[Federal Register Volume 87, Number 97 (Thursday, May 19, 2022)]
[Notices]
[Pages 30546-30548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10733]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94907; File No. SR-CboeBZX-2022-006]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To List and Trade Shares of the WisdomTree Bitcoin 
Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares

May 13, 2022.
    On January 25, 2022, Cboe BZX Exchange, Inc. (``BZX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
WisdomTree Bitcoin Trust (``Trust'') under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares. The proposed rule change was published 
for comment in the Federal Register on February 14, 2022.\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. 94184 (Feb. 8, 
2022), 87 FR 8318 (``Notice''). The Commission has received no 
comments on the proposed rule change.
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    On March 18, 2022, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ to determine whether to approve or disapprove the 
proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 94476, 87 FR 16800 
(Mar. 24, 2022). The Commission designated May 15, 2022, as the date 
by which it should approve, disapprove, or institute proceedings to 
determine whether to disapprove the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in more detail in the Notice,\7\ 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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    \7\ See Notice, supra note 3.
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    The investment objective of the Trust would be to gain exposure to 
the price of bitcoin, less expenses and liabilities of the Trust's 
operation.\8\ The Trust would hold bitcoin, and it would calculate the 
Trust's net asset value (``NAV'') daily based on the value of bitcoin 
as reflected by the CF Bitcoin US Settlement Price (``Reference 
Rate''). The Reference Rate was created, and is administered, by CF 
Benchmarks Ltd., an independent entity. The Reference Rate aggregates 
the trade flow of several bitcoin platforms. The current platform 
composition of the Reference Rate is Bitstamp, Coinbase, Gemini, itBit, 
and Kraken. In calculating the Reference Rate, the methodology creates 
a joint list of the trade prices and sizes from the constituent 
platforms between 3:00 p.m. E.T. and 4:00 p.m. E.T. The methodology 
then divides this list into 12 equally-sized time intervals of 5 
minutes and calculates the volume-weighted median trade price for each 
of those time intervals. The Reference Rate is the arithmetic mean of 
these 12 volume-weighted median trade prices.\9\
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    \8\ See id. at 8329. WisdomTree Digital Commodity Services, LLC 
(``Sponsor'') is the sponsor of the Trust, and Delaware Trust 
Company is the trustee. U.S. Bank, N.A. would serve as the custodian 
of the Trust (``Custodian''). U.S. Bancorp Fund Services, LLC dba 
U.S. Bank Global Fund Services would be the administrator and 
transfer agent (``Administrator'') of the Trust. Foreside Fund 
Services LLC would be the marketing agent in connection with the 
creation and redemption of Shares. See id. at 8318-19, 8329.
    \9\ See id. at 8329-30.
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    Each Share would represent a fractional undivided beneficial 
interest in and ownership of the Trust. The Trust's assets would 
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 would unexpectedly 
hold cash on a temporary basis.\10\
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    \10\ See id. at 8329.
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    The Administrator would determine the NAV and NAV per Share of the 
Trust, on each day that the Exchange is open for regular trading, after 
4:00 p.m. E.T. (often by 5:30 p.m. E.T. and almost always by 8:00 p.m. 
E.T.). The NAV of the Trust is the aggregate value of the Trust's 
assets less total liabilities of the Trust, each determined on the 
basis of generally accepted accounting principles. In determining the 
Trust's

[[Page 30547]]

NAV, the Administrator values the bitcoin held by the Trust based on 
the price set by the Reference Rate as of 4:00 p.m. E.T.\11\
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    \11\ See id. at 8330.
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    The Trust would 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. to 4:00 p.m. E.T.). The IIV would 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.\12\
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    \12\ See id. at 8334.
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    When the Trust sells or redeems its Shares, it would do so in ``in-
kind'' transactions in blocks of 50,000 Shares at the Trust's NAV. 
Authorized participants would deliver, or facilitate the delivery of, 
bitcoin to the Trust's account with the Custodian in exchange for 
Shares when they purchase Shares, and the Trust, through the Custodian, 
would deliver bitcoin to such authorized participants when they redeem 
Shares with the Trust.\13\
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    \13\ See id. at 8329.
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    Although the Trust would not be an investment company registered 
under the Investment Company Act of 1940, as amended (``1940 Act''), 
the Exchange represents that:
     The Trust would qualify as an investment company under 
Accounting Standards Update 2013-08 and, as such, the Sponsor would 
ensure that the Trust's financial statements would be audited at least 
annually by an independent registered public accounting firm and, as 
part of such audit, the auditor would be expected to perform procedures 
similar to those used for exchange-traded funds registered under the 
1940 Act (``ETFs'');
     The Sponsor would facilitate the Trust's compliance with 
the financial record keeping and reporting requirements under the 
Sarbanes-Oxley Act of 2002;
     The Trust's Custodian would qualify as a ``custodian'' 
under the 1940 Act, and the Custodian would agree to exercise 
reasonable care, prudence, and diligence such as a person having 
responsibility for the safekeeping of property of the Trust would 
exercise;
     The Trust would be subject to the transparency 
requirements of Rule 6c-11 under the 1940 Act;
     The Sponsor would adopt procedures to ensure there are no 
transactions with affiliated persons that would be prohibited by 
Section 17 of 1940 Act and the applicable rules and regulations 
thereunder;
     The Trust would maintain a fidelity bond for the benefit 
of the Trust in the maximum amount required by Rule 17g-1 of the 1940 
Act; and
     The Sponsor or applicable service provider of the Trust 
would maintain the books and records of the Trust in satisfaction of 
the requirements of Section 31 of the 1940 Act.\14\
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    \14\ See id. at 8323-24.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2022-006 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \15\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change.
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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\16\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \17\
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    \16\ Id.
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\18\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
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    \18\ See Notice, supra note 3.
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    1. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
bitcoin markets, the bitcoin markets' susceptibility to manipulation, 
and thus the suitability of bitcoin as an underlying asset for an 
exchange-traded product?
    2. What are commenters' views of the Exchange's assertion that 
regulatory and financial landscapes relating to bitcoin and other 
digital assets have changed significantly since 2016? \19\ Are the 
changes that the Exchange identifies sufficient to support the 
determination that the proposed listing and trading of the Shares are 
consistent with the Act?
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    \19\ See id. at 8320-22.
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    3. Based on data provided and the academic research cited by the 
Exchange,\20\ do commenters agree with the Exchange that CME now 
represents a regulated market of significant size related to bitcoin? 
\21\ What are commenters' views on whether there is a reasonable 
likelihood that a person attempting to manipulate the Shares would also 
have to trade on CME to manipulate the Shares? Do commenters agree with 
the Exchange's assertion that the combination of (a) CME Bitcoin 
Futures acting as the predominant influence on price discovery; (b) the 
overall size of the bitcoin market; and (c) the ability for market 
participants to buy or sell large amounts of bitcoin without 
significant market impact, helps to prevent the Shares from becoming 
the predominant force on pricing in either the bitcoin spot or CME 
Bitcoin Futures markets? \22\
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    \20\ See id. at 8325-27, 8327 n.62.
    \21\ See id. at 8320.
    \22\ See id. at 8328.
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    4. The Exchange states that bitcoin is resistant to price 
manipulation and that other means to prevent fraudulent and 
manipulative acts and practices exist to justify dispensing with the 
requirement to enter into a surveillance sharing agreement with a 
regulated market of significant size related to bitcoin.\23\ In support 
of its assertion, the Exchange states that ``the significant liquidity 
in the spot market and the impact of market orders on the overall price 
of bitcoin mean that attempting to move the price of bitcoin is 
costly.'' \24\ The Exchange further states that potential manipulation 
concerns are mitigated by ``the significant increase in trading volume 
in Bitcoin Futures[,] the

[[Page 30548]]

growing body of evidence that the CME Bitcoin Futures market represents 
a regulated market of significant size . . . , the growth of liquidity 
at the inside in the spot market for bitcoin, and certain features of 
the Shares and the Reference Rate . . .'' \25\ What are commenters' 
views regarding the Exchange's argument?
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    \23\ See id. at 8327 n.65.
    \24\ See id. at 8328.
    \25\ See id. at 8327; see also id. at 8332.
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    5. The Exchange states that ETFs that provide exposure to bitcoin 
through CME Bitcoin Futures (``Bitcoin Futures ETFs'') are ``a sub-
optimal'' for U.S. investors looking for long-term exposure to bitcoin 
and that any proposal to list and trade a Spot Bitcoin ETP should be 
reviewed by the Commission with this in mind.\26\ The Exchange further 
states that it would be inconsistent to allow the listing and trading 
of Bitcoin Futures ETFs while simultaneously disapproving Spot Bitcoin 
ETPs on the basis that the CME Bitcoin Futures market is not a 
regulated market of significant size. According to the Exchange, this 
would be ``particularly true for the Trust, which will use the 
[Reference Rate] as its price source to calculate its daily [NAV], with 
inputs from the same bitcoin trading platforms . . . and materially the 
same methodology as is used to price CME Bitcoin Futures.'' \27\ Do 
commenters agree or disagree and why?
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    \26\ See id. at 8323.
    \27\ See id.
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    6. According to the Exchange, the Trust is structured ``to operate 
as if certain 1940 Act provisions apply, providing transparency and 
investor protections such that a distinction between Bitcoin Futures 
ETFs and Spot Bitcoin ETPs is unwarranted.'' \28\ Does the 
representation that the Trust will ``operate as if certain 1940 Act 
provisions apply'' help mitigate the concerns the Commission previously 
expressed, including concerns pertaining to fraud and manipulation?
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    \28\ See id. at 8325.
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\29\
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    \29\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 9, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 23, 
2022.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2022-006 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2022-006. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2022-006 and should be submitted 
by June 9, 2022. Rebuttal comments should be submitted by June 23, 
2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10733 Filed 5-18-22; 8:45 am]
BILLING CODE 8011-01-P


