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

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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

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

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

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

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

(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\
---------------------------------------------------------------------------

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

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

(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

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

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

    \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