[Federal Register Volume 87, Number 198 (Friday, October 14, 2022)]
[Notices]
[Pages 62466-62483]
[FR Doc No: 2022-22345]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96011; File No. SR-CboeBZX-2022-006]

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

October 11, 2022.

I. Introduction

    On January 25, 2022, Cboe BZX Exchange, Inc. (``BZX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the WisdomTree 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 February 14, 2022.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 94184 (Feb. 8,
2022), 87 FR 8318 (``Notice''). Comments received on the proposed
rule change are available at: https://www.sec.gov/comments/sr-cboebzx-2022-006/srcboebzx2022006.htm. BZX previously filed, and the
Commission disapproved, a substantially similar proposal to list and
trade the Shares of the Trust. See Notice of Filing of a Proposed
Rule Change to List and Trade Shares of the WisdomTree Bitcoin Trust
Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities
Exchange Act Release No. 91521 (Apr. 9, 2021), 86 FR 19917 (Apr. 15,
2021); 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'').
---------------------------------------------------------------------------

    On March 18, 2022, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On May 13, 2022, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change,\7\
and on August 4, 2022, the Commission designated a longer period for
Commission action on the proposed rule change.\8\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 94476, 87 FR 16800
(Mar. 24, 2022).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 94907, 87 FR 30546
(May 19, 2022).
    \8\ See Securities Exchange Act Release No. 95422, 87 FR 48738
(Aug. 10, 2022).
---------------------------------------------------------------------------

    This order disapproves the proposed rule change. The Commission
concludes that BZX has not met its burden under the Exchange Act and
the Commission's Rules of Practice to demonstrate that its proposal is
consistent with the requirements of Exchange Act Section 6(b)(5), which
requires, in relevant part, that the rules of a national securities
exchange be ``designed to prevent fraudulent and manipulative acts and
practices'' and ``to protect investors and the public interest.'' \9\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    When considering whether BZX's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same analytical framework used in
its orders considering previous proposals to list bitcoin \10\-based
commodity trusts and bitcoin-based trust issued receipts to assess
whether a listing exchange of an exchange-traded product (``ETP'') can
meet its obligations under Exchange Act Section 6(b)(5).\11\ As the
Commission

has explained, an exchange that lists bitcoin-based ETPs \12\ can meet
its obligations under Exchange Act Section 6(b)(5) by demonstrating
that the exchange has a comprehensive surveillance-sharing agreement
with a regulated market of significant size related to the underlying
or reference bitcoin assets.\13\
---------------------------------------------------------------------------

    \10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Notice, 87 FR at 8320.
    \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'');
WisdomTree Order; Order Disapproving a Proposed Rule Change To List
and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares), Securities Exchange Act
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the Kryptoin
Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021),
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37)
(``SkyBridge Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022)
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares),
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10,
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X
Order''); Order Disapproving a Proposed Rule Change, as Modified by
Amendment No. 1, To List and Trade Shares of the ARK 21Shares
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares, Securities Exchange Act Release No. 94571 (Mar. 31, 2022),
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the One River Carbon Neutral Bitcoin Trust Under
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities
Exchange Act Release No. 94999 (May 27, 2022), 87 FR 33548 (June 2,
2022) (SR-NYSEArca-2021-67) (``One River Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares), Securities Exchange Act Release No. 95179 (June
29, 2022), 87 FR 40282 (July 6, 2022) (SR-NYSEArca-2021-89)
(``Bitwise Order''); Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, To List and Trade Shares of Grayscale
Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares), Securities Exchange Act Release No. 95180 (June 29, 2022),
87 FR 40299 (July 6, 2022) (SR-NYSEArca-2021-90) (``Grayscale
Order''). In addition, orders were issued by delegated authority on
the following matters: Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, Relating to the Listing and Trading of
Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule
8.201, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82
FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order'');
Order Disapproving a Proposed Rule Change To List and Trade the
Shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin
ETF, Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83
FR 43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) (``ProShares
Order''); Order Disapproving a Proposed Rule Change To List and
Trade the Shares of the GraniteShares Bitcoin ETF and the
GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No.
83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-
001) (``GraniteShares Order''); 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''); Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment No. 2,
To List and Trade Shares of the Teucrium Bitcoin Futures Fund Under
NYSE Arca Rule 8.200-E, Commentary .02 (Trust Issued Receipts),
Securities Exchange Act Release No. 94620 (Apr. 6, 2022), 87 FR
21676 (Apr. 12, 2022) (SR-NYSEArca-2021-53) (``Teucrium Order'');
Order Granting Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To List and Trade Shares of the Valkyrie
XBTO Bitcoin Futures Fund Under Nasdaq Rule 5711(g), Securities
Exchange Act Release No. 94853 (May 5, 2022), 87 FR 28848 (May 11,
2022) (SR-NASDAQ-2021-066) (``Valkyrie XBTO Order'').
    \12\ As used in this order, the term ``ETFs'' refers to open-end
exchange-traded funds that register the offer and sale of their
shares under the Securities Act of 1933 (``Securities Act'') and are
regulated as investment companies under the Investment Company Act
of 1940 (``1940 Act''). The term ``ETPs'' refers to exchange-traded
products that register the offer and sale of their shares under the
Securities Act but are not regulated under the 1940 Act, such as
commodity trusts and trust issued receipts.
    \13\ See USBT Order, 85 FR at 12596. See also Winklevoss Order,
83 FR at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
83 FR at 43925-27 nn.35-39 and accompanying text (discussing
previous Commission approvals of commodity-futures ETPs).
---------------------------------------------------------------------------

    In this context, the terms ``significant market'' and ``market of
significant size'' include a market (or group of markets) as to which
(a) there is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
successfully manipulate the ETP, so that a surveillance-sharing
agreement would assist in detecting and deterring misconduct, and (b)
it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\14\ A surveillance-sharing
agreement 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.'' \15\
---------------------------------------------------------------------------

    \14\ See Winklevoss Order, 83 FR at 37594. See also USBT Order,
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322.
    \15\ See USBT Order, 85 FR at 12597.
---------------------------------------------------------------------------

    Although surveillance-sharing agreements are not the exclusive
means by which a listing exchange of a commodity-trust ETP can meet its
obligations under Exchange Act Section 6(b)(5), such agreements have
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has
historically recognized their importance. And where, as here, a listing
exchange fails to establish that other means to prevent fraudulent and
manipulative acts and practices will be sufficient, the listing
exchange must enter into a surveillance-sharing agreement with a
regulated market of significant size because such agreements detect and
deter fraudulent and manipulative activity.\16\
---------------------------------------------------------------------------

    \16\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83
FR at 43924; USBT Order, 85 FR at 12596.
---------------------------------------------------------------------------

    The Commission has long recognized that surveillance-sharing
agreements ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur'' and thus ``enable the Commission
to continue to effectively protect investors and promote the public
interest.'' \17\ As the Commission has emphasized, it is essential for
an exchange listing a derivative securities product to have the ability
that surveillance-sharing agreements provide to obtain information
necessary to detect, investigate, and deter fraud and market
manipulation, as well as violations of exchange rules and applicable
federal securities laws and rules.\18\ The hallmarks of a surveillance-
sharing agreement are that the agreement provides for the sharing of
information about market trading activity, clearing activity, and
customer identity; that the parties to the agreement have reasonable
ability to obtain access to and produce requested information; and that
no existing rules, laws, or practices would impede one party to the
agreement from obtaining this information from, or producing it to, the
other party.\19\
---------------------------------------------------------------------------

    \17\ NDSP Adopting Release, 63 FR at 70954, 70959. See also id.
at 70959 (``It is essential that the SRO [self-regulatory
organization] have the ability to obtain the information necessary
to detect and deter market manipulation, illegal trading and other
abuses involving the new derivative securities product.
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative
securities product and its underlying securities in place between
the SRO listing or trading a derivative product and the markets
trading the securities underlying the new derivative securities
product.'').
    \18\ See NDSP Adopting Release, 63 FR at 70959.
    \19\ See Winklevoss Order, 83 FR at 37592-93 (discussing Letter
from Brandon Becker, Director, Division of Market Regulation,
Commission, to Gerard D. O'Connell, Chairman, Intermarket
Surveillance Group (June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm).
---------------------------------------------------------------------------

    The Commission has explained that the ability of a national
securities exchange to enter into surveillance-sharing agreements
``furthers the protection of investors and the public interest because
it will enable the [e]xchange to conduct prompt investigations into
possible trading violations and other regulatory improprieties.'' \20\
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of
derivative security products, such as equity options, because a
surveillance-sharing agreement ``permits the sharing of information''
that is ``necessary to detect'' manipulation and ``provide[s] an
important deterrent to manipulation because [it] facilitate[s] the
availability of information needed to fully investigate a potential

manipulation if it were to occur.'' \21\ With respect to ETPs, when
approving the listing and trading of one of the first commodity-linked
ETPs--a commodity-linked exchange-traded note--on a national securities
exchange, the Commission continued to emphasize the importance of
surveillance-sharing agreements, stating that the listing exchange had
entered into surveillance-sharing agreements with each of the futures
markets on which pricing of the ETP would be based and stating that
``[t]hese agreements should help to ensure the availability of
information necessary to detect and deter potential manipulations and
other trading abuses, thereby making [the commodity-linked notes] less
readily susceptible to manipulation.'' \22\
---------------------------------------------------------------------------

    \20\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990),
55 FR 13344 (Apr. 10, 1990) (Notice of Filing and Order Granting
Accelerated Approval to Proposed Rule Change Regarding Cooperative
Agreements With Domestic and Foreign Self-Regulatory Organizations)
(SR-NYSE-90-14).
    \21\ Securities Exchange Act Release No. 33555 (Jan. 31, 1994),
59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order approving
listing of options on American Depositary Receipts (``ADR'')) (``ADR
Option Order''). The Commission further stated that it ``generally
believes that having a comprehensive surveillance sharing agreement
in place, between the exchange where the ADR option trades and the
exchange where the foreign security underlying the ADR primarily
trades, will ensure the integrity of the marketplace. The Commission
further believes that the ability to obtain relevant surveillance
information, including, among other things, the identity of the
ultimate purchasers and sellers of securities, is an essential and
necessary component of a comprehensive surveillance sharing
agreement.'' Id.
    \22\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995),
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also
Winklevoss Order, 83 FR at 37593 n.206.
---------------------------------------------------------------------------

    Consistent with these statements, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity and the ETP listing exchange has entered into
surveillance-sharing agreements with, or held Intermarket Surveillance
Group (``ISG'') membership in common with, that market.\23\ Moreover,
the surveillance-sharing agreements have been consistently present
whenever the Commission has approved the listing and trading of
derivative securities, even where the underlying securities were also
listed on national securities exchanges--such as options based on an
index of stocks traded on a national securities exchange--and were thus
subject to the Commission's direct regulatory authority.\24\
---------------------------------------------------------------------------

    \23\ See Winklevoss Order, 83 FR at 37594. See also SolidX
Order, 82 FR at 16254-55 n.125 for a discussion of the
representations the Commission has received from listing exchanges
in connection with proposals to list commodity-trust ETPs about the
existence of a significant, regulated market for trading futures on
the underlying commodity and the listing exchanges' ability to
obtain trading information with respect to such market. Furthermore,
the Commission notes that each of those cases dealt with a futures
market that had been trading for a long period of time before an
exchange proposed a commodity-trust ETP based on the asset
underlying those futures. For example, silver futures and gold
futures began trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and
the first ETPs based on spot silver and gold were approved for
listing and trading in 2006 and 2004. See Securities Exchange Act
Release No. 53521 (Mar. 20, 2006), 71 FR 14967 (Mar. 24, 2006) (SR-
Amex-2005-072) (order approving iShares Silver Trust); Securities
Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5,
2004) (SR-NYSE-2004-22) (order approving streetTRACKS Gold Shares).
Platinum futures and palladium futures began trading in 1956 and
1968, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on spot
platinum and palladium were approved for listing and trading in
2009. See Securities Exchange Act Release No. 61220 (Dec. 22, 2009),
74 FR 68895 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (order approving
ETFS Palladium Trust); Securities Exchange Act Release No. 61219
(Dec. 22, 2009), 74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95)
(order approving ETFS Platinum Trust). Copper futures began trading
in 1988, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html#metals, and the first ETPs based on spot copper
were approved for listing and trading in 2012. See Securities
Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468 (Dec.
20, 2012) (SR-NYSEArca-2012-28) (order approving JPM XF Physical
Copper Trust).
    \24\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at
5621. The Commission has also recognized that surveillance-sharing
agreements provide a necessary deterrent to fraud and manipulation
in the context of index options even when (i) all of the underlying
index component stocks were either registered with the Commission or
exempt from registration under the Exchange Act; (ii) all of the
underlying index component stocks were traded in the U.S. either
directly or as ADRs on a national securities exchange; and (iii)
effective international ADR arbitrage alleviated concerns over the
relatively smaller ADR trading volume, helped to ensure that ADR
prices reflected the pricing on the home market, and helped to
ensure more reliable price determinations for settlement purposes,
due to the unique composition of the index and reliance on ADR
prices. See Securities Exchange Act Release No. 26653 (Mar. 21,
1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-87-25) (stating
that ``surveillance-sharing agreements between the exchange on which
the index option trades and the markets that trade the underlying
securities are necessary'' and that ``[t]he exchange of surveillance
data by the exchange trading a stock index option and the markets
for the securities comprising the index is important to the
detection and deterrence of intermarket manipulation''). And the
Commission has explained that surveillance-sharing agreements
``ensure the availability of information necessary to detect and
deter potential manipulations and other trading abuses'' even when
approving options based on an index of stocks traded on a national
securities exchange. See Securities Exchange Act Release No. 30830
(June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-Amex-91-22).
---------------------------------------------------------------------------

    Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin market
is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\25\ In response, the Commission has stated that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, the
listing market would not necessarily need to enter into a surveillance-
sharing agreement with a regulated significant market.\26\ Such
resistance to fraud and manipulation, however, must be novel and beyond
those protections that exist in traditional commodity markets or
securities markets for which surveillance-sharing agreements in the
context of listing derivative securities products have been
consistently present.\27\
---------------------------------------------------------------------------

    \25\ See USBT Order, 85 FR at 12597.
    \26\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing
assertions that ``bitcoin and [spot] bitcoin markets,'' generally,
as well as one bitcoin trading platform, specifically, have unique
resistance to fraud and manipulation). See also USBT Order, 85 FR at
12597.
    \27\ See USBT Order, 85 FR at 12597, 12599.
---------------------------------------------------------------------------

    Here, BZX contends that approval of the proposal is consistent with
Section 6(b)(5) of the Exchange Act, and, in particular, Section
6(b)(5)'s requirement that the rules of a national securities exchange
be designed to prevent fraudulent and manipulative acts and practices
and to protect investors and the public interest.\28\ As discussed in
more detail below, BZX asserts that the proposal is consistent with
Section 6(b)(5) of the Exchange Act because the Exchange has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size,\29\ and there exist other means to prevent fraudulent
and manipulative acts and practices that are sufficient to justify
dispensing with the detection and deterrence of fraud and manipulation
provided by a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to spot bitcoin.\30\
---------------------------------------------------------------------------

    \28\ See Notice, 87 FR at 8327-29, 8331-34.
    \29\ See id. at 8327-28, 8332-33.
    \30\ See id. at 8328-29, 8333.
---------------------------------------------------------------------------

    In the analysis that follows, the Commission examines whether the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act by addressing: in Section III.B.1 assertions that other means
besides surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices; in Section III.B.2
assertions that BZX has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to spot bitcoin; in Section III.B.3 assertions that the

Commission must approve the proposal because the Commission has
approved the listing and trading of ETFs and ETPs that hold CME bitcoin
futures; and in Section III.C assertions that the proposal is
consistent with the protection of investors and the public interest.
    Based on its analysis, the Commission concludes that BZX has not
established that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin. The Commission further
concludes that BZX has not established that it has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to spot bitcoin, the underlying bitcoin assets that would
be held by the Trust. As discussed further below, BZX repeats various
assertions made in prior bitcoin-based ETP proposals that the
Commission has previously addressed and rejected, including in the
prior WisdomTree Order--and more importantly, BZX does not respond to
the Commission's reasons for rejecting those assertions. As a result,
the Commission is unable to find that the proposed rule change is
consistent with the statutory requirements of Exchange Act Section
6(b)(5).
    The Commission emphasizes that its disapproval of this proposed
rule change does not rest on an evaluation of the relative investment
quality of a product holding spot bitcoin versus a product holding CME
bitcoin futures, or an assessment of whether bitcoin, or blockchain
technology more generally, has utility or value as an innovation or an
investment. Rather, the Commission is disapproving this proposed rule
change because, as discussed below, BZX has not met its burden to
demonstrate that its proposal is consistent with the requirements of
Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\31\ the Exchange
proposes to list and trade the Shares of the Trust under BZX Rule
14.11(e)(4), which governs the listing and trading of Commodity-Based
Trust Shares on the Exchange.
---------------------------------------------------------------------------

    \31\ See supra note 3. According to the Exchange, the Trust has
filed an amended registration statement on Form S-1 under the
Securities Act dated December 8, 2021 (File No. 333-254134)
(``Registration Statement'').
---------------------------------------------------------------------------

    The investment objective of the Trust would be to gain exposure to
the price of bitcoin, less expenses and liabilities of the Trust's
operation.\32\ The Trust would hold bitcoin and would calculate the
Trust's net asset value (``NAV'') daily based on the value of bitcoin
as reflected by the CF Bitcoin US Settlement Price (``Reference
Rate''). The Reference Rate was created, and is administered, by CF
Benchmarks Ltd. (``Benchmark Administrator''), an independent
entity.\33\ The Reference Rate is a once-a-day benchmark rate of the
U.S. dollar price of bitcoin (USD/BTC), calculated as of 4:00 p.m.
E.T., and is based on materially the same methodology (except
calculation time) \34\ as the Benchmark Administrator's CME CF Bitcoin
Reference Rate (``BRR''), which is the rate on which CME bitcoin
futures contracts are cash-settled in U.S. dollars.\35\ The Reference
Rate aggregates the trade flow of several bitcoin platforms (current
platform composition of the Reference Rate is Bitstamp, Coinbase,
Gemini, itBit, and Kraken, collectively, ``Constituent Bitcoin
Platforms''). In calculating the Reference Rate, the methodology
creates a joint list of the trade prices and sizes from the Constituent
Bitcoin Platforms between 3:00 p.m. E.T. and 4:00 p.m. E.T. and then
divides this list into 12 equally-sized time intervals of five minutes
and calculates the volume-weighted median trade price for each of those
time intervals. The Reference Rate is the arithmetic mean of these 12
volume-weighted median trade prices.\36\
---------------------------------------------------------------------------

    \32\ See Notice, 87 FR at 8329. WisdomTree Digital Commodity
Services, LLC (``Sponsor'') is the sponsor of the Trust, and
Delaware Trust Company is the trustee. U.S. Bank, N.A. would serve
as the custodian of the Trust (``Custodian''). U.S. Bancorp Fund
Services, LLC dba U.S. Bank Global Fund Services would be the
administrator and transfer agent (``Administrator'') of the Trust.
Foreside Fund Services LLC would be the marketing agent in
connection with the creation and redemption of Shares. See id. at
8318-19, 8329.
    \33\ See id. at 8329. The Commission notes that the Benchmark
Administrator's website states that the Reference Rate was
discontinued as of April 2022. See https://www.cfbenchmarks.com/blog/cessation-of-the-cf-bitcoin-us-settlement-price-and-cf-ether-dollar-us-settlement-price. The Exchange has not amended its filing
to indicate how the Trust would value bitcoin following
discontinuation of the Reference Rate.
    \34\ The Reference Rate is calculated as of 4:00 p.m. E.T.,
whereas the BRR is calculated as of 4:00 p.m. London Time. See id.
at 8329 n.77.
    \35\ See id. at 8329.
    \36\ See id. at 8329-30.
---------------------------------------------------------------------------

    Each Share would represent a fractional undivided beneficial
interest in and ownership of 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 would unexpectedly
hold cash on a temporary basis.\37\
---------------------------------------------------------------------------

    \37\ See id. at 8329.
---------------------------------------------------------------------------

    The Administrator would determine the NAV and NAV per Share of the
Trust on each day that the Exchange is open for regular trading after
4:00 p.m. E.T. (often by 5:30 p.m. E.T. and almost always by 8:00 p.m.
E.T.). The NAV of the Trust would be the aggregate value of the Trust's
assets, less total liabilities of the Trust, each determined on the
basis of generally accepted accounting principles. In determining the
Trust's NAV, the Administrator would value the bitcoin held by the
Trust based on the price set by the Reference Rate as of 4:00 p.m.
E.T.\38\
---------------------------------------------------------------------------

    \38\ See id. at 8330.
---------------------------------------------------------------------------

    The Trust would provide information regarding the Trust's bitcoin
holdings, as well as an Intraday Indicative Value (``IIV'') per Share
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading
Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV would be calculated by
using the prior day's closing NAV per Share as a base and updating that
value during Regular Trading Hours to reflect changes in the value of
the Trust's bitcoin holdings during the trading day.\39\
---------------------------------------------------------------------------

    \39\ See id. at 8334.
---------------------------------------------------------------------------

    When the Trust sells or redeems its Shares, it would do so in ``in-
kind'' transactions in blocks of 50,000 Shares at the Trust's NAV.
Authorized participants would deliver, or facilitate the delivery of,
bitcoin to the Trust's account with the Custodian in exchange for
Shares when they purchase Shares, and the Trust, through the Custodian,
would deliver bitcoin to such authorized participants when they redeem
Shares with the Trust.\40\
---------------------------------------------------------------------------

    \40\ See id. at 8329.
---------------------------------------------------------------------------

    Further, BZX represents that, although the Trust would not be an
investment company registered under the 1940 Act, in seeking to protect
investors and the public, the Sponsor has taken 1940 Act considerations
into account in the structure of the Trust's operation.\41\
---------------------------------------------------------------------------

    \41\ See id. at 8323-24. For a more detailed description of
those considerations, see infra note 221 and accompanying text.
---------------------------------------------------------------------------

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.'' \42\ 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.'' \43\
---------------------------------------------------------------------------

    \42\ 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).
    \43\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\44\ 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.\45\ 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.\46\
---------------------------------------------------------------------------

    \44\ See id.
    \45\ See id.
    \46\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (DC Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

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

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient to Prevent Fraudulent and Manipulative Acts and
Practices
(i) Assertions Regarding the Bitcoin Market
    As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with the detection and deterrence of fraud and manipulation provided by
a comprehensive surveillance-sharing agreement with a regulated market
of significant size related to the underlying bitcoin assets, including
by demonstrating that the bitcoin market as a whole or the relevant
underlying bitcoin market is uniquely and inherently resistant to fraud
and manipulation.\47\ Such resistance to fraud and manipulation,
however, must be novel and beyond those protections that exist in
traditional commodities or securities markets.\48\
---------------------------------------------------------------------------

    \47\ See USBT Order, 85 FR at 12597 n.23. The Commission is not
applying a ``cannot be manipulated'' standard. Instead, the
Commission is examining whether the proposal meets the requirements
of the Exchange Act and, pursuant to its Rules of Practice, places
the burden on the listing exchange to demonstrate the validity of
its contentions and to establish that the requirements of the
Exchange Act have been met. See id.
    \48\ See id. at 12597.
---------------------------------------------------------------------------

(a) BZX's Assertions
    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.\49\ BZX asserts that fragmentation
across bitcoin platforms, the relatively slow speed of transactions,
and the capital necessary to maintain a significant presence on each
trading platform make manipulation of bitcoin prices through continuous
trading activity challenging.\50\ In addition, BZX states that, to the
extent that there are bitcoin platforms engaged in or allowing wash
trading or other activity intended to manipulate the price of bitcoin
on other markets, such pricing does not normally impact prices on other
platforms because participants will generally ignore markets with
quotes that they deem non-executable.\51\ 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.\52\ According to BZX, arbitrageurs must have
funds distributed across multiple trading platforms in order to take
advantage of temporary price dislocations, thereby making it unlikely
that there will be strong concentration of funds on any particular
bitcoin trading venue.\53\ 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.\54\
---------------------------------------------------------------------------

    \49\ See Notice, 87 FR at 8327 n.65.
    \50\ See id.
    \51\ See id.
    \52\ See id.
    \53\ See id.
    \54\ See id.
---------------------------------------------------------------------------

    BZX also argues that the significant liquidity in the spot bitcoin
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.\55\ 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 spot bitcoin market increases, it follows that the
impact of $5 million and $10 million orders will continue to
decrease.\56\
---------------------------------------------------------------------------

    \55\ See id. at 8328-29.
    \56\ See id.
---------------------------------------------------------------------------

(b) Analysis
    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 does
not sufficiently contest the presence of possible sources of fraud and
manipulation in the spot bitcoin market that the Commission has
identified in previous orders, including: (1) ``wash'' trading; \57\
(2) persons with a

dominant position in bitcoin manipulating bitcoin pricing; (3) hacking
of the bitcoin network and trading platforms; (4) malicious control of
the bitcoin network; (5) trading based on material, non-public
information (for example, plans of market participants to significantly
increase or decrease their holdings in bitcoin, new sources of demand
for bitcoin, or the decision of a bitcoin-based investment vehicle on
how to respond to a ``fork'' in the bitcoin blockchain, which would
create two different, non-interchangeable types of bitcoin) or based on
the dissemination of false and misleading information; (6) manipulative
activity involving purported ``stablecoins,'' including Tether (USDT);
and (7) fraud and manipulation at bitcoin trading platforms.\58\
---------------------------------------------------------------------------

    \57\ See also CFTC v. Gemini Trust Co., LLC, No. 22-cv-4563
(S.D.N.Y. filed June 2, 2022) (alleging, among other things, failure
by Gemini personnel to disclose to the Commodity Futures Trading
Commission (``CFTC'') that Gemini customers could and did engage in
collusive or wash trading).
    \58\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (Oct. 28, 2019),
available at https://ssrn.com/abstract=3195066 and published in 75
J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86;
WisdomTree Order, 86 FR at 69326; Global X Order, 87 FR at 14916;
ARK 21Shares Order, 87 FR at 20019; One River Order, 87 FR at 33554;
Bitwise Order, 87 FR at 40283-84; Grayscale Order, 87 FR at 40305.
---------------------------------------------------------------------------

    BZX asserts that, because of how bitcoin trades occur, including
through continuous means and through fragmented platforms, arbitrage
across the bitcoin platforms essentially helps to keep global bitcoin
prices aligned with one another, thus hindering manipulation. The
Exchange, however, does not provide any data or analysis to support its
assertions, either in terms of how closely bitcoin prices are aligned
across different bitcoin trading venues or how quickly price
disparities may be arbitraged away.\59\ 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 detection and deterrence of fraud and manipulation
provided by a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to spot bitcoin. As stated
above, ``unquestioning reliance'' on an SRO's representations in a
proposed rule change is not sufficient to justify Commission approval
of a proposed rule change.\60\
---------------------------------------------------------------------------

    \59\ For example, the Registration Statement states that ``[i]f
increases in throughput on the Bitcoin network lag behind growth in
usage of bitcoin, average fees and settlement times may increase
considerably . . . which could adversely impact the value of the
Shares.'' See Registration Statement at 20. BZX does not provide
data or analysis to address, among other things, whether such risks
of increased fees and bitcoin transaction settlement times may
affect the arbitrage effectiveness that BZX asserts. See also infra
note 73 and accompanying text (referencing statements made in the
Registration Statement that contradict assertions made by BZX).
    \60\ See supra note 46.
---------------------------------------------------------------------------

    In any event, the Commission has explained that efficient price
arbitrage is not sufficient to support the finding that a market is
uniquely or inherently resistant to manipulation such that the
Commission can dispense with surveillance-sharing agreements.\61\ 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.\62\ Equities that underlie such options trade on U.S.
equity markets that are deep, liquid, and highly interconnected.\63\
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.\64\
---------------------------------------------------------------------------

    \61\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at
74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 FR
at 20019; Grayscale Order, 87 FR at 40306.
    \62\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR
at 74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87
FR at 20019; Grayscale Order, 87 FR at 40306-07.
    \63\ See Market Data Infrastructure Adopting Release, Securities
Exchange Act Release No. 90610 (Dec. 9, 2020); 86 FR 18596, 18606-07
(Apr. 9, 2021); Market Data Infrastructure Proposing Release,
Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR
16726, 16728 (Mar. 24, 2020); Concept Release on Equity Market
Structure, Securities Exchange Act Release No. 61358 (Jan. 14,
2010), 75 FR 3594 (Jan. 21, 2010). See also ARK 21Shares Order, 87
FR at 20019 n.70.
    \64\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85
FR at 12600-01; WisdomTree Order, 86 FR at 69325.
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that, to the
extent that there are bitcoin platforms engaged in or allowing wash
trading or other activity intended to manipulate the price of bitcoin
on other markets, market participants will generally ignore those
platforms. However, the record does not demonstrate that wash trading
and other possible sources of fraud and manipulation in the broader
bitcoin spot market will be ignored by market participants.\65\ 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.\66\
---------------------------------------------------------------------------

    \65\ See infra note 89 and accompanying text.
    \66\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69325.
---------------------------------------------------------------------------

    Further, the continuous nature of bitcoin trading does not support
the finding that the bitcoin market is uniquely or inherently resistant
to manipulation, and neither do linkages among markets, as BZX
asserts.\67\ 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.\68\
---------------------------------------------------------------------------

    \67\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying
text.
    \68\ See id. at 37585. See also, e.g., WisdomTree Order, 86 FR
at 69325-26.
---------------------------------------------------------------------------

    Moreover, the data furnished by BZX regarding the cost to move the
price of bitcoin, and the market impact of such attempts, are
incomplete.\69\ 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. In addition, 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.\70\ 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. 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 potentially some resistance to
manipulation, not that it establishes unique resistance to manipulation
that would justify dispensing with the detection and deterrence of
fraud and manipulation provided by a comprehensive surveillance-sharing
agreement with a regulated market of significant size related to spot
bitcoin.\71\
---------------------------------------------------------------------------

    \69\ See WisdomTree Order, 86 FR at 69326.
    \70\ 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 Notice, 87 FR at
8328-29 nn.74-75.
    \71\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69326; Kryptoin Order, 86 FR at 74171; Global X Order, 87 FR at
14916; Wise Origin Order, 87 FR at 5531; Grayscale Order, 87 FR at
40306.

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

    Finally, BZX does not address risk factors specific to the bitcoin
blockchain and bitcoin platforms, described in the Trust's Registration
Statement, that undermine the argument that the bitcoin market is
inherently resistant to fraud and manipulation.\72\ For example, the
Registration Statement acknowledges that ``bitcoin [platforms] on which
bitcoin trades are relatively new and, in some cases, unregulated, and,
therefore, may be more exposed to fraud and security breaches than
established, regulated exchanges for other financial assets or
instruments''; that ``as an intangible asset without centralized
issuers or governing bodies, bitcoin has been, and may in the future
be, subject to security breaches, cyberattacks or other malicious
activities''; that ``[t]he trading for 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 to the NAV''; that the bitcoin blockchain could be vulnerable
to a ``51% attack,'' in which a bad actor that controls a majority of
the processing power dedicated to mining on the bitcoin network may be
able to alter the bitcoin blockchain on which the bitcoin network and
bitcoin transactions rely; that ``some bitcoin [platforms] have been
closed due to fraud and manipulative activity'' and that larger bitcoin
platforms are more likely to be ``appealing targets for hackers''; and
that ``[b]itcoin [platforms] may be more exposed to the risk of market
manipulation than exchanges for more traditional assets.'' \73\ The
Exchange also acknowledges in the proposed rule change that ``largely
unregulated currency and spot commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight.'' \74\
---------------------------------------------------------------------------

    \72\ See WisdomTree Order, 86 FR at 69326.
    \73\ Registration Statement at 11, 18-19, 25, 37-38. See also
Winklevoss Order, 83 FR at 37585.
    \74\ Notice, 87 FR at 8320.
---------------------------------------------------------------------------

(ii) Assertions Regarding the Reference Rate and the Create/Redeem
Process
(a) BZX's Assertions
    The Exchange also asserts that the Reference Rate, which it uses to
value the Trust's bitcoin, is itself resistant to manipulation based on
the Reference Rate's methodology.\75\ The Exchange states that the
Reference Rate is calculated based on the ``Relevant Transactions''
\76\ of all of its Constituent Bitcoin Platforms. All Relevant
Transactions are added to a joint list, recording the time of
execution, trade price, and size for each transaction, and the list is
partitioned by timestamp into 12 equally-sized time intervals of five-
minute length.\77\ For each partition separately, the volume-weighted
median trade price is calculated from the trade prices and sizes of all
Relevant Transactions.\78\ The Reference Rate is then determined by the
arithmetic mean of the volume-weighted medians of all partitions.\79\
According to BZX, ``[b]y employing the foregoing steps, the Reference
Rate thereby seeks to ensure that transactions in bitcoin conducted at
outlying prices do not have an undue effect on the value of a specific
partition, large trades or clusters of trades transacted over a short
period of time will not have an undue influence on the index level, and
the effect of large trades at prices that deviate from the prevailing
price are mitigated from having an undue influence on the benchmark
level.'' \80\ BZX concludes its analysis of the Reference Rate by
noting that ``an oversight function is implemented by the Benchmark
Administrator in seeking to ensure that the Reference Rate is
administered through codified policies for Reference Rate integrity.''
\81\
---------------------------------------------------------------------------

    \75\ See Notice, 87 FR at 8333.
    \76\ According to the Exchange, a ``Relevant Transaction'' is
any cryptocurrency versus U.S. dollar spot trade that occurs during
the observation window between 3:00 p.m. and 4:00 p.m. E.T. on a
Constituent Bitcon Platform in the BTC/USD pair that is reported and
disseminated by a Constituent Bitcoin Platform and observed by the
Benchmark Adminstrator. See id. at 8329 n.78.
    \77\ See id. at 8329.
    \78\ See id. According to the Exchange, a volume-weighted median
differs from a standard median in that a weighting factor, in this
case trade size, is factored into the calculation. See id.
    \79\ See id. at 8330.
    \80\ Id.
    \81\ Id.
---------------------------------------------------------------------------

    In addition, the Exchange states that to qualify as part of the
bitcoin pricing input for the Trust, a Constituent Bitcoin Platform
must: (a) have policies to ensure fair and transparent market
conditions at all times and have processes in place to identify and
impede illegal, unfair or manipulative trading practices; and (b)
comply with applicable law and regulation, including, but not limited
to, capital markets regulations, money transmission regulations, client
money custody regulations, know-your-client (``KYC'') regulations and
anti-money laundering (``AML'') regulations.\82\
---------------------------------------------------------------------------

    \82\ See id.
---------------------------------------------------------------------------

    Simultaneously with its assertions regarding the Reference Rate,
BZX also states that, because the Trust will engage in in-kind
creations and redemptions only, the ``manipulability of the Reference
Rate [is] significantly less important.'' \83\ The Exchange elaborates
that, ``because the Trust will not accept cash to buy bitcoin in order
to create new shares or . . . 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.'' \84\ 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.\85\
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.\86\
This, according to BZX, not only mitigates the risk associated with
potential manipulation, but also discourages and disincentivizes
manipulation of the Reference Rate because there is little financial
incentive to do so.\87\
---------------------------------------------------------------------------

    \83\ See id. at 8333.
    \84\ See id.
    \85\ See id.
    \86\ See id.
    \87\ See id.
---------------------------------------------------------------------------

(b) Analysis
    Based on the assertions made and the information provided with
respect to the Reference Rate and the create/redeem process, the record
is inadequate to conclude that BZX has articulated other means to
prevent fraud and manipulation that are sufficient to justify
dispensing with the detection and deterrence of fraud and manipulation
provided by a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to spot bitcoin.
    The record does not demonstrate that the proposed methodology for
calculating the Reference Rate would make the proposed ETP resistant to

fraud or manipulation such that the ability to detect and deter fraud
and manipulation that is provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to spot bitcoin is unnecessary. Specifically, BZX has not assessed the
possible influence that spot platforms not included among the
Constituent Bitcoin Platforms would have on bitcoin prices used to
calculate the Reference Rate.\88\ As discussed above, BZX does not
sufficiently contest the presence of possible sources of fraud and
manipulation in the spot bitcoin market generally.\89\ Instead, BZX
focuses its analysis on the eligibility and attributes of the
Constituent Bitcoin Platforms, as well as the Reference Rate's
methodology that calibrates the pricing input generated by the
Constituent Bitcoin Platforms (such as partitioning the Relevant
Transactions into equally-sized time intervals and using volume-
weighted median trade prices). What the Exchange does not address,
however, is that, to the extent that trading on spot bitcoin platforms
not directly used to calculate the Reference Rate affects prices on the
Constituent Bitcoin Platforms, the activities on those other
platforms--where various kinds of fraud and manipulation from a variety
of sources may be present and persist--may affect whether the Reference
Rate is resistant to manipulation. Importantly, the record does not
demonstrate that these possible sources of fraud and manipulation in
the broader spot bitcoin market do not affect the Constituent Bitcoin
Platforms that represent a portion of the spot bitcoin market. To the
extent that fraudulent and manipulative trading on the broader bitcoin
market could influence prices or trading activity on the Constituent
Bitcoin Platforms, the Constituent Bitcoin Platforms (and thus the
Reference Rate) would not be inherently resistant to manipulation.\90\
---------------------------------------------------------------------------

    \88\ As discussed above, while the Exchange asserts that bitcoin
prices on platforms with wash trades or other activity intended to
manipulate the price of bitcoin would generally be ignored, the
Commission has no basis on which to conclude that bitcoin platforms
are insulated from prices of others that engage in or permit fraud
or manipulation. See supra note 66 and accompanying text.
    \89\ See supra notes 65-66 and accompanying text.
    \90\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69327; Kryptoin Order, 86 FR at 74172; Valkyrie Order, 86 FR at
74161; SkyBridge Order, 87 FR at 3873; Grayscale Order, 87 FR at
40309.
---------------------------------------------------------------------------

    In addition, while BZX asserts that aspects of the Reference Rate
methodology mitigate the impact of fraud and manipulation on the
Shares, the Commission can find no basis to conclude that the Reference
Rate methodology constitutes a novel means beyond the protections
utilized by traditional commodity or securities markets to prevent
fraud and manipulation that is sufficient to justify dispensing with
the detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin. BZX has not shown that its
proposed use of 12 equally-sized time intervals of five minute length
over the observation window between 3:00 p.m. and 4:00 p.m. E.T. to
calculate the Reference Rate would effectively be able to eliminate
fraudulent or manipulative activity that is not transient. As the
Commission has previously stated, fraud and manipulation in the spot
bitcoin market could persist for a ``significant duration.'' \91\ The
Exchange does not explain how the use of such partitions would protect
against the effects of the wash and fictitious trading that may persist
in the spot bitcoin market for a significant duration.\92\ While the
Reference Rate methodology records the time of execution, trade price,
and size for each Relevant Transaction, partitions the list of Relevant
Transactions by timestamp into equally-sized time intervals, and
calculates the weighted median trade price from the trade prices and
sizes of such Relevant Transactions, this methodology could at most
attenuate, but not eliminate, the effect of manipulative activity on
the Constituent Bitcoin Platforms--just as it could at most attenuate,
but would not eliminate, the effect of bona fide liquidity demand on
those platforms.\93\
---------------------------------------------------------------------------

    \91\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
    \92\ See WisdomTree Order, 86 FR at 69327.
    \93\ See SolidX Order, 82 FR at 16257.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the Reference Rate's
methodology helps make the Reference Rate resistant to manipulation
conflict with the Registration Statement. Specifically, the
Registration Statement represents, among other things, that ``[b]itcoin
[platforms] on which bitcoin trades . . . may be more exposed to fraud
and security breaches than established, regulated exchanges for other
financial assets or instruments, which could have a negative impact on
the performance of the Trust.'' \94\ Constituent Bitcoin Platforms are
a subset of the bitcoin platforms currently in existence. Although the
Sponsor raises concerns regarding fraud and security of bitcoin
platforms in the Registration Statement, the Exchange does not explain
how or why such concerns are consistent with its assertion that the
Reference Rate is resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \94\ Registration Statement at 19.
---------------------------------------------------------------------------

    The Commission thus concludes that the Exchange has not
demonstrated that its Reference Rate methodology makes the proposed ETP
resistant to manipulation. While the proposed procedures for
calculating the Reference Rate using only prices from the Constituent
Bitcoin Platforms are intended to provide some degree of protection
against attempts to manipulate the Reference Rate, these procedures are
not sufficient for the Commission to dispense with the detection and
deterrence of fraud and manipulation provided by a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to spot bitcoin.\95\
---------------------------------------------------------------------------

    \95\ See WisdomTree Order, 86 FR at 69327-28.
---------------------------------------------------------------------------

    In addition, while BZX represents that a Constituent Bitcoin
Platform must have policies to ensure fair and transparent market
conditions at all times and have processes in place to identify and
impede illegal, unfair, or manipulative trading practices, and comply
with applicable law and regulation, including, but not limited to,
capital markets regulations, money transmission regulations, client
money custody regulations, KYC regulations and AML regulations, any
oversight relating to such policies, processes, and regulations,
including KYC and AML regulations, is not a substitute for a
surveillance-sharing agreement between the Exchange and a regulated
market of significant size related to the underlying bitcoin assets.
KYC and AML regulation, for example, do not substitute for the sharing
of information about market trading activity or clearing activity that
a surveillance-sharing agreement would afford. As the Commission has
explained, there are substantial differences between such regulations
and the Commission's regulation of national securities exchanges.\96\
For example, the Commission's market oversight of national securities
exchanges includes substantial requirements, including the requirement
to have rules that are ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with

persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.'' \97\ Moreover, national
securities exchanges must file proposed rules with the Commission
regarding certain material aspects of their operations,\98\ and the
Commission has the authority to disapprove any such rule that is not
consistent with the requirements of the Exchange Act.\99\ Thus,
national securities exchanges are subject to Commission oversight of,
among other things, their governance, membership qualifications,
trading rules, disciplinary procedures, recordkeeping, and fees.\100\
The Constituent Bitcoin Platforms have none of these requirements--none
are registered as a national securities exchange and none are
comparable to a national securities exchange or futures exchange.\101\
---------------------------------------------------------------------------

    \96\ KYC and AML regulation have been referenced in other
bitcoin-based ETP proposals as a purportedly alternative means by
which such ETPs would be uniquely resistant to manipulation. See
USBT Order, 85 FR at 12603 n.101 and accompanying text. See also,
e.g., WisdomTree Order, 86 FR at 69328 n.95; Kryptoin Order, 86 FR
at 74173 n.98; ARK 21Shares Order, 87 FR at 20022 n.107; Grayscale
Order, 87 FR at 40308 n.111.
    \97\ 15 U.S.C. 78f(b)(5).
    \98\ 17 CFR 240.19b-4(a)(6)(i).
    \99\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rule changes
with the Commission and provides the Commission with the authority
to disapprove proposed rule changes that are not consistent with the
Exchange Act. Designated contract markets (``DCMs'') (commonly
called ``futures markets'') registered with and regulated by the
CFTC must comply with, among other things, a similarly comprehensive
range of regulatory principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available
at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \100\ See Winklevoss Order, 83 FR at 37597.
    \101\ See USBT Order, 85 FR at 12603-05 and n.101; VanEck Order,
86 FR at 64545 and n.89; WisdomTree Order, 86 FR at 69328 and n.95;
Kryptoin Order, 86 FR at 74173 and n.98; ARK 21Shares Order, 87 FR
at 20021-22 and n.107; Grayscale Order, 87 FR at 40308 and n.110.
---------------------------------------------------------------------------

    In addition, the Exchange states that the Benchmark Administrator
would implement an oversight function to ensure that the Reference Rate
is administered through codified policies for Reference Rate
integrity.\102\ However, the record does not suggest that the purported
oversight represents a unique measure to resist or prevent fraud or
manipulation beyond protections that exist in traditional securities or
commodities markets.\103\ Rather, the oversight performed by the
Benchmark Administrator appears to be for the purpose of ensuring the
accuracy and integrity of the Reference Rate. Such Reference Rate
accuracy and integrity oversight serves a fundamentally different
purpose as compared to the regulation of national securities exchanges
and the requirements of the Exchange Act. While the Commission
recognizes that this may be an important function in ensuring the
integrity of the Reference Rate, such requirements do not imbue the
Benchmark Administrator with regulatory authority similar to that which
the Exchange Act confers upon self-regulatory organizations such as
national securities exchanges.\104\ Furthermore, other commodity-based
ETPs approved by the Commission for listing and trading utilize
reference rates or indices administered by similar benchmark
administrators,\105\ and the Commission has not, in those instances,
dispensed with the need for a surveillance-sharing agreement with a
significant regulated market.
---------------------------------------------------------------------------

    \102\ See supra note 81 and accompanying text.
    \103\ See, e.g., WisdomTree Order, 86 FR at 69328; Valkyrie
Order, 86 FR at 74162.
    \104\ See WisdomTree Order, 86 FR at 69329; One River Order, 87
FR at 33556; Grayscale Order, 87 FR at 40310. The Benchmark
Administrator does not itself exercise governmental regulatory
authority. Rather, the Benchmark Administrator is a registered,
privately-held company in England. See https://blog.cfbenchmarks.com/legal/ (stating that the Benchmark
Administrator is authorized and regulated by the UK Financial
Conduct Authority (``FCA'') as a registered Benchmark Administrator
(FRN 847100) under the EU benchmark regulation, and further noting
that the Benchmark Administrator is a member of the Crypto Research
group of companies which is in turn a member of the Payward, Inc.
group of companies, and Payward, Inc. is the owner and operator of
the Kraken Exchange, a venue that facilitates the trading of
cryptocurrencies). The Benchmark Administrator's relationship with
the Constituent Bitcoin Platforms is based on such platforms'
participation in the determination of reference rates, such as the
Reference Rate. While the Benchmark Administrator is regulated by
the FCA as a benchmark administrator, the FCA's regulations do not
extend to the Constituent Bitcoin Platforms by virtue of their trade
prices serving as input data underlying the Reference Rate. See USBT
Order, 85 FR at 12604. See also WisdomTree Order, 86 FR at 69328-29.
    \105\ See, e.g., Securities Exchange Act Release Nos. 80840
(June 1, 2017) 82 FR 26534 (June 7, 2017) (SR-NYSEArca-2017-33)
(approving the listing and trading of shares of certain trusts
seeking to track the Solactive GLD EUR Gold Index, Solactive GLD GBP
Gold Index, and the Solactive GLD JPY Gold Index).
---------------------------------------------------------------------------

    Further, BZX does not explain the significance of the Reference
Rate'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.\106\ To the extent that BZX's argument
is that the price of the Trust's Shares would be resistant to
manipulation if the Reference Rate is resistant to manipulation, BZX
has not established in the record a basis for this conclusion because
BZX has not established a link between the price of the Shares and the
Reference Rate, either in the primary or secondary market. The Trust
uses the Reference Rate to calculate the value of the bitcoin it holds
according to the methodology discussed above.\107\ However, the Trust
will create or redeem baskets in the primary market only upon the
receipt or distribution of bitcoins from/to authorized participants,
and only for the amount of bitcoin represented by the Shares in such
baskets, without reference to the value of such bitcoin as determined
by the Reference Rate or otherwise.\108\ In the secondary market, the
Shares would trade at market-based prices, and market partcipants may
or may not take into account the value of bitcoin as measured by the
Reference Rate in determining such prices. The Exchange provides no
information on the relationship between the Reference Rate and
secondary market prices generally, or how the use of the Reference Rate
would mitigate fraud and manipulation of the Shares in the secondary
market.\109\
---------------------------------------------------------------------------

    \106\ The Commission has previously considered and rejected
similar arguments about the valuation of bitcoin according to a
benchmark or reference price. See, e.g., SolidX Order, 82 FR at
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at
12599-601; WisdomTree Order, 86 FR at 69327-29;Valkyrie Order, 86 FR
at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale Order, 87 FR
at 40310.
    \107\ See supra notes 32-36 and accompanying text.
    \108\ See Notice, 87 FR at 8330. According to the Exchange, to
create, ``the total deposit of bitcoin required is an amount of
bitcoin that is in the same proportion to the total assets of the
Trust, net of accrued expenses and other liabilities, on the date
the order to purchase is properly received, as the number of Shares
to be created under the purchase order is in proportion to the total
number of Shares outstanding on the date the order is received.''
The required deposit is determined ``for a given day by dividing the
number of bitcoin held by the Trust as of the opening of business on
that business day, adjusted for the amount of bitcoin constituting
estimated accrued but unpaid fees and expenses of the Trust as of
the opening of business on that business day, by the quotient of the
number of Shares outstanding at the opening of business divided by
the aggregation of shares (i.e., 50,000) associated with a creation
unit.''
    \109\ See WisdomTree Order, 86 FR at 69329 and n.108; Valkyrie
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale
Order, 87 FR at 40310.
---------------------------------------------------------------------------

    Moreover, the Exchange's arguments are contradictory. While arguing
that the Reference Rate is resistant to manipulation, the Exchange
simultaneously downplays the importance of the Reference Rate in light
of the Trust's in-kind creation and redemption mechanism.\110\ The
Exchange points out that the Trust will create and redeem Shares in-
kind, not in cash, which renders the NAV calculation, and thereby the
ability to manipulate NAV, ``significantly less

important.'' \111\ 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.'' \112\ If the
Reference Rate that the Trust uses to value the Trust's bitcoin ``is
not particularly important,'' it follows that the Reference Rate'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 Reference Rate aids in the
determination that the proposal to list and trade the Shares is
designed to prevent fraudulent and manipulative acts and
practices.\113\
---------------------------------------------------------------------------

    \110\ See supra notes 83-84 and accompanying text.
    \111\ Notice, 87 FR at 8333 (``While the Sponsor believes that
the Reference Rate which it uses to value the Trust's bitcoin is
itself resistant to manipulation based on the methodology further
described below, the fact that creations and redemptions are only
available in-kind makes the manipulability of the Reference Rate
significantly less important.'').
    \112\ Id. (concluding that ``because the Trust will not accept
cash to buy bitcoin in order to create new shares or, barring a
forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses to value the Trust's bitcoin
is not particularly important.'').
    \113\ See WisdomTree Order, 86 FR at 69329.
---------------------------------------------------------------------------

    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.\114\ 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.\115\ Accordingly,
the Commission is not persuaded here that the Trust's in-kind creations
and redemptions afford it a unique resistance to manipulation.\116\
---------------------------------------------------------------------------

    \114\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR
at 12607-08; WisdomTree Order, 86 FR at 69329.
    \115\ 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).
    \116\ Putting aside the Exchange's various assertions about the
nature of bitcoin and the bitcoin market, the Reference Rate, and
the Shares, the Exchange also does not address concerns the
Commission has previously identified, including the susceptibility
of bitcoin markets to potential trading on material, non-public
information (such as plans of market participants to significantly
increase or decrease their holdings in bitcoin; new sources of
demand for bitcoin; the decision of a bitcoin-based investment
vehicle on how to respond to a ``fork'' in the bitcoin blockchain,
which would create two different, non-interchangeable types of
bitcoin), or to the dissemination of false or misleading
information. See Winklevoss Order, 83 FR at 37585. See also USBT
Order, 85 FR at 12600-01.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size Related
to the Underlying Bitcoin Assets
    As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and
manipulative acts and practices, the Commission next examines whether
the record supports the conclusion that BZX has entered into a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to the underlying bitcoin assets. In this
context, the term ``market of significant size'' includes a market (or
group of markets) as to which (i) there is a reasonable likelihood that
a person attempting to manipulate the ETP would also have to trade on
that market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (ii) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\117\
---------------------------------------------------------------------------

    \117\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------

    As the Commission has explained, it considers two markets that are
members of the ISG to have a comprehensive surveillance-sharing
agreement with one another, even if they do not have a separate
bilateral surveillance-sharing agreement.\118\ Accordingly, based on
the common membership of BZX and the CME in the ISG,\119\ 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,\120\ including the CME bitcoin futures market,
and thus such market is ``regulated,'' in the context of the proposed
ETP, the record does not, as explained further below, establish that
the CME bitcoin futures market is a ``market of significant size''
related to spot bitcoin, the underlying bitcoin assets that would be
held by the Trust.
---------------------------------------------------------------------------

    \118\ See id. at 37580 n.19.
    \119\ See Notice, 87 FR at 8328, 8333.
    \120\ While the Commission recognizes that the CFTC regulates
the CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying spot bitcoin market. See Winklevoss
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; SkyBridge Order,
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93; ARK
21Shares Order, 87 FR at 20023 n.121; Bitwise Order, 87 FR at 40286
n.54; Grayscale Order, 87 FR at 40311 n.138.
---------------------------------------------------------------------------

(i) Whether There is a Reasonable Likelihood That a Person Attempting
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin
Futures Market to Successfully Manipulate the ETP
    The first prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' related to spot
bitcoin is the determination that there is a reasonable likelihood that
a person attempting to manipulate the ETP would have to trade on the
CME bitcoin futures market to successfully manipulate the ETP. In
previous Commission orders, the Commission explained that the lead-lag
relationship between the bitcoin futures market and the spot market is
``central'' to understanding this first prong.\121\
---------------------------------------------------------------------------

    \121\ See, e.g., USBT Order, 85 FR at 12612 (``[E]stablishing a
lead-lag relationship between the bitcoin futures market and the
spot market is central to understanding whether it is reasonably
likely that a would-be manipulator of the ETP would need to trade on
the bitcoin futures market to successfully manipulate prices on
those spot platforms that feed into the proposed ETP's pricing
mechanism. In particular, if the spot market leads the futures
market, this would indicate that it would not be necessary to trade
on the futures market to manipulate the proposed ETP, even if
arbitrage worked efficiently, because the futures price would move
to meet the spot price.''). When considering past proposals for spot
bitcoin ETPs, the Commission has discussed whether there is a lead-
lag relationship between the regulated market (e.g., the CME) and
the market on which the assets held by the ETP would have traded
(i.e., spot bitcoin platforms), as part of an analysis of whether a
would-be manipulator of the spot bitcoin ETP would need to trade on
the regulated market to effect such manipulation. See, e.g., USBT
Order, 85 FR at 12612. See also VanEck Order, 86 FR at 64547;
WisdomTree Order, 86 FR at 69330-31; Kryptoin Order, 86 FR at 74175-
76; SkyBridge Order, 87 FR at 3875-76; Wise Origin Order, 87 FR at
5535-36, 5539-40; ARK 21Shares Order, 87 FR at 20023-24; Bitwise
Order, 87 FR at 40287-89; Grayscale Order, 87 FR at 40311-13.
---------------------------------------------------------------------------

(a) BZX's Assertions
    The Exchange asserts in its proposal that the significant growth in
CME bitcoin futures across each of trading volumes, open interest,
large open interest holders, and total market participants over the
last two years are reflective of that market's growing influence on the
spot price.\122\ The Exchange represents that, from October 25, 2021,
through November 19, 2021, CFTC-regulated bitcoin futures represented
approximately $2.9 billion in notional trading volume on CME on a daily
basis, and notional volume was

never below $1.2 billion per day.\123\ The Exchange also represents
that ``[o]pen interest was over $4 billion for the entirety of the
period and at one point reached $5.5 billion.'' \124\ BZX further
asserts that ``[n]early every measurable metric related to CME Bitcoin
Futures has trended consistently up since launch and/or accelerated
upward in the past year.'' \125\ As an example, the Exchange states
that ``there was approximately $12 billion in trading in Bitcoin
Futures in August 2021 compared to $3.9 billion, $4.5[] billion, and
$9[ ] billion in total trading in August 2017, August 2018, and August
2019, respectively.'' \126\ The Exchange states that ``Bitcoin Futures
traded over $500m and represented $1.5 billion in open interest
compared to $115 million in December 2019.'' \127\ BZX also asserts
that the number of large open interest holders \128\ ``has continued to
increase even as the price of bitcoin has risen, as have the number of
unique accounts trading Bitcoin Futures.'' \129\
---------------------------------------------------------------------------

    \122\ See Notice, 87 FR at 8328, 8333.
    \123\ See id. at 8321.
    \124\ Id.
    \125\ Id. at 8325.
    \126\ Id. The Exchange does not define the term ``Bitcoin
Futures'' in its filing.
    \127\ Id.
    \128\ The Exchange states that a ``large open interest holder in
Bitcoin Futures is an entity that holds at least 25 contracts, which
is the equivalent of 125 bitcoin. At a price of approximately
$46,996 per bitcoin on 8/31/21, more than 80 firms had outstanding
positions of greater than $5.8 million in Bitcoin Futures.'' Id. at
8326 n.61.
    \129\ Id. at 8326.
---------------------------------------------------------------------------

    Moreover, acording to the Exchange, the Sponsor believes that
``academic research corroborates this overall trend and supports the
thesis that bitcoin futures, and more particularly CME [b]itcoin
[f]utures[,] given the recent significant growth in that market, is a
predominant influence in bitcoin price formation.'' \130\
---------------------------------------------------------------------------

    \130\ Id. at 8327 (citing to (a) representations made and
comments submitted with respect to the proposed rule changes in
connection with the ARK 21Shares Order and the Wise Origin Order,
and (b) Hu, Y., Hou, Y. and Oxley, L. (2019), ``What role do futures
markets play in Bitcoin pricing? Causality, cointegration and price
discovery from a time-varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu, Hou &
Oxley'')). The Exchange references the following conclusion from the
``time-varying price discovery'' section of Hu, Hou & Oxley: ``There
exist no episodes where the Bitcoin spot markets dominates the price
discovery processes with regard to Bitcoin futures. This points to a
conclusion that the price formation originates solely in the Bitcoin
futures market. We can, therefore, conclude that the Bitcoin futures
markets dominate the dynamic price discovery process based upon
time-varying information share measures. Overall, price discovery
seems to occur in the Bitcoin futures markets rather than the
underlying spot market based upon a time-varying perspective.'' Id.
at n.62
---------------------------------------------------------------------------

    BZX also contends that ``[w]here CME [b]itcoin [f]utures act as a
predominant influence on the price in the spot market, such that a
potential manipulator of the bitcoin spot market (beyond just the
constituents of the Reference Rate) would have to participate in the
CME [b]itcoin [f]utures market, it follows that a potential manipulator
of the Shares would similarly have to transact in the CME [b]itcoin
[f]utures market because the Reference Rate is based on spot prices.''
\131\ Further, BZX asserts that ``the Trust only allows for in-kind
creation and redemption, which . . . reduces the potential for
manipulation of the Shares through manipulation of the Reference Rate
or any of its individual constituents, again emphasizing that a
potential manipulator of the Shares would have to manipulate the
entirety of the bitcoin spot market, of which the CME [b]itcoin
[f]utures market appears to be a predominant influence.'' \132\ As
such, the Exchange believes that the first prong of the significant
market test is satisfied and that common membership in ISG between the
Exchange and CME would assist the listing exchange in detecting and
deterring misconduct in the Shares.\133\
---------------------------------------------------------------------------

    \131\ Id. at 8328, 8333.
    \132\ Id. at 8328.
    \133\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The record does not demonstrate that there is a reasonable
likelihood that a person attempting to manipulate the proposed ETP
would have to trade on the CME bitcoin futures market to successfully
manipulate the proposed ETP. Specifically, BZX's assertions about the
general upward trends 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.\134\ 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
spot bitcoin 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, including
in the WisdomTree Order, 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.\135\ 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.\136\
---------------------------------------------------------------------------

    \134\ See WisdomTree Order, 86 FR at 69330.
    \135\ See USBT Order, 85 FR at 12611. See also WisdomTree Order,
86 FR at 69330; Kryptoin Order, 86 FR at 74175; SkyBridge Order, 87
FR at 3875; Wise Origin Order, 87 FR at 5534.
    \136\ See USBT Order, 85 FR at 12612. The Commission has
previously considered and rejected similar arguments. See, e.g.,
VanEck Order, 86 FR at 64547; WisdomTree Order, 86 FR at 69330;
Kryptoin Order, 86 FR at 74175-76; SkyBridge Order, 87 FR at 3875-
76; Wise Origin Order, 87 FR at 5534-35; Global X Order, 87 FR at
14919; Grayscale Order, 87 FR at 40312.
---------------------------------------------------------------------------

    In addition, the econometric evidence in the record for the
proposal does not support the conclusion that an interrelationship
exists between the CME bitcoin futures market and the spot bitcoin
market such that it is reasonably likely that a person attempting to
manipulate the proposed ETP would also have to trade on the CME bitcoin
futures market.\137\ The Exchange and the Sponsor, as they have done
previously, rely on the findings of one section of the Hu, Hou & Oxley
paper; \138\ however, they do not address issues that the Commission
has previously raised, including in the WisdomTree Order, with respect
to this paper.\139\ As the Commission explained in the WisdomTree
Order, the findings of this paper's Granger causality analysis, which
is widely used to formally test for lead-lag relationships, are
concededly mixed.\140\
---------------------------------------------------------------------------

    \137\ See also USBT Order, 85 FR at 12611; WisdomTree Order, 86
FR at 69330-31; Wise Origin Order, 87 FR at 5535; NYDIG Order, 87 FR
at 14938; Global X Order, 87 FR at 14920; ARK 21Shares, 87 FR at
20024; Bitwise Order, 87 FR at 40288-89; Grayscale Order, 87 FR at
40312-13.
    \138\ See supra note 130.
    \139\ See, e.g., WisdomTree Order, 86 FR at 69331 (discussing
that the paper's use of daily price data, as opposed to intraday
prices may not be able to distinguish which market incorporates new
information faster; and discussing that the paper found inconclusive
evidence that futures prices lead spot bitcoin prices--in
particular, that the months at the end of the paper's sample period
showed, using Granger causality methodology, that the spot market
was the leading market--and that the record did not include evidence
to explain why this would not indicate a shift towards prices in the
spot market leading the futures market that would be expected to
persist into the future). See also USBT Order, 85 FR at 12613 n.244.
    \140\ 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
130. See also WisdomTree Order, 86 FR at 69331.

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

    Moreover, while the Exchange highlights data and analyses submitted
to the Commission in connection with the Wise Origin Order and the ARK
21Shares Order to support the premise that the CME bitcoin futures
market leads the spot bitcoin market,\141\ the Commission disapproved
the proposals related to these submissions, and the Commission raised
issues with respect to these submissions--including with the data and
analyses therein--that the Exchange does not address.\142\
---------------------------------------------------------------------------

    \141\ See supra note 130 and accompanying text.
    \142\ See, e.g., Wise Origin Order, 87 FR at 5534-36, 5539-40;
ARK 21Shares Order, 87 FR at 20023-24.
---------------------------------------------------------------------------

    The Exchange does not provide results of its own lead-lag analysis
or provide any additional evidence of an interrelationship between the
CME bitcoin futures market, which is the regulated market, and spot
bitcoin platforms, which are the markets on which the assets held by
the proposed ETP would trade. As discussed in previous disapprovals,
including the WisdomTree Order, analyses regarding whether the CME
bitcoin futures market leads the spot market remain inconclusive.\143\
Thus, as in previous disapprovals, because the lead-lag analysis
regarding whether the CME bitcoin futures market leads the spot market
is ``central'' to understanding the first prong, the Commission
determines that the evidence in the record is inadequate to conclude
that an interrelationship exists between the CME bitcoin futures market
and the spot bitcoin market such that it is reasonably likely that a
person attempting to manipulate the proposed ETP would have to trade on
the CME bitcoin futures market to successfully manipulate the proposed
ETP.
---------------------------------------------------------------------------

    \143\ As the academic literature and listing exchanges' analyses
pertaining to the pricing relationship between the CME bitcoin
futures market and spot bitcoin market have developed, the
Commission has critically reviewed those materials. See Grayscale
Order, 87 FR at 40311-13; Bitwise Order, 87 FR at 40286-89; ARK
21Shares Order, 87 FR at 20024; Global X Order, 87 FR at 14920; Wise
Origin Order, 87 FR at 5535-36, 5539-40; Kryptoin Order, 86 FR at
74176; WisdomTree Order, 86 FR at 69330-32; VanEck Order, 86 FR at
64547-48; USBT Order, 85 FR at 12613.
---------------------------------------------------------------------------

    The Exchange also makes additional assertions \144\ that are
conclusory and presuppose that the CME bitcoin futures market is a
``predominant influence'' on the spot bitcoin market. For example, the
Exchange's assertion that ``a potential manipulator of the Shares would
. . . have to transact in the CME [b]itcoin [f]utures market because
the Reference Rate is based on spot prices'' \145\ presupposes that
``CME [b]itcoin [f]utures act as a predominant influence on the price
in the spot market'' \146\ and assumes a link between the Reference
Rate and the Shares that, as discussed above,\147\ the Exchange has not
established. Likewise, the Exchange states that the Trust's in-kind
create/redeem process supports the conclusion that a would-be
manipulator would have to trade on the CME bitcoin futures market to
successfully manipulate the proposed ETP because the ``CME [b]itcoin
[f]utures market appears to be a predominant influence'' on the spot
bitcoin market.\148\ However, as discussed already, the evidence in the
record is inadequate to conclude that CME bitcoin futures prices lead
spot bitcoin prices, let alone the premise that the CME bitcoin futures
market has a ``predominant influence'' on the spot bitcoin market.
---------------------------------------------------------------------------

    \144\ See supra notes 131-132.
    \145\ Notice, 87 FR at 8328, 8333.
    \146\ Notice, 87 FR at 8333.
    \147\ See supra notes 106-109 and accompanying text.
    \148\ Notice, 87 FR at 8328 (``the Trust only allows for in-kind
creation and redemption, which . . . reduces the potential for
manipulation of the Shares through manipulation of the Reference
Rate or any of its individual constituents, again emphasizing that a
potential manipulator of the Shares would have to manipulate the
entirety of the bitcoin spot market, of which the CME [b]itcoin
[f]utures market appears to be a predominant influence'').
---------------------------------------------------------------------------

    The Commission thus concludes that the information that BZX
provides is not sufficient to support a determination that it is
reasonably likely that a would-be manipulator of the proposed ETP would
have to trade on the CME bitcoin futures market to successfully
manipulate the proposed ETP. Therefore, the information in the record
also does not establish that the CME bitcoin futures market is a
``market of significant size'' related to the assets to be held by the
proposed ETP.
(ii) Whether It is Unlikely That Trading in the Proposed ETP Would Be
the Predominant Influence on Prices in the CME Bitcoin Futures Market
    The second prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' related to spot
bitcoin is the determination that it is unlikely that trading in the
proposed ETP would be the predominant influence on prices in the CME
bitcoin futures market.\149\
---------------------------------------------------------------------------

    \149\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at
12596-97.
---------------------------------------------------------------------------

(a) BZX's Assertions
    BZX asserts that ``trading in the Shares would not be the
predominant force on prices in the CME [b]itcoin [f]utures market (or
spot market) for a number of reasons, including the significant volume
in the CME [b]itcoin [f]utures market, the size of bitcoin's market
cap, and the significant liquidity available in the spot market.''
\150\ Moreover, BZX asserts that ``the Shares should trade close to NAV
given that market participants would arbitrage any significant price
deviations between the price of the Shares and prices in the spot
market.'' \151\
---------------------------------------------------------------------------

    \150\ Notice, 87 FR at 8328, 8333.
    \151\ Id.
---------------------------------------------------------------------------

    In addition to the CME bitcoin futures market data points cited
above, BZX represents that ``the spot market for bitcoin is also very
liquid.'' \152\ According to the Exchange, based on data from February
2021, the cost to buy or sell $5 million worth of bitcoin averages
roughly 10 basis points with a market impact of 30 basis points.\153\
According to the Exchange, based on the same data, the cost to buy or
sell a $10 million market order of bitcoin ``is roughly 20 basis points
with a market impact of 50 basis points.'' \154\ According to the
Exchange ``[s]tated 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%.'' \155\ As such, BZX concludes that ``the combination of
CME [b]itcoin [f]utures acting as a predominant influence on 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 CME [b]itcoin [f]utures markets.'' \156\
---------------------------------------------------------------------------

    \152\ Id.
    \153\ These statistics are sourced from CoinRoutes from February
2021 and 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. See Notice, 87 FR at 8328-29 nn.74-
75.
    \154\ Notice, 87 FR at 8328.
    \155\ Id.
    \156\ Id. In addition, the Exchange states that the largest
bitcoin futures ETF represents 3,803 contracts of the total 9,625
contracts of open interest in December CME bitcoin futures as of
December 2, 2021, (roughly 40% of open interest) and that this
directly contradicts the previously articulated standards by the
Commission in the disapproval orders issued for spot bitcoin ETPs
related to whether the trading in the ETP would be the predominant
influence on prices in that market. See id. at 8324. The Commission
disagrees. The proposed rule change does not relate to the same
underlying holdings as such ETFs, which provide exposure to bitcoin
through CME bitcoin futures. The Commission considers the proposed
rule change on its own merits and under the standards applicable to
it. Namely, with respect to this proposed rule change, the
Commission must apply the standards as provided by Section 6(b)(5)
of the Exchange Act, which it has applied in connection with its
orders considering previous proposals to list bitcoin-based
commodity trusts and bitcoin-based trust issued receipts. See supra
note 11 and accompanying text. See also infra Section III.B.3.

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

(b) Analysis
    The Commission does not agree with BZX's assertions, which are
substantially the same assertions that BZX made, and the Commission
discussed, in the WisdomTree Order. Now, as then, the record does not
demonstrate that it is unlikely that trading in the proposed ETP would
be the predominant influence on prices in the CME bitcoin futures
market. As the Commission has already addressed and rejected one of the
bases of BZX's assertion--that CME bitcoin futures lead price discovery
\157\--the Commission will only address below the other two bases: the
overall size of, and the impact of buys and sells on, the bitcoin
market.
---------------------------------------------------------------------------

    \157\ See supra Section III.B.2.i.b.
---------------------------------------------------------------------------

    BZX's assertions about the potential effect of trading in the
Shares on the CME bitcoin futures market and spot bitcoin market are
general and conclusory, citing to the aforementioned trade volume of
the CME bitcoin futures market and the size and liquidity of the spot
bitcoin market, as well as the market impact of a single transaction in
spot bitcoin, without any analysis or evidence to support these
assertions. For example, there is no limit on the amount of mined
bitcoin that the Trust may hold. Yet BZX does not provide any
information on the expected growth in the size of the Trust and the
resultant increase in the amount of bitcoin held by the Trust over
time, or on the overall expected number, size, and frequency of
creations and redemptions--or how any of the foregoing could (if at
all) influence prices in the CME bitcoin futures market. Thus, the
Commission cannot conclude, based on BZX's statements alone and absent
any evidence or analysis in support of BZX's assertions, that it is
unlikely that trading in the ETP would be the predominant influence on
prices in the CME bitcoin futures market.\158\
---------------------------------------------------------------------------

    \158\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86
FR at 69332-33; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87
FR at 3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87
FR at 20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    The Commission also is not persuaded by BZX's assertions about the
minimal effect a market order to buy or sell bitcoin would have on the
bitcoin market.\159\ While BZX concludes by way of an example of a $10
million market order that buying or selling large amounts of bitcoin
would have insignificant market impact, the conclusion does not analyze
the extent of any impact on the CME bitcoin futures market or the CME
bitcoin futures market's prices. Accordingly, such statistics, without
more, are not relevant to the Commission's consideration of whether
trading in the ETP would be the predominant influence on prices in the
CME bitcoin futures market.
---------------------------------------------------------------------------

    \159\ See Notice, 87 FR at 8328 (``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%.'').
---------------------------------------------------------------------------

    To the extent 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, the Exchange has not adequately explained why a
single market order in spot bitcoin is an appropriate proxy for trading
in the Shares. As stated above, the second prong in establishing
whether the CME bitcoin futures market constitutes a ``market of
significant size'' is the determination that it is unlikely that
trading in the proposed ETP would be the predominant influence on
prices in the CME bitcoin futures market. While authorized participants
of the Trust might transact in the spot bitcoin market as part of their
creation or redemption of Shares, the Shares themselves would be traded
in the secondary market on BZX. Furthermore, the record does not
discuss the expected number or trading volume of the Shares, or
establish the potential effect of the Shares' trade prices on CME
bitcoin futures prices. For example, BZX does not provide any data or
analysis about the potential effect the quotations or trade prices of
the Shares might have on market-maker quotations in CME bitcoin futures
contracts and whether those effects would constitute a predominant
influence on the prices of those futures contracts.\160\
---------------------------------------------------------------------------

    \160\ See VanEck Order, 86 FR at 64549; WisdomTree Order, 86 FR
at 69333; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87 FR at
3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87 FR at
20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    Moreover, although BZX asserts that ``the Shares should trade close
to NAV given that market participants would arbitrage any significant
price deviations between the price of the Shares and prices in the spot
market,'' \161\ the Exchange does not provide any additional data or
analysis to support such an assertion; \162\ nor does the Exchange show
that the arbitrage that may exist between the Shares and prices in the
spot bitcoin markets demonstrates that the Shares would not be the
predominant force on prices in the CME bitcoin futures market.
---------------------------------------------------------------------------

    \161\ Notice, 87 FR at 8328.
    \162\ See also supra notes 106-109 and accompanying text.
---------------------------------------------------------------------------

    Thus, the Commission cannot conclude, based on the assertions in
the filing and absent sufficient evidence or analysis in support of
these assertions, that it is unlikely that trading in the proposed ETP
would be the predominant influence on prices in the CME bitcoin futures
market.
    Therefore, because BZX has not provided sufficient information to
establish both prongs of the ``market of significant size''
determination, the Commission cannot conclude that the CME bitcoin
futures market is a ``market of significant size'' related to spot
bitcoin such that BZX would be able to rely on a surveillance-sharing
agreement with the CME to provide sufficient protection against
fraudulent and manipulative acts and practices.
(3) Assertions That the Proposed Spot Bitcoin ETP Is Comparable to
Bitcoin Futures-Based ETFs
(i) BZX's Assertions
    BZX asserts that, after allowing the listing and trading of bitcoin
futures ETFs that hold primarily CME bitcoin futures, disapproving spot
bitcoin ETPs ``seems . . . arbitrary and capricious.'' \163\ BZX
asserts that, if the CME bitcoin futures market were not, in the
opinion of the Commission, a regulated market of significant size,
permitting bitcoin futures ETFs that trade on such market ``would seem
to be inconsistent with the requirement under the [Exchange] Act of
being designed to `prevent fraudulent and manipulative acts and
practices.' '' \164\ BZX argues that this is particularly true for the
Trust, which would use the Reference Rate as its price source to
calculate its daily NAV, ``with inputs from the same bitcoin trading
platforms. . . and materially the same methodology as is used to price
CME [b]itcoin [f]utures.'' \165\ According to BZX, the Constituent
Bitcoin Platforms' pricing inputs and methodology (except for the
calculation time) are the same ``with respect to the Trust and CME
bitcoin futures.'' \166\ BZX asserts that any

objective review of the proposals to list spot bitcoin ETPs compared to
the already listed and traded bitcoin futures ETFs would lead to the
conclusion that spot bitcoin ETPs should be available to U.S. investors
\167\ because ``any concerns related to preventing fraudulent and
manipulative acts and practices related to [s]pot [b]itcoin ETPs would
apply equally to the spot markets underlying the futures contracts held
by a [CME] [b]itcoin [f]utures ETF.'' \168\
---------------------------------------------------------------------------

    \163\ Notice, 87 FR at 8325.
    \164\ Id. at 8323; 15 U.S.C. 78f(b)(5).
    \165\ Notice, 87 FR at 8323 (emphasis in the original).
    \166\ Id.
    \167\ See Notice, 87 FR at 8324.
    \168\ Id. at 8325.
---------------------------------------------------------------------------

    Further, as discussed in more detail below,\169\ while the Trust is
not an investment company registered under the 1940 Act,\170\ according
to BZX, ``the Sponsor has taken 1940 Act considerations into account in
structuring the Trust's operations in seeking `to protect investors and
the public interest.' '' \171\ According to BZX, ``the Sponsor has
structured the Trust's operations to operate as if certain 1940 Act
provisions apply, providing transparency and investor protections such
that a distinction between [bitcoin futures] ETFs and [spot bitcoin]
ETPs is unwarranted.'' \172\
---------------------------------------------------------------------------

    \169\ See Section III.C, infra.
    \170\ See id. at 8329 (according to the Registration Statement,
``the Trust is neither an investment company registered under the
[1940 Act], as amended, nor a commodity pool for purposes of the
Commodity Exchange Act . . . , and neither the Trust nor the Sponsor
is subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.'').
    \171\ Id. at 8323. See also supra note 41 and accompanying text
(summarizing the 1940 Act considerations taken into account by the
Sponsor in structuring the Trust's operations).
    \172\ Id.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission disagrees with these assertions and conclusions. The
proposed rule change does not relate to the same underlying holdings as
ETFs regulated under the 1940 Act that provide exposure to bitcoin
through CME bitcoin futures, or CME bitcoin futures-based ETPs that
have registered their offerings under the Securities Act but are not
regulated under the 1940 Act. The Commission considers the proposed
rule change on its own merits and under the standards applicable to it.
Namely, with respect to this proposed rule change, the Commission must
apply the standards as provided by Section 6(b)(5) of the Exchange Act,
which it has applied in connection with its orders considering previous
proposals to list bitcoin-based commodity trusts and bitcoin-based
trust issued receipts.\173\
---------------------------------------------------------------------------

    \173\ See supra note 11 and accompanying text.
---------------------------------------------------------------------------

    In focusing on whether ``concerns related to preventing fraudulent
and manipulative acts and practices related to [s]pot [b]itcoin ETPs
would apply equally to the spot markets underlying the futures
contracts held by a [CME] [b]itcoin [f]utures ETF,'' \174\ the Exchange
mischaracterizes the framework that the Commission has articulated in
the Winklevoss Order. As stated in the Winklevoss Order, the Commission
is not applying a ``cannot be manipulated''approach--either on the CME
bitcoin futures market or the spot bitcoin markets. Rather, as the
Commission has repeatedly emphasized, and also summarized above, the
Commission is examining whether the proposal meets the requirements of
the Exchange Act and, pursuant to its Rules of Practice, is placing the
burden on BZX to demonstrate the validity of its contention that other
means to prevent fraudulent and manipulative acts and practices are
sufficient to justify dispensing with the detection and deterrence of
fraud and manipulation provided by a comprehensive surveillance-sharing
agreement with a regulated market of significant size related to spot
bitcoin,\175\ or to establish that it has entered into such a
surveillance-sharing agreement.
---------------------------------------------------------------------------

    \174\ See Notice, 87 FR at 8325.
    \175\ See supra notes 42-45 and accompanying text.
---------------------------------------------------------------------------

    Consistent with this approach, the Commission's consideration (and
thus far, disapproval) of proposals to list and trade spot bitcoin ETPs
does not focus on an assessment of the overall risk of fraud and
manipulation in the spot bitcoin or futures markets, or on the extent
to which such risks are similar.\176\ Rather, the Commission's focus
has been consistently on whether the listing exchange has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to the underlying bitcoin assets of the ETP
under consideration, so that it would have the necessary ability to
detect and deter manipulative activity. For reasons articulated in the
orders approving proposals to list and trade CME bitcoin futures-based
ETPs (i.e., the Teucrium Order and the Valkyrie XBTO Order), the
Commission found that in each such case the listing exchange has
entered into such a surveillance-sharing agreement.\177\ Applying the
same framework to this proposed spot bitcoin ETP, however, as discussed
and explained above, the Commission finds that BZX has not.
---------------------------------------------------------------------------

    \176\ The Commission's past general discussion on the risk of
fraud and manipulation in the spot bitcoin or futures markets is
only in response to arguments raised by the proposing listing
exchanges (or commenters) that mitigating factors against fraud and
manipulation in the spot bitcoin or futures markets should compel
the Commission to dispense with the detection and deterrence of
fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size
related to the underlying bitcoin assets. See, e.g., Winklevoss
Order, 83 FR at 37580, 37582-91 (addressing assertions that
``bitcoin and [spot] bitcoin markets,'' generally, as well as one
bitcoin trading platform, specifically, have unique resistance to
fraud and manipulation). See also USBT Order, 85 FR at 12597, 12599-
12608. But even in such instance, the central issue is about the
necessity of such a surveillance-sharing agreement, not the overall
risk of fraud and manipulation in the spot bitcoin or futures
markets, or the extent to which such risks are similar.
    \177\ See Teucrium Order, 87 FR at 21678-81; Valkyrie XBTO
Order, 87 FR at 28850-53.
---------------------------------------------------------------------------

    Moreover, for the CME bitcoin futures ETPs under consideration in
the Teucrium Order and the Valkyrie XBTO Order, the proposed
``significant'' regulated market (i.e., the CME) with which the listing
exchange has a surveillance-sharing agreement is the same market on
which the underlying bitcoin assets (i.e., CME bitcoin futures
contracts) trade. As explained in those Orders, the CME's surveillance
can reasonably be relied upon to capture the effects on the CME bitcoin
futures market caused by a person attempting to manipulate the CME
bitcoin futures ETP by manipulating the price of CME bitcoin futures
contracts, whether that attempt is made by directly trading on the CME
bitcoin futures market or indirectly by trading outside of the CME
bitcoin futures market.\178\ Regarding the approved Teucrium Bitcoin
Futures Fund in the Teucrium Order (``Fund''), for example, when the
CME shares its surveillance information with the listing exchange, the
information would assist in detecting and deterring fraudulent or
manipulative misconduct related to the non-cash assets held by the
Fund.\179\ Accordingly, the Commission explains in the Teucrium Order
and the Valkyrie XBTO Order that it is unnecessary for a listing
exchange to establish a reasonable likelihood that a would-be
manipulator would have to trade on the CME itself to manipulate a
proposed ETP whose only non-cash holdings would be CME bitcoin futures
contracts.\180\
---------------------------------------------------------------------------

    \178\ See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order,
87 FR at 28851.
    \179\ See Teucrium Order, 87 FR at 21679.
    \180\ See id.
---------------------------------------------------------------------------

    However, as the Commission also states in those Orders, this
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets
are not currently ``regulated.'' \181\ If an exchange seeking

to list a spot bitcoin ETP relies on the CME as the regulated market
with which it has a comprehensive surveillance-sharing agreement, the
assets held by the spot bitcoin ETP would not be traded on the CME.
Because of this significant difference, with respect to a spot bitcoin