[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14076-14087]
[FR Doc No: 2017-05213]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80206; File No. SR-BatsBZX-2016-30]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, to BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, To List
and Trade Shares Issued by the Winklevoss Bitcoin Trust

March 10, 2017.
    Bats BZX Exchange (``Exchange'' or ``BZX'') has filed a proposed
rule change to list and trade shares of the Winklevoss Bitcoin
Trust.\1\ When an

exchange makes such a filing,\2\ the Commission must determine whether
the proposed rule change is consistent with the statutory provisions,
and the rules and regulations, that apply to national securities
exchanges.\3\ The Commission must approve the filing if it finds that
the proposed rule change is consistent with these legal requirements,
and it must disapprove the filing if it does not make such a
finding.\4\
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    \1\ The Exchange filed notice of the proposed rule change on
June 30, 2016, and the Commission published the notice in the
Federal Register on July 14, 2016. See Exchange Act Release No.
78262 (July 8, 2016), 81 FR 45554 (July 14, 2016) (``Notice''). On
August 23, 2016, the Commission designated a longer period within
which to act on the proposed rule change. See Exchange Act Release
No. 78653 (Aug. 23, 2016), 81 FR 59256 (Aug. 29, 2016). On October
12, 2016, the Commission instituted proceedings under Section
19(b)(2)(B) of the Securities Exchange Act of 1934 (``Exchange
Act''), 15 U.S.C. 78s(b)(2)(B), to determine whether to approve or
disapprove the proposed rule change. See Exchange Act Release No.
79084 (Oct. 12, 2016), 81 FR 71778 (Oct. 18, 2016). On October 20,
2016, the Exchange filed Amendment No. 1 to the proposed rule
change, replacing the original filing in its entirety, and Amendment
No. 1 was published for comment in the Federal Register on November
3, 2016. See Exchange Act Release No. 79183 (Oct. 28, 2016), 81 FR
76650 (Nov. 3, 2016) (``Amendment No. 1''). On January 4, 2017, the
Commission designated a longer period for Commission action on the
proposed rule change. See Exchange Act Release No. 79725 (Jan. 4,
2017), 82 FR 2425 (Jan. 9, 2017) (designating March 11, 2017, as the
date by which the Commission must either approve or disapprove the
proposed rule change). On February 22, 2017, the Exchange filed
Amendment No. 2 to the proposed rule change (``Amendment No. 2'').
Amendment No. 2 further modified the Exchange's proposal by (a)
changing the size of a creation and redemption basket from 10,000
shares to 100,000 shares, (b) changing the bitcoin value of a share
from 0.1 bitcoin to 0.01 bitcoin, and (c) changing the Exchange's
representation about the number of shares outstanding at the
commencement of trading from 100,000 shares to 500,000 shares.
Because Amendment No. 2 does not materially alter the substance of
the proposed rule change, Amendment No. 2 is not subject to notice
and comment. Amendment No. 2 is available on the Commission's Web
site at https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630-1594698-132357.pdf.
    \2\ Such filings are made under Section 19(b)(1) of the Exchange
Act, 15 U.S.C. 78s(b)(1), and Exchange Act Rule 19b-4, 17 CFR
240.19b-4.
    \3\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
    \4\ See id.
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    As discussed further below, the Commission is disapproving this
proposed rule change because it does not find the proposal to be
consistent with Section 6(b)(5) of the Exchange Act, which requires,
among other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest.\5\ The Commission
believes that, in order to meet this standard, an exchange that lists
and trades shares of commodity-trust exchange-traded products
(``ETPs'') must, in addition to other applicable requirements, satisfy
two requirements that are dispositive in this matter. First, the
exchange must have surveillance-sharing agreements with significant
markets for trading the underlying commodity or derivatives on that
commodity. And second, those markets must be regulated.\6\
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    \5\ 15 U.S.C. 78f(b)(5).
    \6\ As discussed below, infra note 96 and accompanying text, the
significant markets relating to the commodity-trust ETPs approved to
date have been well-established regulated futures markets for the
underlying commodity.
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    Based on the record before it, the Commission believes that the
significant markets for bitcoin are unregulated. Therefore, as the
Exchange has not entered into, and would currently be unable to enter
into, the type of surveillance-sharing agreement that has been in place
with respect to all previously approved commodity-trust ETPs--
agreements that help address concerns about the potential for
fraudulent or manipulative acts and practices in this market--the
Commission does not find the proposed rule change to be consistent with
the Exchange Act.

I. Description of the Proposal

    The Exchange proposes to list and trade shares (``Shares'') of the
Winklevoss Bitcoin Trust (``Trust'') as Commodity-Based Trust Shares
under BZX Rule 14.11(e)(4).\7\ Details regarding the proposal and the
Trust can be found in Amendments No. 1 and 2 to the proposal,\8\ and in
the registration statement for the Trust,\9\ but the salient aspects of
the proposal are described below.\10\
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    \7\ See BZX Rule 14.11(e)(4)(C) (permitting the listing and
trading of ``Commodity-Based Trust Shares,'' defined as a security
(a) that is issued by a trust that holds a specified commodity
deposited with the trust; (b) that is issued by the trust in a
specified aggregate minimum number in return for a deposit of a
quantity of the underlying commodity; and (c) that, when aggregated
in the same specified minimum number, may be redeemed at a holder's
request by the trust, which will deliver to the redeeming holder the
quantity of the underlying commodity). Other national securities
exchanges that list and trade shares of commodity-trust ETPs have
similar rules. See, e.g., NYSE Arca Equities Rule 8.201 (permitting
the listing and trading of Commodity-Based Trust Shares) and Nasdaq
Rule 5711(d) (permitting the listing and trading of Commodity-Based
Trust Shares). Commodity-trust ETPs differ from exchange-traded
funds (``ETFs'') in a number of ways, including that they hold as an
asset a single commodity, rather than a portfolio of multiple
securities, and that they are not regulated under the Investment
Company Act of 1940.
    \8\ See Amendments No. 1 and 2, supra note 1.
    \9\ See Registration Statement on Form S-1, as amended, dated
February 8, 2017 (File No. 333-189752) (``Registration Statement'').
The Exchange represents in the proposed rule change that the
Registration Statement will be effective as of the date of any offer
and sale pursuant to the Registration Statement.
    \10\ The proposed rule change describes the ETP's underlying
bitcoin asset as a ``digital asset'' and as a ``commodity,'' see
Amendment No. 1, supra note 1, 81 FR at 76652 & n.21, and describes
the ETP as a Commodity-Based Trust. For the purpose of considering
this proposal, this order describes bitcoin as a ``digital asset''
and a ``commodity.''
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    The Trust would hold only bitcoins as an asset,\11\ and the
bitcoins would be in the custody of, and secured by, the Trust's
custodian, Gemini Trust Company LLC (``Custodian''), which is a
limited-liability trust company chartered by the State of New York and
supervised by the New York State Department of Financial Services
(``NYSDFS'').\12\ Gemini Trust Company is also an affiliate of Digital
Asset Services LLC, the sponsor of the Trust (``Sponsor'').\13\ The
Trust would issue and redeem the Shares only in ``Baskets'' of 100,000
Shares and only to Authorized Participants, and these transactions
would be conducted ``in-kind'' for bitcoin only.\14\
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    \11\ Bitcoin is a digital asset that is issued by, and
transmitted through, the decentralized, open-source protocol of the
peer-to-peer bitcoin computer network that hosts the public
transaction ledger, known as the ``Blockchain,'' on which all
bitcoins are recorded. The bitcoin network source code includes the
protocols that govern the creation of bitcoin and the cryptographic
system that secures and verifies bitcoin transactions. See id. at
76652.
    \12\ See id. at 76651-52.
    \13\ See id. at 76651.
    \14\ See id. at 76664-65. See also Amendment No. 2, supra note
1.
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    The investment objective of the Trust would be for the Shares to
track the price of bitcoins on the Gemini Exchange, which is a digital-
asset exchange owned and operated by the Gemini Trust Company.\15\ The
Net Asset Value (``NAV'') of the Trust would be calculated each
business day, based on the clearing price of that day's 4:00 p.m. ET
Gemini Exchange Auction, a two-sided auction open to all Gemini
Exchange customers.\16\ The Intraday Indicative Value of the Trust
would be calculated and disseminated by the Sponsor, every 15 seconds
during the Exchange's regular trading session, based on the most-recent
Gemini Exchange Auction price.\17\ The Exchange represents that it has
entered into a comprehensive surveillance-sharing agreement with the
Gemini Exchange.\18\
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    \15\ See Amendment No. 1, supra note 1, 81 FR at 76652.
    \16\ See id. In the event that the Sponsor determines that the
Gemini Exchange Auction price, because of extraordinary
circumstances, is ``not an appropriate basis for evaluation of the
Trust's bitcoin on a given Business Day,'' the Exchange's proposal
provides that the Sponsor may use other specified criteria to value
the holdings of the Trust. See id. at 76664.
    \17\ See id. at 76666.
    \18\ See id. at 76668. As discussed below, infra Section
III.B.3, the Commission does not believe that this agreement is
sufficient to form the basis for approving this proposed rule
change.
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II. Summary of Comment Letters

    The comment period closed on November 25, 2016. As of March 8,
2017, the Commission had received 59 comment letters on the proposed
rule change.\19\ Many of these letters address

the nature and uses of bitcoin; \20\ the state of development of
bitcoin as a digital asset; \21\ the inherent value of, and risks of
investing in, bitcoin; \22\ the desire of investors to gain access to
bitcoin through an ETP; \23\ the appropriate measures for the Trust to
secure its bitcoin holdings against theft or loss; \24\ whether the
Trust should insure its bitcoin holdings against theft or loss; \25\
the blockchain treatment of positions in the Shares, including short
positions or derivative positions; \26\ the potential conflicts of
interest related to the affiliations among the Sponsor, the Custodian,
and the Gemini Exchange; \27\ the proposed valuation method for the
Trust's holdings; \28\ or the legitimacy or enhanced regulatory
protection that Commission approval of the proposed ETP might confer
upon bitcoin as a digital asset.\29\ Ultimately, however, comments on
these topics do not bear on the basis for the Commission's decision to
disapprove the proposal. Accordingly, the Commission will summarize and
address the comments that relate to the susceptibility of bitcoin or
the Shares to fraudulent or manipulative acts and practices, including
the need for surveillance-sharing agreements with significant,
regulated markets for trading in bitcoin or derivatives on bitcoin.
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    \19\ See Letters from Robert D. Miller, VP Technical Services,
RKL eSolutions (July 11, 2016) (``R.D. Miller Letter''); Jorge
Stolfi, Full Professor, Institute of Computing UNICAMP (July 13,
2016) (``Stolfi Letter''); Guillaume Lethuillier (July 26, 2016)
(``Lethuillier Letter''); Michael B. Casey (July 31, 2016) (``Casey
Letter''); Erik A. Aronesty, Sr. Software Engineer, Bloomberg LP
(Aug. 2, 2016) (``Aronesty Letter''); Dan Anderson (Aug. 27, 2016)
(``Anderson Letter''); Robert Miller (Oct. 12, 2016) (``R. Miller
Letter''); Lysle Shaw-McMinn, O.D. (Oct. 13, 2016) (``McMinn
Letter''); Nils Neidhardt (Oct. 13, 2016) (``Neidhardt Letter'');
Dana K. Barish (2 letters; Oct. 13, 2016) (``Barish Letter'' and
``Barish Letter II'')); Xin Lu (Oct. 13, 2016) (``Xin Lu Letter'');
Rodger Delehanty CFA (Oct. 14, 2016) (``Delehanty Letter''); Dylan
(Oct. 14, 2016) (``Dylan Letter''); Dana K. Barish (Oct. 14, 2016)
(``Barish Letter III''); Dana K. Barish (2 letters; Oct. 15, 2016)
(``Barish Letter IV'' and ``Barish Letter V''); Jorge Stolfi, Full
Professor, Institute of Computing UNICAMP (Nov. 1, 2016) (``Stolfi
Letter II''); Michael B. Casey (Nov. 5, 2016) (``Casey Letter II'');
Anonymous (Nov. 8, 2016) (``Anonymous Letter''); Chris Burniske,
Blockchain Products Lead, ARK Investment Management LLC (Nov. 8,
2016) (``ARK Letter''); Colin Keeler (Nov. 14, 2016) (``Keeler
Letter''); Robert S. Tull, (Nov. 14, 2016) (``Tull Letter''); Mark
T. Williams (Nov. 15, 2016) (``Williams Letter''); Anonymous (Nov.
21, 2016) (``Anonymous Letter II''); XBT OPPS Team (Nov. 21, 2016)
(``XBT Letter''); Anonymous (Nov. 22, 2016) (``Anonymous Letter
III''); Ken Maher (Nov. 22, 2016) (``Maher Letter''); Kyle Murray,
Assistant General Counsel, Bats Global Markets, Inc. (Nov. 25, 2016)
(``Bats Letter''); Colin Baird (Nov. 26, 2016) (``Baird Letter'');
Scott P. Hall (Jan. 5, 2017) (``Hall Letter''); Suzanne H. Shatto
(Jan. 24, 2017) (``Shatto Letter''); Joshua Lim and Dan Matuszewski,
Treasury & Trading Operations, Circle Internet Financial, Inc. (Feb.
3, 2017) (``Circle Letter''); Zachary J. Herbert (Feb. 10, 2017)
(``Herbert Letter''); Thomas Fernandez (Feb. 12, 2017) (``Fernandez
Letter''); Diego Tomaselli (Feb. 17, 2017) (``Tomaselli Letter'');
Hans Christensen (Feb. 20, 2017) (``Christensen Letter''); Jake Kim
(Feb. 22, 2017) (``Kim Letter''); Andrea Dalla Val (Mar. 4, 2017)
(``Dalla Val Letter''); Josh Barraza (Mar. 6, 2017) (``Barraza
Letter''); Chad Rigsby (Mar. 6, 2017) (``Rigsby Letter''); Michael
Lee (Mar. 6, 2017) (``Lee Letter''); Fabrizio Marchionne (Mar. 6,
2017) (``Marchionne Letter''); Ben Elron (Mar. 6, 2017) (``Elron
Letter''); Patrick Miller (Mar. 6, 2017) (``P. Miller Letter'');
Phil Chronakis (Mar. 6, 2017) (``Chronakis Letter''); Situation
(Mar. 6, 2017) (``Situation Letter''); Steven Swiderski (Mar. 6,
2017) (``Swiderski Letter''); Marcia Paneque (Mar. 6, 2017)
(``Paneque Letter''); Jeremy Nootenboom (Mar. 6, 2017) (``Nootenboom
Letter''); Alan Struna (Mar. 6, 2017) (``Struna Letter''); Mike
Johnson (Mar. 6, 2017) (``Johnson Letter''); Anonymous (Mar. 7,
2017) (``Anonymous Letter IV''); Brian Bang (Mar. 7, 2017) (``Bang
Letter''); Anthony Schulte (Mar. 7, 2017) (``Schulte Letter'');
Melissa Whitman (Mar. 8, 2017) (``Whitman Letter''); Harold Primm
(Mar. 8, 2017) (``Primm Letter''); Shad (Mar. 8, 2017) (``Shad
Letter''); Anonymous (Mar. 8, 2017) (``Anonymous Letter V''). All
comments on the proposed rule change are available on the
Commission's Web site at: https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630.shtml.
    \20\ See, e.g., Stolfi Letter, supra note 19; Stolfi Letter II,
supra note 19; Chronakis Letter, supra note 19.
    \21\ See, e.g., Stolfi Letter II, supra note 19; Barish Letter
IV, supra note 19; ARK Letter, supra note 19; Lee Letter, supra note
19; Chronakis Letter, supra note 19; Struna Letter, supra note 19;
Johnson Letter, supra note 19; Anonymous Letter IV, supra note 19;
Whitman Letter, supra note 19; Anonymous Letter V, supra note 19.
    \22\ See, e.g., Stolfi Letter, supra note 19; Stolfi Letter II,
supra note 19; Shatto Letter, supra note 19; Lethuillier Letter,
supra note 19; Delehanty Letter, supra note 19; Xin Lu Letter, supra
note 19; Neidhardt Letter, supra note 19; XBT Letter, supra note 19;
Williams Letter, supra note 19; ARK Letter, supra note 19; Kim
Letter, supra note 19; Dalla Val Letter, supra note 19; Paneque
Letter, supra note 19; Lee Letter, supra note 19; Chronakis Letter,
supra note 19; Struna Letter, supra note 19; Johnson Letter, supra
note 19; Whitman Letter, supra note 19; Primm Letter; supra note 19;
Anonymous Letter V, supra note 19.
    \23\ See, e.g., R.D. Miller Letter, supra note 19; R. Miller
Letter, supra note 19; Hall Letter, supra note 19; Keeler Letter,
supra note 19; Lethuillier Letter, supra note 19; McMinn Letter,
supra note 19; Herbert Letter, supra note 19; Fernandez Letter,
supra note 19; Tomaselli Letter, supra note 19; Circle Letter, supra
note 19; Baird Letter, supra note 19; Stolfi Letter, supra note 19;
Anderson Letter, supra note 19; P. Miller Letter, supra note 19;
Swiderski Letter, supra note 19; Situation Letter, supra note 19;
Paneque Letter, supra note 19; Nootenboom Letter, supra note 19;
Chronakis Letter, supra note 19.
    \24\ See, e.g., Barish Letter, supra note 19; Barish Letter IV,
supra note 19; Neidhardt Letter, supra note 19; Dylan Letter, supra
note 19; Keeler Letter, supra note 19; Casey Letter, supra note 19;
Aronesty Letter, supra note 19; ARK Letter, supra note 19; Tull
Letter, supra note 19; Stolfi Letter, supra note 19; Stolfi Letter
II, supra note 19; McMinn Letter, supra note 19; Lethuillier Letter,
supra note 19; Delehanty Letter, supra note 19; Tull Letter II,
supra note 19; Anonymous Letter, supra note 19; Bats Letter, supra
note 19; Struna Letter, supra note 19.
    \25\ See, e.g., Anonymous Letter, supra note 19; Tull Letter,
supra note 19; Lethuillier Letter, supra note 19; Aronesty Letter,
supra note 19; Delehanty Letter, supra note 19; XBT Letter, supra
note 19; ARK Letter, supra note 19; Anonymous Letter III, supra note
19; Bats Letter, supra note 19.
    \26\ See, e.g., Anonymous Letter, supra note 19; Tull Letter,
supra note 19.
    \27\ See, e.g., XBT Letter, supra note 19; Tull Letter, supra
note 19; Stolfi Letter II, supra note 19; ARK Letter, supra note 19;
Anonymous Letter II, supra note 19; Bats Letter, supra note 19.
    \28\ See, e.g., McMinn Letter, supra note 19; Bats Letter, supra
note 19; Delehanty Letter II, supra note 19; Dylan Letter, supra
note 19; ARK Letter, supra note 19; Anonymous Letter II, supra note
19; Circle Letter, supra note 19.
    \29\ See, e.g., Stolfi Letter, supra note 19; Circle Letter,
supra note 19; Kim Letter, supra note 19; Delehanty Letter, supra
note 19; Baird Letter, supra note 19; Anonymous Letter, supra note
19; Keeler Letter, supra note 19; Dalla Val Letter, supra note 19;
Elron Letter, supra note 19; P. Miller Letter, supra note 19;
Marchionne Letter, supra note 19; Situation Letter, supra note 19;
Paneque Letter, supra note 19; Nootenboom Letter, supra note 19;
Chronakis Letter, supra note 19; Johnson Letter, supra note 19; Bang
Letter, supra note 19; Primm Letter, supra note 19.
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A. Comments Regarding The Worldwide Market for Bitcoin

    Several commenters note that the majority of bitcoin trading occurs
on exchanges outside the United States. One commenter claims that most
daily trading volume is conducted on poorly capitalized, unregulated
exchanges located outside the United States and that these non-U.S.
exchanges and their practices significantly influence the price
discovery process.\30\ Another commenter states that the biggest and
most-influential bitcoin exchange is located outside U.S.
jurisdiction.\31\
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    \30\ See Williams Letter, supra note 19, at 2.
    \31\ See Anonymous Letter IV, supra note 19.
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    One commenter states that, since 2013, the price of bitcoin has
been defined mostly by the major Chinese exchanges, whose volumes dwarf
those of exchanges outside China. According to the commenter, those
exchanges are not regulated or audited, and are suspected of engaging
in unethical practices like front-running, wash trades, and trading
with insufficient funds. The commenter interprets pricing data from
these Chinese exchanges to mean that the price of bitcoin is defined
entirely by speculation, without any ties to fundamentals.\32\ Another
commenter also observes that Chinese markets drive much of the volume
in the bitcoin markets and that the bitcoin/Chinese Yuan (BTC/CNY)
quote is apt to trade at a significant premium to the bitcoin/U.S.
dollar (BTC/USD) quote. The commenter points out that large arbitrage
opportunities would not exist for long in efficient markets, but they
do persist in bitcoin markets.\33\
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    \32\ See Stolfi Letter II, supra note 19.
    \33\ See ARK Letter, supra note 19, at 5.
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    One commenter claims that a sizeable number of traders and owners
of bitcoin do not desire to trade in a well-regulated environment for
reasons including tax evasion, evading capital controls, and money
laundering. This commenter also states that U.S. exchanges do not offer
products such as fee-free trading, margin trading, or options, which
drive traffic to the top non-U.S. exchanges. The commenter claims that,
because trade is now sparse on regulated U.S. exchanges including
Gemini, arbitrage will not occur efficiently or proportionally to
mitigate manipulation from the dominant unregulated bitcoin exchanges.
This commenter also claims that several Chinese exchanges actively
engage in bitcoin mining operations, creating a conflict of interest,
and notes that these exchanges are unaudited and unaccountable.\34\
Another commenter

also claims that the Chinese exchanges that account for the bulk of
trading are subject to little regulatory oversight and that existing
know-your-customer or identity-verification measures are lax and can be
easily bypassed.\35\
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    \34\ See Maher Letter, supra note 19; see also Johnson Letter,
supra note 19; Anonymous Letter IV, supra note 19. According to the
Exchange, ``bitcoin mining'' refers to the process of adding a set
of transaction records (a ``block'') to bitcoin's ``blockchain''--
its public ledger of past transactions. See Amendment No. 1, supra
note 1, 81 FR at 76655. The Exchange states that ``[b]itcoin miners
engage in a set of prescribed complex mathematical calculations in
order to add a block to the blockchain and thereby confirm bitcoin
transactions included in that block's data. Miners that are
successful in adding a block to the blockchain are automatically
awarded a fixed number of bitcoins for their efforts.'' Id.
    \35\ See Maher Letter, supra note 19.
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    One commenter states that the market for bitcoin, by trade volume,
is very shallow. This commenter notes that the majority of bitcoin is
hoarded by a few owners or is out of circulation. The commenter also
notes that ownership concentration is high, with 50 percent of bitcoin
in the hands of fewer than 1,000 people, and that this high ownership
concentration creates greater market liquidity risk, as large blocks of
bitcoin are difficult to sell in a timely and market efficient manner.
This commenter claims that daily trade volume is only a small fraction
of total bitcoin mined.\36\ This commenter also states that several
fundamental flaws make bitcoin a dangerous asset class to force into an
exchange traded structure, including shallow trade volume, extreme
hoarding, low liquidity, hyper price volatility, a global web of
unregulated bucket-shop exchanges, high bankruptcy risk, and oversized
exposure to trading in countries where there is no regulatory
oversight.\37\ This commenter believes that lack of regulation and
consumer protection also increase the chance and incentives for market
price manipulation and states that approving the ETP before structural
protections and controls are firmly in place would put investors at
undue risk.\38\
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    \36\ See Williams Letter, supra note 19, at 1-2.
    \37\ See id. at 1.
    \38\ See id., at 2-3.
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    The Exchange, in its comment letter, asserts that bitcoin is
resistant to manipulation, arguing that the increasing strength and
resilience of the global bitcoin marketplace serve to reduce the
likelihood of price manipulation and that arbitrage opportunities
across globally diverse marketplaces allow market participants to
ensure approximately equivalent pricing worldwide.\39\
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    \39\ See Bats Letter, supra note 19, at 2.
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    The Exchange further asserts, in its comment letter, that the
Commodity Futures Trading Commission (``CFTC'') has designated bitcoin
as a commodity and is ``broadly responsible for the integrity'' of U.S.
bitcoin spot markets.\40\ The Exchange acknowledges that the CFTC has
not yet brought any enforcement actions based on the anti-manipulation
provisions of the Commodity Exchange Act, but notes that the CFTC has
issued orders against U.S. and non-U.S. bitcoin exchanges for engaging
in other activity prohibited by the Commodity Exchange Act. The
Exchange's comment letter states that a regulatory framework for
providing oversight and deterring market manipulation therefore
currently exists in the U.S.\41\
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    \40\ See id. at 3.
    \41\ See id.
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    Finally, the Commission notes a paper that was submitted with
respect to a similar proposed rule change,\42\ arguing that bitcoin is
relatively uncorrelated with other assets, enabling investors to
construct more efficient portfolios,\43\ and that, as a general matter,
the underlying market for bitcoin is inherently resistant to
manipulation.\44\ The author of the paper posits that the underlying
bitcoin market is not susceptible to manipulation because (a) there is
no inside information related to earnings, revenue, corporate actions,
or new sources of supply; (b) the asset is not subject to the
dissemination of false or misleading information; (c) each bitcoin
market is an independent entity, so that a demand for liquidity does
not necessarily propagate across other exchanges; (d) a substantial
over-the-counter (``OTC'') market provides additional liquidity and
absorption of shocks; (e) there is no market-close pricing event to
manipulate; (f) the market is not subject to ``spoofing'' or other
high-frequency-trading tactics; (g) order books on exchanges worldwide
are publicly visible and available through APIs (application program
interfaces); and (h) it is unlikely that any one person could obtain a
dominant market share.\45\ The author also asserts that listing the
shares on a national securities exchange and a shift from OTC trading
to trading on exchanges would make the overall bitcoin market more
transparent.\46\
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    \42\ Craig M. Lewis, ``SolidX Bitcoin Trust: A Bitcoin Exchange
Traded Product'' (Feb. 2017) (analysis commissioned by SolidX
Management LLC and submitted to comment file SR-NYSEArca-2016-101)
(``Lewis Paper''). A supplemental submission related to this paper
was submitted on March 3, 2017. Craig M. Lewis, ``Supplemental
Submission to SolidX Bitcoin Trust: A Bitcoin Exchange Traded
Product'' (Mar. 3, 2017) (``Lewis Paper II'').
    \43\ See Lewis Paper, supra note 42, at 3, 11-15.
    \44\ See id. at 5-8.
    \45\ See Lewis Paper, supra note 42, at 5-6, 8-9; Lewis Paper
II, supra note 42, at 2. The Commission notes that the Lewis Paper
made additional assertions directed to the particular structure and
pricing mechanism of another proposed bitcoin-based commodity-trust
ETP, and the Commission does not address those arguments in this
order.
    \46\ See Lewis Paper, supra note 42, at 7.
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B. Comments Regarding the Gemini Exchange

    Several commenters discuss the Gemini Exchange's low trading
volumes \47\ and one commenter claims that of all the exchanges Gemini
has the worst pricing.\48\ Another commenter asserts that there is a
significant risk that the nominal ETP share price will be manipulated
by relatively small trades that manipulate the bitcoin price at that
exchange.\49\ This commenter notes that, while U.S.-based bitcoin
exchanges are subjected to stricter regulations and auditing for the
holding of client accounts, the trading itself seems to occur in a
regulatory vacuum and seems impossible to audit effectively.\50\ This
commenter expresses concerns regarding the Gemini Exchange Spot
Price,\51\ noting that the nominal price of the Shares under the
proposal is supposed to be tied to the market price of bitcoins at the
Gemini Exchange, which is closely tied to the ETP proponents.\52\
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    \47\ See, e.g., Maher Letter, supra note 19; Stolfi Letter,
supra note 19; Anonymous Letter II, supra note 19.
    \48\ See Anonymous Letter II, supra note 19.
    \49\ See Stolfi Letter, supra note 19.
    \50\ See Stolfi Letter II, supra note 19.
    \51\ See Stolfi Letter, supra note 19.
    \52\ See id.
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    One commenter claims that among U.S.-dollar bitcoin exchanges,
Gemini has a 3% share and its liquidity measured by order book depth is
significantly lower than several other exchanges. The commenter notes
that it is possible that after the launch of an ETP, Gemini's liquidity
and volume will increase, but claims that the nature of bitcoin trading
that leads to the concentration of volume and liquidity outside of U.S.
borders makes any significant future increase unlikely.\53\ This
commenter also observes that while Gemini is a regulated U.S. exchange,
it does not operate in a vacuum. The commenter claims that the global
landscape of many unregulated bitcoin exchanges exerts huge influence
on the Gemini Exchange and consequently on the Winklevoss ETP.\54\
---------------------------------------------------------------------------

    \53\ See Maher Letter, supra note 19 (noting that the market is
very concentrated and is controlled by a small group of exchanges
operating in China, three of which represented 96% of all bitcoin
trade volume over a six-month period, and noting that the Gemini
Exchange had a 0.07% share of bitcoin volume worldwide during that
period, with a 3% share of USD-exchange volume).
    \54\ See id.
---------------------------------------------------------------------------

    One commenter states that exchanges other than Gemini are not
subject to the same level of oversight and that, if the ETP were based
on some broad measure of weighted prices across different exchanges,
then completely unregulated

actors might be able to exercise undue influence on the ETP valuation
price.\55\
---------------------------------------------------------------------------

    \55\ See Delehanty Letter, supra note 19.
---------------------------------------------------------------------------

    One commenter states that the Gemini Exchange Auction could be an
improvement over other bitcoin pricing mechanisms, but asserts that the
auction has not improved volume. The commenter claims that the Gemini
Exchange has the lowest liquidity of the three exchanges in the United
States and is one of the least-liquid of all exchanges that trade
bitcoin for U.S. dollars.\56\ The commenter observes that the auction
data show that traders in the auction are taking advantage of the
discounted auction price. The commenter notes that the daily two-sided
auction process was designed to maximize price discovery and reduce
price volatility that could be the result of momentum pricing, but asks
what measures have been put in place to address traders who take
advantage of the discounted auction price. The commenter also notes
that while other financial products sometimes have auctions to
determine price, an auction on a stock exchange does not require money
to be deposited in advance with the exchange to be in the auction. The
commenter notes that, by contrast, the Gemini Exchange requires dollars
or bitcoin to be deposited before participation. The commenter believes
that this is a problem because the Gemini auction is limited and
``warped'' and has failed on at least two occasions.\57\
---------------------------------------------------------------------------

    \56\ See Anonymous Letter II, supra note 19.
    \57\ See id.
---------------------------------------------------------------------------

    One commenter claims that there are more robust ways to value the
Trust's holdings than using the spot price of a single exchange, such
as the Gemini Exchange. The commenter notes that bitcoin trades on a
number of exchanges around the world and that most of these exchanges
can be considered isolated liquidity pools, which are more vulnerable
to manipulation or security breach than the broader market.\58\ The
commenter also notes that the Gemini Exchange typically processes less
than 10% of the total volume in the bitcoin/U.S. dollar pair and states
that an index of the most reliable exchanges should be constructed to
value the Trust's holdings. The commenter questions whether using only
the Gemini Exchange's spot price could serve to incentivize Authorized
Participants and other market participants to direct traffic and flow
to Gemini, at the expense of best execution.\59\
---------------------------------------------------------------------------

    \58\ See ARK Letter, supra note 19, at 8.
    \59\ See id. at 8-9.
---------------------------------------------------------------------------

    Another commenter takes a different view on the merits of single
versus multiple price sources. This commenter notes that bitcoin spot
prices diverge across exchanges due to various factors and that some
exchanges may suffer from lack of oversight and a lack of transparency
or fairness. The commenter claims that these facts strengthen the case
for an investment product that does not rely on the spot price of less-
credible exchanges to value its holdings and instead relies on the spot
price on the Gemini Exchange, which is subject to substantive
regulation of its exchange activity and custody of assets by the
NYSDFS. This commenter also notes that, while leveraged trading on some
other exchanges has historically sparked excessive price volatility and
instability, Gemini does not offer such products and would be able to
serve as a trusted, regulated spot exchange for institutional market
participants driving the arbitrage mechanism that ensures efficient
pricing between the spot price and the Shares. The commenter claims
that the Gemini Exchange has the potential for more-robust price
discovery as liquidity is concentrated on that exchange.\60\
---------------------------------------------------------------------------

    \60\ See Circle Letter, supra note 19, at 2.
---------------------------------------------------------------------------

    One commenter states that there is an inherent trade-off to using
one exchange versus an average of several exchanges, some of which may
be less scrupulous. The commenter acknowledges that manipulation is a
legitimate concern, but notes that it is not uncommon to see a very
small number of physical trades determine the base price for a much
larger paper market.\61\
---------------------------------------------------------------------------

    \61\ See Delehanty Letter, supra note 19.
---------------------------------------------------------------------------

    Other commenters view the risk of manipulation as more significant.
One commenter notes that it would be surprising if illegal and
manipulative practices did not occur, since they would be easy to
implement, impossible to detect, perfectly legal, and extremely
lucrative.\62\ This commenter also states that the Gemini Exchange
Auction closing volumes have been low and have shown a slight
decreasing trend since the inception of the auction. The commenter
notes that, with low volumes, it seems possible to manipulate the NAV
by entering suitable bids or asks in the Gemini Exchange Auction.\63\
Another commenter agrees that bitcoin traders can manipulate trading on
Gemini Exchange because of its low trading volumes and notes that the
Trust's documentation states that momentum pricing of bitcoin has
resulted, and may continue to result, in speculation regarding future
appreciation in the value of bitcoin, making the price of bitcoin more
volatile.\64\ The commenter states that the value of bitcoin may
therefore be more likely to fluctuate due to changing investor
confidence in future appreciation in the Gemini Exchange Auction price,
which could adversely affect an investment in the Shares.\65\ According
to another commenter, in this unregulated environment, price
manipulation and front-running of large buy or sell orders can happen
and well-connected customers can gain preferential treatment in order
execution.\66\
---------------------------------------------------------------------------

    \62\ See Stolfi Letter II, supra note 19.
    \63\ See id.
    \64\ See Anonymous Letter II, supra note 19.
    \65\ See id.
    \66\ See Williams Letter, supra note 19, at 2.
---------------------------------------------------------------------------

    The Exchange, in its comment letter, notes that the Gemini Exchange
Auction typically already transacts a volume greater than the proposed
creation basket size for the Trust, and would likely support the needs
of Authorized Participants to engage in basket creation or redemption.
The Exchange claims that the global bitcoin marketplace has the
potential to provide even more liquidity and to be a source of bitcoin
for basket creation and hedging. The Exchange also notes that all
intraday order-book and trade information on the Gemini Exchange is
publicly available through various electronic formats and is also
redistributed by various online aggregators, and that, with the launch
of the proposed Trust, the Sponsor must make important pricing data
available in real time.\67\
---------------------------------------------------------------------------

    \67\ See Bats Letter, supra note 19, at 9.
---------------------------------------------------------------------------

    The Exchange acknowledges in its comment letter that less-liquid
markets, such as the market for bitcoin, may be more easily
manipulated, but claims that these concerns are mitigated with respect
to the Shares and the trading on the Gemini Exchange. The Exchange
notes that the Gemini Exchange Auction price is based on an extremely
similar mechanism to the one leveraged for the Exchange's own Opening
and Closing Auctions and allows full and transparent participation from
all Gemini Exchange participants in the price discovery process. The
Exchange states that the auction process leverages mechanics which have
proven over the years to be robust and effective on the Exchange and
other national listing exchanges in both liquid and illiquid securities
alike. The Exchange notes that, because the time of the Gemini Exchange
Auction coincides with the Exchange's Closing Auction, efficient real-
time arbitrage between the closing price of the Trust and the Gemini

Exchange Auction price will be prevalent and will lead to resilient and
effective pricing of both the Trust and the underlying bitcoin asset,
leading to convergence between the Trust's closing price and its
NAV.\68\ The Exchange states that the Gemini Exchange Auction price
typically deviates very little from the prevailing price on other
bitcoin exchanges, and the Exchange presents statistics to show that
this price is consistent with other pricing sources.\69\
---------------------------------------------------------------------------

    \68\ See id. at 7-8.
    \69\ See id. at 8-9.
---------------------------------------------------------------------------

C. Comments on the Derivatives Markets for Bitcoin

    One commenter claims that the bitcoin markets are not yet efficient
and attributes this inefficiency, in part, to the nascent state of the
bitcoin derivatives market. This commenter notes that derivatives
provide investors more ways to hedge against bitcoin's potential price
movements, introduce more volume and liquidity, and generally give the
markets more points of information about bitcoin's future prospects,
leading to tighter bid/ask spreads. The commenter claims that most
derivatives activity within the bitcoin markets is offered by entities
outside of the purview of U.S. regulators.\70\ This commenter notes
that, within the United States, one market offers bitcoin forwards, but
no one currently offers regulated bitcoin futures. The commenter states
that bitcoin options offered by regulated U.S. entities may come next,
but that as of now there are none. The commenter observes that the lack
of a robust and regulated derivatives market means that market
participants do not have a broad basket of tools at their disposal,
making hedging difficult and keeping away many market makers that
provide significant liquidity to traditional capital markets. The
commenter claims that, while derivative products may be in development,
a full suite of investor tools that will drive market efficiency and
eliminate price disparities is likely at least a couple of years
away.\71\ The commenter also notes that without a robust derivatives
market for institutional investors to short the underlying asset, or
otherwise hedge their positions, there likely would be little
counterbalance to the new demand generated by the ETP, and that
Authorized Participants could then have trouble sourcing bitcoin and
hedging their positions, stalling the creation process.\72\ The
commenter concludes that it would be premature to launch a bitcoin ETP
because bitcoin markets are not liquid enough to support an open-end
fund, and because an ecosystem of institutional-grade infrastructure
players is not yet available to support such a product.\73\
---------------------------------------------------------------------------

    \70\ See ARK Letter, supra note 19, at 5-6.
    \71\ See id. at 6.
    \72\ See id. at 13-14.
    \73\ See id. at 2.
---------------------------------------------------------------------------

    One commenter disagrees with assertions linking inefficient bitcoin
markets to nascent derivatives markets, stating that no evidence has
been provided regarding the would-be effect of derivatives on the
bitcoin market. The commenter claims that the assertion assumes that
bitcoin pricing is inefficient, which the commenter claims is not the
case. The commenter also claims that the assertion assumes that the
lack of a derivatives market causes pricing to be inefficient, instead
stating that there is direct evidence that many securities trade
successfully and efficiently on U.S. and non-U.S. exchanges despite not
having a direct derivatives market.\74\ The commenter also disagrees
with the claim that, absent a robust derivatives market, there would be
little counterbalance to the new demand generated by the ETP, stating
that it is impossible to predict the success or failure of the ETP. The
commenter notes that Authorized Participants may be able to source
bitcoin from China.\75\
---------------------------------------------------------------------------

    \74\ See Anonymous Letter III, supra note 19. Several commenters
also assert that regulation by the Exchange of activity in the ETP
could substitute for a lack of regulation in underlying or
derivatives markets. See, e.g., Baird Letter, supra note 19; Keeler
Letter, supra note 19; Marchionne Letter, supra note 19; Bang
Letter, supra note 19.
    \75\ See Anonymous Letter III, supra note 19.
---------------------------------------------------------------------------

    Another commenter claims that there are several bitcoin futures
markets that have a significant impact on the spot price along with
several OTC markets, such as the one recently launched by the Gemini
Exchange, that also offer liquidity.\76\
---------------------------------------------------------------------------

    \76\ See Dylan Letter, supra note 19, at 1.
---------------------------------------------------------------------------

    The author of the paper submitted with respect to a similar
proposal states that one of the key differences between bitcoin and
other commodities is the lack of a liquid and transparent derivatives
market and that, although there have been nascent attempts to establish
derivatives trading in bitcoin, bitcoin derivatives markets are not at
this time sufficiently liquid to be useful to Authorized Participants
and market makers who would like to use derivatives to hedge
exposures.\77\ The author claims that, for physical commodities that
are not traded on exchanges, the presence of a liquid derivatives
market is a necessary condition, but claims that for digital assets
like bitcoin, derivatives markets are not necessary because price
discovery occurs on the OTC market and exchanges instead.\78\
---------------------------------------------------------------------------

    \77\ See Lewis Paper, supra note 42, at 8.
    \78\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

A. Overview

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must
approve the proposed rule change of a self-regulatory organization
(``SRO'') if the Commission finds that the proposed rule change is
consistent with the requirements of the Exchange Act and the applicable
rules and regulations thereunder.\79\ If it is unable to make such a
finding, the Commission must disapprove the proposed rule change.\80\
Additionally, under Rule 700(b)(3) of the Commission's Rules of
Practice, the ``burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change.'' \81\
---------------------------------------------------------------------------

    \79\ 15 U.S.C 78s(b)(2)(C)(i).
    \80\ 15 U.S.C. 78s(b)(2)(C)(ii).
    \81\ 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. Id. Any failure of a self-regulatory
organization to provide the information elicited by Form 19b-4 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 rules and regulations issued thereunder
that are applicable to the self-regulatory organization. Id.
---------------------------------------------------------------------------

    After careful consideration, and for the reasons discussed in
greater detail below, the Commission does not believe that the proposed
rule change, as modified by Amendments No. 1 and 2, is consistent with
the requirements of the Exchange Act and the applicable rules and
regulations thereunder.\82\

Specifically, the Commission does not find that the proposed rule
change is consistent with Section 6(b)(5) of the Exchange Act--which
requires that the rules of a national securities exchange be designed,
among other things, to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest \83\--
because the Commission believes that the significant markets for
bitcoin are unregulated and that, therefore, the Exchange has not
entered into, and would currently be unable to enter into, the type of
surveillance-sharing agreement that helps address concerns about the
potential for fraudulent or manipulative acts and practices in the
market for the Shares. Accordingly, the Commission disapproves the
proposed rule change.\84\
---------------------------------------------------------------------------

    \82\ In disapproving the proposed rule change, as modified by
Amendments No. 1 and 2, the Commission has considered its impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f); see also notes 42-46 & 115-118 and accompanying text. The
Commission notes that, according to the Exchange, the Sponsor
believes that the Shares will represent a cost-effective and
convenient means of gaining investment exposure to bitcoin similar
to a direct investment in bitcoin, allowing investors to more
effectively implement strategic and tactical asset allocation
strategies that use bitcoin, with lower cost than that associated
with the direct purchase, storage, and safekeeping of bitcoin. See
Amendment No. 1, supra note 1, 81 FR at 76662; see also Lewis Paper,
supra note 42, at 3, 11-16 (asserting that a bitcoin-based ETP would
enable ordinary investors to construct more efficient portfolios).
Regarding competition, the Exchange has asserted that approval of
the proposed rule change ``will enhance competition among market
participants, to the benefit of investors and the marketplace.''
Amendment No. 1, supra note 1, 81 FR at 76669. The Commission
recognizes that the Exchange asserts these economic benefits, but,
for the reasons discussed throughout, the Commission must disapprove
the proposed rule change because it is not consistent with the
Exchange Act.
    \83\ 15 U.S.C. 78f(b)(5).
    \84\ The Commission's disposition of the Exchange's proposed
rule change is independent of, and serves a fundamentally different
purpose than, any Commission actions with respect to the Securities
Act of 1933 registration statement of the Trust.
---------------------------------------------------------------------------

B. Analysis

1. Commodity-Trust ETPs and Surveillance-Sharing Agreements
    The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4), which governs the listing of Commodity-Based Trust
Shares.\85\ In this regard, the proposal is similar to many past
proposals to list and trade shares of ETPs holding precious metals,\86\
assets that individuals could otherwise obtain directly (for example,
in the form of bullion coins), but at the cost of having to secure
those holdings.\87\ The Commission analyzes this proposal under the
standards it has applied to previous commodity-trust ETPs.
---------------------------------------------------------------------------

    \85\ The Commission notes that in settled actions the CFTC has
designated bitcoin as a commodity and has asserted jurisdiction over
the trading of at least certain derivatives on bitcoin, as well as
certain leveraged or margined retail transactions in bitcoin. See In
re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC
Docket No. 15-29, 2015 WL 5535736 (CFTC Sept. 17, 2015) (Order
Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the
Commodity Exchange Act, Making Findings and Imposing Remedial
Sanctions (``Coinflip Settlement Order'')), available at<EMAIL_ADDRESS>    \86\ See, e.g., streetTRACKS Gold Shares, Exchange Act Release
No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-
22) (order approving the listing and trading of shares of commodity-
trust ETP holding physical gold bullion).
    \87\ See Amendment No. 1, supra note 1, 81 FR at 76662 (``The
Sponsor believes that investors will be able to more effectively
implement strategic and tactical asset allocation strategies that
use bitcoin by using the Shares instead of directly purchasing and
holding bitcoin, and for many investors, transaction costs related
to the Shares will be lower than those associated with the direct
purchase, storage and safekeeping of bitcoin.'').
---------------------------------------------------------------------------

    A key consideration for the Commission in determining whether to
approve or disapprove a proposal to list and trade shares of a new
commodity-trust ETP is the susceptibility of the shares or the
underlying asset to manipulation. This consideration flows directly
from the requirement in Section 6(b)(5) of the Exchange Act that a
national securities exchange's rules must be designed ``to prevent
fraudulent and manipulative acts and practices'' and ``to protect
investors and the public interest.'' \88\
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 19f(b)(5).
---------------------------------------------------------------------------

    Since at least 1990, the Commission has expressed the view 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.'' \89\ The Commission has also long held that
surveillance-sharing agreements are important in the context of
exchange listing of derivative security products, such as equity
options. In 1994, the Commission stated:
---------------------------------------------------------------------------

    \89\ See Exchange Act Release No. 27877 (Apr. 4, 1990), 55 FR
13344 (Apr. 10, 1990) (SR-NYSE-90-14).

    As a general matter, the Commission believes that the existence
of a surveillance sharing agreement that effectively permits the
sharing of information between an exchange proposing to list an
equity option and the exchange trading the stock underlying the
equity option is necessary to detect and deter market manipulation
and other trading abuses. In particular, the Commission notes that
surveillance sharing agreements provide an important deterrent to
manipulation because they facilitate the availability of information
needed to fully investigate a potential manipulation if it were to
occur. These agreements are especially important in the context of
derivative products based on foreign securities because they
facilitate the collection of necessary regulatory, surveillance and
other information from foreign jurisdictions.\90\
---------------------------------------------------------------------------

    \90\ Exchange Act Release No. 33555 (Jan. 31, 1994), 59 FR 5619
(Feb. 7, 1994) (SR-Amex-93-28) (order approving listing of options
on American Depositary Receipts). The Commission further stated
that, ``[b]ecause of the additional leverage provided by an option
on an ADR, the Commission 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.,
59 FR at 5621.

    With respect to ETPs, when approving in 1995 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, noting 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.\91\
---------------------------------------------------------------------------

    \91\ See Exchange Act Release No. 35518 (Mar. 21, 1995), 60 FR
15804 (Mar. 27, 1995) (SR-Amex-94-30). In that matter, the
Commission noted that the listing exchange had comprehensive
surveillance-sharing agreements with all of the exchanges upon which
the futures contracts overlying the notes traded and was able to
obtain market surveillance information, including customer identity
information, for transactions occurring on NYMEX and other futures
exchanges. See id., 60 FR at 15806 n.21. See also Exchange Act
Release No. 36885 (Feb. 26, 1996), 61 FR 8315, n.17 (Mar. 4, 1996)
(SR-Amex-95-50) (approving the exchange listing and trading of
Commodity Indexed Securities, and noting (a) that through the
comprehensive surveillance-sharing agreements, the listing exchange
was able to obtain market surveillance information, including
customer identity information, for transactions occurring on NYMEX
and COMEX and that, through the Intermarket Surveillance Group
information-sharing agreement, the listing exchange was able to
obtain, upon request, surveillance information with respect to
trades effected on the London Metal Exchange, including client
identity information and (b) that, if a different market were
utilized for purposes of calculating the value of a designated
futures contract, the listing exchange had represented that it would
ensure that it entered into a surveillance-sharing agreement with
respect to the new relevant market). The Commission has made similar
statements about surveillance-sharing agreements with respect to the
listing and trading of stock-index, currency, and currency-index
warrants. See, e.g., Exchange Act Release No. 36166 (Aug. 29, 1995),
60 FR 46660 (Sept. 7, 1995) (SR-PSE-94-28) (approving a proposal to
adopt uniform listing and trading guidelines for stock-index,
currency, and currency-index warrants).Specifically, the Commission
noted that ``a surveillance sharing agreement should provide the
parties with the ability to obtain information necessary to detect
and deter market manipulation and other trading abuses'' and stated
that the Commission ``generally requires that a surveillance sharing
agreement require that the parties to the agreement provide each
other, upon request, information about market trading activity,
clearing activity, and the identity of the ultimate purchasers for
securities.'' Id., 60 FR at 46665 n.35. In addition, the Commission
stated that ``[t]he 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., 60 FR at 46665 n.36.

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

    In 1998, in adopting Exchange Act Rule 19b-4(e) \92\ to permit the
generic listing and trading of certain new derivatives securities
products--including ETPs--the Commission again emphasized the
importance of the listing exchange's ability to obtain from underlying
markets, through surveillance-sharing agreements (called information-
sharing agreements in the release), the information necessary to detect
and deter manipulative activity. Specifically, in adopting rules
governing the generic listing of new derivatives securities products,
the Commission stated that the Rule 19b-4(e) procedures would ``enable
the Commission to continue to effectively protect investors and promote
the public interest'' and stated that:
---------------------------------------------------------------------------

    \92\ 17 CFR 240.19b-4(e).

    It is essential that the SRO 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. Such 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.\93\
---------------------------------------------------------------------------

    \93\ Amendment to Rule Filing Requirements for Self-Regulatory
Organizations Regarding New Derivative Securities Products, Exchange
Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70959 (Dec. 22,
1998) (File no. S7-13-98) (``NDSP Adopting Release'').

    The Commission, in the NDSP Adopting Release, also stressed the
importance of these surveillance-sharing agreements comprehensively
covering trading in the underlying assets. In the case of a product
overlying domestic securities, the Commission said that the exchange
listing a derivative securities product should ensure that it was
either a common member of the Intermarket Surveillance Group with, or
had entered into an information-sharing agreement with, each market
trading each underlying security.\94\ Further, the Commission stated
that:
---------------------------------------------------------------------------

    \94\ See id., 63 FR at 70959. The Commission further noted that
``if a new SRO trades component securities underlying a new
derivative securities product and is not a member of the ISG, the
SRO seeking to list and trade such new derivative securities product
pursuant to Rule 19b-4(e) should enter into a comprehensive ISA with
the non-ISG SRO. Conversely, if a new SRO seeks to list and trade a
new derivative securities product pursuant to Rule 19b-4(e) and is
not a member of the ISG, such SRO should enter into a comprehensive
ISA with each SRO that trades securities underlying the new
derivative securities product.'' See id., 63 FR at 70959, n.99.

    For a new derivative securities product overlying an instrument
with component securities from several countries, the Commission
recognizes that it may not be practical in all instances to secure
comprehensive ISAs with all of the relevant foreign markets. Foreign
countries' securities or ADRs that are not subject to a
comprehensive ISA should not represent a significant percentage of
the weight of such an underlying instrument.'' \95\
---------------------------------------------------------------------------

    \95\ See id., 63 FR at 70959.

    Consistent with these statements, for the commodity-trust ETPs
approved to date for listing and trading, there have been in every case
well-established, significant, regulated markets for trading futures on
the underlying commodity--gold, silver, platinum, palladium, and
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group
membership in common with, those markets.\96\
---------------------------------------------------------------------------

    \96\ See streetTRACKS Gold Shares, Exchange Act Release No.
50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22)
(approval order notes the New York Stock Exchange's representation
that ``the most significant gold futures exchanges are the COMEX
division of the NYMEX and the Tokyo Commodity Exchange''); iShares
COMEX Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70
FR 3749 (Jan. 26, 2005) (SR-Amex-2004-38) (approval order notes the
American Stock Exchange's representation that ``the most significant
gold futures exchanges are the COMEX division of the NYMEX and the
Tokyo Commodity Exchange''); iShares Silver Trust, Exchange Act
Release No. 53521 (Mar. 20, 2006), 71 FR 14967 (Mar. 24, 2006) (SR-
Amex-2005-72) (approval order notes the American Stock Exchange's
representation that ``the most significant silver futures exchanges
are the COMEX and the Tokyo Commodity Exchange''); ETFS Gold Trust,
Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993 (May 15,
2009) (SR-NYSEArca-2009-40) (accelerated approval order notes NYSE
Arca's representation that the COMEX is one of the ``major world
gold markets''); ETFS Silver Trust, Exchange Act Release No. 59781
(Apr. 17, 2009), 74 FR 18771 (Apr. 24, 2009) (SR-NYSEArca-2009-28)
(accelerated approval order notes NYSE Arca's representation that
``the most significant silver futures exchanges are the COMEX . . .
and the Tokyo Commodity Exchange''); ETFS Palladium Trust, Exchange
Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283 (Nov. 17, 2009)
(SR-NYSEArca-2009-94) (notice of proposed rule change includes NYSE
Arca's representation that ``the most significant palladium futures
exchanges are the NYMEX and the Tokyo Commodity Exchange'' and that
``NYMEX is the largest exchange in the world for trading precious
metals futures and options''); ETFS Platinum Trust, Exchange Act
Release No. 60970 (Nov. 9, 2006), 74 FR 59319 (Nov. 17, 2009) (SR-
NYSEArca-2009-95) (notice of proposed rule change includes NYSE
Arca's representation that ``the most significant palladium futures
exchanges are the NYMEX and the Tokyo Commodity Exchange'' and that
``NYMEX is the largest exchange in the world for trading precious
metals futures and options''); Sprott Physical Gold Trust, Exchange
Act Release No. 61236 (Dec. 23, 2009), 75 FR 170 (Jan. 4, 2010) (SR-
NYSEArca-2009-113) (notice of proposed rule change includes NYSE
Arca's representation that the COMEX is one of the ``major world
gold markets''); Sprott Physical Silver Trust, Exchange Act Release
No. 63043 (Oct. 5, 2010), 75 FR 62615 (Oct. 12, 2010) (SR-NYSEArca-
2010-84) (accelerated approval order notes NYSE Arca's
representation that the COMEX is one of the ``major world silver
markets''); ETFS Precious Metals Basket Trust, Exchange Act Release
No. 62402 (Jun. 29, 2010), 75 FR 39292 (July 8, 2010) (SR-NYSEArca-
2010-56) (notice of proposed rule change includes NYSE Arca's
representation that ``the most significant gold, silver, platinum
and palladium futures exchanges are the COMEX and the TOCOM''); ETFS
White Metals Basket Trust, Exchange Act Release No. 62620 (July 30,
2010), 75 FR 47655 (Aug. 6, 2010) (SR-NYSEArca-2010-71) (notice of
proposed rule change includes NYSE Arca's representation that ``the
most significant silver, platinum and palladium futures exchanges
are the COMEX and the TOCOM''); ETFS Asian Gold Trust, Exchange Act
Release No. 63267 (Nov. 8, 2010), 75 FR 69494 (Nov. 12, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change includes NYSE
Arca's representation that ``the most significant gold futures
exchanges are the COMEX and the Tokyo Commodity Exchange'' and that
``COMEX is the largest exchange in the world for trading precious
metals futures and options''); Sprott Physical Platinum and
Palladium Trust, Exchange Act Release No. 68101 (Oct. 24, 2012), 77
FR 65732 (Oct. 30, 2012) (SR-NYSEArca-2012-111) (accelerated
approval order notes NYSE Arca's representation that ``[f]utures on
platinum and palladium are traded on two major exchanges: The New
York Mercantile Exchange . . . and Tokyo Commodities Exchange'');
APMEX Physical--1 oz. Gold Redeemable Trust, Exchange Act Release
No. 66627 (Mar. 20, 2012), 77 FR 17539 (Mar. 26, 2012) (SR-NYSEArca-
2012-18) (notice of proposed rule change cross-references the
proposed rule change to list and trade shares of the ETFS Gold
Trust, in which NYSE Arca represented that the COMEX is one of the
``major world gold markets''); JPM XF Physical Copper Trust,
Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468 (Dec.
20, 2012) (SR-NYSEArca-2012-28) (approval order notes NYSE Arca's
representation that ``[a] majority of copper derivatives trading
occurs on three exchanges: The LME, the Commodity Exchange, Inc. . .
. and the Shanghai Futures Exchange''); iShares Copper Trust,
Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726 (Feb.
28, 2013) (SR-NYSEArca-2012-66) (approval order notes NYSE Arca's
representation that ``the LME is the longest standing exchange
trading copper futures, with the greatest number of open copper
futures and options contracts''); First Trust Gold Trust, Exchange
Act Release No. 69847 (Jun. 25, 2013), 78 FR 39399 (July 1, 2013)
(SR-NYSEArca-2013-61) (notice of proposed rule change cross-
references the proposed rule change to list and trade shares of the
ETFS Gold Trust, in which NYSE Arca represented that the COMEX is
one of the ``major world gold markets''); Merk Gold Trust, Exchange
Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367 (Dec. 17, 2013)
(SR-NYSEArca-2013-137) (notice of proposed rule change cross-
references the proposed rule change to list and trade shares of the
ETFS Gold Trust, in which NYSE Arca represented that the COMEX is
one of the ``major world gold markets''); Long Dollar Gold Trust,
Exchange Act Release No. 79518 (Dec. 9, 2016), 81 FR 90876 (Dec. 15,
2016) (SR-NYSEArca-2016-84) (accelerated approval order notes NYSE
Arca's representation that ``[t]he most significant gold futures
exchange is COMEX, part of the CME Group, Inc., which began to offer
trading in gold futures contracts in 1974'').
---------------------------------------------------------------------------

    The Exchange represents that its existing surveillance measures,
which focus on trading in the Shares, are sufficient to support the
proposed rule

change. Specifically, the Exchange represents that its surveillance
procedures are adequate to properly monitor the trading of the Shares
on the Exchange during all trading sessions and to deter and detect
violations of Exchange rules and the applicable federal securities
laws.\97\ The Exchange further represents that trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Commodity-Based Trust
Shares, and that the Exchange may obtain information regarding trading
in the Shares through the Intermarket Surveillance Group, from other
members or affiliates of that group, or from exchanges with which the
Exchange has a surveillance-sharing agreement.\98\ In addition, the
Exchange notes that it has entered into a comprehensive surveillance-
sharing agreement with the Gemini Exchange and represents that it may
obtain information about bitcoin transactions, trades, and market data
from the Gemini Exchange (and from any bitcoin exchanges with which the
Exchange enters into a surveillance-sharing agreement in the future),
as well as certain additional information that is publicly available
through the Blockchain. Moreover, several commenters assert that
regulation by the Exchange of activity in the ETP could substitute for
a lack of regulation in underlying or derivatives markets.\99\
---------------------------------------------------------------------------

    \97\ See Amendment No. 1, supra note 1, 81 FR at 76668.
    \98\ See id.
    \99\ See, e.g., Baird Letter, supra note 19 (stating that, if
the U.S. were to approve an ETP and bring regulatory standards and
oversight to cryptocurrencies, investors would not see major
problems as they did with the Bitfinex and Mt. Gox hacks and that,
if the ETP were not approved, investors would be forced to use those
less-than-ideal exchanges); Keeler Letter, supra note 19 (stating
that the alternative to a regulated ETP is investors having to
purchase bitcoin at unregulated exchanges lacking SEC oversight);
Bang Letter, supra note 19 (stating that disapproval of the ETP
would create a more risky environment for investors, who will not
have the option of investing through regulated exchanges).
---------------------------------------------------------------------------

    The Commission views the Exchange's proposed surveillance
procedures regarding the Shares themselves as necessary, but not
sufficient in light of the discussion below noting that the Exchange
has not entered into, and would currently be unable to enter into,
surveillance-sharing agreements with significant, regulated markets for
trading either bitcoin itself or derivatives on bitcoin.\100\ Moreover,
the Commission does not accept the premise, suggested by some
commenters, that regulation of trading in the Shares is a sufficient
and acceptable substitute for regulation in the spot or derivatives
markets related to the underlying asset.\101\ Absent the ability to
detect and deter manipulation of the Shares--through surveillance
sharing with significant, regulated markets related to the underlying
asset--the Commission does not believe that a national securities
exchange can meet its Exchange Act obligations when listing shares of a
commodity-trust ETP.
---------------------------------------------------------------------------

    \100\ See infra Section III.B.
    \101\ See, e.g., Anderson Letter, supra note 19; Baird Letter,
supra note 19; Keeler Letter, supra note 19; Marchionne Letter,
supra note 19; Bang Letter, supra note 19.
---------------------------------------------------------------------------

    The Commission continues to believe that surveillance-sharing
agreements between the exchange listing shares of a commodity-trust ETP
and significant, regulated markets related to the underlying asset
provide a ``necessary deterrent to manipulation.'' \102\ To the extent
there is some question as to the degree to which bitcoin is subject to
manipulation, moreover, surveillance-sharing agreements with
significant, regulated markets relating to bitcoin would help answer
that question and address instances of such manipulation. Therefore,
the Commission's analysis of the Exchange's proposal examines whether
regulated markets of significant size exist--in either bitcoin or
derivatives on bitcoin--with which the Exchange has, or could enter
into, a surveillance-sharing agreement.
---------------------------------------------------------------------------

    \102\ NDSP Adopting Release, supra note 93, 63 FR at 70959.
---------------------------------------------------------------------------

2. The Worldwide Spot Market for Bitcoin
    With respect to spot bitcoin trading outside the United States, the
information in the Exchange's proposal and from commenters demonstrates
that the bulk of bitcoin trading occurs in non-U.S. markets where there
is little to no regulation governing trading,\103\ and thus no
meaningful governmental market oversight designed to detect and deter
fraudulent and manipulative activity.\104\ The Exchange notes in its
comment letter that only a minority of the global spot bitcoin
exchanges are subject to any regulatory regime.\105\ Additionally, the
Commission notes that no bitcoin spot market is currently a member of
the Intermarket Surveillance Group.\106\
---------------------------------------------------------------------------

    \103\ See Bats Letter, supra note 19, at 2-3 (noting that only a
minority of global bitcoin exchanges are fully regulated for their
fiduciary and custodial activities); Stolfi Letter II, supra note 19
(remarking that, since 2013, the price of bitcoin has been defined
mostly by the major Chinese exchanges, whose volumes dwarf those of
exchanges outside China, which are not regulated or audited, and
which are suspected of unethical practices like front-running, wash
trades, and trading with insufficient funds); ARK Letter, supra note
19, at 11-12 (noting that over 90% of bitcoin spot trading volume
occurs in the BTC/CNY pair, where there is little regulatory
oversight and transparency); Maher Letter, supra note 19 (explaining
that the Chinese bitcoin exchanges fall under little oversight by
any regulatory entities); Williams Letter, supra note 19, at 1
(noting that, among several fundamental flaws that make bitcoin a
dangerous asset class to force into an ETP structure, specific risks
include the ``global web of unregulated bucket shop exchanges'' and
the ``oversized exposure to trading in countries where there is no
regulatory oversight, such as China''); Lee Letter, supra note 19
(noting that there is currently no regulation or oversight for the
worldwide market of exchanges).
    \104\ See supra notes 31-38 and accompanying text. The
Commission also notes that, while the Exchange represents that it
can obtain information about bitcoin trading made publicly available
through the Blockchain, see Amendment No. 1, supra note 1, 81 FR at
76668, this information identifies parties to a transaction only by
a pseudonymous public-key address.
    \105\ See Bats Letter, supra note 19, at 2-3 (noting that only a
minority of global bitcoin exchanges are fully regulated for their
fiduciary and custodial activities, and naming Gemini Trust Company
LLC and itBit Trust Company LLC, as the only two exchange operators
that are subject to substantive regulation, each overseen by the
NYSDFS).
    \106\ See http://www.isgportal.com (listing the current members
and affiliate members of the Intermarket Surveillance Group).
---------------------------------------------------------------------------

    With respect to trading in the United States, the Exchange asserts
that the CFTC is broadly responsible for the integrity of bitcoin spot
markets and that, therefore, a regulatory framework for providing
oversight and deterring market manipulation currently exists in the
United States.\107\ The Exchange's conclusion about the state of
regulation in the U.S. market for bitcoin, however, is not supported by
the facts the Exchange presents.
---------------------------------------------------------------------------

    \107\ See Bats Letter, supra note 19, at 3.
---------------------------------------------------------------------------

    Although the CFTC can bring enforcement actions against
manipulative conduct in spot markets for a commodity, spot markets are
not required to register with the CFTC, unless they offer leveraged,
margined, or financed trading to retail customers.\108\ In all other
cases, including the Gemini Exchange, the CFTC does not set standards
for, approve the rules of, examine, or otherwise regulate bitcoin spot
markets.\109\ The Exchange notes in its comment letter that the CFTC
has brought several bitcoin-related enforcement actions against
bitcoin-related entities,\110\ but the actions cited by the Exchange do
not demonstrate

that a regulatory framework for providing oversight and deterring
market manipulation currently exists for the bitcoin spot market.
Rather, the cited enforcement actions have involved either (a) the
failure of an entity to register with the CFTC before trading
derivatives on bitcoin or offering leveraged, margined, or financed
bitcoin trading to retail customers,\111\ or (b) the facilitation of
wash trades in bitcoin swaps by a swap execution facility registered
with the CFTC.\112\
---------------------------------------------------------------------------

    \108\ Commodity Exchange Act Section 2(c)(2)(D), 7 U.S.C.
2(c)(2)(D). See also Commodity Exchange Act Section 2(c)(2)(A), 7
U.S.C. 2(c)(2)(A) (defining CFTC jurisdiction to specifically cover
contracts of sale of a commodity for future delivery (or options on
such contracts), or an option on a commodity (other than foreign
currency or a security or a group or index of securities), that is
executed or traded on an organized exchange).
    \109\ The Gemini Exchange is not registered with the CFTC.
    \110\ Bats Letter, supra note 19, at 3.
    \111\ See Coinflip Settlement Order, supra note 85; In re BFXNA
Inc., d/b/a Bitfinex, CFTC Docket No. 16-19 (CFTC June 2, 2016)
(Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of
the Commodity Exchange Act, Making Findings and Imposing Remedial
Sanctions (``BFXNA Settlement Order'')), available at<EMAIL_ADDRESS>    \112\ See In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL
5658082 (CFTC Sept. 24, 2015) (Order Instituting Proceedings
Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act,
Making Findings and Imposing Remedial Sanctions (``TeraExchange
Settlement Order'')), available at<EMAIL_ADDRESS>---------------------------------------------------------------------------

    Some commenters believe that bitcoin markets can be
manipulated.\113\ The Exchange agrees, in its comment letter, that
``less liquid markets, such as the market for bitcoin, may be more
manipulable,'' but asserts that the strength and resilience of the
global bitcoin market serve to reduce the likelihood of
manipulation.\114\ Additionally, the author of the paper submitted with
respect to a similar proposal for a bitcoin-based ETP asserts that, for
several reasons, the underlying market for bitcoin is not susceptible
to manipulation.\115\
---------------------------------------------------------------------------

    \113\ See supra notes 34-38 and accompanying text.
    \114\ See supra notes 39-41 and accompanying text.
    \115\ See Lewis Paper, supra note 42; see also supra notes 42-46
and accompanying text.
---------------------------------------------------------------------------

    The Commission does not believe that the record supports a finding
that the unique properties of bitcoin and the underlying bitcoin market
are so different from the properties of other commodities and commodity
futures markets that they justify a significant departure from the
standards applied to previous commodity-trust ETPs. While the Exchange
and the author of the paper submit that arbitrage across bitcoin
markets will help to keep worldwide bitcoin prices aligned with one
another, hindering manipulation,\116\ neither provides data regarding
how long pricing disparities may persist before they are arbitraged
away, and one commenter specifically noted that large arbitrage
opportunities persist in bitcoin markets.\117\
---------------------------------------------------------------------------

    \116\ See Bats Letter, supra note 19, at 2; Lewis Paper, supra
note 42, at 6-7.
    \117\ See ARK Letter, supra note 19, at 5.
---------------------------------------------------------------------------

    The Commission also believes that the paper's discussion of the
possible sources of manipulation is incomplete and does not form a
basis to find that bitcoin cannot be manipulated--or to find, by
implication, that no surveillance-sharing agreement is necessary
between an exchange listing shares of a bitcoin-based ETP and
significant markets trading bitcoin or bitcoin derivatives. For
example, while there is no inside information related to the earnings
or revenue of bitcoin, there may be material non-public information
related to the actions of regulators with respect to bitcoin; regarding
order flow, such as plans of market participants to significantly
increase or decrease their holdings in bitcoin; regarding new sources
of demand, such as new ETPs that would hold bitcoin; or regarding the
decision of a bitcoin-based ETP with respect to how it would respond to
a ``fork'' in the blockchain, which would create two different, non-
interchangeable types of bitcoin.\118\
---------------------------------------------------------------------------

    \118\ For example, as described in the Trust's Registration
Statement, supra note 9, in the event the Bitcoin Network undergoes
a ``hard fork'' into two blockchains, the Custodian and the Sponsor
will determine which of the resulting blockchains to use as the
basis for the assets of the Trust and, under certain circumstances,
will have discretion to determine which blockchain is ``most likely
to be supported by a majority of users or miners.'' Id. at 113. See
also Lee Letter, supra note 19; Johnson Letter, supra note 19;
Schulte Letter, supra note 19; Anonymous Letter IV, supra note 19;
Anonymous Letter V, supra note 19. The decision of the Custodian and
Sponsor to support one resulting blockchain over another could have
a material effect on the relative value of the bitcoins in each of
the blockchains.
---------------------------------------------------------------------------

    Moreover, the manipulation of asset prices, as a general matter,
can occur simply through trading activity that creates a false
impression of supply or demand, whether in the context of a closing
auction or in the course of continuous trading, and does not require
formal linkages among markets (such as consolidated quotations or
routing requirements) or the complex quoting behavior associated with
high-frequency trading.\119\ Finally, while it may or may not be
possible to acquire a dominant position in the bitcoin market as a
whole, it might be quite possible to acquire a position large enough to
temporarily move the price on a single, less-liquid bitcoin trading
market, even if OTC markets exist that are capable of absorbing
liquidity shocks.
---------------------------------------------------------------------------

    \119\ The Commission notes that, even if transparent order books
and transaction reports on bitcoin markets would by definition
include the quoting or trading activity of a person attempting to
manipulate the market, along with the activity of all other market
participants, such information could not, by itself, definitively
establish in real time which activity represented bona fide trading
interest and which represented an intent to manipulate.
---------------------------------------------------------------------------

3. The Gemini Exchange
    The Exchange represents that it has entered into a comprehensive
surveillance-sharing agreement with the Gemini Exchange with respect to
trading of the bitcoin asset underlying the Trust and that the Gemini
Exchange is supervised by the NYSDFS.\120\ Additionally, the Exchange
states in its comment letter that it ``agrees that less liquid markets,
such as the market for bitcoin, may be more manipulable, but believes
that . . . such concerns are mitigated as it relates to the Shares of
the Trust and trading activity on the Gemini Exchange.'' \121\ As
explained below, however, the Commission does not believe this
surveillance-sharing agreement to be sufficient, because the Gemini
Exchange conducts only a small fraction of the worldwide trading in
bitcoin, and because the Gemini Exchange is not a ``regulated market''
comparable to a national securities exchange or to the futures
exchanges that are associated with the underlying assets of the
commodity-trust ETPs approved to date.\122\
---------------------------------------------------------------------------

    \120\ See Amendment No. 1, supra note 1, 81 FR at 76660, 76668.
    \121\ See Bats Letter, supra note 19. at 7-8.
    \122\ See supra note 96.
---------------------------------------------------------------------------

    Commenters disagree on whether the Gemini Exchange conducts a
significant volume of trading in bitcoin and whether trading on the
Gemini Exchange is susceptible to manipulation. The Exchange promotes
the Gemini Exchange as one of the top three bitcoin exchanges in the
United States,\123\ and some commenters believe that the Gemini
Exchange conducts sufficient volume to support the Winklevoss Bitcoin
Trust.\124\ Other commenters, however, question these assertions, some
noting that the vast majority of bitcoin trading, including trading
denominated in U.S. dollars

(``USD'') occurs on unregulated exchanges outside the United
States.\125\
---------------------------------------------------------------------------

    \123\ See Amendment No. 1, supra note 1, 81 FR at 76659; Bats
Letter, supra note 19, at 7-8. But see Anonymous Letter II, supra
note 19 (``There are only three exchanges in the United States.
Gemini has the lowest liquidity of the three and is one of the least
liquid exchanges of all exchanges that trade bitcoin for US
dollars.'').
    \124\ See McMinn Letter, supra note 19 (stating that trading
volume on the Gemini Exchange is sufficient, and that manipulation
of these Shares, while possible, would equally be possible for other
exchange-traded funds); Delehanty Letter (concluding that trading
volume in the recent Gemini bitcoin daily auctions seemed ``to be of
reasonable size''); see also Circle Letter, supra note 19, at 2
(noting that the Gemini Exchange would also have the potential for
more robust price discovery as liquidity is concentrated on the
exchange).
    \125\ See ARK Letter, supra note 19, at 7-8 (noting that Gemini
typically processes less than 10% of the total volume in the
bitcoin-USD market); Williams Letter, supra note 19, at 2 (noting
that most daily trading volume is conducted outside the U.S. and
that 90% of bitcoin trading volume occurs in China); Stolfi Letter,
supra note 19 (concluding that the Gemini Exchange ``has relatively
low liquidity and trade volume'' and that ``[t]here seems to be a
significant risk that the nominal ETF share price will be
manipulated, by relatively small trades that manipulate the bitcoin
price at that exchange''); Stolfi Letter II, supra note 19
(concluding that the auction closing volume on the Gemini Exchange
has shown a decreasing trend since its inception and is now under $1
million USD during work days, and considerably less during weekends,
and that ``[w]ith such low volume, it seems possible to manipulate
the NAV value by entering suitable bids or asks in the auction'');
Stolfi Letter II, supra note 19 (noting that, since 2013, the price
of bitcoin has been defined mostly by the major Chinese exchanges,
whose volumes dwarf those of exchanges outside China); Maher Letter,
supra note 19 (characterizing volume on the Gemini Exchange as
``sparse''); Anonymous Letter II, supra note 19 (asserting that
``anyone who trades bitcoin can manipulate trading on the Gemini
Exchange because it has no volume,'' and further stating that Gemini
Exchange has the worst pricing and the lowest trade volume in
comparison to other exchanges); Anonymous Letter IV, supra note 19
(claiming that Gemini has ``the lowest trading volume of known
exchanges'' and that ``[t]here is evidence that markets have been
manipulated by the exchanges for years'').
---------------------------------------------------------------------------

    The information currently available demonstrates that the Gemini
Exchange does not, at this time, trade a significant volume of bitcoin
relative to the overall market for the asset.\126\ Instead, bitcoin
trading on the Gemini Exchange represents a small percentage of overall
bitcoin trading. For example, calculations using statistics from
data.bitcoinity.org,\127\ show that, in the six months preceding
February 28, 2017, trading on the Gemini Exchange accounted for just
0.07% of all worldwide bitcoin trading, and 5.16% of the much-smaller
bitcoin-USD market worldwide.\128\
---------------------------------------------------------------------------

    \126\ See Williams Letter, supra note 19, at 2 (stating that
most daily trading volume in bitcoin is conducted on poorly
capitalized, unregulated bucket shop exchanges located outside of
the U.S., such as in China, Singapore, Hong Kong, and Bulgaria, and
asserting that these non-U.S. exchanges and their practices
significantly influence the price discovery process); ARK Letter,
supra note 19, at 11-12 (stating that the average daily trading
volume for bitcoin over the last year has been around $1 billion and
that over 90% of that volume occurs in the bitcoin-Chinese Yuan pair
where there is little regulatory oversight and transparency); Maher
Letter, supra note 19 (stating that BTC-E is one of the earliest
bitcoin exchanges with a reputation for the least transparency and
is often associated with laundering of stolen or illicitly-obtained
bitcoin, but that it had shown three times the market share of
volume as Gemini in the last six months); Stolfi Letter II, supra
note 19 (noting that, since 2013, the price of bitcoin has been
defined mostly by the major Chinese exchanges, whose volumes dwarf
those of exchanges outside China).
    \127\ Because bitcoin trading activity is dispersed across
markets, many of which are unregulated, and OTC transactions
worldwide, there is no centralized, regulatory data source for
bitcoin trading statistics. Accordingly, the Commission's analysis
of worldwide trading activity must use unofficial sources that
purport to gather and disseminate trading data.
    \128\ One commenter provides similar statistics comparing
worldwide bitcoin trading volume to the Gemini Exchange bitcoin
trading volume. See supra note 53 and accompanying text.
---------------------------------------------------------------------------

    Moreover, self-reported statistics from the Gemini Exchange show
that volume in the Gemini Exchange Auction is small relative to daily
trading in bitcoin and to the number of bitcoin in a creation or
redemption basket for the Trust. As of February 28, 2017, the average
daily volume in the Gemini Exchange Auction, since its inception on
September 21, 2016, has been 1195.72 bitcoins, compared to average
daily worldwide volume of approximately 3.4 million bitcoins in the six
months preceding February 28, 2017. Also, as of February 28, 2017, the
median number of bitcoins traded in the Gemini Exchange Auction on a
business day (when a creation or redemption request might be submitted
to the Trust) has been just 1,061.99 bitcoins,\129\ barely larger than
the 1,000 bitcoins in a creation or redemption basket.\130\
Additionally, 88.2% of the business-day auctions were for fewer than
2,000 bitcoins--equivalent to two creation or redemption baskets--
suggesting that creation or redemption activity on the Gemini Exchange
might dwarf other trading.
---------------------------------------------------------------------------

    \129\ Although the Gemini Exchange conducts an auction on each
calendar day, in order to better represent auction volume for days
on which creations or redemptions might occur in the Shares, the
calculation of average and median auction volume excludes auctions
that occurred on weekends and days on which the U.S. equities
markets are closed.
    \130\ See Amendment No. 2, supra note 1 (setting size of
creation unit at 100,000 shares, with the value of a share at 0.01
BTC, making content of a creation unit 1,000 BTC).
---------------------------------------------------------------------------

    Regarding the regulation of the Gemini Exchange, the Exchange notes
in its proposed rule change that the Gemini Trust Company is supervised
by the NYSDFS, asserting that the Gemini Trust Company is one of only
two bitcoin exchange operators in the world subject to substantive
regulation. The Commission, however, does not believe that the record
supports a finding that the Gemini Exchange is a ``regulated market''
comparable to a national securities exchange or to the futures
exchanges that are associated with the underlying assets of the
commodity-trust ETPs approved to date.
    The Exchange represents that the Gemini Trust Company is subject to
capitalization, anti-money-laundering compliance, consumer protection,
and cybersecurity requirements set forth by the NYSDFS.\131\ Commission
regulation of the securities markets includes similar elements, but
national securities exchanges are also, among other things, required to
have rules that are ``designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.'' \132\ Moreover, national securities exchanges are subject
to Commission oversight of, among other things, their governance,
membership qualifications, trading rules, disciplinary procedures,
recordkeeping, and fees.\133\ Designated Contract Markets (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.\134\
---------------------------------------------------------------------------

    \131\ See Amendment No. 1, supra note 1, 81 FR at 76658-59.
    \132\ 15 U.S.C. 78f(b)(5).
    \133\ 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.
    \134\ See, e.g., Designated Contract Markets (DCMs), U.S.
Commodity Futures Trading Commission, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
---------------------------------------------------------------------------

4. The Market for Derivatives on Bitcoin
    As noted above,\135\ the commodity-trust ETPs previously approved
by the Commission for listing and trading have had--in lieu of
significant, regulated spot markets--significant, well-established, and
regulated futures markets that were associated with the underlying
commodity and with which the listing exchange had entered into a
surveillance-sharing agreement.
---------------------------------------------------------------------------

    \135\ See supra note 96 and accompanying text.
---------------------------------------------------------------------------

    One commenter states that there are several bitcoin futures markets
that have a significant impact on the spot price, but this commenter
did not identify any regulated futures market.\136\ Another commenter
describes the state of derivatives markets for bitcoin as ``nascent.''
\137\
---------------------------------------------------------------------------

    \136\ See Dylan Letter, supra note 19, at 1 (identifying OKCoin,
BitVC, and Bitmex as three of the largest overseas bitcoin futures
markets). See also ARK Letter, supra note 19, at 6 (stating that
most derivatives activity within the bitcoin markets is conducted by
unregulated entities).
    \137\ See ARK Letter, supra note 19, at 5.

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

    The Exchange also describes the current derivative markets for
bitcoin as ``[n]ascent.'' \138\ The Exchange notes that certain types
of options, futures contracts for differences, and other derivative
instruments are available in certain jurisdictions, but that many of
these are not available in the United States and that they generally
are not regulated ``to the degree that U.S. investors expect
derivatives instruments to be regulated.'' \139\ The Exchange notes
that the CFTC has approved the registration of TeraExchange LLC as a
swap execution facility (``SEF'') and that, on October 9, 2014,
TeraExchange announced that it had hosted the first executed bitcoin
swap traded on a CFTC-regulated platform.\140\ Further, the Exchange
notes that the CFTC has temporarily registered another SEF that would
trade swaps on bitcoin.\141\
---------------------------------------------------------------------------

    \138\ See Amendment No. 1, supra note 1, 81 FR at 76661.
    \139\ See id.
    \140\ See id. See also ARK Letter, supra note 19, at 6 (noting
that TeraExchange offers bitcoin forwards).
    \141\ See Amendment No. 1, supra note 1, 81 FR at 76661.
---------------------------------------------------------------------------

    The Commission acknowledges that TeraExchange, a market for swaps
on bitcoin, has registered with the CFTC, but the Exchange's
description of trading activity on that market fails to note that the
very activity it cites was the subject of an enforcement action by the
CFTC. The CFTC found that TeraExchange had improperly arranged for
participants to make prearranged, offsetting ``wash'' transactions of
the same price, notional amount, and tenor and then issued a press
release ``to create the impression of actual trading in the Bitcoin
swap.'' \142\ Neither the Exchange nor any commenter provides evidence
of meaningful trading volume in bitcoin derivatives on any regulated
marketplace. Thus, the Commission believes that the bitcoin derivatives
markets are not significant, regulated markets related to bitcoin with
which the Exchange can enter into a surveillance-sharing agreement.
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    \142\ See TeraExchange Settlement Order, supra note 112.
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    One commenter, and the author of the paper submitted with respect
to a similar rule filing, assert that the existence of bitcoin
derivative markets is not a necessary condition for a bitcoin ETP.\143\
The key requirement the Commission is applying here, however, is not
that a futures or derivatives market is required for every ETP, but
that--when the spot market is unregulated--there must be significant,
regulated derivatives markets related to the underlying asset with
which the Exchange can enter into a surveillance-sharing agreement.
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    \143\ See Anonymous Letter III, supra note 19, at 2; Lewis
Paper, supra note 42, at 8.
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C. Basis for Disapproval

    The Commission has, in past approvals of commodity-trust ETPs,
emphasized the importance of surveillance-sharing agreements between
the national securities exchange listing and trading the ETP, and
significant markets relating to the underlying asset.\144\ Such
agreements, which are a necessary tool to enable the ETP-listing
exchange to detect and deter manipulative conduct, enable the exchange
to meet its obligation under Section 6(b)(5) of the Exchange Act to
have rules that are designed to prevent fraudulent and manipulative
acts and practices and to protect investors and the public
interest.\145\
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    \144\ See supra note 96 and accompanying text.
    \145\ 15 U.S.C. 78f(b)(5).
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    As described above, the Exchange has not entered into a
surveillance-sharing agreement with a significant, regulated, bitcoin-
related market. The Commission also does not believe, as discussed
above, that the proposal supports a finding that the significant
markets for bitcoin or derivatives on bitcoin are regulated markets
with which the Exchange can enter into such an agreement. Therefore, as
the Exchange has not entered into, and would currently be unable to
enter into, the type of surveillance-sharing agreement that has been in
place with respect to all previously approved commodity-trust ETPs, the
Commission does not find the proposed rule change to be consistent with
the Exchange Act and, accordingly, disapproves the proposed rule
change.
    The Commission notes that bitcoin is still in the relatively early
stages of its development and that, over time, regulated bitcoin-
related markets of significant size may develop.\146\ Should such
markets develop, the Commission could consider whether a bitcoin ETP
would, based on the facts and circumstances then presented, be
consistent with the requirements of the Exchange Act.
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    \146\ The Exchange notes, for example, that the CME and the ICE
recently announced bitcoin pricing indexes. See Amendment No. 1,
supra note 1, 81 FR at 76666. In the future, regulated futures or
derivative markets might begin to trade products based on these
indexes.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find that
the proposed rule change, as modified by Amendment Nos. 1 and 2, 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 the proposed rule change (SR-BatsBZX-2016-30), as
modified by Amendments No. 1 and 2, be, and it hereby is, disapproved.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\147\
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    \147\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05213 Filed 3-15-17; 8:45 am]
BILLING CODE 8011-01-P