[Federal Register Volume 84, Number 101 (Friday, May 24, 2019)]
[Notices]
[Pages 24188-24191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10858]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85896; File No. SR-CboeBZX-2019-004]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To List and Trade Shares of the VanEck SolidX 
Bitcoin Trust

May 20, 2019.
    On January 30, 2019, Cboe BZX Exchange, Inc. (``BZX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares of SolidX Bitcoin Shares 
(``Shares'') issued by the VanEck SolidX Bitcoin Trust (``Trust'') 
under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The proposed 
rule change was published for comment in the Federal Register on 
February 20, 2019.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 85119 (Feb. 13, 
2019), 84 FR 5140 (Feb. 20, 2019) (``Notice'').
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    On March 29, 2019, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission has received 25 comment letters on the 
proposed rule change.\6\ This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85475 (Mar. 29, 
2019), 84 FR 13345 (Apr. 4, 2019). The Commission designated May 21, 
2019, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ Comments on the proposed rule change can be found at: 
https://www.sec.gov/comments/sr-cboebzx-2019-004/srcboebzx2019004.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in detail in the Notice,\8\ the Exchange proposes to 
list and trade the Shares under BZX Rule 14.11(e)(4), which governs the 
listing and trading of Commodity-Based Trust Shares on the Exchange.\9\ 
Each Share would represent a fractional undivided beneficial interest 
in the Trust's net assets. The Trust's assets would consist of bitcoin, 
and the Trust would be responsible for custody of the Trust's 
bitcoin.\10\ SolidX Management LLC would be the sponsor of the Trust 
(``Sponsor''). The Bank of New York Mellon would be the Administrator, 
transfer agent, and the custodian with respect to cash of the Trust. 
Foreside Fund Services, LLC would be the marketing agent in connection 
with the creation and redemption of baskets of Shares. Van Eck 
Securities Corporation would provide assistance in the marketing of the 
Shares.\11\
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    \8\ See Notice, supra note 3.
    \9\ See BZX Rule 14.11(e)(4) (permitting the listing and trading 
of ``Commodity-Based Trust Shares,'' defined as a security (a) that 
is used by a trust which holds a specified commodity deposited with 
the trust; (b) that is issued by such trust in a specified aggregate 
minimum number in return for a deposit of a quantity of the 
underlying commodity; and (c) that, when aggregated in the same 
specified minimum number, may be redeemed at a holder's request by 
such trust which will deliver to the redeeming holder the quantity 
of the underlying commodity).
    \10\ See Notice, supra note 3, 84 FR at 5141.
    \11\ See id.
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    According to the Exchange, the investment objective of the Trust 
would be for the Shares to reflect the performance of the price of 
bitcoin, less the expenses of the Trust's operations. The Trust would 
not be actively managed and would not engage in activities designed to 
obtain a profit from, or to ameliorate losses caused by, changes in the 
price of bitcoin.\12\ The Administrator would generally use the closing 
price set for bitcoin by the MVIS Bitcoin OTC Index (``MVBTCO'') to 
calculate the Fund's net asset value (``NAV'') on each business day 
that the Exchange is open for regular trading, as promptly as 
practicable after 4:00 p.m. E.T.\13\
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    \12\ See id.
    \13\ See id. at 5147. In the event that the Sponsor determines 
that this valuation method has failed, the Sponsor will determine 
the bitcoin market price on the valuation date according to a set of 
alternative methods to be used in the following order: (a) The mid-
point price of the bid/ask spread as of 4:00 p.m. E.T. obtained by 
the Sponsor from any bitcoin over-the-counter (``OTC'') platform 
that is part of the MVBTCO index; (b) the volume-weighted average 
price over the 24-hour period ending at 4:00 p.m. E.T. as published 
by a public data feed that is calculated based upon a volume-
weighted average bitcoin price obtained from the major U.S. dollar-
denominated bitcoin exchanges and that the Sponsor determines is 
reasonably reliable; and (c) the Sponsor's best judgment of a good 
faith estimate of the bitcoin market price. Greater detail 
concerning the alternative pricing procedures if the MVBTCO cannot 
be utilized as the basis for NAV calculations can be found in the 
Notice. See id.
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    According to the Exchange, the MVBTCO represents the value of one 
bitcoin in U.S. dollars at any point in time. The Exchange represents 
that the MVBTCO calculates the intra-day price of bitcoin every 15 
seconds and a closing price as of 4:00 p.m. E.T., each

[[Page 24189]]

weekday and that the intra-day levels of the MVBTCO incorporate the 
real-time price of bitcoin based on executable bids and asks derived 
from constituent bitcoin OTC platforms that have entered into an 
agreement with MV Index Solutions GmbH to provide such information.\14\ 
According to the Exchange, the intra-day price and closing level of the 
MVBTCO are calculated using a proprietary methodology collecting 
executable bid/ask spreads and calculating a mid-point price from these 
U.S.-based bitcoin OTC platforms.\15\
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    \14\ According to the Exchange, each OTC constituent platform or 
``OTC Trading Desk'' will offer constant, executable bids and offers 
of at least $250,000 worth of bitcoin, and the MVBTCO value will be 
based on these bids and offers. The Exchange represents that it will 
have in place a comprehensive surveillance sharing agreement with 
each of these OTC Trading Desks prior to the Shares listing on the 
Exchange. See id. at 5145, n.35.
    \15\ According to the Sponsor, the MVBTCO's methodology 
decreases the influence on the MVBTCO of any particular OTC platform 
that diverges from the rest of the data points used by the MVBTCO, 
which reduces the possibility of an attempt to manipulate the price 
of bitcoin as reflected by the MVBTCO. See id. at 5146.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2019-004 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \16\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\17\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \18\
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    \17\ Id.
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\19\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
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    \19\ See Notice, supra note 3.
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    1. What are commenters' views on whether the Exchange has entered 
into a surveillance-sharing agreement with a regulated market of 
significant size related to bitcoin? What are commenters' views of the 
Exchange's assertion that the trading volume in bitcoin futures makes 
the market for bitcoin futures a regulated market of significant size 
related to bitcoin? What are commenters' views on whether there is a 
reasonable likelihood that a person attempting to manipulate the Shares 
would also have to trade in the bitcoin futures market to manipulate 
the Shares? What are commenters' views on whether it is likely that 
trading in the Shares would be the predominant influence on prices in 
the bitcoin futures market?
    2. What are commenters' views on the relationship between the 
bitcoin futures market and the bitcoin spot market? For example, what 
is the relative size of these markets, and where does bitcoin price 
formation occur? Does the market, spot or futures, in which price 
formation occurs affect commenters' analysis of whether it is 
reasonably likely that someone attempting to manipulate the Shares 
would have to trade in the bitcoin futures market, or that trading in 
the Shares would be the predominant influence on prices in the bitcoin 
futures market? To what extent, if at all, do recent developments in 
the bitcoin futures market--namely, the cessation of new bitcoin 
futures contract trading on the Chicago Futures Exchange--affect 
commenters' analysis of these questions?
    3. What are commenters' views on whether the trading relationship 
between the market for bitcoin futures contracts and the proposed 
Trust, which would hold physical bitcoins, would be similar to, or 
different from, the relationship between the market for freight futures 
contracts and the Breakwave Dry Bulk Shipping ETF (cited by the 
Exchange in the Notice),\20\ which directly holds futures contracts 
traded on that market? What are commenters' views on how these 
similarities or differences might affect an analysis of whether it is 
reasonably likely that someone attempting to manipulate the Shares 
would have to trade in the bitcoin futures market, or that trading in 
the Shares would be the predominant influence on prices in the bitcoin 
futures market?
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    \20\ See id. at 5142-45.
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    4. What are commenters' views on the Trust's proposal to value its 
bitcoin holdings based on an index--the MVBTCO--that is calculated 
through a proprietary, non-public methodology that uses the privately 
reported bid/ask spreads of an unidentified set of U.S.-based market-
makers in the OTC marketplace, which, the Exchange says, has no formal 
structure and no open-outcry meeting place? Is the use of a non-public, 
proprietary index to value holdings based on OTC activity an 
appropriate means to calculate the NAV of an exchange-traded product 
(``ETP'')? What are commenters' views on whether determining NAV based 
on the index value at 4:00 p.m. E.T. might, or might not, create an 
opportunity for manipulation of the NAV or of the Shares? What are 
commenters' views on the assertion in the Notice that, according to the 
Sponsor, the MVBTCO's methodology reduces the possibility of an attempt 
to manipulate the price of bitcoin as reflected by the MVBTCO? What are 
commenters' views on the Sponsor's assertion, as described by the 
Exchange in the Notice, that ``the OTC desks have a better measure of 
the market than any exchange-specific reference price, whether 
individually or indexed across multiple exchanges''?
    5. What are commenters' views on the Exchange's representation that 
it will have in place a comprehensive surveillance sharing agreement 
with each of the OTC platforms that constitute the MVBTCO prior to the 
Shares listing on the Exchange? What are commenters' views on the 
Exchange's assertion that the regulated nature of each of the OTC 
platforms that make up the MVBTCO, the notional volume of trading and 
liquidity available on these platforms, the principal-to-principal 
nature of these platforms, and comprehensive surveillance sharing 
agreements with each of the OTC platforms (in addition to the 
Exchange's standard surveillance procedures) are sufficient to prevent 
fraudulent and manipulative acts and practices in the Shares? What are 
commenters' views on the extent to which each of these OTC platforms is 
regulated? What are commenters' views on the extent to which each of 
these OTC platforms can, or does, conduct surveillance of bitcoin 
trading activity?

[[Page 24190]]

    6. What are commenters' views on the size, liquidity, transparency, 
number and nature of market participants, and price discovery in the 
OTC market for bitcoin, both on an absolute basis and relative to the 
bitcoin spot market as a whole? What are commenters' views on whether 
the volume of U.S. dollar trading of bitcoin--which excludes bitcoin 
trading against other sovereign currencies or digital assets--is a 
meaningful or appropriate measure of bitcoin market volume?
    7. The Exchange states that the Trust does not intend to report its 
OTC trading. What are commenters' views on how the Trust's unreported 
OTC trades may affect the calculation of the Trust's NAV and the 
ability of market makers to engage in arbitrage?
    8. What are commenters' views on each of the set of alternative 
means by which the Trust proposes to value its holdings in the event 
that the Sponsor determines that the MVBTCO, or another alternate 
pricing mechanism, has failed, is unavailable, or is deemed unreliable? 
What are commenters' views on whether any of these pricing mechanisms, 
primary or alternate, would be affected by, or resistant to, 
manipulative activity in bitcoin markets?
    9. What are commenters' views on the assertion by the Exchange that 
the dissemination of information on the Trust's website, along with 
quotations for and last-sale prices of transactions in the Shares and 
the intra-day indicative value (or ``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? What are commenters' views on 
whether the liquidity of the OTC bitcoin market is sufficient to 
support efficient arbitrage between the price of the Shares and the 
spot price of bitcoin?
    10. The Exchange represents that it has entered into a 
comprehensive surveillance-sharing agreement with the Gemini Exchange 
and is working to establish similar agreements with other bitcoin 
venues. What are commenters' views on whether the Gemini Exchange is a 
regulated market of significant size? What are commenters' views on 
whether there is a reasonable likelihood that a person attempting to 
manipulate the proposed ETP would also have to trade on the Gemini 
Exchange? What are commenters' views on whether trading in the proposed 
ETP would be the predominant influence on prices in the Gemini 
Exchange? What are commenters' views on whether the Exchange could 
enter into surveillance-sharing agreements with regulated spot markets 
of significant size related to bitcoin?
    11. What are commenters' views of the Exchange's assertions that 
bitcoin is arguably less susceptible to manipulation than other 
commodities that underlie ETPs; that the geographically diverse and 
continuous nature of bitcoin trading makes it difficult and 
prohibitively costly to manipulate the price of bitcoin; that trading 
on inside information regarding bitcoin is unlikely; that the 
fragmentation across bitcoin markets, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin prices 
through continuous trading activity unlikely; that manipulation of the 
price on any single venue would require manipulation of the global 
bitcoin price to be effective; that a substantial OTC bitcoin market 
provides liquidity and shock-absorbing capacity; that bitcoin's ``24/7/
365 nature'' \21\ provides constant arbitrage opportunities across all 
trading venues; and that it is unlikely that any one actor could obtain 
a dominant market share?
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    \21\ See id. at 5142 n.11, 5156 n.46.
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    12. What are commenters' views of the Exchange's assertions that 
transacting in the Shares will be geared toward more sophisticated 
institutional investors and will be cost-prohibitive for smaller retail 
investors? What are commenters' views regarding whether broker-dealers 
are likely to offer fractional shares in the Trust to retail investors, 
permitting retail investment with a smaller financial commitment? What 
are commenters' views of the Exchange's assertions that the Sponsor 
believes that demand from new, larger 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, in light of the 
possibility that broker-dealers may offer fractional shares to their 
customers?
    13. What are commenters' views on the Exchange's assertion that a 
minimum of 100 Shares outstanding at the time of commencement of 
trading will be sufficient to provide adequate market liquidity? What 
are commenters' views on whether the 100-share minimum would affect the 
arbitrage mechanism? What are commenters' views on the Exchange's 
assertion that, even though the Trust would not comply with the minimum 
number of shares outstanding required by Exchange rules, the policy 
concerns underlying that requirement would be otherwise mitigated in 
the case of the Trust, because the lower number of Shares is merely a 
function of the price of the Shares and will have no effect on the 
creation and redemption process or on arbitrage?
    14. What are commenters' views of whether the Trust's proposed 
insurance coverage would affect trading in the Shares or in the 
underlying bitcoins? What are commenters' views regarding the Trust's 
proposed security, control, and insurance measures?

III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\22\
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    \22\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 14, 2019. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 28, 
2019.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeBZX-2019-004 on the subject line.

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Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2019-004. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2019-004 and should be submitted 
by June 14, 2019. Rebuttal comments should be submitted by June 28, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10858 Filed 5-23-19; 8:45 am]
 BILLING CODE 8011-01-P


