[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Notices]
[Pages 14912-14923]
[FR Doc No: 2022-05500]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94396; File No. SR-CboeBZX-2021-052]

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

March 10, 2022.

I. Introduction

    On August 3, 2021, 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 Global X 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 August 23, 2021.\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. 92689 (Aug. 17,
2021), 86 FR 47176 (``Notice''). Comments on the proposed rule
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-052/srcboebzx2021052.htm.
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    On September 29, 2021, 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 November 18, 2021, 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\ On February 9, 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. 93174, 86 FR 55043
(Oct. 5, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 93608, 86 FR 67094
(Nov. 24, 2021).
    \8\ See Securities Exchange Act Release No. 94202, 87 FR 8628
(Feb. 15, 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), and
in particular, the 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.'' \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 standard used in its orders
considering previous proposals to list bitcoin \10\-based commodity
trusts and bitcoin-based trust issued receipts.\11\ As the Commission
has explained, an exchange that lists bitcoin-based exchange-traded
products (``ETPs'') 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.\12\
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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, 86 FR 47177.
    \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 (Commodity-Based Trust Shares), Securities
Exchange Act Release No. 94006 (Jan. 20, 2022), 87 FR 3869 (Jan. 25,
2022) (SR-NYSEArca-2021-37) (``SkyBridge Order''); and 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''). See also 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'').
The Commission also notes that orders were issued by delegated
authority on the following matters: 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''); 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) (``VanEck Order'').
    \12\ See USBT Order, 85 FR 12596. See also Winklevoss Order, 83
FR 37592 n.202 and accompanying text (discussing previous Commission
approvals of commodity-trust ETPs); GraniteShares Order, 83 FR
43925-27 nn.35-39 and accompanying text (discussing previous
Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since
they ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur.'' \13\ The Commission has
emphasized that it is essential for an exchange listing a derivative
securities product to enter into a surveillance-sharing agreement with
markets trading the underlying assets for the listing exchange to have
the ability 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.\14\ 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.\15\
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    \13\ 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, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See
also Winklevoss Order, 83 FR 37594; ProShares Order, 83 FR 43936;
GraniteShares Order, 83 FR 43924; USBT Order, 85 FR 12596.
    \14\ See NDSP Adopting Release, 63 FR 70959.
    \15\ See Winklevoss Order, 83 FR 37592-93; 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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    In the context of this standard, 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.\16\ A surveillance-sharing
agreement must be entered into with a ``significant market'' to assist
in detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to also engage in
trading activity on that ``significant market.'' \17\
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    \16\ See Winklevoss Order, 83 FR 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that will provide guidance to market
participants. See id.
    \17\ See USBT Order, 85 FR 12597.
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    Consistent with this standard, 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--whether gold, silver, platinum, palladium, or
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group
(``ISG'') membership in common with, that market.\18\ 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.\19\
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    \18\ See Winklevoss Order, 83 FR 37594.
    \19\ See USBT Order, 85 FR 12597; 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
Depository Receipts (``ADRs'')). The Commission has also required a
surveillance-sharing agreement 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
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 required a surveillance-sharing agreement 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) (stating that surveillance-sharing agreements ``ensure
the availability of information necessary to detect and deter
potential manipulations and other trading abuses'').
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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.\20\ In response, the Commission has agreed 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, it
would not necessarily need to enter into a surveillance-sharing
agreement with a regulated significant market.\21\ Such resistance to
fraud and manipulation, however, must be novel and beyond those
protections that exist in traditional commodity markets or equity
markets for which the Commission has long required surveillance-sharing
agreements in the context of listing derivative securities
products.\22\ No listing exchange has satisfied its burden to make such
demonstration.\23\
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    \20\ See USBT Order, 85 FR 12597.
    \21\ See Winklevoss Order, 83 FR 37580, 37582-91 (addressing
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation); see also USBT Order, 85 FR
12597.
    \22\ See USBT Order, 85 FR 12597.
    \23\ See supra note 11.
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    Here, BZX contends that approval of the proposal is consistent with
Section 6(b)(5) of the Exchange Act, 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.\24\ 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,\25\ and there exist other means to prevent fraudulent and
manipulative acts and practices that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement.\26\
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    \24\ See Notice, 86 FR 47183.
    \25\ See id. at 47183-84.
    \26\ See id. at 47184.
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    Although BZX recognizes the Commission's focus on potential
manipulation of bitcoin ETPs in prior disapproval orders, BZX argues
that such manipulation concerns have been sufficiently mitigated, and
that the growing and quantifiable investor protection concerns should
be the central consideration of the Commission.\27\ Specifically, as
discussed in more detail below, the Exchange asserts that the
significant increase in trading volume in bitcoin futures on the
Chicago Mercantile Exchange (``CME''), the growth of liquidity in the
spot market for bitcoin, and certain features of the Shares mitigate
potential manipulation concerns to the point that the investor
protection issues that have arisen from the rapid growth of over-the-
counter (``OTC'') bitcoin funds, including premium/discount volatility
and management fees, should be the central consideration as the
Commission determines whether to approve this proposal.\28\
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    \27\ See id. at 47179.
    \28\ See id. at 47183.
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    Further, BZX believes that the proposal would give U.S. investors
access to bitcoin in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors. According to
BZX, the proposed listing and trading of the Shares would mitigate risk
by: (i) Reducing premium and discount volatility; (ii) reducing
management fees through meaningful competition; (iii) reducing risks
associated with investing in operating companies that are

imperfect proxies for bitcoin exposure; and (iv) providing an
alternative to custodying spot bitcoin.\29\
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    \29\ See id. at 47179.
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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 bitcoin; 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
requisite surveillance-sharing agreement. 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 bitcoin. As discussed further below, BZX repeats
various assertions made in prior bitcoin-based ETP proposals that the
Commission has previously addressed and rejected--and more importantly,
BZX does not respond to the Commission's reasons for rejecting those
assertions but merely repeats them. 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 again emphasizes that its disapproval of this
proposed rule change does not rest on an evaluation 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,\30\ 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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    \30\ See Notice, supra note 3. See also Registration Statement
on Form S-1, dated July 21, 2021, submitted to the Commission by
Global X Digital Assets, LLC (``Sponsor'') on behalf of the Trust
(``Registration Statement'').
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    The investment objective of the Trust is to reflect the performance
of the price of bitcoin less the expenses of the Trust's operations.
The Trust would not be actively managed and would not seek to reflect
the performance of any benchmark or index.\31\ Each Share would
represent a fractional undivided beneficial interest in the bitcoin
held by the Trust. The Trust's assets would consist of bitcoin held by
the custodian on behalf of the Trust. The Trust generally does not
intend to hold cash or cash equivalents; however, there may be
situations where the Trust will hold cash on a temporary basis.\32\ In
seeking to achieve its investment objective, the Trust would hold
bitcoin and value its assets daily in accordance with Generally
Accepted Accounting Principles (``GAAP''), which generally value
bitcoin by reference to orderly transactions in the principal active
market for bitcoin.\33\
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    \31\ See Notice, 86 FR 47184-85. Delaware Trust Company is the
trustee. The Sponsor will select the administrator, transfer agent,
and marketing agent in connection with the creation and redemption
of the Shares, and a third-party regulated custodian that will be
responsible for custody of the Trust's bitcoin. See id. at 47184.
    \32\ See id. at 47184.
    \33\ See id. at 47185.
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    The net asset value (``NAV'') for the Trust would be calculated by
the administrator once a day and would be disseminated daily to all
market participants at the same time.\34\ The Sponsor would use fair
value standards according to GAAP to value the assets and liabilities
of the Trust. According to the Exchange, the fair value of an asset
that is traded on a market would be generally measured by reference to
the orderly transactions on an active market. Among all active markets
with orderly transactions, the market that is used to determine the
fair value of an asset is the principal market (with exceptions), which
is either the market on which the Trust actually transacts or, if there
is sufficient evidence, the market with the most trading volume and
level of activity for the asset.\35\ Where there is no active market
with orderly transactions for an asset, the Sponsor's valuation
committee would follow policies and procedures to determine the fair
value.\36\
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    \34\ See id. at 47186.
    \35\ The Sponsor would first determine which markets are likely
to be active markets with orderly transactions for bitcoin.
Currently, the Sponsor has determined that such markets are those
that provide relevant and reliable price and volume information
because the venues that support such markets: (1) Conduct trading
for bitcoin in U.S. dollars; (2) are appropriately licensed to
engage in bitcoin trading involving New York-based customers; and
(3) otherwise have sufficient indicia of an active market with
orderly transactions. Next, among the venues supporting active
markets with orderly transactions, the Sponsor would determine to
which such venues the Trust has access, and refer to these as
eligible venues. Eligible venues consist of eligible OTC venues and
eligible exchanges. The Sponsor would then determine the principal
market for bitcoin as either the market that the Trust normally
transacts in for bitcoin, or, if the Trust does not normally
transact in any market or the Sponsor has sufficient evidence that a
particular market has the highest trading volume and level of
activity, such market. The Trust will not purchase or, barring the
liquidation of the Trust or the Trust incurring certain
extraordinary expenses or liabilities not contractually assumed by
the Sponsor, sell bitcoin directly. As a result, the Sponsor expects
that the principal market will generally be the market with the
highest trading volume and level of activity, which the Sponsor
expects will typically be an eligible exchange. The Sponsor would
determine the principal market for bitcoin at least quarterly and
more frequently as circumstances warrant. See id. at 47185.
    \36\ See id.
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    The Trust will 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 will 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.\37\
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    \37\ See id. at 47185-86.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of Shares (in an amount to be
determined). When creating the Shares, authorized participants will
deliver, or facilitate the delivery of, bitcoin to the Trust's account
with the custodian in exchange for Shares, and when redeeming the
Shares, the Trust, through the custodian, will deliver bitcoin to such
authorized participants.\38\
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    \38\ See id. at 47184.
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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.'' \39\

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.'' \40\
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    \39\ 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).
    \40\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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    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,\41\ 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.\42\ 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.\43\
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    \41\ See id.
    \42\ See id.
    \43\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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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
    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 a comprehensive surveillance-sharing agreement with a regulated
market of significant size, 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.\44\ Such resistance
to fraud and manipulation must be novel and beyond those protections
that exist in traditional commodities or securities markets.\45\
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    \44\ See USBT Order, 85 FR 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.
    \45\ See id. at 12597.
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    BZX asserts that bitcoin is resistant to price manipulation.
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\ 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\ 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, such pricing does not normally
impact prices on other platforms because participants will generally
ignore markets with quotes that they deem non-executable.\48\ 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.\49\ 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.\50\ 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.'' \51\
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    \46\ See Notice, 86 FR 47183 n.54.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
    \51\ See id.
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    As with the previous proposals, 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. 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.\52\ 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.\53\
---------------------------------------------------------------------------

    \52\ Indeed, the Registration Statement states that ``[b]itcoin
faces significant scaling obstacles that can lead to high fees or
slow settlement times, and attempts to increase the volume of
transactions may not be effective.'' See Registration Statement at
14. BZX does not, however, 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 67 and accompanying text
(referencing statements made in the Registration Statement that
contradict assertions made by BZX).
    \53\ See supra note 43.
---------------------------------------------------------------------------

    Efficient price arbitrage, moreover, is not sufficient to support
the finding that a market is uniquely and inherently resistant to
manipulation such that the Commission can dispense with surveillance-
sharing agreements.\54\ 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.\55\ Here, the
Exchange provides no evidence to support its assertion of efficient
price arbitrage across bitcoin platforms, let alone any evidence that
price arbitrage in the bitcoin market is novel or unique so as to
warrant the Commission dispensing with the requirement of a
surveillance-sharing agreement. 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.\56\
---------------------------------------------------------------------------

    \54\ See Winklevoss Order, 83 FR 37586; SolidX Order, 82 FR
16256-57; USBT Order, 85 FR 12601; WisdomTree Order, 86 FR 69325;
Valkyrie Order, 86 FR 74159-60; Kryptoin Order, 86 FR 74170; Wise
Origin Order, 87 FR 5531.
    \55\ See, e.g., USBT Order, 85 FR 12601; WisdomTree Order, 86 FR
69329; Valkyrie Order, 86 FR 74160; Kryptoin Order, 86 FR 74170;
Wise Origin Order, 87 FR 5531.
    \56\ See, e.g., Winklevoss Order, 83 FR 37584; USBT Order, 85 FR
12600-01; WisdomTree Order, 86 FR 69325; Valkyrie Order, 86 FR
74160; Kryptoin Order, 86 FR 74170; SkyBridge Order, 87 FR 3783-84;
Wise Origin Order, 87 FR 5531. See also Registration Statement at 29
(stating that ``[i]t is possible, and in fact, reasonably likely,
that a small group of early bitcoin adopters hold a significant
proportion of the bitcoin that has been created to date. There are
no regulations in place that would prevent a large holder of bitcoin
from selling bitcoin it holds. To the extent such large holders of
bitcoin engage in large-scale sales or distributions . . . it could
result in a reduction in the price of bitcoin and adversely affect
an investment in the Shares.'').
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that bitcoin
prices on platforms with wash trades or other activity intended to
manipulate the price of bitcoin do not influence the ``real'' price of
bitcoin. The Exchange also asserts that, to the extent that there are
bitcoin platforms engaged in or allowing wash trading or other
manipulative activities, market participants will generally ignore
those platforms.\57\ However, 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.\58\
---------------------------------------------------------------------------

    \57\ See Notice, 86 FR 47183 n.54.
    \58\ See USBT Order, 85 FR 12601. See also WisdomTree Order, 86
FR 69325; Kryptoin Order, 86 FR 74170; Wise Origin Order, 87 FR
5531.
---------------------------------------------------------------------------

    Additionally, the continuous nature of bitcoin trading does not
eliminate manipulation risk, and neither do linkages among markets, as
BZX asserts.\59\ 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.\60\
---------------------------------------------------------------------------

    \59\ See Winklevoss Order, 83 FR 37585 n.92 and accompanying
text. See also WisdomTree Order, 86 FR 69325-26; Kryptoin Order, 86
FR 74170; SkyBridge Order, 87 FR 3783-84; Wise Origin Order, 87 FR
5531.
    \60\ See Winklevoss Order, 83 FR 37585.
---------------------------------------------------------------------------

    BZX also argues that the significant liquidity in the bitcoin spot
market and the impact of market orders on the overall price of bitcoin
mean that attempting to move the price of bitcoin is costly and has
grown more expensive over the past year.\61\ According to BZX, in
January 2020, for example, the cost to buy or sell $5 million worth of
bitcoin averaged roughly 30 basis points (compared to 10 basis points
in February 2021) with a market impact of 50 basis points (compared to
30 basis points in February 2021). For a $10 million market order, the
cost to buy or sell was roughly 50 basis points (compared to 20 basis
points in February 2021) with a market impact of 80 basis points
(compared to 50 basis points in February 2021). BZX contends that as
the liquidity in the bitcoin spot market increases, it follows that the
impact of $5 million and $10 million orders will continue to
decrease.\62\
---------------------------------------------------------------------------

    \61\ See Notice, 86 FR 47184.
    \62\ See id.
---------------------------------------------------------------------------

    However, the data furnished by BZX regarding the cost to move the
price of bitcoin, and the market impact of such attempts, are
incomplete. BZX does not provide meaningful analysis pertaining to how
these figures compare to other markets or why one must conclude, based
on the numbers provided, that the bitcoin market is costly to
manipulate. Further, BZX's analysis of the market impact of a mere two
sample transactions is not sufficient evidence to conclude that the
bitcoin market is resistant to manipulation.\63\ Even assuming that the
Commission agreed with BZX's premise, that it is costly to manipulate
the bitcoin market and it is becoming increasingly so, any such
evidence speaks only to establish that there is some resistance to
manipulation, not that it establishes unique resistance to manipulation
to warrant dispensing with the standard surveillance-sharing
agreement.\64\ The Commission thus concludes that the record does not
demonstrate that the nature of bitcoin trading renders the bitcoin
market inherently and uniquely resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \63\ Aside from stating that the ``statistics are based on
samples of bitcoin liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase Pro, Gemini,
Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during
February 2021,'' the Exchange provides no other information
pertaining to the methodology used to enable the Commission to
evaluate these findings or their significance. See id. at 47184
nn.59-60.
    \64\ See USBT Order, 85 FR 12601. See also Kryptoin Order, 86 FR
74171.
---------------------------------------------------------------------------

    Moreover, BZX does not sufficiently contest the presence of
possible sources of fraud and manipulation in the bitcoin spot market
generally that the Commission has raised in previous orders, which have
included (1) ``wash'' trading,\65\ (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,
including the dissemination of false and misleading information, (6)
manipulative activity involving the purported ``stablecoin'' Tether
(``USDT''), and (7) fraud and manipulation at bitcoin trading
platforms.\66\
---------------------------------------------------------------------------

    \65\ See supra notes 57-58 and accompanying text.
    \66\ See USBT Order, 85 FR 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28,
2019), available at https://ssrn.com/abstract=3195066 and published
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR 37585-86;
Valkyrie Order, 86 FR 74160; SkyBridge Order, 87 FR 3872.
---------------------------------------------------------------------------

    In addition, 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. For example,
the Registration Statement acknowledges that ``[t]he venues through
which bitcoin trades are relatively new and may be more exposed to
operational problems or failure''; that ``[o]ver the past several
years, a number of bitcoin exchangs have been closed due to fraud,
failure or security breaches''; that ``[s]ecurity breaches, computer
malware, ransomware and computer hacking attacks have been a prevalent
concern in relation to digital assets''; that ``the Trust's bitcoin
held in the Trust's account with the [custodian] will be an appealing
target to hackers or malware distributors seeking to destroy, damage or
steal the Trust's bitcoin and will only become more appealing as the
Trust's assets grow''; that the bitcoin blockchain could be vulnerable:
To exploitation of flaws in the bitcoin source code, to a ``51%
attack,'' in which a malicious actor or actors that control a majority
of the processing power on the bitcoin network would be able to gain
full control of the network and the ability to alter the blockchain, to
``cancer nodes,'' through which a malicious actor can disconnect users
from the bitcoin network, and to ``double-spend'' attacks; that it is
``reasonably likely'' that a ``small group of early bitcoin adopters
hold a signficiant proportion of the bitcoin that has been created to
date,'' there are ``no regulations in place that would prevent a large
holder from selling the bitcoin it holds,'' and such large holders
could engage in ``large-scale sales'' that would affect the ``price of
bitcoin''; and 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.'' \67\
---------------------------------------------------------------------------

    \67\ See Registration Statement at 21, 27, 29, 34, 44-45. See
also Winklevoss Order, 83 FR 37585.
---------------------------------------------------------------------------

    BZX also asserts that other means to prevent fraud and manipulation
are sufficient to justify dispensing with the requisite surveillance-
sharing agreement. The Exchange mentions that the methodology that it
uses to value the Trust's bitcoin \68\ is itself resistant to
manipulation.\69\ Simultaneously, the Exchange also states that,
because the Trust will engage in in-kind creations and redemptions
only, ``the valuation methodology [is] significantly less important.''
\70\ The Exchange elaborates further that, ``because the Trust will not
accept cash to buy bitcoin in order to create new shares, will charge
fees as a percentage of the Trust's bitcoin holdings measure[d] in
bitcoin and not in dollars, and . . . will not 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.'' \71\
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.\72\ 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.\73\ This, according to BZX, not only mitigates the risk
associated with potential manipulation, but also discourages and
disincentivizes manipulation of the valuation methodology because there
is little financial incentive to do so.\74\
---------------------------------------------------------------------------

    \68\ See supra notes 34-36 and accompanying text.
    \69\ See Notice, 86 FR 47184.
    \70\ See id.
    \71\ See id.
    \72\ See id.
    \73\ See id.
    \74\ See id.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the
Commission can find no basis to conclude that BZX has articulated other
means to prevent fraud and manipulation that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement. First,
the record does not demonstrate that the proposed valuation methodology
would make the proposed ETP resistant to fraud or manipulation such
that a surveillance-sharing agreement with a regulated market of
significant size is unnecessary. The Exchange states that both
``certain'' bitcoin venues and ``the OTC market'' have met the
Sponsor's criteria to be considered ``active markets with orderly
transactions for bitcoin'' and thus to potentially be deemed the
``principal market'' whose prices the Sponsor will, generally, use to
value its bitcoin.\75\ However, the Exchange does not identify which
bitcoin venues, or what portions of ``the OTC market,'' meet its
criteria, nor does the Exchange assess the possible influence that spot
platforms that do not meet the Sponsor's criteria would have on the
``principal market'' that is ultimately used for valuation.\76\ In
addition, as discussed above, the record does not establish that the
broader bitcoin market is inherently and uniquely resistant to fraud
and manipulation. Accordingly, to the extent that trading on platforms
not directly used to value the Trust's bitcoin affects prices on the
market(s) that the Sponsor does use for such valuation, the
characteristics of those other platforms--where various kinds of fraud
and manipulation from a variety of sources may be present and persist--
may affect whether the valuation methodology is resistant to
manipulation.
---------------------------------------------------------------------------

    \75\ See id. at 47185.
    \76\ 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 do not influence the ``real'' price
of bitcoin, 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 57-58 and
accompanying text.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the valuation methodology
is resistant to manipulation are contradicted by the Registration
Statement's own statements. Specifically, the Registration Statement
states that ``[o]ver the past several years, a number of bitcoin
exchanges have been closed due to fraud, failure or security
breaches.'' \77\ And both the Registration Statement and the Exchange
acknowledge that: ``[W]hether the principal market for bitcoin is an
eligible exchange or the OTC market, the price on such principal market
may not always represent fair value or the transactions on such market
may not always represent orderly transactions.'' \78\ As such, the
valuation methodology allows for ``subjective determinations'' by the
Sponsor's valuation committee \79\ ``based on consideration of any
information or factors the Sponsor's valuation committee deems
appropriate.'' \80\ Although the Sponsor raises concerns regarding
fraud and security of bitcoin platforms in the Registration Statement,
leading to the potential need for ``subjective'' fair value
determinations, the Exchange does not explain how or why such concerns
are consistent with its assertion that the valuation methodology is
resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \77\ See Registration Statement at 27.
    \78\ See Registration Statement at 48; Notice, 86 FR 47185.
    \79\ See Registration Statement at 49.
    \80\ See Registration Statement at 48; Notice, 86 FR 47185.
---------------------------------------------------------------------------

    In addition, among the criteria that the Sponsor would use to
identify ``active markets with orderly transactions'' is whether a
venue is ``appropriately licensed to engage in bitcoin trading
involving New York-based customers (and therefore, among other things,
have programs to effectively detect, prevent, and respond to fraud).''
\81\ However, even assuming that this means that the venue would be
regulated by the New York State Department of Financial Services
(``NYSDFS''), the level of oversight of bitcoin spot platforms is not
equivalent to the obligations, authority, and oversight of national
securities exchanges or futures exchanges and therefore is not an
appropriate substitute.\82\ National securities exchanges are required
to have rules that are ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.'' \83\ Moreover, national
securities exchanges must file proposed rules with the Commission
regarding certain material aspects of their operations,\84\ and the
Commission has the authority to disapprove any such rule that is not
consistent with the requirements of the Exchange Act.\85\

Thus, national securities exchanges are subject to Commission oversight
of, among other things, their governance, membership qualifications,
trading rules, disciplinary procedures, recordkeeping, and fees.\86\
Bitcoin spot trading platforms, on the other hand, have none of these
requirements (none are registered as a national securities exchange)
\87\--even if they may be ``licensed to engage in bitcoin trading
involving New York-based customers.'' \88\
---------------------------------------------------------------------------

    \81\ See Notice, 86 FR 47185.
    \82\ See also USBT Order, 85 FR 12603-05; VanEck Order, 86 FR
64545; WisdomTree Order, 86 FR 69328; Kryptoin Order, 86 FR 74173.
    \83\ See 15 U.S.C. 78f(b)(5).
    \84\ 17 CFR 240.19b-4(a)(6)(i).
    \85\ 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 rules
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 Commodity Futures Trading Commission (``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.
    \86\ See Winklevoss Order, 83 FR 37597. The Commission notes
that the 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.
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 bitcoin. For example, AML and KYC policies and
procedures do not substitute for the sharing of information about
market trading activity or clearing activity and do not substitute
for regulation of a national securities exchange. See USBT Order, 85
FR 12603 n.101. See also, e.g., WisdomTree Order, 86 FR 69328 n.95;
Kryptoin Order, 86 FR 74173 n.98.
    \87\ See 15 U.S.C. 78e, 78f.
    \88\ See Notice, 86 FR 47185.
---------------------------------------------------------------------------

    The Commission thus concludes that the Exchange has not
demonstrated that the proposed valuation methodology makes the proposed
ETP resistant to manipulation. While the proposed valuation methodology
may be intended to provide some degree of protection against
manipulation in bitcoin markets, the methodology is not sufficient for
the Commission to dispense with the requisite surveillance-sharing
agreement with a regulated market of significant size.
    Second, the Exchange does not explain the significance of the
valuation methodology'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. Even assuming that the
Exchange's argument is that, if the valuation methodology is resistant
to manipulation, the Trust's NAV, and thereby the Shares as well, would
be resistant to manipulation, the Exchange has not established in the
record a basis for such conclusion. That assumption aside, the
Commission notes that the Shares would trade at market-based prices in
the secondary market, not at NAV, which then raises the question of the
significance of the NAV calculation to the manipulation of the Shares.
    Third, the Exchange's arguments are contradictory. While arguing
that the valuation methodology is resistant to manipulation, the
Exchange simultaneously downplays its importance in light of the
Trust's in-kind creation and redemption mechanism.\89\ The Exchange
points out that the Trust will create and redeem Shares in-kind, not in
cash, which renders the valuation methodology, and thereby the ability
to manipulate NAV, ``significantly less important.'' \90\ 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.'' \91\ If the methodology that the Trust uses
to value the Trust's bitcoin ``is not particularly important,'' it
follows that the methodology'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 valuation
methodology aids in the determination that the proposal to list and
trade the Shares is designed to prevent fraudulent and manipulative
acts and practices.
---------------------------------------------------------------------------

    \89\ See supra notes 70-74 and accompanying text.
    \90\ See Notice, 86 FR 47184 (``While the Sponsor believes that
the methodology 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 valuation methodology significantly less
important.'').
    \91\ See id. (concluding that ``because the Trust will not
accept cash to buy bitcoin in order to create new shares, will
charge fees as a percentage of the Trust's bitcoin holdings
measure[d] in bitcoin and not in dollars, and, barring a forced
redemption of the Trust or under other extraordinary circumstances,
will not 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.'').
---------------------------------------------------------------------------

    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.\92\ 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.\93\ Accordingly,
the Commission is not persuaded here that the Trust's in-kind creations
and redemptions afford it a unique resistance to manipulation.\94\
---------------------------------------------------------------------------

    \92\ See Winklevoss Order, 83 FR 37589-90; USBT Order, 85 FR
12607-08; VanEck Order, 86 FR 64546; WisdomTree Order, 86 FR 69329;
Kryptoin Order, 86 FR 74174; SkyBridge Order, 87 FR 3874; Wise
Origin Order, 87 FR 5533.
    \93\ 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).
    \94\ Putting aside the Exchange's various assertions about the
nature of bitcoin and the bitcoin market, the valuation methodology,
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 37585. See also USBT Order,
85 FR 12600-01; WisdomTree Order, 86 FR 69329 n.114; Kryptoin Order,
86 FR 74174 n.107; SkyBridge Order, 87 FR 3872; Wise Origin Order,
87 FR 5533 n.89.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size
    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 relating to the underlying 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.\95\
---------------------------------------------------------------------------

    \95\ See Winklevoss Order, 83 FR 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that provides guidance to market
participants. See id.
---------------------------------------------------------------------------

    As the Commission has stated in the past, 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.\96\ Accordingly, based on the
common membership of BZX and the CME in the ISG,\97\ 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,\98\ 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'' as
that term is used in the context of the applicable standard here.
---------------------------------------------------------------------------

    \96\ See id. at 37580 n.19.
    \97\ See Notice, 86 FR 47183 n.56 and accompanying text. BZX
also states that it has surveillance-sharing agreements with
``several spot bitcoin exchanges'' with ``material volume.'' See id.
at 47183 & n.55. BZX does not identify the platforms with which it
has such agreements and does not provide any information on the
scope, terms, or enforcement authority for such surveillance-sharing
agreements. Further, as described above, spot bitcoin platforms are
not ``regulated.'' They are not registered as ``exchanges'' and lack
the obligations, authority, and oversight of national securities
exchanges. See supra notes 82-88 and accompanying text.
    \98\ While the Commission recognizes that the CFTC regulates the
CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying bitcoin spot market. See Winklevoss
Order, 83 FR 37587, 37599. See also WisdomTree Order, 86 FR 69330
n.118; Kryptoin Order, 86 FR 74174 n.119; SkyBridge Order, 87 FR
3874 n.80; Wise Origin Order, 87 FR 5534 n.93.
---------------------------------------------------------------------------

(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'' 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.
    BZX notes that the CME began to offer trading in bitcoin futures in
2017.\99\ 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 ``trended consistently up
since launch and/or accelerated upward in the past year.'' \100\ For
example, according to BZX, there was approximately $28 billion in
trading in CME bitcoin futures in December 2020 compared to $737
million, $1.4 billion, and $3.9 billion in total trading in December
2017, December 2018, and December 2019, respectively.\101\
Additionally, CME bitcoin futures traded over $1.2 billion per day in
December 2020 and represented $1.6 billion in open interest compared to
$115 million in December 2019.\102\ Similarly, BZX contends that the
number of large open interest holders \103\ has continued to increase,
even as the price of bitcoin has risen, as have the number of unique
accounts trading CME bitcoin futures.\104\
---------------------------------------------------------------------------

    \99\ According to BZX, each contract represents five bitcoin and
is based on the CME CF Bitcoin Reference Rate. See Notice, 86 FR
47181.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ BZX represents that 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. According to BZX, at a price of
approximately $30,000 per bitcoin on December 31, 2020, more than 80
firms had outstanding positions of greater than $3.8 million in CME
bitcoin futures. See id. at 47181 n.50.
    \104\ See id. at 47181.
---------------------------------------------------------------------------

    BZX argues that the significant growth in CME bitcoin futures
across each of trading volumes, open interest, large open interest
holders, and total market participants since the USBT Order was issued
is reflective of that market's growing influence on the spot price. BZX
asserts that where CME bitcoin futures lead the price in the spot
market such that a potential manipulator of the bitcoin spot market
would have to participate in the CME bitcoin futures market, it follows
that a potential manipulator of the Shares would similarly have to
transact in the CME bitcoin futures market ``because the NAV is based
on the price of bitcoin on the principal market, which identified
market must be an active market with orderly transactions.'' \105\
---------------------------------------------------------------------------

    \105\ See id. at 47183.
---------------------------------------------------------------------------

    BZX further states that academic research corroborates the overall
trend outlined above and supports the thesis that CME bitcoin futures
pricing leads the spot market. BZX asserts that academic research
demonstrates that the CME bitcoin futures market was already leading
the spot price in 2018 and 2019.\106\ BZX concludes that a person
attempting to manipulate the Shares would also have to trade on that
market to manipulate the ETP.\107\
---------------------------------------------------------------------------

    \106\ See id. at 47182 & n.51 (citing Y. Hu, Y. Hou & L. Oxley,
What role do futures markets play in Bitcoin pricing? Causality,
cointegration and price discovery from a time-varying perspective,
72 Int'l Rev. of Fin. Analysis 101569 (2020) (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu, Hou &
Oxley'')).
    \107\ See id. at 47183.
---------------------------------------------------------------------------

    The Commission disagrees. 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 it. Specifically, BZX's assertions about the
general upward trends from 2018 to February 2021 in trading volume and
open interest of, and in the number of large open interest holders and
number of unique accounts trading in, CME bitcoin futures do not
establish that the CME bitcoin futures market is of significant size.
While BZX provides data showing absolute growth in the size of the CME
bitcoin futures market, it provides no data relative to the concomitant
growth in either the bitcoin spot markets or other bitcoin futures
markets (including unregulated futures markets). Moreover, even if the
CME has grown in relative size, as the Commission has previously
articulated, the interpretation of the term ``market of significant
size'' or ``significant market'' depends on the interrelationship
between the market with which the listing exchange has a surveillance-
sharing agreement and the proposed ETP.\108\ BZX's recitation of data
reflecting the size of the CME bitcoin futures market, alone, either
currently or in relation to previous years, is not sufficient to
establish an interrelationship between the CME bitcoin futures market
and the proposed ETP.\109\
---------------------------------------------------------------------------

    \108\ See USBT Order, 85 FR 12611. See also WisdomTree Order, 86
FR 69330; Kryptoin Order, 86 FR 74175; SkyBridge Order, 87 FR 3875;
Wise Origin Order, 87 FR 5534.
    \109\ See USBT Order, 85 FR 12612. The Commission has previously
considered and rejected similar arguments. See, e.g., VanEck Order,
86 FR 64547; Kryptoin Order, 86 FR 74175-76; SkyBridge Order, 87 FR
3875-76; Wise Origin Order, 87 FR 5534-35. As for the Exchange's
statement that a potential manipulator of the Shares would have to
transact in the CME bitcoin futures market ``because the NAV is
based on the price of bitcoin on the principal market, which
identified market must be an active market with orderly
transactions,'' the Exchange does not elaborate further, and the
statement is nonsensical. The Exchange does not explain, for
example, the connection between the CME bitcoin futures market and
the principal market or the NAV. Moreover, the Trust does not create
or redeem in cash based on NAV and the Shares do not trade based on
NAV but on market-based prices in the secondary market.

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

    Further, the econometric evidence in the record for this proposal
also does not support a conclusion that an interrelationship exists
between the CME bitcoin futures market and the bitcoin spot 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
to successfully manipulate the proposed ETP.\110\ While BZX states that
CME bitcoin futures pricing leads the spot market,\111\ it relies on
the findings of a price discovery analysis in one section of a single
academic paper to support the overall thesis.\112\ However, the
findings of that paper's Granger causality analysis, which is widely
used to formally test for lead-lag relationships, are concededly
mixed.\113\ In addition, the Commission considered an unpublished
version of the paper in the USBT Order, as well as a comment letter
submitted by the authors on that record.\114\ In the USBT Order, as
part of the Commission's conclusion that ``mixed results'' in academic
studies failed to demonstrate that the CME bitcoin futures market
constitutes a market of significant size, the Commission noted the
paper's inconclusive evidence that CME bitcoin futures prices lead spot
prices--in particular that the months at the end of the paper's sample
period showed that the spot market was the leading market--and stated
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.\115\ The
Commission also stated 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.\116\ BZX has not addressed either
issue.\117\
---------------------------------------------------------------------------

    \110\ See USBT Order, 85 FR 12611. Listing exchanges have
attempted to demonstrate such an ``interrelationship'' by presenting
the results of various econometric ``lead-lag'' analyses. The
Commission considers such analyses to be central to understanding
whether it is reasonably likely that a would-be manipulator of the
ETP would need to trade on the CME bitcoin futures market. See id.
at 12612. See also VanEck Order, 86 FR 64547; WisdomTree Order, 86
FR 69330-31; Kryptoin Order, 86 FR 74176 n.144; SkyBridge Order, 87
FR 3876 n.101; Wise Origin Order, 87 FR 5535 n.107.
    \111\ See Notice, 86 FR 47182.
    \112\ See supra note 106 and accompanying text. BZX 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 . . .'' See Notice, 86
FR 47182 n.51.
    \113\ 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
106.
    \114\ See USBT Order, 85 FR 12609.
    \115\ See id. at 12613 n.244.
    \116\ See id.
    \117\ See VanEck Order, 86 FR 64547; WisdomTree Order, 86 FR
69331; Kryptoin Order, 86 FR 74176; Wise Origin Order, 87 FR 5535.
---------------------------------------------------------------------------

    Moreover, BZX does not provide results of its own analysis and does
not present any other data supporting its conclusion. BZX's unsupported
representations constitute an insufficient basis for approving a
proposed rule change in circumstances where, as here, the Exchange's
assertion would form such an integral role in the Commission's analysis
and the assertion is subject to several challenges.\118\ In this
context, BZX's reliance on a single paper, whose own lead-lag results
are inconclusive, is especially lacking because the academic literature
on the lead-lag relationship and price discovery between bitcoin spot
and futures markets is unsettled.\119\ In the USBT Order, the
Commission responded to multiple academic papers that were cited and
concluded that, in light of the mixed results found, the exchange there
had not demonstrated that it is reasonably likely that a would-be
manipulator of the proposed ETP would transact on the CME bitcoin
futures market.\120\ Likewise, here, given the body of academic
literature to indicate to the contrary, the Commission concludes that
the information that BZX provides is not a sufficient basis 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.\121\
---------------------------------------------------------------------------

    \118\ See Susquehanna, 866 F.3d at 447.
    \119\ See, e.g., D. Baur & T. Dimpfl, Price discovery in bitcoin
spot or futures?, 39 J. Futures Mkts. 803 (2019) (finding that the
bitcoin spot market leads price discovery); O. Entrop, B. Frijns &
M. Seruset, The determinants of price discovery on bitcoin markets,
40 J. Futures Mkts. 816 (2020) (finding that price discovery
measures vary significantly over time without one market being
clearly dominant over the other); J. Hung, H. Liu & J. Yang, Trading
activity and price discovery in Bitcoin futures markets, 62 J.
Empirical Finance 107 (2021) (finding that the bitcoin spot market
dominates price discovery); B. Kapar & J. Olmo, An analysis of price
discovery between Bitcoin futures and spot markets, 174 Econ.
Letters 62 (2019) (finding that bitcoin futures dominate price
discovery); E. Akyildirim, S. Corbet, P. Katsiampa, N. Kellard & A.
Sensoy, The development of Bitcoin futures: Exploring the
interactions between cryptocurrency derivatives, 34 Fin. Res.
Letters 101234 (2020) (finding that bitcoin futures dominate price
discovery); A. Fassas, S. Papadamou, & A. Koulis, Price discovery in
bitcoin futures, 52 Res. Int'l Bus. Fin. 101116 (2020) (finding that
bitcoin futures play a more important role in price discovery); S.
Aleti & B. Mizrach, Bitcoin spot and futures market microstructure,
41 J. Futures Mkts. 194 (2021) (finding that relatively more price
discovery occurs on the CME as compared to four spot exchanges); J.
Wu, K. Xu, X. Zheng & J. Chen, Fractional cointegration in bitcoin
spot and futures markets, 41 J. Futures Mkts. 1478 (2021) (finding
that CME bitcoin futures dominate price discovery). See also C.
Alexander & D. Heck, Price discovery in Bitcoin: The impact of
unregulated markets, 50 J. Financial Stability 100776 (2020)
(finding that, in a multi-dimensional setting, including the main
price leaders within futures, perpetuals, and spot markets, CME
bitcoin futures have a very minor effect on price discovery; and
that faster speed of adjustment and information absorption occurs on
the unregulated spot and derivatives platforms than on CME bitcoin
futures).
    \120\ See USBT Order, 85 FR 12613 nn.239-244 and accompanying
text.
    \121\ In addition, the Exchange 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 any particular spot platform that could be the ``principal
market'' for purposes of the Trust's valuation methodology, or where
price formation occurs when the entirety of bitcoin futures markets,
not just CME, is considered. See VanEck Order, 86 FR 64547-48;
WisdomTree Order, 86 FR 69331; Kryptoin Order, 86 FR 74176; Wise
Origin Order, 87 FR 5535.
---------------------------------------------------------------------------

    The Commission accordingly concludes that the information provided
in the record for this proposal does not establish a reasonable
likelihood 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'' with respect to 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'' 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.\122\
---------------------------------------------------------------------------

    \122\ See Winklevoss Order, 83 FR 37594; USBT Order, 85 FR
12596-97.
---------------------------------------------------------------------------

    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 significant volume in the CME bitcoin futures market, the size of
bitcoin's market capitalization, which is approximately $1 trillion,
and the significant liquidity available in the spot market.\123\ BZX
provides that, according to February 2021 data, the cost to buy or sell
$5 million worth of bitcoin averages roughly 10 basis points with a
market impact of 30 basis points.\124\ For a $10 million market order,
the cost to buy or sell is roughly 20 basis points with a market impact
of 50 basis points. Stated another way, BZX states that a market
participant could enter a market buy or sell order for $10 million of
bitcoin and only move the market 0.5 percent.\125\ BZX further asserts
that more strategic purchases or sales (such as using limit orders and
executing through 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.\126\ Thus, BZX concludes that the combination of
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 bitcoin spot or the CME bitcoin futures
market.\127\
---------------------------------------------------------------------------

    \123\ See Notice, 86 FR 47184.
    \124\ 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 Pro,
Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin
during February 2021. See id. at 47184 nn.59-60.
    \125\ See id. at 47184.
    \126\ See id.
    \127\ See id.
---------------------------------------------------------------------------

    The Commission does not agree. 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 leads price discovery \128\--
it will only address below the other two bases: The overall size of,
and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

    \128\ See supra notes 110-121 and accompanying text.
---------------------------------------------------------------------------

    BZX's assertions about the potential effect of trading in the
Shares on the CME bitcoin futures market and bitcoin spot market are
general and conclusory, repeating the aforementioned trade volume of
the CME bitcoin futures market and the size and liquidity of the
bitcoin spot market, as well as the market impact of a large
transaction, 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.\129\
---------------------------------------------------------------------------

    \129\ See VanEck Order, 86 FR 64548-59; WisdomTree Order, 86 FR
69332-33; Kryptoin Order, 86 FR 74177; SkyBridge Order, 87 FR 3879;
Wise Origin Order, 87 FR 5537.
---------------------------------------------------------------------------

    The Commission also is not persuaded by BZX's assertions about the
minimal effect a large market order to buy or sell bitcoin would have
on the bitcoin market.\130\ While BZX concludes by way of a $10 million
market order example 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. Even
assuming that BZX is suggesting that a single $10 million order in
bitcoin would have immaterial impact on the prices in the CME bitcoin
futures market, this prong of the ``market of significant size''
determination concerns the influence on prices from trading in the
proposed ETP, which is broader than just trading by the proposed ETP.
While authorized participants of the Trust might only transact in the
bitcoin spot market as part of their creation or redemption of Shares,
the Shares themselves would be traded in the secondary market on BZX.
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.\131\
---------------------------------------------------------------------------

    \130\ See Notice, 86 FR 47184 (``For a $10 million market order,
the cost to buy or sell is roughly 20 basis points with a market
impact of 50 basis points. Stated another way, a market participant
could enter a market buy or sell order for $10 million of bitcoin
and only move the market 0.5%.'').
    \131\ See VanEck Order, 86 FR 64549; WisdomTree Order, 86 FR
69333; Kryptoin Order, 86 FR 74177; SkyBridge Order, 87 FR 3879;
Wise Origin Order, 87 FR 5537.
---------------------------------------------------------------------------

    Thus, 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'' 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.
    The requirements of Section 6(b)(5) of the Exchange Act apply to
the rules of national securities exchanges. Accordingly, the relevant
obligation for a comprehensive surveillance-sharing agreement with a
regulated market of significant size, or other means to prevent
fraudulent and manipulative acts and practices that are sufficient to
justify dispensing with the requisite surveillance-sharing agreement,
resides with the listing exchange. Because there is insufficient
evidence in the record demonstrating that BZX has satisfied this
obligation, the Commission cannot approve the proposed ETP for listing
and trading on BZX.

C. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is
Designed To Protect Investors and the Public Interest

    BZX contends that, if approved, the proposed ETP would protect
investors and the public interest. However, the Commission must
consider these potential benefits in the broader context of whether the
proposal meets each of the applicable requirements of the Exchange
Act.\132\ Because BZX has not demonstrated that its proposed rule
change is designed to prevent fraudulent and manipulative acts and
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

    \132\ See Winklevoss Order, 83 FR 37602. See also GraniteShares
Order, 83 FR 43931; ProShares Order, 83 FR 43941; USBT Order, 85 FR
12615. See also WisdomTree Order, 86 FR 69333; Valkyrie Order, 86 FR
74163; Kryptoin Order, 86 FR 74178; SkyBridge Order, 87 FR 3880;
Wise Origin Order, 87 FR 5537.
---------------------------------------------------------------------------

    BZX asserts that, with the growth of U.S. investor exposure to
bitcoin through OTC bitcoin funds, so too has grown the potential risk
to U.S. investors.\133\ Specifically, BZX argues

that premium and discount volatility, high fees, insufficient
disclosures, and technical hurdles are putting U.S. investor money at
risk on a daily basis and that such risk could potentially be
eliminated through access to a bitcoin ETP.\134\ As such, the Exchange
believes that approving this proposal (and comparable proposals
submitted hereafter) would give U.S. investors access to bitcoin in a
regulated and transparent exchange-traded vehicle that would act to
limit risk to U.S. investors by: (i) Reducing premium and discount
volatility; (ii) reducing management fees through meaningful
competition; (iii) providing an alternative to custodying spot bitcoin;
and (iv) reducing risks associated with investing in operating
companies that are imperfect proxies for bitcoin exposure.\135\
---------------------------------------------------------------------------

    \133\ See Notice, 86 FR 47179.
    \134\ See id. BZX states that while it understands the
Commission's previous focus on potential manipulation of a bitcoin
ETP in prior disapproval orders, it now believes that ``such
concerns have been sufficiently mitigated and that the growing and
quantifiable investor protection concerns should be the central
consideration as the Commission reviews this proposal.'' See id.
    \135\ See id.
---------------------------------------------------------------------------

    According to BZX, OTC bitcoin funds are generally designed to
provide exposure to bitcoin in a manner similar to the Shares. However,
unlike the Shares, BZX states that ``OTC bitcoin funds are unable to
freely offer creation and redemption in a way that incentivizes market
participants to keep their shares trading in line with their NAV and,
as such, frequently trade at a price that is out-of-line with the value
of their assets held.'' \136\ BZX represents that, historically, OTC
bitcoin funds have traded at a significant premium to NAV.\137\
Although the Exchange concedes that trading at a premium (or
potentially a discount) is not unique to OTC bitcoin funds and not
inherently problematic, BZX believes that it raises certain investor
protections issues. First, according to BZX, investors are buying
shares of a fund for a price that is not reflective of the per share
value of the fund's underlying assets.\138\ Second, according to BZX,
because only accredited investors, generally, are able to create or
redeem shares with the issuing trust and can buy or sell shares
directly with the trust at NAV (in exchange for either cash or bitcoin)
without having to pay the premium or sell into the discount, these
investors that are allowed to interact directly with the trust are able
to hedge their bitcoin exposure as needed to satisfy holding
requirements and collect on the premium or discount opportunity. BZX
argues, therefore, that the premium in OTC bitcoin funds essentially
creates a direct payment from retail investors to more sophisticated
investors.\139\
---------------------------------------------------------------------------

    \136\ See id. BZX also states that, unlike the Shares, because
OTC bitcoin funds are not listed on an exchange, they are not
subject to the same transparency and regulatory oversight by a
listing exchange. BZX further asserts that the existence of a
surveillance-sharing agreement between BZX and the CME bitcoin
futures market would result in increased investor protections for
the Shares compared to OTC bitcoin funds. See id. at 47179 n.38.
    \137\ See id. at 47179. BZX further represents that the
inability to trade in line with NAV may at some point result in OTC
bitcoin funds trading at a discount to their NAV. According to BZX,
while that has not historically been the case, trading at a discount
would give rise to nearly identical potential issues related to
trading at a premium. See id. at 47179 n.39.
    \138\ See id. at 47180.
    \139\ See id.
---------------------------------------------------------------------------

    BZX also asserts that exposure to bitcoin through an ETP also
presents advantages for retail investors compared to buying spot
bitcoin directly.\140\ BZX asserts that, without the advantages of an
ETP, an individual retail investor holding bitcoin through a
cryptocurrency trading platform lacks protections.\141\ BZX explains
that, typically, retail platforms hold most, if not all, retail
investors' bitcoin in ``hot'' (internet-connected) storage and do not
make any commitments to indemnify retail investors or to observe any
particular cybersecurity standard.\142\ Meanwhile, a retail investor
holding spot bitcoin directly in a self-hosted wallet may suffer from
inexperience in private key management (e.g., insufficient password
protection, lost key, etc.), which could cause them to lose some or all
of their bitcoin holdings.\143\ BZX represents that the custodian
would, by contrast, use ``cold'' (offline) storage to hold private
keys, employ a certain degree of cybersecurity measures and operational
best practices, be highly experienced in bitcoin custody, and be
accountable for failures.\144\ In addition, BZX represents that the
custodian would be a chartered trust company that carries insurance
covering both hot and cold storage, and ``will custody the Trust's
bitcoin assets in a manner so that it meets the definition of qualified
custodian'' under the Investment Advisers Act of 1940, as amended.\145\
Thus, with respect to custody of the Trust's bitcoin assets, BZX
concludes that, compared to owning spot bitcoin directly, the Trust
presents advantages from an investment protection standpoint for retail
investors.\146\
---------------------------------------------------------------------------

    \140\ See id.
    \141\ See id.
    \142\ See id.
    \143\ See id.
    \144\ See id.
    \145\ See id.
    \146\ See id.
---------------------------------------------------------------------------

    BZX further asserts that a number of operating companies engaged in
unrelated businesses have announced investments as large as $1.5
billion in bitcoin.\147\ Without access to bitcoin ETPs, BZX argues
that retail investors seeking investment exposure to bitcoin may
purchase shares in these companies in order to gain the exposure to
bitcoin that they seek.\148\ BZX contends that such operating
companies, however, are imperfect bitcoin proxies and provide investors
with partial bitcoin exposure paired with additional risks associated
with whichever operating company they decide to purchase. BZX concludes
that investors seeking bitcoin exposure through publicly traded
companies are gaining only partial exposure to bitcoin and are not
fully benefitting from the risk disclosures and associated investor
protections that come from the securities registration process.\149\
---------------------------------------------------------------------------

    \147\ See id.
    \148\ See id.
    \149\ See id. at 47181.
---------------------------------------------------------------------------

    BZX also states that investors in many other countries, including
Canada, are able to use more traditional exchange-listed and traded
products to gain exposure to bitcoin, disadvantaging U.S. investors and
leaving them with more risky and more expensive means of getting
bitcoin exposure.\150\
---------------------------------------------------------------------------

    \150\ See id. at 47179. BZX represents that the Purpose Bitcoin
ETF, a retail bitcoin-based ETP launched in Canada, reportedly
reached $421.8 million in assets under management in two days,
demonstrating the demand for a North American market listed bitcoin
ETP. BZX contends that the Purpose Bitcoin ETF also offers a class
of units that is U.S. dollar denominated, which could appeal to U.S.
investors. BZX also argues that, without an approved bitcoin ETP in
the U.S. as a viable alternative, U.S. investors could seek to
purchase these shares in order to get access to bitcoin exposure.
BZX believes that, given the separate regulatory regime and the
potential difficulties associated with any international litigation,
such an arrangement would create more risk exposure for U.S.
investors than they would otherwise have with a U.S. exchange-listed
ETP. See id. at 47179 n.36. BZX also notes that regulators in other
countries have either approved or otherwise allowed the listing and
trading of bitcoin-based ETPs. See id. at 47179 n.37.
---------------------------------------------------------------------------

    In essence, BZX asserts that the risky nature of direct investment
in the underlying bitcoin and the unregulated markets on which bitcoin
and OTC bitcoin funds trade compel approval of the proposed rule
change. The Commission disagrees. Pursuant to Section 19(b)(2) of the
Exchange Act, the Commission must approve a proposed rule change filed
by a national securities exchange if it finds that the proposed rule
change is consistent with the applicable requirements of the

Exchange Act--including the requirement under Section 6(b)(5) that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices--and it must disapprove
the filing if it does not make such a finding.\151\ Thus, even if a
proposed rule change purports to protect investors from a particular
type of investment risk--such as the susceptibility of an asset to loss
or theft--the proposed rule change may still fail to meet the
requirements under the Exchange Act.\152\
---------------------------------------------------------------------------

    \151\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
    \152\ See SolidX Order, 82 FR 16259; VanEck Order, 86 FR 54550-
51; WisdomTree Order, 86 FR 69344; Kryptoin Order, 86 FR 74179;
Valkyrie Order, 86 FR 74163; SkyBridge Order, 87 FR 3881; Wise
Origin Order, 87 FR 5538.
---------------------------------------------------------------------------

    Here, even if it were true that, compared to trading in unregulated
bitcoin spot markets, trading a bitcoin-based ETP on a national
securities exchange provides some additional protection to investors,
the Commission must consider this potential benefit in the broader
context of whether the proposal meets each of the applicable
requirements of the Exchange Act.\153\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing
exchange have a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to bitcoin, or demonstrate
that other means to prevent fraudulent and manipulative acts and
practices are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The listing exchange has not met that
requirement here. Therefore, the Commission is unable to find that the
proposed rule change is consistent with the statutory standard.
---------------------------------------------------------------------------

    \153\ See supra note 132.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Exchange Act, 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--
including the requirement under Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices.\154\
---------------------------------------------------------------------------

    \154\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, BZX has not met its burden of
demonstrating that the proposal is consistent with Exchange Act Section
6(b)(5),\155\ and, accordingly, the Commission must disapprove the
proposal.\156\
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    \155\ 15 U.S.C. 78f(b)(5).
    \156\ In disapproving the proposed rule change, the Commission
has considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
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D. Other Comments

    One comment letter also addresses the general nature and uses of
bitcoin.\157\ Ultimately, however, additional discussion of these
topics is unnecessary, as they do not bear on the basis for the
Commission's decision to disapprove the proposal.
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    \157\ See letter from Sam Ahn (Aug. 31, 2021).
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IV. Conclusion

    For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and in particular, with Section 6(b)(5) of the
Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that proposed rule change SR-CboeBZX-2021-052 be, and
hereby is, disapproved.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2022-05500 Filed 3-15-22; 8:45 am]
BILLING CODE 8011-01-P