[Federal Register Volume 88, Number 50 (Wednesday, March 15, 2023)]
[Notices]
[Pages 16055-16071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05298]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97102; File No. SR-CboeBZX-2022-035]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; 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

March 10, 2023.

I. Introduction

    On June 24, 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 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares (``Shares'') of the VanEck 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 July 13, 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. 95218 (July 7, 
2022), 87 FR 41755 (``Notice''). BZX previously filed, and the 
Commission disapproved, a substantially similar proposal to list and 
trade the Shares of the Trust. See Notice of Filing of 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. 91326 (Mar. 15, 2021), 86 FR 14987 (Mar. 
19, 2021) (``Previous VanEck Filing''); 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) (``Previous VanEck 
Order'').
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    On August 24, 2022, 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 October 4, 2022, 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\ 
and on December 16, 2022, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 95596, 87 FR 53038 
(Aug. 30, 2022).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 95978, 87 FR 61418 
(Oct. 11, 2022).
    \8\ See Securities Exchange Act Release No. 96517, 87 FR 78740 
(Dec. 22, 2022).
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    This order disapproves the proposed rule change. 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), which 
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.'' \9\
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    \9\ 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 analytical framework used in 
its orders considering previous proposals to list bitcoin \10\-based 
commodity trusts and bitcoin-based trust issued receipts to assess 
whether a listing exchange of an exchange-traded product (``ETP'') can 
meet its obligations under Exchange Act Section 6(b)(5).\11\
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    \10\ 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., 
Notice, 87 FR at 41757.
    \11\ 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 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 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 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''); 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, Securities Exchange Act Release No. 94571 (Mar. 31, 2022), 
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the One River Carbon Neutral Bitcoin Trust Under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities 
Exchange Act Release No. 94999 (May 27, 2022), 87 FR 33548 (June 2, 
2022) (SR-NYSEArca-2021-67) (``One River Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares), Securities Exchange Act Release No. 95179 (June 
29, 2022), 87 FR 40282 (July 6, 2022) (SR-NYSEArca-2021-89) 
(``Bitwise Order''); Order Disapproving a Proposed Rule Change, as 
Modified by Amendment No. 1, To List and Trade Shares of Grayscale 
Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares), Securities Exchange Act Release No. 95180 (June 29, 2022), 
87 FR 40299 (July 6, 2022) (SR-NYSEArca-2021-90) (``Grayscale 
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. 96011 (Oct. 11, 2022), 87 FR 62466 (Oct. 14, 2022) (SR-
CboeBZX-2022-006) (``WisdomTree Order II''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the ARK 21Shares 
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 96751 (Jan. 26, 2023), 
88 FR 6328 (Jan. 31, 2023) (SR-CboeBZX-2021-031) (``ARK 21Shares 
Order II''). In addition, orders were issued by delegated authority 
on the following matters: 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''); 
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''); Previous VanEck Order; Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 2, To List and Trade Shares of the Teucrium Bitcoin 
Futures Fund Under NYSE Arca Rule 8.200-E, Commentary .02 (Trust 
Issued Receipts), Securities Exchange Act Release No. 94620 (Apr. 6, 
2022), 87 FR 21676 (Apr. 12, 2022) (SR-NYSEArca-2021-53) (``Teucrium 
Order''); Order Granting Approval of a Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2, To List and Trade Shares of the 
Valkyrie XBTO Bitcoin Futures Fund Under Nasdaq Rule 5711(g), 
Securities Exchange Act Release No. 94853 (May 5, 2022), 87 FR 28848 
(May 11, 2022) (SR-NASDAQ-2021-066) (``Valkyrie XBTO Order'').

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[[Page 16056]]

    As the Commission has explained, an exchange that lists bitcoin-
based ETPs \12\ 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 related to the underlying or reference bitcoin assets.\13\
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    \12\ As used in this order, the term ``ETFs'' refers to open-end 
exchange-traded funds that register the offer and sale of their 
shares under the Securities Act of 1933 (``Securities Act'') and are 
regulated as investment companies under the Investment Company Act 
of 1940 (``1940 Act''). The term ``ETPs'' refers to exchange-traded 
products that register the offer and sale of their shares under the 
Securities Act but are not regulated under the 1940 Act, such as 
commodity trusts and trust issued receipts.
    \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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    In this context, 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.\14\ A surveillance-sharing 
agreement entered into with a ``significant market'' assists in 
detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to engage also in 
trading activity on that ``significant market.'' \15\
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    \14\ See Winklevoss Order, 83 FR at 37594. See also USBT Order, 
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322; ARK 21Shares 
Order, 87 FR at 20015.
    \15\ See USBT Order, 85 FR at 12597.
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    Although surveillance-sharing agreements are not the exclusive 
means by which a listing exchange of a commodity-trust ETP can meet its 
obligations under Exchange Act Section 6(b)(5), such agreements have 
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has 
historically recognized their importance. And where, as here, a listing 
exchange fails to establish that other means to prevent fraudulent and 
manipulative acts and practices will be sufficient, the listing 
exchange must enter into a surveillance-sharing agreement with a 
regulated market of significant size because such agreements detect and 
deter fraudulent and manipulative activity.\16\
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    \16\ 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, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98) 
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at 
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43924; USBT Order, 85 FR at 12596.
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    The Commission has long recognized that surveillance-sharing 
agreements ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur'' and thus ``enable the Commission 
to continue to effectively protect investors and promote the public 
interest.'' \17\ As the Commission has emphasized, it is essential for 
an exchange listing a derivative securities product to have the ability 
that surveillance-sharing agreements provide 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.\18\ 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.\19\
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    \17\ NDSP Adopting Release, 63 FR at 70954, 70959. See also id. 
at 70959 (``It is essential that the SRO [self-regulatory 
organization] have the ability to obtain the information necessary 
to detect and deter market manipulation, illegal trading and other 
abuses involving the new derivative securities product. 
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative 
securities product and its underlying securities in place between 
the SRO listing or trading a derivative product and the markets 
trading the securities underlying the new derivative securities 
product.'').
    \18\ See NDSP Adopting Release, 63 FR at 70959.
    \19\ See Winklevoss Order, 83 FR at 37592-93 (discussing 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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[[Page 16057]]

    The Commission has explained that the ability of a national 
securities exchange to enter into surveillance-sharing agreements 
``furthers the protection of investors and the public interest because 
it will enable the [e]xchange to conduct prompt investigations into 
possible trading violations and other regulatory improprieties.'' \20\ 
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of 
derivative security products, such as equity options, because a 
surveillance-sharing agreement ``permits the sharing of information'' 
that is ``necessary to detect'' manipulation and ``provide[s] an 
important deterrent to manipulation because [it] facilitate[s] the 
availability of information needed to fully investigate a potential 
manipulation if it were to occur.'' \21\ With respect to ETPs, when 
approving the listing and trading of one of the first commodity-linked 
ETPs--a commodity-linked exchange-traded note--on a national securities 
exchange, the Commission continued to emphasize the importance of 
surveillance-sharing agreements, stating that the listing exchange had 
entered into surveillance-sharing agreements with each of the futures 
markets on which pricing of the ETP would be based and stating that 
``[t]hese agreements should help to ensure the availability of 
information necessary to detect and deter potential manipulations and 
other trading abuses, thereby making [the commodity-linked notes] less 
readily susceptible to manipulation.'' \22\
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    \20\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990), 
55 FR 13344 (Apr. 10, 1990) (Notice of Filing and Order Granting 
Accelerated Approval to Proposed Rule Change Regarding Cooperative 
Agreements With Domestic and Foreign Self-Regulatory Organizations) 
(SR-NYSE-90-14).
    \21\ 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 Depositary Receipts (``ADR'')) (``ADR 
Option Order''). The Commission further stated that it ``generally 
believes that having a comprehensive surveillance sharing agreement 
in place, between the exchange where the ADR option trades and the 
exchange where the foreign security underlying the ADR primarily 
trades, will ensure the integrity of the marketplace. The Commission 
further believes that the ability to obtain relevant surveillance 
information, including, among other things, the identity of the 
ultimate purchasers and sellers of securities, is an essential and 
necessary component of a comprehensive surveillance sharing 
agreement.'' Id.
    \22\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995), 
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also 
Winklevoss Order, 83 FR at 37593 n.206.
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    Consistent with these statements, 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 and the ETP listing exchange has entered into 
surveillance-sharing agreements with, or held Intermarket Surveillance 
Group (``ISG'') membership in common with, that market.\23\ 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.\24\
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    \23\ See Winklevoss Order, 83 FR at 37594. See also SolidX 
Order, 82 FR at 16254-55 n.125 for a discussion of the 
representations the Commission has received from listing exchanges 
in connection with proposals to list commodity-trust ETPs about the 
existence of a significant, regulated market for trading futures on 
the underlying commodity and the listing exchanges' ability to 
obtain trading information with respect to such market. Furthermore, 
the Commission notes that each of those cases dealt with a futures 
market that had been trading for a long period of time before an 
exchange proposed a commodity-trust ETP based on the asset 
underlying those futures. For example, silver futures and gold 
futures began trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETPs based on spot silver and gold were approved for 
listing and trading in 2006 and 2004. See Securities Exchange Act 
Release No. 53521 (Mar. 20, 2006), 71 FR 14967 (Mar. 24, 2006) (SR-
Amex-2005-072) (order approving iShares Silver Trust); Securities 
Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 
2004) (SR-NYSE-2004-22) (order approving streetTRACKS Gold Shares). 
Platinum futures and palladium futures began trading in 1956 and 
1968, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on spot 
platinum and palladium were approved for listing and trading in 
2009. See Securities Exchange Act Release No. 61220 (Dec. 22, 2009), 
74 FR 68895 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (order approving 
ETFS Palladium Trust); Securities Exchange Act Release No. 61219 
(Dec. 22, 2009), 74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95) 
(order approving ETFS Platinum Trust). Copper futures began trading 
in 1988, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html#metals, and the first ETPs based on spot copper 
were approved for listing and trading in 2012. See Securities 
Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468 (Dec. 
20, 2012) (SR-NYSEArca-2012-28) (order approving JPM XF Physical 
Copper Trust).
    \24\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at 
5621. The Commission has also recognized that surveillance-sharing 
agreements provide a necessary deterrent to fraud and manipulation 
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 were 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 explained that surveillance-sharing agreements 
``ensure the availability of information necessary to detect and 
deter potential manipulations and other trading abuses'' 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).
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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.\25\ In response, the Commission has stated 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, the 
listing market would not necessarily need to enter into a surveillance-
sharing agreement with a regulated significant market.\26\ Such 
resistance to fraud and manipulation, however, must be novel and beyond 
those protections that exist in traditional commodity markets or 
securities markets for which surveillance-sharing agreements in the 
context of listing derivative securities products have been 
consistently present.\27\
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    \25\ See USBT Order, 85 FR at 12597.
    \26\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and [spot] bitcoin 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.
    \27\ See USBT Order, 85 FR at 12597, 12599.
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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.\28\ 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

[[Page 16058]]

regulated market of significant size,\29\ and there exist other means 
to prevent fraudulent and manipulative acts and practices that are 
sufficient to justify dispensing with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to spot 
bitcoin.\30\
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    \28\ See Notice, 87 FR at 41767.
    \29\ See id. at 41768-70.
    \30\ See id. at 41769.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change 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 spot bitcoin; in Section III.B.3 assertions that the Commission must 
approve the proposal because the Commission has approved the listing 
and trading of ETFs and ETPs that hold Chicago Mercantile Exchange 
(``CME'') bitcoin futures; 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 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin. 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 spot bitcoin, the underlying bitcoin assets that would 
be held by the Trust. As discussed further below, BZX repeats various 
assertions made in prior bitcoin-based ETP proposals, including in the 
Previous VanEck Filing, that the Commission has previously addressed 
and rejected, including in the Previous VanEck Order--and more 
importantly, BZX does not respond to many of the Commission's reasons 
for rejecting those assertions. 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 emphasizes that its disapproval of this proposed 
rule change does not rest on an evaluation of the relative investment 
quality of a product holding spot bitcoin versus a product holding CME 
bitcoin futures, or an assessment 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 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 described in more detail in the Notice,\31\ 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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    \31\ See supra note 3. According to the Exchange, the Sponsor 
(as defined herein), on behalf of the Trust, has filed Amendment No. 
2 to a registration statement on Form S-1 under the Securities Act 
dated June 22, 2022 (File No. 333-251808) (``Registration 
Statement''). See Notice, 87 FR at 41755 n.7.
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    The investment objective of the Trust would be for the Shares to 
reflect the performance of the MVIS[supreg] CryptoCompare Bitcoin 
Benchmark Rate (``Benchmark''), less the expenses of the Trust's 
operations.\32\ The Benchmark would be used to calculate the Trust's 
net asset value (``NAV''). The Benchmark is designed to be a price for 
bitcoin in USD, and there is no component other than bitcoin in the 
Benchmark. The current platform composition of the Benchmark is 
Bitstamp, Coinbase, Gemini, itBit, and Kraken. In calculating the 
Benchmark, the methodology captures trade prices and sizes from the 
platforms and examines twenty consecutive three-minute periods leading 
up to 4:00 p.m. E.T. It then calculates an equal-weighted average of 
the volume-weighted median price of these twenty three-minute periods, 
removing the highest and lowest contributed prices.\33\
---------------------------------------------------------------------------

    \32\ See Notice, 87 FR at 41765. VanEck Digital Assets, LLC 
(``Sponsor'') is the sponsor of the Trust, and Delaware Trust 
Company is the trustee. The State Street Bank and Trust Company will 
be the administrator (``Administrator'') and transfer agent. VanEck 
Securities Corporation will be the marketing agent in connection 
with the creation and redemption of Shares. VanEck Securities 
Corporation provides assistance in the marketing of the Shares. See 
id. at 41764. A third-party regulated custodian (``Custodian'') will 
be responsible for custody of the Trust's bitcoin. See id. at 41755.
    \33\ See id. at 41765.
---------------------------------------------------------------------------

    Each Share would represent a fractional undivided beneficial 
interest in the Trust's net assets. 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.\34\
---------------------------------------------------------------------------

    \34\ See id. at 41764.
---------------------------------------------------------------------------

    The Administrator would determine the NAV and NAV per Share of the 
Trust on each day that the Exchange is open for regular trading, as 
promptly as practical after 4:00 p.m. E.T. 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 would value the bitcoin held by the 
Trust based on the price set by the Benchmark as of 4:00 p.m. E.T.\35\
---------------------------------------------------------------------------

    \35\ See id. at 41766.
---------------------------------------------------------------------------

    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.\36\
---------------------------------------------------------------------------

    \36\ See id. at 41765.
---------------------------------------------------------------------------

    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.\37\
---------------------------------------------------------------------------

    \37\ See id. at 41764-65.
---------------------------------------------------------------------------

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\

[[Page 16059]]

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

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
(i) Assertions Regarding the Bitcoin Market
    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 the detection and deterrence of fraud and manipulation provided by 
a comprehensive surveillance-sharing agreement with a regulated market 
of significant size related to the underlying bitcoin assets, 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, 
however, must be novel and beyond those protections that exist in 
traditional commodities or securities markets.\44\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

(a) BZX's Assertions
    BZX asserts that bitcoin is resistant to price manipulation.\45\ 
According to BZX, the geographically diverse and continuous nature of 
bitcoin trading render it difficult and prohibitively costly to 
manipulate the price of bitcoin.\46\ BZX asserts that 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.\47\ In addition, BZX states that, to the 
extent that there are bitcoin platforms engaged in or allowing wash 
trading \48\ or other activity intended to manipulate the price of 
bitcoin on other markets, such activity does not normally impact prices 
on other platforms because participants will generally ignore markets 
with quotes that they deem non-executable.\49\ 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.\50\ According to BZX, 
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.\51\ 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.\52\
---------------------------------------------------------------------------

    \45\ See Notice, 87 FR at 41763 n.54.
    \46\ See id.
    \47\ See id.
    \48\ A ``wash trade'' is a transaction such as a purchase and 
sale simultaneously or within a short period of time, that involves 
no changes in beneficial ownership, and is a means of creating 
artificial market activity. See Silseth, Admin. Proc. File No. 3-
9001, Securities Act Release No. 7317, Securities Exchange Act 
Release No. 37493, at 2 and n.3 (July 30, 1996); Reddy v. CFTC, 191 
F.3d 109, 115 (2d Cir. 1999). Wash trading is manipulative and 
defrauds investors. See Reddy v. CFTC, 191 F.3d 109, 115 (2d Cir. 
1999); Santa Fe Indus. v. Green, 430 U.S. 462, 476-77 (1977); Ernst 
& Ernst v. Hochfelder, 425 U.S. 185, 199 (1976). Bitcoin spot 
markets are subject to such ``usual market manipulation tactics.'' 
Kevin Dowd & Martin Hutchinson, Bitcoin Will Bite the Dust, 35 Cato 
J. 357, 374 n.13 (2015), available at https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2015/5/cj-v35n2-12.pdf.
    \49\ See Notice, 87 FR at 41763 n. 54.
    \50\ See id.
    \51\ See id.
    \52\ See id.
---------------------------------------------------------------------------

    BZX also states that ``the in-kind creation and redemption process 
and fungibility of bitcoin means that a would be manipulator of a 
[s]pot [b]itcoin ETP would need to manipulate the price across all 
bitcoin markets or risk simply providing arbitrage opportunities for 
authorized participants.'' \53\ BZX asserts that ``this arbitrage 
opportunity also acts to reduce any incentives to manipulate the price 
of a [s]pot [b]itcoin ETP because the underlying trust will create and 
redeem shares at set rates of bitcoin per share without regard to the 
price that the ETP is trading at in the secondary market or the price 
of the underlying index.'' \54\
---------------------------------------------------------------------------

    \53\ Id. at 41764.
    \54\ See id.
---------------------------------------------------------------------------

(b) Analysis
    As with the previous proposals, including the Previous VanEck 
Filing, 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 such that the Commission can dispense with 
the detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying bitcoin assets. BZX does not 
sufficiently contest the presence of possible sources of fraud and 
manipulation in the spot bitcoin market that the Commission has 
identified in previous orders, including: (1) ``wash'' trading; \55\ 
(2) persons with a dominant position in bitcoin manipulating bitcoin 
pricing; (3)

[[Page 16060]]

hacking of the bitcoin network and trading platforms; (4) malicious 
control of the bitcoin network; (5) trading based on material, non-
public information (for example, plans of market participants to 
significantly increase or decrease their holdings in bitcoin, new 
sources of demand for bitcoin, or 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 based on the dissemination of false and misleading 
information; (6) manipulative activity involving purported 
``stablecoins,'' including Tether (USDT); and (7) fraud and 
manipulation at bitcoin trading platforms.\56\
---------------------------------------------------------------------------

    \55\ See also CFTC v. Gemini Trust Co., LLC, No. 22-cv-4563 
(S.D.N.Y. filed June 2, 2022) (alleging, among other things, failure 
by Gemini personnel to disclose to the Commodity Futures Trading 
Commission (``CFTC'') that Gemini customers could and did engage in 
collusive or wash trading).
    \56\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (Oct. 28, 2019), 
available at https://ssrn.com/abstract=3195066 and published in 75 
J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86; 
WisdomTree Order, 86 FR at 69326; Global X Order, 87 FR at 14916; 
ARK 21Shares Order, 87 FR at 20019; One River Order, 87 FR at 33554; 
Bitwise Order, 87 FR at 40283-84; Grayscale Order, 87 FR at 40305.
---------------------------------------------------------------------------

    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, however, does not provide any data or analysis to support its 
assertions, either in terms of how closely bitcoin prices are aligned 
across different bitcoin trading venues or how quickly price 
disparities may be arbitraged away.\57\ Here, the Exchange provides no 
evidence to support its assertion of efficient price arbitrage across 
bitcoin platforms, nor any evidence that price arbitrage in the bitcoin 
market is novel or unique so as to warrant the Commission dispensing 
with the detection and deterrence of fraud and manipulation provided by 
a comprehensive surveillance-sharing agreement with a regulated market 
of significant size related to spot bitcoin. As stated above, 
``unquestioning reliance'' on an SRO's representations in a proposed 
rule change is not sufficient to justify Commission approval of a 
proposed rule change.\58\
---------------------------------------------------------------------------

    \57\ For example, the Registration Statement states that ``[i]f 
increases in throughput on the Bitcoin network lag behind growth in 
usage of bitcoin, average fees and settlement times may increase 
considerably'' and that such increased fees and decreased settlement 
speeds ``could adversely impact the value of the Shares.'' See 
Registration Statement at 20. 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 72 and 
accompanying text (referencing statements made in the Registration 
Statement that contradict assertions made by BZX).
    \58\ See supra note 42 and accompanying text.
---------------------------------------------------------------------------

    In any event, the Commission has explained that efficient price 
arbitrage is not sufficient to support the finding that a market is 
uniquely or inherently resistant to manipulation such that the 
Commission can dispense with surveillance-sharing agreements.\59\ 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.\60\ Equities that underlie such options trade on U.S. 
equity markets that are deep, liquid, and highly interconnected.\61\ 
Moreover, BZX does not 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.\62\
---------------------------------------------------------------------------

    \59\ 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; ARK 21Shares Order, 87 FR 
at 20019; Grayscale Order, 87 FR at 40306.
    \60\ 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; ARK 21Shares Order, 87 
FR at 20019; Grayscale Order, 87 FR at 40306-07.
    \61\ See Market Data Infrastructure Adopting Release, Securities 
Exchange Act Release No. 90610 (Dec. 9, 2020); 86 FR 18596, 18606-07 
(Apr. 9, 2021); Market Data Infrastructure Proposing Release, 
Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 
16726, 16728 (Mar. 24, 2020); Concept Release on Equity Market 
Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 
2010), 75 FR 3594 (Jan. 21, 2010). See also ARK 21Shares Order, 87 
FR at 20019 n.70.
    \62\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01; WisdomTree Order, 86 FR at 69325.
---------------------------------------------------------------------------

    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 activity intended to manipulate the price of bitcoin 
on other markets, market participants will generally ignore those 
platforms. However, the record does not demonstrate that wash trading 
and other possible sources of fraud and manipulation in the broader 
bitcoin spot market will be ignored by market participants.\63\ 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.\64\
---------------------------------------------------------------------------

    \63\ See infra note 87 and accompanying text.
    \64\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69325. The Exchange has not shown that manipulation on spot 
platforms not included in the Benchmark will not affect prices on 
the Benchmark's constituent platforms. See infra notes 87-89 and 
accompanying text.
---------------------------------------------------------------------------

    Further, the continuous nature of bitcoin trading does not support 
the finding that the bitcoin market is uniquely or inherently resistant 
to manipulation, and neither do linkages among markets, as BZX 
asserts.\65\ 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.\66\
---------------------------------------------------------------------------

    \65\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying 
text.
    \66\ See id. at 37585. See also, e.g., WisdomTree Order, 86 FR 
at 69325-26; ARK 21Shares Order, 87 FR at 20019.
---------------------------------------------------------------------------

    The Exchange also asserts that the Trust's in-kind create/redeem 
process and the ``fungibility of bitcoin'' means that a would be 
manipulator of the Trust would ``need to manipulate the price across 
all bitcoin markets or risk simply providing arbitrage opportunities 
for authorized participants'' and that these arbitrage opportunities 
``[act] to reduce any incentives to manipulate the price of a [s]pot 
[b]itcoin ETP because the underlying trust will create and redeem 
shares at set rates of bitcoin per share without regard to the price 
that the ETP is trading at in the secondary market or the price of the 
underlying index.'' \67\ As discussed above, BZX provides no evidence 
of the existence of efficient price arbitrage across spot bitcoin 
platforms,\68\ nor does BZX provide any additional data or analysis to 
support its conclusion that the arbitrage that may exist would counter 
an attempt to manipulate the proposed ETP.\69\
---------------------------------------------------------------------------

    \67\ See Notice, 87 FR at 41764.
    \68\ See supra notes 57-58 and accompanying text. In addition, 
as discussed above, efficient price arbitrage is not sufficient to 
support the finding that a market is uniquely or inherently 
resistant to manipulation such that the Commission can dispense with 
surveillance-sharing agreements. See supra notes 59-62 and 
accompanying text.
    \69\ See also infra notes 111-113 and accompanying text setting 
forth the Commission's finding that BZX has not demonstrated that 
in-kind creations and redemptions provide the Shares with a unique 
resistance to manipulation.
---------------------------------------------------------------------------

    Finally, BZX does not address risk factors specific to the bitcoin 
blockchain and bitcoin platforms, described in the Trust's Registration 
Statement, that undermine the argument that the bitcoin market is 
inherently resistant to fraud

[[Page 16061]]

and manipulation.\70\ For example, the Registration Statement 
acknowledges that ``[b]itcoin [platforms] on which bitcoin trades are 
relatively new and, in some cases, unregulated, and, therefore, may be 
more exposed to fraud and security breaches than established, regulated 
exchanges for other financial assets or instruments''; that ``[t]he 
trading for spot bitcoin occurs on multiple trading venues that have 
various levels and types of regulation, but are not regulated in the 
same manner as traditional stock and bond exchanges'' and if these spot 
markets ``do not operate smoothly or face technical, security or 
regulatory issues, that could impact the ability of Authorized 
Participants to make markets in the Shares'' which could lead to 
``trading in the Shares [to] occur at a material premium or discount 
against the NAV''; that the bitcoin network ``is at risk of 
vulnerabilities and bugs that can potentially be exploited by malicious 
actors''; that ``[s]ecurity breaches, computer malware and computer 
hacking attacks have been a prevalent concern in relation to digital 
assets''; that the bitcoin blockchain could be vulnerable to a ``51% 
attack,'' in which a bad actor that controls 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; that ``[t]he nature of the assets held at 
bitcoin [platforms] makes them appealing targets for hackers and a 
number of bitcoin [platforms] have been victims of cybercrimes''; and 
that ``[o]ver the past several years, a number of bitcoin [platforms] 
have been closed or faced issues due to fraud, failure, security 
breaches or governmental regulation.'' \71\ The Exchange also 
acknowledges in the proposed rule change that ``largely unregulated 
currency and spot commodity markets do not provide the same protections 
as the markets that are subject to the Commission's oversight.'' \72\
---------------------------------------------------------------------------

    \70\ See Previous VanEck Order, 86 FR at 64544.
    \71\ See Registration Statement at 7, 13, 14, 17, 19, and 31. 
See also Winklevoss Order, 83 FR at 37585.
    \72\ Notice, 87 FR at 41756.
---------------------------------------------------------------------------

(ii) Assertions Regarding the Benchmark and the Create/Redeem Process
(a) BZX's Assertions
    BZX also argues that the Benchmark, which would be used to value 
the Trust's bitcoin, is itself resistant to manipulation based on the 
Benchmark's methodology.\73\ The Exchange states that the Benchmark is 
calculated by capturing twenty three-minute periods of trade prices and 
sizes leading up to 4:00 p.m. E.T. from the constituent platforms. An 
equal-weighted average of the volume-weighted median price of these 
twenty three-minute periods is then calculated, removing the highest 
and lowest contributed prices.\74\ According to BZX, ``[u]sing twenty 
consecutive three-minute segments over a sixty-minute period means 
malicious actors would need to sustain efforts to manipulate the market 
over an extended period of time, or would need to replicate efforts 
multiple times across exchanges, potentially triggering review.'' \75\ 
Further, according to BZX, the ``use of a median price reduces the 
ability of outlier prices to impact the NAV,'' and the ``use of a 
volume-weighted median (as opposed to a traditional median) serves as 
an additional protection against attempts to manipulate the NAV by 
executing a large number of low-dollar trades, because any manipulation 
attempt would have to involve a majority of global spot bitcoin volume 
in a three-minute window to have any influence on the NAV.'' \76\ BZX 
also asserts that ``removing the highest and lowest prices further 
protects against attempts to manipulate the NAV, requiring bad actors 
to act on multiple [platforms] at once to have any ability to influence 
the price.'' \77\
---------------------------------------------------------------------------

    \73\ See id. at 41764.
    \74\ See id. at 41765. The Exchange states that ``[t]his 
extended period also supports authorized participant activity by 
capturing volume over a longer time period, rather than forcing 
authorized participants to mark an individual close or auction.'' 
See id.
    \75\ See id.
    \76\ See id.
    \77\ See id.
---------------------------------------------------------------------------

    The Exchange also states that the Benchmark's constituent bitcoin 
platforms are sourced from the CryptoCompare Exchange Benchmark review 
report.\78\ The Exchange further states that the CryptoCompare Exchange 
Benchmark methodology ``utilizes a combination of qualitative and 
quantitative metrics to analyze a comprehensive data set across eight 
categories of evaluation[:] legal/regulation, KYC/transaction risk, 
data provision, security, team/exchange, asset quality/diversity, 
market quality and negative events.'' \79\ The Exchange states that 
``the CryptoCompare Exchange Benchmark review report assigns a grade to 
each [spot bitcoin] platform which helps identify what it believes to 
be the lowest risk [platforms] in the industry.'' \80\ According to the 
Exchange, ``[b]ased on the CryptoCompare Exchange Benchmark, MVIS 
initially selects the top five spot bitcoin platforms by rank for 
inclusion in the [Benchmark].'' \81\
---------------------------------------------------------------------------

    \78\ See id.
    \79\ See id. at 41765 n.62.
    \80\ See id.
    \81\ See id. The Exchange further states that, ``if an eligible 
[platform] is downgraded by two or more notches in a semi-annual 
review and is no longer in the top five by rank, it is replaced by 
the highest ranked non-component [platform]'' and that 
``[a]djustments to [platform] coverage are announced four business 
days prior to the first business day of each of March and September 
at 23:00 CET'' and the Benchmark ``is rebalanced at 16:00:00 GMT/BST 
on the last business day of each of February and August.'' See id.
---------------------------------------------------------------------------

    Simultaneously with its assertions regarding the Benchmark, BZX 
also states that, because the Trust will engage in in-kind creations 
and redemptions only, the ``manipulability of the Benchmark [is] 
significantly less important.'' \82\ The Exchange elaborates that, 
``because the Trust will not accept cash to buy bitcoin in order to 
create new [S]hares or . . . be forced to sell bitcoin to pay cash for 
redeemed [S]hares, the price that the Sponsor uses to value the Trust's 
bitcoin is not particularly important.'' \83\ 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.\84\ 
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.\85\ 
This, according to BZX, not only mitigates the risk associated with 
potential manipulation, but also discourages and disincentivizes 
manipulation of the Benchmark because there is little financial 
incentive to do so.\86\
---------------------------------------------------------------------------

    \82\ See id. at 41764.
    \83\ See id.
    \84\ See id.
    \85\ See id.
    \86\ See id.
---------------------------------------------------------------------------

(b) Analysis
    Based on the assertions made and the information provided with 
respect to the Benchmark and the create/redeem process, the record is 
inadequate to conclude that BZX has articulated other means to prevent 
fraud and manipulation that are sufficient to justify dispensing with 
the detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing

[[Page 16062]]

agreement with a regulated market of significant size related to spot 
bitcoin.
    The record does not demonstrate that the proposed methodology for 
calculating the Benchmark would make the proposed ETP resistant to 
fraud or manipulation sufficient to dispense with the ability to detect 
and deter fraud and manipulation that is provided by a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to spot bitcoin. Specifically, BZX has not assessed the 
possible influence that spot platforms not included among the 
Benchmark's constituent platforms would have on bitcoin prices used to 
calculate the Benchmark.\87\ As discussed above, BZX does not 
sufficiently contest the presence of possible sources of fraud and 
manipulation in the spot bitcoin market generally.\88\ Instead, BZX 
focuses its analysis on the Benchmark's calculation methodology, as 
well as on the eligibility and attributes of the Benchmark's 
constituent bitcoin platforms. What the Exchange does not address, 
however, is that, to the extent that trading on spot bitcoin platforms 
not directly used to calculate the Benchmark affects prices on the 
Benchmark's constituent platforms, the activities on those other 
platforms where various kinds of fraud and manipulation from a variety 
of sources may be present and persist may affect whether the Benchmark 
is resistant to manipulation. Importantly, the record does not 
demonstrate that these possible sources of fraud and manipulation in 
the broader spot bitcoin market do not affect the Benchmark's 
constituent bitcoin platforms that represent a portion of the spot 
bitcoin market. To the extent that fraudulent and manipulative trading 
on the broader bitcoin market could influence prices or trading 
activity on the Benchmark's constituent platforms, such platforms (and 
thus the Benchmark) would not be inherently resistant to 
manipulation.\89\
---------------------------------------------------------------------------

    \87\ As discussed above, while the Exchange asserts that bitcoin 
prices on platforms with wash trades or other activity intended to 
manipulate the price of bitcoin would generally be ignored, 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 63-64 and accompanying text.
    \88\ See supra notes 55-56 and accompanying text.
    \89\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69327; Kryptoin Order, 86 FR at 74172; Valkyrie Order, 86 FR at 
74161; SkyBridge Order, 87 FR at 3873; ARK 21Shares Order, 87 FR at 
20021; Grayscale Order, 87 FR at 40309.
---------------------------------------------------------------------------

    In addition, while BZX asserts that aspects of the Benchmark 
methodology mitigate the impact of fraud and manipulation on the 
Shares, the Commission can find no basis to conclude that the Benchmark 
methodology constitutes a novel means beyond the protections utilized 
by traditional commodity or securities markets to prevent fraud and 
manipulation that is sufficient to justify dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin. BZX has not shown that its 
proposed use of twenty consecutive three-minute periods over a sixty-
minute period leading up to 4:00 p.m. E.T. of trade prices from the 
constituent platforms to calculate the Benchmark would effectively be 
able to mitigate fraudulent or manipulative activity that is not 
transient. As the Commission has previously stated, fraud and 
manipulation in the spot bitcoin market could persist for a 
``significant duration.'' \90\ The Exchange does not explain how the 
use of such partitions would protect against the effects of the wash 
and fictitious trading that may persist in the spot bitcoin market for 
a significant duration.\91\ While the Benchmark methodology calculates 
an equal-weighted average of the volume-weighted median price of these 
twenty three-minute periods and removes the highest and lowest 
contributed prices, this methodology could at most attenuate, but not 
eliminate, the effect of manipulative activity on the Benchmark's 
constituent bitcoin platforms--just as it could at most attenuate, but 
would not eliminate, the effect of bona fide liquidity demand on those 
platforms.\92\
---------------------------------------------------------------------------

    \90\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
    \91\ See WisdomTree Order, 86 FR at 69327.
    \92\ See SolidX Order, 82 FR at 16257.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the Benchmark's 
methodology helps make the Benchmark resistant to manipulation conflict 
with the Registration Statement. Specifically, the Registration 
Statement represents, among other things, that ``[b]itcoin [platforms] 
on which bitcoin trades are relatively new and, in some cases, 
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 
Trust.'' \93\ The Benchmark's constituent bitcoin platforms are a 
subset of the bitcoin trading venues currently in existence.
---------------------------------------------------------------------------

    \93\ See Registration Statement at 7, 19. See also supra note 71 
and accompanying text.
---------------------------------------------------------------------------

    The Registration Statement also states, specifically with respect 
to the Benchmark, that the Benchmark is ``based on various inputs which 
may include price data from various third-party exchanges and markets'' 
and that these inputs ``may be subject to technological error, 
manipulative activity, or fraudulent reporting from their initial 
source.'' \94\ Although the Sponsor raises concerns regarding fraud and 
security of bitcoin platforms in the Registration Statement, as well as 
concerns specific to the Benchmark, the Exchange does not explain how 
or why such concerns are consistent with its assertion that the 
Benchmark is resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \94\ See Registration Statement at 23.
---------------------------------------------------------------------------

    In addition, BZX represents that the Benchmark includes only the 
top five spot bitcoin platforms, as ranked by the CryptoCompare 
Exchange Benchmark review report based on the following categories: 
legal/regulation, KYC/transaction risk, data provision, security, team/
exchange, asset quality/diversity, market quality and negative events. 
However, the existing level of oversight of the Benchmark's underlying 
bitcoin platforms, whose trade flows might contribute to the Benchmark, 
is not equivalent to the obligations, authority, and oversight of 
national securities exchanges or futures exchanges and therefore is not 
an appropriate substitute.\95\ For example, the Commission's market 
oversight of national securities exchanges includes substantial 
requirements, including the requirement to have rules that are 
``designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.'' \96\ Moreover, national securities exchanges must file 
proposed rules with the Commission regarding certain material aspects 
of their operations,\97\ and the Commission has the authority to 
disapprove any such rule that is not consistent with the requirements 
of the Exchange Act.\98\

[[Page 16063]]

Thus, national securities exchanges are subject to Commission oversight 
of, among other things, their governance, membership qualifications, 
trading rules, disciplinary procedures, recordkeeping, and fees.\99\ 
The Benchmark's underlying spot bitcoin platforms have none of these 
requirements--none are registered as a national securities exchange and 
none are comparable to a national securities exchange or futures 
exchange.\100\
---------------------------------------------------------------------------

    \95\ See also USBT Order, 85 FR at 12603-05; Previous VanEck 
Order, 86 FR at 64545; WisdomTree Order, 86 FR at 69328; Kryptoin 
Order, 86 FR at 74173.
    \96\ 15 U.S.C. 78f(b)(5).
    \97\ 17 CFR 240.19b-4(a)(6)(i).
    \98\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rule changes 
with the Commission 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 
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.
    \99\ 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 Benchmark's constituent 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 the underlying bitcoin assets. For example, AML and KYC 
policies and procedures do not substitute for the sharing of 
information about market trading activity or clearing activity that 
a surveillance sharing agreement would afford and do not substitute 
for regulation as 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.
    \100\ See USBT Order, 85 FR at 12603-05 & n.101; Previous VanEck 
Order, 86 FR at 64545 & n.89; WisdomTree Order, 86 FR at 69328 & 
n.95; Kryptoin Order, 86 FR at 74173 & n.98; ARK 21Shares Order, 87 
FR at 20021-22 & n.107; Grayscale Order, 87 FR at 40308 & n.110.
---------------------------------------------------------------------------

    The Commission thus concludes that the Exchange has not 
demonstrated that its Benchmark methodology makes the proposed ETP 
resistant to manipulation. While the proposed procedures for 
calculating the Benchmark using only prices from the Benchmark's 
constituent spot bitcoin platforms are intended to provide some degree 
of protection against attempts to manipulate the Benchmark, these 
procedures are not sufficient for the Commission to dispense with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin.\101\
---------------------------------------------------------------------------

    \101\ See WisdomTree Order, 86 FR at 69327-28; ARK 21Shares 
Order, 87 FR at 20021-22.
---------------------------------------------------------------------------

    Further, BZX does not explain the significance of the Benchmark'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.\102\ To the extent that BZX's argument is that the 
price of the Trust's Shares would be resistant to manipulation if the 
Benchmark is resistant to manipulation, BZX has not established in the 
record a basis for this conclusion because BZX has not established a 
link between the price of the Shares and the Benchmark, either in the 
primary or secondary market. The Trust uses the Benchmark to calculate 
the value of the bitcoin it holds according to the methodology 
discussed above.\103\ However, the Trust will create or redeem baskets 
in the primary market only upon the receipt or distribution of bitcoins 
from/to authorized participants, and only for the amount of bitcoin 
represented by the Shares in such baskets, without reference to the 
value of such bitcoin as determined by the Benchmark or otherwise.\104\ 
In the secondary market, the Shares would trade at market-based prices, 
and market participants may or may not take into account the value of 
bitcoin as measured by the Benchmark in determining such prices.\105\ 
The Exchange provides no information on the relationship between the 
Benchmark and secondary market prices generally, or how the use of the 
Benchmark would mitigate fraud and manipulation of the Shares in the 
secondary market.\106\
---------------------------------------------------------------------------

    \102\ 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; WisdomTree Order, 86 FR at 69327-29; Valkyrie Order, 86 
FR at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale Order, 87 
FR at 40310.
    \103\ See supra note 35 and accompanying text.
    \104\ See Notice, 87 FR at 41764-65, 41766. According to the 
Exchange, to create, ``[t]he total deposit of bitcoin required is an 
amount of bitcoin that is in the same proportion to the total assets 
of the Trust, net of accrued expenses and other liabilities, on the 
date the order to purchase is properly received, as the number of 
Shares to be created under the purchase order is in proportion to 
the total number of Shares outstanding on the date the order is 
received.'' The required deposit is determined ``for a given day by 
dividing the number of bitcoin held by the Trust as of the opening 
of business on that business day, adjusted for the amount of bitcoin 
constituting estimated accrued but unpaid fees and expenses of the 
Trust as of the opening of business on that business day, by the 
quotient of the number of Shares outstanding at the opening of 
business divided by 50,000.'' See id. at 41766. The Exchange also 
states that shares of a spot bitcoin ETP would represent interest in 
bitcoin directly and authorized participants for a spot bitcoin ETP 
would be able to source bitcoin from any exchange and create or 
redeem with the applicable trust regardless of the price of the 
underlying index. See id. at 41764.
    \105\ See id. at 41765 (stating that ``[a]uthorized participants 
may then offer Shares to the public at prices that depend on various 
factors, including the supply and demand for Shares, the value of 
the Trust's assets, and market conditions at the time of a 
transaction'' and ``[s]hareholders who buy or sell Shares during the 
day from their broker may do so at a premium or discount relative to 
the NAV of the Shares of the Trust'').
    \106\ See WisdomTree Order, 86 FR at 69329 & n.108; Valkyrie 
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale 
Order, 87 FR at 40310.
---------------------------------------------------------------------------

    Moreover, the Exchange's arguments are contradictory. While arguing 
that the Benchmark is resistant to manipulation, the Exchange 
simultaneously downplays the importance of the Benchmark in light of 
the Trust's in-kind creation and redemption mechanism.\107\ The 
Exchange 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.'' \108\ 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.'' \109\ If the Benchmark that the Trust uses to 
value the Trust's bitcoin ``is not particularly important,'' it follows 
that the Benchmark's resistance to manipulation is not material to the 
Shares' susceptibility to fraud and manipulation. As the Exchange does 
not address or provide any analysis with respect to these issues, the 
Commission cannot conclude

[[Page 16064]]

that the Benchmark aids in the determination that the proposal to list 
and trade the Shares is designed to prevent fraudulent and manipulative 
acts and practices.\110\
---------------------------------------------------------------------------

    \107\ See supra notes 82-86 and accompanying text.
    \108\ Notice, 87 FR at 41764 (``While the Sponsor believes that 
the Benchmark which it uses to value the Trust's bitcoin is itself 
resistant to manipulation based on the methodology further described 
below, the fact that creations and redemptions are only available 
in-kind makes the manipulability of the Benchmark significantly less 
important.'').
    \109\ 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'').
    \110\ See WisdomTree Order, 86 FR at 69329; ARK 21Shares Order, 
87 FR at 20022.
---------------------------------------------------------------------------

    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.\111\ 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.\112\ Accordingly, 
the Commission is not persuaded here that the Trust's in-kind creations 
and redemptions afford it a unique resistance to manipulation.\113\
---------------------------------------------------------------------------

    \111\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08; WisdomTree Order, 86 FR at 69329; ARK 21Shares Order, 
87 FR at 20022.
    \112\ 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).
    \113\ Putting aside the Exchange's various assertions about the 
nature of bitcoin and the bitcoin market, the Benchmark, and the 
Shares, the Exchange 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.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size Related 
to the Underlying Bitcoin Assets
    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 related to the underlying bitcoin 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.\114\
---------------------------------------------------------------------------

    \114\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------

    As the Commission has explained, 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.\115\ Accordingly, based on 
the common membership of BZX and the CME in the ISG,\116\ 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,\117\ 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'' 
related to spot bitcoin, the underlying bitcoin assets that would be 
held by the Trust.
---------------------------------------------------------------------------

    \115\ See id. at 37580 n.19.
    \116\ See Notice, 87 FR at 41763.
    \117\ While the Commission recognizes that the CFTC regulates 
the CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying spot bitcoin 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; ARK 
21Shares Order, 87 FR at 20023 n.121; Bitwise Order, 87 FR at 40286 
n.54; Grayscale Order, 87 FR at 40311 n.138.
---------------------------------------------------------------------------

(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'' related to spot 
bitcoin 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. In 
previous Commission orders, the Commission explained that the lead-lag 
relationship between the bitcoin futures market and the spot market is 
``central'' to understanding this first prong.\118\
---------------------------------------------------------------------------

    \118\ See, e.g., USBT Order, 85 FR at 12612 (``[E]stablishing a 
lead-lag relationship between the bitcoin futures market and the 
spot market is central to understanding whether it is reasonably 
likely that a would-be manipulator of the ETP would need to trade on 
the bitcoin futures market to successfully manipulate prices on 
those spot platforms that feed into the proposed ETP's pricing 
mechanism. In particular, if the spot market leads the futures 
market, this would indicate that it would not be necessary to trade 
on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move 
to meet the spot price.''). When considering past proposals for spot 
bitcoin ETPs, the Commission has discussed whether there is a lead-
lag relationship between the regulated market (e.g., the CME) and 
the market on which the assets held by the ETP would have traded 
(i.e., spot bitcoin platforms), as part of an analysis of whether a 
would-be manipulator of the spot bitcoin ETP would need to trade on 
the regulated market to effect such manipulation. See, e.g., USBT 
Order, 85 FR at 12612. See also Previous VanEck Order, 86 FR at 
64547; WisdomTree Order, 86 FR at 69330-31; Kryptoin Order, 86 FR at 
74175-76; SkyBridge Order, 87 FR at 3875-76; Wise Origin Order, 87 
FR at 5535-36, 5539-40; ARK 21Shares Order, 87 FR at 20023-24; 
Bitwise Order, 87 FR at 40287-89; Grayscale Order, 87 FR at 40311-
13.
---------------------------------------------------------------------------

(a) BZX's Assertions
    According to the Exchange, ``publicly available research, including 
research done as part of rule filings proposing to list and trade 
shares of [s]pot [b]itcoin ETPs, supports the thesis that [CME] 
[b]itcoin [f]utures pricing leads the spot market and, thus, a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP.'' \119\ BZX asserts that ``such research 
indicates that bitcoin futures lead the bitcoin spot market in price 
formation.'' \120\ BZX asserts that CME

[[Page 16065]]

bitcoin futures ``represent a growing influence on pricing in the spot 
bitcoin market as has been laid out . . . in other proposals to list 
and trade [s]pot [b]itcoin ETPs.'' \121\
---------------------------------------------------------------------------

    \119\ See Notice, 87 FR at 41762.
    \120\ See id. at 41762-63 and n.51 (citing to (a) the Wise 
Origin Order; Notice of Filing of a Proposed Rule Change To List and 
Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act 
Release No. 94982 (May 25, 2022), 87 FR 33250 (Jun. 1, 2022) (SR-
CboeBZX-2022-031) (``ARK 21Shares Filing II''); Notice of Filing of 
Amendment No. 1 to, and Designation of a Longer Period for 
Commission Action on Proceedings To Determine Whether To Approve or 
Disapprove, a Proposed Rule Change To List and Trade Shares of 
Grayscale Bitcoin Trust (BTC) Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 94844 (May 4, 2022), 87 FR 28043 
(May 10, 2022) (SR-NYSEArca-2021-90) (``Grayscale Filing''); and 
Notice of Filing of Proposed Rule Change to List and Trade Shares of 
the Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E; 
Securities Exchange Act Release No. 93445 (Oct. 28, 2021), 86 FR 
60695 (Nov. 3, 2021) (SR-NYSEArca-2021-89) (``Bitwise Filing''); and 
(b) Hu, Y., Hou, Y. and Oxley, L. (2019), ``What role do futures 
markets play in Bitcoin pricing? Causality, cointegration and price 
discovery from a time-varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu, Hou & 
Oxley'')). The Exchange references the following conclusion from the 
``time-varying price discovery'' section of Hu, Hou & Oxley: ``There 
exist no episodes where the Bitcoin spot markets dominates the price 
discovery processes with regard to Bitcoin futures. This points to a 
conclusion that the price formation originates solely in the Bitcoin 
futures market. We can, therefore, conclude that the Bitcoin futures 
markets dominate the dynamic price discovery process based upon 
time-varying information share measures. Overall, price discovery 
seems to occur in the Bitcoin futures markets rather than the 
underlying spot market based upon a time-varying perspective.'' Id. 
at 41763 n.51.
    \121\ See id. at 41763. See also supra note 120. In addition, 
the Exchange asserts that pricing in CME bitcoin futures ``is based 
on pricing from spot bitcoin markets.'' See id. at 41763. The 
Exchange argues that a statement in the Commission's prior approval 
of CME bitcoin futures ETPs ``makes clear that the Commission 
believes that CME's surveillance can capture the effects of trading 
on the relevant spot markets on the pricing of CME [b]itcoin 
[f]utures.'' See id. BZX further states that if CME's surveillance 
is sufficient to mitigate concerns related to trading in CME bitcoin 
futures ``for which the pricing is based directly on pricing from 
spot bitcoin markets, it's not clear how such a conclusion could 
apply only to ETPs based on [CME] [b]itcoin [f]utures and not extend 
to [s]pot [b]itcoin ETPs.'' See id. at 41763-64. Moreover, BZX 
argues that CME bitcoin futures ETFs may be more susceptible to 
potential manipulation than a spot bitcoin ETP that offers only in-
kind creation and redemption, and potential manipulation of a CME 
bitcoin futures ETF would require manipulation on the spot markets 
on which the pricing for CME bitcoin futures is based. See id. at 
41764. Because these assertions relate more generally to whether the 
CME bitcoin futures market constitutes a ``market of significant 
size'' related to spot bitcoin and do not relate specifically to the 
first prong, the Commission responds to these assertions in Section 
III.B.3 infra.
---------------------------------------------------------------------------

(b) Analysis
    The record does not demonstrate that there is a reasonable 
likelihood that a person attempting to manipulate the proposed ETP 
would have to trade on the CME bitcoin futures market to successfully 
manipulate the proposed ETP. First, 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 
spot bitcoin 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.\122\ The Exchange, as it has done 
previously, relies on the findings of one section of the Hu, Hou & 
Oxley paper; \123\ however, it does not address issues that the 
Commission has previously raised with respect to this single 
paper.\124\ As the Commission previously explained, including in the 
Previous VanEck Order, the findings of this paper's Granger causality 
analysis, which is widely used to formally test for lead-lag 
relationships, are concededly mixed.\125\
---------------------------------------------------------------------------

    \122\ See also USBT Order, 85 FR at 12611; WisdomTree Order, 86 
FR at 69330-31; Wise Origin Order, 87 FR at 5535; NYDIG Order, 87 FR 
at 14938; Global X Order, 87 FR at 14920; ARK 21Shares, 87 FR at 
20024; Bitwise Order, 87 FR at 40288-89; Grayscale Order, 87 FR at 
40312-13.
    \123\ See supra note 120.
    \124\ See, e.g., Previous VanEck Order, 86 FR at 64547 
(discussing that the paper's use of daily price data, as opposed to 
intraday prices, may not be able to distinguish which market 
incorporates new information faster; and discussing that the paper 
found inconclusive evidence that futures prices lead spot bitcoin 
prices--in particular, that the months at the end of the paper's 
sample period showed, using Granger causality methodology, that the 
spot market was the leading market--and that the record did not 
include evidence to explain why this would not indicate a shift 
towards prices in the spot market leading the futures market that 
would be expected to persist into the future). See also USBT Order, 
85 FR at 12613 n.244; WisdomTree Order, 86 FR at 69331.
    \125\ See Previous VanEck Order, 86 FR at 64547; ARK 21Shares 
Order, 87 FR at 20024; WisdomTree Order, 86 FR at 69331. 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 & Oxley, supra note 120.
---------------------------------------------------------------------------

    Moreover, while the Exchange highlights data and analyses submitted 
to the Commission in connection with the Wise Origin Order, the ARK 
21Shares Filing II, the Grayscale Filing, and the Bitwise Filing to 
support the premise that the CME bitcoin futures market leads the spot 
bitcoin market,\126\ the Commission disapproved the proposals related 
to these submissions, and the Commission raised issues with respect to 
these submissions--including with the data and analyses therein--that 
the Exchange does not address.\127\
---------------------------------------------------------------------------

    \126\ See supra note 120 and accompanying text.
    \127\ See, e.g., Wise Origin Order, 87 FR at 5534-36, 5539-40; 
ARK 21Shares Order II, 88 FR 6340-42; Grayscale Order, 87 FR at 
40311-14; Bitwise Order, 87 FR at 40287-92.
---------------------------------------------------------------------------

    The Exchange does not provide results of its own analysis and does 
not present any other data supporting its conclusion. Specifically, the 
Exchange does not provide results of its own lead-lag analysis or 
provide any additional evidence of an interrelationship between the CME 
bitcoin futures market, which is the regulated market, and spot bitcoin 
platforms, which are the markets on which the assets held by the 
proposed ETP would trade. As discussed in previous disapprovals, 
analyses regarding whether the CME bitcoin futures market leads the 
spot market remain inconclusive.\128\ Thus, as in previous 
disapprovals, because the lead-lag analysis regarding whether the CME 
bitcoin futures market leads the spot market is ``central'' to 
understanding the first prong,\129\ the Commission determines that the 
evidence in the record is inadequate to conclude that an 
interrelationship exists between the CME bitcoin futures market and the 
spot bitcoin market such that it is reasonably likely that a person 
attempting to manipulate the proposed ETP would have to trade on the 
CME bitcoin futures market to successfully manipulate the proposed 
ETP.\130\
---------------------------------------------------------------------------

    \128\ As the academic literature and listing exchanges' analyses 
pertaining to the pricing relationship between the CME bitcoin 
futures market and spot bitcoin market have developed, the 
Commission has critically reviewed those materials. See WisdomTree 
Order II, 87 FR at 62476-77; Grayscale Order, 87 FR at 40311-13; 
Bitwise Order, 87 FR at 40286-89; ARK 21Shares Order, 87 FR at 
20024; Global X Order, 87 FR at 14920; Wise Origin Order, 87 FR at 
5535-36, 5539-40; Kryptoin Order, 86 FR at 74176; WisdomTree Order, 
86 FR at 69330-32; Previous VanEck Order, 86 FR at 64547-48; USBT 
Order, 85 FR at 12613.
    \129\ See supra note 118.
    \130\ 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 
constituent bitcoin platforms underlying the Benchmark, or where 
price formation occurs when the entirety of bitcoin futures markets, 
not just the CME, is considered. See ARK 21Shares Order, 87 FR at 
20024 n.147; Previous 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.
---------------------------------------------------------------------------

    The Commission thus concludes that the information that BZX 
provides is not sufficient 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'' related to the assets to be held by 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'' related to spot 
bitcoin is the determination that it is unlikely that trading in the 
proposed ETP would be the predominant influence on prices in the CME 
bitcoin futures market.\131\
---------------------------------------------------------------------------

    \131\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

(a) BZX's Assertions
    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 in-kind creation and redemption process, the spot market 
arbitrage opportunities that

[[Page 16066]]

such in-kind creation and redemption process creates, the significant 
volume in the CME bitcoin futures market,\132\ the size of bitcoin's 
market capitalization,\133\ and the significant liquidity available in 
the spot market.\134\ BZX further provides that the cost to buy or sell 
$5 million worth of bitcoin averages roughly 48 basis points with a 
market impact of $139.08.\135\ According to the Exchange, ``[s]tated 
another way, a market participant could enter a market buy or sell 
order for $5 million of bitcoin and only move the market 0.48%.'' \136\ 
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.\137\ 
Thus, BZX concludes that the combination of in-kind creation and 
redemption process, the 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 spot bitcoin or the CME 
bitcoin futures market.\138\
---------------------------------------------------------------------------

    \132\ BZX states that the CME began to offer trading in bitcoin 
futures in 2017. See Notice, 87 FR at 41761. 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 ``generally trended up since launch, although 
certain notional volume calculations have decreased roughly in line 
with the decrease in the price of bitcoin.'' See id. For example, 
according to BZX, there were 219,089 CME bitcoin futures contracts 
traded in April 2022 (approximately $31.2 billion) compared to 
89,852 ($5.4 billion), 118,235 ($4.6 billion), and 201,295 ($55.8 
billion) contracts traded in April 2019, April 2020, and April 2021, 
respectively. See id. Additionally, according to BZX, from March 28, 
2022, through April 22, 2022, there was approximately $1.3 billion 
in notional trading volume in CME bitcoin futures on a daily basis, 
and notional volume was never below $670 million. See id. at 41757-
58. Additionally, BZX states that open interest was over $2 billion 
for the entirety of such period, and at one point was over $3 
billion. See id. at 41758. BZX further states that the number of 
large interest holders and unique accounts trading CME bitcoin 
futures have both increased, even in the face of heightened spot 
bitcoin price volatility. See id. at 41762. According to BZX, a 
large open interest holder in CME bitcoin futures is an entity that 
holds at least 25 contracts, which is the equivalent of 125 bitcoin, 
and, at a price of approximately $38,605 per bitcoin on April 30, 
2022, more than 80 firms had outstanding positions of greater than 
$4.8 million in CME bitcoin futures. See id. at 41762 n.50.
    \133\ 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 41757 n.24.
    \134\ See id. at 41764.
    \135\ 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, FTX and 
Kraken during the one year period ending May 2022. See id. at 41764 
n.59.
    \136\ Id. at 41764.
    \137\ See id.
    \138\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission does not agree with BZX's assertions, which are 
similar to the assertions that BZX made, and the Commission discussed, 
in the Previous VanEck Order. Now, as then, 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 lead price discovery 
\139\--the Commission will only address below the other three bases: 
the in-kind create/redeem mechanism and arbitrage, and the overall size 
of, and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

    \139\ See supra Section III.B.2.i.b.
---------------------------------------------------------------------------

    BZX's assertions that the Trust's in-kind create/redeem mechanism 
and resulting arbitrage opportunities will help prevent the Shares from 
becoming the predominant force on pricing in either the spot bitcoin or 
the CME bitcoin futures market are general and conclusory. The Exchange 
provides no further discussion, data or analysis to support its 
conclusions or to explain further why or how the in-kind create/redeem 
mechanism or the potential presence of arbitrage implies that it is 
unlikely that trading in the Shares would be the predominant influence 
on prices in the CME bitcoin futures market.\140\
---------------------------------------------------------------------------

    \140\ As discussed above, the Exchange has presented no evidence 
or analysis to support its assertions regarding the presence of 
price arbitrage in the spot bitcoin markets and, in any event, 
efficient price arbitrage is not sufficient to support the finding 
that a market is uniquely or inherently resistant to manipulation 
such that the Commission can dispense with surveillance-sharing 
agreements. See supra notes 57-62 and accompanying text. Also as 
discussed above, the Trust's in-kind creations and redemptions do 
not afford it a unique resistance to manipulation. 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. See supra notes 
111-113 and accompanying text.
---------------------------------------------------------------------------

    Similarly, BZX's assertions about the potential effect of trading 
in the Shares on the CME bitcoin futures market and spot bitcoin market 
are general and conclusory, citing to the aforementioned trade volume 
of the CME bitcoin futures market and the size and liquidity of the 
spot bitcoin market, as well as the market impact of a single 
transaction in spot bitcoin, 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.\141\
---------------------------------------------------------------------------

    \141\ See Previous 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; ARK 21Shares 
Order, 87 FR at 20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    The Commission also is not persuaded by BZX's assertions about the 
minimal effect a market order to buy or sell bitcoin would have on the 
bitcoin market.\142\ While BZX concludes by way of an example of a $5 
million market order 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 or the CME 
bitcoin futures market's prices. Accordingly, such statistics, without 
more, are not relevant to the Commission's consideration of whether 
trading in the ETP would be the predominant influence on prices in the 
CME bitcoin futures market.
---------------------------------------------------------------------------

    \142\ See Notice, 87 FR at 41764 (``[T]he cost to buy or sell $5 
million worth of bitcoin averages roughly 48 basis points with a 
market impact of $139.08. Stated another way, a market participant 
could enter a market buy or sell order for $5 million of bitcoin and 
only move the market 0.48%.'').
---------------------------------------------------------------------------

    To the extent that BZX is suggesting that a single $5 million order 
in bitcoin would have immaterial impact on the prices in the CME 
bitcoin futures market, the Exchange has not adequately explained why a 
single market order in spot bitcoin is an appropriate proxy for trading 
in the Shares. As stated above, 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 be

[[Page 16067]]

the predominant influence on prices in the CME bitcoin futures market. 
While authorized participants of the Trust might transact in the spot 
bitcoin market as part of their creation or redemption of Shares, the 
Shares themselves would be traded in the secondary market on BZX. 
Furthermore, 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. 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.\143\
---------------------------------------------------------------------------

    \143\ See Previous 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; ARK 21Shares 
Order, 87 FR at 20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    Thus, the Commission cannot conclude, based on the assertions in 
the filing and absent sufficient evidence or analysis in support of 
these assertions, that it is unlikely that trading in the proposed ETP 
would be the predominant influence on prices in the CME bitcoin futures 
market.
    Therefore, 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'' related to spot 
bitcoin such that BZX would be able to rely on a surveillance-sharing 
agreement with the CME to provide sufficient protection against 
fraudulent and manipulative acts and practices.
(3) Assertions That the Proposed Spot Bitcoin ETP Is Comparable to 
Bitcoin Futures-Based ETFs
(i) BZX's Assertions
    BZX asserts that, after the Commission has approved the listing and 
trading of CME bitcoin futures ETPs, disapproving spot bitcoin ETPs 
``seems . . . arbitrary and capricious.'' \144\ BZX asserts that CME 
bitcoin futures pricing is based on pricing from spot bitcoin markets 
and that the pricing mechanism applicable to the Shares is similar to 
the CME CF Bitcoin Reference Rate (``BRR'').\145\ BZX argues that a 
statement in the Commission's prior approval of CME bitcoin futures 
ETPs ``makes clear that the Commission believes that CME's surveillance 
can capture the effects of trading on the relevant spot markets on the 
pricing of CME [b]itcoin [f]utures.'' \146\ The Exchange argues that 
``given that there is significant trading volume on numerous bitcoin 
exchanges that are not part of the CME CF Bitcoin Reference Rate and 
that arbitrage opportunities across bitcoin exchanges means that such 
trading volume will influence spot bitcoin prices across the market,'' 
the Commission's belief that CME ``can detect attempted manipulation of 
the [CME] [b]itcoin [f]utures through `trading outside of the CME 
bitcoin futures market' '' means that ``such ability would apply 
equally to both [CME] [b]itcoin [f]utures ETFs and [s]pot [b]itcoin 
ETPs.'' \147\ The Exchange further concludes, ``such an ability would 
also seem to be a strong indication that the CME [b]itcoin [f]utures 
market represents a regulated market of significant size.'' \148\ BZX 
states that if CME's surveillance is sufficient to mitigate concerns 
related to trading in CME bitcoin futures ``for which the pricing is 
based directly on pricing from spot bitcoin markets, it's not clear how 
such a conclusion could apply only to ETPs based on [CME] [b]itcoin 
[f]utures and not extend to [s]pot [b]itcoin ETPs.'' \149\ BZX asserts 
that, after approving the listing and trading of CME bitcoin futures 
ETPs, wherein the Commission concluded that the CME bitcoin futures 
market is a regulated market of significant size as it relates to CME 
bitcoin futures, the only consistent outcome would be to approve spot 
bitcoin ETPs on the basis that the CME bitcoin futures market is also a 
regulated market of significant size as it relates to the spot bitcoin 
market.\150\
---------------------------------------------------------------------------

    \144\ See Notice, 87 FR at 41760.
    \145\ See id. at 41759-60. BZX asserts that each CME bitcoin 
futures contract is based on the BRR. See id. at 41761. According to 
the Exchange, the BRR is based on a publicly available calculation 
methodology based on pricing sourced from several crypto exchanges 
and trading platforms, including Bitstamp, Coinbase, Gemini, itBit, 
Kraken, and LMAX Digital. See id. at 41761 n.38.
    \146\ Id. at 41759 (citing Teucrium Order, 87 FR at 21679 (``The 
CME `comprehensively surveils futures market conditions and price 
movements on a real-time and ongoing basis in order to detect and 
prevent price distortions, including price distortions caused by 
manipulative efforts.' Thus the CME's surveillance can reasonably be 
relied upon to capture the effects on the CME bitcoin futures market 
caused by a person attempting to manipulate the proposed futures ETP 
by manipulating the price of CME bitcoin futures contracts, whether 
that attempt is made by directly trading on the CME bitcoin futures 
market or indirectly by trading outside of the CME bitcoin futures 
market. As such, when the CME shares its surveillance information 
with Arca, the information would assist in detecting and deterring 
fraudulent or manipulative misconduct related to the non-cash assets 
held by the proposed ETP.'')).
    \147\ See id. at 41759-41760.
    \148\ See id. at 41760.
    \149\ See id. at 41763-64.
    \150\ See id.
---------------------------------------------------------------------------

    BZX also states that CME bitcoin futures ETFs may be more 
susceptible to potential manipulation than a spot bitcoin ETP that 
offers only in-kind creation and redemption because of the underlying 
creation and redemption arbitrage mechanism.\151\ BZX asserts that any 
objective review of the proposals to list spot bitcoin ETPs compared to 
the CME bitcoin futures ETFs and ETPs would lead to the conclusion that 
spot bitcoin ETPs should be available to U.S. investors because ``any 
concerns related to preventing fraudulent and manipulative acts and 
practices related to [s]pot [b]itcoin ETPs would apply equally to the 
spot markets underlying the futures contracts held by a [CME] [b]itcoin 
[f]utures ETF.'' \152\
---------------------------------------------------------------------------

    \151\ See id. at 41760. BZX states that CME bitcoin futures 
pricing (and thus the value of the underlying holdings of a CME 
bitcoin futures ETF) is based on a single price derived from spot 
bitcoin pricing, and potential manipulation of a CME bitcoin futures 
ETF would require manipulation on the spot markets on which the 
pricing for CME bitcoin futures is based. On the other hand, the 
Exchange states that shares of a spot bitcoin ETP would represent an 
interest in bitcoin directly and authorized participants would be 
able to source bitcoin from any exchange and create or redeem with 
the applicable trust regardless of the price of the underlying 
index, meaning that a would-be manipulator of a spot bitcoin ETP 
would need to manipulate the price across all bitcoin markets or 
risk simply providing arbitrage opportunities for authorized 
participants. See id. at 41760, 41764. BZX also argues that ``the 
structure of [CME] [b]itcoin [f]utures ETFs provides negative 
outcomes for buy and hold investors as compared to a [s]pot 
[b]itcoin ETP.'' See id. See also infra Section III.C.1.
    \152\ Id. at 41760. BZX states that while the 1940 Act ``does 
offer certain investor protections, those protections do not relate 
to mitigating potential manipulation of the holdings of an ETF in a 
way that warrants distinction between [CME] [b]itcoin [f]utures ETFs 
and [s]pot [b]itcoin ETPs.'' Id.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission disagrees with these assertions and conclusions. The 
proposed rule change does not relate to the same underlying holdings as 
ETFs that provide exposure to bitcoin through CME bitcoin futures, or 
CME bitcoin futures-based ETPs. 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.\153\
---------------------------------------------------------------------------

    \153\ See supra note 11 and accompanying text.
---------------------------------------------------------------------------

    In focusing on whether ``concerns related to preventing fraudulent 
and

[[Page 16068]]

manipulative acts and practices related to [s]pot [b]itcoin ETPs would 
apply equally to the spot markets underlying the futures contracts held 
by a [CME] [b]itcoin [f]utures ETF,'' \154\ the Exchange 
mischaracterizes the framework that the Commission has articulated in 
the Winklevoss Order. As stated in the Winklevoss Order, the Commission 
is not applying a ``cannot be manipulated'' approach--either on the CME 
bitcoin futures market or the spot bitcoin markets. Rather, as the 
Commission has repeatedly emphasized, and also summarized above, the 
Commission is examining whether the proposal meets the requirements of 
the Exchange Act and, pursuant to the Rules of Practice, the burden is 
on BZX to demonstrate the validity of its contention that other means 
to prevent fraudulent and manipulative acts and practices are 
sufficient to justify dispensing with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to spot 
bitcoin,\155\ or to establish that it has entered into such a 
surveillance-sharing agreement.
---------------------------------------------------------------------------

    \154\ See Notice, 87 FR at 41760.
    \155\ See supra notes 38-41 and accompanying text.
---------------------------------------------------------------------------

    Consistent with this approach, the Commission's consideration (and 
thus far, disapproval) of proposals to list and trade spot bitcoin ETPs 
does not focus on an assessment of the overall risk of fraud and 
manipulation in the spot bitcoin or futures markets, or on the extent 
to which such risks are similar.\156\ Rather, the Commission's focus 
has been consistently on whether the listing exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying bitcoin assets of the ETP 
under consideration, so that it would have the ability to detect and 
deter manipulative activity. For reasons articulated in the orders 
approving proposals to list and trade CME bitcoin futures-based ETPs 
(i.e., the Teucrium Order and the Valkyrie XBTO Order), the Commission 
found that in each such case the listing exchange has entered into such 
a surveillance-sharing agreement.\157\ Applying the same framework to 
this proposed spot bitcoin ETP, however, as discussed and explained 
above, the Commission finds that BZX has not.
---------------------------------------------------------------------------

    \156\ The Commission's past general discussion on the risk of 
fraud and manipulation in the spot bitcoin or futures markets is 
only in response to arguments raised by the proposing listing 
exchanges (or commenters) that mitigating factors against fraud and 
manipulation in the spot bitcoin or futures markets should compel 
the Commission to dispense with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size 
related to the underlying bitcoin assets. See, e.g., Winklevoss 
Order, 83 FR at 37580, 37582-91 (addressing assertions that 
``bitcoin and [spot] bitcoin 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, 12599-
12608. But even in such instance, the central issue was about the 
need for such a surveillance-sharing agreement, not the overall risk 
of fraud and manipulation in the spot bitcoin or futures markets, or 
the extent to which such risks are similar.
    \157\ See Teucrium Order, 87 FR at 21678-81; Valkyrie XBTO 
Order, 87 FR at 28850-53.
---------------------------------------------------------------------------

    Moreover, for the CME bitcoin futures ETPs under consideration in 
the Teucrium Order and the Valkyrie XBTO Order, the proposed 
``significant'' regulated market (i.e., the CME) with which the listing 
exchange has a surveillance-sharing agreement is the same market on 
which the underlying bitcoin assets (i.e., CME bitcoin futures 
contracts) trade. Thus, the CME's surveillance can reasonably be relied 
upon to detect and deter manipulative activity caused by a person 
attempting to manipulate the CME bitcoin futures ETP through directly 
trading on the CME bitcoin futures market. Additionally, as explained 
in the Teucrium and the Valkyrie XBTO Orders, the CME's surveillance 
can also reasonably be relied upon to capture the effects on the CME 
bitcoin futures market caused by a person attempting to manipulate the 
CME bitcoin futures ETP by manipulating the price of CME bitcoin 
futures contracts when that attempt is made indirectly by trading 
outside of the CME bitcoin futures market.\158\ Regarding the approved 
Teucrium Bitcoin Futures Fund in the Teucrium Order (``Teucrium 
Fund''), for example, when the CME shares its surveillance information 
with the listing exchange, the information would assist in detecting 
and deterring fraudulent or manipulative misconduct related to the non-
cash assets held by the Teucrium Fund.\159\ Accordingly, the Commission 
explains in the Teucrium Order and the Valkyrie XBTO Order that it is 
unnecessary for a listing exchange to establish a reasonable likelihood 
that a would-be manipulator would have to trade on the CME itself to 
manipulate a proposed ETP whose only non-cash holdings would be CME 
bitcoin futures contracts.\160\
---------------------------------------------------------------------------

    \158\ See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order, 
87 FR at 28851.
    \159\ See Teucrium Order, 87 FR at 21679.
    \160\ See id.
---------------------------------------------------------------------------

    However, as the Commission also states in those Orders, this 
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets 
are not currently ``regulated.'' \161\ If an exchange seeking to list a 
spot bitcoin ETP relies on the CME as the regulated market with which 
it has a comprehensive surveillance-sharing agreement, the assets held 
by the spot bitcoin ETP would not be traded on the CME. Because of this 
significant difference, with respect to a spot bitcoin ETP, there would 
be reason to question whether a surveillance-sharing agreement with the 
CME would, in fact, assist in detecting and deterring fraudulent and 
manipulative misconduct affecting the price of the spot bitcoin held by 
that ETP. If, however, an exchange proposing to list and trade a spot 
bitcoin ETP identifies the CME as the regulated market with which it 
has a comprehensive surveillance-sharing agreement, the exchange could 
overcome the Commission's concern by demonstrating that there is a 
reasonable likelihood that a person attempting to manipulate the spot 
bitcoin ETP would have to trade on the CME in order to manipulate the 
ETP, because such demonstration would help establish that the 
exchange's surveillance-sharing agreement with the CME would have the 
intended effect of aiding in the detection and deterrence of fraudulent 
and manipulative misconduct related to the spot bitcoin held by the 
ETP.\162\
---------------------------------------------------------------------------

    \161\ See id. at 21679 n.46 (citing USBT Order, 85 FR at 12604; 
NYDIG Order, 87 FR at 14936 nn.65-67). See also Valkyrie XBTO Order, 
87 FR at 28851 n.42.
    \162\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
---------------------------------------------------------------------------

    Because, here, BZX is seeking to list a spot bitcoin ETP that 
relies on the CME as the purported ``significant'' regulated market 
with which it has a comprehensive surveillance-sharing agreement, the 
assets held by the proposed ETP would not be traded on the CME. Thus, 
there is reason to question whether a surveillance-sharing agreement 
with the CME would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct affecting the price of the spot 
bitcoin held by the proposed ETP.\163\ An exchange can overcome this

[[Page 16069]]

concern by demonstrating that there is a reasonable likelihood that a 
person attempting to manipulate the proposed ETP would have to trade on 
the CME in order to manipulate the ETP because such demonstration would 
help establish that an exchange's surveillance-sharing agreement with 
the CME would have the intended effect of aiding in the detection and 
deterrence of fraudulent and manipulative misconduct related to the 
spot bitcoin held by the proposed ETP.\164\ As discussed and explained 
above,\165\ the Commission finds that BZX has not made such 
demonstration.
---------------------------------------------------------------------------

    \163\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42. The Exchange mischaracterizes the 
Commission's statement in the Teucrium Order when the Exchange 
asserts that ``the Commission believes that CME's surveillance can 
capture the effects of trading on the relevant spot markets on the 
pricing of CME [b]itcoin [f]utures.'' Notice, 87 FR at 41759. What 
the Commission stated in the Teucrium Order is that for the Teucrium 
Fun (1) the proposed ``significant'' regulated market (i.e., the 
CME) with which the listing exchange has a surveillance-sharing 
agreement is the same market on which the underlying assets trade; 
and (2) therefore that the CME's surveillance can reasonably be 
relied upon to capture the effects on the CME bitcoin futures market 
(i.e., its own market) caused by a person attempting to manipulate 
the CME bitcoin futures ETP by manipulating the price of CME bitcoin 
futures contracts, whether that attempt is made by directly trading 
on the CME bitcoin futures market or indirectly by trading outside 
of the CME bitcoin futures market. See Teucrium Order, 87 FR at 
21679. Importantly, the Commission did not state that, for spot 
bitcoin ETPs such as the one proposed here, where the underlying 
asset would not trade on the CME, the CME's surveillance can 
similarly be relied upon to capture the effects of a person 
attempting to manipulate a spot bitcoin ETP by manipulating the 
price of spot bitcoin when the attempt is made by trading outside of 
the CME bitcoin futures market. Indeed, there is reason to question 
whether the CME's surveillance would capture manipulation of spot 
bitcoin that occurs off of the CME, if, for example, off-CME 
manipulation of spot bitcoin does not also similarly impact CME 
bitcoin futures contracts. And, as discussed below, the Exchange has 
not provided any data or analysis to show that CME bitcoin futures 
would be impacted by instances of fraud and manipulation in the spot 
bitcoin market that occurs off of the CME.
    \164\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
    \165\ See supra Section III.B.2.i.
---------------------------------------------------------------------------

    To the extent that the Exchange is arguing that the CME's 
surveillance would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct that impacts spot bitcoin ETPs 
in the same way as it would for misconduct that impacts the CME bitcoin 
futures ETFs/ETPs, the information in the record for this filing does 
not support such a claim.
    BZX asserts that CME bitcoin futures pricing ``is based on pricing 
from spot bitcoin markets'' and that ``the pricing mechanism applicable 
to the Shares is similar to the CME CF Bitcoin Reference Rate.'' \166\ 
However, the Exchange provides no evidence or data to support the 
assertion that CME bitcoin futures pricing ``is based on'' pricing from 
spot bitcoin markets. Moreover, if, as the Exchange claims here in the 
context of its arbitrary/capricious argument, CME bitcoin futures 
prices are ``based on'' spot bitcoin prices, the Exchange does not 
explain how this is consistent with, and indeed how it does not 
contradict, the Exchange's claims in the context of its ``significant 
market'' arguments that CME bitcoin futures prices ``lead'' spot 
bitcoin prices.
---------------------------------------------------------------------------

    \166\ See Notice, 87 FR at 41763, 41769.
---------------------------------------------------------------------------

    In addition, to the extent the Exchange is asserting that CME 
bitcoin futures pricing ``is based on'' spot bitcoin pricing because of 
the BRR, this is also not supported by the evidence in the record for 
this proposal. While the BRR is used to value the final cash settlement 
of CME bitcoin futures contracts, it is not generally used for daily 
cash settlement of such contracts, nor is it claimed to be used for any 
intra-day trading of such contracts.\167\ Moreover, the shares of CME 
bitcoin futures ETFs/ETPs trade in secondary markets, as would the 
Shares, and there is no evidence in the record for this filing that 
such intra-day, secondary market trading prices are, or would be, 
determined by the BRR. Further, the Commission's determination in the 
Teucrium Order and the Valkyrie XBTO Order to approve the listing and 
trading of the relevant CME bitcoin futures ETPs was not based on 
either the ETPs' or the underlying CME bitcoin futures contracts' 
pricing mechanism. Rather, as discussed above, the Commission approved 
the listing and trading of such CME bitcoin futures ETPs because the 
Commission found that the listing exchanges have a surveillance-sharing 
agreement with a regulated market of significant size related to the 
underlying bitcoin assets--which for such ETPs are CME bitcoin futures 
contracts, not spot bitcoin.
---------------------------------------------------------------------------

    \167\ See, e.g., Grayscale Order, 87 FR at 40317-18.
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    Moreover, even if the Exchange had demonstrated a connection 
between spot bitcoin prices and CME bitcoin futures prices, which it 
has not, it does not necessarily follow that the CME's surveillance 
would, in fact, assist in detecting and deterring fraudulent and 
manipulative misconduct that impacts spot bitcoin ETPs in the same way 
as it would for misconduct that impacts the CME bitcoin futures ETFs/
ETPs--particularly when such misconduct occurs off of the CME 
itself.\168\ This is because it does not--absent supporting data--
necessarily follow that any manipulation that impacts spot bitcoin also 
similarly impacts CME bitcoin futures contracts. The Exchange has not 
provided analysis or data that assesses the reaction (if any) of CME 
bitcoin futures contracts to instances of fraud and manipulation in 
spot bitcoin markets.
---------------------------------------------------------------------------

    \168\ See also supra note 163.
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    In addition, for the reasons discussed throughout this order, the 
disapproval of the proposal would not constitute an ``arbitrary and 
capricious'' administrative action in violation of the Administrative 
Procedure Act.\169\ Importantly, the issuers are not similarly 
situated. The issuers of CME bitcoin futures-based ETFs/ETPs propose to 
hold only CME bitcoin futures contracts (which are traded on the CME 
itself) as their only non-cash holdings, and the Trust proposes to hold 
only spot bitcoin (which is not traded on the CME). As explained in 
detail above, and in the Teucrium Order, the Valkyrie XBTO Order, and 
the Grayscale Order, because of this important difference, for a spot 
bitcoin ETP, there is reason to question whether a surveillance-sharing 
agreement with the CME would, in fact, assist in detecting and 
deterring fraudulent and manipulative misconduct affecting the price of 
the spot bitcoin held by that ETP.\170\ And as discussed above, neither 
the Exchange nor any other evidence in the record for this filing, 
sufficiently demonstrates that the CME's surveillance can be reasonably 
relied upon to capture the effects of manipulation of the spot bitcoin 
assets underlying the proposed ETP when such manipulation is not 
attempted on the CME itself.
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    \169\ The Commission is disapproving this proposed rule change 
because BZX has not met its burden to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5). 
The Commission's disapproval of this proposed rule change does not 
rest on an evaluation of the relative investment quality of a 
product holding spot bitcoin versus a product holding CME bitcoin 
futures, or an assessment of whether bitcoin, or blockchain 
technology more generally, has utility or value as an innovation or 
an investment. See, e.g., Winklevoss Order, 83 FR at 37580; USBT 
Order, 85 FR at 12597; One River Order, 87 FR at 33550; Grayscale 
Order, 87 FR at 40318 n.227.
    \170\ See supra note 163 and accompanying text.
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    Moreover, the analytical framework for assessing compliance with 
the requirements of Exchange Act Section 6(b)(5) that the Commission 
applies here (i.e., comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to the underlying bitcoin 
assets) is the same one that the Commission has applied in each of its 
orders considering previous proposals to list bitcoin-based commodity 
trusts and trust issued receipts.\171\ The Commission has applied this 
framework to each proposal by analyzing the evidence presented by the 
listing exchange and statements made by commenters.\172\ Exchange Act 
Section 6(b)(5) can be satisfied by a proper showing; the Commission 
has in fact recently approved proposals by NYSE Arca, Inc. and the 
Nasdaq Stock Market to list and trade shares of ETPs holding CME 
bitcoin futures as their

[[Page 16070]]

only non-cash holdings.\173\ And in the orders approving the CME 
bitcoin futures-based ETPs, the Commission explicitly discussed how an 
exchange seeking to list and trade a spot bitcoin ETP could overcome 
the lack of a one-to-one relationship between the regulated market with 
which it has a surveillance-sharing agreement and the market(s) on 
which the assets held by a spot bitcoin ETP could be traded: by 
demonstrating that there is a reasonable likelihood that a person 
attempting to manipulate the spot bitcoin ETP would have to trade on 
the regulated market (i.e., on the CME) to manipulate the spot bitcoin 
ETP.\174\
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    \171\ See supra notes 11-24 and accompanying text.
    \172\ See supra note 11.
    \173\ See Teucrium Order and Valkyrie XBTO Order, supra note 11.
    \174\ See supra note 162 and accompanying text.
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    When considering past proposals for spot bitcoin ETPs, the 
Commission has, in particular, reviewed the econometric and/or 
statistical evidence in the record to determine whether the listing 
exchange's proposal has met the applicable standard.\175\ The 
Commission's assessment fundamentally presents quantitative, empirical 
questions, but, as discussed above, the Exchange has not provided 
evidence sufficient to support its arguments.\176\
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    \175\ See, e.g., USBT Order, 85 FR at 12612-13; Previous VanEck 
Order, 86 FR at 64547-48; WisdomTree Order, 86 FR at 69330-32; 
Kryptoin Order, 86 FR at 74175-76; NYDIG Order, 87 FR at 14938-39; 
Wise Origin Order, 87 FR at 5534-36; Global X Order, 87 FR at 14919-
20; ARK 21Shares Order, 87 FR at 20023-24; Bitwise Order, 87 FR at 
40286-92; Grayscale Order, 87 FR at 40311-14.
    \176\ See supra Sections III.B.1 & III.B.2.
---------------------------------------------------------------------------

    The requirements of Section 6(b)(5) of the Exchange Act apply to 
the rules of national securities exchanges. Accordingly, the relevant 
obligation to have a comprehensive surveillance-sharing agreement with 
a regulated market of significant size related to spot bitcoin, or 
other means to prevent fraudulent and manipulative acts and practices 
that are sufficient to justify dispensing with such a 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.\177\ 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.
---------------------------------------------------------------------------

    \177\ 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; 
ARK 21Shares Order, 87 FR at 20026; Global X Order, 87 FR at 14921; 
Bitwise Order, 87 FR at 40292; Grayscale Order, 87 FR at 40319.
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(1) BZX's Assertions
    The Exchange states that the proposal is designed to protect 
investors and the public interest. BZX asserts that access for U.S. 
retail investors to gain exposure to bitcoin via a transparent and U.S. 
regulated, exchange-traded vehicle remains limited.\178\ According to 
the Exchange, current options include: (i) OTC bitcoin funds with high 
management fees and potentially volatile premiums and discounts; \179\ 
(ii) facing the technical risk, complexity, and generally high fees 
associated with buying spot bitcoin; \180\ (iii) purchasing shares of 
operating companies that they believe will provide proxy exposure to 
bitcoin with limited disclosure about the associated risks; \181\ or 
(iv) purchasing CME bitcoin futures ETFs that represent a sub-optimal 
investment for long-term investors.\182\
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    \178\ See Notice, 87 FR at 41759.
    \179\ BZX states that ``[t]he largest OTC [b]itcoin [f]und has 
an [assets under management or ``AUM''] of $23 billion.'' See id. at 
41758 n.38. According to BZX, the premium and discount for OTC 
bitcoin funds ``is known to move rapidly'' and ``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. BZX further asserts that ``investors 
that do not directly buy OTC [b]itcoin [f]unds can be disadvantaged 
by extreme premiums (or discounts) and premium volatility.'' See id.
    \180\ The Exchange states that ``the Trust presents advantages 
from an investment protection standpoint for retail investors 
compared to owning spot bitcoin directly,'' such as ``the 
elimination of the need for an individual retail investor to either 
manage their own private keys or to hold bitcoin through a 
cryptocurrency exchange that lacks sufficient protections.'' See id. 
at 41760.
    \181\ BZX states that a number of operating companies engaged in 
unrelated businesses have announced investments as large as $5.3 
billion in bitcoin. See id. at 41759 n.39. See also id. at 41760. 
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 exposure to bitcoin. 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. See id. at 41759 n.39, 41760-61.
    \182\ See id. at 41758-59. The Exchange asserts that, as a 
result of rolling CME bitcoin futures contracts and also potentially 
hitting CME position limits and being forced to invest in non-
futures assets for bitcoin exposure, CME bitcoin futures ETFs will 
``unnecessarily cost U.S. investors significant amounts of money 
every year compared to [s]pot [b]itcoin ETPs'' and the proposed rule 
change ``should be reviewed by the Commission with this important 
investor protection context in mind.'' See id. at 41760.
---------------------------------------------------------------------------

    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 vehicles holding spot 
bitcoin) to gain exposure to bitcoin, disadvantaging U.S. investors and 
leaving them with more risky means of getting bitcoin exposure.\183\ 
BZX concludes that its proposal limits the risk to U.S. investors that 
are increasingly seeking exposure to bitcoin by providing direct 
exposure to bitcoin in a regulated, transparent, U.S. exchange-traded 
vehicle, by: (i) reducing premium volatility; (ii) reducing management 
fees through meaningful competition; (iii) providing an alternative to 
CME bitcoin futures ETFs; (iv) reducing risks associated with investing 
in operating companies that are imperfect proxies for bitcoin exposure; 
and (v) providing an alternative to custodying spot bitcoin.\184\
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    \183\ See id. at 41759. BZX represents 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 spot 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. 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. ETFs are 
using Canadian bitcoin ETPs to gain exposure to spot bitcoin--and 
that approving this proposal ``would provide U.S. [ETFs] and mutual 
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 41759 n.40.
    \184\ See id. at 41770.
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(2) Analysis
    The Commission disagrees that the proposal should be approved 
because it is designed to protect investors and the public interest. 
Here, even if it were true that, compared to trading in unregulated 
spot bitcoin markets or OTC bitcoin

[[Page 16071]]

funds, trading a spot bitcoin-based ETP on a national securities 
exchange could provide some additional protection to investors, or that 
the Shares would provide more efficient exposure to bitcoin than other 
products on the market such as CME bitcoin futures ETFs/ETPs, 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.\185\ 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.\186\ Thus, even if a proposed rule 
change purports to protect investors from a particular type of 
investment risk--such as experiencing a potentially high premium/
discount by investing in OTC bitcoin funds or roll costs by investing 
in bitcoin futures ETFs/ETPs--or purports to provide benefits to 
investors and the public interest--such as enhancing competition--the 
proposed rule change may still fail to meet the requirements under the 
Exchange Act.\187\
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    \185\ See supra note 177.
    \186\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C). See also Affiliated Ute Citizens of Utah v. United 
States, 406 U.S. 128, 151 (1972) (Congress enacted the Exchange Act 
largely ``for the purpose of avoiding frauds''); Gabelli v. SEC, 568 
U.S. 442, 451 (2013) (The ``SEC's very purpose'' is to detect and 
mitigate fraud.).
    \187\ See SolidX Order, 82 FR at 16259; Previous 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.
---------------------------------------------------------------------------

    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),\188\ and, accordingly, the Commission must disapprove the 
proposal.\189\
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    \188\ 15 U.S.C. 78f(b)(5).
    \189\ 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).
---------------------------------------------------------------------------

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 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-2022-035 be, and it 
hereby is, disapproved.

    By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-05298 Filed 3-14-23; 8:45 am]
BILLING CODE 8011-01-P


