[Federal Register Volume 88, Number 50 (Wednesday, March 15, 2023)]
[Notices]
[Pages 16055-16071]
[FR Doc No: 2023-05298]

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SECURITIES AND EXCHANGE COMMISSION

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

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares

March 10, 2023.

I. Introduction

    On June 24, 2022, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the VanEck Bitcoin
Trust (``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares. The proposed rule change was published for comment in the
Federal Register on July 13, 2022.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 95218 (July 7,
2022), 87 FR 41755 (``Notice''). BZX previously filed, and the
Commission disapproved, a substantially similar proposal to list and
trade the Shares of the Trust. See Notice of Filing of a Proposed
Rule Change To List and Trade Shares of the VanEck Bitcoin Trust
Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities
Exchange Act Release No. 91326 (Mar. 15, 2021), 86 FR 14987 (Mar.
19, 2021) (``Previous VanEck Filing''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the VanEck Bitcoin
Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares,
Securities Exchange Act Release No. 93559 (Nov. 12, 2021), 86 FR
64539 (Nov. 18, 2021) (SR-CboeBZX-2021-019) (``Previous VanEck
Order'').
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    On August 24, 2022, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On October 4, 2022, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change,\7\
and on December 16, 2022, the Commission designated a longer period for
Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 95596, 87 FR 53038
(Aug. 30, 2022).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 95978, 87 FR 61418
(Oct. 11, 2022).
    \8\ See Securities Exchange Act Release No. 96517, 87 FR 78740
(Dec. 22, 2022).
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    This order disapproves the proposed rule change. The Commission
concludes that BZX has not met its burden under the Exchange Act and
the Commission's Rules of Practice to demonstrate that its proposal is
consistent with the requirements of Exchange Act Section 6(b)(5), which
requires, in relevant part, that the rules of a national securities
exchange be ``designed to prevent fraudulent and manipulative acts and
practices'' and ``to protect investors and the public interest.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether BZX's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same analytical framework used in
its orders considering previous proposals to list bitcoin \10\-based
commodity trusts and bitcoin-based trust issued receipts to assess
whether a listing exchange of an exchange-traded product (``ETP'') can
meet its obligations under Exchange Act Section 6(b)(5).\11\
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    \10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Notice, 87 FR at 41757.
    \11\ See Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) and To List and Trade Shares of the United States Bitcoin
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E,
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1,
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024)
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the Kryptoin
Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021),
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37)
(``SkyBridge Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022)
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares),
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10,
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X
Order''); Order Disapproving a Proposed Rule Change, as Modified by
Amendment No. 1, To List and Trade Shares of the ARK 21Shares
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares, Securities Exchange Act Release No. 94571 (Mar. 31, 2022),
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the One River Carbon Neutral Bitcoin Trust Under
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities
Exchange Act Release No. 94999 (May 27, 2022), 87 FR 33548 (June 2,
2022) (SR-NYSEArca-2021-67) (``One River Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares), Securities Exchange Act Release No. 95179 (June
29, 2022), 87 FR 40282 (July 6, 2022) (SR-NYSEArca-2021-89)
(``Bitwise Order''); Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, To List and Trade Shares of Grayscale
Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares), Securities Exchange Act Release No. 95180 (June 29, 2022),
87 FR 40299 (July 6, 2022) (SR-NYSEArca-2021-90) (``Grayscale
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the WisdomTree Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act
Release No. 96011 (Oct. 11, 2022), 87 FR 62466 (Oct. 14, 2022) (SR-
CboeBZX-2022-006) (``WisdomTree Order II''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the ARK 21Shares
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares, Securities Exchange Act Release No. 96751 (Jan. 26, 2023),
88 FR 6328 (Jan. 31, 2023) (SR-CboeBZX-2021-031) (``ARK 21Shares
Order II''). In addition, orders were issued by delegated authority
on the following matters: Order Disapproving a Proposed Rule Change,
as Modified by Amendment No. 1, Relating to the Listing and Trading
of Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule
8.201, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82
FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order'');
Order Disapproving a Proposed Rule Change To List and Trade the
Shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin
ETF, Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83
FR 43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) (``ProShares
Order''); Order Disapproving a Proposed Rule Change To List and
Trade the Shares of the GraniteShares Bitcoin ETF and the
GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No.
83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-
001) (``GraniteShares Order''); Previous VanEck Order; Order
Granting Approval of a Proposed Rule Change, as Modified by
Amendment No. 2, To List and Trade Shares of the Teucrium Bitcoin
Futures Fund Under NYSE Arca Rule 8.200-E, Commentary .02 (Trust
Issued Receipts), Securities Exchange Act Release No. 94620 (Apr. 6,
2022), 87 FR 21676 (Apr. 12, 2022) (SR-NYSEArca-2021-53) (``Teucrium
Order''); Order Granting Approval of a Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2, To List and Trade Shares of the
Valkyrie XBTO Bitcoin Futures Fund Under Nasdaq Rule 5711(g),
Securities Exchange Act Release No. 94853 (May 5, 2022), 87 FR 28848
(May 11, 2022) (SR-NASDAQ-2021-066) (``Valkyrie XBTO Order'').

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    As the Commission has explained, an exchange that lists bitcoin-
based ETPs \12\ can meet its obligations under Exchange Act Section
6(b)(5) by demonstrating that the exchange has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to the underlying or reference bitcoin assets.\13\
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    \12\ As used in this order, the term ``ETFs'' refers to open-end
exchange-traded funds that register the offer and sale of their
shares under the Securities Act of 1933 (``Securities Act'') and are
regulated as investment companies under the Investment Company Act
of 1940 (``1940 Act''). The term ``ETPs'' refers to exchange-traded
products that register the offer and sale of their shares under the
Securities Act but are not regulated under the 1940 Act, such as
commodity trusts and trust issued receipts.
    \13\ See USBT Order, 85 FR at 12596. See also Winklevoss Order,
83 FR at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
83 FR at 43925-27 nn.35-39 and accompanying text (discussing
previous Commission approvals of commodity-futures ETPs).
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    In this context, the terms ``significant market'' and ``market of
significant size'' include a market (or group of markets) as to which
(a) there is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
successfully manipulate the ETP, so that a surveillance-sharing
agreement would assist in detecting and deterring misconduct, and (b)
it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\14\ A surveillance-sharing
agreement entered into with a ``significant market'' assists in
detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to engage also in
trading activity on that ``significant market.'' \15\
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    \14\ See Winklevoss Order, 83 FR at 37594. See also USBT Order,
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322; ARK 21Shares
Order, 87 FR at 20015.
    \15\ See USBT Order, 85 FR at 12597.
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    Although surveillance-sharing agreements are not the exclusive
means by which a listing exchange of a commodity-trust ETP can meet its
obligations under Exchange Act Section 6(b)(5), such agreements have
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has
historically recognized their importance. And where, as here, a listing
exchange fails to establish that other means to prevent fraudulent and
manipulative acts and practices will be sufficient, the listing
exchange must enter into a surveillance-sharing agreement with a
regulated market of significant size because such agreements detect and
deter fraudulent and manipulative activity.\16\
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    \16\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83
FR at 43924; USBT Order, 85 FR at 12596.
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    The Commission has long recognized that surveillance-sharing
agreements ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur'' and thus ``enable the Commission
to continue to effectively protect investors and promote the public
interest.'' \17\ As the Commission has emphasized, it is essential for
an exchange listing a derivative securities product to have the ability
that surveillance-sharing agreements provide to obtain information
necessary to detect, investigate, and deter fraud and market
manipulation, as well as violations of exchange rules and applicable
federal securities laws and rules.\18\ The hallmarks of a surveillance-
sharing agreement are that the agreement provides for the sharing of
information about market trading activity, clearing activity, and
customer identity; that the parties to the agreement have reasonable
ability to obtain access to and produce requested information; and that
no existing rules, laws, or practices would impede one party to the
agreement from obtaining this information from, or producing it to, the
other party.\19\
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    \17\ NDSP Adopting Release, 63 FR at 70954, 70959. See also id.
at 70959 (``It is essential that the SRO [self-regulatory
organization] have the ability to obtain the information necessary
to detect and deter market manipulation, illegal trading and other
abuses involving the new derivative securities product.
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative
securities product and its underlying securities in place between
the SRO listing or trading a derivative product and the markets
trading the securities underlying the new derivative securities
product.'').
    \18\ See NDSP Adopting Release, 63 FR at 70959.
    \19\ See Winklevoss Order, 83 FR at 37592-93 (discussing Letter
from Brandon Becker, Director, Division of Market Regulation,
Commission, to Gerard D. O'Connell, Chairman, Intermarket
Surveillance Group (June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm).

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    The Commission has explained that the ability of a national
securities exchange to enter into surveillance-sharing agreements
``furthers the protection of investors and the public interest because
it will enable the [e]xchange to conduct prompt investigations into
possible trading violations and other regulatory improprieties.'' \20\
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of
derivative security products, such as equity options, because a
surveillance-sharing agreement ``permits the sharing of information''
that is ``necessary to detect'' manipulation and ``provide[s] an
important deterrent to manipulation because [it] facilitate[s] the
availability of information needed to fully investigate a potential
manipulation if it were to occur.'' \21\ With respect to ETPs, when
approving the listing and trading of one of the first commodity-linked
ETPs--a commodity-linked exchange-traded note--on a national securities
exchange, the Commission continued to emphasize the importance of
surveillance-sharing agreements, stating that the listing exchange had
entered into surveillance-sharing agreements with each of the futures
markets on which pricing of the ETP would be based and stating that
``[t]hese agreements should help to ensure the availability of
information necessary to detect and deter potential manipulations and
other trading abuses, thereby making [the commodity-linked notes] less
readily susceptible to manipulation.'' \22\
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    \20\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990),
55 FR 13344 (Apr. 10, 1990) (Notice of Filing and Order Granting
Accelerated Approval to Proposed Rule Change Regarding Cooperative
Agreements With Domestic and Foreign Self-Regulatory Organizations)
(SR-NYSE-90-14).
    \21\ Securities Exchange Act Release No. 33555 (Jan. 31, 1994),
59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order approving
listing of options on American Depositary Receipts (``ADR'')) (``ADR
Option Order''). The Commission further stated that it ``generally
believes that having a comprehensive surveillance sharing agreement
in place, between the exchange where the ADR option trades and the
exchange where the foreign security underlying the ADR primarily
trades, will ensure the integrity of the marketplace. The Commission
further believes that the ability to obtain relevant surveillance
information, including, among other things, the identity of the
ultimate purchasers and sellers of securities, is an essential and
necessary component of a comprehensive surveillance sharing
agreement.'' Id.
    \22\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995),
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also
Winklevoss Order, 83 FR at 37593 n.206.
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    Consistent with these statements, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity and the ETP listing exchange has entered into
surveillance-sharing agreements with, or held Intermarket Surveillance
Group (``ISG'') membership in common with, that market.\23\ Moreover,
the surveillance-sharing agreements have been consistently present
whenever the Commission has approved the listing and trading of
derivative securities, even where the underlying securities were also
listed on national securities exchanges--such as options based on an
index of stocks traded on a national securities exchange--and were thus
subject to the Commission's direct regulatory authority.\24\
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    \23\ See Winklevoss Order, 83 FR at 37594. See also SolidX
Order, 82 FR at 16254-55 n.125 for a discussion of the
representations the Commission has received from listing exchanges
in connection with proposals to list commodity-trust ETPs about the
existence of a significant, regulated market for trading futures on
the underlying commodity and the listing exchanges' ability to
obtain trading information with respect to such market. Furthermore,
the Commission notes that each of those cases dealt with a futures
market that had been trading for a long period of time before an
exchange proposed a commodity-trust ETP based on the asset
underlying those futures. For example, silver futures and gold
futures began trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and
the first ETPs based on spot silver and gold were approved for
listing and trading in 2006 and 2004. See Securities Exchange Act
Release No. 53521 (Mar. 20, 2006), 71 FR 14967 (Mar. 24, 2006) (SR-
Amex-2005-072) (order approving iShares Silver Trust); Securities
Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5,
2004) (SR-NYSE-2004-22) (order approving streetTRACKS Gold Shares).
Platinum futures and palladium futures began trading in 1956 and
1968, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on spot
platinum and palladium were approved for listing and trading in
2009. See Securities Exchange Act Release No. 61220 (Dec. 22, 2009),
74 FR 68895 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (order approving
ETFS Palladium Trust); Securities Exchange Act Release No. 61219
(Dec. 22, 2009), 74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95)
(order approving ETFS Platinum Trust). Copper futures began trading
in 1988, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html#metals, and the first ETPs based on spot copper
were approved for listing and trading in 2012. See Securities
Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468 (Dec.
20, 2012) (SR-NYSEArca-2012-28) (order approving JPM XF Physical
Copper Trust).
    \24\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at
5621. The Commission has also recognized that surveillance-sharing
agreements provide a necessary deterrent to fraud and manipulation
in the context of index options even when (i) all of the underlying
index component stocks were either registered with the Commission or
exempt from registration under the Exchange Act; (ii) all of the
underlying index component stocks were traded in the U.S. either
directly or as ADRs on a national securities exchange; and (iii)
effective international ADR arbitrage alleviated concerns over the
relatively smaller ADR trading volume, helped to ensure that ADR
prices reflected the pricing on the home market, and helped to
ensure more reliable price determinations for settlement purposes,
due to the unique composition of the index and reliance on ADR
prices. See Securities Exchange Act Release No. 26653 (Mar. 21,
1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-87-25) (stating
that ``surveillance-sharing agreements between the exchange on which
the index option trades and the markets that trade the underlying
securities are necessary'' and that ``[t]he exchange of surveillance
data by the exchange trading a stock index option and the markets
for the securities comprising the index is important to the
detection and deterrence of intermarket manipulation''). And the
Commission has explained that surveillance-sharing agreements
``ensure the availability of information necessary to detect and
deter potential manipulations and other trading abuses'' even when
approving options based on an index of stocks traded on a national
securities exchange. See Securities Exchange Act Release No. 30830
(June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-Amex-91-22).
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    Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin market
is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\25\ In response, the Commission has stated that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, the
listing market would not necessarily need to enter into a surveillance-
sharing agreement with a regulated significant market.\26\ Such
resistance to fraud and manipulation, however, must be novel and beyond
those protections that exist in traditional commodity markets or
securities markets for which surveillance-sharing agreements in the
context of listing derivative securities products have been
consistently present.\27\
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    \25\ See USBT Order, 85 FR at 12597.
    \26\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing
assertions that ``bitcoin and [spot] bitcoin markets,'' generally,
as well as one bitcoin trading platform, specifically, have unique
resistance to fraud and manipulation). See also USBT Order, 85 FR at
12597.
    \27\ See USBT Order, 85 FR at 12597, 12599.
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    Here, BZX contends that approval of the proposal is consistent with
Section 6(b)(5) of the Exchange Act, and, in particular, Section
6(b)(5)'s requirement that the rules of a national securities exchange
be designed to prevent fraudulent and manipulative acts and practices
and to protect investors and the public interest.\28\ As discussed in
more detail below, BZX asserts that the proposal is consistent with
Section 6(b)(5) of the Exchange Act because the Exchange has a
comprehensive surveillance-sharing agreement with a

regulated market of significant size,\29\ and there exist other means
to prevent fraudulent and manipulative acts and practices that are
sufficient to justify dispensing with the detection and deterrence of
fraud and manipulation provided by a comprehensive surveillance-sharing
agreement with a regulated market of significant size related to spot
bitcoin.\30\
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    \28\ See Notice, 87 FR at 41767.
    \29\ See id. at 41768-70.
    \30\ See id. at 41769.
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    In the analysis that follows, the Commission examines whether the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act by addressing: in Section III.B.1 assertions that other means
besides surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices; in Section III.B.2
assertions that BZX has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to spot bitcoin; in Section III.B.3 assertions that the Commission must
approve the proposal because the Commission has approved the listing
and trading of ETFs and ETPs that hold Chicago Mercantile Exchange
(``CME'') bitcoin futures; and in Section III.C assertions that the
proposal is consistent with the protection of investors and the public
interest.
    Based on its analysis, the Commission concludes that BZX has not
established that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin. The Commission further
concludes that BZX has not established that it has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to spot bitcoin, the underlying bitcoin assets that would
be held by the Trust. As discussed further below, BZX repeats various
assertions made in prior bitcoin-based ETP proposals, including in the
Previous VanEck Filing, that the Commission has previously addressed
and rejected, including in the Previous VanEck Order--and more
importantly, BZX does not respond to many of the Commission's reasons
for rejecting those assertions. As a result, the Commission is unable
to find that the proposed rule change is consistent with the statutory
requirements of Exchange Act Section 6(b)(5).
    The Commission emphasizes that its disapproval of this proposed
rule change does not rest on an evaluation of the relative investment
quality of a product holding spot bitcoin versus a product holding CME
bitcoin futures, or an assessment of whether bitcoin, or blockchain
technology more generally, has utility or value as an innovation or an
investment. Rather, the Commission is disapproving this proposed rule
change because, as discussed below, BZX has not met its burden to
demonstrate that its proposal is consistent with the requirements of
Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\31\ the Exchange
proposes to list and trade the Shares of the Trust under BZX Rule
14.11(e)(4), which governs the listing and trading of Commodity-Based
Trust Shares on the Exchange.
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    \31\ See supra note 3. According to the Exchange, the Sponsor
(as defined herein), on behalf of the Trust, has filed Amendment No.
2 to a registration statement on Form S-1 under the Securities Act
dated June 22, 2022 (File No. 333-251808) (``Registration
Statement''). See Notice, 87 FR at 41755 n.7.
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    The investment objective of the Trust would be for the Shares to
reflect the performance of the MVIS[supreg] CryptoCompare Bitcoin
Benchmark Rate (``Benchmark''), less the expenses of the Trust's
operations.\32\ The Benchmark would be used to calculate the Trust's
net asset value (``NAV''). The Benchmark is designed to be a price for
bitcoin in USD, and there is no component other than bitcoin in the
Benchmark. The current platform composition of the Benchmark is
Bitstamp, Coinbase, Gemini, itBit, and Kraken. In calculating the
Benchmark, the methodology captures trade prices and sizes from the
platforms and examines twenty consecutive three-minute periods leading
up to 4:00 p.m. E.T. It then calculates an equal-weighted average of
the volume-weighted median price of these twenty three-minute periods,
removing the highest and lowest contributed prices.\33\
---------------------------------------------------------------------------

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

    Each Share would represent a fractional undivided beneficial
interest in the Trust's net assets. The Trust's assets would consist of
bitcoin held by the Custodian on behalf of the Trust. The Trust
generally does not intend to hold cash or cash equivalents. However,
there may be situations where the Trust would unexpectedly hold cash on
a temporary basis.\34\
---------------------------------------------------------------------------

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

    The Administrator would determine the NAV and NAV per Share of the
Trust on each day that the Exchange is open for regular trading, as
promptly as practical after 4:00 p.m. E.T. The NAV of the Trust is the
aggregate value of the Trust's assets less its estimated accrued but
unpaid liabilities (which include accrued expenses). In determining the
Trust's NAV, the Administrator would value the bitcoin held by the
Trust based on the price set by the Benchmark as of 4:00 p.m. E.T.\35\
---------------------------------------------------------------------------

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

    The Trust would provide information regarding the Trust's bitcoin
holdings, as well as an Intraday Indicative Value (``IIV'') per Share
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading
Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV would be calculated by
using the prior day's closing NAV per Share as a base and updating that
value during Regular Trading Hours to reflect changes in the value of
the Trust's bitcoin holdings during the trading day.\36\
---------------------------------------------------------------------------

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

    When the Trust sells or redeems its Shares, it would do so in ``in-
kind'' transactions in blocks of 50,000 Shares at the Trust's NAV.
Authorized participants would deliver, or facilitate the delivery of,
bitcoin to the Trust's account with the Custodian in exchange for
Shares when they purchase Shares, and the Trust, through the Custodian,
would deliver bitcoin to such authorized participants when they redeem
Shares with the Trust.\37\
---------------------------------------------------------------------------

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

III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether BZX's proposal is consistent
with the Exchange Act. Section 6(b)(5) of the Exchange Act requires, in
relevant part, that the rules of a national securities exchange be
designed ``to prevent fraudulent and manipulative acts and practices''
and ``to protect investors and the public interest.'' \38\

Under the Commission's Rules of Practice, the ``burden to demonstrate
that a proposed rule change is consistent with the Exchange Act and the
rules and regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \39\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \39\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\40\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\41\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\42\
---------------------------------------------------------------------------

    \40\ See id.
    \41\ See id.
    \42\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is
Designed To Prevent Fraudulent and Manipulative Acts and Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and
Practices
(i) Assertions Regarding the Bitcoin Market
    As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with the detection and deterrence of fraud and manipulation provided by
a comprehensive surveillance-sharing agreement with a regulated market
of significant size related to the underlying bitcoin assets, including
by demonstrating that the bitcoin market as a whole or the relevant
underlying bitcoin market is uniquely and inherently resistant to fraud
and manipulation.\43\ Such resistance to fraud and manipulation,
however, must be novel and beyond those protections that exist in
traditional commodities or securities markets.\44\
---------------------------------------------------------------------------

    \43\ See USBT Order, 85 FR at 12597 n.23. The Commission is not
applying a ``cannot be manipulated'' standard. Instead, the
Commission is examining whether the proposal meets the requirements
of the Exchange Act and, pursuant to its Rules of Practice, places
the burden on the listing exchange to demonstrate the validity of
its contentions and to establish that the requirements of the
Exchange Act have been met. See id.
    \44\ See id. at 12597.
---------------------------------------------------------------------------

(a) BZX's Assertions
    BZX asserts that bitcoin is resistant to price manipulation.\45\
According to BZX, the geographically diverse and continuous nature of
bitcoin trading render it difficult and prohibitively costly to
manipulate the price of bitcoin.\46\ BZX asserts that fragmentation
across bitcoin platforms, the relatively slow speed of transactions,
and the capital necessary to maintain a significant presence on each
trading platform make manipulation of bitcoin prices through continuous
trading activity challenging.\47\ In addition, BZX states that, to the
extent that there are bitcoin platforms engaged in or allowing wash
trading \48\ or other activity intended to manipulate the price of
bitcoin on other markets, such activity does not normally impact prices
on other platforms because participants will generally ignore markets
with quotes that they deem non-executable.\49\ BZX further argues that
the linkage between the bitcoin markets and the presence of
arbitrageurs in those markets means that the manipulation of the price
of bitcoin on any single venue would require manipulation of the global
bitcoin price in order to be effective.\50\ According to BZX,
arbitrageurs must have funds distributed across multiple trading
platforms in order to take advantage of temporary price dislocations,
thereby making it unlikely that there will be strong concentration of
funds on any particular bitcoin trading venue.\51\ As a result, BZX
concludes that the potential for manipulation on a bitcoin trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market pricing
differences.\52\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

    \57\ For example, the Registration Statement states that ``[i]f
increases in throughput on the Bitcoin network lag behind growth in
usage of bitcoin, average fees and settlement times may increase
considerably'' and that such increased fees and decreased settlement
speeds ``could adversely impact the value of the Shares.'' See
Registration Statement at 20. BZX does not provide data or analysis
to address, among other things, whether such risks of increased fees
and bitcoin transaction settlement times may affect the arbitrage
effectiveness that BZX asserts. See also infra note 72 and
accompanying text (referencing statements made in the Registration
Statement that contradict assertions made by BZX).
    \58\ See supra note 42 and accompanying text.
---------------------------------------------------------------------------

    In any event, the Commission has explained that efficient price
arbitrage is not sufficient to support the finding that a market is
uniquely or inherently resistant to manipulation such that the
Commission can dispense with surveillance-sharing agreements.\59\ The
Commission has stated, for example, that even for equity options based
on securities listed on national securities exchanges, the Commission
relies on surveillance-sharing agreements to detect and deter fraud and
manipulation.\60\ Equities that underlie such options trade on U.S.
equity markets that are deep, liquid, and highly interconnected.\61\
Moreover, BZX does not take into account that a market participant with
a dominant ownership position would not find it prohibitively expensive
to overcome the liquidity supplied by arbitrageurs and could use
dominant market share to engage in manipulation.\62\
---------------------------------------------------------------------------

    \59\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at
74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 FR
at 20019; Grayscale Order, 87 FR at 40306.
    \60\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR
at 74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87
FR at 20019; Grayscale Order, 87 FR at 40306-07.
    \61\ See Market Data Infrastructure Adopting Release, Securities
Exchange Act Release No. 90610 (Dec. 9, 2020); 86 FR 18596, 18606-07
(Apr. 9, 2021); Market Data Infrastructure Proposing Release,
Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR
16726, 16728 (Mar. 24, 2020); Concept Release on Equity Market
Structure, Securities Exchange Act Release No. 61358 (Jan. 14,
2010), 75 FR 3594 (Jan. 21, 2010). See also ARK 21Shares Order, 87
FR at 20019 n.70.
    \62\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85
FR at 12600-01; WisdomTree Order, 86 FR at 69325.
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that, to the
extent that there are bitcoin platforms engaged in or allowing wash
trading or other activity intended to manipulate the price of bitcoin
on other markets, market participants will generally ignore those
platforms. However, the record does not demonstrate that wash trading
and other possible sources of fraud and manipulation in the broader
bitcoin spot market will be ignored by market participants.\63\ Without
the necessary data or other evidence, the Commission has no basis on
which to conclude that bitcoin platforms are insulated from prices of
others that engage in or permit fraud or manipulation.\64\
---------------------------------------------------------------------------

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

    Further, the continuous nature of bitcoin trading does not support
the finding that the bitcoin market is uniquely or inherently resistant
to manipulation, and neither do linkages among markets, as BZX
asserts.\65\ Even in the presence of continuous trading or linkages
among markets, formal (such as those with consolidated quotations or
routing requirements) or otherwise (such as in the context of the
fragmented, global bitcoin markets), manipulation of asset prices, as a
general matter, can occur simply through trading activity that creates
a false impression of supply or demand.\66\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

    Simultaneously with its assertions regarding the Benchmark, BZX
also states that, because the Trust will engage in in-kind creations
and redemptions only, the ``manipulability of the Benchmark [is]
significantly less important.'' \82\ The Exchange elaborates that,
``because the Trust will not accept cash to buy bitcoin in order to
create new [S]hares or . . . be forced to sell bitcoin to pay cash for
redeemed [S]hares, the price that the Sponsor uses to value the Trust's
bitcoin is not particularly important.'' \83\ According to BZX, when
authorized participants create Shares with the Trust, they would need
to deliver a certain number of bitcoin per Share (regardless of the
valuation used), and when they redeem with the Trust, they would
similarly expect to receive a certain number of bitcoin per Share.\84\
As such, BZX argues that, even if the price used to value the Trust's
bitcoin is manipulated, the ratio of bitcoin per Share does not change,
and the Trust will either accept (for creations) or distribute (for
redemptions) the same number of bitcoin regardless of the value.\85\
This, according to BZX, not only mitigates the risk associated with
potential manipulation, but also discourages and disincentivizes
manipulation of the Benchmark because there is little financial
incentive to do so.\86\
---------------------------------------------------------------------------

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

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

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

    \87\ As discussed above, while the Exchange asserts that bitcoin
prices on platforms with wash trades or other activity intended to
manipulate the price of bitcoin would generally be ignored, the
Commission has no basis on which to conclude that bitcoin platforms
are insulated from prices of others that engage in or permit fraud
or manipulation. See supra notes 63-64 and accompanying text.
    \88\ See supra notes 55-56 and accompanying text.
    \89\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69327; Kryptoin Order, 86 FR at 74172; Valkyrie Order, 86 FR at
74161; SkyBridge Order, 87 FR at 3873; ARK 21Shares Order, 87 FR at
20021; Grayscale Order, 87 FR at 40309.
---------------------------------------------------------------------------

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

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

    Moreover, the Exchange's assertions that the Benchmark's
methodology helps make the Benchmark resistant to manipulation conflict
with the Registration Statement. Specifically, the Registration
Statement represents, among other things, that ``[b]itcoin [platforms]
on which bitcoin trades are relatively new and, in some cases,
unregulated, and, therefore, may be more exposed to fraud and security
breaches than established, regulated exchanges for other financial
assets or instruments, which could have a negative impact on the
Trust.'' \93\ The Benchmark's constituent bitcoin platforms are a
subset of the bitcoin trading venues currently in existence.
---------------------------------------------------------------------------

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

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

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

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

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

    \95\ See also USBT Order, 85 FR at 12603-05; Previous VanEck
Order, 86 FR at 64545; WisdomTree Order, 86 FR at 69328; Kryptoin
Order, 86 FR at 74173.
    \96\ 15 U.S.C. 78f(b)(5).
    \97\ 17 CFR 240.19b-4(a)(6)(i).
    \98\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rule changes
with the Commission and provides the Commission with the authority
to disapprove proposed rule changes that are not consistent with the
Exchange Act. Designated contract markets (``DCMs'') (commonly
called ``futures markets'') registered with and regulated by the
CFTC must comply with, among other things, a similarly comprehensive
range of regulatory principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available
at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \99\ See Winklevoss Order, 83 FR at 37597. The Commission notes
that the New York State Department of Financial Services
(``NYSDFS'') has issued ``guidance'' to supervised virtual currency
business entities, stating that these entities must ``implement
measures designed to effectively detect, prevent, and respond to
fraud, attempted fraud, and similar wrongdoing.'' See Maria T.
Vullo, Superintendent of Financial Services, NYSDFS, Guidance on
Prevention of Market Manipulation and Other Wrongful Activity (Feb.
7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS recognizes that its ``guidance is not
intended to limit the scope or applicability of any law or
regulation'' (id.), which would include the Exchange Act. Nothing in
the record evidences whether the Benchmark's constituent bitcoin
platforms have complied with this NYSDFS guidance. Further, as
stated previously, there are substantial differences between the
NYSDFS and the Commission's regulation. Anti-money laundering
(``AML'') and know-your-customer (``KYC'') policies and procedures,
for example, have been referenced in other bitcoin-based ETP
proposals as a purportedly alternative means by which such ETPs
would be uniquely resistant to manipulation. The Commission has
previously concluded that such AML and KYC policies and procedures
do not serve as a substitute for, and are not otherwise dispositive
in the analysis regarding the importance of, having a surveillance-
sharing agreement with a regulated market of significant size
relating to the underlying bitcoin assets. For example, AML and KYC
policies and procedures do not substitute for the sharing of
information about market trading activity or clearing activity that
a surveillance sharing agreement would afford and do not substitute
for regulation as a national securities exchange. See USBT Order, 85
FR at 12603 n.101. See also, e.g., WisdomTree Order, 86 FR at 69328
n.95; Kryptoin Order, 86 FR at 74173 n.98.
    \100\ See USBT Order, 85 FR at 12603-05 & n.101; Previous VanEck
Order, 86 FR at 64545 & n.89; WisdomTree Order, 86 FR at 69328 &
n.95; Kryptoin Order, 86 FR at 74173 & n.98; ARK 21Shares Order, 87
FR at 20021-22 & n.107; Grayscale Order, 87 FR at 40308 & n.110.
---------------------------------------------------------------------------

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

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

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

    \102\ The Commission has previously considered and rejected
similar arguments about the valuation of bitcoin according to a
benchmark or reference price. See, e.g., SolidX Order, 82 FR at
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at
12599-601; WisdomTree Order, 86 FR at 69327-29; Valkyrie Order, 86
FR at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale Order, 87
FR at 40310.
    \103\ See supra note 35 and accompanying text.
    \104\ See Notice, 87 FR at 41764-65, 41766. According to the
Exchange, to create, ``[t]he total deposit of bitcoin required is an
amount of bitcoin that is in the same proportion to the total assets
of the Trust, net of accrued expenses and other liabilities, on the
date the order to purchase is properly received, as the number of
Shares to be created under the purchase order is in proportion to
the total number of Shares outstanding on the date the order is
received.'' The required deposit is determined ``for a given day by
dividing the number of bitcoin held by the Trust as of the opening
of business on that business day, adjusted for the amount of bitcoin
constituting estimated accrued but unpaid fees and expenses of the
Trust as of the opening of business on that business day, by the
quotient of the number of Shares outstanding at the opening of
business divided by 50,000.'' See id. at 41766. The Exchange also
states that shares of a spot bitcoin ETP would represent interest in
bitcoin directly and authorized participants for a spot bitcoin ETP
would be able to source bitcoin from any exchange and create or
redeem with the applicable trust regardless of the price of the
underlying index. See id. at 41764.
    \105\ See id. at 41765 (stating that ``[a]uthorized participants
may then offer Shares to the public at prices that depend on various
factors, including the supply and demand for Shares, the value of
the Trust's assets, and market conditions at the time of a
transaction'' and ``[s]hareholders who buy or sell Shares during the
day from their broker may do so at a premium or discount relative to
the NAV of the Shares of the Trust'').
    \106\ See WisdomTree Order, 86 FR at 69329 & n.108; Valkyrie
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale
Order, 87 FR at 40310.
---------------------------------------------------------------------------

    Moreover, the Exchange's arguments are contradictory. While arguing
that the Benchmark is resistant to manipulation, the Exchange
simultaneously downplays the importance of the Benchmark in light of
the Trust's in-kind creation and redemption mechanism.\107\ The
Exchange points out that the Trust will create and redeem Shares in-
kind, not in cash, which renders the NAV calculation, and thereby the
ability to manipulate NAV, ``significantly less important.'' \108\ In
BZX's own words, the Trust will not accept cash to buy bitcoin in order
to create Shares or sell bitcoin to pay cash for redeemed Shares, so
the price that the Sponsor uses to value the Trust's bitcoin ``is not
particularly important.'' \109\ If the Benchmark that the Trust uses to
value the Trust's bitcoin ``is not particularly important,'' it follows
that the Benchmark's resistance to manipulation is not material to the
Shares' susceptibility to fraud and manipulation. As the Exchange does
not address or provide any analysis with respect to these issues, the
Commission cannot conclude

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

    \107\ See supra notes 82-86 and accompanying text.
    \108\ Notice, 87 FR at 41764 (``While the Sponsor believes that
the Benchmark which it uses to value the Trust's bitcoin is itself
resistant to manipulation based on the methodology further described
below, the fact that creations and redemptions are only available
in-kind makes the manipulability of the Benchmark significantly less
important.'').
    \109\ Id. (concluding that ``because the Trust will not accept
cash to buy bitcoin in order to create new shares or, barring a
forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses to value the Trust's bitcoin
is not particularly important'').
    \110\ See WisdomTree Order, 86 FR at 69329; ARK 21Shares Order,
87 FR at 20022.
---------------------------------------------------------------------------

    Finally, the Commission finds that BZX has not demonstrated that
in-kind creations and redemptions provide the Shares with a unique
resistance to manipulation. The Commission has previously addressed
similar assertions.\111\ As the Commission stated before, in-kind
creations and redemptions are a common feature of ETPs, and the
Commission has not previously relied on the in-kind creation and
redemption mechanism as a basis for excusing exchanges that list ETPs
from entering into surveillance-sharing agreements with significant,
regulated markets related to the portfolio's assets.\112\ Accordingly,
the Commission is not persuaded here that the Trust's in-kind creations
and redemptions afford it a unique resistance to manipulation.\113\
---------------------------------------------------------------------------

    \111\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR
at 12607-08; WisdomTree Order, 86 FR at 69329; ARK 21Shares Order,
87 FR at 20022.
    \112\ See, e.g., iShares COMEX Gold Trust, Securities Exchange
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26,
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24,
2006) (SR-Amex-2005-072).
    \113\ Putting aside the Exchange's various assertions about the
nature of bitcoin and the bitcoin market, the Benchmark, and the
Shares, the Exchange also does not address concerns the Commission
has previously identified, including the susceptibility of bitcoin
markets to potential trading on material, non-public information
(such as plans of market participants to significantly increase or
decrease their holdings in bitcoin; new sources of demand for
bitcoin; the decision of a bitcoin-based investment vehicle on how
to respond to a ``fork'' in the bitcoin blockchain, which would
create two different, non-interchangeable types of bitcoin), or to
the dissemination of false or misleading information. See Winklevoss
Order, 83 FR at 37585. See also USBT Order, 85 FR at 12600-01.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size Related
to the Underlying Bitcoin Assets
    As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and
manipulative acts and practices, the Commission next examines whether
the record supports the conclusion that BZX has entered into a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to the underlying bitcoin assets. In this
context, the term ``market of significant size'' includes a market (or
group of markets) as to which (i) there is a reasonable likelihood that
a person attempting to manipulate the ETP would also have to trade on
that market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (ii) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\114\
---------------------------------------------------------------------------

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

    As the Commission has explained, it considers two markets that are
members of the ISG to have a comprehensive surveillance-sharing
agreement with one another, even if they do not have a separate
bilateral surveillance-sharing agreement.\115\ Accordingly, based on
the common membership of BZX and the CME in the ISG,\116\ BZX has the
equivalent of a comprehensive surveillance-sharing agreement with the
CME. However, while the Commission recognizes that the CFTC regulates
the CME futures market,\117\ including the CME bitcoin futures market,
and thus such market is ``regulated,'' in the context of the proposed
ETP, the record does not, as explained further below, establish that
the CME bitcoin futures market is a ``market of significant size''
related to spot bitcoin, the underlying bitcoin assets that would be
held by the Trust.
---------------------------------------------------------------------------

    \115\ See id. at 37580 n.19.
    \116\ See Notice, 87 FR at 41763.
    \117\ While the Commission recognizes that the CFTC regulates
the CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying spot bitcoin market. See Winklevoss
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; SkyBridge Order,
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93; ARK
21Shares Order, 87 FR at 20023 n.121; Bitwise Order, 87 FR at 40286
n.54; Grayscale Order, 87 FR at 40311 n.138.
---------------------------------------------------------------------------

(i) Whether There Is a Reasonable Likelihood That a Person Attempting
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin
Futures Market To Successfully Manipulate the ETP
    The first prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' related to spot
bitcoin is the determination that there is a reasonable likelihood that
a person attempting to manipulate the ETP would have to trade on the
CME bitcoin futures market to successfully manipulate the ETP. In
previous Commission orders, the Commission explained that the lead-lag
relationship between the bitcoin futures market and the spot market is
``central'' to understanding this first prong.\118\
---------------------------------------------------------------------------

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

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

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

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

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

    \122\ See also USBT Order, 85 FR at 12611; WisdomTree Order, 86
FR at 69330-31; Wise Origin Order, 87 FR at 5535; NYDIG Order, 87 FR
at 14938; Global X Order, 87 FR at 14920; ARK 21Shares, 87 FR at
20024; Bitwise Order, 87 FR at 40288-89; Grayscale Order, 87 FR at
40312-13.
    \123\ See supra note 120.
    \124\ See, e.g., Previous VanEck Order, 86 FR at 64547
(discussing that the paper's use of daily price data, as opposed to
intraday prices, may not be able to distinguish which market
incorporates new information faster; and discussing that the paper
found inconclusive evidence that futures prices lead spot bitcoin
prices--in particular, that the months at the end of the paper's
sample period showed, using Granger causality methodology, that the
spot market was the leading market--and that the record did not
include evidence to explain why this would not indicate a shift
towards prices in the spot market leading the futures market that
would be expected to persist into the future). See also USBT Order,
85 FR at 12613 n.244; WisdomTree Order, 86 FR at 69331.
    \125\ See Previous VanEck Order, 86 FR at 64547; ARK 21Shares
Order, 87 FR at 20024; WisdomTree Order, 86 FR at 69331. The paper
finds that the CME bitcoin futures market dominates the spot markets
in terms of Granger causality, but that the causal relationship is
bi-directional, and a Granger causality episode from March 2019 to
June/July 2019 runs from bitcoin spot prices to CME bitcoin futures
prices. The paper concludes: ``[T]he Granger causality episodes are
not constant throughout the whole sample period. Via our causality
detection methods, market participants can identify when markets are
being led by futures prices and when they might not be.'' See Hu,
Hou & Oxley, supra note 120.
---------------------------------------------------------------------------

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

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

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

    \128\ As the academic literature and listing exchanges' analyses
pertaining to the pricing relationship between the CME bitcoin
futures market and spot bitcoin market have developed, the
Commission has critically reviewed those materials. See WisdomTree
Order II, 87 FR at 62476-77; Grayscale Order, 87 FR at 40311-13;
Bitwise Order, 87 FR at 40286-89; ARK 21Shares Order, 87 FR at
20024; Global X Order, 87 FR at 14920; Wise Origin Order, 87 FR at
5535-36, 5539-40; Kryptoin Order, 86 FR at 74176; WisdomTree Order,
86 FR at 69330-32; Previous VanEck Order, 86 FR at 64547-48; USBT
Order, 85 FR at 12613.
    \129\ See supra note 118.
    \130\ In addition, BZX fails to address the relationship (if
any) between prices on other bitcoin futures markets and the CME
bitcoin futures market, the bitcoin spot market, and/or the
constituent bitcoin platforms underlying the Benchmark, or where
price formation occurs when the entirety of bitcoin futures markets,
not just the CME, is considered. See ARK 21Shares Order, 87 FR at
20024 n.147; Previous VanEck Order, 86 FR at 64547-48; WisdomTree
Order, 86 FR at 69331; Kryptoin Order, 86 FR at 74176; Wise Origin
Order, 87 FR at 5535.
---------------------------------------------------------------------------

    The Commission thus concludes that the information that BZX
provides is not sufficient to support a determination that it is
reasonably likely that a would-be manipulator of the proposed ETP would
have to trade on the CME bitcoin futures market to successfully
manipulate the proposed ETP. Therefore, the information in the record
also does not establish that the CME bitcoin futures market is a
``market of significant size'' related to the assets to be held by the
proposed ETP.
(ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be
the Predominant Influence on Prices in the CME Bitcoin Futures Market
    The second prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' related to spot
bitcoin is the determination that it is unlikely that trading in the
proposed ETP would be the predominant influence on prices in the CME
bitcoin futures market.\131\
---------------------------------------------------------------------------

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

(a) BZX's Assertions
    BZX asserts that trading in the Shares would not be the predominant
force on prices in the CME bitcoin futures market (or spot market)
because of the in-kind creation and redemption process, the spot market
arbitrage opportunities that

such in-kind creation and redemption process creates, the significant
volume in the CME bitcoin futures market,\132\ the size of bitcoin's
market capitalization,\133\ and the significant liquidity available in
the spot market.\134\ BZX further provides that the cost to buy or sell
$5 million worth of bitcoin averages roughly 48 basis points with a
market impact of $139.08.\135\ According to the Exchange, ``[s]tated
another way, a market participant could enter a market buy or sell
order for $5 million of bitcoin and only move the market 0.48%.'' \136\
BZX further asserts that more strategic purchases or sales (such as
using limit orders and executing through over-the-counter (``OTC'')
bitcoin trade desks) would likely have less obvious impact on the
market, which is consistent with MicroStrategy, Tesla, and Square being
able to collectively purchase billions of dollars in bitcoin.\137\
Thus, BZX concludes that the combination of in-kind creation and
redemption process, the CME bitcoin futures leading price discovery,
the overall size of the bitcoin market, and the ability for market
participants, including authorized participants creating and redeeming
in-kind with the Trust, to buy or sell large amounts of bitcoin without
significant market impact, will help prevent the Shares from becoming
the predominant force on pricing in either the spot bitcoin or the CME
bitcoin futures market.\138\
---------------------------------------------------------------------------

    \132\ BZX states that the CME began to offer trading in bitcoin
futures in 2017. See Notice, 87 FR at 41761. According to BZX,
nearly every measurable metric related to CME bitcoin futures
contracts, which trade and settle like other cash-settled commodity
futures contracts, has ``generally trended up since launch, although
certain notional volume calculations have decreased roughly in line
with the decrease in the price of bitcoin.'' See id. For example,
according to BZX, there were 219,089 CME bitcoin futures contracts
traded in April 2022 (approximately $31.2 billion) compared to
89,852 ($5.4 billion), 118,235 ($4.6 billion), and 201,295 ($55.8
billion) contracts traded in April 2019, April 2020, and April 2021,
respectively. See id. Additionally, according to BZX, from March 28,
2022, through April 22, 2022, there was approximately $1.3 billion
in notional trading volume in CME bitcoin futures on a daily basis,
and notional volume was never below $670 million. See id. at 41757-
58. Additionally, BZX states that open interest was over $2 billion
for the entirety of such period, and at one point was over $3
billion. See id. at 41758. BZX further states that the number of
large interest holders and unique accounts trading CME bitcoin
futures have both increased, even in the face of heightened spot
bitcoin price volatility. See id. at 41762. According to BZX, a
large open interest holder in CME bitcoin futures is an entity that
holds at least 25 contracts, which is the equivalent of 125 bitcoin,
and, at a price of approximately $38,605 per bitcoin on April 30,
2022, more than 80 firms had outstanding positions of greater than
$4.8 million in CME bitcoin futures. See id. at 41762 n.50.
    \133\ According to BZX, as of December 1, 2021, the total market
cap of all bitcoin in circulation was approximately $1.08 trillion.
See id. at 41757 n.24.
    \134\ See id. at 41764.
    \135\ See id. According to BZX, these statistics are based on
samples of bitcoin liquidity in U.S. dollars (excluding stablecoins
or Euro liquidity) based on executable quotes on Coinbase, FTX and
Kraken during the one year period ending May 2022. See id. at 41764
n.59.
    \136\ Id. at 41764.
    \137\ See id.
    \138\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission does not agree with BZX's assertions, which are
similar to the assertions that BZX made, and the Commission discussed,
in the Previous VanEck Order. Now, as then, the record does not
demonstrate that it is unlikely that trading in the proposed ETP would
be the predominant influence on prices in the CME bitcoin futures
market. As the Commission has already addressed and rejected one of the
bases of BZX's assertion--that CME bitcoin futures lead price discovery
\139\--the Commission will only address below the other three bases:
the in-kind create/redeem mechanism and arbitrage, and the overall size
of, and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

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

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

    \140\ As discussed above, the Exchange has presented no evidence
or analysis to support its assertions regarding the presence of
price arbitrage in the spot bitcoin markets and, in any event,
efficient price arbitrage is not sufficient to support the finding
that a market is uniquely or inherently resistant to manipulation
such that the Commission can dispense with surveillance-sharing
agreements. See supra notes 57-62 and accompanying text. Also as
discussed above, the Trust's in-kind creations and redemptions do
not afford it a unique resistance to manipulation. In-kind creations
and redemptions are a common feature of ETPs, and the Commission has
not previously relied on the in-kind creation and redemption
mechanism as a basis for excusing exchanges that list ETPs from
entering into surveillance-sharing agreements with significant,
regulated markets related to the portfolio's assets. See supra notes
111-113 and accompanying text.
---------------------------------------------------------------------------

    Similarly, BZX's assertions about the potential effect of trading
in the Shares on the CME bitcoin futures market and spot bitcoin market
are general and conclusory, citing to the aforementioned trade volume
of the CME bitcoin futures market and the size and liquidity of the
spot bitcoin market, as well as the market impact of a single
transaction in spot bitcoin, without any analysis or evidence to
support these assertions. For example, there is no limit on the amount
of mined bitcoin that the Trust may hold. Yet BZX does not provide any
information on the expected growth in the size of the Trust and the
resultant increase in the amount of bitcoin held by the Trust over
time, or on the overall expected number, size, and frequency of
creations and redemptions--or how any of the foregoing could (if at
all) influence prices in the CME bitcoin futures market. Thus, the
Commission cannot conclude, based on BZX's statements alone and absent
any evidence or analysis in support of BZX's assertions, that it is
unlikely that trading in the ETP would be the predominant influence on
prices in the CME bitcoin futures market.\141\
---------------------------------------------------------------------------

    \141\ See Previous VanEck Order, 86 FR at 64548-59; WisdomTree
Order, 86 FR at 69332-33; Kryptoin Order, 86 FR at 74177; SkyBridge
Order, 87 FR at 3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares
Order, 87 FR at 20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

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

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

    To the extent that BZX is suggesting that a single $5 million order
in bitcoin would have immaterial impact on the prices in the CME
bitcoin futures market, the Exchange has not adequately explained why a
single market order in spot bitcoin is an appropriate proxy for trading
in the Shares. As stated above, the second prong in establishing
whether the CME bitcoin futures market constitutes a ``market of
significant size'' is the determination that it is unlikely that
trading in the proposed ETP would be

the predominant influence on prices in the CME bitcoin futures market.
While authorized participants of the Trust might transact in the spot
bitcoin market as part of their creation or redemption of Shares, the
Shares themselves would be traded in the secondary market on BZX.
Furthermore, the record does not discuss the expected number or trading
volume of the Shares, or establish the potential effect of the Shares'
trade prices on CME bitcoin futures prices. For example, BZX does not
provide any data or analysis about the potential effect the quotations
or trade prices of the Shares might have on market-maker quotations in
CME bitcoin futures contracts and whether those effects would
constitute a predominant influence on the prices of those futures
contracts.\143\
---------------------------------------------------------------------------

    \143\ See Previous VanEck Order, 86 FR at 64549; WisdomTree
Order, 86 FR at 69333; Kryptoin Order, 86 FR at 74177; SkyBridge
Order, 87 FR at 3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares
Order, 87 FR at 20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

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

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

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

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

(ii) Analysis
    The Commission disagrees with these assertions and conclusions. The
proposed rule change does not relate to the same underlying holdings as
ETFs that provide exposure to bitcoin through CME bitcoin futures, or
CME bitcoin futures-based ETPs. The Commission considers the proposed
rule change on its own merits and under the standards applicable to it.
Namely, with respect to this proposed rule change, the Commission must
apply the standards as provided by Section 6(b)(5) of the Exchange Act,
which it has applied in connection with its orders considering previous
proposals to list bitcoin-based commodity trusts and bitcoin-based
trust issued receipts.\153\
---------------------------------------------------------------------------

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

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

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

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

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

    \156\ The Commission's past general discussion on the risk of
fraud and manipulation in the spot bitcoin or futures markets is
only in response to arguments raised by the proposing listing
exchanges (or commenters) that mitigating factors against fraud and
manipulation in the spot bitcoin or futures markets should compel
the Commission to dispense with the detection and deterrence of
fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size
related to the underlying bitcoin assets. See, e.g., Winklevoss
Order, 83 FR at 37580, 37582-91 (addressing assertions that
``bitcoin and [spot] bitcoin markets,'' generally, as well as one
bitcoin trading platform, specifically, have unique resistance to
fraud and manipulation). See also USBT Order, 85 FR at 12597, 12599-
12608. But even in such instance, the central issue was about the
need for such a surveillance-sharing agreement, not the overall risk
of fraud and manipulation in the spot bitcoin or futures markets, or
the extent to which such risks are similar.
    \157\ See Teucrium Order, 87 FR at 21678-81; Valkyrie XBTO
Order, 87 FR at 28850-53.
---------------------------------------------------------------------------

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

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

    However, as the Commission also states in those Orders, this
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets
are not currently ``regulated.'' \161\ If an exchange seeking to list a
spot bitcoin ETP relies on the CME as the regulated market with which
it has a comprehensive surveillance-sharing agreement, the assets held
by the spot bitcoin ETP would not be traded on the CME. Because of this
significant difference, with respect to a spot bitcoin ETP, there would
be reason to question whether a surveillance-sharing agreement with the
CME would, in fact, assist in detecting and deterring fraudulent and