[Federal Register Volume 85, Number 248 (Monday, December 28, 2020)]
[Notices]
[Pages 84403-84431]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28536]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90735; File No. SR-BOX-2020-14]


Self-Regulatory Organizations; BOX Exchange LLC; Order 
Disapproving Proposed Rule Change, as Modified by Amendment No. 1, To 
Adopt Rules Governing the Trading of Equity Securities on the Exchange 
Through a Facility of the Exchange Known as the Boston Security Token 
Exchange LLC

December 18, 2020.

Introduction

    On May 21, 2020, BOX Exchange LLC (``Exchange'' or ``BOX'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt rules governing the listing and trading of equity securities that 
would be National Market System (``NMS'') stocks on the Exchange 
through a facility of the Exchange known as the Boston Security Token 
Exchange LLC (``BSTX''). The proposed rule change was published for 
comment in the Federal Register on June 1, 2020.\3\ On July 16, 2020, 
pursuant to Section 19(b)(2) of the Exchange Act,\4\ the Commission 
designated a longer period within which to either approve the proposed 
rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\
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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. 88946 (May 26, 
2020), 85 FR 33454 (June 1, 2020) (SR-BOX-2020-14) (``Notice''). 
Comments received on the proposed rule change are available at: 
https://www.sec.gov/comments/sr-box-2020-14/srbox202014.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89328 (July 16, 
2020), 85 FR 44338 (July 22, 2020). The Commission designated August 
30, 2020, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
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    On July 31, 2020, the Exchange filed Amendment No. 1 to the 
proposed rule change, which replaced and superseded the proposed rule 
change as originally filed.\6\ On August 12, 2020, the Commission 
published the proposed rule change, as modified by Amendment No. 1, for 
notice and comment and instituted proceedings to determine whether to 
approve or disapprove the proposed rule change, as modified by 
Amendment No. 1.\7\ On November 24, 2020, pursuant to Section 19(b)(2) 
of the Exchange Act, the Commission

[[Page 84404]]

designated a longer period within which to issue an order approving or 
disapproving the proposed rule change, as modified by Amendment No. 
1.\8\
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    \6\ In Amendment No. 1, the Exchange revised the proposal to: 
(i) Change the name used to refer to BSTX-listed securities from 
``security tokens'' to ``Securities''; (ii) eliminate the proposed 
requirement for trades on the Exchange to settle one business day 
after the trade date (``T+1''), which is not the settlement cycle 
for NMS stock; (iii) add proposed rule text that the Exchange 
describes as containing measures to ensure the accuracy of end-of-
day Security balance reports; (iv) add proposed rule text specifying 
that the time by which Exchange members must report end-of-day 
Security balances to the Exchange will be set forth by the Exchange 
via regulatory circular; (v) provide additional description of 
several aspects of the proposal, including end-of-day Security 
balance reporting and implications of the trading of BSTX-listed 
Securities on other national securities exchanges on the end-of-day 
reporting process; and (vi) make technical and conforming changes. 
Amendment No. 1 is available on the Commission's website at: https://www.sec.gov/comments/sr-box-2020-14/srbox202014-7570237-222233.pdf. 
On July 31, 2020, the Exchange also submitted a letter to the 
Commission requesting that the Commission concur with the Exchange's 
conclusion that members that enter orders into BSTX's trading system 
satisfy the conditions of Rule 11a2-2(T) under the Exchange Act (17 
CFR 240.11a2-2(T)). See Letter from Lisa Fall, President, BOX, to 
Vanessa Countryman, Secretary, Commission, and Tyler Raimo, 
Assistant Director, Division of Trading and Markets, Commission 
(July 31, 2020), available at https://www.sec.gov/comments/sr-box-2020-14/srbox202014-7506169-221931.pdf.
    \7\ See Securities Exchange Act Release No. 89536 (August 12, 
2020), 85 FR 51250 (August 19, 2020) (``Order Instituting 
Proceedings'' or ``OIP'').
    \8\ See Securities Exchange Act Release No. 90512 (Nov. 24, 
2020), 85 FR 77327 (Dec. 1, 2020).
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    In Amendment No. 1 to the proposed rule change, the Exchange states 
that the proposed rule change was previously filed with the Commission 
as SR-BOX-2019-19, which the Exchange amended twice, and that the 
current proposed rule change, SR-BOX-2020-14, is ``substantively 
identical'' to previously-filed proposed rule change, SR-BOX-2019-19, 
as modified by Amendment No. 2 thereto.\9\ SR-BOX-2019-19, as modified 
by Amendment No. 2 thereto, was published for comment in the Federal 
Register on March 6, 2020.\10\ The Commission received comments on the 
substance of SR-BOX-2019-19, as well as responses submitted by BOX.\11\ 
BOX withdrew proposed rule change SR-BOX-2019-19 on May 12, 2020.\12\ 
As applicable and discussed below, the Commission considered comments 
submitted on SR-BOX-2019-19 and SR-BOX-2020-14 in its review of SR-BOX-
2020-14.\13\
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    \9\ See OIP, supra note 7, 85 FR at 51251, n.14.
    \10\ See Securities Exchange Act Release No. 88300 (February 28, 
2020), 85 FR 13242 (March 6, 2020) (Notice of Filing of Amendment 
No. 2 to Proposed Rule Change). See also Securities Exchange Act 
Release Nos. 87287 (October 11, 2019), 84 FR 56022 (October 18, 
2019) (Notice of Filing of Proposed Rule Change) (noticing SR-BOX-
2019-19 as originally filed); and 88002 (January 16, 2020), 85 FR 
4040 (January 23, 2020) (Notice of Filing of Amendment No. 1 and 
Order Instituting Proceedings) (noticing Amendment No. 1 to SR-BOX-
2019-19 and instituting proceedings to determine whether to 
disapprove the proposed rule change as modified by Amendment No. 1). 
The only differences between SR-BOX-2019-19, as modified by 
Amendment No. 2, and SR-BOX-2020-14 relate to: Removal of references 
to Amendment No. 2; modification of a reference to Exhibit 5 to the 
filing; modification of the description of BSTX ownership interests 
to reflect the addition of a small percentage (less than 10%) of 
non-voting economic interest-holders; updating a reference to a 
related filing (SR-BOX-2019-37, which was also withdrawn and refiled 
as SR-BOX-2020-16); corrections to citations; and grammatical 
corrections.
    \11\ Comments on SR-BOX-2019-19 can be found at: https://www.sec.gov/comments/sr-box-2019-19/srbox201919.htm. These comments 
also include response letters from the Exchange.
    \12\ See Securities Exchange Act Release No. 89018 (June 4, 
2020), 85 FR 35458 (June 10, 2020) (Notice of Withdrawal of a 
Proposed Rule Change).
    \13\ With respect to comments received on SR-BOX-2019-19 that 
are discussed below, the Commission notes that the aspects of the 
proposal that were the subject of commenters' concerns remain the 
same in the current proposal, SR-BOX-2020-14.
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    This order disapproves the proposed rule change, as modified by 
Amendment No. 1. The Exchange proposes to list and trade NMS stock that 
would be uncertificated securities that are issued, traded, and cleared 
like any other NMS stock. Unlike other NMS stock, however, the Exchange 
proposes to require issuers and members eligible to participate on the 
BSTX trading system (``BSTX Participants'') to comply with a protocol 
that would enable BSTX to record and publicly disseminate BSTX 
Participants' end-of-day securities ownership balances to the Ethereum 
blockchain \14\ (such BSTX-listed stock to be referred to as 
``Securities''). According to the Exchange, this information recorded 
on the Ethereum blockchain would be ``ancillary'' to the official 
ownership records maintained by participants at the securities 
depository and would not convey legal ownership of Securities. For each 
Security, the Ethereum blockchain would reflect the end-of-day balance 
for each BSTX Participant, along with a balance allocated to an 
``omnibus'' wallet. The Exchange proposes to use the omnibus wallet to, 
among other things, record and publicly disseminate the aggregate 
balance of Securities held by non-BSTX Participants, as well as to 
account for other discrepancies between the total balance reported by 
BSTX Participants and the total number of Securities outstanding. As 
discussed in further detail below, this Order finds that that the 
Exchange has not met its burden to demonstrate that the proposal is 
consistent with Sections 6(b)(1), 6(b)(5), and 6(b)(8) of the Exchange 
Act.
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    \14\ A ``blockchain'' is a type of distributed ledger, or peer-
to-peer database spread across a network, that records all 
transactions in the network in digitally-recorded data packages 
called blocks. The ``Ethereum blockchain'' is an open, or 
permissionless, blockchain that is a record of events resulting from 
the execution of code (smart contracts) on the blockchain. See 
generally, Report of Investigation Pursuant to Section 21(a) of the 
Securities Exchange Act of 1934: The DAO, Release No. 81207, 2017 WL 
7184670, at *1-*2 & n.6 (July 25, 2017) (``The DAO Report'').
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    Specifically, the Commission examines in Section III.B how the 
Exchange's proposal would result in inaccurate BSTX-listed Security 
ownership balances being publicly disseminated on the Ethereum 
blockchain. As explained in more detail below, there are several ways 
in which inaccurate information from BSTX would be publicly available 
on the Ethereum blockchain, including: (i) Security balances published 
to the Ethereum blockchain would be inaccurate to the extent that BSTX 
Participants report inaccurate information or are late in reporting; 
(ii) Security balances would be stale because they would represent a 
snapshot of a BSTX Participant's depository account balance at the end 
of the last trading day and thus fail to reflect transactions that have 
not yet settled; (iii) the omnibus wallet would include Security 
balances that cannot be attributed to the respective BSTX Participant 
due to such inaccurate or late reporting as well as the holdings of 
non-BSTX Participants; and (iv) BSTX Participants' short and long 
positions, both of which would be reported, would be indistinguishable 
when represented on the Ethereum blockchain, and thereby would provide 
an economically inaccurate picture of Security balances. Accordingly, 
as the Exchange concedes, there are a variety of circumstances in which 
the publicly disseminated information reflected on the Ethereum 
blockchain would not represent true holdings. Furthermore, exacerbating 
the inaccuracy of the information that the Exchange would publicly 
disseminate on the Ethereum blockchain, the Exchange has not 
demonstrated whether or how it would surveil for, reconcile, or address 
these inaccuracies. The Commission finds, based on the significant risk 
that this inaccurate information would confuse and mislead investors, 
that the Exchange has not met its burden to demonstrate that the 
proposed rule change is consistent with the protection of investors and 
the public interest, in accordance with Section 6(b)(5) of the Exchange 
Act. The Commission separately finds that, based on the significant 
risk that investors will use this inaccurate public information about 
Security ownership in their investment decisions, the Exchange has not 
met its burden to demonstrate that the proposed rule change is 
consistent with the protection of investors and the public interest, in 
accordance with Section 6(b)(5) of the Exchange Act.
    In addition, the Commission examines in Section III.C significant 
operational aspects of the Exchange's proposal that the Exchange has 
not sufficiently explained, thereby making it difficult for potential 
BSTX Participants and other market participants to understand the 
obligations that the Exchange would impose. The Commission examines 
below several aspects of the Exchange's proposal, including: (i) The 
Exchange's proposed procedures relating to the recording and 
dissemination of end-of-day Security ownership balances; (ii) the costs 
or other burdens that would be imposed on market participants to comply 
with the proposed requirement to report end-of-day Security ownership 
balances; (iii) the Exchange's standard or procedures to suspend the 
end-of-day Security reporting requirements; and (iv) the requirements 
the Exchange would place on listed companies, and in particular,

[[Page 84405]]

how trading might be impacted between two classes of securities of an 
issuer--one listed on BSTX and one listed on another national 
securities exchange--where the only distinction may be that one has the 
necessary smart contracts to comply with BSTX's requirements. The 
Commission finds, due to the lack of information about BSTX's intended 
operations, that the Exchange has not met its burden to demonstrate 
that its proposed rule change would prevent fraudulent and manipulative 
acts and practices, facilitate transactions in securities, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest, and is not designed to permit unfair discrimination, 
consistent with Section 6(b)(5) of the Exchange Act. The Commission 
also finds, due to a lack of explanation about how the Exchange would 
carry out these functions and fulfill its obligation to be organized 
and be able to carry out the purposes of the Exchange Act, and to 
comply and enforce compliance by its members with its own rules, that 
the Exchange has not met its burden to show that its proposed rule 
change is consistent with Section 6(b)(1) of the Exchange Act.
    Lastly, the Commission examines in Section III.D how another 
national securities exchange could provide end-of-day Security 
ownership balance reporting functionality for its members. The 
Commission finds, due to the lack of explanation of how another 
national securities exchange that seeks to extend unlisted trading 
privileges (``UTP'') to a BSTX-listed Security could feasibly provide 
an end-of-day Security ownership balance reporting functionality to its 
members, that the Exchange has not met its burden to demonstrate that 
its rules do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act, as 
required by Section 6(b)(8) of the Exchange Act. Specifically, the 
Exchange has not sufficiently addressed its control over the end-of-day 
reporting process or the feasibility of another national securities 
exchange setting up its own parallel process for end-of-day reporting. 
Without a sufficient understanding of the burdens on competition, the 
Commission cannot determine if these burdens are necessary or 
appropriate in furtherance of the Exchange Act.
    Although the Commission is disapproving this proposed rule change, 
the Commission emphasizes that it encourages and supports innovation 
and the application of beneficial technologies in our securities 
markets, and its disapproval of this proposed rule change does not rest 
on an evaluation of whether blockchain technology has utility or value 
as an innovation, generally or as applied to the functions of a 
national securities exchange. The Commission believes that there is 
value in distributed ledger technology and related innovation, which 
offers the ability to share information, transfer value, and record 
transactions in a distributed digital environment. However, the public 
dissemination of information known to be inaccurate or misleading, as 
here, irrespective of whether it takes place through a public 
blockchain, a public database, a public website, or a published 
circular, is problematic.

Description of the Proposed Rule Change

    As described in the OIP,\15\ the Exchange proposes to adopt listing 
standards for certain NMS stocks that the Exchange refers to as 
``Securities.'' For each class of ``Securities'' listed by BOX, the 
Exchange would employ a functionality to record and publicly 
disseminate on the Ethereum blockchain end-of-day ownership balances 
reported to the Exchange by BSTX Participants.\16\ The Exchange is also 
proposing rules governing the trading of these NMS stocks through a 
facility of the Exchange known as BSTX, which would operate a fully 
automated, price-time priority execution system (``BSTX System'').\17\ 
According to the Exchange, the end-of-day Security ownership balance 
information would constitute ``ancillary'' or supplemental records of 
end-of-day ownership balances and legal ownership would be separately 
established and evidenced by operation of commercial law. The Exchange 
contends that the official records of security ownership would be 
maintained by participants at The Depository Trust Company (``DTC''), 
and attribution of a ``Security'' to a particular wallet address on the 
Ethereum blockchain would not convey ownership of shareholder equity in 
the issuer of the NMS stock.\18\
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    \15\ See OIP, supra note 7.
    \16\ See OIP, supra note 7, 85 FR at 51250-51. A ``BSTX 
Participant'' would be a participant that is authorized to trade 
Securities on the Exchange. See proposed BSTX Rule 17000(a)(11).
    \17\ See OIP, supra note 7, 85 FR at 51250. Pursuant to a 
separate proposed rule change, the Exchange proposes to establish 
BSTX as a facility of the Exchange that will operate a market for 
the trading of securities (``BSTX Market'') and adopt the BSTX 
Second Amended and Restated LLC Agreement. See Securities Exchange 
Act Release No. 89537 (August 12, 2020), 85 FR 50850 (August 18, 
2020) (SR-BOX-2020-16) (Notice of Filing of Amendment No. 1 and 
Order Instituting Proceedings to Determine Whether to Approve or 
Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, 
in Connection with the Proposed Establishment of the Boston Security 
Token Exchange LLC as a Facility of the Exchange) (``Amended BSTX 
Governance Proposal''). See also Securities Exchange Act Release No. 
88949 (May 26, 2020), 85 FR 33258 (June 1, 2020) (``BSTX Governance 
Proposal''). Among other things, the Amended BSTX Governance 
Proposal sets forth the proposed ownership structure for BSTX. The 
Exchange states that without Commission approval of the trading 
rules, the Exchange would not permit BSTX to commence operations of 
the BSTX Market, and that the Exchange's regulatory oversight 
responsibilities with respect to BSTX would not be triggered unless 
SR-BOX-2020-16 is approved by the Commission. See Amended BSTX 
Governance Proposal, 85 FR at 50850.
    \18\ See OIP, supra note 7, 85 FR at 51253, 51257.
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    According to the Exchange, the Exchange would record Security 
ownership balances on the Ethereum blockchain using a protocol standard 
determined by BSTX that each security admitted to trading on BSTX would 
be required to follow (the ``BSTX Protocol'').\19\ The Exchange 
proposes that each BSTX Participant would be required to establish, 
either directly or through a carrying firm, what the Exchange calls a 
``whitelisted'' wallet address (hereinafter ``allowlisted'') to which 
its end-of-day Security ownership balances may be recorded.\20\ The 
Exchange proposes that, each business day, each BSTX Participant would 
be required to report to BSTX certain end-of-day Security ownership 
balances in a manner and form acceptable to BSTX.\21\ The Exchange 
would then provide this information to a Wallet Manager \22\ to update 
the Ethereum blockchain to reflect changes in ownership of Securities 
and publicly disseminate the ownership balance for each wallet 
address.\23\ The Exchange proposes that a BSTX Participant shall 
promptly send a corrected end-of-day Security balance report to the 
Exchange upon the BSTX Participant's discovery that it submitted an 
inaccurate end-of-day report that has not already been corrected or 
superseded.\24\ If the Exchange has reason to believe that Security 
balances reported by one or

[[Page 84406]]

more BSTX Participants may be inaccurate, the Exchange may request 
additional information regarding the applicable reports and balances 
from any BSTX Participant to which the BSTX Participant shall promptly 
respond.\25\ Under the proposal, the Exchange would, in its discretion, 
be able to suspend the requirement that a BSTX Participant establish a 
wallet address and report its end-of-day ownership balance with respect 
to any BSTX Participant and/or with respect to one or more Securities, 
as applicable.\26\ Non-BSTX Participants that may trade Securities 
would not be subject to the requirement to obtain an allowlisted wallet 
address or to report their end-of-day Security ownership balances, and 
would not be able to voluntarily report end-of-day Security ownership 
balances to BSTX.\27\
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    \19\ See OIP, supra note 7, 85 FR at 51254-56.
    \20\ See OIP, supra note 7, 85 FR at 51256-57. According to the 
Exchange, an allowlisted wallet address would be a permissioned 
number associated with a particular market participant to which 
Securities may be sent. See id. at 51255-56.
    \21\ See OIP, supra note 7, 85 FR at 51258. The Exchange states 
that BSTX Participants who fail to comply with the end-of-day 
ownership reporting requirement may be subject to disciplinary 
action. See OIP, supra note 7, 85 FR at 51259.
    \22\ The Exchange proposes to define a ``Wallet Manager'' as a 
party approved by BSTX to operate software compatible with the BSTX 
Protocol. See proposed BSTX Rule 17000(a)(31).
    \23\ See OIP, supra note 7, 85 FR at 51258-59.
    \24\ See OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule 
17020(e)(1).
    \25\ See OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule 
17020(e)(2).
    \26\ See OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule 
17020(f).
    \27\ See OIP, supra note 7, 85 FR at 51257.
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    According to the Exchange, the Ethereum blockchain could contain an 
imprecise distribution of Securities among holders and display 
inaccurate information about Security ownership balances if BSTX 
Participants inaccurately report end-of-day Security balances to BSTX 
or if the number of reported Securities exceeds the number of 
outstanding Securities of a particular issuance.\28\ To account for 
instances in which a BSTX Participant fails to report or inaccurately 
reports its end-of-day ownership balance, as well as for the Security 
positions of non-BSTX Participants who are not subject to the end-of-
day ownership reporting requirement, the Exchange would provide 
information to the Wallet Manager to attribute all such unreported 
Security ownership balances for a given Security to a single omnibus 
wallet address.\29\ The Exchange states that the Ethereum blockchain 
would publicly display Security balances that would reflect the end-of-
day ownership balances reported to BSTX by BSTX Participants pursuant 
to proposed BSTX Rule 17020 \30\ and a balance allocated to the omnibus 
wallet address for any type of Security for which the sum of the 
reported positions is less than the number of Securities known by the 
Exchange to be issued and outstanding.\31\ The Exchange acknowledges 
that there is a risk of situations in which it would be unable to 
communicate the end-of-day Security ownership balances to the Wallet 
Manager or the Wallet Manager would be unable to update the 
blockchain.\32\ The Exchange states that it would not make public which 
BSTX Participant is associated with a particular wallet address or 
identify which address is the omnibus wallet address.\33\
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    \28\ See OIP, supra note 7, 85 FR at 51260. See also OIP, supra 
note 7, 85 FR at 51295 (``The Exchange acknowledges that, in certain 
circumstances, a BSTX Participant subject to the requirements of 
proposed Rule 17020 could fail to report end-of-day Security 
balances to BSTX in a timely manner, inaccurately report such 
balances, or fail to obtain a wallet address prior to acquiring a 
position in a Security. Such failures would impair the ability of 
the Exchange to report complete end-of-day Security balance 
information . . . to the Wallet Manager(s) who [would] update the 
Security balance information that is reflected on the Ethereum 
blockchain.'').
    \29\ See OIP, supra note 7, 85 FR at 51259; proposed BSTX Rule 
17020(d).
    \30\ Proposed BSTX Rule 17020 sets forth the proposed end-of-day 
reporting requirements for BSTX Participants. See proposed BSTX Rule 
17020.
    \31\ See OIP, supra note 7, 85 FR at 51259-60.
    \32\ See OIP, supra note 7, 85 FR at 51260, 51262.
    \33\ See OIP, supra note 7, 85 FR at 51261.
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    The Exchange proposes that Securities would be eligible for trading 
on other national securities exchanges that extend unlisted trading 
privileges to them. According to the Exchange, the end-of-day Security 
ownership balance reporting by BSTX Participants and the public 
dissemination of the information on the Ethereum blockchain would not 
impact the ability of Securities to trade on other national securities 
exchanges or over-the-counter (``OTC'').\34\
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    \34\ See OIP, supra note 7, 85 FR at 51262.
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    The Exchange also proposes rules for participation on BSTX, 
business conduct for BSTX Participants, financial and operational 
provisions for BSTX Participants, supervision, trading practices, 
discipline, trading on the BSTX System, and market making.\35\ In 
addition, the Exchange proposes listing standards that, according to 
the Exchange, are similar to the listing standards of NYSE 
American.\36\ The Exchange proposes that these listing standards would 
also specify that all listed Securities comply with the BSTX 
Protocol.\37\ The Exchange states that it is not proposing rules that 
would support its extension of UTP to NMS stock listed on other 
national securities exchanges.\38\
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    \35\ See OIP, supra note 7, 85 FR at 51264-77. The trading rules 
that the Exchange proposes include provisions for primary 
distributions of securities to be made through the Exchange, 
including using an auction process. See id. at 51270.
    \36\ See OIP, supra note 7, 85 FR at 51277.
    \37\ See OIP, supra note 7, 85 FR at 51278.
    \38\ See OIP, supra note 7, 85 FR at 51251. The Exchange also 
states that, therefore, it would only trade Securities listed on 
BSTX unless and until it proposes and receives Commission approval 
for rules that would support trading in other types of securities, 
including through the extension of UTP to other NMS stocks. Id.
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    According to the Exchange, all transactions in Securities would 
clear and settle in accordance with the rules, policies, and procedures 
of registered clearing agencies.\39\ The Exchange states that BSTX 
anticipates that DTC would serve as the securities depository for 
Securities and that confirmed trades in Securities on BSTX would be 
transmitted to National Securities Clearing Corporation (``NSCC'') for 
clearing.\40\ The Exchange states that Security transactions occurring 
on BSTX would be cleared through NSCC using a T+2 settlement cycle, as 
is the case today for all other exchanges that facilitate trading in 
NMS stock.\41\
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    \39\ See OIP, supra note 7, 85 FR at 51253.
    \40\ See OIP, supra note 7, 85 FR at 51253.
    \41\ See OIP, supra note 7, 85 FR at 51254.
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Discussion

Applicable Standard for Review

    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; if it does not make such a finding, 
the Commission must disapprove the proposed rule change.\42\ 
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.'' \43\ The description of a proposed rule change, its 
purpose and operation, its effect, and a legal analysis of its 
consistency with applicable requirements must be sufficiently detailed 
and specific to support an affirmative Commission finding.\44\ Any 
failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations issued thereunder that are applicable 
to the SRO.\45\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\46\
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    \42\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \43\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \44\ See id.
    \45\ See id.
    \46\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).

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[[Page 84407]]

    In reviewing the proposed rule change, the Commission has analyzed 
information provided by the Exchange and issues raised by commenters. 
Based on the information before the Commission, for each of the reasons 
discussed below (whether viewed independently or in combination), the 
Commission is unable to find that the Exchange has met its burden to 
show that the proposed rule change is consistent with the Exchange Act 
and the applicable rules and regulations thereunder, including Exchange 
Act Sections 6(b)(1), 6(b)(5), and 6(b)(8), and is therefore unable to 
find that the proposal is consistent with the Exchange Act.

Whether BOX Has Met its Burden To Demonstrate That the Proposal Is 
Consistent With Section 6(b)(5) of the Exchange Act Notwithstanding the 
Risk That the Dissemination of Inaccurate Information About BSTX-Listed 
Securities Would Mislead Investors

    Pursuant to the Exchange's proposal, the Exchange would disseminate 
inaccurate Security ownership balances to the public under many 
circumstances. The Commission has grave concerns when an SEC 
registrant, such as a national securities exchange that is an SRO, 
knowingly disseminates inaccurate information to the public, 
irrespective of whether it takes place through a public blockchain, a 
public database, a public website, or a published circular. As 
discussed below, the Exchange has failed to meet its burden to 
demonstrate that its proposal is consistent with protection of 
investors and the public interest, pursuant to Section 6(b)(5) of the 
Exchange Act, given that the publicly disseminated Security ownership 
balances could be inaccurate, which creates a significant risk of 
confusing and misleading investors. Furthermore, the Commission has 
concerns that the inaccurate Security ownership balance information 
disseminated to the public would impact investor decisions, and the 
Exchange has also failed to meet its burden to demonstrate how 
investors' use of inaccurate Security ownership balance information is 
consistent with the protection of investors and the public interest, 
pursuant to Section 6(b)(5) of the Exchange Act.
1. Exchange's Representations and Comments Received
    The Exchange states that the proposed rules contemplate the use of 
smart contract \47\ functionality to record end-of-day Security \48\ 
position balance information to the Ethereum blockchain as an 
``ancillary'' recordkeeping mechanism.\49\ In the context of its 
proposal, the Exchange states that a Token \50\ on the blockchain would 
be akin to a digital representation of shareholder equity in a legal 
entity that is organized under the authority of state or federal law 
and that meets BSTX's listing standards.\51\ The Exchange further 
states that attribution of a Token to a particular wallet address would 
not convey ownership of shareholder equity in the issuer and that, 
instead, official records of ownership would be maintained at DTC.\52\ 
The Exchange states that, pursuant to its proposal, ownership of 
Securities would be able to be transferred without regard to the 
blockchain-based recordkeeping functionality.\53\
---------------------------------------------------------------------------

    \47\ A ``smart contract'' has been defined as a computerized 
transaction protocol that executes terms of a contract with the 
general objectives to satisfy common contractual conditions (such as 
payment terms, liens, confidentiality, and even enforcement), 
minimize exceptions both malicious and accidental, and minimize the 
need for trusted intermediaries. See The DAO Report, supra note 13, 
at *2 & n.3.
    \48\ The Exchange defines ``Security'' as an ``NMS stock, as 
defined in Rule 600(b)(47) of the Exchange Act, trading on the BSTX 
System and for which ancillary blockchain records are maintained 
under these Rules.'' See proposed BSTX Rule 17000(a)(30). Exchange 
Act Rule 600(b)(47) defines ``NMS security'' as ``any security or 
class of securities for which transaction reports are collected, 
processed, and made available pursuant to an effective transaction 
reporting plan, or an effective national market system plan for 
reporting transactions in listed options.'' 17 CFR 242.600(b)(47). 
Exchange Act Rule 600(b)(48) then defines ``NMS stock'' as ``any NMS 
security other than an option.'' 17 CFR 242.600(b)(48). The Exchange 
states that it proposes to use the term ``Security'' to refer to 
BSTX-listed securities to distinguish them from other securities 
that are not designed to use blockchain technology as an ancillary 
recordkeeping mechanism. See OIP, supra note 7, 85 FR at 51251, 
n.15. For purposes of this Order, where discussing statements by 
commenters on previous versions of the proposal that used the term 
``security token,'' which term the Exchange replaced with 
``Security'' in Amendment No. 1, this Order will use the term 
``Security.'' See supra note 6.
    \49\ See OIP, supra note 7, 85 FR at 51263. The Exchange uses 
the term ``tokens'' in its proposal to mean, in the context of 
blockchain technology, blockchain-based abstractions that can be 
owned and that represent assets, currency, or access rights. See 
OIP, supra note 7, 85 FR at 51255.
    \50\ This Order will use the term ``Token'' to refer more 
specifically to representations of Securities on a smart contract on 
the Ethereum blockchain that the Exchange would use to represent the 
reported end-of-day Security ownership balances for a particular 
Security. Securities listed and traded on BSTX would not be issued 
and/or transferred using distributed ledger or blockchain 
technology.
    \51\ See OIP, supra note 7, 85 FR at 51255. The Exchange states 
that this digital representation of a Security associated with a 
particular wallet address reflects an ancillary record of Security 
ownership based on data provided to BSTX by BSTX Participants. See 
OIP, supra note 7, 85 FR at 51255, n.52.
    \52\ See OIP, supra note 7, 85 FR at 51255. See also id. at 
51261 (stating that the Security balance information as recorded on 
the Ethereum blockchain in Token form will not reflect legal 
ownership).
    \53\ See OIP, supra note 7, 85 FR at 51252 (also stating that 
Securities would trade, clear, and settle in the same manner as all 
other NMS stocks traded today).
---------------------------------------------------------------------------

    The Exchange states that, for each Security, the Ethereum 
blockchain would reflect the end-of-day Security ownership balance 
associated with each BSTX Participant's wallet address, along with a 
balance allocated to an omnibus wallet address.\54\ The Exchange states 
that it expects that each Security would have a designated omnibus 
wallet address.\55\ The Exchange states that it would use an omnibus 
wallet address to account for instances in which a BSTX Participant 
fails to report or to accurately report its end-of-day Security 
ownership balance, as well as to account for the positions of Security 
holders that are not BSTX Participants and therefore not subject to the 
end-of-day Security ownership balance reporting requirement.\56\ 
According to the Exchange, it would determine the number of Tokens 
(which represent Securities) to be allocated to the omnibus wallet 
address by subtracting the sum of the Security ownership balances 
reported for a particular Security by BSTX Participants from the total 
outstanding number of that particular Security.\57\ The Exchange also 
recognizes that the omnibus wallet address would display the entire 
outstanding balance of a Security if only non-BSTX Participants hold 
the entire outstanding balance of a particular Security.\58\
---------------------------------------------------------------------------

    \54\ See OIP, supra note 7, 85 FR at 51261. The end-of-day 
Security ownership balance reported by a BSTX Participant or its 
carrying firm to the Exchange would reflect the total number of 
Securities for each class of Security that are credited to each 
account of the BSTX Participant at the securities depository (i.e., 
DTC), or the total number of Securities for each class of Security 
that are credited to the BSTX Participant by its carrying firm. See 
proposed BSTX Rule 17020(b).
    \55\ See OIP, supra note 7, 85 FR at 51259.
    \56\ See OIP, supra note 7, 85 FR at 51259.
    \57\ See OIP, supra note 7, 85 FR at 51259. See also proposed 
BSTX Rule 17020(d).
    \58\ See OIP, supra note 7, 85 FR at 51260, n.80.
---------------------------------------------------------------------------

    According to the Exchange, Security ownership balance information 
reported to the Ethereum blockchain would be publicly available at the 
website Etherscan.io.\59\ The Exchange states that, from Etherscan.io, 
an individual member of the public would be able to search for the name 
of a particular Security and see the holders of Tokens representing the 
Securities by wallet address and the quantity associated with each 
holder, along with other

[[Page 84408]]

information.\60\ The observable quantity would reflect the last end-of-
day Security ownership balances that the Exchange received from BSTX 
Participants and provided to the Wallet Manager to update the Ethereum 
blockchain.\61\ The Exchange describes that a wallet address is 
essentially a string of numbers and characters.\62\ The Exchange 
represents that it would not make public which wallet address is 
associated with a particular BSTX Participant or with the omnibus 
wallet address.\63\ The Exchange states that an individual member of 
the public observing Security ownership balances would not be able to 
determine whether a particular wallet address represented, for example, 
a carrying firm reporting end-of-day Security ownership balances on 
behalf of multiple BSTX Participants, an individual BSTX Participant, 
or the omnibus wallet address.\64\ In addition, the Exchange states 
that an individual member of the public would not to be able to tell 
whether a particular wallet address was long or short the shares.\65\
---------------------------------------------------------------------------

    \59\ See OIP, supra note 7, 85 FR at 51261.
    \60\ See OIP, supra note 7, 85 FR at 51261 (stating that, for 
example, this other information may include transfers made as a 
result of the Wallet Manager's allocation process).
    \61\ See OIP, supra note 7, 85 FR at 51529. See infra Section 
III.C.2 for discussion of the process by which each BSTX 
Participant, directly or through its carrying firm, would report 
end-of-day Security ownership balances to BSTX and BSTX would 
provide this information, along with information pertaining to the 
balance to be allocated to the omnibus wallet address, to the Wallet 
Manager.
    \62\ See OIP, supra note 7, 85 FR at 51261.
    \63\ See OIP, supra note 7, 85 FR at 51261.
    \64\ See OIP, supra note 7, 85 FR at 51261. The Exchange further 
states that an individual member of the public would not be able to 
determine which underlying customers of a BSTX Participant held the 
Securities or whether the BSTX Participant owned the Securities 
proprietarily. See id. The Exchange asserts its belief that the 
Security ownership balance information that would be publicly 
available on the Ethereum blockchain would be sufficiently anonymous 
to address privacy concerns related to such information. See id. The 
Exchange further states that it believes that the use of anonymized 
wallet addresses to track end-of-day ownership balances may prevent 
fraudulent and manipulative acts and practices, because, according 
to the Exchange, obscuring the identities of the wallet address 
owners may make it difficult to misuse any private information 
associated with these wallet addresses. See id. at 51262.
    \65\ See OIP, supra note 7, 85 FR at 51261. The Exchange states 
that individual members of the public would not be able to know if a 
position is long or short because the reported end-of-day Security 
ownership balances would reflect balances as reported by DTC to BSTX 
Participants and their carrying firms. See id. at 51261, n.90. 
Therefore, according to the Exchange, if a BSTX Participant borrowed 
Securities and the borrowed Securities were moved to its DTC account 
(or the DTC account of its carrying firm on its behalf), the 
borrowed Securities would appear to be a long position in the 
Security, even if the BSTX Participant was taking a short position. 
See id.
---------------------------------------------------------------------------

    The Exchange recognizes that end-of-day Token balances (which 
represent Securities) ``may be inaccurate or unavailable.'' \66\ The 
Exchange also acknowledges that there are many circumstances where the 
end-of-day Security ownership balances published on the Ethereum 
blockchain would not reflect the correct distribution of a Security 
among holders of the Security, or even among BSTX Participants holding 
the Security.\67\ According to the Exchange, the Ethereum blockchain 
could reflect inaccurate information if BSTX Participants report 
inaccurate end-of-day Security balances.\68\ The Exchange states that 
there could be situations where the number of reported Securities 
exceeds the number of outstanding Securities of a particular 
issuance.\69\ The Exchange also states that there could be situations 
in which the Exchange is unable to communicate end-of-day Security 
ownership balances to the Wallet Manager or the Wallet Manager is 
unable to update the blockchain.\70\ According to the Exchange, even if 
there were a disruption relating to the end-of-day Security balance 
reporting process, there would not be any impact on the ability to 
trade, clear, or settle Security transactions, because the end-of-day 
Security balance reporting process is solely an ``ancillary'' 
recordkeeping mechanism.\71\
---------------------------------------------------------------------------

    \66\ OIP, supra note 7, 85 FR at 51262. As discussed further 
below, the Exchange asserts that it believes that inaccuracies in 
the reported end-of-day Security ownership balances ``should not be 
routine'' and that the Exchange has adopted a number of mechanisms 
against potential inaccuracies. Id. at 51262, n.95. See also infra 
notes 116-120 and accompanying text. The Exchange states that it has 
described ``potential scenarios where potential inaccuracies could 
theoretically occur in the interest of full transparency.'' OIP, 
supra note 7, 85 FR at 51262, n.95.
    \67\ See OIP, supra note 7, 85 FR at 51260. The Exchange states 
that, while the ancillary recordkeeping mechanism will provide 
additional transparency into Securities holdings, there are 
limitations in what the Ethereum blockchain will reflect with regard 
to end-of-day Security ownership balances as an ancillary 
recordkeeping mechanism, given that all non-BSTX Participants' 
balances will be aggregated and reflected in an omnibus wallet 
address for each Security. See id. at 51261-62.
    \68\ See OIP, supra note 7, 85 FR at 51260.
    \69\ See OIP, supra note 7, 85 FR at 51260. The Exchange also 
gives examples of how the omnibus wallet address for each Security 
could have greater or fewer Tokens as a result of a misreport by a 
BSTX Participant, particularly if a Security is held entirely by 
BSTX Participants and a BSTX Participant over-reports. See id. In 
the case of an under-report by a BSTX Participant (e.g., owns 100 of 
XYZ Securities, but reports only 90), the omnibus address for XYZ 
would have an additional 10 Tokens allocated to it; and in the case 
of an over-report (e.g., owns 100 of XYZ Securities, but reports 
110), the omnibus address for XYZ may have 10 additional Tokens 
allocated to it. See OIP, supra note 7, 85 FR at 51259-60, n.79.
    \70\ See OIP, supra note 7, 85 FR at 51260. See infra Sections 
III.C.1 and III.C.2 for discussion of the process by which BSTX 
would provide end-of-day Security balances to the Wallet Manager and 
the Wallet Manager would update the blockchain.
    \71\ See OIP, supra note 7, 85 FR at 51260-61. See also id. at 
51262 (stating that, in the event of any disruption to the 
blockchain, the architecture of the Security (and its Token 
representation), or the end-of-day Security ownership balance 
reporting process, there would be no impact on the ability of market 
participants to trade Securities or on current balances of 
Securities held by each market participant through the facilities of 
DTC).
---------------------------------------------------------------------------

    The Exchange asserts that it does not believe that the records of 
Security ownership balance information published on the blockchain 
would be likely to cause investor confusion, because an individual 
member of the public observing the blockchain would not have any 
similar source of information with which to compare it.\72\ According 
to the Exchange, the ownership balances related to Security ownership 
of BSTX Participants and other market participants are not available 
through another medium.\73\ The Exchange also states that Security 
balance information recorded on the Ethereum blockchain would not 
reflect legal ownership of Securities, and the identities of BSTX 
Participants corresponding to each wallet address, as well as the 
identity of the omnibus wallet address, would not be made public.\74\ 
The Exchange represents that it will not knowingly provide inaccurate 
end-of-day Security ownership balance information to the Wallet 
Manager.\75\ Further, according to the Exchange, any reporting regime 
depends on the accuracy of the information reported to the reporting 
authority.\76\
---------------------------------------------------------------------------

    \72\ See OIP, supra note 7, 85 FR at 51261.
    \73\ See OIP, supra note 7, 85 FR at 51261.
    \74\ See OIP, supra note 7, 85 FR at 51261.
    \75\ See OIP, supra note 7, 85 FR at 51262, n.95.
    \76\ See OIP, supra note 7, 85 FR at 51262, n.95 (stating that 
this includes reporting regimes administered by the Commission, such 
as large trader reporting, ATS quarterly transaction volume data 
reporting, and security-based swap reporting).
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, two commenters raised concerns 
that the proposal would lead to investor confusion.\77\ One commenter 
asserted that the proposal may confuse ``Main Street'' investors and 
that the difference between ``official'' and ``ancillary'' 
recordkeeping is inherently confusing.\78\ This commenter stated that 
the proposal does not describe in detail how these two systems will 
interact or reconcile, and that this failing is likely to render the 
proposal confusing to market participants and investors.\79\ Another

[[Page 84409]]

commenter asserted its belief that the Exchange has not sufficiently 
addressed the potential for confusion by investors and other 
participants because of a discrepancy between DTC ownership records and 
records maintained through the Exchange's proposed mechanism to record 
and disseminate on the Ethereum blockchain end-of-day Security 
ownership balances.\80\ This commenter questioned whether there is some 
``best-effort'' threshold around inaccurate or partial end-of-day 
Securities ownership balances on the Ethereum blockchain that would 
sufficiently address the risk of investor confusion.\81\
---------------------------------------------------------------------------

    \77\ See Letter from Benjamin Connault, Economist, Investors 
Exchange LLC (March 26, 2020) (``IEX Letter''), at 5; Letter from 
Joan C. Conley, Senior Vice President & Corporate Secretary, The 
Nasdaq Stock Market LLC (March 27, 2020) (``Nasdaq Letter''), at 3.
    \78\ See Nasdaq Letter, supra note 77, at 3.
    \79\ See Nasdaq Letter, supra note 77, at 3.
    \80\ See IEX Letter, supra note 77, at 5.
    \81\ See IEX Letter, supra note 77, at 5.
---------------------------------------------------------------------------

    In a response submitted in connection with SR-BOX-2019-19, the 
Exchange stated that it is unclear what the commenter finds inherently 
confusing between official and ``ancillary'' records, and that 
``official'' means that the record is authoritative, while 
``ancillary'' means that the record is supplementary.\82\ The Exchange 
also stated that the end-of-day Security balance information would 
constitute ``ancillary'' records of end-of-day ownership balances and 
that legal ownership would be separately established and evidenced by 
operation of commercial law.\83\ According to the Exchange, what would 
appear on the Ethereum blockchain would be end-of-day Security 
ownership balances associated with an anonymous wallet address.\84\ The 
Exchange stated that market participants would not have access to the 
full position records of DTC regarding Security ownership balances 
maintained by its participants, so it would not be possible for a 
market participant to see both sets of records and be confused by 
them.\85\ Moreover, the Exchange stated that there is no possibility of 
an identifiable discrepancy between the DTC records and ``ancillary'' 
records, because aggregate records regarding DTC position balances are 
not available.\86\
---------------------------------------------------------------------------

    \82\ See Letter from Lisa J. Fall, President, BOX Exchange LLC 
(April 9, 2020) (``BSTX Response Letter I''), at 6.
    \83\ See BSTX Response Letter I, supra note 82, at 6.
    \84\ See BSTX Response Letter I, supra note 82, at 6.
    \85\ See BSTX Response Letter I, supra note 82, at 6. See also 
id. at 11-12.
    \86\ See BSTX Response Letter I, supra note 82, at 8. According 
to the Exchange, although a BSTX Participant would be able to 
determine whether its own Security ownership balance as reported to 
the Exchange is ultimately reflected on the Ethereum blockchain, it 
is ``highly unlikely'' that the BSTX Participant, familiar with the 
Exchange and its process for recording and disseminating end-of-day 
Security ownership balances on the blockchain, would be confused as 
to which record is official and which record is ``ancillary.'' See 
id. at 8, n.36.
---------------------------------------------------------------------------

    In response to the commenter's question in the context of SR-BOX-
2019-19 about whether there is a ``best-effort'' threshold, the 
Exchange stated that Section 19(g) of the Exchange Act requires the 
Exchange to comply with the Exchange Act, Commission rules, or its own 
rules.\87\ The Exchange stated that this would require the Exchange to 
carry out its process for recording and disseminating end-of-day 
Security ownership balances as set forth in its rules and the proposal, 
or face a potential violation of Section 19(g) of the Exchange Act.\88\ 
According to the Exchange, as described further below, in the event 
that these records become inaccurate, the Exchange would have the 
authority to suspend the reporting process with prompt notice to BSTX 
Participants and to the Commission.\89\ The Exchange asserted, however, 
that even in the case of inaccurate ``ancillary'' records, there is no 
risk of investor confusion for the reasons it describes.\90\
---------------------------------------------------------------------------

    \87\ See BSTX Response Letter I, supra note 82, at 8.
    \88\ See BSTX Response Letter I, supra note 82, at 8.
    \89\ See BSTX Response Letter I, supra note 82, at 8.
    \90\ See BSTX Response Letter I, supra note 82, at 8.
---------------------------------------------------------------------------

    Several commenters raised other questions, in the context of SR-
BOX-2019-19, about differences between the end-of-day Security 
ownership balances on the blockchain and official records of legal 
ownership.\91\ Two commenters asserted that the proposal is not clear 
regarding the differences between the records maintained by the 
Exchange, DTC, and NSCC and the end-of-day Security ownership 
balances.\92\ Another commenter questioned whether the end-of-day 
Security ownership balances reported to the Ethereum blockchain would 
reflect the most recently completed transactions, or whether they would 
match DTC's records, including any reporting lags related to the T+2 
settlement cycle.\93\ This commenter questioned what type of 
information would be publicly observable from the end-of-day Security 
ownership balances and whether the public would be able to track the 
daily amount of stocks owned by a given BSTX Participant in its 
anonymized wallet address.\94\ This commenter also asked how the 
Exchange's proposed recordkeeping mechanism would handle over-reporting 
of ownership balances,\95\ and how short positions would be reflected 
in the end-of-day Security ownership balance recordkeeping 
mechanism.\96\ Another commenter stated that the proposal does not 
describe all of the ``ancillary'' data and metadata that will be stored 
on the blockchain.\97\ This commenter stated that the investor 
protection concerns that potentially flow from the creation of 
``ancillary'' records need to be articulated and analyzed, including 
who benefits from the record, who will have access to the record, if 
the ``ancillary'' record would have any potential impact on the 
safeguarding of customer non-public information, and the utility of the 
Security for investors.\98\
---------------------------------------------------------------------------

    \91\ See Letter from Holly H. Smith, Eversheds Sutherland (US) 
LLP (February 12, 2020) (``Eversheds Letter''), at 2; IEX Letter, 
supra note 77, at 6; Nasdaq Letter, supra note 77, at 3.
    \92\ See Nasdaq Letter, supra note 77, at 3; Eversheds Letter, 
supra note 91, at 2. One of these commenters stated that the 
proposal will require a Security to follow the BSTX Protocol as 
distributed by the Exchange via Regulatory Circular, but that 
currently there is no draft of the circular or other documentation 
that identifies the differences, if any, between the various types 
of records. See Eversheds Letter, supra note 91, at 2. The 
Commission notes that the Exchange filed a document described as a 
summary of the BSTX Protocol as Exhibit 3N to SR-BOX-2019-19, as 
modified by Amendment No. 2 and which was available on the 
Exchange's website, but, as discussed below, provides limited 
description of the protocol. This summary of the BSTX Protocol was 
refiled as Exhibit 3N to SR-BOX-2020-14, with minor revisions made 
in Amendment No. 1, and is available on the Commission's website at 
https://www.sec.gov/rules/sro/box/2020/34-89536-ex3n.pdf (``BSTX 
Protocol Summary Overview''). See also infra note 170 and 
accompanying text.
    \93\ See IEX Letter, supra note 77, at 6.
    \94\ See IEX Letter, supra note 77, at 5 (also asking whether 
BSTX Participants would be allowed to use multiple wallet addresses 
or change wallet addresses over time, including for the purpose of 
limiting the public's ability to track their positions).
    \95\ See IEX Letter, supra note 77, at 6. This commenter 
questioned whether, in the case of over-reporting, the total number 
of Securities for a given BSTX Security would fluctuate from one day 
to the next, with extra Securities being created and then destroyed 
when there is no longer over-reporting. See id.
    \96\ See IEX Letter, supra note 77, at 6.
    \97\ See Eversheds Letter, supra note 91, at 2.
    \98\ See Eversheds Letter, supra note 91, at 2.
---------------------------------------------------------------------------

    In response, in the context of SR-BOX-2019-19, the Exchange stated 
that its proposed recordkeeping process using distributed ledger 
technology would be entirely separate from the trading, clearance, and 
settlement process for Securities, and that all Securities would be 
able to trade, clear, and settle in the same manner as any other NMS 
stock.\99\ The Exchange stated that the only interaction between the 
existing market infrastructure and the Exchange's additional 
recordkeeping process would be that BSTX Participants, either directly 
or through their carrying firm, would be required to obtain end-of-day 
Security ownership

[[Page 84410]]

balances available to them through DTC and report such balances to the 
Exchange.\100\
---------------------------------------------------------------------------

    \99\ See BSTX Response Letter I, supra note 82, at 5.
    \100\ See BSTX Response Letter I, supra note 82, at 5-6.
---------------------------------------------------------------------------

    The Exchange also responded that the data appearing on the 
blockchain would only reflect end-of-day Security ownership balances 
associated with each BSTX Participant's anonymized address, as well as 
the omnibus address for unreported ownership balances.\101\ With 
respect to whether the end-of-day Security ownership balances reflected 
on the Ethereum blockchain would reflect the most recent transactions 
or match DTC's records, the Exchange stated that the end-of-day 
Security ownership balances would represent a moment-in-time snapshot 
of each BSTX Participant's balance in each Security at the end of the 
day, either as credited to its DTC account or to its account at its 
carrying firm.\102\ With respect to the potential for over-reporting, 
the Exchange stated that the total supply of Tokens associated with a 
particular issuance of a Security for purposes of the recordkeeping 
process on the blockchain would be fixed (subject to adjustment in the 
case of a corporate action that impacts the total supply) and would not 
fluctuate day-to-day.\103\ The Exchange stated that it has proposed 
authority to suspend this recordkeeping process in its discretion, with 
prompt notice to BSTX Participants and to the Commission, which could 
include circumstances involving over-reporting.\104\
---------------------------------------------------------------------------

    \101\ See BSTX Response Letter I, supra note 82, at 13-14. See 
also id. at 15.
    \102\ See BSTX Response Letter I, supra note 82, at 10.
    \103\ See BSTX Response Letter I, supra note 82, at 11.
    \104\ See BSTX Response Letter I, supra note 82, at 11.
---------------------------------------------------------------------------

    According to the Exchange, the Ethereum blockchain is public, so 
anyone would have access to the end-of-day Security ownership balances 
on the blockchain.\105\ The Exchange stated that individual members of 
the public observing the Ethereum blockchain would not be able to view 
transaction-level or market participant-identifying detail, whether an 
ownership balance reflects proprietary or customer positions, whether a 
wallet address belongs to a carrying firm reporting on behalf of 
multiple BSTX Participants or a single BSTX Participant, or whether the 
reported long positions include borrowed shares.\106\ The Exchange 
asserted that it has not proposed any limitation on the ability of BSTX 
Participants to establish multiple wallet addresses, and that the 
Exchange would discuss operational issues with BSTX Participants as 
appropriate.\107\ The Exchange stated that, due to the lack of specific 
transaction-level details, the end-of-day Security ownership balances 
would contain only a small fraction of the records that the Exchange 
would retain with respect to transactions on its market.\108\ According 
to the Exchange, it believes that DTC and NSCC's records would likely 
be extensively more detailed than the proposed end-of-day Security 
ownership balances, and likely contain transaction-level and market 
participant-identifying information.\109\
---------------------------------------------------------------------------

    \105\ See BSTX Response Letter I, supra note 82, at 14. See also 
Letter from Lisa J. Fall, President, BOX Exchange LLC (April 27, 
2020) (``BSTX Response Letter II''), at 4, n.21 (stating that all 
market participants would have open access to the distributed ledger 
technology associated with BSTX, but also noting that market 
participants would not have the ability to modify the underlying 
source).
    \106\ See BSTX Response Letter I, supra note 82, at 10, 15. See 
also BSTX Response Letter II, supra note 105, at 21, n.22. The 
Exchange also stated that short positions would not be reflected, 
because the end-of-day Security ownership balances would include any 
borrowed shares. See BSTX Response Letter I, supra note 82, at 10.
    \107\ See BSTX Response Letter I, supra note 82, at 10.
    \108\ See BSTX Response Letter I, supra note 82, at 14.
    \109\ See BSTX Response Letter I, supra note 82, at 14.
---------------------------------------------------------------------------

    One commenter questioned, in the context of SR-BOX-2019-19, what 
the implications might be of making end-of-day Security ownership 
balance data publicly available.\110\ This commenter stated that it 
would be unclear who would be responsible for ensuring the accuracy of 
this data.\111\ This commenter also questioned whether the system for 
recording and disseminating end-of-day Security ownership balances 
could be gamed (e.g., would a firm be able to publish a large holding 
to the blockchain that it does not actually hold, or vice versa).\112\ 
The Exchange responds that knowingly reporting a false number of 
Securities to the Exchange would be a direct violation of proposed BSTX 
Rule 17020, violate just and equitable principles of trade, and cause a 
BSTX Participant to be subject to disciplinary action by the 
Exchange.\113\ The Exchange states that if a BSTX Participant did try 
to ``game'' the end-of-day Security ownership balance recordkeeping 
process in the manner suggested, it would not have any impact on the 
ability of the Securities to trade, clear, or settle.\114\ The Exchange 
also asserts that the balance information would not be useful to inform 
a market participant's trading in Securities because an individual 
member of the public observing the blockchain would not know which 
market participant is associated with each wallet address, whether a 
wallet address represents a DTC participant reporting on behalf of 
multiple Securities holders, whether the position is long or short, or 
whether the position represents a proprietary position or the position 
of customer of a BSTX Participant.\115\
---------------------------------------------------------------------------

    \110\ See Letter from Ellen Greene, Managing Director, Equities 
& Options Market Structure, & Thomas F. Price, Managing Director, 
Operations, Technology, Cyber & BCP, Securities Industry and 
Financial Markets Association (April 22, 2020) (``SIFMA Letter 
II''), at 5. This commenter stated that SR-BOX-2020-14 appears to be 
identical to Amendment No. 2 to SR-BOX-2019-19 and that, for that 
reason, SIFMA Letter II continues to apply to SR-BOX-2020-14. See 
Letter from Ellen Greene, Managing Director, Equities & Options 
Market Structure, & Thomas F. Price, Managing Director, Operations, 
Technology, Cyber & BCP, Securities Industry and Financial Markets 
Association (June 23, 2020) (``SIFMA Letter III''), at 1-2.
    \111\ See SIFMA Letter II, supra note 110, at 5.
    \112\ See SIFMA Letter II, supra note 110, at 5.
    \113\ See OIP, supra note 7, 85 FR at 51262, n.100. See also 
BSTX Response Letter II, supra note 105, at 4.
    \114\ See OIP, supra note 7, 85 FR at 51262, n.100. See also 
BSTX Response Letter II, supra note 105, at 4.
    \115\ See OIP, supra note 7, 85 FR at 51262, n.100 (stating that 
it is unclear what purpose or incentive there would be for a BSTX 
Participant to ``game'' the ancillary recordkeeping process, and 
noting that such an attempt would expose the BSTX Participant to 
disciplinary action).
---------------------------------------------------------------------------

    In its notice of the proposal, the Exchange states that, to address 
the potential for inaccurate reporting by BSTX Participants, proposed 
BSTX Rule 17020(e) would provide that if a BSTX Participant discovers 
that it submitted an inaccurate end-of-day Security balance report that 
has not already been corrected or superseded, it must promptly send a 
corrected report to the Exchange.\116\ In addition, if the Exchange has 
reason to believe that reported Security balances may be inaccurate, it 
may request additional information regarding the applicable reports and 
balances from any BSTX Participant.\117\ The Exchange would consider a 
BSTX Participant's compliance with proposed BSTX Rule 17020(e) by 
promptly submitting a corrected report or responding to additional 
information requests from the Exchange in determining whether to

[[Page 84411]]

bring, or the appropriate consequences of, disciplinary action.\118\ 
According to the Exchange, similar mechanisms to promote accurate 
reporting exist for a wide variety of different market participant 
obligations, such as the duty of the broker-dealer operator of an NMS 
stock alternative trading system to promptly correct material errors or 
omissions discovered in its Form ATS-N and the duty to correct trade 
reports submitted to the Financial Industry Regulatory Authority 
(``FINRA'').\119\ The Exchange states that its proposed rule sets forth 
reasonable processes to help ensure that the Security position balances 
published as Token balances on the blockchain are accurate, and that 
ensuring the accuracy of this information will better facilitate all 
market participants' ability to evaluate the potential uses of 
blockchain technology in securities transactions.\120\
---------------------------------------------------------------------------

    \116\ See OIP, supra note 7, 85 FR at 51260. See also proposed 
BSTX Rule 17020(e)(1).
    \117\ See OIP, supra note 7, 85 FR at 51260. The BSTX 
Participant must promptly respond to any additional information 
requests that the Exchange may make regarding its end-of-day 
Security balance reports. See id. (stating that these additional 
information requests may include asking the BSTX Participant to 
confirm its Security balances, or to provide a copy of the 
information the BSTX Participant used to provide its end-of-day 
Security ownership balance report, or other books and records of the 
BSTX Participant relating to its transactions in Securities). See 
also proposed BSTX Rule 17020(e)(2).
    \118\ See OIP, supra note 7, 85 FR at 51260, n.83.
    \119\ See OIP, supra note 7, 85 FR at 51260 (citing 17 CFR 
242.304(a)(2)(i)(C); FINRA, Trade Reporting FAQ, Section 311).
    \120\ See OIP, supra note 7, 85 FR at 51260. The Exchange states 
that, in addition to these controls and mechanisms, it may need to 
implement further measures in instances in which the ability to 
update the blockchain may be affected by exogenous factors, and 
points to proposed BSTX Rule 17020(f) as giving the Exchange the 
ability to suspend certain requirements related to end-of-day 
Security ownership reporting on the blockchain. See id. For further 
discussion of the proposed suspension provisions, see infra Section 
III.C.3.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, one commenter expressed concern 
over the uncertainty of whether surveillance of the end-of-day 
reporting requirement to make sure that a BSTX Participant accurately 
reports its Security ownership balances would be done by BSTX, or by 
FINRA pursuant to the Regulatory Services Agreement.\121\ This 
commenter asked, in either case, what procedures would be used for 
surveillance and enforcement of the requirement.\122\ Two commenters 
asserted that it is not clear how differences in reporting between the 
records maintained by the Exchange, DTC, and NSCC and the end-of-day 
Security ownership balances would be reconciled.\123\ Another commenter 
questioned whether there would be any mechanism to ensure that 
ownership balances reported by a BSTX Participant accurately match 
DTC's records.\124\
---------------------------------------------------------------------------

    \121\ See IEX Letter, supra note 77, at 6.
    \122\ See IEX Letter, supra note 77, at 6.
    \123\ See Nasdaq Letter, supra note 77, at 3; Eversheds Letter, 
supra note 91, at 2.
    \124\ See IEX Letter, supra note 77, at 6.
---------------------------------------------------------------------------

    The Exchange responded, in the context of SR-BOX-2019-19, that it 
has general authority under proposed BSTX Rule 20000 to request that a 
BSTX Participant provide the Exchange with copies of records related to 
its business.\125\ According to the Exchange, its request to a BSTX 
Participant could include a request for the reports provided by DTC to 
the BSTX Participant that the BSTX Participant used to report end-of-
day Security ownership balance information to the Exchange.\126\
---------------------------------------------------------------------------

    \125\ See BSTX Response Letter I, supra note 82, at 11, 16.
    \126\ See BSTX Response Letter I, supra note 82, at 11, 16.
---------------------------------------------------------------------------

Analysis
    The Commission concludes that the Exchange has not met its burden 
to demonstrate that its proposal to publicly disseminate end-of-day 
Security ownership balances associated with certain wallet addresses by 
publishing these balances on the Ethereum blockchain on a daily basis 
is consistent with the protection of investors and the public interest, 
given that the disseminated balances could be inaccurate, which raises 
the significant risk that the publicly disseminated information may 
confuse and mislead investors. The Exchange acknowledges that, in a 
variety of circumstances the Security ownership balances published to 
the Ethereum blockchain would be inaccurate.\127\ For example, if BSTX 
Participants report end-of-day Security ownership balances to BSTX that 
are not accurate, these inaccuracies would be reflected on the public 
Ethereum blockchain.\128\ The publicly disseminated end-of-day Security 
ownership balances would also become inaccurate if a BSTX Participant 
is late in reporting or if the Exchange is unable to communicate 
updated ownership balances to the Wallet Manager or the Wallet Manager 
is unable to update the blockchain.\129\ In addition, end-of-day 
Security ownership balances on the Ethereum blockchain would be stale 
because they would represent a snapshot of a BSTX Participant's DTC 
account balance at the end of the last trading day and would not 
reflect ownership balances that have changed due to transactions that 
settled during the day or that will change due to transactions that 
have not yet settled.\130\ This latter variance may increase during the 
course of the trading day due to continued trading in the Securities. 
There is a significant risk that the reported balances of clearing firm 
BSTX Participants would create the misimpression of a large position 
because the reported balances would not indicate the beneficial owner, 
at least to the extent that the beneficial owner is not also a BSTX 
Participant.\131\ In addition, BSTX concedes that its Participants' 
short and long positions, both of which would be reported, would be 
indistinguishable when represented on the Ethereum blockchain.\132\ 
Given that these two types of transactions reflect opposite economic 
positions in the Security, the disseminated end-of-day Security 
ownership balances would provide an economically misleading picture. 
Moreover, while the Exchange represents that it believes inaccuracies 
in the end-of-day Security ownership balances ``should not be 
routine,'' \133\ the Exchange does not explain what it would consider 
``routine'' or further describe what it would consider to be an 
acceptable level of inaccuracy.
---------------------------------------------------------------------------

    \127\ See supra notes 66-70 and accompanying text.
    \128\ See supra note 68 and accompanying text. The Exchange 
states that it is possible for BSTX Participants to over-report (see 
supra note 69 and accompanying text), but the Exchange does not 
explain how it would reconcile this over-reporting for purposes of 
updating the blockchain, given that the total supply of Tokens 
associated with a given Security is fixed (see supra note 103 and 
accompanying text).
    \129\ See supra note 70 and accompanying text.
    \130\ See supra notes 93, 102, and accompanying text.
    \131\ Moreover, the proposal is not clear regarding how BSTX 
Participants that are carrying firms will report Security ownership 
balances associated with their proprietary holdings versus Security 
ownership balances associated with other investors' holdings. The 
lack of clarity about how certain investors' Security ownership 
balances will be reported to BSTX and subsequently reflected on the 
Ethereum blockchain could impact the Security ownership balances 
that are viewable to the public.
    \132\ See supra notes 65, 106, and accompanying text. The 
Exchange states that end-of-day Security ownership balances may 
include borrowed shares in a DTC participant's account (see supra 
note 65), but the Exchange does not explain fully how borrowed 
shares may impact the end-of-day ownership balances of various types 
of participants. For example, the Exchange has not explained what 
might occur with respect to ownership balances on the blockchain in 
the case of a short sale with a failure to deliver.
    \133\ See supra note 66 and accompanying text.
---------------------------------------------------------------------------

    In addition, the end-of-day Security ownership balances would be 
incomplete in that they would be lacking in relevant detail, and thus 
there is a significant risk that the investing public would be confused 
or misled by the information presented. The Exchange has not explained 
how the public would be made aware of what information about Security 
ownership balances is actually reflected on the blockchain and the ways 
in which the true holdings of investors might be different than 
publicly disseminated balances.\134\ The omnibus wallet address itself 
represents balances that cannot be attributed to a particular

[[Page 84412]]

holder, and would include balances that are unaccounted for because 
they represent the holdings of non-BSTX Participants, along with 
balances not associated with a BSTX Participant due to a failure to 
report on time or inaccurate reporting.\135\ The Exchange has not 
explained its standard for how it will determine what to include and 
remove from the omnibus account, and this makes it unclear what the 
Security balance associated with the omnibus account will represent. 
The Exchange also has not proposed, for example, to identify within the 
omnibus account what Security ownership balances reflect errors, late 
reporting, or unaccounted for ownership because the shares are not 
owned by a BSTX Participant.
---------------------------------------------------------------------------

    \134\ For example, the Exchange has not indicated whether it 
would be relying on issuers of Securities to inform potential 
investors about potential inaccuracies in the public Security 
ownership information or how that information would otherwise be 
conveyed to market participants.
    \135\ See supra notes 56-57 and accompanying text.
---------------------------------------------------------------------------

    While the Exchange represents that it would not make public which 
wallet addresses are associated with particular BSTX Participants or 
the omnibus account and asserts that the publicly available information 
would be sufficiently anonymous to address privacy concerns,\136\ the 
lack of identification of which Security holder is associated with a 
particular wallet address itself presents a significant risk of 
confusion for investors, potential investors, and other market 
participants. In particular, with respect to the omnibus account, a 
large associated Security balance could create the misimpression that 
there is a significant holder in the Security, when in fact the omnibus 
account for a Security reflects the combined holdings of several 
holders. As discussed above, if a carrying firm BSTX Participant 
reports a large Security ownership balance that represents the 
positions of many beneficial owners, the reported balance could create 
a similar misimpression.\137\ Furthermore, the inability to 
disaggregate short and long positions is inherent in the proposed 
reporting scheme and would confuse and mislead investors. The Exchange 
does not describe any measures to mitigate these inherent inaccuracies.
---------------------------------------------------------------------------

    \136\ See supra notes 63-64 and accompanying text.
    \137\ See supra note 64 and accompanying text.
---------------------------------------------------------------------------

    Exacerbating the inaccuracy of the information that the Exchange 
would publicly disseminate on the Ethereum blockchain, the Exchange has 
not demonstrated whether or how it would surveil for or reconcile 
inaccurate reporting of end-of-day Security ownership balances by BSTX 
Participants, or otherwise address inaccurate information displayed on 
the Ethereum blockchain. The lack of a demonstrated ability of the 
Exchange to ensure the integrity of the end-of-day Security ownership 
balances that would be publicly disseminated by the Exchange increases 
the likelihood that these records would be inaccurate.\138\ The 
Exchange would impose a unique obligation on BSTX Participants to 
obtain an allowlisted wallet address and report end-of-day Security 
ownership balances. BSTX Participants that fail to comply with these 
requirements may be subject to disciplinary actions.\139\ However, the 
record does not demonstrate how the Exchange will perform surveillance 
for BSTX Participant compliance, particularly with respect to the end-
of-day Security ownership balance reporting requirement.
---------------------------------------------------------------------------

    \138\ See also supra notes 110-112 and accompanying text 
(commenter questioning the accuracy of the end-of-day Security 
ownership balances). It is also not clear from the record exactly 
what information would be publicly available. For example, it is not 
clear what ``other information'' beyond the end-of-day Security 
ownership balance information for BSTX Participants and the total 
balance attributed to the omnibus account, would be available to 
market participants. See supra note 60 and accompanying text. See 
also supra note 97 and accompanying text. Accordingly, this ``other 
information'' would not clear up the inaccuracies described herein, 
and the Exchange does not suggest otherwise.
    \139\ See OIP, supra note 7, at 51259. The Exchange states that 
BSTX Participants would be required to comply with applicable 
Exchange rules, including the requirement to report their end-of-day 
Security balances, and may be subject to disciplinary action for 
failing to comply with applicable rules pursuant to proposed BSTX 
Rule series 24000 (Discipline and Summary Suspension).
---------------------------------------------------------------------------

    Proposed BSTX Rule 17020(e) provides that the Exchange may request 
additional information from a BSTX Participant if the Exchange has 
``reason to believe'' that its reported end-of-day Security ownership 
balances are inaccurate.\140\ Yet the Exchange provides no evidence 
that it would take any affirmative steps to surveil for inaccurate end-
of-day Security ownership balances, including where there are 
discrepancies between these reported ownership balances and official 
records of legal ownership. Rather, the Exchange would rely on BSTX 
Participants' self-reporting of the end-of-day Security ownership 
balances and on whether those reported balances reveal any apparent 
errors on their face, which the Commission finds to be insufficient to 
mitigate these inaccuracies. Moreover, the Exchange does not address 
what steps, if any, it will take after finding an inaccuracy. The 
proposed requirement that a BSTX Participant must respond to a request 
from the Exchange for information about its reported end-of-day 
Security ownership balances merely reinforces the Exchange's general 
regulatory authority.\141\ While the Exchange has the authority to 
request records from a BSTX Participant, including the reports that the 
BSTX Participant received from DTC and used to determine its end-of-day 
Security ownership balance, the Exchange does not represent that it 
would request such records on a routine basis or use such requests to 
affirmatively identify inaccuracies in the reported end-of-day Security 
ownership balances, as opposed to using them as a tool to investigate 
suspected inaccuracies. And the Exchange does not describe alternative 
means that it might use to determine whether a BSTX Participant has 
accurately reported its end-of-day Security ownership balances, or how 
it might surveil for and correct against late reporting by BSTX 
Participants.
---------------------------------------------------------------------------

    \140\ See supra note 117 and accompanying text.
    \141\ See supra note 117. See also supra notes 125-126 and 
accompanying text.
---------------------------------------------------------------------------

    The Exchange compares its proposal to other reporting regimes and 
asserts that other reporting regimes, including reporting regimes 
administered by the Commission, depend on the accuracy of the 
information reported or explicitly direct their participants to correct 
inaccurate reports.\142\ But this assertion does not alleviate the 
Commission's concern that the lack of a process for the Exchange to 
monitor or address the inaccuracy of end-of-day Security ownership 
information would exacerbate the inaccuracy of the publicly 
disseminated information, and that disseminating inaccurate information 
would not be consistent with the protection of investors and the public 
interest, as required by Section 6(b)(5) of the Exchange Act. For 
example, the Commission does not rely solely on trust to assure the 
integrity of its reporting regime, but rather also conducts 
surveillance of its regulated entities, and also relies on the presence 
of SROs that surveil these entities.\143\ Moreover, provisions in other 
reporting regimes directing participants to correct inaccurate reports 
exist within a regulatory framework that includes

[[Page 84413]]

other affirmative surveillance measures.\144\ Therefore, this 
comparison between other reporting regimes and the obligations on BSTX 
Participants to accurately report end-of-day Security balances to the 
Exchange and to correct inaccurate reports does not demonstrate that, 
without taking reasonable affirmative steps to monitor whether BSTX 
Participants have reported accurate information, the Exchange would be 
able to mitigate against the dissemination of inaccurate Security 
ownership information.
---------------------------------------------------------------------------

    \142\ See supra notes 76, 119, and accompanying text.
    \143\ See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70908 (December 22, 1998) (File No. S7-12-98) 
(Regulation of Exchanges and Alternative Trading Systems) (``As 
broker-dealers, alternative trading systems will be inspected on a 
regular basis by any SRO of which they are a member, and by the 
Commission only on an intermittent basis.''). See also id. at 70848 
(``the Commission intends to work with the self-regulatory 
organizations (`SROs') to ensure that they can operate ongoing, 
real-time surveillance for market manipulation and fraud and develop 
surveillance and examination procedures specifically targeted to 
alternative trading systems they oversee'').
    \144\ For example, when discussing amendments to Form ATS 
recordkeeping requirements to cover Form ATS-N filers, the 
Commission stated that it believed that the amendments ``are 
necessary to create a meaningful audit trail of an ATS's current and 
previous written safeguards and procedures . . . and permit 
surveillance and examination staff to help ensure fair and orderly 
markets without imposing any undue burden on ATSs.'' Securities 
Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768, 38788, 
n.278 (August 7, 2018) (File No. S7-23-15) (Regulation of NMS Stock 
Alternative Trading Systems). Similarly, when approving amendments 
to FINRA's equity trade reporting rules, the Commission stated that 
these changes ``should enhance FINRA's audit trail and automated 
surveillance program, promote more consistent trade reporting by 
members, and aid in the detection of violations of FINRA trade 
reporting and other rules.'' Securities Exchange Act Release No. 
71623 (February 27, 2014), 79 FR 12558, 12562 (March 5, 2014) (SR-
FINRA-2013-050).
---------------------------------------------------------------------------

    The Exchange's proposed use of an omnibus account to cover 
unattributed Security ownership balances arising from inaccurate or 
late reporting by BSTX Participants, and discretionary authority to 
suspend the end-of-day reporting obligation with respect to a 
particular BSTX Participant or a Security, suggest that the Exchange 
may rely on one or both of these measures, even though there is a 
significant risk that these measures would leave inaccurate information 
on the Ethereum blockchain, rather than taking steps to resolve certain 
inaccuracies or inconsistencies.\145\ And the Exchange does not 
describe any procedures for correcting the end-of-day Security 
ownership balances beyond a proposed requirement that a BSTX 
Participant correct an inaccurate report, which would have an 
insufficient mitigating effect because BSTX Participants also have a 
duty to submit accurate reports.\146\ Therefore, the Exchange has not 
demonstrated in the proposal how the Exchange would ensure the 
integrity of information that the Exchange seeks to publicly 
disseminate.
---------------------------------------------------------------------------

    \145\ See supra notes 56, 120, and accompanying text. See also 
infra note 262 and accompanying text.
    \146\ See supra note 116 and accompanying text. Further, this 
duty to update only applies if the erroneous report has not been 
corrected or superseded, and BSTX Participants must submit new end-
of-day Security ownership balances at the end of each day. See id.
---------------------------------------------------------------------------

    The Exchange asserts that it does not believe that the end-of-day 
Security balances on the Ethereum blockchain would cause investor 
confusion because there is no similar source of information with which 
an individual member of the public could make a comparison to the 
information disseminated on the blockchain and become confused.\147\ 
The Commission concludes, however, that it would not be consistent with 
the protection of investors and the public interest for the Exchange to 
publicly disseminate inaccurate information about Securities ownership, 
even if the public is not able to make comparisons to identify 
discrepancies with official ownership records. While the lack of a 
comparable source of information may prevent the public from being 
aware of a discrepancy in ownership balances, the information the 
Exchange publishes would still be inaccurate.
---------------------------------------------------------------------------

    \147\ See supra note 72 and accompanying text.
---------------------------------------------------------------------------

    The reliability of public securities records is important to the 
integrity of, and investor confidence in, the securities markets, and 
the Commission concludes that labeling records as ``ancillary'' does 
not minimize the need for such records of securities ownership publicly 
disseminated by a national securities exchange to be accurate. Where, 
as here, the very purpose of the Exchange's proposal is to publicize 
such securities ownership information,\148\ the reliability and 
accuracy of that information is particularly important. Further, if a 
national securities exchange requires its members to report security 
ownership information that the exchange makes publicly available in 
some form, that exchange is obligated to take reasonable steps to 
surveil the reported information for accuracy, to prevent inaccuracies 
from misleading investors and other market participants. The Commission 
thus finds that the Exchange has not met its burden to demonstrate how 
its proposal is consistent with the requirements of Exchange Act 
Section 6(b)(5) that a national securities exchange's rules must be 
consistent with the protection of investors and the public interest.
---------------------------------------------------------------------------

    \148\ See OIP, supra note 7, 85 FR at 51251.
---------------------------------------------------------------------------

    Furthermore, once information about end-of-day Security ownership 
balances is put into the public domain, there is a significant risk 
that market participants, including investors, would interpret those 
public records and make use of this information. The Commission is not 
persuaded that the Exchange's designation of the end-of-day Security 
ownership balances publicly disseminated on the Ethereum blockchain as 
an ``ancillary'' record prevents market participants from making use of 
the information, including in connection with investment and trading 
decisions.\149\ The Commission is also not persuaded by the Exchange's 
assertion, when responding to a commenter's concern that a BSTX 
Participant might try to ``game'' the system by reporting an inaccurate 
end-of-day Security ownership balance, that the balance information 
would not seem to be useful to inform a market participant's trading in 
a Security because of a lack of detail in the publicly disseminated 
information.\150\ To the contrary, the Commission concludes that market 
participants put in place various investment strategies that at times 
use advantages in obtaining or analyzing information, and that it is 
reasonable to assume that some subset of market participants would try 
to analyze and make use of a new source of publicly available 
information concerning Security ownership, even if such information is 
incomplete.
---------------------------------------------------------------------------

    \149\ Although the Exchange states that any disruption to end-
of-day Security ownership reporting would not impact the ability to 
trade, clear, or settle Security transactions (see supra notes 71, 
114, and accompanying text), the ``ancillary'' nature of the 
blockchain-based records does not negate that these records could be 
viewed as a publicly available source of information regarding 
Security ownership.
    \150\ See supra note 115 and accompanying text.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission concludes that the 
public dissemination of inaccurate information about Security ownership 
has the significant potential to mislead investors, irrespective of 
whether the information is disseminated on the blockchain, the 
internet, or in print, and that the Exchange has not met its burden to 
demonstrate that its proposal is nonetheless consistent with the 
protection of investors and the public interest, pursuant to Section 
6(b)(5) of the Exchange Act. The Commission also concludes that this 
misleading information creates a significant risk that investors make 
investment decisions based on misinterpretations of public information 
about Security ownership. Based on the consequences of the Exchange 
disseminating securities ownership information that is inaccurate, the 
Commission finds that the Exchange has failed to demonstrate that the 
proposal would protect investors and the public interest, in accordance 
with Section 6(b)(5) of the Exchange Act.

[[Page 84414]]

C. Whether BOX Has Met Its Burden To Demonstrate That the Proposal Is 
Consistent With Sections 6(b)(1) and 6(b)(5) of the Exchange Act With 
Respect to the Operation of the Proposed Reporting of End-of-Day 
Security Ownership Balances

    The Commission examines below whether the Exchange has met its 
burden to demonstrate that its proposal is consistent with Sections 
6(b)(1) and 6(b)(5) of the Exchange Act with respect to additional 
aspects of the proposal. The Commission first considers whether the 
record explains sufficiently the processes by which a Wallet Manager 
will write to the Ethereum blockchain. As discussed below, the 
Commission concludes that the Exchange has not met its burden to 
demonstrate how the Exchange would, consistent with Section 6(b)(1) of 
the Exchange Act, be able to ensure compliance by the Exchange with its 
own rules, or that the Exchange's proposed rules would protect 
investors and the public interest, in accordance with Section 6(b)(5) 
of the Exchange Act.\151\ Next, the Commission considers the processes 
by which BSTX Participants will obtain allowlisted wallet addresses, 
BSTX Participants will provide end-of-day Security ownership balances 
to BSTX, and BSTX will provide Security ownership balances to a Wallet 
Manager, as well as the costs or other burdens market participants 
would face as a result of the end-of-day Security ownership balance 
reporting requirements. As discussed below, the Commission concludes 
that the Exchange has not met its burden to demonstrate that the 
Exchange would be able to carry out its necessary functions or fulfill 
its obligations as an SRO to comply with its own rules, pursuant to 
Section 6(b)(1) of the Exchange Act; or that the Exchange's rules would 
facilitate transactions in securities, remove impediments to a free and 
open market and national market system, or protect investors and the 
public interest, in accordance with Section 6(b)(5) of the Exchange 
Act.\152\
---------------------------------------------------------------------------

    \151\ See infra Section III.C.1.
    \152\ See infra Section III.C.2.
---------------------------------------------------------------------------

    The Commission examines how the Exchange might use its proposed 
discretion to suspend the requirements for BSTX Participants to obtain 
allowlisted wallet addresses and report end-of-day Security ownership 
balances as to a particular BSTX Participant or Security. As discussed 
below, the Commission concludes that the Exchange has not met its 
burden to demonstrate that it would be able to carry out its necessary 
functions, in accordance with Section 6(b)(1) of the Exchange Act; and 
that the Exchange's rules are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, as 
required by Section 6(b)(5) of the Exchange Act.\153\
---------------------------------------------------------------------------

    \153\ See infra Section III.C.3.
---------------------------------------------------------------------------

    The Commission then examines specific issues presented by the 
Exchange's proposed listing of Securities--specifically, the lack of 
fungibility between a BSTX-listed Security and other classes of 
securities of the same issuer, whether the Exchange has sufficiently 
addressed issues posed by potential listings by the Exchange or its 
affiliate, and its proposed continued listing requirement that all 
BSTX-listed Securities remain compliant with the BSTX Protocol. As 
discussed below, the Commission concludes that the Exchange has not met 
its burden to demonstrate that (1) notwithstanding the described lack 
of fungibility, the Exchange's rules would prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments to a free and open market and national 
market system, or protect investors and the public interest, in 
accordance with Section 6(b)(5) of the Exchange Act; \154\ and (2) 
based on a lack of explanation about issuer compliance with the BSTX 
Protocol, that the proposal is designed to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and is not designed to permit unfair discrimination between 
issuers, as required under Section 6(b)(5) of the Exchange Act.\155\
---------------------------------------------------------------------------

    \154\ See infra Section III.C.4(a).
    \155\ See infra Section III.C.4(b).
---------------------------------------------------------------------------

1. Wallet Manager Writing to Blockchain
(a) Exchange's Representations and Comments Received
    According to the Exchange, it will enter into a contractual 
arrangement with a Wallet Manager as a third-party service provider for 
the Exchange that will establish wallet addresses for BSTX Participants 
and update the Ethereum blockchain with Security ownership 
balances.\156\ The Exchange states that it intends to evaluate each 
potential Wallet Manager's capability to receive information from BSTX 
related to BSTX Participants' end-of-day Security balances and its 
ability to update the Ethereum blockchain.\157\
---------------------------------------------------------------------------

    \156\ See OIP, supra note 7, 85 FR at 51257. The Exchange states 
that it believes that the Wallet Manager's functions do not meet the 
definition of ``facility'' under Section 3(a)(2) of the Exchange 
Act. See id.
    \157\ See OIP, supra note 7, 85 FR at 51258. The Exchange also 
describes that it intends to perform due diligence on potential 
Wallet Managers and that it will require in its service agreements 
with Wallet Managers that they agree to comply with applicable 
securities laws. The Exchange states its belief that its listed 
criteria for evaluating potential Wallet Managers may prevent 
fraudulent and manipulative act and practices, consistent with 
Section 6(b)(5) of the Exchange Act. See id.
---------------------------------------------------------------------------

    The Exchange states that, initially, it expects to contract with 
only one Wallet Manager, tZERO, who would also be a 50% owner of 
BSTX.\158\ According to the Exchange, following the end of a trading 
day, BSTX Participants (or their carrying firms) would be required to 
send Security balance information to BSTX, and BSTX would deliver that 
information to the Wallet Manager (or Wallet Managers) who would be 
responsible for updating the Security ownership balances on the 
Ethereum blockchain ``by allocating balances among the wallet addresses 
of BSTX Participants and the omnibus address.'' \159\ The Exchange 
states that the Ethereum blockchain would not reflect any particular 
transactions, but would instead record allocations of end-of-day 
Security balances that may result from, among other things, trading and 
lending activity.\160\
---------------------------------------------------------------------------

    \158\ See OIP, supra note 7, 85 FR at 51258, n.68. The Exchange 
also states that there is nothing to preclude the use of another 
Wallet Manager capable of operating software that is compatible with 
the BSTX Protocol. See id.
    \159\ OIP, supra note 7, 85 FR at 51257. See also proposed BSTX 
Rule 17020(d). The Exchange also states that pursuant to the 
Exchange's agreement with the Wallet Manager (or Wallet Managers), 
the Wallet Manager would be required to record balances to the 
Ethereum blockchain following each trading day. Thus, Tokens 
representing Security balances of BSTX Participants would be updated 
each trading day, but not on non-trading days. See OIP, supra note 
7, 85 FR at 51258, n.69.
    \160\ See OIP, supra note 7, 85 FR at 51257. See also supra note 
65 discussing how short sales and borrowed shares would appear in 
the end-of-day Security ownership balances.
---------------------------------------------------------------------------

    Specifically, the Exchange states that the Wallet Manager would 
make updates to the balances associated with wallet addresses by 
reallocating Tokens (which represent Securities) between wallet 
addresses, including the omnibus wallet address, so that, according to 
the Exchange, after each trading day the wallet address account 
balances reflect the new Security ownership balances reported to BSTX 
pursuant to BSTX Rule 17020. The Exchange also states that these 
reallocations based on end-of-day Security ownership balance reports 
from BSTX Participants are not designed to reflect actual transactions 
that occurred during the trading day, but that instead, the 
reallocation process focuses on having the correct number of

[[Page 84415]]

Tokens attributed to each wallet address based on the end-of-day 
Security ownership balance reports.\161\
---------------------------------------------------------------------------

    \161\ See OIP, supra note 7, 85 FR at 51259, n.76. The Exchange 
gives as an example that if there were only two transactions in the 
entire marketplace during the trading day--a sale of 100 Securities 
from BSTX Participant A to BSTX Participant B and a subsequent sale 
of 100 Securities from BSTX Participant B to BSTX Participant C--the 
end-of-day reallocation process would result in a reallocation of 
100 Tokens from BSTX Participant A to BSTX Participant C, and would 
consequently not reflect any actual transactions. See id.
---------------------------------------------------------------------------

    The Exchange states that, to create a new Token on the Ethereum 
blockchain for purposes of facilitating the recording and dissemination 
of Security ownership balances, the issuer of the securities must 
create a new smart contract that is configured to detail, among other 
things, the name of the issuer and total supply of the Tokens that 
correspond to the BSTX-listed Security.\162\ According to the Exchange, 
the recording of Security ownership balances would not commence until 
the conclusion of the first day of Security trading on BSTX.\163\ As 
discussed above, the Exchange states that, using Etherscan.io, an 
individual member of the public would be able to see holders of Tokens 
representing the Securities and the associated quantity, as well as 
``other information (e.g., transfers made as a result of the Wallet 
Manager(s) reallocation process).'' \164\ In describing how the term 
``smart contract'' is commonly used, the Exchange asserts that in the 
context of Tokens representing Securities, smart contracts generally 
may have three components: (i) Functions, (ii) configurations; (iii) 
and events; and that ``events'' are the functions of a smart contract 
that, when executed, result in a log or record being recorded to the 
Ethereum blockchain, such as ``the transfer of tokenized assets from 
one address to another.'' \165\ The Exchange also states that with a 
Token ``transfer'' no transaction is actually sent to the recipient of 
the ``Token.'' \166\ The Exchange explains that a transaction 
``transferring'' a Token to an address only changes the state of the 
Token contract, and that, instead of a wallet address being full of 
``Tokens,'' it is the Token smart contact that contains the wallet 
addresses and associated balances.\167\ Additionally, the Exchange 
states that in the context of the BSTX Protocol, a ``transfer'' of a 
Token refers to a reallocation of the digital representation of a 
Security on the Ethereum blockchain as an ``ancillary'' recordkeeping 
mechanism to reflect corresponding changes in ownership of the 
Security.\168\
---------------------------------------------------------------------------

    \162\ See OIP, supra note 7, 85 FR at 51255. The Exchange states 
that the BSTX Protocol would require a BSTX-listed company to use 
three related smart contracts as follows: (1) The ``Asset Smart 
Contract'' would define and establish the ``Tokens,'' such as 
setting the maximum number of Tokens available for a particular 
issuance, and record a list of market participant wallet addresses 
and the Tokens associated with each address; (2) the ``Registry 
Smart Contract'' would define the permissions available to different 
types of market participants to perform certain functions and 
contain the list of allowlisted wallet addresses and additional 
information associated with each address; and (3) the ``Compliance 
Smart Contract'' would contain a set of rules that could be 
configured to abide by and ensure compliance with applicable laws 
and regulations, such as by restricting a movement of Securities to 
a wallet address that has not been added to the Registry Smart 
Contract. See OIP, supra note 7, 85 FR at 51256-57.
    \163\ See OIP, supra note 7, 85 FR at 51253. According to the 
Exchange, all offerings of securities that are intended to be listed 
as Securities on BSTX would be conducted in the same general manner 
as offerings of exchange-listed equity securities are conducted 
today under the federal securities laws. See id. The Exchange states 
that an issuer would enter into a firm commitment or best efforts 
underwriting agreement with a sole underwriter or underwriting 
syndicate, the underwriter or underwriters would market the 
securities and distribute them to purchasers, and secondary trading 
in the securities (that are intended to trade on BSTX as Securities) 
would thereafter commence on BSTX. See id.
    \164\ See OIP, supra note 7, 85 FR at 51261. See also supra note 
60 and accompanying text (discussing the Exchange's assertions 
regarding what would be publicly available on Etherscan.io).
    \165\ See OIP, supra note 7, 85 FR at 51255. The Exchange states 
that in the context of Tokens representing Securities and the 
ability to query a particular address to determine the quantity of 
Tokens that belong to that address, the term ``address'' refers to a 
number that is associated with a particular market participant that 
can be updated to ``reflect changes in ownership of tokenized 
assets.'' See OIP, supra note 7, 85 FR at 51256, ns.49-50 and 
accompanying text.
    \166\ See OIP, supra note 7, 85 FR at 51256.
    \167\ See id.
    \168\ See OIP, supra note 7, 85 FR at 51256, n.54. See supra 
Section III.B.1 (discussing the Exchange's use of the term 
``ancillary'').
---------------------------------------------------------------------------

    The Exchange states that, in connection with the operation of BSTX, 
it proposes to use a series of ``new forms'' to facilitate becoming a 
BSTX Participant and for issuers to list their Securities,\169\ and 
includes as one of these what it refers to as an overview of the BSTX 
Protocol.\170\ Pursuant to the proposed BSTX Protocol Summary Overview, 
it is the Asset Smart Contract that will contain the balances of Tokens 
associated with each wallet address and carry out the functions 
necessary to effect changes in ownership for ``ancillary'' 
recordkeeping purposes.\171\ Specifically, the proposed BSTX Protocol 
Summary Overview states that the Asset Smart Contract defines and 
creates the maximum number of Tokens available for a particular 
issuance for purposes of recording and disseminating end-of-day 
Security ownership balances on the Ethereum blockchain and records a 
list of each ``BSTX Participant or non-BSTX Participant broker-dealer 
address[ ]'' and the Tokens held at each address.\172\ Pursuant to the 
proposed BSTX Protocol Summary Overview, the Asset Smart Contract 
includes the function ``Transfer,'' which allows for the transfer of 
Tokens to other specified, allowlisted addresses, and requires two 
parameters: The receiver address and the amount of Tokens being 
sent.\173\ Also, one of the Asset Smart Contract's events, which 
generates a record on the Ethereum blockchain that is publicly 
viewable, will be ``Transfer.'' According to the proposed BSTX Protocol 
Summary Overview, this event records the details of the movement of the 
digital Token representation of a BSTX-listed Security from one address 
to another, as recorded in the ledger of the Asset Smart Contract.\174\
---------------------------------------------------------------------------

    \169\ See OIP, supra note 7, 85 FR at 51283.
    \170\ See OIP, supra note 7, 85 FR at 51286. The Exchange filed 
the BSTX Protocol Summary Overview as Exhibit 3N. See supra note 92.
    \171\ See BSTX Protocol Summary Overview, supra note 92, at 344; 
OIP, supra note 7, 85 FR at 51256. The Exchange states that the 
Asset Smart Contract defines and creates the Tokens (e.g., the 
maximum number of Tokens available for a particular issuance) for 
purposes of the Ethereum blockchain ancillary recordkeeping function 
and records a list of each BSTX Participant or non-BSTX Participant 
broker-dealer addresses and the Tokens held at each address. See 
BSTX Protocol Summary Overview, supra note 92, at 344; OIP, supra 
note 7, 85 FR at 51255. The Exchange also states that the smart 
contracts of a Security cannot run on their own, but rather lie 
dormant until a transaction triggers them to carry out a specified 
operation, and that a ``transaction'' in this context is an 
operation triggering a smart contract to carry out its specified 
function, which must ultimately originate from a human source. See 
BSTX Protocol Summary Overview, supra note 92, at 342; OIP, supra 
note 7, 85 FR at 51256.
    \172\ See BSTX Protocol Summary Overview, supra note 92, at 344.
    \173\ See id. at 346.
    \174\ See id. at 347.
---------------------------------------------------------------------------

    With respect to the role of Wallet Managers under the proposal, in 
the context of SR-BOX-2019-19, one commenter stated that further 
clarification is warranted for, among other things, ``rules regarding 
`Wallet Managers.' '' \175\ This commenter also stated that it is 
unclear ``why a `Wallet Manager' would improve rather than complicate 
current market structure.'' \176\ Another commenter stated that the 
Exchange should address why BSTX will act as an intermediary between 
BSTX Participants and Wallet Managers in the reporting of end-of-day 
Security ownership balances instead of

[[Page 84416]]

allowing direct reporting from BSTX Participants to Wallet 
Managers.\177\
---------------------------------------------------------------------------

    \175\ See Letter from David A. Schrader, Partner, Paykin Krieg & 
Adams, LLP (February 25, 2020) (``PKA Law Letter''), at 1.
    \176\ PKA Law Letter, supra note 175, at 1-2.
    \177\ See IEX Letter, supra note 77, at 5.
---------------------------------------------------------------------------

    In response, the Exchange contended in the context of SR-BOX-2019-
19 that it added more information regarding Wallet Managers in 
Amendment No. 2, and reiterated its discussion from the proposal 
without further elaboration.\178\ The Exchange also stated that the 
Exchange has determined to have BSTX act as an intermediary between 
BSTX Participants and Wallet Managers ``for several reasons,'' 
including that the Exchange contends that it is less burdensome for a 
BSTX Participant to report to BSTX rather than establish a new 
relationship with a Wallet Manager.\179\ The Exchange stated that it 
may consider other models in the future, which would be subject to the 
rule filing requirements of Section 19 of the Exchange Act.\180\
---------------------------------------------------------------------------

    \178\ See BSTX Response Letter I, supra note 82, at 18. See also 
OIP, supra note 7, 85 FR at 51257-58.
    \179\ See BSTX Response Letter I, supra note 82, at 18. The 
Commission notes that the Exchange did not provide any other reasons 
in its response.
    \180\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission believes that the Exchange's proposed rules for 
using third-party service providers to act as Wallet Managers to 
perform the function of recording and updating Security ownership 
balance information on the Ethereum blockchain lacks clarity, and 
agrees with commenters that further clarification is warranted with 
respect to Wallet Managers.\181\ This lack of clarity prevents the 
Commission from assessing whether the publicly available information 
about end-of-day Security ownership balances on the Ethereum blockchain 
will be inaccurate and misleading, and therefore whether the proposal 
would be consistent with the protection of investors and the public 
interest pursuant to Section 6(b)(5) of the Exchange Act, and how the 
Exchange would enforce compliance with its own rules, pursuant to 
Section 6(b)(1) of the Exchange Act. The areas needing clarification 
include how Wallet Managers will update BSTX Participants' account 
balances and how the smart contracts will be triggered to effectuate 
changes in the end-of-day ownership balances that are recorded using 
Tokens on the Ethereum blockchain. In addition, as described further 
below, the Wallet Manager's process of updating end-of-day Security 
ownership balances on the Ethereum blockchain will result in transfers 
between wallet addresses being publicly visible on the Ethereum 
blockchain, where these transfers may reflect the Wallet Manager's 
reallocation process but not correspond to actual transactions between 
the particular Securities holders associated with those specific wallet 
addresses.
---------------------------------------------------------------------------

    \181\ See supra notes 175-177 and accompanying text.
---------------------------------------------------------------------------

    While the Exchange states that it would provide end-of-day Security 
ownership balances to Wallet Mangers to update the Ethereum blockchain, 
neither the proposed rules nor the Exchange's description in the 
proposal explain how the balances will be updated by the Wallet 
Managers, including what procedures the Wallet Manger must follow to 
update the account balances of BSTX Participants on the blockchain. 
Among other things, the Exchange does not describe in its proposal many 
aspects of the proposed BSTX Protocol Summary Overview, such as the 
``Transfer'' function and the ``Transfer'' event aspects of the Asset 
Smart Contract component of the protocol set forth in the BSTX Protocol 
Summary Overview, including what would be ``publicly viewable'' as a 
result. Additionally, the Exchange does not explain how the Asset Smart 
Contract, Registry Smart Contract, and Compliance Smart Contract 
interact, and what roles and authorities BSTX, the Exchange, the Wallet 
Manager or Wallet Managers, or other market participants would have 
with respect to each of the smart contracts, and whether and how those 
roles or authorities may change over time. For example, while the 
Exchange states that the process of reallocating Token balances among 
different wallet addresses is a function that will be performed by the 
Exchange ``in coordination with the Wallet Manager(s),'' \182\ the 
Exchange does not specify when the Exchange will direct the Wallet 
Manager, and when the Wallet Manager will act according to its 
discretion. Furthermore, the proposed BSTX Protocol Summary Overview 
states that the Asset Smart Contract will record a list of each non-
BSTX Participant broker-dealer wallet address and the Tokens held at 
each wallet address; however, non-BSTX Participants are neither 
required to, nor may they voluntarily, report their end-of-day Security 
ownership balances to the Exchange for recording to the Ethereum 
blockchain.\183\
---------------------------------------------------------------------------

    \182\ See infra note 217. The Exchange states that the process 
of reallocating Token balances among different wallets addresses is 
a function performed by the Exchange in coordination with the Wallet 
Manager, and that the proposed use of blockchain technology is 
``almost passive'' for BSTX Participants, but for obtaining a wallet 
address and the end-of-day reporting of balances. The Exchange also 
states that the Exchange would be responsible for maintaining wallet 
addresses for the entire life cycle of a Security and the associated 
Token and life cycle of participants' accounts. See OIP, supra note 
7, 85 FR at 51257, n.58.
    \183\ See supra note 27 and accompanying text. The proposal also 
does not explain how the updating of the Ethereum blockchain will be 
achieved if there is a separate Wallet Manager used by another 
trading center, such as a national securities exchange trading 
Securities pursuant to UTP or an alternative trading center trading 
Securities OTC. See infra Section III.D for discussion about other 
trading centers' ability to trade BSTX-listed Securities.
---------------------------------------------------------------------------

    As discussed above, the proposal is unclear as to what information 
will be publicly observable on the Ethereum blockchain, including what 
details beyond the wallet addresses of holders of Securities and 
associated quantities may be observable, but the Exchange has indicated 
that such information may include transfers made as a result of the 
Wallet Manager's reallocation process.\184\ Given that BSTX 
Participants will not report individual transactions and will only 
update their end-of-day Security ownership balances at the end of each 
trading day, it is unclear how a transfer would work and whether issues 
could arise that might prevent the Wallet Manager from allocating the 
same number of Tokens representing Securities to a BSTX Participant's 
wallet address as the number of Securities that the BSTX Participant 
reports to the Exchange. The Commission believes that the proposal does 
not clearly address, for example, what the role of the Wallet Manager 
would be and the procedures the Wallet Manager would follow to 
reallocate the end-of-day balances if the total of the Security 
ownership balances reported were to exceed the total issuance.\185\ 
Also, while the Exchange gives examples of what may be viewable as a 
result of a reallocation,\186\ the Exchange does not describe whether 
the public would be able to view ``transfers'' between specific 
accounts for the purpose of reallocating Tokens to

[[Page 84417]]

achieve the updated end-of-day balances associated with each wallet 
address. The lack of clarity concerning how the Wallet Manager would 
update the Ethereum blockchain, and what information may be available 
on the Ethereum blockchain that is generated by the Wallet Manager's 
actions, is an additional aspect that contributes to the Commission's 
concerns regarding the public dissemination of inaccurate or misleading 
information and inhibits the Commission's ability to find that the 
information to be recorded to the blockchain pursuant to the proposal 
is consistent with the protection of investors and the public interest. 
For example, if the publicly available information indicates that 
transactions have occurred between the holders of certain wallet 
addresses, when instead the Wallet Manager reallocated Securities from 
one wallet address to another wallet address to arrive at the reported 
end-of-day Security ownership balances without regard to what 
underlying transactions occurred, this would result in the appearance 
of false transactions, seriously risk misleading investors, and 
potentially affect investors' investment decisions.\187\ Other market 
participants, such as BSTX Participants, could similarly be confused 
if, for example, the publicly disseminated information indicates 
Securities being reallocated between their wallet address and only one 
other wallet address, if in actuality their new balance is attributable 
to transactions with multiple counterparties.
---------------------------------------------------------------------------

    \184\ See supra note 60 and accompanying text. See also supra 
Section III.B.2.
    \185\ See supra note 69 and accompanying text (discussing the 
Exchange's assertion that the Ethereum blockchain may not reflect 
the precise distribution of Securities among holders and the 
possibility that the number of reported Securities may exceed the 
number of outstanding Securities of a particular issuance) and infra 
note 253 and accompanying text (discussing the lack of clarity 
around whether in the case of over-reporting of an end-of-day 
ownership balance by a BSTX Participant to BSTX the Exchange would 
suspend the end-of-day reporting process or whether the Exchange 
would handle allocations in such a circumstance some other way). See 
also supra note 128 (providing an example of the possibility of 
over-reporting by a BSTX Participant) and note 172 and accompanying 
text (discussing how the Smart Contract will, among other things, 
define and create the maximum number of Tokens available for a 
particular issuance).
    \186\ See supra note 161.
    \187\ See supra note 161 discussing the Exchange's examples 
regarding how reallocations would be effectuated.
---------------------------------------------------------------------------

    The Commission cannot conclude that the proposal is consistent with 
the protection of investors and the public interest because the 
Exchange has failed to sufficiently describe both the process for 
Wallet Managers to produce updates in end-of-day ownership balances to 
the Ethereum blockchain and the public information resulting from these 
updates. In the absence of clarification about these processes and the 
resulting public information, the Commission cannot assess the extent 
to which the information on the Ethereum blockchain may be inaccurate 
or misleading, and therefore whether the dissemination of that 
information would be consistent with the protection of investors and 
the public interest.\188\ For these reasons, the Commission finds that 
the Exchange has not met its burden to demonstrate that the Exchange's 
proposed rules would protect investors and the public interest, in 
accordance with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \188\ While the Exchange asserts that its listed criteria for 
evaluating potential Wallet Managers may prevent fraudulent and 
manipulative acts and practices, consistent with Section 6(b)(5) of 
the Exchange Act (see supra note 157), it does not provide a basis 
for this assertion and therefore the Commission cannot determine 
whether it agrees with this conclusion.
---------------------------------------------------------------------------

    Further, the proposal lacks information regarding the roles and 
authorities BSTX, the Exchange, the Wallet Manager or Wallet Managers, 
or other market participants would have with respect to smart 
contracts, as well as the possibility that these roles or authorities 
may change over time. Without such information, the Commission cannot 
assess how the Exchange would, consistent with Section 6(b)(1) of the 
Exchange Act, ensure compliance by the Exchange with its own rules 
requiring BSTX to provide end-of-day Security balance information to 
the Wallet Manager or Wallet Managers, and the updating of the 
blockchain by the Wallet Manager or Wallet Managers to reflect the end-
of-day balance information reported to BSTX by BSTX Participants.
Allowlisting and End-of-Day Reporting
(a) Exchange's Representations and Comments Received
    According to the Exchange, a BSTX Participant must obtain an 
allowlisted wallet address and report certain end-of-day Security 
ownership balance information to BSTX.\189\ Specifically, proposed BSTX 
Rule 17020(a) states that each BSTX Participant, either directly or 
through its carrying firm acting on its behalf, must contact BSTX to 
establish a wallet address to which its end-of-day Security balances 
may be recorded. Furthermore, a BSTX Participant must obtain this 
wallet address within five business days after the Exchange approves 
its application.\190\ The Exchange states that the process of obtaining 
a wallet address will generally occur contemporaneously with the 
application to become a BSTX Participant, but states that if a BSTX 
Participant is unable to obtain a wallet address within the five day 
period, the BSTX Participant's end-of-day Security ownership balances 
would be attributed to the omnibus wallet address until the BSTX 
Participant obtains a wallet address.\191\ The Exchange proposes not to 
require a BSTX Participant to have a separate wallet address for each 
Security issuance that it trades, because multiple Security issuances 
can be attributed to a BSTX Participant's wallet address.\192\ The 
Exchange states that the requirement for BSTX Participants to obtain a 
wallet address is not discriminatory because all BSTX Participants must 
do so, and the Exchange will not propose to charge a fee for obtaining 
a wallet address.\193\ Finally, the Exchange states that once the 
Exchange assigns a BSTX Participant a wallet address, the only further 
obligation of the BSTX Participant is to report its end-of-day Security 
ownership balances to BSTX.\194\
---------------------------------------------------------------------------

    \189\ See OIP, supra note 7, 85 FR at 51256-57. According to the 
Exchange, an allowlisted wallet address is a permissioned wallet 
address associated with a market participant to which end-of-day 
Security ownership balances may be recorded. See id.
    \190\ See proposed BSTX Rule 17020(a).
    \191\ See OIP, supra note 7, 85 FR at 51257. The Exchange likens 
the requirement for BSTX Participants to obtain a wallet address to 
that of other exchanges requiring a market participant identifier 
(MPID), because it is establishing an identifier that can be 
attributed to a particular BSTX Participant for reporting 
requirements. See id.
    \192\ See OIP, supra note 7, 85 FR at 51257, n.59. In the 
context of SR-BOX-2019-19, in response to a commenter's question 
about whether the a BSTX Participant could use multiple wallets, 
(see supra note 94), the Exchange stated that, pursuant to proposed 
BSTX Rule 17020, BSTX Participants would be required to contact the 
Exchange as part of the allowlisting process, and the Exchange 
intends to discuss related operational issues with BSTX Participants 
as appropriate (see supra note 107 and accompanying text).
    \193\ See OIP, supra note 7, 85 FR at 51257.
    \194\ See id.
---------------------------------------------------------------------------

    In the proposal, the Exchange describes the process for BSTX 
Participants reporting end-of-day Security ownership balances. The 
Exchange proposes to require each BSTX Participant, either directly or 
through its carrying firm, to report each business day to BSTX, in a 
manner and form acceptable to BSTX, the total number of Securities for 
each class of Security credited to either the BSTX Participant's DTC 
account or the BSTX Participant by its carrying firm.\195\ The Exchange 
states that it would require BSTX Participants to provide the end-of-
day Security ownership balance report to the Exchange each business day 
when DTC is open for business after such time as DTC has completed its 
end-of-day settlement process.\196\ The Exchange represents that DTC 
typically makes end-of-day security position reports available to 
participants at approximately 7:30 p.m. Eastern time, and that it would 
notify BSTX Participants, via Regulatory Circular, of

[[Page 84418]]

the time after 7:30 p.m. Eastern time by which they must report end-of-
day Security ownership balances to BSTX.\197\ Furthermore, the Exchange 
represents that it would notify BSTX Participants of the precise manner 
in which Securities should be reported via a Regulatory Circular.\198\ 
The Exchange states that, in general, the report would simply require 
certain identifying information regarding the BSTX Participant (e.g., 
name, carrying firm, MPID) and a list of the end-of-day Security 
ownership balances of the BSTX Participant.\199\ Furthermore, the 
Exchange states that BSTX Participants would be subject to potential 
disciplinary action for failing to comply with the requirement to 
report their end-of-day Security ownership balances.\200\
---------------------------------------------------------------------------

    \195\ See OIP, supra note 7, 85 FR at 51258. For BSTX 
Participants that are participants at DTC, the report to BSTX would 
consist of the total number of Securities for each class of Security 
that is credited to each DTC account of the BSTX Participant, and 
for those that are not participants at DTC, the report would consist 
of the total number of Securities that are credited to the BSTX 
Participant by its carrying firm. See id.
    \196\ See OIP, supra note 7, 85 FR at 51259. See also proposed 
BSTX Rule 17020(c).
    \197\ See OIP, supra note 7, 85 FR at 51259. See also proposed 
BSTX Rule 17020(c).
    \198\ See OIP, supra note 7, 85 FR at 51261.
    \199\ See id. The Exchange likens the requirement of BSTX 
Participants to report end-of-day Security ownership balances to 
BSTX to other exchanges' ability to request that members or 
participants furnish to the exchange records pertaining to 
transactions executed on or through the exchange in a time and 
manner required by such exchange. See id.
    \200\ See OIP, supra note 7, 85 FR at 51262, n.95.
---------------------------------------------------------------------------

    Once BSTX Participants have reported their end-of-day Security 
ownership balances to BSTX, BSTX would provide this information to the 
Wallet Manager (or Wallet Managers) to update the Ethereum blockchain 
with Security ownership balances.\201\ Pursuant to proposed BSTX Rule 
17020(d), the updates to the Ethereum blockchain would reflect updates 
in Security ownership balances in Token form.\202\ The Exchange also 
represents that it would notify BSTX Participants via Regulatory 
Circular of the time by which BSTX would need to provide Security 
ownership balance information to the Wallet Manager so that the Wallet 
Manager would have sufficient time to update the Ethereum blockchain 
prior to the commencement of trading on BSTX the next trading day.\203\ 
According to the Exchange, the result of the end-of-day Security 
ownership balance reporting requirement would be that the Ethereum 
blockchain, for each Security, would reflect the end-of-day ownership 
balance associated with each BSTX Participant's wallet address.\204\ 
Furthermore, the Exchange states that the end-of-day Security balance 
reporting by BSTX Participants would ``reflect a relatively more robust 
use of the functionality of the smart contracts,'' than just the use of 
the omnibus wallet, and that ``[p]romoting this more robust use of the 
functionality of the smart contracts and their ability to allocate and 
re-allocate Security balances across multiple wallet addresses will 
enhance the ability of market participants, including the Exchange, to 
observe and evaluate the capabilities of blockchain technology as an 
ancillary recordkeeping mechanism.'' \205\
---------------------------------------------------------------------------

    \201\ See OIP, supra note 7, 85 FR at 51258-59. See also 
proposed BSTX Rule 17020(d).
    \202\ See proposed BSTX Rule 17020(d).
    \203\ See OIP, supra note 7, 85 FR at 51259.
    \204\ See OIP, supra note 7, 85 FR at 51261. As described in 
more detail above, the Exchange also states that as part of the end-
of-day reporting process, the Exchange would provide information to 
the Wallet Manager(s) which would allow the Wallet Manager(s) to 
allocate Tokens (which represent Securities) among BSTX Participants 
consistent with their end-of-day Security balance reports, and to 
attribute the unreported Security balance for a given Security to an 
omnibus wallet address for each Security. See OIP, supra note 7, 85 
FR at 51259. See also supra Sections III.B and III.C.1.
    \205\ OIP, supra note 7, 85 FR at 51261.
---------------------------------------------------------------------------

    The Exchange asserts that imposing the end-of-day Security 
ownership balance reporting requirement on BSTX Participants would not 
be unfairly discriminatory or burden competition because all market 
participants would be free to choose whether or not to become a BSTX 
Participant.\206\ The Exchange states that market participants that 
voluntarily choose to become BSTX Participants must comply with the 
rules of the Exchange, but remain free to become a member of another 
national securities exchange that supports trading of BSTX-listed 
Securities or to purchase BSTX-listed Securities OTC.\207\
---------------------------------------------------------------------------

    \206\ See OIP, supra note 7, 85 FR at 51262, n.94.
    \207\ See id. The Exchange also asserts that the end-of-day 
Security ownership balance reporting process would not impose a 
substantial burden on BSTX Participants, because it would not 
require them to expend significant resources or time. See id. See 
also Letter from Lisa J. Fall, President, BOX Exchange LLC 
(September 17, 2020) (``BSTX Response Letter III''), at 5.
---------------------------------------------------------------------------

    In its notice of the proposal, the Exchange states that it 
currently functions as an exchange only for standardized options, and 
that equity securities would represent a new asset class for the 
Exchange.\208\ According to the Exchange, in connection with the 
operation of BSTX, the Exchange would leverage many of the regulatory 
structures that it established to operate a national securities 
exchange in compliance with Section 6 of the Exchange Act.\209\ The 
Exchange states that it will perform Security listing regulation, 
authorize BSTX Participants to trade on the BSTX System, and conduct 
surveillance of Security trading on the BSTX System.\210\ In addition, 
the Exchange states that it will oversee the onboarding and application 
process for BSTX Participants and compliance by issuers of Securities 
with the applicable initial and continued listing requirements, 
including those pertaining to compliance with the BSTX Protocol.\211\ 
As discussed in more detail above, the Exchange also proposes to 
address the potential for inaccurate reporting by BSTX Participants 
with proposed BSTX Rule 17020(e), which, among other things, provides 
that the Exchange may request additional information regarding 
applicable reports and balances from any BSTX Participant if the 
Exchange has reason to believe that reported Security balances may be 
inaccurate.\212\
---------------------------------------------------------------------------

    \208\ See OIP, supra note 7, 85 FR at 51252. The Exchange also 
states that while BSTX may eventually support a wider variety of 
securities, subject to Commission approval, at the time that BSTX 
commences operations it would only support trading in Securities 
that are equity securities. See id.
    \209\ See OIP, supra note 7, 85 FR at 51286. The Exchange states 
that it will extend its Regulatory Services Agreement with FINRA to 
cover BSTX Participants and trading on the BSTX System, and this 
Regulatory Services Agreement will govern many aspects of the 
regulation and discipline of BSTX Participants, similar to how it 
functions for options regulation. See id. The Exchange also states 
that, as is the case with the Exchange's options trading platform, 
the Exchange will supervise FINRA and continue to bear ultimate 
regulatory responsibility for BSTX. See id. The Exchange further 
states that it plans to join the Plan for the Allocation of 
Regulatory Responsibilities Regarding Regulation NMS and may choose 
to join certain Rule 17d-2 agreements such as the agreement 
allocating responsibility for insider trading rules. See id.
    \210\ See OIP, supra note 7, 85 FR at 51286. The Exchange states 
that it will perform automated surveillance of trading on BSTX for 
the purpose of maintaining a fair and orderly market at all times 
and monitor BSTX to identify unusual trading patterns and determine 
whether particular trading activity requires further regulatory 
investigation by FINRA. See id. at 51286-87. The Exchange also 
states that it will oversee the process for determining and 
implementing trade halts, identifying and responding to unusual 
market conductions, and administering the process for identifying 
and remediating ``clearly erroneous trades.'' See id. at 51287.
    \211\ See OIP, supra note 7, 85 FR at 51287.
    \212\ See supra notes 116-126 and accompanying text. See also 
OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule 17020(e).
---------------------------------------------------------------------------

    With respect to the end-of-day reporting requirements, in the 
context of SR-BOX-2019-19, one commenter raised a concern that BSTX 
might place additional reporting requirements on market 
participants.\213\ Another commenter questioned how a BSTX Participant 
would obtain an allowlisted address, how the permissioning would be 
determined for the allowlisted wallet, and who would control this 
permissioning.\214\ This commenter also asked how allowlisting would be 
maintained for the entire life-cycle of a

[[Page 84419]]

Security and for the life-cycle of participant accounts.\215\
---------------------------------------------------------------------------

    \213\ See PKA Law Letter, supra note 175, at 1.
    \214\ See SIFMA Letter II, supra note 110, at 5.
    \215\ See SIFMA Letter II, supra note 110, at 5.
---------------------------------------------------------------------------

    The Exchange responds that it would be the only source for 
obtaining wallet addresses and that the Exchange would be responsible 
for permissioning wallet addresses.\216\ According to the Exchange, a 
BSTX Participant would not have the ability to move Tokens to or from 
its wallet address or otherwise ``control'' the wallet address, and the 
process of reallocating Token balances among different wallet addresses 
would be a function performed by the Exchange in coordination with a 
Wallet Manager.\217\ The Exchange states that the use of the blockchain 
technology would be ``almost entirely passive'' for the BSTX 
Participants, excluding the obtaining of a wallet address and the end-
of-day reporting of ownership balances.\218\ Lastly, the Exchange 
responds that the Exchange would be responsible for maintenance of 
allowlisting for the entire life-cycle of the allowlisted wallet 
address and that an unlimited number of wallet addresses may be 
established for a Security and could be removed as necessary.\219\
---------------------------------------------------------------------------

    \216\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also 
BSTX Response Letter II, supra note 105, at 5.
    \217\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also 
BSTX Response Letter II, supra note 105, at 5.
    \218\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also 
BSTX Response Letter II, supra note 105, at 5.
    \219\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also 
BSTX Response Letter II, supra note 105, at 5.
---------------------------------------------------------------------------

    A commenter asserted, in the context of SR-BOX-2019-19, that the 
proposed rule change did not explore in sufficient detail the costs or 
other impacts to firms associated with adopting systems to accommodate 
the infrastructure needed to manage the Securities' distributed ledger 
technology, including allowlisted wallet addresses and associated 
recordkeeping.\220\ This commenter stated that although the Exchange 
suggests that firms could avoid these impacts by not becoming BSTX 
Participants, that would not be the case if the Securities start 
trading on other exchanges pursuant to UTP.\221\ This commenter further 
stated that, in that scenario, firms would likely need to implement 
systems and other infrastructure to be able to submit reports of end-
of-day Security ownership balances to the Exchange, assuming they 
determine that they need to become BSTX Participants.\222\ In the 
context of SR-BOX-2020-14, this commenter noted its prior comment that 
if exchanges were to adopt different forms of distributed ledger 
technology to track ownership of equity securities, that could cause 
additional costs to market participants.\223\
---------------------------------------------------------------------------

    \220\ See SIFMA Letter II, supra note 110, at 3. In the context 
of SR-BOX-2020-14, this commenter stated that it continues to 
believe that the Proposal contains novel aspects related to the 
current recordkeeping processes for equity securities that are 
potentially inconsistent with the Exchange Act, and that it 
continues to have some concerns about the proposal's ``ancillary'' 
recordkeeping requirements. See Letter from Ellen Greene, Managing 
Director, Equities & Options Market Structure, & Thomas F. Price, 
Managing Director, Operations, Technology, Cyber & BCP, Securities 
Industry and Financial Markets Association (September 10, 2020) 
(``SIFMA Letter IV''), at 3. This commenter also noted its 
previously stated concerns, citing its comments in the context of 
SR-BOX-2019-19. See id. at 4.
    \221\ See SIFMA Letter II, supra note 110, at 3.
    \222\ See SIFMA Letter II, supra note 110, at 3.
    \223\ See SIFMA Letter IV, supra note 220, at 4 (citing SIFMA 
Letter III).
---------------------------------------------------------------------------

    Also in the context of SR-BOX-2020-14, this commenter noted that 
certain firms, by virtue of their business (such as order 
consolidation), may need to become BSTX Participants.\224\ This 
commenter also stated that as a result of the Order Protection Rule 
under Regulation NMS,\225\ trading centers such as OTC market makers 
and firms that internalize order flow may need to become BSTX 
Participants to satisfy their firms' policies and procedures reasonably 
designed to prevent trade-throughs. This commenter stated that firms in 
these lines of business would take on additional burdens if subject to 
the end-of-day Security ownership balance reporting obligations or 
potentially be subject to regulatory exposure from BSTX if they err in 
reporting end-of-day ownership balances.\226\ This commenter stated 
that although the Exchange asserts, in response to its concerns, that 
the end-of-day Security ownership balance reporting obligations are no 
different than other reporting obligations imposed on firms, such as 
the large options positions reporting requirements adopted by the 
options exchanges and FINRA that obligate firms to report large options 
positions at the end of the day to the exchanges and FINRA, the end-of-
day Security ownership balance reporting obligation is not related to 
any regulatory objectives.\227\
---------------------------------------------------------------------------

    \224\ See SIFMA Letter IV, supra note 220, at 4-5. This 
commenter stated that, for example, order consolidators for other 
firms may need to become BSTX Participants if customers of those 
other firms trade BSTX-listed Securities. See SIFMA Letter IV, supra 
note 220, at 5.
    \225\ Rule 611 of Regulation NMS under the Exchange Act is also 
known as the ``Order Protection Rule'' or ``Trade-through Rule,'' 
and requires a trading center to implement policies and procedures 
that are reasonably designed to prevent trade-throughs on that 
trading center of protected quotations in NMS stocks that do not 
fall within one of certain specified exceptions. See 17 CFR 242.611.
    \226\ See SIFMA Letter IV, supra note 220, at 5. This commenter 
also stated that it is unclear from the Proposal whether a firm that 
is a member of other exchanges and is also a BSTX Participant would 
be subject to the end-of-day Security ownership balance reporting 
obligation in connection with effecting or clearing trades in 
Securities that are trading on other exchanges pursuant to UTP. See 
id.
    \227\ See id. This commenter stated that it has concerns when 
new processes and technology with wider implications for the equity 
market infrastructure are considered in the framework of a proposed 
rule change by a single exchange. See SIFMA Letter IV, supra note 
220, at 5-6.
---------------------------------------------------------------------------

    The Exchange states that, to the extent any market participant does 
not want to perform the end-of-day Security ownership reporting 
obligations, it could avoid these obligations by choosing not to become 
a BSTX Participant.\228\ The Exchange also states that a BSTX 
Participant would only need to obtain a wallet address from the 
Exchange and comply with the end-of-day Security ownership balance 
reporting requirement.\229\ According to the Exchange, the proposal 
would not require BSTX Participants to make a technological investment 
related to the use of distributed ledger technology,\230\ and the 
Exchange does not propose any fees associated with the end-of-day 
Security ownership balance recordkeeping process.\231\ In the context 
of SR-BOX-2019-19, the Exchange stated, however, that BSTX Participants 
would likely need to include in their policies and procedures a process 
for complying with the end-of-day Security ownership balance reporting 
requirement to promote compliance with the proposed BSTX rules.\232\
---------------------------------------------------------------------------

    \228\ See OIP, supra note 7, 85 FR at 51263.
    \229\ See OIP, supra note 7, 85 FR at 51263, n.106. 
Additionally, with respect to the ability of market participants to 
trade Securities OTC, the Exchange states its belief that the 
additional requirements of acquiring a wallet address and end-of-day 
Security balance reporting impose only a minimal burden on BSTX 
Participants and should not have any material or undue burden or 
impact on competition between BSTX Participants and non-BSTX 
Participants. See OIP, supra note 7, 85 FR at 51289. In response to 
comments in the context of SR-BOX-2019-19, the Exchange also stated 
that the end-of-day Security ownership balance reporting process 
would impose only a ``minimal'' reporting burden on BSTX 
Participants that would be similar to other reporting obligations 
currently required by SROs, such as large options position 
reporting. See BSTX Response Letter II, supra note 105, at 3. See 
also OIP, supra note 7, 85 FR at 51288 (analogizing the end-of-day 
reporting requirement to reporting of end-of-day large options 
position reporting); and infra note 347 (discussing the purpose of 
large options position reporting).
    \230\ See OIP, supra note 7, 85 FR at 51263, n.105.
    \231\ See OIP, supra note 7, 85 FR at 51287.
    \232\ See BSTX Response Letter II, supra note 105, at 3, n.13.
---------------------------------------------------------------------------

    The Exchange also responded that no market participant would be 
forced to

[[Page 84420]]

become a BSTX Participant as a result of the proposal, including if 
operating as a carrying firm or order consolidator; that the only 
potential circumstance in which a firm would be required to execute a 
trade in a Security on BSTX would be to comply with the Order 
Protection Rule, if the firm wanted to trade through on an away market 
a protected quotation on BSTX; and that even then the firm could choose 
to execute the trade through a BSTX Participant instead of becoming a 
BSTX Participant.\233\ The Exchange further responded that the Exchange 
has addressed in the Proposal the issue of whether a market participant 
that trades Securities on multiple exchanges would be subject to the 
end-of-day Security ownership balance reporting obligation in 
connection with effecting or clearing trades in Securities that are 
trading on another exchange, and that a BSTX Participant would be 
required to report its end-of-day balance in Securities at DTC (or at 
its carrying firm) in the relevant Security pursuant to proposed BSTX 
Rule 17020(b).\234\ In addition, the Exchange responded that it 
disagrees with a commenter's assertion that the end-of-day Security 
ownership balance reporting obligation is not related to any regulatory 
objective, citing its assertion in the proposal that the requirement 
will allow market participants to observe and increase their 
familiarity with the capabilities and potential benefits of blockchain 
technology in a context that advances and protects the public's 
interest.\235\
---------------------------------------------------------------------------

    \233\ See BSTX Response Letter III, supra note 207, at 2-3. The 
Exchange stated that a routing broker that chooses to become a BSTX 
Participant would be acting on an agency basis and would not have an 
end-of-day balance in Securities arising from this function, and 
that accordingly, reporting a zero end-of-day balance to the 
Exchange would not be burdensome. See id.
    \234\ See id.
    \235\ See BSTX Response Letter III, supra note 207, at 4. See 
also infra notes 330-331 and accompanying text.
---------------------------------------------------------------------------

    Additionally, the Exchange responded that it maintains its views 
expressed in the Proposal, including that the Exchange does not believe 
that imposing the end-of-day Security ownership balance reporting 
requirements on BSTX Participants is unfairly discriminatory or burdens 
competition, and that the end-of-day Security ownership balance 
reporting process would not impose a substantial burden on BSTX 
Participants.\236\ While the Exchange stated that it recognizes a 
commenter's assertion that the Proposal may require market participants 
that wish to become BSTX Participants to bear certain costs, the 
Exchange contends that it is incorrect that the costs related to the 
end-of-day Security ownership balance reporting obligation will be 
significant.\237\ The Exchange also stated that the Proposal is not 
inconsistent with the Exchange Act, ``simply because market 
participants might not want to take on the additional operational 
processes and minimal costs associated with'' the end-of-day Security 
ownership balance reporting obligation.\238\
---------------------------------------------------------------------------

    \236\ See BSTX Response Letter III, supra note 207, at 5-6. See 
also supra note 206.
    \237\ See BSTX Response Letter III, supra note 207, at 6.
    \238\ Id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission concludes that the Exchange's proposed rules 
concerning the process for obtaining an allowlisted wallet address and 
reporting end-of-day Security ownership balances does not contain 
sufficient detail about how BSTX Participants must satisfy their 
obligations. The Commission also does not believe that the Exchange has 
addressed commenters' concerns regarding the costs or other burdens 
that would be imposed on market participants as a result of the end-of-
day Security ownership balance reporting process.
    The Exchange does not provide support for its assertion that BSTX 
Participants would not need to expend significant resources or time on 
the end-of-day Security ownership balance reporting process.\239\ The 
Exchange concedes that market participants will have to bear costs from 
the Proposal, and then characterizes those costs as ``minimal,'' \240\ 
but the Commission finds no support for that characterization. The 
Exchange acknowledges that BSTX Participants may need to add to their 
policies and procedures a process to comply with the end-of-day 
Security ownership balance reporting requirement,\241\ but does not 
discuss the potential outlines of that process. The Exchange states 
that BSTX Participants would not need to make a technological 
investment related to the distributed ledger technology,\242\ but does 
not discuss whether BSTX Participants would need to update their 
systems to facilitate the reporting of end-of-day Security ownership 
balances.\243\ The Exchange states that a commenter's assertion that 
market participants might not want to take on the additional 
operational processes and minimal costs associated with the end-of-day 
Security ownership balance reporting obligation does not make the 
proposal inconsistent with the Exchange Act.\244\ But the Exchange has 
not clarified what those processes and costs may be and why, in light 
of the additional burden, the proposed end-of-day Security ownership 
reporting obligations are consistent with the Exchange Act.\245\ Also, 
pursuant to proposed BSTX Rule 17020(e), a BSTX Participant would be 
required to send a corrected end-of-day Security balance report to the 
Exchange upon the BSTX Participant's discovery that it submitted an 
inaccurate end-of-day report that has not already been corrected or 
superseded.\246\ Yet the Exchange does not explain whether BSTX 
Participants would be obligated to monitor the end-of-day Security 
ownership balances on the blockchain associated with their assigned 
wallet addresses and whether the Exchange would provide any process by 
which BSTX Participants could contest or rectify discrepancies between 
their reported end-of-day Security ownership balances and the balances 
attributed to their addresses as observable on the blockchain.
---------------------------------------------------------------------------

    \239\ See supra note 207.
    \240\ Id.
    \241\ See supra note 232 and accompanying text.
    \242\ See supra note 230 and accompanying text.
    \243\ See supra note 222 and accompanying text (commenter 
stating that firms would likely need to implement systems and other 
infrastructure to be able to submit reports of end-of-day Security 
ownership balances to the Exchange).
    \244\ See supra note 238 and accompanying text.
    \245\ The Exchange asserts that market participants can decide 
voluntarily whether to become a BSTX Participant (see supra notes 
206-207 and accompanying text), and although the Exchange recognizes 
that a firm may need to execute a trade on BSTX to comply with the 
Order Protection Rule if BSTX is the protected quote, it further 
states that the firm could choose to execute the trade through a 
BSTX Participant instead of becoming a BSTX Participant. See supra 
note 233 and accompanying text. And a firm could also choose not to 
execute a trade that would trade through a protected quote on BSTX. 
However, the Exchange does not examine whether there may be 
additional factors for broker-dealer firms, including compliance 
with best-execution requirements, that might influence whether a 
broker-dealer firm decides to become a BSTX Participant. Also, as 
one commenter recognized, whether BSTX-listed Securities traded on 
other national securities exchanges pursuant to UTP may influence 
whether a broker-dealer firm would need to become a BSTX 
Participant. See supra notes 224-225 and accompanying text.
    \246\ See supra note 116 and accompanying text (discussing 
proposed BSTX Rule 17020(e)).
---------------------------------------------------------------------------

    The Exchange asserts that the end-of-day Security balance reporting 
by BSTX Participants and recording to the Ethereum blockchain will 
allow market participants to observe and increase their familiarity 
with the capabilities and potential benefits of blockchain technology 
in a context that advances and protects the public's interest,\247\ but 
the fact that the information on the blockchain will not be accurate 
undercuts the benefit. Moreover, the

[[Page 84421]]

Exchange asserts that the balance information that will be publicly 
observable on the Ethereum blockchain would not be useful to inform a 
market participant's trading in Securities.\248\ BOX does not explain 
how knowingly recording and disseminating to the public inaccurate 
information regarding BSTX Securities ownership on the blockchain is 
consistent with the purposes of the Exchange Act, or even with BOX's 
stated purposes of the proposed rule change.\249\
---------------------------------------------------------------------------

    \247\ See supra note 235 and accompanying text.
    \248\ See supra note 115 and accompanying text.
    \249\ See supra Section III.B.
---------------------------------------------------------------------------

    The Exchange also does not propose a standard for how the Exchange 
will determine what to include and remove from the omnibus account, 
beyond stating that the omnibus account will comprise the unreported 
Security balance for a given Security.\250\ While the Exchange states 
that the Security ownership balance that it would allocate to the 
omnibus account would account for instances in which a BSTX Participant 
fails to report its end-of-day Security ownership balance or 
inaccurately reports such balance, and for the positions of Security 
holders that are not BSTX Participants,\251\ the Exchange has not 
described how it will determine when a BSTX Participant's report is 
late or inaccurate, other than stating that it will provide additional 
information about the time, after 7:30 p.m. Eastern time, by which 
reports are due.
---------------------------------------------------------------------------

    \250\ See supra note 135. Pursuant to proposed BSTX Rule 
17020(d), the Exchange would determine any difference between the 
Security position balance(s) reported to BSTX regarding a Security 
and the number of shares outstanding for the Security, and provide 
that information to the Wallet Manager(s) for allocation to an 
omnibus wallet address for the Security. See proposed BSTX Rule 
17020(d).
    \251\ See supra notes 56-57 and accompanying text. As described 
above, BSTX Participants would report their Security ownership 
balances at the end of each trading day and the Wallet Manager would 
reallocate Tokens (representing Securities) as needed to reflect the 
reported balances, without regard to whether these transfers 
correspond with actual transactions. See supra Section III.C.1. 
Therefore, if a BSTX Participant fails to report its end-of-day 
Security ownership balance or inaccurately reports such balance, and 
the Exchange allocates Securities owned by such BSTX Participant to 
the omnibus account, or if a BSTX Participant that previously failed 
to report or inaccurately reported subsequently reports its end-of-
day Security ownership balance, the Wallet Manager's reallocation of 
Tokens to reflect reported balances may not include a transfer 
between the wallet addresses associated with that BSTX Participant 
and the omnibus account.
---------------------------------------------------------------------------

    The Exchange also acknowledges that it is possible that, due to 
inaccurate reporting, the total of the Security ownership balances 
reported to BSTX could exceed the number of Securities actually 
issued,\252\ but does not explain, given that it is not possible to 
over-allocate Token balances on the blockchain, how the Exchange would 
then determine how to allocate balances to wallet addresses.\253\ For 
example, the Exchange does not address whether, in the case of over-
reporting by BSTX Participants, it might assign a negative balance to 
the omnibus wallet address or take some other action. And the proposal 
does not indicate whether, if the BSTX Participants' wallet addresses 
account for the full balance of the Securities, the wallet address 
associated with the omnibus account would appear on the Ethereum 
blockchain with a balance of zero or the wallet address for the omnibus 
account would be omitted. This lack of information about how the 
Exchange will carry out its functions with respect to determining the 
Security balance to be associated with the omnibus account for a 
particular Security would impede the Commission from being able to 
carry out its obligations to ensure that the Exchange is complying with 
its own rules.
---------------------------------------------------------------------------

    \252\ See supra note 69 and accompanying text.
    \253\ The Commission notes that, while in the case of over-
reporting by BSTX Participants in a particular Security, the 
Exchange would have the ability to use its discretion, pursuant to 
proposed BSTX Rule 17020(f), to suspend the requirements regarding 
reporting of end-of-day Security balances for that Security, the 
Exchange has not indicated that it would necessarily do so in such 
circumstances. See supra note 104 and accompanying text; infra 
Section III.C.3. See also BSTX Response Letter I, supra note 82, at 
11.
---------------------------------------------------------------------------

    Further, the Commission concludes that the record does not 
demonstrate that the Exchange's proposed use of surveillance will 
enable the Exchange to carry out its necessary functions or enforce 
BSTX Participants' compliance with its rules. Specifically, while the 
Exchange states that it will extend its Regulatory Services Agreement 
with FINRA to BSTX Participants and trading in the BSTX Market,\254\ 
the record does not demonstrate how the Exchange will perform 
surveillance regarding and enforce the unique obligations that it would 
impose on BSTX Participants to obtain an allowlisted wallet address and 
report end-of-day-Security ownership balances, including whether or how 
it would surveil for or reconcile inaccurate reporting of these end-of-
day Security ownership balances.\255\ For example, as discussed above, 
in response to commenters' concerns regarding surveillance and 
enforcement of the end-of day-reporting requirement to ensure that BSTX 
Participants accurately report their Security ownership balances,\256\ 
as well as how differences in reporting between the records maintained 
by the Exchange, DTC, and NSCC and the end-of-day Security ownership 
balances would be reconciled,\257\ the Exchange stated that it could 
use its general authority under BSTX rules to request from a BSTX 
Participant records related to its business, which could include the 
reports provided by DTC to the BSTX Participant that the BSTX 
Participant used to report end-of-day Security ownership balance 
information to the Exchange.\258\ As the Commission stated above, the 
record does not, however, demonstrate how the Exchange will perform 
surveillance for BSTX Participant compliance, particularly with respect 
to the end-of-day Security ownership balance reporting requirement, 
such as whether it would request such records from BSTX Participants on 
a routine basis or use alternative means to determine whether a BSTX 
Participant has accurately reported its end-of-day Security ownership 
balances, and how it might surveil for and correct against late 
reporting by BSTX Participants.\259\
---------------------------------------------------------------------------

    \254\ See supra note 209.
    \255\ See supra Section III.B for additional discussion about 
whether or how the Exchange would surveil the end-of-day Security 
ownership balance reporting.
    \256\ See supra notes 121-122 and accompanying text.
    \257\ See supra notes 123-124 and accompanying text.
    \258\ See supra notes 125-126 and accompanying text. Pursuant to 
proposed BSTX Rule 17020(e), the Exchange may also request 
additional information regarding the applicable reports and balances 
from any BSTX Participant, if the Exchange has reason to believe 
that Security balances reported by one or more BSTX Participants may 
be inaccurate. See supra note 117 and accompanying text.
    \259\ See supra Section III.B.2.
---------------------------------------------------------------------------

    For these reasons, the Exchange has not provided sufficient 
information for the Commission to be able to find that the Exchange's 
rules would facilitate transactions in securities, remove impediments 
to a free and open market and national market system, or protect 
investors and the public interest, in accordance with Section 6(b)(5) 
of the Exchange Act. In the absence of information about, among other 
things, when and how a BSTX participant must obtain an allowlisted 
wallet address and the associated costs, as well as the time and manner 
by which a BSTX Participant must submit end-of-day Security balances to 
BSTX and the costs to comply with the reporting obligation, the 
Commission cannot evaluate whether imposing a burden on BSTX 
Participants to obtain an allowlisted wallet address and report end-of-
day Security balance information to BSTX is reasonable in light of the 
intended purpose for recording end-of-day balances on the Ethereum 
blockchain. Particularly given that BSTX

[[Page 84422]]

Participants would be subject to disciplinary action if they fail to 
comply with either obligation, the Commission is not able to find that 
the obligations to obtain a wallet address and to report end-of-day 
Security balances are consistent with the requirements of Exchange Act 
Section 6(b)(5), and, in particular, the requirement that the rules of 
a national securities exchange be designed to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system.
    Also, due to the lack of information discussed above regarding, 
among other things, anticipated timeframe regarding when BSTX must 
provide the reported information to the Wallet Manager, the way in 
which balances are allocated to the omnibus account, and the Exchange's 
infrastructure to surveil and enforce compliance by BSTX Participants 
to accurately report end-of-day Security ownership balances, the 
Commission cannot assess whether the Exchange would be able to carry 
out its responsibilities and enforce compliance by BSTX Participants 
with their obligations. Therefore, the Commission is not able to find 
that the Exchange would be able to carry out its necessary functions or 
fulfill its obligations as an SRO to comply with its own rules, 
pursuant to Section 6(b)(1) of the Exchange Act.
Suspension of Allowlisting and End-of-Day Reporting Requirements
(a) Exchange's Representations
    The Exchange states that, in addition to controls and mechanisms 
for ensuring the accuracy of reported records,\260\ the Exchange may 
need to implement further measures in situations where the ability to 
update blockchain records may be affected by ``exogenous factors,'' for 
example a disruption to the website through which ownership balances 
may be observed (i.e., Etherscan.io), to the Ethereum blockchain itself 
that prevents the updating of end-of-day balances, or to the 
architecture or functioning of a particular Security.\261\ To account 
for these situations, the Exchange proposes that the Exchange would, in 
its discretion, be able to suspend the allowlisting and end-of-day 
reporting requirements regarding any BSTX Participant and/or regarding 
one or more Securities.\262\ The Exchange also proposes that in the 
case of such a suspension, the Exchange would be required to provide 
prompt notice, including the reasons for the suspension, to BSTX 
Participants, and must also notify the Commission within two 
hours.\263\ The Exchange proposes that the suspension may not continue 
for more than thirty days unless the Exchange submits a proposed rule 
change to the Commission seeking approval of the suspension, in which 
case the suspension may continue until the Commission approves or 
disapproves the proposed rule change.\264\ The Exchange states its 
belief that the proposal to allow for suspension of the allowlisting 
and end-of-day reporting requirements may foster coordination with 
persons processing information with respect to Securities and is not 
designed to permit unfair discrimination, because it will allow the 
Exchange to suspend certain rule requirements in events where there may 
be difficulty coordinating or sharing pertinent information with BSTX 
Participants or Wallet Managers.\265\ The Exchange also states that its 
proposed suspension provision is designed to apply to all market 
participants equally, and to provide notice to affected participants 
and regulators of BSTX, in order to allow such individuals and entities 
to coordinate with the Exchange and react to potential issues as deemed 
necessary.\266\
---------------------------------------------------------------------------

    \260\ See supra notes 116-120 and accompanying text.
    \261\ See OIP, supra note 7, 85 FR at 51260 and n.81.
    \262\ See proposed BSTX Rule 17020(f). The Exchange states that 
suspension of the ancillary recordkeeping process would not impact 
trading in a Security and that trading and clearance and settlement 
of Securities can operate entirely independently from the 
``ancillary'' recordkeeping process. See OIP, supra note 7, 85 FR at 
51258, n.67.
    \263\ See id.
    \264\ See id.
    \265\ See OIP, supra note 7, 85 FR at 51260, n.86.
    \266\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission concludes that the Exchange's proposal, which would 
give the Exchange discretion to suspend the requirements for obtaining 
an allowlisted wallet address or the end-of-day reporting requirements, 
is insufficient to support a finding that the Exchange's proposed rules 
are consistent with the Exchange Act, and with Section 6(b)(5) in 
particular. The Exchange failed to propose in its suspension provision 
a standard for the Exchange to suspend the allowlisting and end-of-day 
ownership reporting requirements. Under the proposal, the Exchange 
appears to retain complete discretion to suspend the allowlisting and 
end-of-day ownership balance reporting requirements as to some BSTX 
Participants or Securities but not others. The Exchange also appears to 
have discretion to suspend its own reporting of information to Wallet 
Managers to in turn update the Ethereum blockchain. Absent a standard 
for determining the suspension of allowlisting and end-of-day ownership 
reporting that would mitigate against the Exchange differently treating 
BSTX Participants or classes of Securities, the Commission has concerns 
about the potential for unfair discrimination among brokers-dealers, 
and also among issuers.
    While the Exchange states that the proposed suspension provision is 
designed to apply to all market participants equally, and has listed 
several examples of when it may be appropriate to suspend the 
allowlisting or end-of-day ownership balance reporting requirements, 
the proposal does not provide any specificity regarding when the 
Exchange would be required to suspend these requirements or any 
conditions that must be met to warrant suspension.\267\ Furthermore, 
while the Exchange states that it will provide prompt notice to market 
participants in the case of a suspension, the proposal does not 
describe who at BSTX is empowered to make the decision to suspend or 
the standard that would be applied when deciding whether to suspend. 
Specific information regarding the extent of the Exchange's discretion 
and standards that it would apply in determining when to suspend the 
allowlisting and end-of-day ownership balance reporting requirements is 
necessary for the Commission to assess whether the Exchange's rules are 
not designed to permit unfair discrimination between issuers and 
between brokers or dealers,

[[Page 84423]]

consistent with the requirements of Section 6(b)(5).
---------------------------------------------------------------------------

    \267\ For example, while the Exchange states that it may use its 
suspension authority in the case of over-reporting of end-of-day 
Security ownership balances, it does not state, and the proposed 
rule does not require, that it would necessarily do so. See supra 
note 253. The Exchange also does not explain how it would mitigate 
any potential conflicts of interest that may impact its 
discretionary use of its suspension authority with respect to an 
Affiliate Security. The Exchange would define ``Affiliate Security'' 
as ``any security or Security issued by an Exchange Affiliate or any 
Exchange-listed option on any such security.'' See proposed BSTX 
Rule 26140(a)(2). The Exchange would define ``Exchange Affiliate'' 
as ``the Exchange and any entity that directly or indirectly, 
through one or more intermediaries, controls, is controlled by, or 
is under common control with the Exchange, where `control' means 
that the one entity possesses, directly or indirectly, voting 
control of the other entity either through ownership of capital 
stock or equity securities or through majority representation on the 
board of directors or other managements body of such entity.'' See 
proposed BSTX Rule 26140(a)(1). The Exchange would define 
``Exchange'' to mean ``BOX Exchange LLC and its facilities.'' See 
proposed BSTX Rule 17000(a)(20).
---------------------------------------------------------------------------

    Due to the proposal's failure to explain how the Exchange's broad 
discretion to suspend requirements related to end-of-day reporting, 
which is the cornerstone of the Security as an NMS stock, is consistent 
with the Exchange Act, the Commission cannot find that the Exchange's 
rules are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, as required by Section 6(b)(5) 
of the Exchange Act.\268\ Further, due to the lack of information 
regarding how the Exchange will determine whether to suspend the 
requirements for allowlisting and end-of-day reporting, the Commission 
is not able to find that the Exchange would be able to carry out its 
necessary functions, in accordance with Section 6(b)(1) of the Exchange 
Act.
---------------------------------------------------------------------------

    \268\ Additionally, the Exchange has not addressed how it would 
mitigate any potential conflicts of interest that could arise if 
Affiliate Securities were listed and traded on BSTX or if a broker-
dealer affiliate of BSTX or the Exchange were to trade Securities as 
a BSTX Participant or otherwise, which could impact the Exchange's 
determination to use its suspension authority.
---------------------------------------------------------------------------

4. Listed Companies
    The proposal contains proposed rules concerning the listing of 
Securities, and the Exchange states that its proposed listing rules are 
substantially similar to the listing rules of another national 
securities exchange, with certain additions or modifications to the 
rules that are specific to the Exchange's market.\269\ The Commission 
considers the proposed lack of fungibility between BSTX-listed 
Securities and other classes of securities of the same issuer, and 
concludes that the Exchange has not sufficiently addressed the 
potential implications on the trading of these securities and how these 
securities would trade in a manner consistent with the Exchange Act. In 
addition, the Commission considers the Exchange's proposed rules 
requiring that a Security comply and continue to comply with the BSTX 
Protocol, and concludes that the record does not demonstrate how the 
Exchange will apply these provisions in a manner that is consistent 
with the Exchange Act.\270\
---------------------------------------------------------------------------

    \269\ See OIP, supra note 7, 85 FR at 51277 (citing Parts 1-12 
of the NYSE American LLC Company Guide).
    \270\ The Commission's conclusions that the Exchange has not 
demonstrated that its proposal is consistent with the Exchange Act 
focus on these two specific aspects of the Exchange's proposed 
listing rules. The Commission does not reach a conclusion about 
whether other aspects of the Exchange's proposed listing rules are 
consistent with the Exchange Act.
---------------------------------------------------------------------------

(a) Fungibility of BSTX-Listed Securities
Exchange's Representations and Comments Received
    The Exchange states that potential issuers on BSTX could include 
(1) new issuers that do not currently have any class of securities 
registered on a national securities exchange; and (2) issuers who 
currently have securities registered on another national securities 
exchange, and who are seeking registration of a separate class of 
equity securities for listing on BSTX.\271\ The Exchange also states 
that BSTX does not intend for Securities listed on BSTX to be fungible 
with any other class of securities from the same issuer.\272\
---------------------------------------------------------------------------

    \271\ See OIP, supra note 7, 85 FR at 51253.
    \272\ See OIP, supra note 7, 85 FR at 51253.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, one commenter questioned why a 
class of BSTX-listed Securities would not be fungible with any other 
class of securities from the same issuer.\273\ This commenter also 
questioned what implications a lack of fungibility would have for the 
overall equity market infrastructure.\274\ In response, the Exchange 
stated that Securities would not be fungible with another class of 
securities of the same issuer, because no class of an issuer's 
securities would be fungible with a separate class of its securities, 
and that it was not proposing any changes to the existing framework for 
different classes of securities.\275\ The Exchange gave as an example 
that two classes of shares of the same issuer, each of which have 
different ticker symbols, different rights (such as different voting 
rights), and different dividend rates, would not, according to the 
Exchange, be fungible with one another.\276\
---------------------------------------------------------------------------

    \273\ See SIFMA Letter II, supra note 110, at 5.
    \274\ See SIFMA Letter II, supra note 110, at 5.
    \275\ See OIP, supra note 7, 85 FR at 51253, n.34. See also BSTX 
Response Letter II, supra note 105, at 4.
    \276\ See BSTX Response Letter II, supra note 105, at 4, n.22.
---------------------------------------------------------------------------

(b) Analysis
    The Exchange asserts that its proposed use of blockchain technology 
to record and disseminate end-of-day Security ownership balances would 
operate separately from the existing market infrastructure and would 
not have an impact on the trading, clearing, or settlement of BSTX-
listed Securities.\277\ For the Commission to make a finding that the 
rules of the Exchange are designed to, among other things, prevent 
fraudulent and manipulative practices, it is important for the Exchange 
to comprehensively analyze the potential relationship between a 
Security listed on BSTX and another class of securities from the same 
issuer that is listed on another national securities exchange. The 
Exchange asserts that, while issuers who have a class of securities 
listed on another national securities exchange may issue a separate 
class of securities to list on BSTX, the Securities listed on BSTX 
would not be fungible with any other class of securities from the same 
issuer.\278\ However, the proposal does not address whether BSTX would 
require that there be any differences in the rights and obligations 
associated with two classes of securities from the same issuer, only 
one of which is a Security listed on BSTX, other than that the BSTX-
listed Security would have to have associated smart contracts that are 
compliant with the BSTX Protocol and adhere to the associated 
obligations relating to allowlisting and end-of-day reporting, which 
according to the Exchange would not impact trading, clearing or 
settling of BSTX-listed Securities.
---------------------------------------------------------------------------

    \277\ See infra note 339 and accompanying text. For a discussion 
of other trading centers' ability to trade BSTX-listed Securities, 
see infra Section III.D.
    \278\ See supra notes 271-272, 275-276, and accompanying text.
---------------------------------------------------------------------------

    Moreover, as discussed above, the Exchange would be able to suspend 
the allowlisting and end-of-day reporting requirements for Securities 
listed on BSTX without an articulated standard in its rules.\279\ The 
Exchange does not address the possibility that, if the Exchange 
suspended these requirements with respect to a particular BSTX-listed 
Security, there might not be any difference in the rights and 
obligations associated with two classes of securities, or whether this 
lack of different characteristics would impact the fungibility of the 
classes. The Exchange also does not explain whether there might be 
possibilities for arbitrage between the two classes of securities of 
same issuer, if, due to a suspension of the allowlisting and end-of-day 
reporting requirements for the particular BSTX-listed Security, there 
are no remaining differences between the rights and obligations of the 
two classes of securities. Further, the Exchange does not explain 
whether a lack of remaining differences between the two classes of 
securities would impact trading in the securities. For example, in the 
instance the Exchange suspends allowlisting, which could occur at any 
time and for any reason as proposed under the Exchange's rules, the 
Exchange does not explain whether it anticipates the two classes of 
securities would trade at the

[[Page 84424]]

same or different prices and why there might be a discrepancy in 
prices. The lack of clarity about differences between multiple classes 
of securities of the same issuer, particularly where only one is a 
Security with an associated Token representation and that Token 
representation for a Security is suspended by the Exchange, and how 
this may impact the fungibility of the classes or how they trade, 
prevents the Commission from determining whether the relationship 
between the classes might create the potential for fraudulent or 
manipulative trading practices. Due to the Exchange's failure to 
explain whether or how its proposed use of blockchain technology to 
record and disseminate end-of-day Security ownership balances could 
impact trading of the BSTX-listed Securities, the Commission cannot 
find that the Exchange's rules would prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments to a free and open market and national 
market system, or protect investors and the public interest, in 
accordance with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \279\ See supra Section III.C.3 for discussion about the 
Exchange's ability to suspend the allowlisting and end-of-day 
reporting requirements.
---------------------------------------------------------------------------

(b) Compliance With BSTX Protocol
(1) Exchange's Representations
    Proposed BSTX Rule 26230 would provide listing requirements 
relating to the architecture of a Security's associated smart contract 
that an issuer must satisfy to list and remain listed on the Exchange. 
The Exchange states that all listed companies' Securities must comply 
with the BSTX Protocol to ensure that all Securities are governed by 
the same set of specifications and controls that allow for their 
ownership to be recorded on the Ethereum blockchain using Tokens as an 
``ancillary'' recordkeeping mechanism.\280\ Prior to approving a 
Security for trading on the Exchange, the Exchange would conduct an 
audit of the Security's smart contract architecture to ensure 
compliance with the BSTX Protocol.\281\ The Exchange states that the 
purpose of this initial listing requirement is to ensure that the 
design and structure of a prospective BSTX-listed company's Security 
smart contract is compatible with the BSTX Protocol, for purposes of 
facilitating updates to the blockchain as an ancillary recordkeeping 
mechanism.\282\ The Exchange states that it may use third party service 
providers that have demonstrated sufficient technical expertise in 
blockchain technology and an understanding of the BSTX Protocol to 
conduct this audit on behalf of the Exchange.\283\
---------------------------------------------------------------------------

    \280\ See OIP, supra note 7, 85 FR at 51256. See also proposed 
BSTX Rule 26138.
    \281\ See proposed BSTX Rule 26230(a). In addition, an applicant 
that was denied initial listing pursuant to this section would be 
able to appeal the decision via the process outlined in the proposed 
BSTX Rule 27200 Series. See id.
    \282\ See OIP, supra note 7, 85 FR at 51278.
    \283\ See OIP, supra note 7, 85 FR at 51278. The Exchange states 
that it expects that some issuers may choose to use an outside 
vendor to help build their Security smart contract in a manner that 
complies with the BSTX Protocol, and that it understands that there 
are numerous technology companies that offer this service. See id. 
at 51278, n.300.
---------------------------------------------------------------------------

    After being listed on the Exchange, as a continued listing 
requirement, a BSTX-listed company would remain responsible for 
ensuring that its Security smart contract remains compatible with the 
BSTX Protocol and accurately reflects the number of shares 
outstanding.\284\ The Exchange states that it recognizes that there may 
be circumstances in which it becomes necessary to modify certain 
aspects of the smart contract corresponding to the Security.\285\ The 
Exchange adds that, for example, in the case of a stock split, a BSTX-
listed company may need to increase the total supply of Securities as 
programmed into its Security smart contract.\286\ Under the proposal, 
the BSTX-listed company would be required to provide notice to the 
Exchange at least five days prior to implementing any modification that 
it would make to a smart contract corresponding to a Security (e.g., to 
increase the total supply), to allow the Exchange to audit the proposed 
modification.\287\ If additional time is needed to implement the 
modification, the Exchange would be able to exercise its authority to 
suspend the ancillary recordkeeping process relating to that Security 
pursuant to proposed BSTX Rule 17020(f).\288\
---------------------------------------------------------------------------

    \284\ See proposed BSTX Rule 26230(b).
    \285\ See OIP, supra note 7, 85 FR at 51278.
    \286\ See OIP, supra note 7, 85 FR at 51278.
    \287\ See proposed BSTX Rule 26230(b).
    \288\ See proposed BSTX Rule 26230(b). See supra Section III.C.3 
for a discussion of suspension of the end-of-day ownership balance 
reporting requirement.
---------------------------------------------------------------------------

    The Exchange asserts that the primary circumstances under which a 
modification to a smart contract corresponding to a Security may be 
necessary would be where there is a change to the total supply of the 
Security, which could occur in the case of a stock split, a reverse 
stock split, a buy-back, or a dividend in kind.\289\ The Exchange 
states that any delay in the implementation of a change to a smart 
contract that corresponds to a Security would not impact the record 
date or ex-dividend date for any dividend, distribution, or other 
action.\290\ According to the Exchange, it believes that proposed BSTX 
Rule 26230 facilitates end-of-day Security ownership balance reporting 
for BSTX-listed Securities, and that this reporting is a first step 
towards the potential integration of blockchain technology to 
securities transactions.\291\ The Exchange states that, without 
ensuring that BSTX-listed companies' Securities are compatible with the 
BSTX Protocol, the use of blockchain technology as an ancillary 
recordkeeping mechanism could be impaired.\292\
---------------------------------------------------------------------------

    \289\ See OIP, supra note 7, 85 FR at 51278.
    \290\ See OIP, supra note 7, 85 FR at 51278-79.
    \291\ See OIP, supra note 7, 85 FR at 51279.
    \292\ See OIP, supra note 7, 85 FR at 51279.
---------------------------------------------------------------------------

(2) Analysis
    The record fails to explain clearly how the Exchange will implement 
its proposed continued listing requirement that smart contracts 
associated with BSTX-listed Securities must remain in compliance with 
the BSTX Protocol. The proposal contemplates circumstances in which the 
smart contracts associated with Securities would need to be changed due 
to corporate actions by the BSTX-listed company that would change the 
outstanding number of Securities.\293\ However, the record does not 
contain any discussion about the impact on a BSTX-listed company's 
obligations under circumstances in which the Exchange initiates changes 
to the BSTX Protocol. In such circumstances, proposed BSTX Rule 
26230(b) would require an issuer to make changes to the smart contract 
associated with its Security so that its Security remains compliant 
with the BSTX Protocol.\294\ Yet the proposal does not contain any 
discussion about what policies and procedures the Exchange would use to 
evaluate the ability of BSTX-listed companies to respond to changes in 
the BSTX Protocol initiated by the Exchange or resulting from changes 
to the Ethereum blockchain itself and to ensure that the BSTX-listed 
company's Securities continue to meet this continued listing 
requirement under BSTX's proposed rules. The lack of procedures 
increases the risk of the Exchange unfairly discriminating between 
issuers.
---------------------------------------------------------------------------

    \293\ See supra notes 284-287, 289, and accompanying text.
    \294\ See supra note 284 and accompanying text.
---------------------------------------------------------------------------

    In particular, the proposal does not address whether any 
protections would be in place to ensure that the BSTX-

[[Page 84425]]

listed company has adequate notice of changes to the BSTX Protocol and 
has the technical capability to make any changes necessary to its 
Security smart contract to maintain its Security in compliance with the 
BSTX Protocol. Although a BSTX-listed company may hire an external 
vendor prior to initial listing to help it build its smart 
contracts,\295\ assessing capabilities to comply with the BSTX Protocol 
prior to listing, when an issuer can decide whether to undertake the 
work necessary to ensure that its smart contracts comply with the BSTX 
Protocol, presents different concerns than what is needed to make 
changes to maintain compliance with the BSTX Protocol after listing, 
when the failure to comply can lead to the delisting of a listed and 
actively-traded security. In addition, it is unclear how a fork in the 
Ethereum blockchain might impact the BSTX Protocol and the steps 
necessary for a BSTX-listed company to maintain compliance. Moreover, 
the proposed rule provision concerning the Exchange's audit of the 
architecture of a Security's associated smart contract prior to listing 
states explicitly that an applicant denied listing pursuant to that 
provision would be able to appeal that decision via the process 
outlined in the proposed BSTX Rule 27200 Series,\296\ but the proposal 
does not set forth procedures for appeal of a decision by the Exchange 
that a Security has fallen outside of compliance with the BSTX 
Protocol. To the extent that the general procedures in the proposed 
BSTX Rule 27000 Series (Suspension and Delisting) would apply, the 
Exchange has not demonstrated that these procedures are adequate for 
technical determinations about compliance with the BSTX Protocol.
---------------------------------------------------------------------------

    \295\ See supra note 283.
    \296\ See supra note 281.
---------------------------------------------------------------------------

    For the Commission to conclude that the proposal is not designed 
to, among other things, impose continued listing requirements on 
issuers in an arbitrary manner or permit unfair discrimination between 
issuers, it is important for the Exchange to provide sufficient 
explanation about how the Exchange will implement its continued listing 
requirement that a BSTX-listed Security remain compliant with the BSTX 
Protocol, and how issuers will be able to ensure that their listed 
Securities remain compliant. Due to the lack of such information, the 
Commission is unable to find that the proposal is designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and is not designed to permit unfair 
discrimination between issuers, as required under Section 6(b)(5) of 
the Exchange Act.

D. Whether BOX Has Sufficiently Explained the Burden the Proposal Would 
Place on Other National Securities Exchanges' Ability To Trade BSTX-
Listed Securities and Met its Burden To Demonstrate That the Proposal 
Is Consistent With Section 6(b)(8) of the Exchange Act

    The Commission examines below whether the Exchange has met its 
burden to demonstrate that its rules do not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act, as required by Section 6(b)(8) of the Exchange 
Act. As discussed further below, the Exchange has not sufficiently 
explained the burden that the proposal would place on national 
securities exchanges to provide end-of-day reporting of Security 
ownership balances for their members. Moreover, the Exchange has not 
adequately addressed the potential burden on competition that would 
result from the Exchange's control over the end-of-day reporting 
process or the burden on other national securities exchanges that seek 
to either participate in the end-of-day reporting process of the 
Exchange or develop their own. Accordingly, the Commission does not 
have sufficient information to assess whether the burden on competition 
imposed by the proposed end-of-day reporting functionality is necessary 
or appropriate in furtherance of the Exchange Act, in accordance with 
Section 6(b)(8) of the Exchange Act.
1. Exchange's Representations and Comments Received
    The Exchange states that the end-of-day Security ownership balance 
reporting by BSTX Participants and the public dissemination of the end-
of-day Security ownership balances on the blockchain does not impact 
the ability of Securities to trade on other national securities 
exchanges or OTC.\297\ The Exchange states that Securities would be 
eligible for trading on other national security exchanges that extend 
UTP to them, and therefore Securities would be able to trade on other 
national securities exchanges and OTC in the same manner as other NMS 
stocks.\298\ Specifically, the Exchange states that because Securities 
would trade, clear, and settle in the same manner as other NMS stock, 
other national securities exchanges could extend UTP to BSTX-listed 
Securities that are NMS stock in accordance with Commission rules.\299\ 
Additionally, the Exchange states that a national securities exchange 
that chooses to extend UTP to Securities could trade them without any 
end-of-day or blockchain reporting structure.\300\ Furthermore, the 
Exchange states that, with regard to other national securities 
exchanges extending UTP to Securities, the Exchange does not believe 
that the proposed BSTX Rules would impose a burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Exchange Act.\301\
---------------------------------------------------------------------------

    \297\ See OIP, supra note 7, 85 FR at 51262.
    \298\ See OIP, supra note 7, 85 FR at 51262.
    \299\ See OIP, supra note 7, 85 FR at 51289.
    \300\ See OIP, supra note 7, 85 FR at 51263.
    \301\ See OIP, supra note 7, 85 FR at 51289. See infra notes 
328-331 and accompanying text (discussing the Exchange's assertions 
concerning the benefits of the proposal).
---------------------------------------------------------------------------

    The Exchange states that there are many ways another national 
securities exchange could adopt its own end-of-day Security ownership 
balance reporting requirement. The Exchange also states that it cannot 
predict whether another exchange would want to adopt its own reporting 
requirement, and if it did, what model it would choose, and how or 
whether that model would interact with the Exchange's end-of-day 
Security ownership reporting structure.\302\ Further, the Exchange 
states that it is not proposing any limitation that would prevent 
another national securities exchange from participating in the 
Exchange's end-of-day Security ownership balance reporting process or 
establishing its own alternative or complementary process, and that it 
is not proposing to limit another exchange's ability to establish a 
similar, different, or integrated reporting structure.\303\ If another 
exchange

[[Page 84426]]

decides to trade Securities, but not to use blockchain technology to 
record end-of-day ownership balances reported by its members, the 
Exchange states that the other exchange's process would not be able to 
leverage the smart contract functionality built into BSTX-listed 
issuers' Securities pursuant to the BSTX Protocol.\304\ The Exchange 
states that in such a case, there would be separate sets of end-of-day 
ownership balance records--the balances of BSTX Participants would be 
recorded on the Ethereum blockchain and the balances of the other 
exchange's members would be separately reflected.\305\
---------------------------------------------------------------------------

    \302\ See OIP, supra note 7, 85 FR at 51262-63. The Exchange 
gives as examples of potential alternatives that another national 
securities exchange could employ: Collecting end-of-day Security 
ownership balance information from its members and then relaying 
that information to BSTX to deliver to a Wallet Manager for 
recording to the Ethereum blockchain; trading BSTX-listed Securities 
without any end-of-day reporting requirement; engaging its own 
version of a wallet manager to communicate with BSTX's Wallet 
Manager(s) to facilitate updates to the Ethereum blockchain; or 
designing its own reporting process and technology, with no nexus to 
the BSTX end-of-day Security balance reporting structure. See OIP, 
supra note 7, 85 FR at 51263. In the case of a national securities 
exchange that determined to relay balance information from its 
members to BSTX, the Exchange states that no development of 
blockchain technology, smart contract functionality, or other 
similar technology would be required, because an exchange that 
adopts such a reporting structure would be in a position similar to 
a BSTX Participant, in that it would simply deliver end-of-day 
Security balance information to BSTX (or a Wallet Manager). See OIP, 
supra note 7, 85 FR at 51263, n.103 and accompanying text.
    \303\ See OIP, supra note 7, 85 FR at 51263.
    \304\ See OIP, supra note 7, 85 FR at 51263, n.105.
    \305\ See id.
---------------------------------------------------------------------------

    One commenter questioned, in the context of SR-BOX-2019-19, whether 
other national securities exchanges would be in a position to extend 
UTP to BSTX-listed Securities.\306\ This commenter asked if the 
distributed ledger technology proposed by BSTX would be exclusive to 
BSTX and if other national securities exchanges would have access to 
the technology or its source code.\307\ This commenter asked if other 
national securities exchanges would have the ability currently to trade 
BSTX-listed Securities, and, if not, what changes they would need to 
make to be able to do so.\308\ This commenter stated that, to the 
extent that other national securities exchanges adopt their own 
distributed ledger technology to track ownership of equity securities 
traded on their markets, complications may arise in the equities 
markets if varying forms of this technology are used.\309\ Another 
commenter, in the context of SR-BOX-2019-19, stated its belief that the 
Exchange should address the implications in terms of burden on 
competition for other national securities exchanges that would like to 
extend UTP to BSTX-listed stocks.\310\
---------------------------------------------------------------------------

    \306\ See SIFMA Letter II, supra note 110, at 6.
    \307\ See SIFMA Letter II, supra note 110, at 4. This commenter 
also asked, if the distributed ledger technology and its source code 
is exclusive to BSTX, what other national securities exchanges would 
have to do to gain access. See id. at 4-5.
    \308\ See SIFMA Letter II, supra note 110, at 6. This commenter 
also stated that it is unclear whether the Exchange could limit UTP 
trading in BSTX-listed Securities in the future. See id.
    \309\ See SIFMA Letter II, supra note 110, at 3. This commenter 
also questioned whether other market participants would have the 
ability to change the source code underlying the distributed ledger 
technology. See id. at 5.
    \310\ See IEX Letter, supra note 77, at 5.
---------------------------------------------------------------------------

    Also in the context of SR-BOX-2019-19, one commenter stated that 
the proposal appears to provide insufficient detail regarding the 
digital security infrastructure and how technology would pair with 
existing equities market infrastructure.\311\ This commenter stated 
that to avail itself of the blockchain technology associated with the 
proposed Securities (which this commenter asserted is the only unique 
characteristic of the Securities), the purchaser must be a BSTX 
Participant.\312\ This commenter further stated that the proposal is 
designed to provide an advantage to the Exchange as the exclusive 
provider of blockchain technology for Securities, because the Exchange 
will not accept end-of-day Security ownership balance reports from non-
BSTX Participants.\313\ This commenter asserted that, as such, the 
Exchange's proposal places an ``unreasonable'' burden on 
competition.\314\ This commenter also stated it would be inappropriate, 
and perhaps beyond the scope of the Commission's authority, to allow 
NMS plans to be used for the ``specialized competitive purposes'' of an 
individual national securities exchange.\315\
---------------------------------------------------------------------------

    \311\ See Nasdaq Letter, supra note 77, at 1.
    \312\ See Nasdaq Letter, supra note 77, at 2.
    \313\ See Nasdaq Letter, supra note 77, at 3.
    \314\ See Nasdaq Letter, supra note 77, at 3.
    \315\ See Nasdaq Letter, supra note 77, at 3.
---------------------------------------------------------------------------

    In response, in the context of SR-BOX-2019-19, the Exchange 
asserted that the trading of Securities does not impose any additional 
burden compared to the trading of other NMS stocks.\316\ The Exchange 
stated that end-of-day Security ownership balance reporting and the 
publication of such information on the Ethereum blockchain does not 
impact the ability of Securities to trade on other national securities 
exchanges or OTC, and that Securities are fully capable of trading on 
other national securities exchanges or OTC without an ``ancillary'' 
recordkeeping mechanism.\317\ Therefore, according to the Exchange, if 
any other national securities exchange sought to extend UTP to a BSTX-
listed Security, it could do so under the existing regulatory 
framework.\318\
---------------------------------------------------------------------------

    \316\ See BSTX Response Letter I, supra note 82, at 3. Also, 
with respect to other exchanges extending UTP to Securities, the 
Exchange states that it does not believe that the proposal would 
impose a burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act, in that 
Securities would trade, clear, and settle in the same manner as 
other NMS stock, and accordingly, other exchanges would be able to 
extend UTP to Securities in accordance with Commission rules. See 
OIP, supra note 7, 85 FR at 51289. See also supra notes 301, 303, 
and accompanying text (discussing the Exchange's statement regarding 
burden on competition in the context of other exchanges extending 
UTP).
    \317\ See OIP, supra note 7, 85 FR at 51262; BSTX Response 
Letter I, supra note 82, at 3. See also id. at 16 (stating that 
Securities are fully capable of trading on other national securities 
exchanges or OTC without an ``ancillary'' recordkeeping mechanism); 
BSTX Response Letter II, supra note 105, at 5 (same).
    \318\ See BSTX Response Letter I, supra note 82, at 3. See also 
BSTX Response Letter II, supra note 105, at 5 (stating that any 
national securities exchange would be free to extend UTP to 
Securities consistent with applicable regulatory requirements). The 
Exchange also states, in response to whether other exchanges would 
be able to access the distributed ledger technology that BSTX 
proposes to use, that use of Ethereum blockchain technology, which 
is an open source public blockchain that supports smart contract 
functionality, is not exclusive to BSTX, and thus, all market 
participants would have open access to the distributed ledger 
technology associated with the Exchange's proposal. See OIP, supra 
note 7, 85 FR at 51289, n.366.
---------------------------------------------------------------------------

    The Exchange responded further that there is no limitation in its 
proposal that would prevent another national securities exchange from 
adopting its own process and requirements to record and disseminate 
end-of-day Security ownership balances.\319\ The Exchange stated that 
it encourages other national securities exchanges to consider taking 
steps to promote the use of blockchain technology and help familiarize 
market participants with its potential uses and benefits.\320\ The 
Exchange also stated that it proposes to use a ``common distributed 
ledger'' in the form of the public Ethereum blockchain that any other 
national securities exchange could use to implement its own 
recordkeeping process.\321\ According to the Exchange, any other 
national securities exchange that wants to trade Securities would have 
access to the publicly available, open-source code from the BSTX 
Protocol, and also would be able to leverage the pre-established 
Security architecture to facilitate any similar end-of-day reporting 
requirements.\322\ The Exchange stated that it would impose the end-of-
day reporting requirement only on BSTX Participants because of the 
limits of its legal authority, and that while it would not initially 
accept voluntary reporting from non-BSTX Participants, it may consider 
accepting such voluntary reports in the future.\323\
---------------------------------------------------------------------------

    \319\ See OIP, supra note 7, 85 FR at 51290; BSTX Response 
Letter I, supra note 82, at 3, 4.
    \320\ See BSTX Response Letter I, supra note 82, at 4.
    \321\ See BSTX Response Letter I, supra note 82, at 4. See also 
BSTX Response Letter II, supra note 105, at 2-3 (reiterating that 
the distributed ledger technology that would be used is the Ethereum 
blockchain, which is not exclusive to BSTX, and is an open source 
public blockchain that supports smart contract functionality).
    \322\ See BSTX Response Letter I, supra note 82, at 4.
    \323\ See BSTX Response Letter I, supra note 82, at 4. See also 
OIP, supra note 7, 85 FR at 51257 (stating that the Exchange will 
not accept voluntary reports of end-of-day Security balances from 
non-BSTX Participants, but may consider doing so in the future, 
subject to any applicable or necessary rule filing requirements with 
the Commission); BSTX Response Letter III, supra note 207, at 3.

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

[[Page 84427]]

    In response to comments on SR-BOX-2019-19, the Exchange stated its 
disagreement with a commenter's assertion that the Exchange is 
proposing to use UTP to promote trading that uniquely benefits the 
Exchange, and states that it is not ``using'' UTP in any manner.\324\ 
The Exchange asserted its belief that its proposal would not impose any 
burden on competition because other national securities exchanges would 
be free to determine whether to extend UTP to Securities.\325\ The 
Exchange further asserted that there is no mechanism by which one 
national securities exchange can force another national securities 
exchange to extend UTP to its listed securities, and therefore any 
national securities exchange would be free to extend UTP to BSTX-listed 
Securities consistent with applicable regulatory requirements.\326\ The 
Exchange also stated that, if a national securities exchange were to 
choose to extend UTP to BSTX-listed Securities and adopt a 
recordkeeping process utilizing the blockchain, it could do so in a 
manner consistent with BSTX's proposed requirements and end-of-day 
reporting structure, or could develop and pursue another approach.\327\
---------------------------------------------------------------------------

    \324\ See BSTX Response Letter I, supra note 82, at 4. The 
Exchange also stated that it was not proposing a fee related to the 
reporting of end-of-day ownership balances to the Ethereum 
blockchain, and therefore Securities trading on other national 
securities exchanges would not offer a unique benefit to the 
Exchange in this respect. See id. at 5.
    \325\ See BSTX Response Letter I, supra note 82, at 4, 5.
    \326\ See BSTX Response Letter I, supra note 82, at 4-5.
    \327\ See BSTX Response Letter I, supra note 82, at 5, 9-10. The 
Exchange also asserted its disagreement with a commenter's statement 
that it would be inappropriate to allow national market system plans 
to be used for the specialized competitive purposes of an individual 
national securities exchange, and stated that the point is not 
relevant because the Exchange had not proposed any national market 
system plan relating to its proposal. See id. at 4, n.15.
---------------------------------------------------------------------------

    With respect to the Exchange's stated purpose for recording and 
publicly disseminating Security ownership balances, the Exchange states 
that it believes that initially using blockchain technology as an 
``ancillary'' recordkeeping mechanism, pursuant to which the Securities 
represented on the blockchain in Token form would not convey legal 
ownership, is the appropriate way to explore the potential benefits of 
blockchain technology consistent with the protection of investors and 
the public interest.\328\ According to the Exchange, it believes that 
using blockchain technology to record and disseminate end-of-day 
Security ownership balances in parallel with the traditional trading, 
recordkeeping, and clearance and settlement structures that market 
participants are familiar with is an important first step toward 
exploring the potential uses and benefits of blockchain technology in 
securities transactions.\329\ The Exchange further states that it 
believes that promoting the use of the functionality of smart contracts 
and their ability to allocate and re-allocate Securities balances in 
Token form across multiple wallet addresses in connection with end-of-
day Security ownership balance information of BSTX Participants will 
allow market participants to observe and increase their familiarity 
with the ``capabilities and potential benefits'' of blockchain 
technology in a context that parallels the current equity market 
infrastructure.\330\ Thereby, according to the Exchange, its proposal 
would advance and protect the public's interest in the use and 
development of new data processing techniques that may create 
opportunities for more efficient, effective, and safe securities 
markets.\331\
---------------------------------------------------------------------------

    \328\ See OIP, supra note 7, 85 FR at 51262. The Exchange also 
states that it believes that the public has an interest in exploring 
the use of new technology, such as blockchain technology, and that 
such technology may be able to help perfect the mechanism of a free 
and open market and a national market system. See id.
    \329\ See OIP, supra note 7, 85 FR at 51287. See also id. at 
51262 (stating that the Exchange's contention that the proposal is 
reasonably designed to introduce blockchain technology in a gradual 
way, and in coordination and cooperation with the industry, the 
Commission, and the existing regulatory framework).
    \330\ See OIP, supra note 7, 85 FR at 51263.
    \331\ See id. See also BSTX Response Letter I, supra note 82, at 
13. The Exchange also states that, while it believes that its 
proposal represents an introductory step in pairing the benefits of 
blockchain technology with the current equity market structure, 
other market participants and FINRA have recognized additional 
potential benefits to blockchain technology in various applications 
related to the securities markets. See OIP, supra note 7, 85 FR at 
51263, n.110.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, several commenters raised 
questions about the purpose of the Exchange's proposed use of 
blockchain technology to record and disseminate end-of-day Security 
ownership balances.\332\ One commenter asserted that it is unclear what 
efficiencies or purposes an end-of-day Security ownership balance would 
provide or that Securities would offer to the global securities 
marketplace, and that the proposed structure would introduce potential 
burdens on market participants.\333\ According to this commenter, it 
seemed likely that the introduction and use of Securities would create 
an undue burden on market participants, exchanges, custodians, clearing 
firms, and retail and institutional investors.\334\ Another commenter 
asked what the purpose of the proposed end-of-day Security ownership 
balance reporting mechanism would be.\335\ This commenter further 
asked, if the purpose was to gradually introduce blockchain technology, 
what the next steps would be.\336\ Another commenter asserted that the 
proposal did not provide sufficient detail regarding the ultimate 
purpose of the records of end-of-day Security ownership balances and 
the specific content and design of such records, and that therefore the 
purpose and design of these records was unclear and could not be 
evaluated under the Exchange Act.\337\ According to this commenter, a 
reader of the proposal could not identify and evaluate the ways in 
which the end-of-day Security ownership balance may benefit investors 
or add transactional, operational, and other types of risk.\338\
---------------------------------------------------------------------------

    \332\ See Eversheds Letter, supra note 91, at 1-2; IEX Letter, 
supra note 77, at 5; PKA Law Letter, supra note 175, at 1-2; SIFMA 
Letter II, supra note 110, at 3.
    \333\ See PKA Law Letter, supra note 175, at 1-2.
    \334\ See PKA Law Letter, supra note 175, at 2.
    \335\ See IEX Letter, supra note 77, at 5.
    \336\ See IEX Letter, supra note 77, at 5.
    \337\ See Eversheds Letter, supra note 91, at 1-2. See also IEX 
Letter, supra note 77, at 5, n.8 (agreeing with the concerns 
identified in the Eversheds Letter and stating that these concerns 
were not fully or clearly addressed by Amendment No. 2).
    \338\ See Eversheds Letter, supra note 91, at 2.
---------------------------------------------------------------------------

    In response, in the context of SR-BOX-2019-19, the Exchange 
reiterated the purpose of the end-of-day Security ownership balances as 
previously stated and asserted its belief that the proposed 
``ancillary'' recordkeeping process, which is designed to operate 
separate and apart from the existing market infrastructure and would 
not impact trading, clearance, or settlement of Securities, would not 
pose any transactional or operational risks.\339\ According to the 
Exchange, it believed that its explanation about the purpose of the 
end-of-day Security ownership balances that it provided in SR-BOX-2019-
19 as amended by Amendment No. 2 provided ``sufficient information for 
market participants to independently arrive at this same conclusion.'' 
\340\ The Exchange stated that the record of end-of-day Security 
balances on the blockchain is for the public benefit.\341\ The Exchange 
asserted its belief that blockchain technology may offer benefits to 
the trading of securities, and that the Exchange had proposed a

[[Page 84428]]

limited use of the technology in the form of end-of-day Security 
ownership balances on the blockchain to help it evaluate whether such 
benefits might be realized.\342\ The Exchange stated that it may 
consider a variety of next steps towards potential further integration 
of blockchain technology, any of which would be subject to the rule 
filing requirements, and public notice and comment, pursuant to Section 
19 of the Exchange Act.\343\
---------------------------------------------------------------------------

    \339\ See BSTX Response Letter I, supra note 82, at 13.
    \340\ BSTX Response Letter I, supra note 82, at 13.
    \341\ See BSTX Response Letter I, supra note 82, at 14.
    \342\ See BSTX Response Letter I, supra note 82, at 14.
    \343\ See BSTX Response Letter I, supra note 82, at 9.
---------------------------------------------------------------------------

    Also in the context of SR-BOX-2019-19, one commenter asserted that 
the proposal's requirements with respect to maintaining end-of-day 
Security ownership balances on the blockchain are inconsistent with the 
requirement in Section 6(b)(5) of the Exchange Act that a national 
securities exchange's rules may not regulate matters not related to the 
purposes of this title or the administration of the exchange, because 
the maintenance of these records does not appear to be necessary for 
the clearance and settlement of the Securities, the fair and orderly 
trading of Securities, or any purpose regulated by the Exchange 
Act.\344\ The Exchange responds that it believes that the proposal is 
not designed to regulate matters outside those contemplated and 
authorized by the Exchange Act.\345\ The Exchange states that Section 2 
of the Exchange Act sets forth the reasons for the Exchange Act, which 
include that `` transactions in securities as commonly conducted upon 
securities exchanges and over-the-counter markets are effected with a 
national public interest which makes it necessary to provide for 
regulation and control of such transactions and of practices and 
matters related thereto, including . . . to require appropriate 
reports.' '' \346\ According to the Exchange, the Exchange Act and the 
rules of SROs include reporting requirements that regulate and control 
matters and practices related to securities transactions conducted on 
national securities exchanges and in OTC markets.\347\ As noted above, 
the Exchange also reasserts its belief that the end-of-day reporting 
requirements will allow market participants to observe and increase 
their familiarity with the capabilities and potential benefits of 
blockchain technology in a context that parallels current equity market 
infrastructure.\348\
---------------------------------------------------------------------------

    \344\ See Eversheds Letter, supra note 91, at 3.
    \345\ See also OIP, supra note 7, 85 FR at 51288.
    \346\ See OIP, supra note 7, 85 FR at 51288 (quoting 15 U.S.C. 
78(b) (emphasis in OIP)). See also BSTX Response Letter I, supra 
note 82, at 16.
    \347\ See OIP, supra note 7, 85 FR at 51288; BSTX Response 
Letter I, supra note 82, at 16-17. The Exchange states that, for 
example, all of the U.S. options exchanges and FINRA maintain rules 
approved by the Commission that require their member broker-dealers 
to prepare and submit daily large options position reports, and that 
these reports do not concern the trading or clearance and settlement 
of securities transactions themselves, but instead are reports 
relating to end-of day positions. The Exchange asserts that the 
requirements regarding the end-of-day Security ownership balance 
reporting process would similarly require BSTX Participants to 
provide reports regarding their end-of-day ownership balances in 
Securities. See OIP, supra note 7, 85 FR at 51288. See also BSTX 
Response Letter I, supra note 82, at 17.
    \348\ See OIP, supra note 7, 85 FR at 51288. See also BOX 
Response Letter I, supra note 82, at 13; OIP, supra note 7, 85 FR at 
51289, n.371 and accompanying text. See also supra notes 328-331 and 
accompanying text.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, one commenter stated that the 
Exchange appeared to be proposing a proprietary Ether-based distributed 
ledger technology to be used to track ownership on an ``ancillary'' 
basis for BSTX-listed Securities.\349\ This commenter asserted that the 
Exchange is encouraging the adoption of this technology with the likely 
eventual goal of having it become a system for tracking equity security 
ownership outside of the current system maintained by DTC and broker-
dealers.\350\ This commenter further asserted that the end-of-day 
Security balance reporting ``appears to be nothing more than a way to 
force industry participants to sign up for the Exchange's blockchain 
service, adding cost while providing no apparent value to firms, 
institutional clients, or retail investors.'' \351\ This commenter 
stated that while it supports adoption of new processes and technology 
to make the equity market infrastructure more efficient and robust and 
supports the use of technology to strengthen the security settlement 
system, it has concerns about the wider implications on the equity 
market infrastructure.\352\ The Exchange responded that that proposal 
was designed to operate entirely within the existing equity market 
structure, including the requirements for clearance through NSCC and 
settlement through DTC, and that any future changes would be subject to 
the Commission's rule filing process under Section 19 of the Exchange 
Act.\353\
---------------------------------------------------------------------------

    \349\ See SIFMA Letter II, supra note 110, at 3.
    \350\ See SIFMA Letter II, supra note 110, at 3.
    \351\ SIFMA Letter II, supra note 110, at 3.
    \352\ See SIFMA Letter II, supra note 110, at 3-4. This 
commenter suggested that the novel equity market infrastructure 
issues presented by the proposal are better suited for a concept 
release or other type of release by the Commission that is geared 
toward soliciting market-wide feedback, rather than an ad hoc 
proposal by a single national securities exchange. See id. at 4. See 
also SIFMA Letter IV, supra note 220, at 5-6 (stating continued 
concerns about new processes and technology with wider implications 
for the equity market structure infrastructure being considered in 
the framework of a proposed rule change by a single exchange without 
actively working with and soliciting input from the industry).
    \353\ See BSTX Response Letter II, supra note 105, at 3.
---------------------------------------------------------------------------

    In the context of SR-BOX-2020-14, this commenter stated that it 
previously expressed concerns regarding the end-of-day Security balance 
reporting aspect of the Exchange's proposal, and that it had previously 
raised concerns about how other exchanges might trade Securities 
pursuant to UTP, whether they might be required to adopt BOX's 
proprietary technology, and how having exchanges adopt different forms 
of distributed ledger technology to track equity ownership of equity 
securities could cause additional costs to the industry.\354\ This 
commenter stated that the end-of-day Securities balance reporting 
requirements would serve as a potential impediment for other exchanges 
to trade the Securities pursuant to UTP, and that other exchanges may 
be hesitant to trade Securities pursuant to UTP because of the lack of 
clarity around the implications of BSTX's end-of-day Security ownership 
balance reporting requirements for their members.\355\
---------------------------------------------------------------------------

    \354\ See SIFMA Letter IV, supra note 220, at 4 (noting its 
prior comment).
    \355\ See SIFMA Letter IV, supra note 220, at 5.
---------------------------------------------------------------------------

    In response to the commenter's concerns about ``how other exchanges 
might trade the Securities pursuant to UTP,'' the Exchange stated that 
no comments were submitted by any national securities exchanges 
following its filing of Amendment No. 1 to the proposal.\356\ The 
Exchange also stated that a market participant that voluntarily chooses 
to become a BSTX Participant must comply with BSTX rules,\357\ and that 
its proposal is clear that a BSTX Participant must report its end-of-
day balance at DTC or its carrying firm in the relevant Security 
pursuant to proposed BSTX Rule 17020(b).\358\ Additionally, the 
Exchange stated that, regarding costs associated with the end-of-day 
Security ownership balance reporting process, it does not believe that 
imposing the proposed requirement on BSTX Participants is unfairly 
discriminatory or burdens competition because all market

[[Page 84429]]

participants are free to choose whether to become a BSTX Participant or 
not and there is no limitation imposed by the Exchange on the ability 
to trade Securities on other markets.\359\ The Exchange also stated 
that its proposal represents an incremental change to incorporate 
blockchain technology within the current infrastructure and regulations 
for the equities market--including clearance and settlement--and that 
any future structural changes would be subject to the rule filing 
process pursuant to Section 19 of the Act.\360\
---------------------------------------------------------------------------

    \356\ See BSTX Response Letter III, supra note 207, at 5, n.13.
    \357\ See BSTX Response Letter III, supra note 207, at 6.
    \358\ See BSTX Response Letter III, supra note 207, at 3.
    \359\ See BSTX Response Letter III, supra note 207, at 5-6.
    \360\ See BSTX Response Letter III, supra note 207, at 6-7.
---------------------------------------------------------------------------

2. Analysis
    As stated above, the Commission supports innovation in our 
securities markets, and its disapproval does not rest on an evaluation 
of the utility or value of blockchain technology as applied to the 
functions of a national securities exchange. Due to the Exchange's lack 
of analysis about the burden that other national securities exchanges 
would face to use an end-of-day Security ownership reporting mechanism 
in connection with the trading of Securities on their markets and the 
competitive impacts, however, the Commission cannot find that the 
proposal does not impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act, consistent with Section 6(b)(8). The Exchange asserts that it is 
not proposing any limitation that would prevent another national 
securities exchange from participating in the Exchange's end-of-day 
Security ownership balance reporting process or establishing its own 
alternative or complementary process, and that it is not proposing to 
limit another exchange's ability to establish a similar, different, or 
integrated reporting structure.
    As discussed below, the Commission believes that the Exchange has 
not fully explained critical operational aspects of the end-of-day 
Security ownership reporting functionality, particularly with respect 
to how another national securities exchange may employ such 
functionality, on its own or in coordination with BSTX, and trade BSTX-
listed NMS stock on its exchange.\361\ Without this explanation, the 
Commission is unable to comprehensively assess the existence or scope 
of any burden resulting from the Exchange's proposed end-of-day 
Security ownership reporting functionality and concludes that the 
Exchange has not provided sufficient information to support a finding 
by the Commission that the proposed rules would not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the federal securities laws.
---------------------------------------------------------------------------

    \361\ Commenters raised concerns about the Exchange being an 
exclusive provider of a process that would use blockchain technology 
to record and disseminate end-of-day Security ownership balances and 
that other national securities exchanges would be unable to compete 
on this basis. See supra notes 307-315 and accompanying text.
---------------------------------------------------------------------------

    Although the Exchange asserts that BSTX-listed Securities trading 
on another national securities exchange could trade, clear, and settle 
in the same manner as other NMS stock,\362\ the Exchange will not 
accept, at least initially, end-of-day Security ownership balance 
reports from non-BSTX Participants that transact on other trading 
centers.\363\ The Exchange asserts that another national securities 
exchange that wants to trade BSTX-listed Securities would be able to 
leverage the Exchange's pre-established Security architecture to 
facilitate similar end-of-day reporting requirements, or could develop 
and pursue its own approach,\364\ and provides some broad examples of 
how it believes another exchange could develop its own end-of-day 
reporting requirement or participate in BSTX's process.\365\ However, 
the Exchange has not provided sufficient information for the Commission 
to determine whether it would be feasible, and the associated burden, 
for another national securities exchange that extends UTP to BSTX-
listed Securities, or another trading center that trades BSTX-listed 
Securities, to implement a process that uses blockchain technology for 
end-of-day Security ownership balance reporting for its members. The 
Exchange has not explained, as proposed, how another national 
securities exchange would be able to participate in the Exchange's end-
of-day Security ownership balance reporting mechanism without the 
Exchange's permission, and without complying with any conditions that 
the Exchange might place on access to this mechanism, including 
membership requirements. For example, only BOX would control the end-
of-day reporting mechanism by requiring the issuer to set up the 
necessary smart contracts, contracting with the Wallet Manager, 
obtaining allowlisted wallet addresses for BSTX Participants, 
collecting end-of-day Security ownership balance reports from BSTX 
Participants, and instructing the Wallet Manager to update the Ethereum 
blockchain to reflect those ownership balances.\366\ It is also unclear 
whether the Exchange would make its allowlisting and end-of-day 
reporting process available to other national securities exchanges or 
trading centers directly. For example, the Exchange provides as an 
example of how another exchange could adopt its own end-of-day 
reporting requirement, that the other exchange could choose to collect 
end-of-day Security ownership balance information from its members and 
then relay that information to BSTX to deliver to a Wallet Manager for 
recording to the Ethereum blockchain,\367\ but it is unclear what that 
process would entail. While the Exchange suggests that the other 
exchange would be in a position similar to a BSTX Participant in such a 
case,\368\ the Exchange also states that it would not accept voluntary 
reporting from non-BSTX Participants.\369\ Further, the Exchange does 
not explain what would be necessary for the coordination of end-of-day 
reporting mechanisms.\370\
---------------------------------------------------------------------------

    \362\ See supra note 299 and accompanying text.
    \363\ See supra note 323.
    \364\ See supra notes 319-322, 327, and accompanying text.
    \365\ See supra note 302.
    \366\ See supra Section III.C.2 for additional discussion of the 
process for allowlisting and end-of-day reporting.
    \367\ See supra note 302.
    \368\ See id.
    \369\ See supra note 323. Although the Exchange states that it 
may determine to accept voluntary reporting from non-BSTX 
Participants in the future (see supra note 323 and accompanying 
text), the Commission must evaluate whether the current proposal is 
consistent with the Exchange Act.
    \370\ See OIP, supra note 7, 85 FR at 51264, n.104 (discussing 
the Exchange's lack of clarity as to whether it would be necessary 
for BSTX and another exchange that decides to trade Securities, 
establish an end-of-day balance reporting requirement for its 
members, and relay the balance information to BSTX for recording to 
the Ethereum blockchain to file an NMS plan with respect to 
coordinating end-of-day balance reporting mechanisms).
---------------------------------------------------------------------------

    The Exchange also does not provide sufficient detail about how the 
end-of-day Security ownership balances of members of another national 
securities exchange could be included in the same smart contract on the 
Ethereum blockchain that is being used for BSTX Participants, and 
whether the Exchange's permission would be required. The Exchange 
states that other exchanges would be able to access the distributed 
ledger technology that BSTX proposes to use because Ethereum blockchain 
technology is an open source public blockchain that supports smart 
contract functionality and is not

[[Page 84430]]

exclusive to BSTX.\371\ However, the Exchange's proposal suggests that, 
for end-of-day Security ownership balances of trading centers' non-BSTX 
Participant members to be included in the same smart contract that 
contains the records for BSTX Participants, the non-BSTX Participants 
would need to obtain allowlisted wallet addresses, and that the 
Exchange would control the allowlisting process. In addition, either 
the other exchange or its non-BSTX Participant members would need to be 
allowed to provide end-of-day Securities ownership balances to the 
Exchange or its Wallet Manager, or if the other exchange was to work 
with another Wallet Manager, that Wallet Manager would need to have the 
necessary security permissions to write to the same smart 
contract.\372\ Moreover, the Exchange does not explain the implications 
for the recordkeeping process of having more than one Wallet Manager, 
particularly if there is a Wallet Manager that does not have a direct 
relationship with the Exchange. And the Exchange does not explain how 
it would calculate the Securities ownership balance to attribute to the 
omnibus wallet address if non-BSTX Participants did not report their 
ownership balances to the Exchange, but these ownership balances were 
associated with non-BSTX Participants' wallet addresses in the smart 
contract on the Ethereum blockchain.\373\
---------------------------------------------------------------------------

    \371\ See supra notes 318-322 and accompanying text.
    \372\ See supra Section III.C.1 for discussion of the process by 
which the Wallet Manager would write to the blockchain. For example, 
the Exchange indicated that one option might be for the other 
exchange to report its members' balances to BSTX's Wallet Manager or 
engage its own wallet manager to communicate with BSTX's Wallet 
Manager. However, the Exchange has not explained how that other 
exchange (or its wallet manager) could coordinate with BSTX's Wallet 
Manager, given that BOX has the contractual relationship with its 
Wallet Manager.
    \373\ See supra note 57 and accompanying text (stating that the 
Exchange would determine the number of Tokens to be allocated to the 
omnibus wallet address for a particular Security by subtracting the 
sum of the Security ownership balances reported by BSTX Participants 
from the total outstanding number).
---------------------------------------------------------------------------

    The Exchange also does not explain, alternatively, the potential 
implications of having two separate smart contracts with digital 
representations of ownership interest in the same Security if a 
national securities exchange extending UTP to BSTX-listed Securities 
(or other trading center trading BSTX-listed Securities) were to create 
its own smart contracts, using a parallel process for end-of-day 
Securities ownership balance reporting that is either similar to or 
differs greatly from that developed by the Exchange.\374\ For example, 
the existence of competing sets of records could be confusing for 
investors and other market participants. One potential source of 
confusion is that even if one smart contract represented end-of-day 
Security ownership balances for BSTX Participants and a separate smart 
contract represented end-of-day Security ownership balances for another 
trading center's members, there could be double-counting if some BSTX 
Participants were also members of the other trading center. And whereas 
an issuer of a BSTX-listed Security must create a smart contract 
compliant with BSTX Protocol as a condition of listing on the 
Exchange,\375\ that issuer would not have a direct relationship with 
another national securities exchange that extends UTP to its Security 
(or other trading center that trades its Security). The Exchange does 
not explain the likelihood that an issuer would be willing to work with 
another national securities exchange that wishes to trade the same 
BSTX-listed Security to create a separate smart contract associated 
with its Security, or whether there would be any logistical impediments 
to doing so post-issuance.
---------------------------------------------------------------------------

    \374\ See also supra note 309 and accompanying text (commenter 
asserting that, to the extent that other national securities 
exchanges adopt their own distributed ledger technology and varying 
forms of technology are used, complications may arise in the 
equities markets).
    \375\ See supra Section III.C.4(b) for discussion of the 
obligations that companies have to comply with the BSTX Protocol as 
a condition of Exchange listing.
---------------------------------------------------------------------------

    These deficiencies in the Exchange's explanation about how another 
national securities exchange may be able to use the proposed end-of-day 
Security ownership reporting functionality leaves the Commission with 
significant concerns about whether it would be feasible for another 
national securities exchange to make use of this functionality or 
create its own parallel reporting functionality. The Commission finds 
that the Exchange has not met its obligation to explain any burden its 
proposed end-of-day Security ownership reporting functionality would 
place on competition between BSTX and other national securities 
exchanges. Without being able to assess this potential burden on 
competition, particularly in light of commenters' concerns that 
meaningful competition among national securities exchanges with respect 
to the use of the end-of-day Security ownership functionality may be 
foreclosed, the Commission is unable to assess the necessity or 
appropriateness of that burden on competition. Therefore the Commission 
does not need to reach the question of whether the Exchange's 
assertions about the purpose of its end-of-day Security ownership 
reporting functionality demonstrate that the burden on competition is 
necessary or appropriate in furtherance of the Exchange Act.\376\ 
Accordingly, the Commission is unable to find that the Exchange's rules 
would not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the federal securities 
laws, in accordance with Section 6(b)(8) of the Exchange Act.
---------------------------------------------------------------------------

    \376\ See supra notes 328-360 and accompanying text. Moreover, 
the record does not contain any argument that the Exchange's 
proposed use of end-of-day Security ownership reporting 
functionality is necessary or appropriate in furtherance of the 
purposes of the Exchange Act, notwithstanding a significant burden 
imposed by such functionality on competition between national 
securities exchanges.
---------------------------------------------------------------------------

    For the reasons discussed above, considered independently or in 
combination, the Commission concludes that Exchange has not met its 
burden of demonstrating that the proposal is consistent with Exchange 
Act Sections 6(b)(1), 6(b)(5), or 6(b)(8),\377\ and, accordingly, the 
Commission must disapprove the proposal.\378\
---------------------------------------------------------------------------

    \377\ 15 U.S.C. 78f(b)(1), (5), and (8).
    \378\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See U.S.C. 78c(f). For the reasons discussed throughout, 
the Commission is disapproving the proposed rule change because it 
does not find that the proposed rule change is consistent with the 
Exchange Act.
---------------------------------------------------------------------------

E. Other Aspects of the Exchange's Proposal and Comments Received

    The Commission is disapproving the proposed rule change for the 
reasons discussed above. Therefore the Commission does not reach the 
question of whether other aspects of the Exchange's proposal, including 
proposed rules relating to participation on BSTX, business conduct for 
BSTX Participants, financial and operational provisions for BSTX 
Participants, supervision, trading practices, discipline, trading on 
the BSTX System, market making, and listing on the Exchange (with the 
exception of the specific topics discussed in Section III.C.4 above), 
are consistent with the Exchange Act. Other issues have been raised by 
commenters, in connection with SR-BOX-2019-19, including the settlement 
process for Securities; \379\ what reporting facility would be used for 
trade reporting; \380\ the process of trade confirmation reporting; 
\381\ the

[[Page 84431]]

proposal's compatibility with DTC and NSCC infrastructure; \382\ the 
liquidity of Securities; \383\ how the end-of-day Security ownership 
balance reporting mechanism would affect short sales, including the 
locate process, clearing, settling, and market maker compliance with 
short sale rules; \384\ how end-of-day Security ownership balances 
would affect the margin methodology for member self-calculation; \385\ 
the potential liability of custodians for differences between DTC 
records and end-of-day Security ownership balances; \386\ the proposed 
listing requirements' compliance with penny stock rules; \387\ the 
proposal's compliance with the anti-fraud or customer protection 
provisions of the Exchange Act or other Commission regulations; \388\ 
Security ownership verification, including for purposes of compliance 
with know-your-customer and anti-money laundering rules; \389\ access 
to the end-of-day Security ownership balance records and the 
safeguarding of customer non-public information; \390\ the requirements 
of Exchange Act Rule 12f-5 relating to the extension of UTP by other 
national securities exchanges to BSTX-listed Securities; \391\ the 
relationship among tZERO, Overstock.com, Inc. (``Overstock''),\392\ and 
entities related to the Exchange; \393\ whether any registered broker-
dealer has indicated its intention to become a BSTX Participant; \394\ 
and whether the Exchange is still working with FINRA regarding end-of-
day Security ownership balance reporting requirements for FINRA 
members.\395\ Additional discussion on these topics is unnecessary, as 
they do not bear on the basis for the Commission's decision to 
disapprove this proposal.
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    \379\ See PKA Law Letter, supra note 175, at 1.
    \380\ See PKA Law Letter, supra note 175, at 1.
    \381\ See PKA Law Letter, supra note 175, at 1.
    \382\ See PKA Law Letter, supra note 175, at 2.
    \383\ See PKA Law Letter, supra note 175, at 1.
    \384\ See IEX Letter, supra note 77, at 6; PKA Law Letter, supra 
note 175, at 1.
    \385\ See Nasdaq Letter, supra note 77, at 3.
    \386\ See Eversheds Letter, supra note 91, at 2.
    \387\ See IEX Letter, supra note 77, at 6.
    \388\ See Eversheds Letter, supra note 91, at 2; Nasdaq Letter, 
supra note 77, at 3.
    \389\ See Nasdaq Letter, supra note 77, at 3; PKA Law Letter, 
supra note 175, at 1.
    \390\ See Eversheds Letter, supra note 91, at 2.
    \391\ See Eversheds Letter, supra note 91, at 2-3; IEX Letter, 
supra note 77, at 3-4. One commenter also discussed aspects of 
requirements might be placed on a national securities exchange 
extending UTP to BSTX-listed Securities that the Exchange modified 
in Amendment No. 2 to SR-BOX-2019-19. See Eversheds Letter, supra 
note 91, at 3.
    \392\ In the Amended BSTX Governance Proposal, the Exchange 
states that Overstock, which is a publicly held corporation, wholly 
owns Medici Ventures, Inc., which owns 80.07% of tZERO. See Amended 
BSTX Governance Proposal, supra note 17, 85 FR at 50851.
    \393\ See PKA Law Letter, supra note 175, at 2.
    \394\ See IEX Letter, supra note 77, at 5.
    \395\ See IEX Letter, supra note 77, at 6.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change, 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 Sections 6(b)(1), 6(b)(5), and 6(b)(8) of the Exchange 
Act.\396\
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    \396\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\397\ that the proposed rule change (SR-BOX-2020-14), as 
modified by Amendment No. 1, be, and hereby is, disapproved.
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    \397\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-28536 Filed 12-23-20; 8:45 am]
BILLING CODE 8011-01-P


