China all offer futures 
contracts settled in bitcoin. The Exchange also states that Coinut 
(based in Singapore) offers bitcoin binary options and ``vanilla 
options'' based on the Coinut index; that Nadex (based in Chicago) 
offers bitcoin binary options denominated in USD using the TeraBit 
Bitcoin Price Index; and that IGMarkets (based in the United Kingdom), 
Avatrade (based in the Republic of Ireland), and Plus500 (based in 
Israel) also offer bitcoin derivative products.\35\ The Exchange also 
notes the CFTC has approved the registration of TeraExchange LLC as a 
swap execution facility (``SEF''), where bitcoin swaps and NDFs may be 
entered into, and the registration of LedgerX provisionally as a 
SEF.\36\
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    \34\ According to the Exchange, the Sponsor is not aware of any 
bitcoin derivatives currently trading based on the XBX Index. See 
id. at 12258.
    \35\ See id. at 12260.
    \36\ See id.
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    The Exchange asserts that its own surveillance procedures are 
sufficient to detect and deter manipulation.\37\ The Exchange 
represents that the Exchange or FINRA, on behalf of the Exchange, or 
both, (a) will communicate as needed regarding trading in the Shares 
with other markets and other entities that are members of the 
Intermarket Surveillance Group, and (b) may obtain trading information 
regarding trading in the Shares from these other markets and other 
entities. In addition, the Exchange states that it may obtain 
information regarding trading in the Shares from markets and other 
entities that are members of the Intermarket Surveillance Group or with 
which the Exchange has in place a comprehensive surveillance-sharing 
agreement.\38\
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    \37\ The Exchange represents that its surveillance procedures 
generally focus on detecting securities trading outside their normal 
patterns, which could be indicative of manipulative or other 
violative activity. The Exchange represents that, when such 
situations are detected, surveillance analysis would follow and 
investigations would be opened, where appropriate, to review the 
behavior of all relevant parties for all relevant trading 
violations. See id. at 12266 (further representing that trading in 
the Shares will be subject to the existing trading surveillances 
administered by the Exchange, as well as cross-market surveillances 
administered by FINRA on behalf of the Exchange, which are designed 
to detect violations of Exchange rules and applicable federal 
securities laws, and further representing that these procedures are 
adequate to properly monitor Exchange trading of the Shares in all 
trading sessions and to deter and detect violations of Exchange 
rules and federal securities laws applicable to trading on the 
Exchange).
    \38\ See id. at 12266. The Exchange also notes that, pursuant to 
NYSE Arca Equities Rule 8.201(g), the Exchange is able to obtain 
information regarding trading in the Shares and the underlying 
bitcoin or any bitcoin derivative through Exchange-registered market 
makers, in connection with the market makers' proprietary or 
customer trades effected on any relevant market. Id.
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    According to the Exchange, the Sponsor believes 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.\39\
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    \39\ See id. at 12259.
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    Further details regarding the proposal and the Trust can be found 
in Amendment No. 1 to the proposal,\40\ and in the Registration 
Statement.\41\
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    \40\ See id. Compared to the initial Notice, see supra note 1, 
Amendment No. 1 makes the following substantive changes: (1) 
Identifies Foreside Fund Services, LLC as the order examiner in 
connection with the creation and redemption of baskets of Shares; 
(2) identifies SolidX Management LLC as the custodian of the Trust's 
bitcoin and The Bank of New York Mellon as custodian of the Trust's 
cash; (3) adds content regarding a recent loss of trading volume on 
the leading Chinese exchanges and asserts that trading volumes at 
these Chinese exchanges are now in line with volumes at USD 
exchanges; (4) notes that, in May 2016, the Gibraltar Financial 
Services Commission approved the BitcoinETI, which was listed on the 
Gibraltar Stock Exchange in July 2016 and on Deutsche Boerse 
Frankfurt in August 2016; (5) adds or changes certain details 
regarding the first alternative pricing source for the Shares; (6) 
adds disclosure that the Sponsor (operating on a principal basis) 
also may offer NDFs and swaps in order to provide Authorized 
Participants and market makers with additional options for hedging 
their exposure to bitcoin; (7) deletes text relating to the 
suspension or rejection of redemption orders; and (8) adds text 
stating that, to the extent that the Administrator has utilized the 
cascading set of rules described in ``bitcoin Market Price,'' in 
Amendment No. 1, the Trust's Web site will note the valuation 
methodology used and the price per bitcoin resulting from that 
calculation.
    \41\ See Registration Statement, supra note 21.
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II. Summary of Comment Letters

    The comment period for the initial Notice of Proposed Rule Change 
closed on August 23, 2016, and the comment period for Amendment No. 1 
closed March 16, 2017.\42\ As of March 24, the Commission had received 
11 comment letters on the proposed rule change.\43\

[[Page 16250]]

Commenters address, among other things, investors' interest in bitcoin 
and their desire to gain access to bitcoin through an ETP; \44\ the 
state of development of bitcoin as a digital asset; \45\ the inherent 
value of, and risks of investing in, bitcoin; \46\ the appropriate 
measures for the Trust to secure its bitcoin holdings against theft or 
loss; \47\ the creation and redemption processes for the Trust; \48\ 
the proposed valuation method for the Trust's holdings; \49\ and the 
legitimacy or other benefits that Commission approval of the proposed 
ETP might confer upon bitcoin as a digital asset.\50\ Ultimately, 
however, comments on these topics do not bear on the basis for the 
Commission's decision to disapprove the proposal. Accordingly, the 
Commission will summarize and address the comments that relate to the 
susceptibility of bitcoin or the Shares to fraudulent or manipulative 
acts and practices, including the need for surveillance-sharing 
agreements with significant regulated markets for trading in bitcoin or 
derivatives on bitcoin.
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    \42\ The initial comment period for the Order Instituting 
Proceedings closed on November 23, 2016, and the period for rebuttal 
comments closed on December 7, 2016. See Order Instituting 
Proceedings, supra note 1, 81 FR at 76401-02.
    \43\ See Letters from Daniel H. Gallancy, CFA, SolidX Management 
LLP (Nov. 23, 2016) (``SolidX Letter''); Thaya B. Knight, Associate 
Director, Financial Regulation Studies, The Cato Institute (Dec. 1, 
2016) (``Cato Letter''); Jerry Brito, Executive Director, Coin 
Center (Dec. 7, 2016) (``Coin Center Letter''); Joseph Colangelo, 
President, Consumers' Research (Dec. 7, 2016) (``Consumers' Research 
Letter''); Denise Krisko, CFA, President and Co-Founder, Vident 
Investment Advisory, LLC (Dec. 7, 2016) (``Vident Letter''); Balaji 
Srinivasan, Chief Executive Officer & Cofounder, 21, et al. (Dec. 7, 
2016) (``Srinivasan Letter''); Ken I. Maher (Dec. 8, 2016) (``Maher 
Letter''); Craig M. Lewis, Madison S. Wigginton Professor of 
Finance, Owen Graduate School of Management, Vanderbilt University 
(Feb. 13, 2017) (``Lewis Paper''); Douglas M. Yones, Head of 
Exchange Traded Products, New York Stock Exchange (Feb. 22, 2017) 
(``NYSE Letter''); Craig M. Lewis, Madison S. Wigginton Professor of 
Finance, Owen Graduate School of Management, Vanderbilt University 
(Mar. 3, 2017) (``Lewis Paper II''); Daniel H. Gallancy, CFA, SolidX 
Management LLP (Mar. 15, 2017) (``SolidX Letter II''). All comments 
on the proposed rule change are available on the Commission's Web 
site at: https://www.sec.gov/comments/sr-nysearca-2016-101/nysearca2016101.shtml.
    \44\ See, e.g., Cato Letter, supra note 43; Coin Center Letter, 
supra note 43; Vident Letter, supra note 43; Consumers' Research 
Letter, supra note 43; SolidX Letter, supra note 43; Srinivasan 
Letter, supra note 43; NYSE Letter, supra note 43; Lewis Paper, 
supra note 43; SolidX Letter II, supra note 43.
    \45\ See, e.g., Coin Center Letter, supra note 43; Vident 
Letter, supra note 43; Lewis Paper, supra note 43.
    \46\ See, e.g., Vident Letter, supra note 43; Coin Center 
Letter, supra note 43; SolidX Letter, supra note 43; Maher Letter, 
supra note 43; Lewis Paper, supra note 43; SolidX Letter II, supra 
note 43.
    \47\ See, e.g., Srinivasan Letter, supra note 43; Coin Center 
Letter, supra note 43; SolidX Letter, supra note 43; Consumers' 
Research Letter, supra note 43; SolidX Letter II, supra note 43.
    \48\ See, e.g., SolidX Letter, supra note 43; NYSE Letter, supra 
note 43; Lewis Paper, supra note 43.
    \49\ See, e.g., SolidX Letter, supra note 43; NYSE Letter, supra 
note 43; Lewis Paper, supra note 43; Consumers' Research Letter, 
supra note 43; SolidX Letter II, supra note 43.
    \50\ See, e.g., Vident Letter, supra note 43; Coin Center 
Letter, supra note 43.
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    A. Comments Regarding the Worldwide Market for Bitcoin
    Several commenters note that a significant volume of bitcoin 
trading occurs in markets outside the United States that are largely 
unregulated.\51\ One commenter claims that several bitcoin exchanges do 
not offer the same regulatory safeguards that U.S. consumers have come 
to expect when they make investments in U.S. securities, and that 
bitcoin exchanges lack Commission oversight and have lost investor 
funds.\52\ The Lewis Paper also notes that the Commission does not 
regulate bitcoin exchanges.\53\ A different commenter expresses 
concerns that certain bitcoin exchanges that are components of the XBX 
Index, such as Bitfinex and OKCoin International, are not audited or 
governed by fair and transparent business practices.\54\
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    \51\ See, e.g., Consumers' Research Letter, supra note 43; Maher 
Letter, supra note 43.
    \52\ See Consumers' Research Letter, supra note 43, at 1-2.
    \53\ See Lewis Paper, supra note 43, at 8.
    \54\ See Maher Letter, supra note 43. This commenter also 
disputes some commenters' statements that this ETP would give 
investors safe exposure to bitcoin by reducing security risk of 
holding the bitcoins, noting that investors will still bear the many 
risks of the bitcoin ecosystem itself. See id.
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    The Sponsor asserts that the majority of bitcoin transactions are 
executed on public bitcoin exchanges that typically publish real-time 
trade data on their respective Web sites and through application 
programming interfaces. The Sponsor claims that the existence and 
availability of the numerous pricing sources for bitcoin delivers 
unmatched price transparency when compared to most other assets.\55\ 
The Sponsor also asserts that the volume of bitcoin trading, both on-
exchange and in the OTC market, is significant and that the bitcoin 
market is a liquid market. According to the Sponsor, between November 
2015 and November 2016, the trading volume on the five constituent 
exchanges of the XBX Index (Bitfinex, Bitstamp, GDAX, itBit, and OKCoin 
International) represented the overwhelming majority of the entire USD-
denominated bitcoin exchange market, and average daily trade volume on 
these exchanges during this period was approximately $24 million.\56\
---------------------------------------------------------------------------

    \55\ See SolidX Letter, supra note 43, at 12.
    \56\ See id. at 13. The Sponsor also notes that there are three 
Chinese yuan-denominated exchanges on which trading volume is 
significant: BTCC, Huobi, and OKCoin Exchange China. See id.
---------------------------------------------------------------------------

    The Sponsor acknowledges that a significant portion of bitcoin 
trading occurs on exchanges outside the United States.\57\ The Sponsor 
also claims that, while there is a significant volume of bitcoin 
trading in China, the prices on U.S. and Chinese exchanges tend to 
conform with minimal variation, in spite of various capital controls in 
effect in China.\58\ Consequently, for purposes of arbitrage among all 
the various bitcoin exchanges (including those that trade bitcoin for 
USD and Chinese yuan), the Sponsor concludes that the tendency for 
prices to conform supports the conclusion that the exchange market is 
efficient and is generally resistant to manipulation.\59\ The Sponsor 
also provides data that, it says, indicate that arbitrage across 
bitcoin markets helps to keep bitcoin prices aligned and to reduce the 
likelihood of manipulation and indicate that arbitrage functions within 
a few seconds to address price discrepancies.\60\
---------------------------------------------------------------------------

    \57\ See id. at 5, 13. For example, the Sponsor notes that 
Bitfinex, a component of the XBX Index, has continued to have the 
highest volume of trading on any of the USD-denominated bitcoin 
exchanges. See SolidX Letter, supra note 43, at 6. See also supra 
notes 31-32 and accompanying text.
    \58\ See SolidX Letter, supra note 43, at 5.
    \59\ See id. at 13-14.
    \60\ See SolidX Letter II, supra note 43, at 5.
---------------------------------------------------------------------------

    The Sponsor also submits that, as of January 2017, the volume of 
bitcoin trading on Chinese exchanges has declined to levels similar to 
those of USD-denominated exchanges that follow AML and KYC procedures 
applied by their respective jurisdictions.\61\ The Sponsor states that, 
in light of capital controls that apply in China, the Sponsor views the 
Chinese markets for bitcoin as separate and distinct from the USD 
markets.\62\ The Sponsor further asserts that the pricing differences 
between the XBX Index and the Chinese bitcoin exchanges are analogous 
to the location-based pricing differences in commodities markets, 
including the markets for gold, silver, platinum, and palladium--
commodities that are the underlying assets for existing commodity-trust 
ETPs.
---------------------------------------------------------------------------

    \61\ See id. at 6.
    \62\ See id.
---------------------------------------------------------------------------

    The Sponsor states that, in addition to exchange trading, bitcoin 
has a robust, global OTC market and states that the parallel existence 
of an exchange-based and an OTC bitcoin market increases the difficulty 
of manipulation. Similarly, the Exchange notes that the OTC market for 
bitcoin as a standalone liquidity pool has greater daily trade volumes 
than any single bitcoin exchange.\63\
---------------------------------------------------------------------------

    \63\ See NYSE Letter, supra note 43, at 2.
---------------------------------------------------------------------------

    According to the Sponsor, a potential manipulator in the bitcoin 
marketplace would need to prevent other market participants from taking 
advantage of potential arbitrage opportunities between the exchanges, 
which would be further complicated by the high level of price 
transparency in the bitcoin market.\64\ The Sponsor notes that ``Level-
II type'' quotes for bitcoin are

[[Page 16251]]

freely available from nearly all bitcoin exchanges.\65\
---------------------------------------------------------------------------

    \64\ See SolidX Letter, supra note 43, at 7.
    \65\ See id. Generally, Level-II quotes provide best-price 
orders and quotes from each market participant on a market.
---------------------------------------------------------------------------

    The Sponsor also claims that opening and closing prices for common 
financial instruments are a frequent target for market manipulators and 
that, because bitcoin trades continuously and never has an opening or 
closing price, the risk of such manipulation is eliminated.\66\ The 
Exchange also notes that bitcoin is traded continuously and asserts 
that this means that price discovery for bitcoin is widespread and 
continuous.\67\
---------------------------------------------------------------------------

    \66\ See id. at 8.
    \67\ See NYSE Letter, supra note 43, at 2.
---------------------------------------------------------------------------

    The Sponsor also states that the Trust is materially identical to 
existing, physically-backed ETPs, which, the Sponsor asserts, have 
become an important component of the market.\68\ The Sponsor further 
claims that, as with any ETP, there may be attempts to spread false or 
misleading information about the Trust, but an attempt to manipulate 
the price of bitcoin through trading activity would be difficult, and 
controlling or artificially affecting the market would require a 
massive amount of capital distributed across numerous exchanges in 
multiple currencies and jurisdictions around the world.\69\
---------------------------------------------------------------------------

    \68\ See SolidX Letter, supra note 43, at 3.
    \69\ See id. at 7.
---------------------------------------------------------------------------

    The Lewis Paper claims that the underlying market for bitcoin is 
inherently resistant to manipulation. This commenter posits that the 
underlying bitcoin market is not susceptible to manipulation because:
    (1) Unlike traditional securities, there is no inside information, 
and therefore bitcoin is not subject to the dissemination of false or 
misleading information;
    (2) manipulation through acquisition of a dominant market share is 
unlikely;
    (3) each bitcoin market is an independent entity, so demand for 
liquidity does not necessarily propagate across other exchanges;
    (4) a substantial OTC market provides additional liquidity and 
absorption of shocks;
    (5) compared to equity markets, trading on bitcoin exchanges is 
slower, and therefore cross-market arbitrage is available to all market 
participants at the same time; and
    (6) the market is not subject to ``spoofing'' or other high-
frequency-trading tactics.\70\
---------------------------------------------------------------------------

    \70\ See Lewis Paper, supra note 43, at 5-9; Lewis Paper II, 
supra note 43, at 2. The Lewis Paper also raises a number of 
arguments bearing on the susceptibility to manipulation of the XBX 
Index and the Shares. See Lewis Paper, supra note 43, at 5-9. Those 
arguments are discussed below. See infra Sections III.B.3 & III.B.5.
---------------------------------------------------------------------------

    Specifically with respect to the risk that a market participant 
might acquire a dominant position, the Lewis Paper notes that one of 
the risks associated with bitcoin is the possibility that a single 
investor or a small group acting in collusion could own a dominant 
share of the available bitcoin, and the Lewis Paper also notes that the 
Registration Statement states that it is possible, and in fact, 
reasonably likely, that a small group of early adopters holds a 
significant proportion of the bitcoin that has been mined.\71\ Since, 
according to the Lewis Paper, there is no registry showing which 
individuals or entities own bitcoin, or the quantity they own, it is 
not possible to know how large individual positions are.\72\ The Lewis 
Paper asserts that this issue is not unique to bitcoin, as there are no 
corresponding registries for precious metals.\73\ The Lewis Paper also 
asserts that a number of factors relevant to the Shares should 
ameliorate risks associated with possible manipulation due to a 
dominant market share.\74\
---------------------------------------------------------------------------

    \71\ See Lewis Paper, supra note 43, at 6.
    \72\ Id.
    \73\ Id.
    \74\ Id. at 6-7. According to the Lewis Paper, those factors 
are: (a) That bitcoin held by the Trust will remain available to 
market participants through redemption of the Shares; (b) that, 
given the availability of arbitrage activity between the Shares and 
the underlying bitcoin market, the bitcoins held by the Trust will 
not represent a meaningful percentage of the bitcoin available for 
transaction purposes; (c) that a price increase in bitcoin following 
the introduction of a bitcoin ETP would be the result of increased 
demand for bitcoin, rather than a sign of price manipulation; (d) 
that the receive-versus-payment and delivery-versus-payment account 
arrangements that the Trust has with multiple bitcoin exchanges, the 
Trust's transparent and rules-based redemption protocol, and the 
transparency of the Trust's holdings and valuations, as well as of 
quotations and transactions in the Shares, would reduce the 
potential for fraud and manipulation in the bitcoin markets; (e) 
market participants can choose the bitcoin exchanges on which to 
trade and can arbitrage away price deviations; and (f) trading of 
the Shares on the Exchange may serve to make the overall bitcoin 
market more transparent, especially if OTC bitcoin trading shifts to 
bitcoin exchanges. Id.
---------------------------------------------------------------------------

    The Sponsor, which commissioned the Lewis Paper, agrees with the 
paper's reasoning and with the assertion that the underlying bitcoin 
spot market is not susceptible to manipulation.\75\ The Exchange also 
agrees with the Lewis Paper's analysis, claiming that trading in the 
Shares would not be expected to contribute to the manipulation of 
bitcoin prices and, in fact, may actually reduce the potential for 
fraud and manipulation.\76\
---------------------------------------------------------------------------

    \75\ See SolidX Letter II, supra note 43, at 3-4.
    \76\ See NYSE Letter, supra note 43, at 5.
---------------------------------------------------------------------------

B. Comments Regarding Potential Manipulation of the XBX Index

    One commenter notes that the XBX Index includes several exchanges 
that many have expressed concerns about and that are not audited or 
governed by fair and transparent business practices.\77\
---------------------------------------------------------------------------

    \77\ See Maher Letter, supra note 43.
---------------------------------------------------------------------------

    The Sponsor claims that the XBX Index is resistant to manipulation 
and responsive to market movements in real time and that it is 
therefore a superior mechanism--compared to using a single exchange--
for valuing the Trust's bitcoin holdings.\78\ The Sponsor asserts that 
the XBX Index price closely approximates actual bitcoin transaction 
prices across the various USD-denominated bitcoin exchanges and that it 
accurately reflects the fair value of bitcoin for valuation, for 
accounting purposes, and as a practical matter.\79\ The Sponsor states 
that the XBX Index's methodology penalizes stale prices because, if an 
exchange does not have recent trading data, its weighting in the XBX 
Index is gradually reduced until it is de-weighted entirely.\80\
---------------------------------------------------------------------------

    \78\ See SolidX Letter, supra note 43, at 9.
    \79\ See id. at 8.
    \80\ See id. at 9.
---------------------------------------------------------------------------

    The Exchange states that the XBX Index's proprietary methodology 
helps to protect the calculation of the XBX Index against any undue 
impact from bitcoin pricing outliers among the various exchanges and 
from any potential attempts to manipulate the price of bitcoin.\81\
---------------------------------------------------------------------------

    \81\ See NYSE Letter, supra note 43, at 2-3.
---------------------------------------------------------------------------

    The Lewis Paper claims that the following features of the XBX 
Index's proprietary weighting methodology mitigate manipulation risk: 
(a) That lower trading volume reduces the weight an exchange is given 
in the average; (b) that the weight of an exchange is reduced the more 
a price deviates from the average; and (c) that weights are reduced for 
stale prices. The Lewis Paper claims that these features significantly 
increase the amount of capital required to manipulate bitcoin prices 
enough to affect XBX Index levels.\82\
---------------------------------------------------------------------------

    \82\ See Lewis Paper, supra note 43, at 8-9.
---------------------------------------------------------------------------

C. Comments on the Derivatives Markets for Bitcoin

    The Lewis Paper states that one of the key differences between 
bitcoin and other commodities is the lack of a liquid and transparent 
derivatives market and that, although there have been nascent attempts 
to establish derivatives trading in bitcoin, bitcoin derivatives 
markets are not at this time sufficiently liquid to

[[Page 16252]]

be useful to Authorized Participants and market makers who would like 
to use derivatives to hedge exposures.\83\ The Lewis Paper claims that, 
for physical commodities that are not traded on exchanges, the presence 
of a liquid derivatives market is a necessary condition, but that, for 
digital assets like bitcoin, derivatives markets are not necessary 
because price discovery occurs on the OTC market and exchanges 
instead.\84\
---------------------------------------------------------------------------

    \83\ See id. at 8.
    \84\ See id. (concluding that, for these assets, derivatives 
markets are not necessary because the OTC market and exchanges are 
close substitutes).
---------------------------------------------------------------------------

    The Sponsor states that it expects that bitcoin NDFs, swaps, or 
both will be offered by several participants in the bitcoin 
marketplace, including bitcoin exchanges and bitcoin OTC market 
participants, and that the Sponsor itself (operating on a principal 
basis) also may offer NDFs and swaps in order to provide Authorized 
Participants and market makers with the ability to hedge their exposure 
to bitcoin.\85\
---------------------------------------------------------------------------

    \85\ See SolidX Letter, supra note 43, at 14-15. The Sponsor 
notes that, while Authorized Participants and market makers will 
generally want to hedge their exposure to bitcoin in connection with 
basket creation and redemption orders, not all of them are ready, 
willing, and able to trade bitcoin, and they will require a 
mechanism to gain synthetic exposure to bitcoin for their hedging 
needs when they enter orders to create and redeem shares. Id. 
According to the Sponsor, Authorized Participants will be able to 
use NDFs and swap contracts to obtain synthetic long and short 
exposure to bitcoin for their hedging purposes. Id.
---------------------------------------------------------------------------

D. Comments Regarding the Susceptibility of the Shares to Manipulation

    The Sponsor states that, as a full-fledged ETP in the United 
States, the Trust will provide investors with an opportunity to invest 
in bitcoin without being exposed directly to the risks associated with 
sourcing and holding bitcoin outside the regulated traditional 
financial markets.\86\ The Sponsor also claims that, because the Shares 
would be traded on the Exchange, they should not be subject to risks of 
manipulation beyond those applicable to any publicly listed stock.\87\ 
In addition, the Sponsor asserts 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 IIV 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, and that the 
Trust's arbitrage mechanism will facilitate the correction of price 
discrepancies in bitcoin and the Shares.\88\ The Sponsor also asserts 
that the requirements of Section 6(b)(5) of the Exchange Act apply not 
to trading in bitcoin, but to trading in the Shares, and asserts that 
the rules of the Exchange will prevent fraudulent and manipulative acts 
and practices, and protect investors and the public interest, with 
respect to the Shares.\89\ Finally, the Sponsor argues that the 
requirements of Section 6(b)(5) of the Exchange Act do not include any 
inherent requirement for market surveillance and asserts that the 
Commission, in 2005, approved the listing and trading of shares of the 
Euro Currency Trust, even though, according to the Sponsor, exchange 
surveillance of the underlying foreign exchange markets did not 
exist.\90\
---------------------------------------------------------------------------

    \86\ See SolidX Letter, supra note 43, at 4. For similar claims, 
see Consumers' Research Letter, supra note 43, at 1-2; Coin Center 
Letter, supra note 43, at 1-2; NYSE Letter, supra note 43, at 1-2.
    \87\ See SolidX Letter, supra note 43, at 7.
    \88\ See Amendment No. 1, supra note 1, 82 FR at 12259.
    \89\ See SolidX Letter II, supra note 43, at 1-2.
    \90\ See id. at 3-4.
---------------------------------------------------------------------------

    The Lewis Paper also argues that several institutional features of 
the bitcoin trading environment and the Trust make the price of the 
Shares resistant to manipulation because: (a) The Trust's disclosures, 
creation and redemption activity, and price dissemination would 
increase transparency and diminish the risk of manipulation or unfair 
informational advantage; \91\ (b) bitcoin prices are quoted to eight 
decimal places, mitigating incentives to move prices a penny up or down 
because the potential gains would be immaterial; \92\ (c) bitcoin 
markets trade continuously, and the XBX Index is calculated 
continuously, and therefore the manipulation of opening and closing 
prices is not a significant risk; \93\ (d) the listing and delisting 
criteria for the Shares are expected to help to maintain a minimum 
level of liquidity and thus minimize the potential for manipulation of 
Share prices; \94\ and (e) the continuous cash and in-kind creation and 
redemption of Shares increases the Trust's efficiency because the 
exchange trading of bitcoin lowers the costs of creating and redeeming 
Shares, which would tighten the spread between the Share price and the 
NAV and reduce manipulation risk.\95\
---------------------------------------------------------------------------

    \91\ See Lewis Paper, supra note 43, at 7.
    \92\ See id. at 9.
    \93\ See id.
    \94\ See id.
    \95\ See id. at 10.
---------------------------------------------------------------------------

E. Comments Regarding the Protection of Investors and the Public 
Interest

    The Sponsor asserts that the structure of the Trust and the 
proposed rule change by the Exchange will serve the public interest by 
protecting investors from the risks of investing in bitcoins directly, 
citing the hacking of bitcoin exchanges, as well as schemes perpetrated 
upon investors by dishonest individuals.\96\ Several other commenters 
also raise similar points, arguing that approving the proposed rule 
change would benefit investor protection.\97\ The Sponsor argues that 
the risk of investor harm from manipulation in the Shares is 
hypothetical in nature and unlikely, while the harm to investors from a 
lack of access to an insured vehicle is overt and likely to continue in 
the absence of the Commission's approval of the Exchange's proposed 
rule change.\98\ The Sponsor also asserts that the Trust would provide 
other benefits to investors--such as limited counterparty risk, the 
simplicity of holding the Shares, and the lack of minimum investment 
requirements--and that approving the proposed rule change would enable 
U.S. exchanges to remain competitive internationally.\99\ Finally, the 
Sponsor asserts that disapproval of the proposed rule change would be 
in direct contravention of the goal of Section 6(b)(5) to protect 
investors and the public interest.\100\
---------------------------------------------------------------------------

    \96\ See SolidX Letter II, supra note 43, at 2.
    \97\ See, e.g., Cato Letter, supra note 43; Srinivasan Letter, 
supra note 43; Consumers' Research Letter, supra note 43; NYSE 
Letter, supra note 43.
    \98\ See SolidX Letter II, supra note 43, at 2.
    \99\ See SolidX Letter, supra note 43, at 2-4.
    \100\ See SolidX Letter II, supra note 43, at 2.
---------------------------------------------------------------------------

    Several commenters assert that the Trust's insurance of its bitcoin 
holdings would ensure safe access to bitcoin for investors.\101\ The 
Sponsor notes that, in traditional and regulated systems, custodial and 
clearing firms mitigate risks and keep assets safe for the benefit of 
the investing public, but that no such mechanisms currently exist for 
bitcoin.\102\ The Sponsor claims that insurance is important to 
investor protection and the public interest because investors cannot be 
expected to assume the risks associated with the possible loss or theft 
of the Trust's bitcoins.\103\ The Sponsor acknowledges that Trust 
investors will expect to assume the market risk associated with their 
investment (i.e., bitcoin price fluctuations), but claims that it is 
appropriate to minimize the investors' risks regarding the adequacy of 
the mechanisms and infrastructure used to secure the Trust's bitcoin 
holdings, since that is not, and should not be, a typical analysis 
undertaken by investors

[[Page 16253]]

in the U.S. securities markets.\104\ The Sponsor also asserts that the 
Trust's insurance policy and the proposed rule change will serve the 
public interest in a manner otherwise unavailable and notes that 
multiple commenters have emphasized the importance of the Trust's 
insurance policy.\105\
---------------------------------------------------------------------------

    \101\ See, e.g., SolidX Letter, supra note 43; Consumers' 
Research Letter, supra note 43; Lewis Paper, supra note 43; NYSE 
Letter, supra note 43; SolidX Letter II, supra note 43.
    \102\ See SolidX Letter, supra note 43, at 11.
    \103\ See id.
    \104\ See id.; see also Lewis Paper, supra note 43, at 11.
    \105\ See SolidX Letter II, supra note 43, at 2.
---------------------------------------------------------------------------

    The Exchange claims that, as a substitute to the investor 
safeguards offered by traditional custodians, bitcoin insurance is 
important for investor protection and the public interest.\106\ One 
commenter claims that the Trust's insurance coverage is an important, 
market-based solution that substitutes for a traditional custodial 
infrastructure and a true transfer-agency function that does not exist 
in the underlying bitcoin market.\107\ Another commenter claims that 
the fact that the Trust carries insurance and will be exchange traded 
will prevent situations where consumers risk losing bitcoins or having 
them stolen due to a fiduciary's flawed security protocols.\108\
---------------------------------------------------------------------------

    \106\ See NYSE Letter, supra note 43, at 4.
    \107\ See Lewis Paper, supra note 43, at 11.
    \108\ See Consumers' Research Letter, supra note 43, at 2.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

A. Overview

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must 
approve the proposed rule change of a self-regulatory organization 
(``SRO'') if the Commission finds that the proposed rule change is 
consistent with the requirements of the Exchange Act and the applicable 
rules and regulations thereunder.\109\ If it is unable to make such a 
finding, the Commission must disapprove the proposed rule change.\110\ 
Additionally, under Rule 700(b)(3) of 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 that proposed 
the rule change.'' \111\
---------------------------------------------------------------------------

    \109\ 15 U.S.C 78s(b)(2)(C)(i).
    \110\ 15 U.S.C. 78s(b)(2)(C)(ii).
    \111\ 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. Id. Any failure of an SRO to provide the 
information elicited by Form 19b-4 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 
rules and regulations issued thereunder that are applicable to the 
SRO. Id.
---------------------------------------------------------------------------

    After careful consideration, and for the reasons discussed in 
greater detail below, the Commission does not believe that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Exchange Act and the applicable rules and 
regulations thereunder.\112\ Specifically, the Commission does not find 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Exchange Act--which requires that the rules of a national securities 
exchange be designed, among other things, to prevent fraudulent and 
manipulative acts and practices and to protect investors and the public 
interest \113\--because the Commission believes that the significant 
markets for bitcoin are unregulated and that, therefore, the Exchange 
has not entered into, and would currently be unable to enter into, the 
type of surveillance-sharing agreement that helps address concerns 
about the potential for fraudulent or manipulative acts and practices 
in the market for the Shares. Accordingly, the Commission disapproves 
the proposed rule change.\114\
---------------------------------------------------------------------------

    \112\ In disapproving the proposed rule change, as modified by 
Amendment No. 1, the Commission has considered its impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f); see also notes 70-74, 82-84, 91-95, 107, 148-158 & 169-176 
and accompanying text. The Commission notes that, according to the 
Sponsor, the Trust is a means of providing a simple and cost-
effective way for investors to gain investment exposure to the 
performance of the USD price of bitcoin. See SolidX Letter, supra 
note 43, at 1; see also Lewis Paper, supra note 43, at 3, 11-16 
(asserting that a bitcoin-based ETP would enable ordinary investors 
to construct more efficient and diversified portfolios). The Sponsor 
also asserts that bitcoin exchanges have been subject to hacking and 
investor schemes in the past, the losses from which are documented 
and quantifiable at approximately $2 billion, and that such losses 
will continue unless investors are able to invest in bitcoin through 
a regulated and insured product such as the Trust. See SolidX Letter 
II, supra note 43, at 2. Regarding competition, the Exchange has 
asserted that approval of the proposed rule change ``will enhance 
competition among market participants, to the benefit of investors 
and the marketplace.'' See Amendment No. 1, supra note 1, 82 FR at 
12267. The Sponsor claims that the proposed rule change would 
further advance the goal of helping U.S. exchanges remain 
competitive in the international marketplace by demonstrating to 
future sponsors of new products that the Commission remains 
committed to fostering innovation in the U.S. securities markets. 
See SolidX Letter, supra note 43, at 3. Finally, regarding the 
potential effect of the proposed rule change on capital formation, 
the Exchange asserts that the Sponsor believes that demand from new 
investors accessing bitcoin through investment in the Shares will 
broaden the investor base in bitcoin. See Amendment No. 1, supra 
note 1, 82 FR at 12259. The Commission recognizes that the Exchange 
and commenters assert these economic benefits and specifically 
addresses the Sponsor's claims about investor protection from 
hacking and other risks of bitcoin ownership below. See infra 
Section III.B.6. The Commission, however, for the reasons discussed 
throughout this order, must disapprove the proposed rule change 
because it is not consistent with the Exchange Act.
    \113\ 15 U.S.C. 78f(b)(5).
    \114\ The Commission's disposition of the Exchange's proposed 
rule change is independent of, and serves a fundamentally different 
purpose than, any Commission actions with respect to the Securities 
Act of 1933 Registration Statement of the Trust.
---------------------------------------------------------------------------

B. Analysis

1. Commodity-Trust ETPs and Surveillance-Sharing Agreements
    The Exchange proposes to list and trade the Shares under NYSE Arca 
Equities Rule 8.201, which governs the listing of Commodity-Based Trust 
Shares.\115\ The proposal is similar to many past proposals to list and 
trade shares of ETPs holding precious metals.\116\ Accordingly, the 
Commission analyzes this proposal under the standards that it has 
applied to previous commodity-trust ETPs--and that it also applied in 
the recent Bats BZX Order.\117\
---------------------------------------------------------------------------

    \115\ The Commission notes that in settled actions the CFTC has 
designated bitcoin as a commodity and has asserted jurisdiction over 
the trading of at least certain derivatives on bitcoin, as well as 
certain leveraged or margined retail transactions in bitcoin. See In 
re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC 
Docket No. 15-29, 2015 WL 5535736 (CFTC Sept. 17, 2015) (Order 
Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the 
Commodity Exchange Act, Making Findings and Imposing Remedial 
Sanctions (``Coinflip Settlement Order'')), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf.
    \116\ See, e.g., streetTRACKS Gold Shares, Exchange Act Release 
No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-
22) (order approving the listing and trading of shares of commodity-
trust ETP holding physical gold bullion). The Commission notes that 
the Sponsor also views the Trust to be materially identical to other 
existing commodity-trust ETPs. See SolidX Letter, supra note 43, at 
3.
    \117\ See Bats BZX Order, supra note 6, 82 FR at 14081-87.
---------------------------------------------------------------------------

    A key consideration for the Commission in determining whether to 
approve or disapprove a proposal to list and trade shares of a new 
commodity-trust ETP is the susceptibility of the shares or the 
underlying asset to manipulation. This consideration flows directly 
from the requirement in Section 6(b)(5) of the Exchange Act that a 
national securities exchange's rules must be designed ``to prevent 
fraudulent and manipulative acts and practices'' and ``to protect 
investors and the public interest.'' \118\
---------------------------------------------------------------------------

    \118\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Since at least 1990, the Commission has expressed the view 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

[[Page 16254]]

possible trading violations and other regulatory improprieties.'' \119\ 
The Commission has also long held that surveillance-sharing agreements 
are important in the context of exchange listing of derivative security 
products, such as equity options.\120\
---------------------------------------------------------------------------

    \119\ See Exchange Act Release No. 27877 (Apr. 4, 1990), 55 FR 
13344 (Apr. 10, 1990) (SR-NYSE-90-14).
    \120\ See 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).
---------------------------------------------------------------------------

    With respect to ETPs, when approving in 1995 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, noting 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.'' \121\
---------------------------------------------------------------------------

    \121\ Exchange Act Release No. 35518 (Mar. 21, 1995), 60 FR 
15804 (Mar. 27, 1995) (SR-Amex-94-30). See also Exchange Act Release 
No. 36885 (Feb. 26, 1996), 61 FR 8315 n.17 (Mar. 4, 1996) (SR-Amex-
95-50) (approving the exchange listing and trading of Commodity 
Indexed Securities and noting that, through the comprehensive 
surveillance-sharing agreements, the listing exchange was able to 
obtain market surveillance information for transactions occurring on 
NYMEX and COMEX and from the London Metal Exchange through the 
Intermarket Surveillance Group.
---------------------------------------------------------------------------

    In 1998, in adopting Exchange Act Rule 19b-4(e) \122\ to permit the 
generic listing and trading of certain new derivative securities 
products--including ETPs--the Commission again emphasized the 
importance of the listing exchange's ability to obtain from underlying 
markets, through surveillance-sharing agreements (called information-
sharing agreements in the release), the information necessary to detect 
and deter manipulative activity. Specifically, in adopting rules 
governing the generic listing of new derivative securities products, 
the Commission stated that the Rule 19b-4(e) procedures would ``enable 
the Commission to continue to effectively protect investors and promote 
the public interest.'' \123\ The Commission also stressed the 
importance of these surveillance-sharing agreements comprehensively 
covering trading in the underlying assets. In the case of a product 
overlying domestic securities, the Commission said that the exchange 
listing a derivative securities product should ensure that it was 
either a common member of the Intermarket Surveillance Group with, or 
had entered into an information-sharing agreement with, each market 
trading each underlying security.\124\
---------------------------------------------------------------------------

    \122\ 17 CFR 240.19b-4(e).
    \123\ Amendment to Rule Filing Requirements for Self-Regulatory 
Organizations Regarding New Derivative Securities Products, Exchange 
Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70959 (Dec. 22, 
1998) (File no. S7-13-98) (``NDSP Adopting Release'') (also noting 
that ``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. Such 
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.'').
    \124\ See id. at 70959. The Commission further noted that, ``if 
a new SRO trades component securities underlying a new derivative 
securities product and is not a member of the ISG [Intermarket 
Surveillance Group], the SRO seeking to list and trade such new 
derivative securities product pursuant to Rule 19b-4(e) should enter 
into a comprehensive ISA with the non-ISG SRO. Conversely, if a new 
SRO seeks to list and trade a new derivative securities product 
pursuant to Rule 19b-4(e) and is not a member of the ISG, such SRO 
should enter into a comprehensive ISA with each SRO that trades 
securities underlying the new derivative securities product.'' Id. 
at 70959 n.99.
---------------------------------------------------------------------------

    Consistent with these statements, for the commodity-trust ETPs 
approved to date for listing and trading, there have been in every case 
well-established, significant, regulated markets for trading futures on 
the underlying commodity--gold, silver, platinum, palladium, and 
copper--and the ETP-listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group 
membership in common with, those markets.\125\ The

[[Page 16255]]

Commission believes that the need for an exchange listing a commodity-
trust ETP to have surveillance-sharing agreements with significant, 
regulated markets relating to the underlying commodity applies equally 
to a commodity-trust ETP that is based on bitcoin or another digital 
asset.\126\
---------------------------------------------------------------------------

    \125\ See streetTRACKS Gold Shares, Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614, 64618 (Nov. 5, 2004) (SR-NYSE-
2004-22) (approval order notes the New York Stock Exchange's 
representation that ``the most significant gold futures exchanges 
are the COMEX division of the NYMEX and the Tokyo Commodity 
Exchange'' and that the New York Stock Exchange has entered into a 
reciprocal Memorandum of Understanding with the NYMEX (of which 
COMEX is a division) ``for the sharing of information related to any 
financial instrument based, in whole or in part, upon an interest in 
or performance of gold''); iShares COMEX Gold Trust, Exchange Act 
Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751, 3754 (Jan. 26, 
2005) (SR-Amex-2004-38) (approval order notes the American Stock 
Exchange's representation that ``the most significant gold futures 
exchanges are the COMEX division of the NYMEX and the Tokyo 
Commodity Exchange'' and that the American Stock Exchange has ``in 
place an Information Sharing Agreement with the NYMEX for the 
purpose of providing information in connection with trading in or 
related to COMEX gold futures contracts''); iShares Silver Trust, 
Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 14967, 14968, 
14973 (Mar. 24, 2006) (SR-Amex-2005-72) (approval order notes the 
American Stock Exchange's representation that ``the most significant 
silver futures exchanges are the COMEX and the Tokyo Commodity 
Exchange'' and that the American Stock Exchange has ``in place an 
Information Sharing Agreement with the NYMEX for the purpose of 
providing information in connection with trading in or related to 
COMEX silver futures contracts''); ETFS Gold Trust, Exchange Act 
Release No. 59895 (May 8, 2009), 74 FR 22993, 22994-95, 22998 (May 
15, 2009) (SR-NYSEArca-2009-40) (accelerated approval order notes 
NYSE Arca's representation that the COMEX is one of the ``major 
world gold markets'' and that NYSE Arca ``has an Information Sharing 
Agreement with NYMEX for the purpose of sharing information in 
connection with trading in or related to COMEX gold futures 
contracts''); ETFS Silver Trust, Exchange Act Release No. 59781 
(Apr. 17, 2009), 74 FR 18771, 18772, 18776 (Apr. 24, 2009) (SR-
NYSEArca-2009-28) (accelerated approval order notes NYSE Arca's 
representation that ``the most significant silver futures exchanges 
are the COMEX . . . and the Tokyo Commodity Exchange'' and that NYSE 
Arca ``has an Information Sharing Agreement with NYMEX for the 
purpose of sharing information in connection with trading in or 
related to COMEX silver futures contracts''); ETFS Palladium Trust, 
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009) (SR-NYSEArca-2009-94) (notice of proposed 
rule change includes NYSE Arca's representation that ``the most 
significant palladium futures exchanges are the NYMEX and the Tokyo 
Commodity Exchange,'' that ``NYMEX is the largest exchange in the 
world for trading precious metals futures and options,'' and that 
NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which NYMEX is a member); ETFS Platinum 
Trust, Exchange Act Release No. 60970 (Nov. 9, 2006), 74 FR 59319, 
59321, 59327 (Nov. 17, 2009) (SR-NYSEArca-2009-95) (notice of 
proposed rule change includes NYSE Arca's representation that ``the 
most significant palladium futures exchanges are the NYMEX and the 
Tokyo Commodity Exchange,'' that ``NYMEX is the largest exchange in 
the world for trading precious metals futures and options,'' and 
that NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which NYMEX is a member); Sprott Physical 
Gold Trust, Exchange Act Release No. 61236 (Dec. 23, 2009), 75 FR 
170, 171, 174 and n.27 (Jan. 4, 2010) (SR-NYSEArca-2009-113) (notice 
of proposed rule change includes NYSE Arca's representations that 
the COMEX is one of the ``major world gold markets,'' that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' and that NYMEX, of which COMEX is a division, is a member 
of the Intermarket Surveillance Group); Sprott Physical Silver 
Trust, Exchange Act Release No. 63043 (Oct. 5, 2010), 75 FR 62615, 
62616, 62619 and n.26 (Oct. 12, 2010) (SR-NYSEArca-2010-84) 
(accelerated approval order notes NYSE Arca's representation that 
the COMEX is one of the ``major world silver markets,'' that NYSE 
Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' and that NYMEX, of which COMEX is a division, 
is a member of the Intermarket Surveillance Group); ETFS Precious 
Metals Basket Trust, Exchange Act Release No. 62402 (Jun. 29, 2010), 
75 FR 39292, 39295, 39298 (July 8, 2010) (SR-NYSEArca-2010-56) 
(notice of proposed rule change includes NYSE Arca's representation 
that ``the most significant gold, silver, platinum and palladium 
futures exchanges are the COMEX and the TOCOM'' and that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' of which NYMEX (of which COMEX is a division) is a member); 
ETFS White Metals Basket Trust, Exchange Act Release No. 62620 (July 
30, 2010), 75 FR 47655, 47657, 47660 (Aug. 6, 2010) (SR-NYSEArca-
2010-71) (notice of proposed rule change includes NYSE Arca's 
representation that ``the most significant silver, platinum and 
palladium futures exchanges are the COMEX and the TOCOM'' and that 
NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which COMEX is a member); ETFS Asian Gold 
Trust, Exchange Act Release No. 63267 (Nov. 8, 2010), 75 FR 69494, 
69496, 69500-01 (Nov. 12, 2010) (SR-NYSEArca-2010-95) (notice of 
proposed rule change includes NYSE Arca's representation that ``the 
most significant gold futures exchanges are the COMEX and the Tokyo 
Commodity Exchange,'' that ``COMEX is the largest exchange in the 
world for trading precious metals futures and options,'' and that 
NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which COMEX is a member); Sprott Physical 
Platinum and Palladium Trust, Exchange Act Release No. 68101 (Oct. 
24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012) (SR-NYSEArca-
2012-111) (accelerated approval order notes NYSE Arca's 
representation that ``[f]utures on platinum and palladium are traded 
on two major exchanges: The New York Mercantile Exchange . . . and 
Tokyo Commodities Exchange'' and that NYSE Arca ``may obtain 
information via ISG [Intermarket Surveillance Group] from other 
exchanges that are members of ISG or with which [NYSE Arca] has 
entered into a comprehensive surveillance sharing agreement, 
including COMEX''); APMEX Physical--1 oz. Gold Redeemable Trust, 
Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17547 
(Mar. 26, 2012) (SR-NYSEArca-2012-18) (notice of proposed rule 
change cross-references the proposed rule change to list and trade 
shares of the ETFS Gold Trust, in which NYSE Arca represented that 
the COMEX is one of the ``major world gold markets'' and notes that 
NYSE Arca ``may obtain information via ISG from other exchanges that 
are members of ISG or with which [NYSE Arca] has entered into a 
comprehensive surveillance sharing agreement, including COMEX''); 
JPM XF Physical Copper Trust, Exchange Act Release No. 68440 (Dec. 
14, 2012), 77 FR 75468, 75469-72 (Dec. 20, 2012) (SR-NYSEArca-2012-
28) (approval order notes NYSE Arca's representation that a majority 
of copper derivatives trading occurs on the LME, the COMEX, and the 
Shanghai Futures Exchange and that NYSE Arca could obtain trading 
information from other members of the Intermarket Surveillance Group 
(including from the COMEX) and that it had entered into a 
comprehensive surveillance-sharing agreement with the LME with 
respect to trading in copper and copper derivatives); iShares Copper 
Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 
13727-30 (Feb. 28, 2013) (SR-NYSEArca-2012-66) (approval order notes 
NYSE Arca's representation that the LME is the exchange with the 
greatest number of open copper futures and options contracts and 
that NYSE Arca had entered into a comprehensive surveillance-sharing 
agreement with the LME regarding trading in copper and copper 
derivatives and could also obtain trading information from other 
members of the Intermarket Surveillance Group, including the COMEX, 
which also trades copper futures); First Trust Gold Trust, Exchange 
Act Release No. 69847 (June 25, 2013), 78 FR 39399, 39400 n.15, 
39405 (July 1, 2013) (SR-NYSEArca-2013-61) (notice of proposed rule 
change notes that FINRA, on behalf of the exchange, can obtain 
trading information regarding gold futures and options on gold 
futures from members of the Intermarket Surveillance Group, 
including the COMEX, and cross-references the proposed rule change 
to list and trade shares of the ETFS Gold Trust, in which NYSE Arca 
represented that the COMEX is one of the ``major world gold 
markets''); Merk Gold Trust, Exchange Act Release No. 71038 (Dec. 
11, 2013), 78 FR 76367, 76369 n.26, 76374 (Dec. 17, 2013) (SR-
NYSEArca-2013-137) (notice of proposed rule change notes that the 
exchange can obtain trading information via the Intermarket 
Surveillance Group from other members, including the COMEX, and 
cross-references the proposed rule change to list and trade shares 
of the ETFS Gold Trust, in which NYSE Arca represented that the 
COMEX is one of the ``major world gold markets''); Long Dollar Gold 
Trust, Exchange Act Release No. 79518 (Dec. 9, 2016), 81 FR 90876, 
90881, 90886 (Dec. 15, 2016) (SR-NYSEArca-2016-84) (accelerated 
approval order notes NYSE Arca's representation that the most 
significant gold futures exchange is the COMEX and that the exchange 
can obtain trading information from other members of the Intermarket 
Surveillance Group).
    \126\ See Bats BZX Order, supra note 6, 82 FR at 14087 
(disapproving proposed rule change to list a bitcoin-based 
commodity-trust ETP on the basis that the listing exchange had not, 
and would not be able to, enter into a surveillance-sharing 
agreement with significant, regulated markets related to the 
underlying asset).
---------------------------------------------------------------------------

    The Sponsor argues that Section 6(b)(5) does not contain any 
inherent requirement for market surveillance and argues that the 
Commission, in 2005, approved the listing and trading of an ETP--the 
Euro Currency Trust--where the underlying market was not 
surveilled.\127\ The Commission, however, believes that its approval of 
the Euro Currency Trust is readily distinguishable from its disapproval 
of the proposed SolidX Bitcoin Trust.
---------------------------------------------------------------------------

    \127\ See supra note 90 and accompanying text.
---------------------------------------------------------------------------

    First, the Euro Currency Trust is not a commodity trust, and it is 
not listed and traded under the Exchange listing standards for 
commodity-based trusts. Second, the Commission's approval order for the 
Euro Currency Trust notes that, in addition to a large OTC market in 
currency derivatives, currency options and futures were traded on 
regulated markets with the authority to perform surveillance on their 
members' trading activities, to review positions held by members and 
large-scale customers, and to monitor the price movements of options 
and futures markets by comparing them with cash and other derivative 
markets' prices.\128\ These regulated derivatives markets included the 
Philadelphia Stock Exchange and the Chicago Mercantile Exchange, which, 
along with the ETP's listing exchange (the New York Stock Exchange) are 
members of the Intermarket Surveillance Group.
---------------------------------------------------------------------------

    \128\ Exchange Act Release No. 52843 (Nov. 28, 2005), 70 FR 
72486, 72487 (Dec. 5, 2005) (Order Granting Accelerated Approval of 
a Proposed Rule Change regarding the Euro Currency Trust).
---------------------------------------------------------------------------

    Third, the Commission's approval order notes a number of 
significant facts about the underlying spot market for foreign 
exchange, including:
     That the listing exchange had represented that the foreign 
exchange market is the largest and most liquid financial market in the 
world and that, as of April 2004, the foreign exchange market 
experienced average daily turnover of approximately $1.88 trillion; 
\129\
---------------------------------------------------------------------------

    \129\ See id. at 72486.
---------------------------------------------------------------------------

     That the most significant participants in the spot market 
are the major international commercial banks that act both as brokers 
and as dealers; \130\ and
---------------------------------------------------------------------------

    \130\ See id. at 72487.
---------------------------------------------------------------------------

     That most trading in the global OTC foreign currency 
markets is conducted by regulated financial institutions, such as banks 
and broker dealers.\131\

    \131\ See id.
---------------------------------------------------------------------------

Thus, significant, regulated markets related to foreign exchange 
trading exist, and the listing exchange of the Euro Currency Trust 
belongs to a multilateral surveillance-sharing agreement with those 
markets. Moreover, many prominent participants in the OTC foreign 
exchange market are regulated financial institutions. The markets 
related to foreign exchange therefore bear little resemblance to the 
markets currently related to bitcoin, which are either unregulated, not 
of significant size, or both. The rationale behind the Commission's 
approval of the Euro Currency Trust is therefore consistent with the 
rationale for the Commission's disapproval of the SolidX Bitcoin Trust.
    The Commission continues to believe that surveillance-sharing 
agreements between the exchange listing shares of a commodity-trust ETP 
and significant, regulated markets related to the underlying asset 
provide a ``necessary deterrent to manipulation.'' \132\ To the extent 
there is some question as to the degree to which bitcoin is subject to 
manipulation, moreover, surveillance-sharing agreements with 
significant, regulated markets relating to bitcoin would help answer 
that question and address instances of such manipulation. Therefore, 
the Commission's analysis of the Exchange's proposal examines whether 
regulated markets of significant size exist--in either bitcoin or 
derivatives on bitcoin--with which the Exchange has, or could enter 
into, a surveillance-sharing agreement.
---------------------------------------------------------------------------

    \132\ NDSP Adopting Release, supra note 123, 63 FR at 70959.
---------------------------------------------------------------------------

2. The Worldwide Spot Market for Bitcoin
    The Commission believes--consistent with its conclusion in the Bats 
BZX Order \133\--that the bulk of bitcoin trading occurs on markets 
where there

[[Page 16256]]

is little to no regulation governing trading,\134\ and thus no 
meaningful governmental market oversight designed to detect and deter 
fraudulent and manipulative activity.\135\ The Commission also notes 
that none of the bitcoin spot markets identified by the Exchange or the 
Sponsor is currently a member of the Intermarket Surveillance 
Group.\136\
---------------------------------------------------------------------------

    \133\ See Bats BZX Order, supra note 6, 82 FR at 14084 & nn.103-
106.
    \134\ Several commenters discussed the unregulated state of the 
underlying bitcoin markets. See supra notes 51-54 and accompanying 
text. The Commission believes that certain restrictions imposed by 
the Trust to conduct bitcoin transactions reflect the absence of 
meaningful regulatory oversight and transparency of certain non-U.S. 
bitcoin markets. For example, the Sponsor notes that Bitfinex, one 
of the bitcoin exchanges included in the Trust's underlying XBX 
Index, does not conduct business in New York or with New York 
residents, and another XBX Index component bitcoin exchange, OKCoin 
International, is open only to non-U.S. persons. See supra note 23 
and accompanying text. See also supra note 61 and accompanying text 
(noting that, as of January 2017, the volume of bitcoin trading on 
Chinese exchanges has declined to levels similar to those of USD-
denominated exchanges that follow AML and KYC procedures applied by 
their respective jurisdictions).
    \135\ See supra notes 51-54 and accompanying text.
    \136\ See http://www.isgportal.org (listing the current members 
and affiliate members of the Intermarket Surveillance Group).
---------------------------------------------------------------------------

    The Commission also believes that the bitcoin markets identified by 
the Exchange and the Sponsor as subject to certain regulatory 
requirements--GDAX, itBit, Gemini, and Genesis Global Trading--are not, 
in fact, regulated markets consistent with the requirements met with 
respect to previously approved commodity-trust ETPs. While the Exchange 
notes that GDAX, itBit, and Gemini are subject to consumer protection, 
KYC compliance, AML compliance, and cybersecurity requirements imposed 
by the NYSDFS,\137\ the Commission's market oversight of national 
securities exchanges includes substantial additional 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.'' \138\ Moreover, national 
securities exchanges are subject to Commission oversight of, among 
other things, their governance, membership qualifications, trading 
rules, disciplinary procedures, recordkeeping, and fees.\139\ Likewise, 
Designated Contract Markets that trade futures on commodities 
underlying other commodity-trust ETPs are registered with and regulated 
by the CFTC, and they must comply with, among other things, a similarly 
comprehensive range of regulatory principles and file their rule 
changes with the CFTC.\140\ Additionally, while the Exchange asserts 
that Genesis Global Trading is a FINRA member,\141\ the digital 
currency business of that firm, according to the Genesis Global Trading 
Web site, is conducted pursuant to a BitLicense issued by the NYSDFS, 
and only the securities activities of the firm are regulated by 
FINRA.\142\
---------------------------------------------------------------------------

    \137\ See supra notes 24-28 and accompanying text (noting that 
there are currently several U.S.-based regulated entities that 
facilitate bitcoin trading and that comply with U.S. AML and KYC 
regulatory requirements, and that a regulatory framework created by 
the NYSDFS sets forth consumer protection, AML compliance, and cyber 
security rules tailored for digital currency companies operating and 
transacting business in New York). The Commission notes that there 
is no basis in the record to support a finding that non-U.S. bitcoin 
exchanges that have not obtained a BitLicense are subject to AML, 
KYC, consumer protection, or cybersecurity requirements.
    \138\ 15 U.S.C. 78f(b)(5).
    \139\ 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.
    \140\ See, e.g., Designated Contract Markets (DCMs), U.S. 
Commodity Futures Trading Commission, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \141\ See supra note 28 and accompanying text.
    \142\ See Frequently Asked Questions, Genesis: A Digital 
Currency Group Company (FAQ: ``Is Genesis Regulated?''), https://genesistrading.com/frequently-asked-questions/ (last visited Mar. 
17, 2017).
---------------------------------------------------------------------------

    Further, while the Exchange notes that the CFTC has asserted 
jurisdiction over derivatives on bitcoin,\143\ the Commission does not 
believe that the record supports a finding that there is currently a 
regulatory framework in the United States for detecting and deterring 
manipulation in the bitcoin spot markets. Although the CFTC can bring 
enforcement actions against manipulative conduct in spot markets for a 
commodity, spot markets are not required to register with the CFTC 
unless they offer leveraged, margined, or financed trading to retail 
customers.\144\ In all other cases, the CFTC does not set standards 
for, approve the rules of, examine, or otherwise regulate bitcoin spot 
markets.
---------------------------------------------------------------------------

    \143\ See supra note 29 and accompanying text.
    \144\ Commodity Exchange Act Section 2(c)(2)(D), 7 U.S.C. 
2(c)(2)(D). See also Commodity Exchange Act Section 2(c)(2)(A), 7 
U.S.C. 2(c)(2)(A) (defining CFTC jurisdiction to specifically cover 
contracts of sale of a commodity for future delivery (or options on 
such contracts), or an option on a commodity (other than foreign 
currency or a security or a group or index of securities), that is 
executed or traded on an organized exchange).
---------------------------------------------------------------------------

    While the CFTC has brought settled enforcement actions against 
bitcoin-related entities, these actions do not demonstrate that a 
regulatory framework for providing market oversight and deterring 
market manipulation currently exists for the bitcoin spot market. These 
actions have involved either (a) the failure of an entity to register 
with the CFTC before trading derivatives on bitcoin or offering 
leveraged, margined, or financed bitcoin trading to retail 
customers,\145\ or (b) the facilitation of wash trades in bitcoin swaps 
by a SEF registered with the CFTC.\146\ Based on the record, therefore, 
the Commission does not believe that the worldwide spot bitcoin 
markets, including the bitcoin exchanges that are constituents of the 
XBX Index, are regulated markets with which the Exchange has, or could 
enter into, a surveillance-sharing agreement.\147\
---------------------------------------------------------------------------

    \145\ See Coinflip Settlement Order, supra note 115; In re BFXNA 
Inc., d/b/a Bitfinex, CFTC Docket No. 16-19 (CFTC June 2, 2016) 
(Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of 
the Commodity Exchange Act, Making Findings and Imposing Remedial 
Sanctions (``BFXNA Settlement Order'')), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf.
    \146\ See In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL 
5658082 (CFTC Sept. 24, 2015) (Order Instituting Proceedings 
Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, 
Making Findings and Imposing Remedial Sanctions (``TeraExchange 
Settlement Order'')), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfteraexchangeorder92415.pdf.
    \147\ The Exchange does not assert that it has a surveillance-
sharing agreement with any bitcoin exchange.
---------------------------------------------------------------------------

    As noted above, the Lewis Paper asserts that, for several reasons, 
the underlying market for bitcoin is not susceptible to 
manipulation,\148\ and the Exchange agrees with this conclusion.\149\ 
While the Lewis Paper submits that arbitrage across bitcoin markets 
will help to keep worldwide bitcoin prices aligned with one another, 
hindering manipulation,\150\ the Commission believes that the Lewis 
Paper's discussion of the possible sources of manipulation in the 
underlying bitcoin market is incomplete and does not form a basis to 
find that bitcoin cannot be manipulated--or to find, by implication, 
that no surveillance-sharing agreement is necessary between an exchange 
listing shares of a bitcoin-based ETP and

[[Page 16257]]

significant markets trading bitcoin or bitcoin derivatives.\151\
---------------------------------------------------------------------------

    \148\ See Lewis Paper, supra note 43; see also supra notes 70-74 
and accompanying text.
    \149\ See NYSE Letter, supra note 43, at 5; see also supra note 
76 and accompanying text.
    \150\ See Lewis Paper, supra note 43, at 6-7.
    \151\ The Sponsor also argues, in its second comment letter, 
that arbitrage across bitcoin markets helps to keep bitcoin prices 
aligned and reduces the likelihood of manipulation. See SolidX 
Letter II, supra note 43, at 5. The Sponsor offers several 
histograms purporting to show that pricing discrepancies across 
bitcoin markets are generally arbitraged away within several 
seconds. Id. These histograms, however, use data from only four 
bitcoin exchanges, based on the Sponsor's argument that--in light of 
recently imposed capital controls in China and because Chinese 
exchanges trade bitcoins only against the Chinese yuan--the Chinese 
markets for bitcoin are ``separate and distinct'' from the USD 
market. Id. at 6-7. The Commission, however, believes that the 
Sponsor's argument that the worldwide markets for trading bitcoins 
against various government currencies are ``stable, resilient, fair 
and efficient,'' see SolidX Letter, supra note 43, at 4, is at odds 
with its argument that there are at least two substantial segments 
of that market that have recently become ``separate and distinct'' 
from one another. See SolidX Letter II, supra note 43, at 6-7. 
Moreover, the Commission does not believe that the charts provided 
by the Sponsor establish there are two separate and distinct 
segments of the market. The data describe a limited period, and, 
while the charts purport to show a price differential between the 
XBX Index and the bitcoin prices on Chinese exchanges, the charts 
also appear to show a close correlation between the timing and 
direction of price movements in the two market ``segments.'' See id. 
If the market is not segmented, then the histograms (which show that 
pricing discrepancies across only four bitcoin markets are generally 
arbitraged away within several seconds) are not enough to establish 
that the worldwide markets are efficient. If anything, the data 
provided by the Sponsor show that bitcoin markets are still 
developing and that the efficiency of arbitrage between bitcoin 
markets may depend on, among other things, regulatory conditions 
that can change over time. And, even if the Commission assumed that 
bitcoin markets were efficient, other manipulation concerns--such as 
the potential for trading on material non-public information or 
potential issues arising from concentrated bitcoin holdings--would 
still be applicable. See infra notes 152-158 and accompanying text.
---------------------------------------------------------------------------

    For example, while there is no inside information related to the 
earnings or revenue of bitcoin, there may be material non-public 
information related to the actions of regulators with respect to 
bitcoin; regarding order flow, such as plans of market participants to 
significantly increase or decrease their holdings in bitcoin; regarding 
new sources of demand, such as new ETPs that would hold bitcoin; or 
regarding the decision of a bitcoin-based ETP with respect to how it 
would respond to a ``fork'' in the blockchain, which would create two 
different, non-interchangeable types of bitcoin.\152\ Additionally, the 
manipulation of asset prices, as a general matter, can occur simply 
through trading activity that creates a false impression of supply or 
demand, whether in the context of a closing auction or in the course of 
continuous trading, and does not require formal linkages among markets 
(such as consolidated quotations or routing requirements) or the 
complex quoting behavior associated with high-frequency trading. 
Although the Exchange notes that bitcoin trades continuously so that 
there are no opening or closing prices to manipulate, the Commission 
believes that continuous trading does not necessarily eliminate 
manipulation risk.\153\
---------------------------------------------------------------------------

    \152\ For example, as described in the Trust's Registration 
Statement, supra note 21, in the event the bitcoin network undergoes 
a ``hard fork'' into two blockchains, the Trust would then hold 
equal amounts of both the original bitcoin and the alternative new 
bitcoin. As a result, the Sponsor would need to decide whether to 
continue to hold the original bitcoin, the alternative new bitcoin, 
or both and would need to decide what action to take with respect to 
the unselected bitcoin, such as the possible sale of the unselected 
bitcoin. The Sponsor's decision to continue to hold either the 
original or alternative new bitcoin would be based on factors such 
as the market value and liquidity of the original bitcoin versus the 
alternative new bitcoin. Id. at 14.
    \153\ See infra notes 164-165.
---------------------------------------------------------------------------

    While it may or may not be possible to acquire a dominant position 
in the bitcoin market as a whole, this risk exists, as the Lewis Paper 
concedes.\154\ And, as the Registration Statement discloses, it is 
reasonably likely that a small group of early adopters holds a 
significant proportion of the bitcoins that have been mined.\155\ The 
Lewis Paper lists a number of features of the Trust that should, the 
paper claims, ameliorate the risk of manipulation through ownership of 
a dominant market share,\156\ but these features generally address 
whether the Trust itself would acquire a dominant market share, or 
whether other market participants might acquire a dominant share of 
bitcoin ownership through participation in the underlying bitcoin 
markets. These features do not address the possible market effect of 
large bitcoin positions held by early adopters. Additionally, the Lewis 
Paper asserts that many features of the proposal that purportedly 
ameliorate the risk of price manipulation through a dominant market 
share are also factors that were used as a basis for the Commission's 
approval of a commodity-trust ETP based on copper.\157\ The Commission 
notes, however, that the listing exchange for that copper-based ETP had 
entered into a surveillance-sharing agreement with the London Metal 
Exchange regarding trading in copper and copper futures and that the 
listing exchange was also a common member of the Intermarket 
Surveillance Group with the COMEX, which also trades copper 
futures.\158\
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    \154\ See supra notes 71-74 and accompanying text.
    \155\ See Registration Statement, supra note 21, at 16. See also 
Lewis Paper, supra note 43, at 6. The Lewis Paper states that there 
is ``no compelling evidence'' to suggest that any single investor or 
group has acquired a dominant position in bitcoin, but its citation 
of ``media estimates'' regarding the holdings of certain 
individuals, see Lewis Paper, supra note 43, at 6 & n.7, only 
demonstrates that the risk of a person or group acquiring a 
significant proportion of all bitcoins cannot be quantified or 
dismissed.
    \156\ See supra note 74.
    \157\ See Lewis Paper, supra note 43, at 6 n.8.
    \158\ See Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 
75468, 75472 (Dec. 20, 2012) (NYSEArca-2012-28) (approval of 
proposal to list and trade shares of the JPM XF Physical Copper 
Trust).
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    Thus, the Commission does not believe that the record supports a 
finding that the unique properties of bitcoin and the underlying 
bitcoin market are so different from the properties of other 
commodities and commodity futures markets that they justify a 
significant departure from the standards applied to previous commodity-
trust ETPs.
3. The Susceptibility to Manipulation of the XBX Index
    The Sponsor, the Exchange, and the Lewis Paper all express the view 
that the XBX Index is resistant to manipulation because of its 
proprietary weighting methodology and its ability to respond to market 
movements in real time.\159\ In essence, they claim that the XBX 
Index's weighting methodology is able to resist the effects of 
manipulation because it discounts prices from constituent exchanges 
based on lower volume at that exchange, price deviation from the 
average on other exchanges, and the staleness of reported prices.\160\ 
Additionally, the Sponsor and the Lewis Paper note that the XBX Index 
is not susceptible to a key mechanism of manipulation, opening and 
closing auctions.\161\
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    \159\ See supra Section II.B. See also supra note 16 (describing 
the Sponsor's representation that the XBX Index's price variance 
weighting decreases the influence on the XBX Index of any particular 
exchange that diverges from the rest of the data points used by the 
XBX Index and thereby reduces the possibility of an attempt to 
manipulate the price of bitcoin as reflected by the XBX Index).
    \160\ See, e.g., Lewis Paper, supra note 43, at 8.
    \161\ See SolidX Letter, supra note 43, at 8; Lewis Paper, supra 
note 43, at 9.
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    The Commission, however, does not agree that index-based pricing 
for the Trust's bitcoin assets eliminates the risk of manipulation or 
the need to monitor that risk through surveillance-sharing agreements. 
While the XBX Index methodology uses an algorithm to discount prices 
that deviate from the average, this automatic discounting could 
attenuate, but not eliminate, the effect of manipulative activity on 
one of the constituent exchanges--just as it could attenuate, but not 
eliminate, the effect of bona fide liquidity demand on one of those 
exchanges.

[[Page 16258]]

    The Lewis Paper asserts that the absence of formal ties between 
bitcoin exchanges (i.e., the absence of an analog to Regulation NMS in 
the U.S. equity markets) means that demands for liquidity will not 
propagate across the worldwide market for bitcoin, limiting the price 
impact of manipulative behavior in the underlying market.\162\ However, 
to the extent that market participants view pricing information from 
one exchange as indications of likely price moves on other exchanges, 
price moves on the first exchange might be, temporarily at least, 
reflected on those other exchanges, despite the discounting function of 
the XBX Index algorithm. And, as material non-public information--such 
as regulatory information--can exist with respect to bitcoin, use of 
that information might be possible across multiple component exchanges, 
affecting the level of the XBX Index without requiring the deployment 
of large amounts of capital.\163\
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    \162\ Lewis Paper, supra note 43, at 8-9.
    \163\ The Lewis Paper notes that, since each bitcoin exchange is 
an independent entity, a liquidity event on one exchange does not 
necessarily propagate across other exchanges. This, according to the 
Lewis Paper, makes prices more resilient to liquidity shocks, but 
also slows down the transmission of fundamental information. See id. 
at 9. The Commission does not believe that manipulative activity 
propagates across trading venues solely through demands on liquidity 
being transferred from one venue to another. For example, regulatory 
events may simultaneously affect more than one bitcoin exchange, and 
the dissemination of pricing information from trades on one exchange 
may affect traders' view of supply and demand on other exchanges.
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    The Commission also observes that, while the XBX Index will be 
calculated continuously, this does not eliminate possible incentives 
for market participants to manipulate prices at single points in time. 
The Exchange notes that a closing level of the XBX Index will be 
calculated and published at or after 4:00 p.m. E.T.,\164\ and that the 
NAV of the Trust will be set using the XBX Index value as of 4:00 p.m. 
E.T., so the Commission believes that incentives would exist to 
manipulate the XBX Index at specific times.\165\
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    \164\ See supra note 16 and accompanying text.
    \165\ The Lewis Paper argues that, because bitcoin is quoted in 
prices with eight decimal places, this ``mitigates incentives to 
move prices a penny up or penny down because the potential gains 
from moving prices at the eighth decimal point are immaterial.'' 
Lewis Paper, supra note 43, at 9. But the divisibility of bitcoin 
itself is not relevant, and even if it were, the incentive to move 
the price by one hundred-millionth of a bitcoin would increase as 
the price and volume of traded bitcoin increased.
---------------------------------------------------------------------------

    Accordingly, the Commission does not believe that the record 
supports the claim that the unique properties of the XBX Index--or of a 
commodity-trust ETP based on the XBX Index--are sufficient to isolate 
the Shares from any manipulative activity in the underlying market or, 
by extension, to justify a significant departure from the standards 
applied to previous commodity-trust ETPs.
4. The Market for Derivatives on Bitcoin
    As noted above,\166\ the commodity-trust ETPs previously approved 
by the Commission for listing and trading have had--in lieu of 
significant, regulated spot markets--significant, well-established, and 
regulated futures markets that were associated with the underlying 
commodity and with which the listing exchange had entered into a 
surveillance-sharing agreement. For the reasons discussed further 
below, the Commission believes that this proposal fails to support a 
finding that there are significant, regulated derivatives markets 
related to bitcoin with which the Exchange could enter into a 
surveillance-sharing agreement.
---------------------------------------------------------------------------

    \166\ See supra notes 125-126 and accompanying text.
---------------------------------------------------------------------------

    The Exchange states that the CFTC has approved the registration of 
TeraExchange as a SEF and has provisionally registered another SEF, 
LedgerX, and that these are markets where market participants can enter 
into bitcoin swaps and NDFs.\167\ The Commission observes, however, 
that there is no evidence in the record that either of these venues 
transacts significant volume in bitcoin-related derivatives, and the 
Commission notes that the CFTC has, in fact, brought a settled 
enforcement action against one of those venues for facilitating 
prearranged, offsetting ``wash'' transactions and issuing a press 
release ``to create the impression of actual trading in the Bitcoin 
swap.'' \168\
---------------------------------------------------------------------------

    \167\ See supra notes 34-36 and accompanying text.
    \168\ See TeraExchange Settlement Order, supra note 146 and 
accompanying text.
---------------------------------------------------------------------------

    The Exchange names several non-U.S. bitcoin exchanges that offer 
derivative products on bitcoin such as options, swaps, and futures. The 
Commission, however, does not believe that the existence of these 
markets supports a finding that there are significant, regulated 
markets for bitcoin derivatives with which the Exchange could enter 
into a surveillance-sharing agreement. The record does not contain any 
evidence of the trading volume of these markets, the state of 
regulation of these markets, or the availability of surveillance-
sharing agreements with the regulators of these markets.
    The Lewis Paper asserts that the existence of bitcoin derivative 
markets is not a necessary condition for a bitcoin ETP.\169\ The key 
requirement the Commission is applying here, however, is not that a 
futures or derivatives market is required for every ETP, but that--when 
the spot market is unregulated--there must be significant, regulated 
derivatives markets related to the underlying asset with which the 
Exchange can enter into a surveillance-sharing agreement.
---------------------------------------------------------------------------

    \169\ See Lewis Paper, supra note 43, at 8.
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5. The Susceptibility of the Shares to Manipulation
    The Exchange represents that its existing surveillance measures, 
which focus on trading in the Shares, are sufficient to support the 
proposed rule change. Specifically, the Exchange represents that its 
surveillance procedures are adequate to properly monitor the trading of 
the Shares on the Exchange during all trading sessions and to detect 
and deter violations of Exchange rules and the applicable federal 
securities laws.\170\ The Exchange further represents that trading of 
the Shares through the Exchange will be subject to the Exchange's 
surveillance procedures for derivative products, including Commodity-
Based Trust Shares, and that the Exchange may obtain information 
regarding trading in the Shares through the Intermarket Surveillance 
Group, from other members of that group, or from markets with which the 
Exchange has a surveillance-sharing agreement.\171\ The Exchange also 
notes that, pursuant to its listing standards for Commodity-Based Trust 
Shares, the Exchange is able to obtain information regarding trading in 
the Shares and the underlying bitcoin, or any bitcoin derivative, from 
market makers registered with the Exchange, in connection with the 
market makers' proprietary or customer trades effected on any relevant 
market.\172\
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    \170\ See supra note 37 and accompanying text.
    \171\ See supra note 38 and accompanying text.
    \172\ See supra note 38. NYSE Arca Equities Rule 8.201(g) 
provides that a registered market maker in Commodity-Based Trust 
Shares must file with the Exchange and keep current a list 
identifying all accounts for trading in an underlying commodity, 
related commodity futures or options on commodity futures, or any 
other related commodity derivatives that the market maker may have 
or over which it may exercise investment discretion and must make 
available to the Exchange books, records, or other information 
relating to transactions in the underlying physical commodity, 
related commodity futures, or options on commodity futures.
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    Moreover, as noted earlier, some commenters assert that regulation 
by the Exchange of activity in the ETP could substitute for a lack of 
regulation in underlying spot or derivatives markets.\173\ The Sponsor 
also argues that

[[Page 16259]]

the Exchange's listing standards will provide strong protection against 
manipulation of the Shares.\174\
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    \173\ See supra notes 86-87 and accompanying text.
    \174\ See SolidX Letter II, supra note 43, at 2-3.
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    The Commission notes the Exchange's proposed surveillance 
procedures regarding the Shares, and the views expressed by the Lewis 
Paper and the Sponsor regarding the Trust's disclosures and information 
dissemination procedures. The Commission, however, views these 
procedures as necessary, but not sufficient, in light of the discussion 
above noting that the Exchange has not entered into, and would 
currently be unable to enter into, surveillance-sharing agreements with 
significant, regulated markets for trading either bitcoin itself or 
derivatives on bitcoin.\175\ In addition, while the Exchange would, 
pursuant to its listing rules, be able to obtain certain information 
regarding trading in the Shares and the underlying bitcoin or any 
bitcoin derivative through Exchange-registered market makers,\176\ the 
Commission observes that this trade information would be limited to the 
activities of its members that are market makers. Moreover, the 
Commission does not accept the premise that regulation of trading in 
the Shares is a sufficient and acceptable substitute for regulation in 
the spot or derivatives markets related to the underlying asset. Absent 
the ability to detect and deter manipulation of the Shares--through 
surveillance sharing with significant, regulated markets related to the 
underlying asset--the Commission does not believe that a national 
securities exchange can meet its Exchange Act obligations when listing 
shares of a commodity-trust ETP.
---------------------------------------------------------------------------

    \175\ See supra Sections III.B.2 & III.B.4.
    \176\ See supra note 172 and accompanying text.
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6. The Protection of Investors and the Public Interest
    The Sponsor argues that approval of the proposed rule change is 
consistent with the protection of investors because investors are 
currently being harmed by the inability to invest in an insured bitcoin 
vehicle and need to be protected from ``ongoing losses related to 
hacking, errors and other operational hazards associated with direct 
bitcoin ownership.'' \177\ The Sponsor concludes that Section 6(b)(5) 
of the Exchange Act compels approval of the Exchange's proposal, so 
that investors may invest in the Trust and thereby be protected from 
these risks.\178\ In essence, the Sponsor asserts that it is the risky 
nature of direct investment in the underlying bitcoin (including lack 
of insurance coverage) and the unregulated markets on which bitcoin 
trades that compel approval of the proposed rule change. The Sponsor 
offers no limiting principle to this argument, under which, by logical 
extension, the Commission would be required to approve the listing and 
trading of any ETP that arguably presented marginally less risk to 
investors than a direct investment in the underlying asset.
---------------------------------------------------------------------------

    \177\ SolidX Letter II, supra note 43, at 2.
    \178\ See supra note 39 and accompanying text.
---------------------------------------------------------------------------

    The Commission disagrees with this reading of the Exchange Act. 
Pursuant to Section 19(b)(2) of the Exchange Act, the Commission must 
approve a proposed rule change filed by a national securities exchange 
if it finds that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act--including the requirement 
under Section 6(b)(5) that the rules of a national securities exchange 
be designed to prevent fraudulent and manipulative acts and practices--
and it must disapprove the filing if it does not make such a 
finding.\179\ Thus, even if a proposed rule change purports to protect 
investors from a particular type of investment risk--such as the 
susceptibility of an asset to loss or theft--the proposed rule change 
may still fail to meet other requirements under the Exchange Act.\180\
---------------------------------------------------------------------------

    \179\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \180\ The Commission notes that the insurance policy for the 
Trust's bitcoin holdings, as described by the Exchange and the 
Sponsor, see Amendment No. 1, supra note 1, 82 FR at 12261; SolidX 
Letter, supra note 43, at 2, 5, 11-12, covers theft and loss of the 
bitcoin holdings, but does not insure against the risk of loss 
resulting from fraudulent or manipulative acts and practices with 
respect to the underlying bitcoins or the Shares.
---------------------------------------------------------------------------

    As explained above, the Commission has consistently, for commodity-
trust ETPs, required that the listing exchange have surveillance-
sharing agreements with significant, regulated markets related to the 
underlying asset. That requirement has not been met here. Therefore, 
the Commission--even if, for the sake of argument, it agreed that 
investment in the Trust might present fewer risks to investors than 
direct investments in bitcoin--would be unable to find that the 
proposed rule change is consistent with the statutory standard.

C. Basis for Disapproval

    The Commission has, in past approvals of commodity-trust ETPs, 
emphasized the importance of surveillance-sharing agreements between 
the national securities exchange listing and trading the ETP, and 
significant markets relating to the underlying asset.\181\ Such 
agreements, which are a necessary tool to enable the ETP-listing 
exchange to detect and deter manipulative conduct, enable the exchange 
to meet its obligation under Section 6(b)(5) of the Exchange Act to 
have rules that are designed to prevent fraudulent and manipulative 
acts and practices and to protect investors and the public 
interest.\182\
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    \181\ See supra notes 125-126 and accompanying text. The 
Commission has also emphasized this requirement in the context of 
disapproving a proposal to list and trade shares of a commodity-
trust ETP. See Bats BZX Order, supra note 6, 82 FR at 14087.
    \182\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As described above, the Exchange has not entered into a 
surveillance-sharing agreement with a significant, regulated, bitcoin-
related market. The Commission also does not believe, as discussed 
above, that the proposal supports a finding that the significant 
markets for bitcoin or derivatives on bitcoin are regulated markets 
with which the Exchange can enter into such an agreement. Therefore, as 
the Exchange has not entered into, and would currently be unable to 
enter into, the type of surveillance-sharing agreement that has been in 
place with respect to all previously approved commodity-trust ETPs, the 
Commission does not find the proposed rule change to be consistent with 
the Exchange Act and, accordingly, disapproves the proposed rule 
change.
    The Commission notes that bitcoin is still in the relatively early 
stages of its development and that, over time, regulated bitcoin-
related markets of significant size may develop. Should such markets 
develop, the Commission could consider whether a bitcoin ETP would, 
based on the facts and circumstances then presented, be consistent with 
the requirements of the Exchange Act.

IV. Conclusion

    For the reasons set forth above, the Commission does not find that 
the proposed rule change, as modified by Amendment No. 1, 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,\183\ that the proposed rule change (SR-NYSEArca-2016-
101), as modified by Amendment No. 1, be, and it hereby is, 
disapproved.
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    \183\ 15 U.S.C. 78s(b)(2).


[[Page 16260]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\184\
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    \184\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-06441 Filed 3-31-17; 8:45 am]
BILLING CODE 8011-01-P


