[Federal Register Volume 87, Number 66 (Wednesday, April 6, 2022)]
[Notices]
[Pages 20014-20028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07193]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94571; File No. SR-CboeBZX-2021-051]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, To 
List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares

March 31, 2022.

I. Introduction

    On July 20, 2021, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares (``Shares'') of the ARK 21Shares 
Bitcoin ETF (``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares. The proposed rule change was published for comment in the 
Federal Register on August 6, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92543 (Aug. 2, 
2021), 86 FR 43289. Comments on the proposed rule change can be 
found at: https://www.sec.gov/comments/sr-cboebzx-2021-051/srcboebzx2021051.htm.
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    On September 15, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On November 2, 2021, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On December 9, 2021, the Exchange filed Amendment No. 1, which amended 
and replaced the proposed rule change in its entirety, and on December 
17, 2021, the Commission published notice of Amendment No. 1 to the 
proposed rule change.\8\ On January 25, 2022, the Commission designated 
a longer period for Commission action on the proposed rule change, as 
modified by Amendment No. 1.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92989, 86 FR 52530 
(Sept. 21, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 93510, 86 FR 61820 
(Nov. 8, 2021).
    \8\ See Securities Exchange Act Release No. 93822, 86 FR 73360 
(Dec. 27, 2021). Amendment No. 1 to the proposed rule change can be 
found at: https://www.sec.gov/rules/sro/cboebzx/2021/34-93822.pdf.
    \9\ See Securities Exchange Act Release No. 94055, 87 FR 4980 
(Jan. 31, 2022).
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    This order disapproves the proposed rule change, as modified by 
Amendment No. 1. The Commission concludes that BZX has not met its 
burden under the Exchange Act and the Commission's Rules of Practice to 
demonstrate that its proposal is consistent with the requirements of 
Exchange Act Section 6(b)(5), and in particular, the requirement that 
the rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices'' and ``to protect 
investors and the public interest.'' \10\
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    \10\ 15 U.S.C. 78f(b)(5).
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    When considering whether BZX's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same standard used in its orders 
considering previous proposals to list bitcoin \11\-based commodity 
trusts and bitcoin-based trust issued receipts.\12\ As the Commission 
has explained, an exchange that lists bitcoin-based exchange-traded 
products (``ETPs'') can meet its obligations under Exchange Act Section 
6(b)(5) by demonstrating that the exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size

[[Page 20015]]

related to the underlying or reference bitcoin assets.\13\
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    \11\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Amendment No. 1, 86 FR at 73362.
    \12\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Kryptoin Bitcoin ETF Trust Under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 93860 (Dec. 22, 2021), 86 FR 74166 (Dec. 29, 2021) 
(SR-CboeBZX-2021-029) (``Kryptoin Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the Valkyrie 
Bitcoin Fund Under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares), Securities Exchange Act Release No. 93859 (Dec. 22, 2021), 
86 FR 74156 (Dec. 29, 2021) (SR-NYSEArca-2021-31) (``Valkyrie 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under 
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006 
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37) 
(``Skybridge Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Wise Origin Bitcoin Trust under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022) 
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin 
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), 
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR 
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10, 
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X 
Order''). See also Order Disapproving a Proposed Rule Change, as 
Modified by Amendment No. 1, Relating to the Listing and Trading of 
Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule 
8.201, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 
FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order''). 
The Commission also notes that orders were issued by delegated 
authority on the following matters: Order Disapproving a Proposed 
Rule Change To List and Trade the Shares of the ProShares Bitcoin 
ETF and the ProShares Short Bitcoin ETF, Securities Exchange Act 
Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (SR-
NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a 
Proposed Rule Change To List and Trade the Shares of the 
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF, 
Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR 
43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) (``GraniteShares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares, Securities Exchange Act Release No. 
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019) (``VanEck Order'').
    \13\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since 
they ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur.'' \14\ The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading the underlying assets for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\15\ The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading activity, 
clearing activity, and customer identity; that the parties to the 
agreement have reasonable ability to obtain access to and produce 
requested information; and that no existing rules, laws, or practices 
would impede one party to the agreement from obtaining this information 
from, or producing it to, the other party.\16\
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    \14\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See 
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at 
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at 
12596.
    \15\ See NDSP Adopting Release, 63 FR at 70959.
    \16\ See Winklevoss Order, 83 FR at 37592-93; Letter from 
Brandon Becker, Director, Division of Market Regulation, Commission, 
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group 
(June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
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    In the context of this standard, the terms ``significant market'' 
and ``market of significant size'' include a market (or group of 
markets) as to which (a) there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (b) it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\17\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \18\
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    \17\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that will provide guidance to market 
participants. See id.
    \18\ See USBT Order, 85 FR at 12597.
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    Consistent with this standard, for the commodity-trust ETPs 
approved to date for listing and trading, there has been in every case 
at least one significant, regulated market for trading futures on the 
underlying commodity--whether gold, silver, platinum, palladium, or 
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group 
(``ISG'') membership in common with, that market.\19\ Moreover, the 
surveillance-sharing agreements have been consistently present whenever 
the Commission has approved the listing and trading of derivative 
securities, even where the underlying securities were also listed on 
national securities exchanges--such as options based on an index of 
stocks traded on a national securities exchange--and were thus subject 
to the Commission's direct regulatory authority.\20\
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    \19\ See Winklevoss Order, 83 FR at 37594.
    \20\ See USBT Order, 85 FR at 12597; Securities Exchange Act 
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) 
(SR-Amex-93-28) (order approving listing of options on American 
Depository Receipts (``ADRs'')). The Commission has also required a 
surveillance-sharing agreement in the context of index options even 
when (i) all of the underlying index component stocks were either 
registered with the Commission or exempt from registration under the 
Exchange Act; (ii) all of the underlying index component stocks 
traded in the U.S. either directly or as ADRs on a national 
securities exchange; and (iii) effective international ADR arbitrage 
alleviated concerns over the relatively smaller ADR trading volume, 
helped to ensure that ADR prices reflected the pricing on the home 
market, and helped to ensure more reliable price determinations for 
settlement purposes, due to the unique composition of the index and 
reliance on ADR prices. See Securities Exchange Act Release No. 
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the 
exchange on which the index option trades and the markets that trade 
the underlying securities are necessary'' and that ``[t]he exchange 
of surveillance data by the exchange trading a stock index option 
and the markets for the securities comprising the index is important 
to the detection and deterrence of intermarket manipulation.''). And 
the Commission has required a surveillance-sharing agreement even 
when approving options based on an index of stocks traded on a 
national securities exchange. See Securities Exchange Act Release 
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure 
the availability of information necessary to detect and deter 
potential manipulations and other trading abuses'').
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    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin market 
is ``uniquely'' and ``inherently'' resistant to fraud and 
manipulation.\21\ In response, the Commission has agreed that, if a 
listing exchange could establish that the underlying market inherently 
possesses a unique resistance to manipulation beyond the protections 
that are utilized by traditional commodity or securities markets, it 
would not necessarily need to enter into a surveillance-sharing 
agreement with a regulated significant market.\22\ Such resistance to 
fraud and manipulation, however, must be novel and beyond those 
protections that exist in traditional commodity markets or equity 
markets for which the Commission has long required surveillance-sharing 
agreements in the context of listing derivative securities 
products.\23\ No listing exchange has satisfied its burden to make such 
demonstration.\24\
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    \21\ See USBT Order, 85 FR at 12597.
    \22\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation); see also USBT Order, 85 FR at 
12597.
    \23\ See USBT Order, 85 FR at 12597.
    \24\ See supra note 12.
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    Here, BZX contends that approval of the proposal is consistent with 
Section 6(b)(5) of the Exchange Act, and, in particular, Section 
6(b)(5)'s requirement that the rules of a national securities exchange 
be designed to prevent fraudulent and manipulative acts and practices 
and to protect investors and the public interest.\25\ As discussed in 
more detail below, BZX asserts that the proposal is consistent with 
Section 6(b)(5) of the Exchange Act because the Exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size,\26\ and there exist other means to prevent fraudulent 
and manipulative acts and practices that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement.\27\
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    \25\ See Amendment No. 1, 86 FR at 73370-78.
    \26\ See id. at 73371-72.
    \27\ See id. at 73372-78.
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    Specifically, the Exchange believes that the proposal is consistent 
with the requirements of Section 6(b)(5) of the Exchange Act because 
the proposal sufficiently demonstrates that the Chicago Mercantile 
Exhange (``CME'') bitcoin futures market represents a regulated market 
of significant size and

[[Page 20016]]

that, on the whole, ``the manipulation concerns previously articulated 
by the Commission are sufficiently mitigated to the point that they are 
outweighed by quantifiable investor protection issues that would be 
resolved by approving this proposal.'' \28\
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    \28\ See id. at 73382.
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    Further, BZX believes that the proposal would give U.S. investors 
access to bitcoin in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors. According to 
BZX, the proposed listing and trading of the Shares would mitigate risk 
by: (i) Reducing premium and discount volatility; (ii) reducing 
management fees through meaningful competition; (iii) reducing risks 
and costs associated with investing in bitcoin futures exchange-traded 
funds and operating companies that are imperfect proxies for bitcoin 
exposure; and (iv) providing an alternative to custodying spot 
bitcoin.\29\
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    \29\ See id. at 73390.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 6(b)(5) of the Exchange Act by addressing: In Section 
III.B.1 assertions that other means besides surveillance-sharing 
agreements will be sufficient to prevent fraudulent and manipulative 
acts and practices; in Section III.B.2 assertions that BZX has entered 
into a comprehensive surveillance-sharing agreement with a regulated 
market of significant size related to bitcoin; and in Section III.C 
assertions that the proposal is consistent with the protection of 
investors and the public interest.
    Based on its analysis, the Commission concludes that BZX has not 
established that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Commission further 
concludes that BZX has not established that it has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to bitcoin. As discussed further below, BZX repeats 
certain assertions made in prior bitcoin-based ETP proposals that the 
Commission has previously addressed and rejected--and more importantly, 
BZX does not respond to the Commission's reasons for rejecting those 
assertions but merely repeats them. As a result, the Commission is 
unable to find that the proposed rule change is consistent with the 
statutory requirements of Exchange Act Section 6(b)(5).
    The Commission again emphasizes that its disapproval of this 
proposed rule change, as modified by Amendment No. 1, does not rest on 
an evaluation of whether bitcoin, or blockchain technology more 
generally, has utility or value as an innovation or an investment. 
Rather, the Commission is disapproving this proposed rule change, as 
modified by Amendment No. 1, because, as discussed below, BZX has not 
met its burden to demonstrate that its proposal is consistent with the 
requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    As described in more detail in Amendment No. 1,\30\ the Exchange 
proposes to list and trade the Shares of the Trust under BZX Rule 
14.11(e)(4), which governs the listing and trading of Commodity-Based 
Trust Shares on the Exchange.
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    \30\ See Amendment No. 1, supra note 8. See also draft 
Registration Statement on Form S-1, dated June 28, 2021, filed with 
the Commission on behalf of the Trust (``Registration Statement'').
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    The investment objective of the Trust would be to seek to track the 
performance of bitcoin, as measured by the performance of the S&P 
Bitcoin Index (``Index''), adjusted for the Trust's expenses and other 
liabilities.\31\ Each Share will represent a fractional undivided 
beneficial interest in the bitcoin held by the Trust. The Trust's 
assets will consist of bitcoin held by the Custodian on behalf of the 
Trust. The Trust generally does not intend to hold cash or cash 
equivalents. However, there may be situations where the Trust will 
unexpectedly hold cash on a temporary basis.\32\
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    \31\ See Amendment No. 1, 86 FR at 73379. 21Shares US LLC 
(``Sponsor'') is the sponsor of the Trust, Delaware Trust Company is 
the trustee, and The Bank of New York Mellon will be the 
administrator (``Administrator'') and transfer agent. Foreside 
Global Services, LLC will be the marketing agent in connection with 
the creation and redemption of Shares. ARK Investment Management LLC 
will provide assistance in the marketing of the Shares. Coinbase 
Custody Trust Company, LLC (``Custodian'') will be responsible for 
custody of the Trust's bitcoin. See id. at 73361, 73378.
    \32\ See id. at 73378-79.
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    In seeking to achieve its investment objective, the Trust would 
hold bitcoin and value the Shares daily based on the Index. The Index 
is a U.S. dollar-denominated composite reference rate for the price of 
bitcoin. The Index price is currently sourced from the following 
platforms: Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase 
Pro, Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.\33\ The Index 
methodology is intended to determine the fair market value for bitcoin 
by determining the principal market for bitcoin as of 4:00 p.m. ET 
daily.\34\
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    \33\ The underlying platforms are sourced by Lukka Inc. (``Data 
Provider''), which according to BZX, bases its sourcing on a 
combination of qualitative and quantitative metrics to analyze a 
comprehensive data set and evaluate factors including legal/
regulation, Know-Your-Customer/transaction risk, data provision, 
security, team/exchange, asset quality/diversity, market quality, 
and negative events. See id. at 73379.
    \34\ According to BZX, the Index methodology uses a ranking 
approach that considers several platform characteristics including 
oversight and intra-day trading volume. Specifically, to rank the 
credibility and quality of each platform, the Data Provider 
dynamically assigns a Base Exchange Score (``BES'') to the key 
characteristics for each platform. The BES reflects the fundamentals 
of a platform and determines which platform should be designated as 
the principal market at a given point of time. This score is 
determined by computing a weighted average of the values assigned to 
four different platform characteristics: (i) Oversight; (ii) 
microstructure efficiency; (iii) data transparency; and (iv) data 
integrity. The methodology then applies a five-step weighting 
process for identifying a principal market and the last price on 
that market. Following this weighting process, an ``executed 
exchange price'' is assigned for bitcoin as of 4:00 p.m. ET. The 
Data Provider takes the last traded prices at that moment in time on 
that trading venue for the relevant pair (bitcoin/USD) when 
determining the Index price. See id. at 73379-80.
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    The net asset value (``NAV'') of the Trust means the total assets 
of the Trust including, but not limited to, all bitcoin and cash, if 
any, less total liabilities of the Trust, each determined on the basis 
of generally accepted accounting principles. The NAV of the Trust is 
the aggregate value of the Trust's assets less its estimated accrued 
but unpaid liabilities (which include accrued expenses). In determining 
the Trust's NAV, the Administrator values the bitcoin held by the Trust 
based on the price set by the Index as of 4:00 p.m. ET. The 
Administrator determines the NAV of the Trust on each day that the 
Exchange is open for regular trading, as promptly as practical after 
4:00 p.m. ET.\35\
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    \35\ See id. at 73381.
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    The Trust will provide information regarding the Trust's bitcoin 
holdings, as well as an Intraday Indicative Value (``IIV'') per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading 
Hours (9:30 a.m. ET to 4:00 p.m. ET). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during Regular Trading Hours to reflect changes in the value of 
the Trust's bitcoin holdings during the trading day.\36\
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    \36\ See id. at 73380.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 Shares. When creating the 
Shares, authorized

[[Page 20017]]

participants will deliver, or facilitate the delivery of, bitcoin to 
the Trust's account with the Custodian in exchange for the Shares, and, 
when redeeming the Shares, the Trust, through the Custodian, will 
deliver bitcoin to such authorized participants.\37\
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    \37\ See id. at 73379.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether BZX's proposal is consistent 
with the Exchange Act. Section 6(b)(5) of the Exchange Act requires, in 
relevant part, that the rules of a national securities exchange be 
designed ``to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \38\ Under the 
Commission's Rules of Practice, the ``burden to demonstrate that a 
proposed rule change is consistent with the Exchange Act and the rules 
and regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \39\
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    \38\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \39\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\40\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\41\ 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.\42\
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    \40\ See id.
    \41\ See id.
    \42\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is 
Designed To Prevent Fraudulent and Manipulative Acts and Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and 
Practices
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with a comprehensive surveillance-sharing agreement with a regulated 
market of significant size, including by demonstrating that the bitcoin 
market as a whole or the relevant underlying bitcoin market is uniquely 
and inherently resistant to fraud and manipulation.\43\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\44\
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    \43\ See USBT Order, 85 FR at 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \44\ See id. at 12597.
---------------------------------------------------------------------------

(i) Assertions Regarding Bitcoin Markets
    BZX asserts that bitcoin is resistant to price manipulation. 
According to BZX, the geographically diverse and continuous nature of 
bitcoin trading render it difficult and prohibitively costly to 
manipulate the price of bitcoin.\45\ Fragmentation across bitcoin 
platforms, the relatively slow speed of transactions, and the capital 
necessary to maintain a significant presence on each trading platform 
make manipulation of bitcoin prices through continuous trading activity 
challenging.\46\ To the extent that there are bitcoin platforms engaged 
in or allowing wash trading or other activity intended to manipulate 
the price of bitcoin on other markets, such pricing does not normally 
impact prices on other platforms because participants will generally 
ignore markets with quotes that they deem non-executable.\47\ BZX 
further argues that the linkage between the bitcoin markets and the 
presence of arbitrageurs in those markets means that the manipulation 
of the price of bitcoin on any single venue would require manipulation 
of the global bitcoin price in order to be effective.\48\ Arbitrageurs 
must have funds distributed across multiple trading platforms in order 
to take advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin trading venue.\49\ As a result, BZX concludes that 
``the potential for manipulation on a [bitcoin] trading platform would 
require overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.'' \50\
---------------------------------------------------------------------------

    \45\ See Amendment No. 1, 86 FR at 73370 n.73.
    \46\ See id.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
---------------------------------------------------------------------------

    BZX provides results of statistical analysis by the Sponsor in 
support of its assertions regarding linkages between bitcoin markets 
and efficient arbitrage across such markets. First, according to BZX, 
using daily bitcoin prices, the Sponsor calculated the Pearson 
correlation \51\ of returns across certain bitcoin spot markets, non-
U.S. bitcoin ETPs, and the CME, and concluded that there is a high 
degree of correlation across these markets.\52\ BZX argues that in 
markets that are globally and efficiently integrated, one would expect 
changes in prices of an asset across all markets to be highly 
correlated, and that ``the rationale behind this is that quick and 
efficient arbitrageurs would capture potentially profitable 
opportunities, consequently converging prices to the average intrinsic 
value very rapidly.'' \53\
---------------------------------------------------------------------------

    \51\ According to the Exchange, the Pearson correlation is a 
measure of linear association between two variables and indicates 
the magnitude as well as direction of this relationship. See id. at 
73368 n.68.
    \52\ See id. at 73368. BZX represents that correlations are 
between 57% and 99%, with the latter found mainly across centralized 
market venues due to their higher level of interconnectedness and 
the lower correlations pertaining mainly to the non-U.S. bitcoin 
ETPs, which are relatively newer products and are mainly offered by 
a few competing market makers who are required to trade in large 
blocks, thus making it, according to BZX, economically infeasible to 
capture small mispricings. According to BZX, as additional investors 
and arbitrageurs enter the market and capture the mispricing 
opportunities between these markets, it is likely that there will be 
much higher levels of correlations across all markets. See id.
    \53\ See id.
---------------------------------------------------------------------------

    Second, BZX asserts that, according to the Sponsor's research, this 
high correlation holds true during periods of extreme price volatility. 
Employing a statistical component called cokurtosis,

[[Page 20018]]

which, according to BZX, measures to what extent two random variables 
change together, the Sponsor found, using hourly bitcoin prices, that 
the bitcoin markets tend to move very similarly, especially for extreme 
price deviations. BZX states that this is evidence of a robust global 
bitcoin market ``that quickly reacts in a unanimous manner to extreme 
price movements across both the spot markets, futures and [non-U.S.] 
ETP markets.'' \54\ According to BZX, this implies that ``no single 
[b]itcoin market can deviate significantly from the consensus for a 
prolonged period of time, such that the global [b]itcoin market is 
sufficiently large and has an inherent unique resistance to 
manipulation.'' \55\
---------------------------------------------------------------------------

    \54\ According to BZX, if two returns series exhibit a high 
degree of cokurtosis, this means that they tend to undergo extreme 
positive and negative changes simultaneously. A cokurtosis value 
larger than +3 or less than -3 is considered statistically 
significant. According to BZX, the Sponsor calculated cokurtosis 
using hourly bitcoin returns across ``centralized'' market venues, 
two non-U.S. ETPs (21Shares Bitcoin ETP (Ticker: ABTC) and VanEck 
Vectors Bitcoin ETN (Ticker: VBTC)), and the CME. See id. at 73369 & 
n.69.
    \55\ See id. at 73369.
---------------------------------------------------------------------------

    Third, based on the Sponsor's research using daily bitcoin price 
series, BZX argues that cross-platform spreads in bitcoin have been 
declining consistently over the past several years.\56\ BZX contends 
that the ``clear and sharp'' decline in the spread indicates that the 
bitcoin market has become more efficient over time.\57\ In addition, 
based on the Sponsor's research, BZX argues that the magnitude of 
outlier spreads have also declined over time, and that the market has 
experienced a 38% year-on-year decline in the annual median spread, 
indicating ``a greater degree of [b]itcoin price convergence across 
[platforms] and a more efficient market.'' \58\ Further, based on the 
Sponsor's calculations of a 7-day rolling standard deviation of the 
spread from January 1, 2017, to December 1, 2021, BZX asserts that the 
dispersion in bitcoin prices across all platforms has decreased over 
time, indicating that prices on all the considered platforms converge 
towards the ``intrinsic average'' much more efficiently, and suggesting 
that the market has become better at quickly reaching a ``consensus 
price'' for bitcoin.\59\ BZX posits that, as the pricing of the bitcoin 
market becomes increasingly efficient, pricing methodologies become 
``more accurate and less susceptible to manipulation.'' BZX further 
asserts that the ``clustering of prices across a variety of sources 
within the primary market'' points towards robust price discovery 
mechanisms and efficient arbitrage.\60\
---------------------------------------------------------------------------

    \56\ According to BZX, the Sponsor calculated the largest cross-
platform percentage spread (defined as ``%C-Spread'') at a given 
time by subtracting the highest price across all platforms at that 
time from the lowest price across all platforms at that time, and 
dividing the result by that lowest price. BZX represents that, for 
this calculation, the Sponsor used daily bitcoin price series from 
Binance, Bitfinex, Bithumb, Bitstamp, Cexio, Coinbase, Coinone, 
Gateio, Gemini, HuobiPro, itBit, Kraken, Kucoin, and OKEX. See id. 
at 73372 & n.95.
    \57\ See id. at 73373.
    \58\ See id.
    \59\ See id. at 73374.
    \60\ See id.
---------------------------------------------------------------------------

    Fourth, BZX asserts that one factor that has contributed to the 
overall efficiency, price discovery, and lower volatility of the 
bitcoin market is the increase in the number of participants, and 
subsequently, ``the total dollar amount allocated to this market.'' 
BZX's measure of participation is based on the increase from March 2012 
to December 2021 in the number of wallet addresses holding bitcoin.\61\
---------------------------------------------------------------------------

    \61\ See id. at 73375.
---------------------------------------------------------------------------

    Finally, BZX contends that this increase in the number of 
participants has resulted in higher liquidity in the bitcoin market, 
based on the ``daily aggregated dollar notional of the bid and ask 
order books within the first 100 price levels across several of the 
largest centralized crypto [platforms] from October 2020 to April 
2021.'' According to BZX, ``the dollar notional that is allocated 
closest to the mid price has increased from around $230 million to $860 
million over that period, representing a 270% increase in half a 
year.'' \62\ BZX suggests that the ``increased notional order book'' 
indicates that there is a ``higher degree of consensus'' among 
investors regarding the price of bitcoin, and that this ``hampers any 
attempt of price manipulation by any single large entity.'' \63\ 
Additionally, according to BZX, the Sponsor found that movements in the 
bid and ask dollar notional of the bitcoin order book within a six-hour 
window around ``extreme'' \64\ price events were indicative of an 
efficient market, whereby large market movements are ``quickly and 
dynamically absorbed'' by a thick order book and market participants' 
reactions are ``quick to restore the market back to its equilibrium 
level.'' \65\
---------------------------------------------------------------------------

    \62\ See id.
    \63\ See id. at 73376.
    \64\ According to BZX, the Sponsor used the top and bottom 0.1% 
of hourly price changes from October 2020 to April 2021 as events of 
extreme upward and downward market movements. See id.
    \65\ See id.
---------------------------------------------------------------------------

    As with the previous proposals, the Commission here concludes that 
the record does not support a finding that the bitcoin market is 
inherently and uniquely resistant to fraud and manipulation.\66\ BZX 
asserts that, because of how bitcoin trades occur, including through 
continuous means and through fragmented platforms, arbitrage across the 
bitcoin platforms essentially helps to keep global bitcoin prices 
aligned with one another, thus hindering manipulation. The Exchange 
also provides various statistics from the Sponsor which purport to show 
that bitcoin prices are closely and increasingly aligned across markets 
and that any price disparities are quickly arbitraged away. However, as 
described by BZX, the Sponsor's statistics are based on aggregated 
daily or hourly bitcoin prices (for example, according to BZX, the 
Pearson correlations were calculated using daily bitcoin prices, and 
cokurtosis was calculated using hourly bitcoin prices). Such data does 
not capture intra-hour or intra-day price disparities, and provides no 
information on how long price disparities typically persist. Nor do the 
Sponsor's statistics or BZX's assertions provide any insight into what 
size or duration of price disparities would be profitable for a would-
be manipulator, and thus they do not inform BZX's conclusion that 
bitcoin pricing has become ``less susceptible to manipulation.'' \67\ 
The

[[Page 20019]]

Commission is thus unable to conclude from the evidence provided that 
arbitrage across bitcoin markets is efficient, let alone so efficient 
as to make the markets inherently resistant to fraud and 
manipulation.\68\
---------------------------------------------------------------------------

    \66\ One commenter questions BZX's statement about bitcoin's 
resistance to fraud and manipulation. See letter from Adam Girts, 
dated November 5, 2021 (``Girts Letter'') (stating that the proposed 
ETP does not ``seem resistant to manipulation'' and that the 
Exchange's emphasis on the decentralized nature of bitcoin itself 
``is a red herring.'').
    \67\ See Amendment No. 1, 86 FR at 73374. Several other 
deficiencies in the Sponsor's methodological choices prevent the 
Commission from agreeing with the Exchange's conclusions. For 
example, one measure of cokurtosis uses the square of the difference 
of two random variables from their means, and the squares of the two 
variables' standard deviations, and as such, the statistic 
calculates magnitude, but not direction. If this is the cokurtosis 
statistic that was used by the Sponsor (Amendment No. 1 does not 
specify), then while the results may show that the two variables 
move together, it would not necessarily mean that the two variables 
move in the same direction ``in a unanimous manner'' (see id. at 
73369). In addition, by design, the Sponsor's ``%C-Spread'' 
statistic measures the maximum difference among prices (i.e., the 
highest and lowest) across bitcoin platforms at a given point in 
time. However, such statistic does not provide any information about 
the extent of price dispersion among the intermediary prices across 
bitcoin platforms or whether there is any ``intrinsic average'' or 
``consensus price'' of bitcoin towards which prices are converging 
(see id. at 73374). Moreover, the Commission is not able to assess 
the validity of the Sponsor's claims regarding ``higher liquidity'' 
in the bitcoin market, based upon the Sponsor's calculations of 
``increased notional order book'' and reactions to ``extreme'' price 
events, because of insufficient detail in the proposal on the 
process the Sponsor used to calculate the ``dollar notional'' of a 
bitcoin platform's order book, the ``mid price'' on a bitcoin 
platform, and the ``first 100 price levels'' across bitcoin 
platforms (see id. at 73375-76). Further, even if the calculations 
performed by the Sponsor show, as BZX claims, that ``there is a 
higher degree of consensus among investors regarding the price of 
[b]itcoin'' and that ``market participants' reactions are quick to 
restore the market back to its equilibrium level,'' the Exchange has 
not demonstrated how either purported showing leads to its 
conclusion that this ``hampers any attempt of price manipulation by 
any single large entity'' (see id. at 73376). In particular, the 
Exchange has not addressed the concerns raised by the Commission in 
previous proposals, as well as risk factors raised by the Sponsor in 
the Registration Statement, that actions by a single large, dominant 
market participant could ``have an adverse effect on the price of 
bitcoin'' (see Registration Statement at 24 and infra note 71). That 
is, even if, as the Exchange claims, there is a ``high degree of 
consensus'' among investors and market participants are ``quick to 
restore'' the market back to its equilibrium level, the trading 
activity of a dominant market participant could, itself, impact what 
that consensus/equilibrium will be. These deficiencies undermine the 
Exchange's arguments that linkages between bitcoin markets, and 
increasingly efficient arbitrage across such markets, make such 
markets less susceptible to manipulation.
    \68\ In addition, the Registration Statement states: ``As the 
use of digital asset networks increases without a corresponding 
increase in transaction processing speed of the networks, average 
fees and settlement times can increase significantly. Bitcoin's 
network has been, at times, at capacity, which has led to increased 
transaction fees. . . . Increased fees and decreased settlement 
speeds . . . could adversely impact the value of the Shares.'' See 
Registration Statement at 21. The Registration Statement further 
states that ``the [b]itcoin network faces significant obstacles to 
increasing the usage of bitcoin without resulting in higher fees or 
slower transaction settlement times, and attempts to increase the 
volume of transactions may not be effective . . . . which may 
adversely affect the price of bitcoin and therefore an investment in 
the Shares.'' See Registration Statement at 14. BZX does not provide 
data or analysis to address, among other things, whether such risks 
of increased fees and bitcoin transaction settlement times may 
affect the arbitrage effectiveness that BZX asserts. See also infra 
note 81 and accompanying text (referencing statements made in the 
Registration Statement that contradict assertions made by BZX). And 
without such data or analysis, the Commission cannot accept BZX's 
assertions. See Susquehanna, 866 F.3d at 447.
---------------------------------------------------------------------------

    Efficient price arbitrage, moreover, is not sufficient to support 
the finding that a market is uniquely and inherently resistant to 
manipulation such that the Commission can dispense with surveillance-
sharing agreements.\69\ The Commission has stated, for example, that 
even for equity options based on securities listed on national 
securities exchanges, the Commission relies on surveillance-sharing 
agreements to detect and deter fraud and manipulation.\70\ Here, the 
Exchange provides insufficient evidence to support its assertion of 
efficient price arbitrage across bitcoin platforms, let alone any 
evidence that price arbitrage in the bitcoin market is novel or unique 
so as to warrant the Commission dispensing with the requirement of a 
surveillance-sharing agreement. Moreover, BZX's data regarding the 
increase in the number of wallet addresses holding bitcoin do not 
provide any information on the concentration of bitcoin within or among 
such wallets, or take into account that a market participant with a 
dominant ownership position would not find it prohibitively expensive 
to overcome the liquidity supplied by arbitrageurs and could use 
dominant market share to engage in manipulation.\71\
---------------------------------------------------------------------------

    \69\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR 
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at 
74170; Wise Origin Order, 87 FR at 5531.
    \70\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86 
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR 
at 74170; Wise Origin Order, 87 FR at 5531. The Commission also 
notes that equities that underlie such options trade on U.S. equity 
markets that are deep, liquid, highly interconnected, and almost 
entirely automated, and that operate at high speeds measured in 
microseconds and even nanoseconds. See SEC Staff Report on 
Algorithmic Trading in U.S. Capital Markets (Aug. 5, 2020), 
available at: https://www.sec.gov/files/Algo_Trading_Report_2020.pdf; Market Data Infrastructure Proposing 
Release, Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 
85 FR 16726, 16728 (Mar. 24, 2020).
    \71\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01; WisdomTree Order, 86 FR at 69325; Valkyrie Order, 86 
FR at 74160; Kryptoin Order, 86 FR at 74170; Skybridge Order, 87 FR 
at 3783-84; Wise Origin Order, 87 FR at 5531. See also Registration 
Statement at 24 (``Some entities hold large amounts of bitcoin 
relative to other market participants, and to the extent such 
entities engage in large-scale hedging, sales or distributions on 
non-market terms, or sales in the ordinary course, it could result 
in a reduction in the price of bitcoin and adversely affect the 
value of the Shares. . . . As of the date of this [Registration 
Statement], the largest 100 bitcoin wallets held a substantial 
amount of the outstanding supply of bitcoin and it is possible that 
some of these wallets are controlled by the same person or entity. 
Moreover, it is possible that other persons or entities control 
multiple wallets that collectively hold a significant number of 
bitcoin, even if each wallet individually only holds a small amount. 
As a result of this concentration of ownership, large sales by such 
holders could have an adverse effect on the market price of 
bitcoin.''); and supra note 67.
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that, to the 
extent that there are bitcoin platforms engaged in or allowing wash 
trading or other manipulative activities, market participants will 
generally ignore those platforms.\72\ However, without the necessary 
data or other evidence, the Commission has no basis on which to 
conclude that bitcoin platforms are insulated from prices of others 
that engage in or permit fraud or manipulation.\73\ Indeed, the notion 
that a platform would be insulated from prices on other platforms is 
contradicted by the Exchange's assertions and the Sponsor's statistical 
evidence that bitcoin markets are ``highly correlated,'' including 
during periods of extreme price volatility.\74\
---------------------------------------------------------------------------

    \72\ See Amendment No. 1, 86 FR at 73370 n.73 (``To the extent 
that there are bitcoin exchanges engaged in or allowing wash trading 
or other activity intended to manipulate the price of bitcoin on 
other markets, such pricing does not normally impact prices on other 
exchange because participants will generally ignore markets with 
quotes that they deem non-executable.'').
    \73\ See USBT Order, 85 FR at 12601. See also WisdomTree Order, 
86 FR at 69325; Kryptoin Order, 86 FR at 74170; Wise Origin Order, 
87 FR at 5531.
    \74\ See supra notes 52-54 and accompanying text.
---------------------------------------------------------------------------

    Additionally, the continuous nature of bitcoin trading does not 
eliminate manipulation risk, and neither do linkages among markets, as 
BZX asserts.\75\ Even in the presence of continuous trading or linkages 
among markets, formal (such as those with consolidated quotations or 
routing requirements) or otherwise (such as in the context of the 
fragmented, global bitcoin markets), manipulation of asset prices, as a 
general matter, can occur simply through trading activity that creates 
a false impression of supply or demand.\76\
---------------------------------------------------------------------------

    \75\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying 
text. See also WisdomTree Order, 86 FR at 69325-26; Kryptoin Order, 
86 FR at 74170; Skybridge Order, 87 FR at 3783-84; Wise Origin 
Order, 87 FR at 5531.
    \76\ See Winklevoss Order, 83 FR at 37585.
---------------------------------------------------------------------------

    Moreover, BZX does not sufficiently contest the presence of 
possible sources of fraud and manipulation in the bitcoin spot market 
generally that the Commission has raised in previous orders. Such 
possible sources have included (1) ``wash'' trading,\77\ (2) persons 
with a dominant position in bitcoin manipulating bitcoin pricing,\78\ 
(3) hacking of the bitcoin network and trading platforms, (4) malicious 
control of the bitcoin network, (5) trading based on material, non-
public information, including the dissemination of false and misleading 
information, (6) manipulative activity involving the purported 
``stablecoin'' Tether (USDT), and (7) fraud and manipulation at bitcoin 
trading platforms.\79\
---------------------------------------------------------------------------

    \77\ See supra notes 72-73 and accompanying text.
    \78\ See supra note 71 and accompanying text.
    \79\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28, 
2019), available at https://ssrn.com/abstract=3195066 and published 
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
---------------------------------------------------------------------------

    In addition, BZX does not address risk factors specific to the 
bitcoin blockchain and bitcoin platforms, described in the

[[Page 20020]]

Trust's Registration Statement, that undermine the argument that the 
bitcoin market is inherently resistant to fraud and manipulation. For 
example, the Registration Statement acknowledges that ``it may be 
possible for a bad actor to manipulate the [b]itcoin network and hinder 
transactions''; that ``[s]pot markets on which bitcoin trades are 
relatively new and largely unregulated, and, therefore, may be more 
exposed to fraud and security breaches than established, regulated 
exchanges for other financial assets or instruments, which could have a 
negative impact on the performance of the Trust''; \80\ that ``[o]ver 
the past several years, a number of bitcoin spot markets have been 
closed or faced issues due to fraud, failure, security breaches or 
governmental regulations''; that ``[t]he nature of the assets held at 
bitcoin spot markets makes them appealing targets for hackers and a 
number of bitcoin spot markets have been victims of cybercrimes'' and 
``[n]o bitcoin [platform] is immune from these risks''; that ``[t]he 
potential consequences of a spot market's failure or failure to prevent 
market manipulation could adversely affect the value of the Shares[,] . 
. . . [t]he blockchain infrastructure could be used by certain market 
participants to exploit arbitrage opportunities through schemes such as 
front-running, spoofing, pump-and-dump and fraud across different 
systems, platforms or geographic locations'' . . . . and ``[a]s a 
result of reduced oversight, these schemes may be more prevalent in 
digital asset markets than in the general market for financial 
products''; that ``many [bitcoin] spot markets and over-the-counter 
market venues . . . do not provide the public with significant 
information regarding their ownership structure, management teams, 
corporate practices or oversight of customer trading'' and ``many 
[bitcoin] spot markets lack certain safeguards put in place by more 
traditional exchanges to enhance the stability of trading on the 
exchange''; that ``[s]ecurity breaches, cyber-attacks, computer malware 
and computer hacking attacks have been a prevalent concern in relation 
to digital assets''; and that the bitcoin blockchain could be 
vulnerable to a ``51% attack,'' in which a bad actor or actors that 
control a majority of the processing power dedicated to mining on the 
bitcoin network may be able to alter the bitcoin blockchain on which 
the bitcoin network and bitcoin transactions rely.\81\
---------------------------------------------------------------------------

    \80\ BZX expressly acknowledges that ``unregulated currency and 
commodity markets do not provide the same protections as the markets 
that are subject to the Commission's oversight.'' See Amendment No. 
1, 86 FR at 73362.
    \81\ See Registration Statement at 4, 12-13, 18-20, 28. See also 
Winklevoss Order, 83 FR at 37585.
---------------------------------------------------------------------------

(ii) Assertions Regarding the Index and the Create/Redeem Process
    BZX also argues that the Index, which would be used to value the 
Trust's bitcoin, is designed to reduce the risk of manipulation based 
on the Index's methodology.\82\ BZX states that the Index is a U.S. 
dollar-denominated composite reference rate for the price of bitcoin. 
The Index price is currently sourced from the following bitcoin 
platforms selected by the Data Provider based on a combination of 
qualitative and quantitative metrics: Binance, Bitfinex, Bitflyer, 
Bittrex, Bitstamp, Coinbase Pro, Gemini, HitBTC, Huobi, Kraken, KuCoin, 
and Poloniex.\83\ According to BZX, the Index methodology is intended 
to determine the fair market value for bitcoin by determining the 
``principal market'' for bitcoin as of 4:00 p.m. ET daily. To rank the 
credibility and quality of each underlying bitcoin platform, the Data 
Provider dynamically assigns a score to the key characteristics for 
each platform.\84\ BZX states that the score determines which platform 
should be designated as the ``principal market'' at a given point of 
time by computing a weighted average of the values assigned to four 
different platform characteristics: (i) Oversight; (ii) microstructure 
efficiency; (iii) data transparency; and (iv) data integrity.\85\ The 
methodology then applies a five-step weighting process for identifying 
a principal market and the last price on that market.\86\ Following 
this weighting process, an ``executed exchange price'' is assigned for 
bitcoin as of 4:00 p.m. ET. The Data Provider takes the last traded 
prices at that moment in time on that trading venue for the relevant 
pair (bitcoin/USD) when determining the Index price.\87\
---------------------------------------------------------------------------

    \82\ See Amendment No. 1, 86 FR at 73378.
    \83\ See id. at 73379.
    \84\ See id.
    \85\ See id.
    \86\ See id.
    \87\ See id. at 73379-80.
---------------------------------------------------------------------------

    BZX asserts that the fact that there are multiple bitcoin spot 
markets that may contribute prices to the Index price makes 
manipulation more difficult in a well-arbitraged and fractured market, 
as a malicious actor would need to manipulate multiple spot markets 
simultaneously to impact the Index price, or dramatically skew the 
historical distribution of volume between the various platforms.\88\ In 
addition, BZX asserts that the Data Provider has dedicated resources 
and committees established to ensure all prices are representative of 
the market, and that any price challenges will result in an independent 
analysis of the price. This includes assessing whether the price from 
the selected platform is biased according to analyses designed to 
recognize patterns consistent with manipulative activity, such as a 
quick reversion to previous traded levels following a sharp price 
change or any significant deviations from the volume weighted average 
price on a particular platform or pricing on any other eligible 
platform.\89\ In addition, BZX further represents that, after the 
``Lukka Prime price'' \90\ is generated, the S&P DJI (``Index 
Provider'') performs independent quality checks as a second layer of 
validation to those employed by the Data Provider, and may submit a 
price challenge to the Data Provider. In such circumstances, according 
to BZX, the Data Provider will perform an independent review of the 
price challenge to ensure the price is representative of the fair value 
of a particular cryptocurrency.\91\
---------------------------------------------------------------------------

    \88\ See id. at 73380.
    \89\ See id. BZX states that, upon detection or external 
referral of suspect manipulative activities, the case is raised to 
the Price Integrity Oversight Board. These checks occur on an on-
going, intraday basis, and any investigations are typically resolved 
promptly, in clear cases within minutes and in more complex cases 
same business day. According to BZX, the evidence uncovered will be 
turned over to the Data Provider's Price Integrity Oversight Board 
for final decision and action. The Price Integrity Oversight Board 
may choose to pick an alternative ``primary market'' and may exclude 
such market from future inclusion in the Index methodology or choose 
to stand by the original published price upon fully evaluating all 
available evidence. It may also initiate an investigation of prior 
prices from such markets and shall evaluate evidence presented on a 
case-by-case basis. See id.
    \90\ The Exchange appears to use the terms ``Lukka Prime 
price,'' ``Lukka price,'' and ``Index price'' interchangeably. The 
Commission understands these terms to be interchangeable.
    \91\ See Amendment No. 1, 86 FR at 73380. BZX also notes that 
the Index Provider provides certain quality assurance mechanisms 
with respect to ``crypto price validation'' based on current market 
conditions, internal system processes, and other assessments. See 
id.
---------------------------------------------------------------------------

    Simultaneously with its assertions regarding the Index, BZX also 
states that, because the Trust will engage in in-kind creations and 
redemptions only, the ``manipulability of the Index [is] significantly 
less important.'' \92\ BZX elaborates further that, ``because the Trust 
will not accept cash to buy bitcoin in order to create new shares or . 
. . be forced to sell bitcoin to pay cash for redeemed shares, the 
price that the Sponsor uses to value the Trust's bitcoin is not 
particularly important.'' \93\

[[Page 20021]]

According to BZX, when authorized participants create Shares with the 
Trust, they would need to deliver a certain number of bitcoin per Share 
(regardless of the valuation used), and when they redeem with the 
Trust, they would similarly expect to receive a certain number of 
bitcoin per Share.\94\ As such, BZX argues that, even if the price used 
to value the Trust's bitcoin is manipulated, the ratio of bitcoin per 
Share does not change, and the Trust will either accept (for creations) 
or distribute (for redemptions) the same number of bitcoin regardless 
of the value.\95\ This, according to BZX, not only mitigates the risk 
associated with potential manipulation, but also discourages and 
disincentivizes manipulation of the Index because there is little 
financial incentive to do so.\96\
---------------------------------------------------------------------------

    \92\ See id. at 73378.
    \93\ See id.
    \94\ See id.
    \95\ See id.
    \96\ See id.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the 
Commission can find no basis to conclude that BZX has articulated other 
means to prevent fraud and manipulation that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement. First, 
the record does not demonstrate that the proposed methodology for 
calculating the Index would make the proposed ETP resistant to fraud or 
manipulation such that a surveillance-sharing agreement with a 
regulated market of significant size is unnecessary. Specifically, BZX 
has not assessed the possible influence that spot platforms not 
included among the Index's underlying bitcoin platforms would have on 
the ``principal market'' that is used to calculate the Index.\97\ And 
as discussed above, the record does not establish that the broader 
bitcoin market is inherently and uniquely resistant to fraud and 
manipulation. Accordingly, to the extent that trading on platforms not 
directly used to calculate the Index affects prices on the Index's 
underlying bitcoin platforms, the characteristics of those other 
platforms--where various kinds of fraud and manipulation from a variety 
of sources may be present and persist--may affect whether the Index is 
resistant to manipulation.
---------------------------------------------------------------------------

    \97\ As discussed above, while BZX asserts that bitcoin prices 
on platforms with wash trades or other activity intended to 
manipulate the price of bitcoin do not influence the real price of 
bitcoin, the Commission has no basis on which to conclude that 
bitcoin platforms are insulated from prices of others that engage in 
or permit fraud or manipulation. See supra notes 72-73 and 
accompanying text.
---------------------------------------------------------------------------

    Moreover, BZX's assertions that the Index's methodology helps make 
the Index resistant to manipulation are contradicted by the 
Registration Statement's own statements. Specifically, the Registration 
Statement states, among other things, that ``[s]pot markets on which 
bitcoin trades are relatively new and largely unregulated, and, 
therefore, may be more exposed to fraud and security breaches than 
established, regulated exchanges for other financial assets or 
instruments''; and that ``[t]he potential consequences of a spot 
market's failure or failure to prevent market manipulation could 
adversely affect the value of the Shares[,] . . . . [t]he blockchain 
infrastructure could be used by certain market participants to exploit 
arbitrage opportunities through schemes such as front-running, 
spoofing, pump-and-dump and fraud across different systems, platforms 
or geographic locations'' . . . . and ``[a]s a result of reduced 
oversight, these schemes may be more prevalent in digital asset markets 
than in the general market for financial products.'' \98\ The Index's 
underlying bitcoin platforms are a subset of the bitcoin trading venues 
currently in existence.
---------------------------------------------------------------------------

    \98\ See Registration Statement at 12-13, 32.
---------------------------------------------------------------------------

    The Registration Statement also states, specifically with respect 
to the Index, that ``[p]ricing sources used by the Index are digital 
asset spot markets that facilitate the buying and selling of bitcoin 
and other digital assets'' and that ``[a]lthough many pricing sources 
refer to themselves as `exchanges,' they are not registered with, or 
supervised by, the [Commission] or [Commodity Futures Trading 
Commission] and do not meet the regulatory standards of a national 
securities exchange or designated contract market,'' and ``[f]or these 
reasons, among others, purchases and sales of bitcoin may be subject to 
temporary distortions or other disruptions . . . . [which] could affect 
the price of bitcoin used in Index calculations and, therefore, could 
adversely affect the bitcoin price as reflected by the Index.'' The 
Sponsor further states in the Registration Statement that ``[t]he Index 
is based on various inputs which include price data from various third-
party bitcoin spot markets'' and that ``[t]he [index provider] does not 
guarantee the validity of any of these inputs, which may be subject to 
technological error, manipulative activity, or fraudulent reporting 
from their initial source.'' \99\ Moreover, the Exchange describes a 
process through which the Data Provider may select an ``alternative 
primary market'' upon detection or referral of suspect manipulative 
activities.\100\ And, although the Sponsor raises concerns regarding 
fraud and security of bitcoin platforms, as well as concerns specific 
to the Index's underlying bitcoin platforms, leading to the potential 
need for an ``alternative'' basis for the Index price, the Exchange 
does not explain how or why such concerns are consistent with its 
assertion that the Index is resistant to fraud and manipulation.\101\
---------------------------------------------------------------------------

    \99\ See id. at 32.
    \100\ See Amendment No. 1, 86 FR at 73380.
    \101\ One commenter states that the proposed ETP is ``pegging 
the value to a collection of independent exchanges, who 
collectively, would be able to manipulate the bitcoin index by 
manipulation of their own forums.'' See Girts Letter.
---------------------------------------------------------------------------

    The Commission thus concludes that BZX has not demonstrated that 
the Index methodology makes the proposed ETP resistant to manipulation.
    Second, BZX argues that the Data Provider has dedicated resources 
and has established committees to ensure all prices are representative 
of the market, and that any price challenges will result in an 
independent price analysis, which would include assessing whether the 
price from the selected ``principal market'' platform is biased 
according to analyses designed to recognize patterns consistent with 
manipulative activity.\102\ However, the level of oversight of the 
Index's underlying bitcoin platforms, whose trade flows might 
contribute to the Index, is not equivalent to the obligations, 
authority, and oversight of national securities exchanges or futures 
exchanges and therefore is not an appropriate substitute.\103\ National 
securities exchanges are required to have rules that are ``designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.'' \104\ Moreover, national 
securities exchanges must file proposed rules with the Commission 
regarding certain material aspects of their

[[Page 20022]]

operations,\105\ and the Commission has the authority to disapprove any 
such rule that is not consistent with the requirements of the Exchange 
Act.\106\ Thus, national securities exchanges are subject to Commission 
oversight of, among other things, their governance, membership 
qualifications, trading rules, disciplinary procedures, recordkeeping, 
and fees.\107\ The Index's underlying bitcoin platforms, on the other 
hand, have none of these requirements (none are registered as a 
national securities exchange).\108\
---------------------------------------------------------------------------

    \102\ See Amendment No. 1, 86 FR at 73380. BZX represents that 
the Data Provider has also ``designed a series of automated 
algorithms designed to supplement the core Lukka Prime Methodology 
in enhancing the ability to detect potentially anomalous price 
activity which could be detrimental to the goal of obtaining a Fair 
Market Value price that is representative of the market at a point 
in time.'' See id.
    \103\ See also USBT Order, 85 FR at 12603-05; VanEck Order, 86 
FR at 64545; WisdomTree Order, 86 FR at 69328; Kryptoin Order, 86 FR 
at 74173.
    \104\ See 15 U.S.C. 78f(b)(5).
    \105\ 17 CFR 240.19b-4(a)(6)(i).
    \106\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rules 
changes with the Commission and provides the Commission with the 
authority to disapprove proposed rule changes that are not 
consistent with the Exchange Act. Designated contract markets 
(``DCMs'') (commonly called ``futures markets'') registered with and 
regulated by the Commodity Futures Trading Commission (``CFTC'') 
must comply with, among other things, a similarly comprehensive 
range of regulatory principles and must file rule changes with the 
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available 
at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \107\ See Winklevoss Order, 83 FR at 37597. The Commission notes 
that the New York State Department of Financial Services 
(``NYSDFS'') has issued ``guidance'' to supervised virtual currency 
business entities, stating that these entities must ``implement 
measures designed to effectively detect, prevent, and respond to 
fraud, attempted fraud, and similar wrongdoing.'' See Maria T. 
Vullo, Superintendent of Financial Services, NYSDFS, Guidance on 
Prevention of Market Manipulation and Other Wrongful Activity (Feb. 
7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS recognizes that its ``guidance is not 
intended to limit the scope or applicability of any law or 
regulation'' (id.), which would include the Exchange Act. Nothing in 
the record evidences whether the Index's underlying bitcoin 
platforms have complied with this NYSDFS guidance. Further, as 
stated previously, there are substantial differences between the 
NYSDFS and the Commission's regulation. Anti-money laundering 
(``AML'') and know-your-customer (``KYC'') policies and procedures, 
for example, have been referenced in other bitcoin-based ETP 
proposals as a purportedly alternative means by which such ETPs 
would be uniquely resistant to manipulation. The Commission has 
previously concluded that such AML and KYC policies and procedures 
do not serve as a substitute for, and are not otherwise dispositive 
in the analysis regarding the importance of, having a surveillance-
sharing agreement with a regulated market of significant size 
relating to bitcoin. For example, AML and KYC policies and 
procedures do not substitute for the sharing of information about 
market trading activity or clearing activity and do not substitute 
for regulation of a national securities exchange. See USBT Order, 85 
FR at 12603 n.101. See also, e.g., WisdomTree Order, 86 FR at 69328 
n.95; Kryptoin Order, 86 FR at 74173 n.98.
    \108\ See 15 U.S.C. 78e, 78f.
---------------------------------------------------------------------------

    In addition, although BZX argues that the Data Provider's various 
procedures of oversight of the Index helps to identify patterns 
consistent with manipulative activity, the purported procedures and 
oversight do not represent a unique measure to resist or prevent 
manipulation beyond mechanisms that exist in securities or commodities 
markets.\109\
---------------------------------------------------------------------------

    \109\ The Commission has previously considered and rejected 
similar arguments about the valuation of bitcoin according to a 
benchmark or reference price. See, e.g., SolidX Order, 82 FR at 
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at 
12599-601.
---------------------------------------------------------------------------

    Further, the oversight performed by the Data Provider of the 
Index's underlying bitcoin platforms is for the purpose of ensuring the 
accuracy and integrity of the Index.\110\ Such oversight serves a 
fundamentally different purpose as compared to the regulation of 
national securities exchanges and the requirements of the Exchange Act. 
While the Commission recognizes that this may be an important function 
in ensuring the integrity of the Index, such requirements do not imbue 
either the Data Provider or the Index's underlying bitcoin platforms 
with regulatory authority similar to that the Exchange Act confers upon 
self-regulatory organizations such as national securities 
exchanges.\111\
---------------------------------------------------------------------------

    \110\ See supra notes 84-91 and accompanying text.
    \111\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    Third, BZX does not explain the significance of the Index's 
purported resistance to manipulation to the overall analysis of whether 
the proposal to list and trade the Shares is designed to prevent fraud 
and manipulation. Even assuming that BZX's argument is that, if the 
Index is resistant to manipulation, the Trust's NAV, and thereby the 
Shares as well, would be resistant to manipulation, BZX has not 
established in the record a basis for such conclusion. That assumption 
aside, the Commission notes that the Shares would trade at market-based 
prices in the secondary market, not at NAV, which then raises the 
question of the significance of the NAV calculation to the manipulation 
of the Shares.
    Fourth, BZX's arguments are contradictory. While arguing that the 
Index is resistant to manipulation, the Exchange simultaneously 
downplays the importance of the Index in light of the Trust's in-kind 
creation and redemption mechanism.\112\ BZX points out that the Trust 
will create and redeem Shares in-kind, not in cash, which renders the 
NAV calculation, and thereby the ability to manipulate NAV, 
``significantly less important.'' \113\ In BZX's own words, the Trust 
will not accept cash to buy bitcoin in order to create Shares or sell 
bitcoin to pay cash for redeemed Shares, so the price that the Sponsor 
uses to value the Trust's bitcoin ``is not particularly important.'' 
\114\ If the Index that the Trust uses to value the Trust's bitcoin 
``is not particularly important,'' it follows that the Index's 
resistance to manipulation is not material to the Shares' 
susceptibility to fraud and manipulation. As BZX does not address or 
provide any analysis with respect to these issues, the Commission 
cannot conclude that the Index aids in the determination that the 
proposal to list and trade the Shares is designed to prevent fraudulent 
and manipulative acts and practices.
---------------------------------------------------------------------------

    \112\ See supra notes 92-96 and accompanying text.
    \113\ See Amendment No. 1, 86 FR at 73378 (``While the Sponsor 
believes that the Index which it uses to value the Trust's bitcoin 
is designed to reduce the risk of manipulation based on the 
methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of 
the Index significantly less important.'').
    \114\ See id. (concluding that ``because the Trust will not 
accept cash to buy bitcoin in order to create new shares or, barring 
a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin 
is not particularly important.'').
---------------------------------------------------------------------------

    Finally, the Commission finds that BZX has not demonstrated that 
in-kind creations and redemptions provide the Shares with a unique 
resistance to manipulation. The Commission has previously addressed 
similar assertions.\115\ As the Commission stated before, in-kind 
creations and redemptions are a common feature of ETPs, and the 
Commission has not previously relied on the in-kind creation and 
redemption mechanism as a basis for excusing exchanges that list ETPs 
from entering into surveillance-sharing agreements with significant, 
regulated markets related to the portfolio's assets.\116\ Accordingly, 
the Commission is not persuaded here that the Trust's in-kind creations 
and redemptions afford it a unique resistance to manipulation.\117\
---------------------------------------------------------------------------

    \115\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08; VanEck Order, 86 FR at 64546; WisdomTree Order, 86 FR 
at 69329; Kryptoin Order, 86 FR at 74174; Skybridge Order, 87 FR at 
3874; Wise Origin Order, 87 FR at 5533.
    \116\ See, e.g., iShares COMEX Gold Trust, Securities Exchange 
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26, 
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange 
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24, 
2006) (SR-Amex-2005-072).
    \117\ Putting aside BZX's various assertions about the nature of 
bitcoin and the bitcoin market, the Index, and the Shares, BZX also 
does not address concerns the Commission has previously identified, 
including the susceptibility of bitcoin markets to potential trading 
on material, non-public information (such as plans of market 
participants to significantly increase or decrease their holdings in 
bitcoin; new sources of demand for bitcoin; the decision of a 
bitcoin-based investment vehicle on how to respond to a ``fork'' in 
the bitcoin blockchain, which would create two different, non-
interchangeable types of bitcoin), or to the dissemination of false 
or misleading information. See Winklevoss Order, 83 FR at 37585. See 
also USBT Order, 85 FR at 12600-01; WisdomTree Order, 86 FR at 69329 
n.114; Kryptoin Order, 86 FR at 74174 n.107; Skybridge Order, 87 FR 
at 3872; Wise Origin Order, 87 FR at 5533 n.89.

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

[[Page 20023]]

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size
    As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and 
manipulative acts and practices, the Commission next examines whether 
the record supports the conclusion that BZX has entered into a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size relating to the underlying assets. In this context, 
the term ``market of significant size'' includes a market (or group of 
markets) as to which (i) there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (ii) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\118\
---------------------------------------------------------------------------

    \118\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that provides guidance to market 
participants. See id.
---------------------------------------------------------------------------

    As the Commission has stated in the past, it considers two markets 
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate 
bilateral surveillance-sharing agreement.\119\ Accordingly, based on 
the common membership of BZX and the CME in the ISG,\120\ BZX has the 
equivalent of a comprehensive surveillance-sharing agreement with the 
CME. However, while the Commission recognizes that the CFTC regulates 
the CME futures market,\121\ including the CME bitcoin futures market, 
and thus such market is ``regulated,'' in the context of the proposed 
ETP, the record does not, as explained further below, establish that 
the CME bitcoin futures market is a ``market of significant size'' as 
that term is used in the context of the applicable standard here.
---------------------------------------------------------------------------

    \119\ See id. at 37580 n.19.
    \120\ See Amendment No. 1, 86 FR at 73371 n.75 and accompanying 
text.
    \121\ While the Commission recognizes that the CFTC regulates 
the CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying bitcoin spot market. See Winklevoss 
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at 
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; Skybridge Order, 
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93.
---------------------------------------------------------------------------

(i) Whether There Is a Reasonable Likelihood That a Person Attempting 
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin 
Futures Market To Successfully Manipulate the ETP
    The first prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' is the 
determination that there is a reasonable likelihood that a person 
attempting to manipulate the ETP would have to trade on the CME bitcoin 
futures market to successfully manipulate the ETP.
    While BZX states that academic research supports the thesis that 
CME bitcoin futures pricing leads the spot market,\122\ BZX 
acknowledges that the literature has presented mixed evidence. BZX 
states that, on the one hand, an early study by Corbet et al. (2018) 
\123\ applied four metrics of price discovery to the CME, CBOE, and 
spot prices using data sampled on a one-minute frequency, and found 
that price discovery is focused on the spot market.\124\ BZX states 
that, in another study, Baur and Dimpfl (2019) \125\ use data sampled 
on a five-minute interval and similarly conclude that price discovery 
occurs in the spot market.\126\
---------------------------------------------------------------------------

    \122\ See Amendment No. 1, 86 FR at 73370.
    \123\ See id. at 73371 (citing S. Corbet, B. Lucey, M. Peat, & 
S. Vigne, Bitcoin futures--What use are they?, 172 Econ. Letters 23 
(2018) (``Corbet et al.'')).
    \124\ See id. at 73371.
    \125\ See id. at 73371 (citing D. Baur & T. Dimpfl, Price 
discovery in bitcoin spot or futures?, 39 J. Futures Mkts. 803 
(2019)).
    \126\ See id. at 73371.
---------------------------------------------------------------------------

    BZX states that, on the other hand, a study by Kapar and Olmo 
(2019) \127\ finds contradictory evidence using daily-sampled data, 
concluding that the CME bitcoin futures market dominates price 
discovery. BZX states that similarly, Akyildirim et al. (2019) \128\ 
show that bitcoin futures play a significant role in price discovery 
relative to the spot market.
---------------------------------------------------------------------------

    \127\ See id. at 73371 (citing B. Kapar & J. Olmo, An analysis 
of price discovery between Bitcoin futures and spot markets, 174 
Econ. Letters 62 (2019) (``Kapar and Olmo'')).
    \128\ See id. at 73371 (citing E. Akyildirim, S. Corbet, P. 
Katsiampa, N. Kellard & A. Sensoy, The development of Bitcoin 
futures: Exploring the interactions between cryptocurrency 
derivatives, 34 Fin. Res. Letters 101234 (2020)).
---------------------------------------------------------------------------

    BZX surmises that one potential reason for the mixed evidence, 
according to BZX's interpretation of Hu, Hou and Oxley (2020),\129\ is 
that ``cointegration relationships may go undetected if the underlying 
model formulation is constrained to be time-invariant.'' BZX states 
that, as such, Hu, Hou and Oxley ``apply time-varying cointegrating 
coefficients'' and ``conclude that futures prices Granger-cause spot 
prices and that futures prices dominate [b]itcoin price discovery.'' 
\130\
---------------------------------------------------------------------------

    \129\ See id. at 73371 (citing Y. Hu, Y. Hou & L. Oxley, What 
role do futures markets play in Bitcoin pricing? Causality, 
cointegration and price discovery from a time-varying perspective, 
72 Int'l Rev. of Fin. Analysis 101569 (2020) (``Hu, Hou and 
Oxley'')).
    \130\ See id. at 73371.
---------------------------------------------------------------------------

    BZX further asserts that the bitcoin futures market is by orders of 
magnitude larger than the entire spot market of all cryptoassets in 
terms of traded volume, and that, according to a study by the 
Blockchain Lab of Massachusetts Institute of Technology: ``[T]he 
derivative market leads price discovery of bitcoin more frequently than 
the spot markets. The spot market is more likely to indicate the 
direction of the price movement while the derivatives market is more 
likely to lead the magnitude of the price movement.'' \131\
---------------------------------------------------------------------------

    \131\ See id. at 73372 (citing L. Eguren, B. Fondufe, C. Hogan, 
and C. Matthews, Price Discovery in the Bitcoin Spot and Derivatives 
Markets, Massachusetts Institute of Technology Blockchain Lab 
Program, May 15, 2020 (``Blockchain Lab Paper''), available at: 
https://static1.squarespace.com/static/59aae5e9a803bb10bedeb03e/t/5fa2de64862fbd230d09033d/1604509286275/WG19-20PriceDiscoveryintheBitcoinSpot%26DerivativesMarketsComplete.pdf 
(last visited Mar. 3, 2022)). This study was performed by MBA 
students at the MIT Sloan School of Management as part of the 
Blockchain Lab, an action-learning course offered by MIT. The sudy 
considered the relationship between unregulated spot and derivatives 
bitcoin markets, and which market leads the other in pricing.
---------------------------------------------------------------------------

    BZX also asserts that the bitcoin futures market has processed more 
than $1 trillion in futures volume per month since the start of the 
year. In November 2021, bitcoin futures volume accounted for $1.58 
trillion, while spot volume, in the same time frame, amounted to $1.4 
trillion, including both crypto-only and fiat currency volumes of all 
cryptoassets, not just bitcoin. In terms of volume just in the last 
month,\132\ BZX asserts that the bitcoin futures market is 12% larger 
than the entire spot market. Over the past three months,\133\ the 
average monthly spot volume was $1.3 trillion while the average bitcoin 
futures volume was significantly greater (approximately 30%) than the 
spot at $1.71 trillion.\134\
---------------------------------------------------------------------------

    \132\ Based on the submission of Amendment No. 1 in December 
2021, the Commission understands ``last month'' to refer to November 
2021.
    \133\ Based on the submission of Amendment No. 1 in December 
2021, the Commission understands ``past three months'' to refer to 
September-November 2021.
    \134\ See Amendment No. 1, 86 FR at 73372. That is, according to 
BZX, since the start of the year, the bitcoin futures market is 52% 
larger than the spot volume of all cryptoassets traded on platforms.

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

[[Page 20024]]

    In addition, BZX contends that, in the past twelve months, the 
average monthly futures volume for bitcoin was $1.89 trillion, while 
the monthly spot volume for all cryptoassets was $1.24 trillion.\135\ 
BZX further states that, as of December 2, 2021, the ratio of bitcoin 
spot versus futures volume currently stands at 0.17.\136\ BZX concludes 
that, ``where CME bitcoin futures lead the price in the spot market 
such that a potential manipulator of the bitcoin spot market (beyond 
just the constituents of the Index . . .) would have to participate in 
the CME [b]itcoin [f]utures market, it follows that a potential 
manipulator of the Shares would similarly have to transact in the CME 
[b]itcoin [f]utures market.'' \137\
---------------------------------------------------------------------------

    \135\ See id.
    \136\ See id. Put in another way, according to BZX, the bitcoin 
spot market accounts for 17% of the bitcoin futures market in volume 
terms.
    \137\ See id.
---------------------------------------------------------------------------

    The Commission disagrees. Specifically, the econometric evidence in 
the record for the proposal does not support the conclusion that an 
interrelationship exists between the CME bitcoin futures market and the 
bitcoin spot market such that it is reasonably likely that a person 
attempting to manipulate the proposed ETP would also have to trade on 
the CME bitcoin futures market.\138\ While BZX concludes that CME 
bitcoin futures pricing leads the spot market,\139\ BZX's own 
recitation of the literature on the lead-lag relationship and price 
discovery between bitcoin spot and futures markets underscores that the 
literature is unsettled.\140\ BZX also has not addressed issues that 
the Commission has raised in past disapproval orders with respect to 
some of the studies that BZX cites in the present proposal. 
Specifically, BZX has not addressed the concern that the use of daily 
price data by Kapar and Olmo and Hu, Hou and Oxley, as opposed to 
intra-day prices, may hinder the ability to distinguish which market 
incorporates new information faster; \141\ or that, as stated in 
previous disapproval orders,\142\ the findings of Hu, Hou and Oxley's 
Granger causality analysis are concededly mixed; \143\ or why Hu, Hou 
and Oxley's inconclusive evidence that CME bitcoin futures prices lead 
spot prices--in particular that the months at the end of the paper's 
sample period showed that the spot market was the leading market--would 
not indicate a shift towards prices in the spot market leading the 
futures market that would be expected to persist into the future.\144\
---------------------------------------------------------------------------

    \138\ See USBT Order, 85 FR at 12611. Listing exchanges have 
attempted to demonstrate such an ``interrelationship'' by presenting 
the results of various econometric ``lead-lag'' analyses. The 
Commission considers such analyses to be central to understanding 
whether it is reasonably likely that a would-be manipulator of the 
ETP would need to trade on the CME bitcoin futures market. See id. 
at 12612. See also VanEck Order, 86 FR at 64547; WisdomTree Order, 
86 FR at 69330-31; Kryptoin Order, 86 FR at 74176 n.144; Skybridge 
Order, 87 FR at 3876 n.101; Wise Origin Order, 87 FR at 5535 n.107.
    \139\ See Amendment No. 1, 86 FR at 73372.
    \140\ See supra notes 123-131 and accompanying text. See also, 
e.g., O. Entrop, B. Frijns & M. Seruset, The determinants of price 
discovery on bitcoin markets, 40 J. Futures Mkts. 816 (2020) 
(finding that price discovery measures vary significantly over time 
without one market being clearly dominant over the other); J. Hung, 
H. Liu & J. Yang, Trading activity and price discovery in Bitcoin 
futures markets, 62 J. Empirical Finance 107 (2021) (finding that 
the bitcoin spot market dominates price discovery); A. Fassas, S. 
Papadamou, & A. Koulis, Price discovery in bitcoin futures, 52 Res. 
Int'l Bus. Fin. 101116 (2020) (finding that bitcoin futures play a 
more important role in price discovery); S. Aleti & B. Mizrach, 
Bitcoin spot and futures market microstructure, 41 J. Futures Mkts. 
194 (2021) (finding that relatively more price discovery occurs on 
the CME as compared to four spot exchanges); J. Wu, K. Xu, X. Zheng 
& J. Chen, Fractional cointegration in bitcoin spot and futures 
markets, 41 J. Futures Mkts. 1478 (2021) (finding that CME bitcoin 
futures dominate price discovery). See also C. Alexander & D. Heck, 
Price discovery in Bitcoin: The impact of unregulated markets, 50 J. 
Financial Stability 100776 (2020) (finding that, in a multi-
dimensional setting, including the main price leaders within 
futures, perpetuals, and spot markets, CME bitcoin futures have a 
very minor effect on price discovery; and that faster speed of 
adjustment and information absorption occurs on the unregulated spot 
and derivatives platforms than on CME bitcoin futures) (``Alexander 
& Heck'').
    \141\ See USBT Order, 85 FR at 12613 n.244.
    \142\ See, e.g., VanEck Order, 86 FR at 64547; WisdomTree Order, 
86 FR at 69331; Kryptoin Order, 86 FR at 74176; Wise Origin Order, 
87 FR at 5535.
    \143\ The paper finds that the CME bitcoin futures market 
dominates the spot markets in terms of Granger causality, but that 
the causal relationship is bi-directional, and a Granger causality 
episode from March 2019 to June/July 2019 runs from bitcoin spot 
prices to CME bitcoin futures prices. The paper concludes: ``[T]he 
Granger causality episodes are not constant throughout the whole 
sample period. Via our causality detection methods, market 
participants can identify when markets are being led by futures 
prices and when they might not be.'' See Hu, Hou and Oxley, supra 
note 129.
    \144\ See USBT Order, 85 FR at 12613 n.244.
---------------------------------------------------------------------------

    In addition, the Blockchain Lab Paper \145\ does not appear to have 
included CME bitcoin futures in its analysis. Thus, even setting aside 
methodological and data issues in this unpublished paper and accepting 
its results at face value, the Blockchain Lab Paper's results provide 
no evidence that the CME leads price discovery, or that it is 
reasonably likely that a would-be manipulator would have to trade on 
the CME to successfully manipulate the proposed ETP. According to the 
paper's results, the ``derivatives market'' quoted by BZX as 
``lead[ing] price discovery of bitcoin more frequently'' were 
unregulated derivatives markets such as OkEX and bitMEX.\146\ The 
Exchange, however, proposes that the CME is the market of significant 
size, not OkEX, bitMEX, or any other unregulated derivatives market.
---------------------------------------------------------------------------

    \145\ See supra note 131.
    \146\ See also supra note 140 (citing Alexander & Heck's finding 
that, in a multi-dimensional price discovery analysis, including the 
main price leaders within futures, perpetuals, and spot markets, CME 
bitcoin futures have a very minor effect on price discovery; and 
that faster speed of adjustment and information absorption occurs on 
the unregulated spot and derivatives platforms than on CME bitcoin 
futures).
---------------------------------------------------------------------------

    The failure to distinguish between the (regulated) CME bitcoin 
futures market and unregulated bitcoin derivatives markets is also 
prevalent in the data that BZX cites. None of the ``bitcoin futures'' 
market data that BZX provides in support of the first prong of the 
``market of significant size'' determination is specific to the CME 
bitcoin futures market. Nor does BZX provide information establishing 
what portion of the total ``bitcoin futures'' market the CME 
comprises.\147\
---------------------------------------------------------------------------

    \147\ In addition, BZX fails to address the relationship (if 
any) between prices on other bitcoin futures markets and the CME 
bitcoin futures market, the bitcoin spot market, and/or the bitcoin 
platforms underlying the Index, or where price formation occurs when 
the entirety of bitcoin futures markets, not just the CME, is 
considered. See VanEck Order, 86 FR at 64547-48; WisdomTree Order, 
86 FR at 69331; Kryptoin Order, 86 FR at 74176; Wise Origin Order, 
87 FR at 5535.
---------------------------------------------------------------------------

    Moreover, BZX does not provide results of its own analysis and does 
not present any other data supporting its conclusion.
    BZX's unsupported representations constitute an insufficient basis 
for approving this proposed rule change. The Commission thus concludes 
that the information that BZX provides is not a sufficient basis to 
support a determination that it is reasonably likely that a would-be 
manipulator of the proposed ETP would have to trade on the CME bitcoin 
futures market to successfully manipulate the proposed ETP. Therefore, 
the information in the record also does not establish that the CME 
bitcoin futures market is a ``market of significant size'' with respect 
to the proposed ETP.
(ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be 
the Predominant Influence on Prices in the CME Bitcoin Futures Market
    The second prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' is the 
determination that it is unlikely that trading in the proposed ETP 
would

[[Page 20025]]

be the predominant influence on prices in the CME bitcoin futures 
market.\148\
---------------------------------------------------------------------------

    \148\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

    BZX asserts that trading in the Shares would not be the predominant 
force on prices in the CME bitcoin futures market (or spot market) 
because of the significant volume in the CME bitcoin futures 
market,\149\ the size of bitcoin's market capitalization,\150\ and the 
significant liquidity available in the spot market.\151\ BZX also 
asserts that, because the Shares are created in-kind, they are ``fully 
collateralized,'' and the Shares should remain close to NAV given that 
investors and market makers would arbitrage any significant price 
deviations between the price of the Shares and prices in the spot 
market.\152\ BZX further provides that, according to February 2021 
data, the cost to buy or sell $5 million worth of bitcoin averages 
roughly 10 basis points with a market impact of 30 basis points.\153\ 
For a $10 million market order, the cost to buy or sell is roughly 20 
basis points with a market impact of 50 basis points. Stated another 
way, BZX provides that a market participant could enter a market buy or 
sell order for $10 million of bitcoin and only move the market 0.5 
percent.\154\ BZX further asserts that more strategic purchases or 
sales (such as using limit orders and executing through over-the-
counter (``OTC'') bitcoin trade desks) would likely have less obvious 
impact on the market, which is consistent with MicroStrategy, Tesla, 
and Square being able to collectively purchase billions of dollars in 
bitcoin.\155\ Thus, BZX concludes that the combination of CME bitcoin 
futures leading price discovery, the overall size of the bitcoin 
market, and the ability for market participants (including authorized 
participants creating and redeeming in-kind with the Trust) to buy or 
sell large amounts of bitcoin without significant market impact, will 
help prevent the Shares from becoming the predominant force on pricing 
in either the bitcoin spot or the CME bitcoin futures market.\156\
---------------------------------------------------------------------------

    \149\ BZX states that the CME began to offer trading in bitcoin 
futures in December 2017. See Amendment No. 1, 86 FR at 73366. 
According to BZX, nearly every measurable metric related to CME 
bitcoin futures contracts, which trade and settle like other cash-
settled commodity futures contracts, has ``trended consistently up 
since launch and/or accelerated upward in the past year.'' See id. 
For example, according to BZX, from October 25, 2021, through 
November 19, 2021, there was approximately $2.9 billion in notional 
trading volume in CME bitcoin futures on a daily basis, and notional 
volume was never below $1.2 billion per day. See id. at 73363. 
Additionally, BZX states that open interest was over $4 billion for 
the entirety of the period, and at one point reached $5.5 billion. 
See id. According to the Sponsor, the increase in the volume on the 
CME is reflected in a higher proportion of the bitcoin market share, 
based on the proportion of the total monthly volume of bitcoin 
futures traded on the CME in relation to the total spot bitcoin 
volume on digital asset platforms. See id. at 73367. BZX states that 
that proportion has increased from less than 5% at inception, to 
more than 20% over three and a half years. See id. at 73367-68.
    \150\ According to BZX, as of December 1, 2021, the total market 
cap of all bitcoin in circulation was approximately $1.08 trillion. 
See id. at 73363 n.30.
    \151\ See id. at 73372.
    \152\ See id.
    \153\ See id. According to BZX, these statistics are based on 
samples of bitcoin liquidity in U.S. dollars (excluding stablecoins 
or Euro liquidity) based on executable quotes on Coinbase Pro, 
Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin 
during February 2021. See id. at 73372 n.94.
    \154\ See id. at 73372.
    \155\ See id.
    \156\ See id.
---------------------------------------------------------------------------

    The Commission does not agree. The record does not demonstrate that 
it is unlikely that trading in the proposed ETP would be the 
predominant influence on prices in the CME bitcoin futures market. As 
the Commission has already addressed and rejected one of the bases of 
BZX's assertion--that CME bitcoin futures leads price discovery \157\--
it will only address below the other two bases--the overall size of, 
and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

    \157\ See supra notes 138-146 and accompanying text.
---------------------------------------------------------------------------

    BZX's assertions about the potential effect of trading in the 
Shares on the CME bitcoin futures market and bitcoin spot market are 
general and conclusory, repeating the aforementioned trade volume of 
the CME bitcoin futures market and the size and liquidity of the 
bitcoin spot market, as well as the market impact of a large 
transaction, without any analysis or evidence to support these 
assertions. For example, there is no limit on the amount of mined 
bitcoin that the Trust may hold. Yet BZX does not provide any 
information on the expected growth in the size of the Trust and the 
resultant increase in the amount of bitcoin held by the Trust over 
time, or on the overall expected number, size, and frequency of 
creations and redemptions--or how any of the foregoing could (if at 
all) influence prices in the CME bitcoin futures market. Thus, the 
Commission cannot conclude, based on BZX's statements alone and absent 
any evidence or analysis in support of BZX's assertions, that it is 
unlikely that trading in the ETP would be the predominant influence on 
prices in the CME bitcoin futures market.\158\
---------------------------------------------------------------------------

    \158\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86 
FR at 69332-33; Kryptoin Order, 86 FR at 74177; Skybridge Order, 87 
FR at 3879; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    The Commission also is not persuaded by BZX's assertions about the 
minimal effect a large market order to buy or sell bitcoin would have 
on the bitcoin market.\159\ While BZX concludes by way of a $10 million 
market order example that buying or selling large amounts of bitcoin 
would have insignificant market impact, the conclusion does not analyze 
the extent of any impact on the CME bitcoin futures market. Even 
assuming that BZX is suggesting that a single $10 million order in 
bitcoin would have immaterial impact on the prices in the CME bitcoin 
futures market, this prong of the ``market of significant size'' 
determination concerns the influence on prices from trading in the 
proposed ETP, which is broader than just trading by the proposed ETP. 
While authorized participants of the Trust might only transact in the 
bitcoin spot market as part of their creation or redemption of Shares, 
the Shares themselves would be traded in the secondary market on BZX 
and other national securities exchanges. The record does not discuss 
the expected number or trading volume of the Shares, or establish the 
potential effect of the Shares' trade prices on CME bitcoin futures 
prices.\160\ For example, BZX does not provide any data or analysis 
about the potential effect the quotations or trade prices of the Shares 
might have on market-maker quotations in CME bitcoin futures contracts 
and whether those effects would constitute a predominant influence on 
the prices of those futures contracts.\161\
---------------------------------------------------------------------------

    \159\ See Amendment No. 1, 86 FR at 73372 (``For a $10 million 
market order, the cost to buy or sell is roughly 20 basis points 
with a market impact of 50 basis points. Stated another way, a 
market participant could enter a market buy or sell order for $10 
million of bitcoin and only move the market 0.5%.'').
    \160\ In addition, with respect to the Exchange's assertions 
that, because the Shares are created in-kind, they are ``fully 
collateralized'' and that the Shares should remain close to NAV 
because investors and market makers would arbitrage any significant 
price deviations between the price of the Shares and prices in the 
spot market (see id. at 73372), the Exchange's statement relates 
only to the potential connection between the Shares' trade prices 
and NAV. It does not speak to any potential connection between the 
Shares' trade prices and CME bitcoin futures prices, which is the 
interrelationship relevant to the second prong of the ``market of 
significant size'' determination.
    \161\ See VanEck Order, 86 FR at 64549; WisdomTree Order, 86 FR 
at 69333; Kryptoin Order, 86 FR at 74177; Skybridge Order, 87 FR at 
3879; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    Thus, because BZX has not provided sufficient information to 
establish both prongs of the ``market of significant size'' 
determination, the Commission cannot conclude that the CME bitcoin 
futures market is a ``market of significant size'' such that BZX would

[[Page 20026]]

be able to rely on a surveillance-sharing agreement with the CME to 
provide sufficient protection against fraudulent and manipulative acts 
and practices.
    The requirements of Section 6(b)(5) of the Exchange Act apply to 
the rules of national securities exchanges. Accordingly, the relevant 
obligation for a comprehensive surveillance-sharing agreement with a 
regulated market of significant size, or other means to prevent 
fraudulent and manipulative acts and practices that are sufficient to 
justify dispensing with the requisite surveillance-sharing agreement, 
resides with the listing exchange. Because there is insufficient 
evidence in the record demonstrating that BZX has satisfied this 
obligation, the Commission cannot approve the proposed ETP for listing 
and trading on BZX.

C. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is 
Designed To Protect Investors and the Public Interest

    BZX contends that, if approved, the proposed ETP would protect 
investors and the public interest. However, the Commission must 
consider these potential benefits in the broader context of whether the 
proposal meets each of the applicable requirements of the Exchange 
Act.\162\ Because BZX has not demonstrated that its proposed rule 
change is designed to prevent fraudulent and manipulative acts and 
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

    \162\ See Winklevoss Order, 83 FR at 37602. See also 
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at 
43941; USBT Order, 85 FR at 12615; WisdomTree Order, 86 FR at 69333; 
Valkyrie Order, 86 FR at 74163; Kryptoin Order, 86 FR at 74178; 
Skybridge Order, 87 FR at 3880; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    BZX asserts that access for U.S. retail investors to gain exposure 
to bitcoin via a transparent and U.S. regulated, U.S. exchange-traded 
vehicle remains limited. Specifically, BZX asserts that current options 
for U.S. retail investors include paying a potentially high premium 
(and high management fees) to buy OTC bitcoin funds, to the advantage 
of more sophisticated investors that are able to create shares at NAV 
directly with the issuing trust,\163\ facing the technical risk, 
complexity, and generally high fees associated with buying spot 
bitcoin, purchasing shares of operating companies that they believe 
will provide proxy exposure to bitcoin with limited disclosure about 
the associated risks, or through the purchase of bitcoin futures 
exchange-traded funds.\164\ BZX explains that over the past 1.5 years, 
U.S. investor exposure to bitcoin through OTC bitcoin funds has grown 
into the tens of billions of dollars and more than a billion dollars of 
exposure through bitcoin futures exchange-traded funds.\165\ With that 
growth, so too has grown the quantifiable investor protection issues to 
U.S. investors through roll costs for bitcoin futures exchange-traded 
funds and premium/discount volatility and management fees for OTC 
bitcoin funds. BZX asserts that the concerns related to the prevention 
of fraudulent and manipulative acts and practices have been 
sufficiently addressed to be consistent with the Exchange Act and, as 
such, approving the proposal (and comparable proposals) would provide 
U.S. investors access to bitcoin in a regulated and transparent 
exchange-traded vehicle that would act to limit risk to U.S. investors 
by: (i) Reducing premium and discount volatility; (ii) reducing 
management fees through meaningful competition; (iii) reducing risks 
and costs associated with investing in bitcoin futures exchange-traded 
funds and operating companies that are imperfect proxies for bitcoin 
exposure; and (iv) providing an alternative for investors to self-
custodying spot bitcoin.\166\
---------------------------------------------------------------------------

    \163\ BZX states that ``[t]he largest OTC Bitcoin Fund has grown 
its [assets under management or ``AUM''] from approximately $2.6 
billion on February 26, 2020, the date on which the Commission 
issued the disapproval order for the United States Bitcoin and 
Treasury Investment Trust, to $37.1 billion on December 1, 2021 . . 
. .''. See Amendment No. 1, 86 FR at 73364 n.48. According to BZX, 
while the price of one bitcoin has increased approximately 690% in 
the intervening period, the total AUM has increased by approximately 
1,540%, indicating that the increase in AUM was created beyond just 
price appreciation in bitcoin and that investors are buying shares 
of a fund that experiences significant volatility in its premium and 
discount outside of the fluctuations in price of the underlying 
asset. See id.
    \164\ See id. at 73364.
    \165\ See id. at 73378.
    \166\ See id.
---------------------------------------------------------------------------

    BZX states that a number of operating companies engaged in 
unrelated businesses have announced investments as large as $5.3 
billion in bitcoin.\167\ BZX argues that, without access to bitcoin 
ETPs, retail investors seeking investment exposure to bitcoin may 
purchase shares in these companies in order to gain the exposure to 
bitcoin.\168\ BZX contends that such operating companies, however, are 
imperfect bitcoin proxies and provide investors with partial bitcoin 
exposure paired with additional risks associated with whichever 
operating company they decide to purchase. BZX concludes that investors 
seeking bitcoin exposure through publicly traded companies are gaining 
only partial exposure to bitcoin and are not fully benefitting from the 
risk disclosures and associated investor protections that come from the 
securities registration process.\169\
---------------------------------------------------------------------------

    \167\ See id. at 73364 n.49.
    \168\ See id.
    \169\ See id.
---------------------------------------------------------------------------

    BZX also states that investors in many other countries, including 
Canada and Brazil, are able to use more traditional exchange-listed and 
traded products (including exchange-traded funds holding spot bitcoin) 
to gain exposure to bitcoin, disadvantaging U.S. investors and leaving 
them with more risky means of getting bitcoin exposure.\170\
---------------------------------------------------------------------------

    \170\ See id. at 73364-65. BZX represents that the Purpose 
Bitcoin ETF, a retail bitcoin-based ETP launched in Canada, 
reportedly reached $1.2 billion in AUM as of October 15, 2021, 
demonstrating the demand for a North American market listed bitcoin 
ETP. BZX contends that the Purpose Bitcoin ETF also offers a class 
of units that is U.S. dollar denominated, which could appeal to U.S. 
investors. See id. at 73364 n.50. In addition, BZX states that 
investors in other countries, specifically Canada, generally pay 
lower fees than U.S. retail investors that invest in OTC bitcoin 
funds due to the fee pressure that results from increased 
competition among available bitcoin investment options. BZX also 
argues that, without an approved bitcoin ETP in the U.S. as a viable 
alternative, U.S. investors could seek to purchase shares of non-
U.S. bitcoin vehicles in order to gain access to bitcoin exposure. 
BZX believes that, given the separate regulatory regime and the 
potential difficulties associated with any international litigation, 
such an arrangement would create more risk exposure for U.S. 
investors than they would otherwise have with a U.S. exchange-listed 
ETP. See id. at 73365. BZX further contends that the lack of a U.S.-
listed spot bitcoin ETP is not preventing U.S. funds from gaining 
exposure to bitcoin--several U.S. exchange-traded funds are using 
Canadian bitcoin ETPs to gain exposure to spot bitcoin--and that 
approving this proposal ``would provide U.S. exchange-traded funds 
with a U.S.-listed and regulated product to provide such access 
rather than relying on either flawed products or products listed and 
primarily regulated in other countries.'' See id. BZX also states 
that regulators in other countries have either approved or otherwise 
allowed the listing and trading of bitcoin-based ETPs. See id. at 
73365 n.51.
---------------------------------------------------------------------------

    In essence, BZX asserts that the risky nature of direct investment 
in the underlying bitcoin and the unregulated markets on which bitcoin 
and OTC bitcoin funds trade compel approval of the proposed rule 
change. The Commission disagrees. Pursuant to Section 19(b)(2) of the 
Exchange Act, the Commission must approve a proposed rule change filed 
by a national securities exchange if it finds that the proposed rule 
change is consistent with the applicable requirements of the Exchange 
Act--including the requirement under Section 6(b)(5) that the rules of 
a national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices--and it must disapprove the filing if 
it does not make such a finding.\171\ Thus, even if a proposed rule 
change purports to protect investors

[[Page 20027]]

from a particular type of investment risk--such as experiencing a 
potentially high premium/discount by investing in OTC bitcoin funds--
the proposed rule change may still fail to meet the requirements under 
the Exchange Act.\172\
---------------------------------------------------------------------------

    \171\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \172\ See SolidX Order, 82 FR at 16259; VanEck Order, 86 FR at 
54550-51; WisdomTree Order, 86 FR at 69344; Kryptoin Order, 86 FR at 
74179; Valkyrie Order, 86 FR at 74163; Skybridge Order, 87 FR at 
3881; Wise Origin Order, 87 FR at 5538.
---------------------------------------------------------------------------

    Here, even if it were true that, compared to trading in unregulated 
bitcoin spot markets, trading a bitcoin-based ETP on a national 
securities exchange provides some additional protection to investors, 
the Commission must consider this potential benefit in the broader 
context of whether the proposal meets each of the applicable 
requirements of the Exchange Act.\173\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing 
exchange have a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to bitcoin, or demonstrate 
that other means to prevent fraudulent and manipulative acts and 
practices are sufficient to justify dispensing with the requisite 
surveillance-sharing agreement. The listing exchange has not met that 
requirement here. Therefore, the Commission is unable to find that the 
proposed rule change is consistent with the statutory standard.
---------------------------------------------------------------------------

    \173\ See supra note 162.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Exchange Act, the Commission 
must disapprove a proposed rule change filed by a national securities 
exchange if it does not find that the proposed rule change is 
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices.\174\
---------------------------------------------------------------------------

    \174\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, BZX has not met its burden of 
demonstrating that the proposal is consistent with Exchange Act Section 
6(b)(5),\175\ and, accordingly, the Commission must disapprove the 
proposal.\176\
---------------------------------------------------------------------------

    \175\ 15 U.S.C. 78f(b)(5).
    \176\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

D. Other Arguments and Comments

    The Exchange makes additional arguments in its Amendment No. 1. The 
Exchange argues that, based on a review of the Commission's past 
approvals and disapprovals of ETPs, the applicable standard does not 
require the underlying commodity market to be regulated, but rather 
requires that the listing exchange has in place a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to the underlying commodity.\177\ The Exchange states 
that, therefore, the CME bitcoin futures market is the proper market 
for the Commission to consider in determining whether the proposal is 
consistent with the Exchange Act.
---------------------------------------------------------------------------

    \177\ See Amendment No. 1, 86 FR at 73361-62.
---------------------------------------------------------------------------

    The Commission does not disagree. As the Commission has clearly and 
consistently stated, an exchange that lists bitcoin-based ETPs can meet 
its obligation under Exchange Act Section 6(b)(5) that its rules be 
designed to prevent fraudulent and manipulative acts and practices by 
demonstrating that the exchange has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to the underlying or reference bitcoin assets.\178\ As discussed in 
detail in Section III.B.2, the Commission has considered the Exchange's 
arguments with respect to the CME bitcoin futures market, and the 
Commission concludes that the Exchange has failed to demonstrate that 
the CME bitcoin futures market is such a ``market of significant 
size.''
---------------------------------------------------------------------------

    \178\ See supra notes 12 and 13 and accompanying text. See also 
Wise Origin Order, 87 FR at 5539.
---------------------------------------------------------------------------

    The Exchange also argues that it would be inconsistent for the 
Commission to allow the listing and trading of exchange-traded funds 
registered under the Investment Company Act of 1940 (``1940 Act'') that 
provide exposure to bitcoin through CME bitcoin futures (``Bitcoin 
Futures ETFs'') while disapproving this proposal.\179\ The Exchange 
asserts that, if the Commission does not deem the CME bitcoin futures 
market a regulated market of significant size, permitting Bitcoin 
Futures ETFs to list and trade would be inconsistent with the 
requirement under the Exchange Act that the listing and trading of the 
Bitcoin Futures ETFs be designed to prevent fraudulent and manipulative 
acts and practices as articulated in the Winklevoss Order and other 
disapproval orders.\180\ The Exchange states that, while one may argue 
that the 1940 Act provides certain investor protections, those 
protections relate primarily to the composition of board of directors, 
limitations on leverage, and transactions with affiliates, among 
others, and thus do not confer additional protections to investors in 
relation to the underlying CME bitcoin futures market to justify 
different regulatory outcomes for Bitcoin Futures ETFs and non-1940 
Act-regulated ETPs that hold spot bitcoin.\181\ The Exchange also adds 
that the largest Bitcoin Futures ETF has contracts representing about 
40 percent of open interest in CME bitcoin futures, which, according to 
the Exchange, ``seems to directly contradict'' the ``predominant 
influence'' prong in establishing whether the CME bitcoin futures 
market constitutes a market of significant size.\182\ The Exchange 
further asserts that any concerns related to preventing fraud and 
manipulation related to spot bitcoin ETPs would ``apply equally'' to 
the spot markets underlying the futures contracts held by a Bitcoin 
Futures ETF.\183\ The Exchange concludes that the only ``consistent 
outcome'' would be approving spot bitcoin ETPs on the basis that the 
CME bitcoin futures market is a regulated market of significant 
size.\184\
---------------------------------------------------------------------------

    \179\ See Amendment No. 1, 86 FR at 73365.
    \180\ See id.
    \181\ See id. The Exchange further asserts that, to the extent 
the Commission may view differential treatment of Bitcoin Futures 
ETFs and non-1940 Act-registered ETPs that hold spot bitcoin as 
warranted based on concerns about the custody of bitcoin, that 
concern is mitigated to a significant degree by the custodial 
arrangements that the Trust has with the Custodian, which the 
Exchange believes are the same types of policies, procedures, and 
safeguards in handling spot bitcoin that the Commission has stated 
that broker-dealers should implement with respect to digital asset 
securities. The Exchange also asserts that the Custodian's policies, 
procedures, and controls are consistent with industry best practices 
and, as a trust company chartered by the NYSDFS, the Custodian is 
subject to extensive regulation and has among the longest track 
records in the industry of providing custodial services for digital 
asset private keys. See id. at 73366. But see also supra note 107 
(regarding the limitations of NYSDFS regulation). In addition, even 
if the Exchange's assertions regarding custodial arrangements are 
true, as noted above, see supra note 162, the Commission must 
consider any such potential investor protections in the broader 
context of whether the proposal meets each of the applicable 
requirements of the Exchange Act. The Exchange has not met such 
requirements.
    \182\ See Amendment No. 1, 86 FR at 73366.
    \183\ See id.
    \184\ See id. The Exchange also makes additional investor 
protection arguments related to Bitcoin Futures ETFs, namely, that 
Bitcoin Futures ETFs represent a sub-optimal structure for long-term 
investors. The Exchange states that the cost of rolling CME bitcoin 
futures contracts will cause the Bitcoin Futures ETFs to lag the 
performance of bitcoin itself and, at over a billion dollars in 
assets under management, would cost U.S. investors hundreds of 
millions of dollars on an annual basis. The Exchange states that 
such rolling costs would not be required for spot bitcoin ETPs. The 
Exchange further states that Bitcoin Futures ETFs have grown so 
rapidly that they face potentially running into CME position limits, 
which would force a Bitcoin Futures ETF to invest in non-futures 
assets for bitcoin exposure and cause potential investor confusion 
and lack of certainty about what such Bitcoin Futures ETFs are 
actually holding and change the risk profile associated with such a 
Bitcoin Futures ETF. See id. at 73365. However, as noted above, see 
supra note 162, even if these assertions are true, the Commission 
must consider any potential investor protections of the proposal in 
the broader context of whether the proposal meets each of the 
applicable requirements of the Exchange Act. The Exchange has not 
met such requirements.

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

[[Page 20028]]

    The Commission disagrees with the premise of these arguments. The 
proposed rule change, as modified by Amendment No. 1, does not relate 
to a product regulated under the 1940 Act, nor does it relate to the 
same underlying holdings as the Bitcoin Futures ETFs. The Commission 
considers the proposed rule change on its own merits and under the 
standards applicable to it. Namely, with respect to this proposed rule 
change, the Commission must apply the standards as provided by Section 
6(b)(5) of the Exchange Act, which it has applied in connection with 
its orders considering previous proposals to list bitcoin-based 
commodity trusts and bitcoin-based trust issued receipts.\185\
---------------------------------------------------------------------------

    \185\ See supra note 12. See also VanEck Order, 86 FR at 64552; 
Skybridge Order, 87 FR at 3881 n.177.
---------------------------------------------------------------------------

    Comment letters also address the general nature and uses of bitcoin 
\186\ and the state of regulation of bitcoin markets.\187\ Ultimately, 
however, additional discussion of these topics is unnecessary, as they 
do not bear on the basis for the Commission's decision to disapprove 
the proposal.
---------------------------------------------------------------------------

    \186\ See letter from Sam Ahn, dated August 25, 2021 (``Ahn 
Letter'').
    \187\ See Ahn Letter.
---------------------------------------------------------------------------

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 Section 6(b)(5) of the Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-CboeBZX-2021-051, as 
modified by Amendment No. 1, be, and hereby is, disapproved.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-07193 Filed 4-5-22; 8:45 am]
BILLING CODE 8011-01-P


