may be recorded. Furthermore, a BSTX Participant must obtain this
wallet address within five business days after the Exchange approves
its application.\190\ The Exchange states that the process of obtaining
a wallet address will generally occur contemporaneously with the
application to become a BSTX Participant, but states that if a BSTX
Participant is unable to obtain a wallet address within the five day
period, the BSTX Participant's end-of-day Security ownership balances
would be attributed to the omnibus wallet address until the BSTX
Participant obtains a wallet address.\191\ The Exchange proposes not to
require a BSTX Participant to have a separate wallet address for each
Security issuance that it trades, because multiple Security issuances
can be attributed to a BSTX Participant's wallet address.\192\ The
Exchange states that the requirement for BSTX Participants to obtain a
wallet address is not discriminatory because all BSTX Participants must
do so, and the Exchange will not propose to charge a fee for obtaining
a wallet address.\193\ Finally, the Exchange states that once the
Exchange assigns a BSTX Participant a wallet address, the only further
obligation of the BSTX Participant is to report its end-of-day Security
ownership balances to BSTX.\194\
---------------------------------------------------------------------------

    \189\ See OIP, supra note 7, 85 FR at 51256-57. According to the
Exchange, an allowlisted wallet address is a permissioned wallet
address associated with a market participant to which end-of-day
Security ownership balances may be recorded. See id.
    \190\ See proposed BSTX Rule 17020(a).
    \191\ See OIP, supra note 7, 85 FR at 51257. The Exchange likens
the requirement for BSTX Participants to obtain a wallet address to
that of other exchanges requiring a market participant identifier
(MPID), because it is establishing an identifier that can be
attributed to a particular BSTX Participant for reporting
requirements. See id.
    \192\ See OIP, supra note 7, 85 FR at 51257, n.59. In the
context of SR-BOX-2019-19, in response to a commenter's question
about whether the a BSTX Participant could use multiple wallets,
(see supra note 94), the Exchange stated that, pursuant to proposed
BSTX Rule 17020, BSTX Participants would be required to contact the
Exchange as part of the allowlisting process, and the Exchange
intends to discuss related operational issues with BSTX Participants
as appropriate (see supra note 107 and accompanying text).
    \193\ See OIP, supra note 7, 85 FR at 51257.
    \194\ See id.
---------------------------------------------------------------------------

    In the proposal, the Exchange describes the process for BSTX
Participants reporting end-of-day Security ownership balances. The
Exchange proposes to require each BSTX Participant, either directly or
through its carrying firm, to report each business day to BSTX, in a
manner and form acceptable to BSTX, the total number of Securities for
each class of Security credited to either the BSTX Participant's DTC
account or the BSTX Participant by its carrying firm.\195\ The Exchange
states that it would require BSTX Participants to provide the end-of-
day Security ownership balance report to the Exchange each business day
when DTC is open for business after such time as DTC has completed its
end-of-day settlement process.\196\ The Exchange represents that DTC
typically makes end-of-day security position reports available to
participants at approximately 7:30 p.m. Eastern time, and that it would
notify BSTX Participants, via Regulatory Circular, of

the time after 7:30 p.m. Eastern time by which they must report end-of-
day Security ownership balances to BSTX.\197\ Furthermore, the Exchange
represents that it would notify BSTX Participants of the precise manner
in which Securities should be reported via a Regulatory Circular.\198\
The Exchange states that, in general, the report would simply require
certain identifying information regarding the BSTX Participant (e.g.,
name, carrying firm, MPID) and a list of the end-of-day Security
ownership balances of the BSTX Participant.\199\ Furthermore, the
Exchange states that BSTX Participants would be subject to potential
disciplinary action for failing to comply with the requirement to
report their end-of-day Security ownership balances.\200\
---------------------------------------------------------------------------

    \195\ See OIP, supra note 7, 85 FR at 51258. For BSTX
Participants that are participants at DTC, the report to BSTX would
consist of the total number of Securities for each class of Security
that is credited to each DTC account of the BSTX Participant, and
for those that are not participants at DTC, the report would consist
of the total number of Securities that are credited to the BSTX
Participant by its carrying firm. See id.
    \196\ See OIP, supra note 7, 85 FR at 51259. See also proposed
BSTX Rule 17020(c).
    \197\ See OIP, supra note 7, 85 FR at 51259. See also proposed
BSTX Rule 17020(c).
    \198\ See OIP, supra note 7, 85 FR at 51261.
    \199\ See id. The Exchange likens the requirement of BSTX
Participants to report end-of-day Security ownership balances to
BSTX to other exchanges' ability to request that members or
participants furnish to the exchange records pertaining to
transactions executed on or through the exchange in a time and
manner required by such exchange. See id.
    \200\ See OIP, supra note 7, 85 FR at 51262, n.95.
---------------------------------------------------------------------------

    Once BSTX Participants have reported their end-of-day Security
ownership balances to BSTX, BSTX would provide this information to the
Wallet Manager (or Wallet Managers) to update the Ethereum blockchain
with Security ownership balances.\201\ Pursuant to proposed BSTX Rule
17020(d), the updates to the Ethereum blockchain would reflect updates
in Security ownership balances in Token form.\202\ The Exchange also
represents that it would notify BSTX Participants via Regulatory
Circular of the time by which BSTX would need to provide Security
ownership balance information to the Wallet Manager so that the Wallet
Manager would have sufficient time to update the Ethereum blockchain
prior to the commencement of trading on BSTX the next trading day.\203\
According to the Exchange, the result of the end-of-day Security
ownership balance reporting requirement would be that the Ethereum
blockchain, for each Security, would reflect the end-of-day ownership
balance associated with each BSTX Participant's wallet address.\204\
Furthermore, the Exchange states that the end-of-day Security balance
reporting by BSTX Participants would ``reflect a relatively more robust
use of the functionality of the smart contracts,'' than just the use of
the omnibus wallet, and that ``[p]romoting this more robust use of the
functionality of the smart contracts and their ability to allocate and
re-allocate Security balances across multiple wallet addresses will
enhance the ability of market participants, including the Exchange, to
observe and evaluate the capabilities of blockchain technology as an
ancillary recordkeeping mechanism.'' \205\
---------------------------------------------------------------------------

    \201\ See OIP, supra note 7, 85 FR at 51258-59. See also
proposed BSTX Rule 17020(d).
    \202\ See proposed BSTX Rule 17020(d).
    \203\ See OIP, supra note 7, 85 FR at 51259.
    \204\ See OIP, supra note 7, 85 FR at 51261. As described in
more detail above, the Exchange also states that as part of the end-
of-day reporting process, the Exchange would provide information to
the Wallet Manager(s) which would allow the Wallet Manager(s) to
allocate Tokens (which represent Securities) among BSTX Participants
consistent with their end-of-day Security balance reports, and to
attribute the unreported Security balance for a given Security to an
omnibus wallet address for each Security. See OIP, supra note 7, 85
FR at 51259. See also supra Sections III.B and III.C.1.
    \205\ OIP, supra note 7, 85 FR at 51261.
---------------------------------------------------------------------------

    The Exchange asserts that imposing the end-of-day Security
ownership balance reporting requirement on BSTX Participants would not
be unfairly discriminatory or burden competition because all market
participants would be free to choose whether or not to become a BSTX
Participant.\206\ The Exchange states that market participants that
voluntarily choose to become BSTX Participants must comply with the
rules of the Exchange, but remain free to become a member of another
national securities exchange that supports trading of BSTX-listed
Securities or to purchase BSTX-listed Securities OTC.\207\
---------------------------------------------------------------------------

    \206\ See OIP, supra note 7, 85 FR at 51262, n.94.
    \207\ See id. The Exchange also asserts that the end-of-day
Security ownership balance reporting process would not impose a
substantial burden on BSTX Participants, because it would not
require them to expend significant resources or time. See id. See
also Letter from Lisa J. Fall, President, BOX Exchange LLC
(September 17, 2020) (``BSTX Response Letter III''), at 5.
---------------------------------------------------------------------------

    In its notice of the proposal, the Exchange states that it
currently functions as an exchange only for standardized options, and
that equity securities would represent a new asset class for the
Exchange.\208\ According to the Exchange, in connection with the
operation of BSTX, the Exchange would leverage many of the regulatory
structures that it established to operate a national securities
exchange in compliance with Section 6 of the Exchange Act.\209\ The
Exchange states that it will perform Security listing regulation,
authorize BSTX Participants to trade on the BSTX System, and conduct
surveillance of Security trading on the BSTX System.\210\ In addition,
the Exchange states that it will oversee the onboarding and application
process for BSTX Participants and compliance by issuers of Securities
with the applicable initial and continued listing requirements,
including those pertaining to compliance with the BSTX Protocol.\211\
As discussed in more detail above, the Exchange also proposes to
address the potential for inaccurate reporting by BSTX Participants
with proposed BSTX Rule 17020(e), which, among other things, provides
that the Exchange may request additional information regarding
applicable reports and balances from any BSTX Participant if the
Exchange has reason to believe that reported Security balances may be
inaccurate.\212\
---------------------------------------------------------------------------

    \208\ See OIP, supra note 7, 85 FR at 51252. The Exchange also
states that while BSTX may eventually support a wider variety of
securities, subject to Commission approval, at the time that BSTX
commences operations it would only support trading in Securities
that are equity securities. See id.
    \209\ See OIP, supra note 7, 85 FR at 51286. The Exchange states
that it will extend its Regulatory Services Agreement with FINRA to
cover BSTX Participants and trading on the BSTX System, and this
Regulatory Services Agreement will govern many aspects of the
regulation and discipline of BSTX Participants, similar to how it
functions for options regulation. See id. The Exchange also states
that, as is the case with the Exchange's options trading platform,
the Exchange will supervise FINRA and continue to bear ultimate
regulatory responsibility for BSTX. See id. The Exchange further
states that it plans to join the Plan for the Allocation of
Regulatory Responsibilities Regarding Regulation NMS and may choose
to join certain Rule 17d-2 agreements such as the agreement
allocating responsibility for insider trading rules. See id.
    \210\ See OIP, supra note 7, 85 FR at 51286. The Exchange states
that it will perform automated surveillance of trading on BSTX for
the purpose of maintaining a fair and orderly market at all times
and monitor BSTX to identify unusual trading patterns and determine
whether particular trading activity requires further regulatory
investigation by FINRA. See id. at 51286-87. The Exchange also
states that it will oversee the process for determining and
implementing trade halts, identifying and responding to unusual
market conductions, and administering the process for identifying
and remediating ``clearly erroneous trades.'' See id. at 51287.
    \211\ See OIP, supra note 7, 85 FR at 51287.
    \212\ See supra notes 116-126 and accompanying text. See also
OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule 17020(e).
---------------------------------------------------------------------------

    With respect to the end-of-day reporting requirements, in the
context of SR-BOX-2019-19, one commenter raised a concern that BSTX
might place additional reporting requirements on market
participants.\213\ Another commenter questioned how a BSTX Participant
would obtain an allowlisted address, how the permissioning would be
determined for the allowlisted wallet, and who would control this
permissioning.\214\ This commenter also asked how allowlisting would be
maintained for the entire life-cycle of a

Security and for the life-cycle of participant accounts.\215\
---------------------------------------------------------------------------

    \213\ See PKA Law Letter, supra note 175, at 1.
    \214\ See SIFMA Letter II, supra note 110, at 5.
    \215\ See SIFMA Letter II, supra note 110, at 5.
---------------------------------------------------------------------------

    The Exchange responds that it would be the only source for
obtaining wallet addresses and that the Exchange would be responsible
for permissioning wallet addresses.\216\ According to the Exchange, a
BSTX Participant would not have the ability to move Tokens to or from
its wallet address or otherwise ``control'' the wallet address, and the
process of reallocating Token balances among different wallet addresses
would be a function performed by the Exchange in coordination with a
Wallet Manager.\217\ The Exchange states that the use of the blockchain
technology would be ``almost entirely passive'' for the BSTX
Participants, excluding the obtaining of a wallet address and the end-
of-day reporting of ownership balances.\218\ Lastly, the Exchange
responds that the Exchange would be responsible for maintenance of
allowlisting for the entire life-cycle of the allowlisted wallet
address and that an unlimited number of wallet addresses may be
established for a Security and could be removed as necessary.\219\
---------------------------------------------------------------------------

    \216\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also
BSTX Response Letter II, supra note 105, at 5.
    \217\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also
BSTX Response Letter II, supra note 105, at 5.
    \218\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also
BSTX Response Letter II, supra note 105, at 5.
    \219\ See OIP, supra note 7, 85 FR at 51256-57, n.58. See also
BSTX Response Letter II, supra note 105, at 5.
---------------------------------------------------------------------------

    A commenter asserted, in the context of SR-BOX-2019-19, that the
proposed rule change did not explore in sufficient detail the costs or
other impacts to firms associated with adopting systems to accommodate
the infrastructure needed to manage the Securities' distributed ledger
technology, including allowlisted wallet addresses and associated
recordkeeping.\220\ This commenter stated that although the Exchange
suggests that firms could avoid these impacts by not becoming BSTX
Participants, that would not be the case if the Securities start
trading on other exchanges pursuant to UTP.\221\ This commenter further
stated that, in that scenario, firms would likely need to implement
systems and other infrastructure to be able to submit reports of end-
of-day Security ownership balances to the Exchange, assuming they
determine that they need to become BSTX Participants.\222\ In the
context of SR-BOX-2020-14, this commenter noted its prior comment that
if exchanges were to adopt different forms of distributed ledger
technology to track ownership of equity securities, that could cause
additional costs to market participants.\223\
---------------------------------------------------------------------------

    \220\ See SIFMA Letter II, supra note 110, at 3. In the context
of SR-BOX-2020-14, this commenter stated that it continues to
believe that the Proposal contains novel aspects related to the
current recordkeeping processes for equity securities that are
potentially inconsistent with the Exchange Act, and that it
continues to have some concerns about the proposal's ``ancillary''
recordkeeping requirements. See Letter from Ellen Greene, Managing
Director, Equities & Options Market Structure, & Thomas F. Price,
Managing Director, Operations, Technology, Cyber & BCP, Securities
Industry and Financial Markets Association (September 10, 2020)
(``SIFMA Letter IV''), at 3. This commenter also noted its
previously stated concerns, citing its comments in the context of
SR-BOX-2019-19. See id. at 4.
    \221\ See SIFMA Letter II, supra note 110, at 3.
    \222\ See SIFMA Letter II, supra note 110, at 3.
    \223\ See SIFMA Letter IV, supra note 220, at 4 (citing SIFMA
Letter III).
---------------------------------------------------------------------------

    Also in the context of SR-BOX-2020-14, this commenter noted that
certain firms, by virtue of their business (such as order
consolidation), may need to become BSTX Participants.\224\ This
commenter also stated that as a result of the Order Protection Rule
under Regulation NMS,\225\ trading centers such as OTC market makers
and firms that internalize order flow may need to become BSTX
Participants to satisfy their firms' policies and procedures reasonably
designed to prevent trade-throughs. This commenter stated that firms in
these lines of business would take on additional burdens if subject to
the end-of-day Security ownership balance reporting obligations or
potentially be subject to regulatory exposure from BSTX if they err in
reporting end-of-day ownership balances.\226\ This commenter stated
that although the Exchange asserts, in response to its concerns, that
the end-of-day Security ownership balance reporting obligations are no
different than other reporting obligations imposed on firms, such as
the large options positions reporting requirements adopted by the
options exchanges and FINRA that obligate firms to report large options
positions at the end of the day to the exchanges and FINRA, the end-of-
day Security ownership balance reporting obligation is not related to
any regulatory objectives.\227\
---------------------------------------------------------------------------

    \224\ See SIFMA Letter IV, supra note 220, at 4-5. This
commenter stated that, for example, order consolidators for other
firms may need to become BSTX Participants if customers of those
other firms trade BSTX-listed Securities. See SIFMA Letter IV, supra
note 220, at 5.
    \225\ Rule 611 of Regulation NMS under the Exchange Act is also
known as the ``Order Protection Rule'' or ``Trade-through Rule,''
and requires a trading center to implement policies and procedures
that are reasonably designed to prevent trade-throughs on that
trading center of protected quotations in NMS stocks that do not
fall within one of certain specified exceptions. See 17 CFR 242.611.
    \226\ See SIFMA Letter IV, supra note 220, at 5. This commenter
also stated that it is unclear from the Proposal whether a firm that
is a member of other exchanges and is also a BSTX Participant would
be subject to the end-of-day Security ownership balance reporting
obligation in connection with effecting or clearing trades in
Securities that are trading on other exchanges pursuant to UTP. See
id.
    \227\ See id. This commenter stated that it has concerns when
new processes and technology with wider implications for the equity
market infrastructure are considered in the framework of a proposed
rule change by a single exchange. See SIFMA Letter IV, supra note
220, at 5-6.
---------------------------------------------------------------------------

    The Exchange states that, to the extent any market participant does
not want to perform the end-of-day Security ownership reporting
obligations, it could avoid these obligations by choosing not to become
a BSTX Participant.\228\ The Exchange also states that a BSTX
Participant would only need to obtain a wallet address from the
Exchange and comply with the end-of-day Security ownership balance
reporting requirement.\229\ According to the Exchange, the proposal
would not require BSTX Participants to make a technological investment
related to the use of distributed ledger technology,\230\ and the
Exchange does not propose any fees associated with the end-of-day
Security ownership balance recordkeeping process.\231\ In the context
of SR-BOX-2019-19, the Exchange stated, however, that BSTX Participants
would likely need to include in their policies and procedures a process
for complying with the end-of-day Security ownership balance reporting
requirement to promote compliance with the proposed BSTX rules.\232\
---------------------------------------------------------------------------

    \228\ See OIP, supra note 7, 85 FR at 51263.
    \229\ See OIP, supra note 7, 85 FR at 51263, n.106.
Additionally, with respect to the ability of market participants to
trade Securities OTC, the Exchange states its belief that the
additional requirements of acquiring a wallet address and end-of-day
Security balance reporting impose only a minimal burden on BSTX
Participants and should not have any material or undue burden or
impact on competition between BSTX Participants and non-BSTX
Participants. See OIP, supra note 7, 85 FR at 51289. In response to
comments in the context of SR-BOX-2019-19, the Exchange also stated
that the end-of-day Security ownership balance reporting process
would impose only a ``minimal'' reporting burden on BSTX
Participants that would be similar to other reporting obligations
currently required by SROs, such as large options position
reporting. See BSTX Response Letter II, supra note 105, at 3. See
also OIP, supra note 7, 85 FR at 51288 (analogizing the end-of-day
reporting requirement to reporting of end-of-day large options
position reporting); and infra note 347 (discussing the purpose of
large options position reporting).
    \230\ See OIP, supra note 7, 85 FR at 51263, n.105.
    \231\ See OIP, supra note 7, 85 FR at 51287.
    \232\ See BSTX Response Letter II, supra note 105, at 3, n.13.
---------------------------------------------------------------------------

    The Exchange also responded that no market participant would be
forced to

become a BSTX Participant as a result of the proposal, including if
operating as a carrying firm or order consolidator; that the only
potential circumstance in which a firm would be required to execute a
trade in a Security on BSTX would be to comply with the Order
Protection Rule, if the firm wanted to trade through on an away market
a protected quotation on BSTX; and that even then the firm could choose
to execute the trade through a BSTX Participant instead of becoming a
BSTX Participant.\233\ The Exchange further responded that the Exchange
has addressed in the Proposal the issue of whether a market participant
that trades Securities on multiple exchanges would be subject to the
end-of-day Security ownership balance reporting obligation in
connection with effecting or clearing trades in Securities that are
trading on another exchange, and that a BSTX Participant would be
required to report its end-of-day balance in Securities at DTC (or at
its carrying firm) in the relevant Security pursuant to proposed BSTX
Rule 17020(b).\234\ In addition, the Exchange responded that it
disagrees with a commenter's assertion that the end-of-day Security
ownership balance reporting obligation is not related to any regulatory
objective, citing its assertion in the proposal that the requirement
will allow market participants to observe and increase their
familiarity with the capabilities and potential benefits of blockchain
technology in a context that advances and protects the public's
interest.\235\
---------------------------------------------------------------------------

    \233\ See BSTX Response Letter III, supra note 207, at 2-3. The
Exchange stated that a routing broker that chooses to become a BSTX
Participant would be acting on an agency basis and would not have an
end-of-day balance in Securities arising from this function, and
that accordingly, reporting a zero end-of-day balance to the
Exchange would not be burdensome. See id.
    \234\ See id.
    \235\ See BSTX Response Letter III, supra note 207, at 4. See
also infra notes 330-331 and accompanying text.
---------------------------------------------------------------------------

    Additionally, the Exchange responded that it maintains its views
expressed in the Proposal, including that the Exchange does not believe
that imposing the end-of-day Security ownership balance reporting
requirements on BSTX Participants is unfairly discriminatory or burdens
competition, and that the end-of-day Security ownership balance
reporting process would not impose a substantial burden on BSTX
Participants.\236\ While the Exchange stated that it recognizes a
commenter's assertion that the Proposal may require market participants
that wish to become BSTX Participants to bear certain costs, the
Exchange contends that it is incorrect that the costs related to the
end-of-day Security ownership balance reporting obligation will be
significant.\237\ The Exchange also stated that the Proposal is not
inconsistent with the Exchange Act, ``simply because market
participants might not want to take on the additional operational
processes and minimal costs associated with'' the end-of-day Security
ownership balance reporting obligation.\238\
---------------------------------------------------------------------------

    \236\ See BSTX Response Letter III, supra note 207, at 5-6. See
also supra note 206.
    \237\ See BSTX Response Letter III, supra note 207, at 6.
    \238\ Id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission concludes that the Exchange's proposed rules
concerning the process for obtaining an allowlisted wallet address and
reporting end-of-day Security ownership balances does not contain
sufficient detail about how BSTX Participants must satisfy their
obligations. The Commission also does not believe that the Exchange has
addressed commenters' concerns regarding the costs or other burdens
that would be imposed on market participants as a result of the end-of-
day Security ownership balance reporting process.
    The Exchange does not provide support for its assertion that BSTX
Participants would not need to expend significant resources or time on
the end-of-day Security ownership balance reporting process.\239\ The
Exchange concedes that market participants will have to bear costs from
the Proposal, and then characterizes those costs as ``minimal,'' \240\
but the Commission finds no support for that characterization. The
Exchange acknowledges that BSTX Participants may need to add to their
policies and procedures a process to comply with the end-of-day
Security ownership balance reporting requirement,\241\ but does not
discuss the potential outlines of that process. The Exchange states
that BSTX Participants would not need to make a technological
investment related to the distributed ledger technology,\242\ but does
not discuss whether BSTX Participants would need to update their
systems to facilitate the reporting of end-of-day Security ownership
balances.\243\ The Exchange states that a commenter's assertion that
market participants might not want to take on the additional
operational processes and minimal costs associated with the end-of-day
Security ownership balance reporting obligation does not make the
proposal inconsistent with the Exchange Act.\244\ But the Exchange has
not clarified what those processes and costs may be and why, in light
of the additional burden, the proposed end-of-day Security ownership
reporting obligations are consistent with the Exchange Act.\245\ Also,
pursuant to proposed BSTX Rule 17020(e), a BSTX Participant would be
required to send a corrected end-of-day Security balance report to the
Exchange upon the BSTX Participant's discovery that it submitted an
inaccurate end-of-day report that has not already been corrected or
superseded.\246\ Yet the Exchange does not explain whether BSTX
Participants would be obligated to monitor the end-of-day Security
ownership balances on the blockchain associated with their assigned
wallet addresses and whether the Exchange would provide any process by
which BSTX Participants could contest or rectify discrepancies between
their reported end-of-day Security ownership balances and the balances
attributed to their addresses as observable on the blockchain.
---------------------------------------------------------------------------

    \239\ See supra note 207.
    \240\ Id.
    \241\ See supra note 232 and accompanying text.
    \242\ See supra note 230 and accompanying text.
    \243\ See supra note 222 and accompanying text (commenter
stating that firms would likely need to implement systems and other
infrastructure to be able to submit reports of end-of-day Security
ownership balances to the Exchange).
    \244\ See supra note 238 and accompanying text.
    \245\ The Exchange asserts that market participants can decide
voluntarily whether to become a BSTX Participant (see supra notes
206-207 and accompanying text), and although the Exchange recognizes
that a firm may need to execute a trade on BSTX to comply with the
Order Protection Rule if BSTX is the protected quote, it further
states that the firm could choose to execute the trade through a
BSTX Participant instead of becoming a BSTX Participant. See supra
note 233 and accompanying text. And a firm could also choose not to
execute a trade that would trade through a protected quote on BSTX.
However, the Exchange does not examine whether there may be
additional factors for broker-dealer firms, including compliance
with best-execution requirements, that might influence whether a
broker-dealer firm decides to become a BSTX Participant. Also, as
one commenter recognized, whether BSTX-listed Securities traded on
other national securities exchanges pursuant to UTP may influence
whether a broker-dealer firm would need to become a BSTX
Participant. See supra notes 224-225 and accompanying text.
    \246\ See supra note 116 and accompanying text (discussing
proposed BSTX Rule 17020(e)).
---------------------------------------------------------------------------

    The Exchange asserts that the end-of-day Security balance reporting
by BSTX Participants and recording to the Ethereum blockchain will
allow market participants to observe and increase their familiarity
with the capabilities and potential benefits of blockchain technology
in a context that advances and protects the public's interest,\247\ but
the fact that the information on the blockchain will not be accurate
undercuts the benefit. Moreover, the

Exchange asserts that the balance information that will be publicly
observable on the Ethereum blockchain would not be useful to inform a
market participant's trading in Securities.\248\ BOX does not explain
how knowingly recording and disseminating to the public inaccurate
information regarding BSTX Securities ownership on the blockchain is
consistent with the purposes of the Exchange Act, or even with BOX's
stated purposes of the proposed rule change.\249\
---------------------------------------------------------------------------

    \247\ See supra note 235 and accompanying text.
    \248\ See supra note 115 and accompanying text.
    \249\ See supra Section III.B.
---------------------------------------------------------------------------

    The Exchange also does not propose a standard for how the Exchange
will determine what to include and remove from the omnibus account,
beyond stating that the omnibus account will comprise the unreported
Security balance for a given Security.\250\ While the Exchange states
that the Security ownership balance that it would allocate to the
omnibus account would account for instances in which a BSTX Participant
fails to report its end-of-day Security ownership balance or
inaccurately reports such balance, and for the positions of Security
holders that are not BSTX Participants,\251\ the Exchange has not
described how it will determine when a BSTX Participant's report is
late or inaccurate, other than stating that it will provide additional
information about the time, after 7:30 p.m. Eastern time, by which
reports are due.
---------------------------------------------------------------------------

    \250\ See supra note 135. Pursuant to proposed BSTX Rule
17020(d), the Exchange would determine any difference between the
Security position balance(s) reported to BSTX regarding a Security
and the number of shares outstanding for the Security, and provide
that information to the Wallet Manager(s) for allocation to an
omnibus wallet address for the Security. See proposed BSTX Rule
17020(d).
    \251\ See supra notes 56-57 and accompanying text. As described
above, BSTX Participants would report their Security ownership
balances at the end of each trading day and the Wallet Manager would
reallocate Tokens (representing Securities) as needed to reflect the
reported balances, without regard to whether these transfers
correspond with actual transactions. See supra Section III.C.1.
Therefore, if a BSTX Participant fails to report its end-of-day
Security ownership balance or inaccurately reports such balance, and
the Exchange allocates Securities owned by such BSTX Participant to
the omnibus account, or if a BSTX Participant that previously failed
to report or inaccurately reported subsequently reports its end-of-
day Security ownership balance, the Wallet Manager's reallocation of
Tokens to reflect reported balances may not include a transfer
between the wallet addresses associated with that BSTX Participant
and the omnibus account.
---------------------------------------------------------------------------

    The Exchange also acknowledges that it is possible that, due to
inaccurate reporting, the total of the Security ownership balances
reported to BSTX could exceed the number of Securities actually
issued,\252\ but does not explain, given that it is not possible to
over-allocate Token balances on the blockchain, how the Exchange would
then determine how to allocate balances to wallet addresses.\253\ For
example, the Exchange does not address whether, in the case of over-
reporting by BSTX Participants, it might assign a negative balance to
the omnibus wallet address or take some other action. And the proposal
does not indicate whether, if the BSTX Participants' wallet addresses
account for the full balance of the Securities, the wallet address
associated with the omnibus account would appear on the Ethereum
blockchain with a balance of zero or the wallet address for the omnibus
account would be omitted. This lack of information about how the
Exchange will carry out its functions with respect to determining the
Security balance to be associated with the omnibus account for a
particular Security would impede the Commission from being able to
carry out its obligations to ensure that the Exchange is complying with
its own rules.
---------------------------------------------------------------------------

    \252\ See supra note 69 and accompanying text.
    \253\ The Commission notes that, while in the case of over-
reporting by BSTX Participants in a particular Security, the
Exchange would have the ability to use its discretion, pursuant to
proposed BSTX Rule 17020(f), to suspend the requirements regarding
reporting of end-of-day Security balances for that Security, the
Exchange has not indicated that it would necessarily do so in such
circumstances. See supra note 104 and accompanying text; infra
Section III.C.3. See also BSTX Response Letter I, supra note 82, at
11.
---------------------------------------------------------------------------

    Further, the Commission concludes that the record does not
demonstrate that the Exchange's proposed use of surveillance will
enable the Exchange to carry out its necessary functions or enforce
BSTX Participants' compliance with its rules. Specifically, while the
Exchange states that it will extend its Regulatory Services Agreement
with FINRA to BSTX Participants and trading in the BSTX Market,\254\
the record does not demonstrate how the Exchange will perform
surveillance regarding and enforce the unique obligations that it would
impose on BSTX Participants to obtain an allowlisted wallet address and
report end-of-day-Security ownership balances, including whether or how
it would surveil for or reconcile inaccurate reporting of these end-of-
day Security ownership balances.\255\ For example, as discussed above,
in response to commenters' concerns regarding surveillance and
enforcement of the end-of day-reporting requirement to ensure that BSTX
Participants accurately report their Security ownership balances,\256\
as well as how differences in reporting between the records maintained
by the Exchange, DTC, and NSCC and the end-of-day Security ownership
balances would be reconciled,\257\ the Exchange stated that it could
use its general authority under BSTX rules to request from a BSTX
Participant records related to its business, which could include the
reports provided by DTC to the BSTX Participant that the BSTX
Participant used to report end-of-day Security ownership balance
information to the Exchange.\258\ As the Commission stated above, the
record does not, however, demonstrate how the Exchange will perform
surveillance for BSTX Participant compliance, particularly with respect
to the end-of-day Security ownership balance reporting requirement,
such as whether it would request such records from BSTX Participants on
a routine basis or use alternative means to determine whether a BSTX
Participant has accurately reported its end-of-day Security ownership
balances, and how it might surveil for and correct against late
reporting by BSTX Participants.\259\
---------------------------------------------------------------------------

    \254\ See supra note 209.
    \255\ See supra Section III.B for additional discussion about
whether or how the Exchange would surveil the end-of-day Security
ownership balance reporting.
    \256\ See supra notes 121-122 and accompanying text.
    \257\ See supra notes 123-124 and accompanying text.
    \258\ See supra notes 125-126 and accompanying text. Pursuant to
proposed BSTX Rule 17020(e), the Exchange may also request
additional information regarding the applicable reports and balances
from any BSTX Participant, if the Exchange has reason to believe
that Security balances reported by one or more BSTX Participants may
be inaccurate. See supra note 117 and accompanying text.
    \259\ See supra Section III.B.2.
---------------------------------------------------------------------------

    For these reasons, the Exchange has not provided sufficient
information for the Commission to be able to find that the Exchange's
rules would facilitate transactions in securities, remove impediments
to a free and open market and national market system, or protect
investors and the public interest, in accordance with Section 6(b)(5)
of the Exchange Act. In the absence of information about, among other
things, when and how a BSTX participant must obtain an allowlisted
wallet address and the associated costs, as well as the time and manner
by which a BSTX Participant must submit end-of-day Security balances to
BSTX and the costs to comply with the reporting obligation, the
Commission cannot evaluate whether imposing a burden on BSTX
Participants to obtain an allowlisted wallet address and report end-of-
day Security balance information to BSTX is reasonable in light of the
intended purpose for recording end-of-day balances on the Ethereum
blockchain. Particularly given that BSTX

Participants would be subject to disciplinary action if they fail to
comply with either obligation, the Commission is not able to find that
the obligations to obtain a wallet address and to report end-of-day
Security balances are consistent with the requirements of Exchange Act
Section 6(b)(5), and, in particular, the requirement that the rules of
a national securities exchange be designed to remove impediments to and
perfect the mechanism of a free and open market and a national market
system.
    Also, due to the lack of information discussed above regarding,
among other things, anticipated timeframe regarding when BSTX must
provide the reported information to the Wallet Manager, the way in
which balances are allocated to the omnibus account, and the Exchange's
infrastructure to surveil and enforce compliance by BSTX Participants
to accurately report end-of-day Security ownership balances, the
Commission cannot assess whether the Exchange would be able to carry
out its responsibilities and enforce compliance by BSTX Participants
with their obligations. Therefore, the Commission is not able to find
that the Exchange would be able to carry out its necessary functions or
fulfill its obligations as an SRO to comply with its own rules,
pursuant to Section 6(b)(1) of the Exchange Act.
Suspension of Allowlisting and End-of-Day Reporting Requirements
(a) Exchange's Representations
    The Exchange states that, in addition to controls and mechanisms
for ensuring the accuracy of reported records,\260\ the Exchange may
need to implement further measures in situations where the ability to
update blockchain records may be affected by ``exogenous factors,'' for
example a disruption to the website through which ownership balances
may be observed (i.e., Etherscan.io), to the Ethereum blockchain itself
that prevents the updating of end-of-day balances, or to the
architecture or functioning of a particular Security.\261\ To account
for these situations, the Exchange proposes that the Exchange would, in
its discretion, be able to suspend the allowlisting and end-of-day
reporting requirements regarding any BSTX Participant and/or regarding
one or more Securities.\262\ The Exchange also proposes that in the
case of such a suspension, the Exchange would be required to provide
prompt notice, including the reasons for the suspension, to BSTX
Participants, and must also notify the Commission within two
hours.\263\ The Exchange proposes that the suspension may not continue
for more than thirty days unless the Exchange submits a proposed rule
change to the Commission seeking approval of the suspension, in which
case the suspension may continue until the Commission approves or
disapproves the proposed rule change.\264\ The Exchange states its
belief that the proposal to allow for suspension of the allowlisting
and end-of-day reporting requirements may foster coordination with
persons processing information with respect to Securities and is not
designed to permit unfair discrimination, because it will allow the
Exchange to suspend certain rule requirements in events where there may
be difficulty coordinating or sharing pertinent information with BSTX
Participants or Wallet Managers.\265\ The Exchange also states that its
proposed suspension provision is designed to apply to all market
participants equally, and to provide notice to affected participants
and regulators of BSTX, in order to allow such individuals and entities
to coordinate with the Exchange and react to potential issues as deemed
necessary.\266\
---------------------------------------------------------------------------

    \260\ See supra notes 116-120 and accompanying text.
    \261\ See OIP, supra note 7, 85 FR at 51260 and n.81.
    \262\ See proposed BSTX Rule 17020(f). The Exchange states that
suspension of the ancillary recordkeeping process would not impact
trading in a Security and that trading and clearance and settlement
of Securities can operate entirely independently from the
``ancillary'' recordkeeping process. See OIP, supra note 7, 85 FR at
51258, n.67.
    \263\ See id.
    \264\ See id.
    \265\ See OIP, supra note 7, 85 FR at 51260, n.86.
    \266\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission concludes that the Exchange's proposal, which would
give the Exchange discretion to suspend the requirements for obtaining
an allowlisted wallet address or the end-of-day reporting requirements,
is insufficient to support a finding that the Exchange's proposed rules
are consistent with the Exchange Act, and with Section 6(b)(5) in
particular. The Exchange failed to propose in its suspension provision
a standard for the Exchange to suspend the allowlisting and end-of-day
ownership reporting requirements. Under the proposal, the Exchange
appears to retain complete discretion to suspend the allowlisting and
end-of-day ownership balance reporting requirements as to some BSTX
Participants or Securities but not others. The Exchange also appears to
have discretion to suspend its own reporting of information to Wallet
Managers to in turn update the Ethereum blockchain. Absent a standard
for determining the suspension of allowlisting and end-of-day ownership
reporting that would mitigate against the Exchange differently treating
BSTX Participants or classes of Securities, the Commission has concerns
about the potential for unfair discrimination among brokers-dealers,
and also among issuers.
    While the Exchange states that the proposed suspension provision is
designed to apply to all market participants equally, and has listed
several examples of when it may be appropriate to suspend the
allowlisting or end-of-day ownership balance reporting requirements,
the proposal does not provide any specificity regarding when the
Exchange would be required to suspend these requirements or any
conditions that must be met to warrant suspension.\267\ Furthermore,
while the Exchange states that it will provide prompt notice to market
participants in the case of a suspension, the proposal does not
describe who at BSTX is empowered to make the decision to suspend or
the standard that would be applied when deciding whether to suspend.
Specific information regarding the extent of the Exchange's discretion
and standards that it would apply in determining when to suspend the
allowlisting and end-of-day ownership balance reporting requirements is
necessary for the Commission to assess whether the Exchange's rules are
not designed to permit unfair discrimination between issuers and
between brokers or dealers,

consistent with the requirements of Section 6(b)(5).
---------------------------------------------------------------------------

    \267\ For example, while the Exchange states that it may use its
suspension authority in the case of over-reporting of end-of-day
Security ownership balances, it does not state, and the proposed
rule does not require, that it would necessarily do so. See supra
note 253. The Exchange also does not explain how it would mitigate
any potential conflicts of interest that may impact its
discretionary use of its suspension authority with respect to an
Affiliate Security. The Exchange would define ``Affiliate Security''
as ``any security or Security issued by an Exchange Affiliate or any
Exchange-listed option on any such security.'' See proposed BSTX
Rule 26140(a)(2). The Exchange would define ``Exchange Affiliate''
as ``the Exchange and any entity that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or
is under common control with the Exchange, where `control' means
that the one entity possesses, directly or indirectly, voting
control of the other entity either through ownership of capital
stock or equity securities or through majority representation on the
board of directors or other managements body of such entity.'' See
proposed BSTX Rule 26140(a)(1). The Exchange would define
``Exchange'' to mean ``BOX Exchange LLC and its facilities.'' See
proposed BSTX Rule 17000(a)(20).
---------------------------------------------------------------------------

    Due to the proposal's failure to explain how the Exchange's broad
discretion to suspend requirements related to end-of-day reporting,
which is the cornerstone of the Security as an NMS stock, is consistent
with the Exchange Act, the Commission cannot find that the Exchange's
rules are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers, as required by Section 6(b)(5)
of the Exchange Act.\268\ Further, due to the lack of information
regarding how the Exchange will determine whether to suspend the
requirements for allowlisting and end-of-day reporting, the Commission
is not able to find that the Exchange would be able to carry out its
necessary functions, in accordance with Section 6(b)(1) of the Exchange
Act.
---------------------------------------------------------------------------

    \268\ Additionally, the Exchange has not addressed how it would
mitigate any potential conflicts of interest that could arise if
Affiliate Securities were listed and traded on BSTX or if a broker-
dealer affiliate of BSTX or the Exchange were to trade Securities as
a BSTX Participant or otherwise, which could impact the Exchange's
determination to use its suspension authority.
---------------------------------------------------------------------------

4. Listed Companies
    The proposal contains proposed rules concerning the listing of
Securities, and the Exchange states that its proposed listing rules are
substantially similar to the listing rules of another national
securities exchange, with certain additions or modifications to the
rules that are specific to the Exchange's market.\269\ The Commission
considers the proposed lack of fungibility between BSTX-listed
Securities and other classes of securities of the same issuer, and
concludes that the Exchange has not sufficiently addressed the
potential implications on the trading of these securities and how these
securities would trade in a manner consistent with the Exchange Act. In
addition, the Commission considers the Exchange's proposed rules
requiring that a Security comply and continue to comply with the BSTX
Protocol, and concludes that the record does not demonstrate how the
Exchange will apply these provisions in a manner that is consistent
with the Exchange Act.\270\
---------------------------------------------------------------------------

    \269\ See OIP, supra note 7, 85 FR at 51277 (citing Parts 1-12
of the NYSE American LLC Company Guide).
    \270\ The Commission's conclusions that the Exchange has not
demonstrated that its proposal is consistent with the Exchange Act
focus on these two specific aspects of the Exchange's proposed
listing rules. The Commission does not reach a conclusion about
whether other aspects of the Exchange's proposed listing rules are
consistent with the Exchange Act.
---------------------------------------------------------------------------

(a) Fungibility of BSTX-Listed Securities
Exchange's Representations and Comments Received
    The Exchange states that potential issuers on BSTX could include
(1) new issuers that do not currently have any class of securities
registered on a national securities exchange; and (2) issuers who
currently have securities registered on another national securities
exchange, and who are seeking registration of a separate class of
equity securities for listing on BSTX.\271\ The Exchange also states
that BSTX does not intend for Securities listed on BSTX to be fungible
with any other class of securities from the same issuer.\272\
---------------------------------------------------------------------------

    \271\ See OIP, supra note 7, 85 FR at 51253.
    \272\ See OIP, supra note 7, 85 FR at 51253.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, one commenter questioned why a
class of BSTX-listed Securities would not be fungible with any other
class of securities from the same issuer.\273\ This commenter also
questioned what implications a lack of fungibility would have for the
overall equity market infrastructure.\274\ In response, the Exchange
stated that Securities would not be fungible with another class of
securities of the same issuer, because no class of an issuer's
securities would be fungible with a separate class of its securities,
and that it was not proposing any changes to the existing framework for
different classes of securities.\275\ The Exchange gave as an example
that two classes of shares of the same issuer, each of which have
different ticker symbols, different rights (such as different voting
rights), and different dividend rates, would not, according to the
Exchange, be fungible with one another.\276\
---------------------------------------------------------------------------

    \273\ See SIFMA Letter II, supra note 110, at 5.
    \274\ See SIFMA Letter II, supra note 110, at 5.
    \275\ See OIP, supra note 7, 85 FR at 51253, n.34. See also BSTX
Response Letter II, supra note 105, at 4.
    \276\ See BSTX Response Letter II, supra note 105, at 4, n.22.
---------------------------------------------------------------------------

(b) Analysis
    The Exchange asserts that its proposed use of blockchain technology
to record and disseminate end-of-day Security ownership balances would
operate separately from the existing market infrastructure and would
not have an impact on the trading, clearing, or settlement of BSTX-
listed Securities.\277\ For the Commission to make a finding that the
rules of the Exchange are designed to, among other things, prevent
fraudulent and manipulative practices, it is important for the Exchange
to comprehensively analyze the potential relationship between a
Security listed on BSTX and another class of securities from the same
issuer that is listed on another national securities exchange. The
Exchange asserts that, while issuers who have a class of securities
listed on another national securities exchange may issue a separate
class of securities to list on BSTX, the Securities listed on BSTX
would not be fungible with any other class of securities from the same
issuer.\278\ However, the proposal does not address whether BSTX would
require that there be any differences in the rights and obligations
associated with two classes of securities from the same issuer, only
one of which is a Security listed on BSTX, other than that the BSTX-
listed Security would have to have associated smart contracts that are
compliant with the BSTX Protocol and adhere to the associated
obligations relating to allowlisting and end-of-day reporting, which
according to the Exchange would not impact trading, clearing or
settling of BSTX-listed Securities.
---------------------------------------------------------------------------

    \277\ See infra note 339 and accompanying text. For a discussion
of other trading centers' ability to trade BSTX-listed Securities,
see infra Section III.D.
    \278\ See supra notes 271-272, 275-276, and accompanying text.
---------------------------------------------------------------------------

    Moreover, as discussed above, the Exchange would be able to suspend
the allowlisting and end-of-day reporting requirements for Securities
listed on BSTX without an articulated standard in its rules.\279\ The
Exchange does not address the possibility that, if the Exchange
suspended these requirements with respect to a particular BSTX-listed
Security, there might not be any difference in the rights and
obligations associated with two classes of securities, or whether this
lack of different characteristics would impact the fungibility of the
classes. The Exchange also does not explain whether there might be
possibilities for arbitrage between the two classes of securities of
same issuer, if, due to a suspension of the allowlisting and end-of-day
reporting requirements for the particular BSTX-listed Security, there
are no remaining differences between the rights and obligations of the
two classes of securities. Further, the Exchange does not explain
whether a lack of remaining differences between the two classes of
securities would impact trading in the securities. For example, in the
instance the Exchange suspends allowlisting, which could occur at any
time and for any reason as proposed under the Exchange's rules, the
Exchange does not explain whether it anticipates the two classes of
securities would trade at the

same or different prices and why there might be a discrepancy in
prices. The lack of clarity about differences between multiple classes
of securities of the same issuer, particularly where only one is a
Security with an associated Token representation and that Token
representation for a Security is suspended by the Exchange, and how
this may impact the fungibility of the classes or how they trade,
prevents the Commission from determining whether the relationship
between the classes might create the potential for fraudulent or
manipulative trading practices. Due to the Exchange's failure to
explain whether or how its proposed use of blockchain technology to
record and disseminate end-of-day Security ownership balances could
impact trading of the BSTX-listed Securities, the Commission cannot
find that the Exchange's rules would prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, remove impediments to a free and open market and national
market system, or protect investors and the public interest, in
accordance with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \279\ See supra Section III.C.3 for discussion about the
Exchange's ability to suspend the allowlisting and end-of-day
reporting requirements.
---------------------------------------------------------------------------

(b) Compliance With BSTX Protocol
(1) Exchange's Representations
    Proposed BSTX Rule 26230 would provide listing requirements
relating to the architecture of a Security's associated smart contract
that an issuer must satisfy to list and remain listed on the Exchange.
The Exchange states that all listed companies' Securities must comply
with the BSTX Protocol to ensure that all Securities are governed by
the same set of specifications and controls that allow for their
ownership to be recorded on the Ethereum blockchain using Tokens as an
``ancillary'' recordkeeping mechanism.\280\ Prior to approving a
Security for trading on the Exchange, the Exchange would conduct an
audit of the Security's smart contract architecture to ensure
compliance with the BSTX Protocol.\281\ The Exchange states that the
purpose of this initial listing requirement is to ensure that the
design and structure of a prospective BSTX-listed company's Security
smart contract is compatible with the BSTX Protocol, for purposes of
facilitating updates to the blockchain as an ancillary recordkeeping
mechanism.\282\ The Exchange states that it may use third party service
providers that have demonstrated sufficient technical expertise in
blockchain technology and an understanding of the BSTX Protocol to
conduct this audit on behalf of the Exchange.\283\
---------------------------------------------------------------------------

    \280\ See OIP, supra note 7, 85 FR at 51256. See also proposed
BSTX Rule 26138.
    \281\ See proposed BSTX Rule 26230(a). In addition, an applicant
that was denied initial listing pursuant to this section would be
able to appeal the decision via the process outlined in the proposed
BSTX Rule 27200 Series. See id.
    \282\ See OIP, supra note 7, 85 FR at 51278.
    \283\ See OIP, supra note 7, 85 FR at 51278. The Exchange states
that it expects that some issuers may choose to use an outside
vendor to help build their Security smart contract in a manner that
complies with the BSTX Protocol, and that it understands that there
are numerous technology companies that offer this service. See id.
at 51278, n.300.
---------------------------------------------------------------------------

    After being listed on the Exchange, as a continued listing
requirement, a BSTX-listed company would remain responsible for
ensuring that its Security smart contract remains compatible with the
BSTX Protocol and accurately reflects the number of shares
outstanding.\284\ The Exchange states that it recognizes that there may
be circumstances in which it becomes necessary to modify certain
aspects of the smart contract corresponding to the Security.\285\ The
Exchange adds that, for example, in the case of a stock split, a BSTX-
listed company may need to increase the total supply of Securities as
programmed into its Security smart contract.\286\ Under the proposal,
the BSTX-listed company would be required to provide notice to the
Exchange at least five days prior to implementing any modification that
it would make to a smart contract corresponding to a Security (e.g., to
increase the total supply), to allow the Exchange to audit the proposed
modification.\287\ If additional time is needed to implement the
modification, the Exchange would be able to exercise its authority to
suspend the ancillary recordkeeping process relating to that Security
pursuant to proposed BSTX Rule 17020(f).\288\
---------------------------------------------------------------------------

    \284\ See proposed BSTX Rule 26230(b).
    \285\ See OIP, supra note 7, 85 FR at 51278.
    \286\ See OIP, supra note 7, 85 FR at 51278.
    \287\ See proposed BSTX Rule 26230(b).
    \288\ See proposed BSTX Rule 26230(b). See supra Section III.C.3
for a discussion of suspension of the end-of-day ownership balance
reporting requirement.
---------------------------------------------------------------------------

    The Exchange asserts that the primary circumstances under which a
modification to a smart contract corresponding to a Security may be
necessary would be where there is a change to the total supply of the
Security, which could occur in the case of a stock split, a reverse
stock split, a buy-back, or a dividend in kind.\289\ The Exchange
states that any delay in the implementation of a change to a smart
contract that corresponds to a Security would not impact the record
date or ex-dividend date for any dividend, distribution, or other
action.\290\ According to the Exchange, it believes that proposed BSTX
Rule 26230 facilitates end-of-day Security ownership balance reporting
for BSTX-listed Securities, and that this reporting is a first step
towards the potential integration of blockchain technology to
securities transactions.\291\ The Exchange states that, without
ensuring that BSTX-listed companies' Securities are compatible with the
BSTX Protocol, the use of blockchain technology as an ancillary
recordkeeping mechanism could be impaired.\292\
---------------------------------------------------------------------------

    \289\ See OIP, supra note 7, 85 FR at 51278.
    \290\ See OIP, supra note 7, 85 FR at 51278-79.
    \291\ See OIP, supra note 7, 85 FR at 51279.
    \292\ See OIP, supra note 7, 85 FR at 51279.
---------------------------------------------------------------------------

(2) Analysis
    The record fails to explain clearly how the Exchange will implement
its proposed continued listing requirement that smart contracts
associated with BSTX-listed Securities must remain in compliance with
the BSTX Protocol. The proposal contemplates circumstances in which the
smart contracts associated with Securities would need to be changed due
to corporate actions by the BSTX-listed company that would change the
outstanding number of Securities.\293\ However, the record does not
contain any discussion about the impact on a BSTX-listed company's
obligations under circumstances in which the Exchange initiates changes
to the BSTX Protocol. In such circumstances, proposed BSTX Rule
26230(b) would require an issuer to make changes to the smart contract
associated with its Security so that its Security remains compliant
with the BSTX Protocol.\294\ Yet the proposal does not contain any
discussion about what policies and procedures the Exchange would use to
evaluate the ability of BSTX-listed companies to respond to changes in
the BSTX Protocol initiated by the Exchange or resulting from changes
to the Ethereum blockchain itself and to ensure that the BSTX-listed
company's Securities continue to meet this continued listing
requirement under BSTX's proposed rules. The lack of procedures
increases the risk of the Exchange unfairly discriminating between
issuers.
---------------------------------------------------------------------------

    \293\ See supra notes 284-287, 289, and accompanying text.
    \294\ See supra note 284 and accompanying text.
---------------------------------------------------------------------------

    In particular, the proposal does not address whether any
protections would be in place to ensure that the BSTX-

listed company has adequate notice of changes to the BSTX Protocol and
has the technical capability to make any changes necessary to its
Security smart contract to maintain its Security in compliance with the
BSTX Protocol. Although a BSTX-listed company may hire an external
vendor prior to initial listing to help it build its smart
contracts,\295\ assessing capabilities to comply with the BSTX Protocol
prior to listing, when an issuer can decide whether to undertake the
work necessary to ensure that its smart contracts comply with the BSTX
Protocol, presents different concerns than what is needed to make
changes to maintain compliance with the BSTX Protocol after listing,
when the failure to comply can lead to the delisting of a listed and
actively-traded security. In addition, it is unclear how a fork in the
Ethereum blockchain might impact the BSTX Protocol and the steps
necessary for a BSTX-listed company to maintain compliance. Moreover,
the proposed rule provision concerning the Exchange's audit of the
architecture of a Security's associated smart contract prior to listing
states explicitly that an applicant denied listing pursuant to that
provision would be able to appeal that decision via the process
outlined in the proposed BSTX Rule 27200 Series,\296\ but the proposal
does not set forth procedures for appeal of a decision by the Exchange
that a Security has fallen outside of compliance with the BSTX
Protocol. To the extent that the general procedures in the proposed
BSTX Rule 27000 Series (Suspension and Delisting) would apply, the
Exchange has not demonstrated that these procedures are adequate for
technical determinations about compliance with the BSTX Protocol.
---------------------------------------------------------------------------

    \295\ See supra note 283.
    \296\ See supra note 281.
---------------------------------------------------------------------------

    For the Commission to conclude that the proposal is not designed
to, among other things, impose continued listing requirements on
issuers in an arbitrary manner or permit unfair discrimination between
issuers, it is important for the Exchange to provide sufficient
explanation about how the Exchange will implement its continued listing
requirement that a BSTX-listed Security remain compliant with the BSTX
Protocol, and how issuers will be able to ensure that their listed
Securities remain compliant. Due to the lack of such information, the
Commission is unable to find that the proposal is designed to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and is not designed to permit unfair
discrimination between issuers, as required under Section 6(b)(5) of
the Exchange Act.

D. Whether BOX Has Sufficiently Explained the Burden the Proposal Would
Place on Other National Securities Exchanges' Ability To Trade BSTX-
Listed Securities and Met its Burden To Demonstrate That the Proposal
Is Consistent With Section 6(b)(8) of the Exchange Act

    The Commission examines below whether the Exchange has met its
burden to demonstrate that its rules do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act, as required by Section 6(b)(8) of the Exchange
Act. As discussed further below, the Exchange has not sufficiently
explained the burden that the proposal would place on national
securities exchanges to provide end-of-day reporting of Security
ownership balances for their members. Moreover, the Exchange has not
adequately addressed the potential burden on competition that would
result from the Exchange's control over the end-of-day reporting
process or the burden on other national securities exchanges that seek
to either participate in the end-of-day reporting process of the
Exchange or develop their own. Accordingly, the Commission does not
have sufficient information to assess whether the burden on competition
imposed by the proposed end-of-day reporting functionality is necessary
or appropriate in furtherance of the Exchange Act, in accordance with
Section 6(b)(8) of the Exchange Act.
1. Exchange's Representations and Comments Received
    The Exchange states that the end-of-day Security ownership balance
reporting by BSTX Participants and the public dissemination of the end-
of-day Security ownership balances on the blockchain does not impact
the ability of Securities to trade on other national securities
exchanges or OTC.\297\ The Exchange states that Securities would be
eligible for trading on other national security exchanges that extend
UTP to them, and therefore Securities would be able to trade on other
national securities exchanges and OTC in the same manner as other NMS
stocks.\298\ Specifically, the Exchange states that because Securities
would trade, clear, and settle in the same manner as other NMS stock,
other national securities exchanges could extend UTP to BSTX-listed
Securities that are NMS stock in accordance with Commission rules.\299\
Additionally, the Exchange states that a national securities exchange
that chooses to extend UTP to Securities could trade them without any
end-of-day or blockchain reporting structure.\300\ Furthermore, the
Exchange states that, with regard to other national securities
exchanges extending UTP to Securities, the Exchange does not believe
that the proposed BSTX Rules would impose a burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Exchange Act.\301\
---------------------------------------------------------------------------

    \297\ See OIP, supra note 7, 85 FR at 51262.
    \298\ See OIP, supra note 7, 85 FR at 51262.
    \299\ See OIP, supra note 7, 85 FR at 51289.
    \300\ See OIP, supra note 7, 85 FR at 51263.
    \301\ See OIP, supra note 7, 85 FR at 51289. See infra notes
328-331 and accompanying text (discussing the Exchange's assertions
concerning the benefits of the proposal).
---------------------------------------------------------------------------

    The Exchange states that there are many ways another national
securities exchange could adopt its own end-of-day Security ownership
balance reporting requirement. The Exchange also states that it cannot
predict whether another exchange would want to adopt its own reporting
requirement, and if it did, what model it would choose, and how or
whether that model would interact with the Exchange's end-of-day
Security ownership reporting structure.\302\ Further, the Exchange
states that it is not proposing any limitation that would prevent
another national securities exchange from participating in the
Exchange's end-of-day Security ownership balance reporting process or
establishing its own alternative or complementary process, and that it
is not proposing to limit another exchange's ability to establish a
similar, different, or integrated reporting structure.\303\ If another
exchange

decides to trade Securities, but not to use blockchain technology to
record end-of-day ownership balances reported by its members, the
Exchange states that the other exchange's process would not be able to
leverage the smart contract functionality built into BSTX-listed
issuers' Securities pursuant to the BSTX Protocol.\304\ The Exchange
states that in such a case, there would be separate sets of end-of-day
ownership balance records--the balances of BSTX Participants would be
recorded on the Ethereum blockchain and the balances of the other
exchange's members would be separately reflected.\305\
---------------------------------------------------------------------------

    \302\ See OIP, supra note 7, 85 FR at 51262-63. The Exchange
gives as examples of potential alternatives that another national
securities exchange could employ: Collecting end-of-day Security
ownership balance information from its members and then relaying
that information to BSTX to deliver to a Wallet Manager for
recording to the Ethereum blockchain; trading BSTX-listed Securities
without any end-of-day reporting requirement; engaging its own
version of a wallet manager to communicate with BSTX's Wallet
Manager(s) to facilitate updates to the Ethereum blockchain; or
designing its own reporting process and technology, with no nexus to
the BSTX end-of-day Security balance reporting structure. See OIP,
supra note 7, 85 FR at 51263. In the case of a national securities
exchange that determined to relay balance information from its
members to BSTX, the Exchange states that no development of
blockchain technology, smart contract functionality, or other
similar technology would be required, because an exchange that
adopts such a reporting structure would be in a position similar to
a BSTX Participant, in that it would simply deliver end-of-day
Security balance information to BSTX (or a Wallet Manager). See OIP,
supra note 7, 85 FR at 51263, n.103 and accompanying text.
    \303\ See OIP, supra note 7, 85 FR at 51263.
    \304\ See OIP, supra note 7, 85 FR at 51263, n.105.
    \305\ See id.
---------------------------------------------------------------------------

    One commenter questioned, in the context of SR-BOX-2019-19, whether
other national securities exchanges would be in a position to extend
UTP to BSTX-listed Securities.\306\ This commenter asked if the
distributed ledger technology proposed by BSTX would be exclusive to
BSTX and if other national securities exchanges would have access to
the technology or its source code.\307\ This commenter asked if other
national securities exchanges would have the ability currently to trade
BSTX-listed Securities, and, if not, what changes they would need to
make to be able to do so.\308\ This commenter stated that, to the
extent that other national securities exchanges adopt their own
distributed ledger technology to track ownership of equity securities
traded on their markets, complications may arise in the equities
markets if varying forms of this technology are used.\309\ Another
commenter, in the context of SR-BOX-2019-19, stated its belief that the
Exchange should address the implications in terms of burden on
competition for other national securities exchanges that would like to
extend UTP to BSTX-listed stocks.\310\
---------------------------------------------------------------------------

    \306\ See SIFMA Letter II, supra note 110, at 6.
    \307\ See SIFMA Letter II, supra note 110, at 4. This commenter
also asked, if the distributed ledger technology and its source code
is exclusive to BSTX, what other national securities exchanges would
have to do to gain access. See id. at 4-5.
    \308\ See SIFMA Letter II, supra note 110, at 6. This commenter
also stated that it is unclear whether the Exchange could limit UTP
trading in BSTX-listed Securities in the future. See id.
    \309\ See SIFMA Letter II, supra note 110, at 3. This commenter
also questioned whether other market participants would have the
ability to change the source code underlying the distributed ledger
technology. See id. at 5.
    \310\ See IEX Letter, supra note 77, at 5.
---------------------------------------------------------------------------

    Also in the context of SR-BOX-2019-19, one commenter stated that
the proposal appears to provide insufficient detail regarding the
digital security infrastructure and how technology would pair with
existing equities market infrastructure.\311\ This commenter stated
that to avail itself of the blockchain technology associated with the
proposed Securities (which this commenter asserted is the only unique
characteristic of the Securities), the purchaser must be a BSTX
Participant.\312\ This commenter further stated that the proposal is
designed to provide an advantage to the Exchange as the exclusive
provider of blockchain technology for Securities, because the Exchange
will not accept end-of-day Security ownership balance reports from non-
BSTX Participants.\313\ This commenter asserted that, as such, the
Exchange's proposal places an ``unreasonable'' burden on
competition.\314\ This commenter also stated it would be inappropriate,
and perhaps beyond the scope of the Commission's authority, to allow
NMS plans to be used for the ``specialized competitive purposes'' of an
individual national securities exchange.\315\
---------------------------------------------------------------------------

    \311\ See Nasdaq Letter, supra note 77, at 1.
    \312\ See Nasdaq Letter, supra note 77, at 2.
    \313\ See Nasdaq Letter, supra note 77, at 3.
    \314\ See Nasdaq Letter, supra note 77, at 3.
    \315\ See Nasdaq Letter, supra note 77, at 3.
---------------------------------------------------------------------------

    In response, in the context of SR-BOX-2019-19, the Exchange
asserted that the trading of Securities does not impose any additional
burden compared to the trading of other NMS stocks.\316\ The Exchange
stated that end-of-day Security ownership balance reporting and the
publication of such information on the Ethereum blockchain does not
impact the ability of Securities to trade on other national securities
exchanges or OTC, and that Securities are fully capable of trading on
other national securities exchanges or OTC without an ``ancillary''
recordkeeping mechanism.\317\ Therefore, according to the Exchange, if
any other national securities exchange sought to extend UTP to a BSTX-
listed Security, it could do so under the existing regulatory
framework.\318\
---------------------------------------------------------------------------

    \316\ See BSTX Response Letter I, supra note 82, at 3. Also,
with respect to other exchanges extending UTP to Securities, the
Exchange states that it does not believe that the proposal would
impose a burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act, in that
Securities would trade, clear, and settle in the same manner as
other NMS stock, and accordingly, other exchanges would be able to
extend UTP to Securities in accordance with Commission rules. See
OIP, supra note 7, 85 FR at 51289. See also supra notes 301, 303,
and accompanying text (discussing the Exchange's statement regarding
burden on competition in the context of other exchanges extending
UTP).
    \317\ See OIP, supra note 7, 85 FR at 51262; BSTX Response
Letter I, supra note 82, at 3. See also id. at 16 (stating that
Securities are fully capable of trading on other national securities
exchanges or OTC without an ``ancillary'' recordkeeping mechanism);
BSTX Response Letter II, supra note 105, at 5 (same).
    \318\ See BSTX Response Letter I, supra note 82, at 3. See also
BSTX Response Letter II, supra note 105, at 5 (stating that any
national securities exchange would be free to extend UTP to
Securities consistent with applicable regulatory requirements). The
Exchange also states, in response to whether other exchanges would
be able to access the distributed ledger technology that BSTX
proposes to use, that use of Ethereum blockchain technology, which
is an open source public blockchain that supports smart contract
functionality, is not exclusive to BSTX, and thus, all market
participants would have open access to the distributed ledger
technology associated with the Exchange's proposal. See OIP, supra
note 7, 85 FR at 51289, n.366.
---------------------------------------------------------------------------

    The Exchange responded further that there is no limitation in its
proposal that would prevent another national securities exchange from
adopting its own process and requirements to record and disseminate
end-of-day Security ownership balances.\319\ The Exchange stated that
it encourages other national securities exchanges to consider taking
steps to promote the use of blockchain technology and help familiarize
market participants with its potential uses and benefits.\320\ The
Exchange also stated that it proposes to use a ``common distributed
ledger'' in the form of the public Ethereum blockchain that any other
national securities exchange could use to implement its own
recordkeeping process.\321\ According to the Exchange, any other
national securities exchange that wants to trade Securities would have
access to the publicly available, open-source code from the BSTX
Protocol, and also would be able to leverage the pre-established
Security architecture to facilitate any similar end-of-day reporting
requirements.\322\ The Exchange stated that it would impose the end-of-
day reporting requirement only on BSTX Participants because of the
limits of its legal authority, and that while it would not initially
accept voluntary reporting from non-BSTX Participants, it may consider
accepting such voluntary reports in the future.\323\
---------------------------------------------------------------------------

    \319\ See OIP, supra note 7, 85 FR at 51290; BSTX Response
Letter I, supra note 82, at 3, 4.
    \320\ See BSTX Response Letter I, supra note 82, at 4.
    \321\ See BSTX Response Letter I, supra note 82, at 4. See also
BSTX Response Letter II, supra note 105, at 2-3 (reiterating that
the distributed ledger technology that would be used is the Ethereum
blockchain, which is not exclusive to BSTX, and is an open source
public blockchain that supports smart contract functionality).
    \322\ See BSTX Response Letter I, supra note 82, at 4.
    \323\ See BSTX Response Letter I, supra note 82, at 4. See also
OIP, supra note 7, 85 FR at 51257 (stating that the Exchange will
not accept voluntary reports of end-of-day Security balances from
non-BSTX Participants, but may consider doing so in the future,
subject to any applicable or necessary rule filing requirements with
the Commission); BSTX Response Letter III, supra note 207, at 3.

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

    In response to comments on SR-BOX-2019-19, the Exchange stated its
disagreement with a commenter's assertion that the Exchange is
proposing to use UTP to promote trading that uniquely benefits the
Exchange, and states that it is not ``using'' UTP in any manner.\324\
The Exchange asserted its belief that its proposal would not impose any
burden on competition because other national securities exchanges would
be free to determine whether to extend UTP to Securities.\325\ The
Exchange further asserted that there is no mechanism by which one
national securities exchange can force another national securities
exchange to extend UTP to its listed securities, and therefore any
national securities exchange would be free to extend UTP to BSTX-listed
Securities consistent with applicable regulatory requirements.\326\ The
Exchange also stated that, if a national securities exchange were to
choose to extend UTP to BSTX-listed Securities and adopt a
recordkeeping process utilizing the blockchain, it could do so in a
manner consistent with BSTX's proposed requirements and end-of-day
reporting structure, or could develop and pursue another approach.\327\
---------------------------------------------------------------------------

    \324\ See BSTX Response Letter I, supra note 82, at 4. The
Exchange also stated that it was not proposing a fee related to the
reporting of end-of-day ownership balances to the Ethereum
blockchain, and therefore Securities trading on other national
securities exchanges would not offer a unique benefit to the
Exchange in this respect. See id. at 5.
    \325\ See BSTX Response Letter I, supra note 82, at 4, 5.
    \326\ See BSTX Response Letter I, supra note 82, at 4-5.
    \327\ See BSTX Response Letter I, supra note 82, at 5, 9-10. The
Exchange also asserted its disagreement with a commenter's statement
that it would be inappropriate to allow national market system plans
to be used for the specialized competitive purposes of an individual
national securities exchange, and stated that the point is not
relevant because the Exchange had not proposed any national market
system plan relating to its proposal. See id. at 4, n.15.
---------------------------------------------------------------------------

    With respect to the Exchange's stated purpose for recording and
publicly disseminating Security ownership balances, the Exchange states
that it believes that initially using blockchain technology as an
``ancillary'' recordkeeping mechanism, pursuant to which the Securities
represented on the blockchain in Token form would not convey legal
ownership, is the appropriate way to explore the potential benefits of
blockchain technology consistent with the protection of investors and
the public interest.\328\ According to the Exchange, it believes that
using blockchain technology to record and disseminate end-of-day
Security ownership balances in parallel with the traditional trading,
recordkeeping, and clearance and settlement structures that market
participants are familiar with is an important first step toward
exploring the potential uses and benefits of blockchain technology in
securities transactions.\329\ The Exchange further states that it
believes that promoting the use of the functionality of smart contracts
and their ability to allocate and re-allocate Securities balances in
Token form across multiple wallet addresses in connection with end-of-
day Security ownership balance information of BSTX Participants will
allow market participants to observe and increase their familiarity
with the ``capabilities and potential benefits'' of blockchain
technology in a context that parallels the current equity market
infrastructure.\330\ Thereby, according to the Exchange, its proposal
would advance and protect the public's interest in the use and
development of new data processing techniques that may create
opportunities for more efficient, effective, and safe securities
markets.\331\
---------------------------------------------------------------------------

    \328\ See OIP, supra note 7, 85 FR at 51262. The Exchange also
states that it believes that the public has an interest in exploring
the use of new technology, such as blockchain technology, and that
such technology may be able to help perfect the mechanism of a free
and open market and a national market system. See id.
    \329\ See OIP, supra note 7, 85 FR at 51287. See also id. at
51262 (stating that the Exchange's contention that the proposal is
reasonably designed to introduce blockchain technology in a gradual
way, and in coordination and cooperation with the industry, the
Commission, and the existing regulatory framework).
    \330\ See OIP, supra note 7, 85 FR at 51263.
    \331\ See id. See also BSTX Response Letter I, supra note 82, at
13. The Exchange also states that, while it believes that its
proposal represents an introductory step in pairing the benefits of
blockchain technology with the current equity market structure,
other market participants and FINRA have recognized additional
potential benefits to blockchain technology in various applications
related to the securities markets. See OIP, supra note 7, 85 FR at
51263, n.110.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, several commenters raised
questions about the purpose of the Exchange's proposed use of
blockchain technology to record and disseminate end-of-day Security
ownership balances.\332\ One commenter asserted that it is unclear what
efficiencies or purposes an end-of-day Security ownership balance would
provide or that Securities would offer to the global securities
marketplace, and that the proposed structure would introduce potential
burdens on market participants.\333\ According to this commenter, it
seemed likely that the introduction and use of Securities would create
an undue burden on market participants, exchanges, custodians, clearing
firms, and retail and institutional investors.\334\ Another commenter
asked what the purpose of the proposed end-of-day Security ownership
balance reporting mechanism would be.\335\ This commenter further
asked, if the purpose was to gradually introduce blockchain technology,
what the next steps would be.\336\ Another commenter asserted that the
proposal did not provide sufficient detail regarding the ultimate
purpose of the records of end-of-day Security ownership balances and
the specific content and design of such records, and that therefore the
purpose and design of these records was unclear and could not be
evaluated under the Exchange Act.\337\ According to this commenter, a
reader of the proposal could not identify and evaluate the ways in
which the end-of-day Security ownership balance may benefit investors
or add transactional, operational, and other types of risk.\338\
---------------------------------------------------------------------------

    \332\ See Eversheds Letter, supra note 91, at 1-2; IEX Letter,
supra note 77, at 5; PKA Law Letter, supra note 175, at 1-2; SIFMA
Letter II, supra note 110, at 3.
    \333\ See PKA Law Letter, supra note 175, at 1-2.
    \334\ See PKA Law Letter, supra note 175, at 2.
    \335\ See IEX Letter, supra note 77, at 5.
    \336\ See IEX Letter, supra note 77, at 5.
    \337\ See Eversheds Letter, supra note 91, at 1-2. See also IEX
Letter, supra note 77, at 5, n.8 (agreeing with the concerns
identified in the Eversheds Letter and stating that these concerns
were not fully or clearly addressed by Amendment No. 2).
    \338\ See Eversheds Letter, supra note 91, at 2.
---------------------------------------------------------------------------

    In response, in the context of SR-BOX-2019-19, the Exchange
reiterated the purpose of the end-of-day Security ownership balances as
previously stated and asserted its belief that the proposed
``ancillary'' recordkeeping process, which is designed to operate
separate and apart from the existing market infrastructure and would
not impact trading, clearance, or settlement of Securities, would not
pose any transactional or operational risks.\339\ According to the
Exchange, it believed that its explanation about the purpose of the
end-of-day Security ownership balances that it provided in SR-BOX-2019-
19 as amended by Amendment No. 2 provided ``sufficient information for
market participants to independently arrive at this same conclusion.''
\340\ The Exchange stated that the record of end-of-day Security
balances on the blockchain is for the public benefit.\341\ The Exchange
asserted its belief that blockchain technology may offer benefits to
the trading of securities, and that the Exchange had proposed a

limited use of the technology in the form of end-of-day Security
ownership balances on the blockchain to help it evaluate whether such
benefits might be realized.\342\ The Exchange stated that it may
consider a variety of next steps towards potential further integration
of blockchain technology, any of which would be subject to the rule
filing requirements, and public notice and comment, pursuant to Section
19 of the Exchange Act.\343\
---------------------------------------------------------------------------

    \339\ See BSTX Response Letter I, supra note 82, at 13.
    \340\ BSTX Response Letter I, supra note 82, at 13.
    \341\ See BSTX Response Letter I, supra note 82, at 14.
    \342\ See BSTX Response Letter I, supra note 82, at 14.
    \343\ See BSTX Response Letter I, supra note 82, at 9.
---------------------------------------------------------------------------

    Also in the context of SR-BOX-2019-19, one commenter asserted that
the proposal's requirements with respect to maintaining end-of-day
Security ownership balances on the blockchain are inconsistent with the
requirement in Section 6(b)(5) of the Exchange Act that a national
securities exchange's rules may not regulate matters not related to the
purposes of this title or the administration of the exchange, because
the maintenance of these records does not appear to be necessary for
the clearance and settlement of the Securities, the fair and orderly
trading of Securities, or any purpose regulated by the Exchange
Act.\344\ The Exchange responds that it believes that the proposal is
not designed to regulate matters outside those contemplated and
authorized by the Exchange Act.\345\ The Exchange states that Section 2
of the Exchange Act sets forth the reasons for the Exchange Act, which
include that `` transactions in securities as commonly conducted upon
securities exchanges and over-the-counter markets are effected with a
national public interest which makes it necessary to provide for
regulation and control of such transactions and of practices and
matters related thereto, including . . . to require appropriate
reports.' '' \346\ According to the Exchange, the Exchange Act and the
rules of SROs include reporting requirements that regulate and control
matters and practices related to securities transactions conducted on
national securities exchanges and in OTC markets.\347\ As noted above,
the Exchange also reasserts its belief that the end-of-day reporting
requirements will allow market participants to observe and increase
their familiarity with the capabilities and potential benefits of
blockchain technology in a context that parallels current equity market
infrastructure.\348\
---------------------------------------------------------------------------

    \344\ See Eversheds Letter, supra note 91, at 3.
    \345\ See also OIP, supra note 7, 85 FR at 51288.
    \346\ See OIP, supra note 7, 85 FR at 51288 (quoting 15 U.S.C.
78(b) (emphasis in OIP)). See also BSTX Response Letter I, supra
note 82, at 16.
    \347\ See OIP, supra note 7, 85 FR at 51288; BSTX Response
Letter I, supra note 82, at 16-17. The Exchange states that, for
example, all of the U.S. options exchanges and FINRA maintain rules
approved by the Commission that require their member broker-dealers
to prepare and submit daily large options position reports, and that
these reports do not concern the trading or clearance and settlement
of securities transactions themselves, but instead are reports
relating to end-of day positions. The Exchange asserts that the
requirements regarding the end-of-day Security ownership balance
reporting process would similarly require BSTX Participants to
provide reports regarding their end-of-day ownership balances in
Securities. See OIP, supra note 7, 85 FR at 51288. See also BSTX
Response Letter I, supra note 82, at 17.
    \348\ See OIP, supra note 7, 85 FR at 51288. See also BOX
Response Letter I, supra note 82, at 13; OIP, supra note 7, 85 FR at
51289, n.371 and accompanying text. See also supra notes 328-331 and
accompanying text.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, one commenter stated that the
Exchange appeared to be proposing a proprietary Ether-based distributed
ledger technology to be used to track ownership on an ``ancillary''
basis for BSTX-listed Securities.\349\ This commenter asserted that the
Exchange is encouraging the adoption of this technology with the likely
eventual goal of having it become a system for tracking equity security
ownership outside of the current system maintained by DTC and broker-
dealers.\350\ This commenter further asserted that the end-of-day
Security balance reporting ``appears to be nothing more than a way to
force industry participants to sign up for the Exchange's blockchain
service, adding cost while providing no apparent value to firms,
institutional clients, or retail investors.'' \351\ This commenter
stated that while it supports adoption of new processes and technology
to make the equity market infrastructure more efficient and robust and
supports the use of technology to strengthen the security settlement
system, it has concerns about the wider implications on the equity
market infrastructure.\352\ The Exchange responded that that proposal
was designed to operate entirely within the existing equity market
structure, including the requirements for clearance through NSCC and
settlement through DTC, and that any future changes would be subject to
the Commission's rule filing process under Section 19 of the Exchange
Act.\353\
---------------------------------------------------------------------------

    \349\ See SIFMA Letter II, supra note 110, at 3.
    \350\ See SIFMA Letter II, supra note 110, at 3.
    \351\ SIFMA Letter II, supra note 110, at 3.
    \352\ See SIFMA Letter II, supra note 110, at 3-4. This
commenter suggested that the novel equity market infrastructure
issues presented by the proposal are better suited for a concept
release or other type of release by the Commission that is geared
toward soliciting market-wide feedback, rather than an ad hoc
proposal by a single national securities exchange. See id. at 4. See
also SIFMA Letter IV, supra note 220, at 5-6 (stating continued
concerns about new processes and technology with wider implications
for the equity market structure infrastructure being considered in
the framework of a proposed rule change by a single exchange without
actively working with and soliciting input from the industry).
    \353\ See BSTX Response Letter II, supra note 105, at 3.
---------------------------------------------------------------------------

    In the context of SR-BOX-2020-14, this commenter stated that it
previously expressed concerns regarding the end-of-day Security balance
reporting aspect of the Exchange's proposal, and that it had previously
raised concerns about how other exchanges might trade Securities
pursuant to UTP, whether they might be required to adopt BOX's
proprietary technology, and how having exchanges adopt different forms
of distributed ledger technology to track equity ownership of equity
securities could cause additional costs to the industry.\354\ This
commenter stated that the end-of-day Securities balance reporting
requirements would serve as a potential impediment for other exchanges
to trade the Securities pursuant to UTP, and that other exchanges may
be hesitant to trade Securities pursuant to UTP because of the lack of
clarity around the implications of BSTX's end-of-day Security ownership
balance reporting requirements for their members.\355\
---------------------------------------------------------------------------

    \354\ See SIFMA Letter IV, supra note 220, at 4 (noting its
prior comment).
    \355\ See SIFMA Letter IV, supra note 220, at 5.
---------------------------------------------------------------------------

    In response to the commenter's concerns about ``how other exchanges
might trade the Securities pursuant to UTP,'' the Exchange stated that
no comments were submitted by any national securities exchanges
following its filing of Amendment No. 1 to the proposal.\356\ The
Exchange also stated that a market participant that voluntarily chooses
to become a BSTX Participant must comply with BSTX rules,\357\ and that
its proposal is clear that a BSTX Participant must report its end-of-
day balance at DTC or its carrying firm in the relevant Security
pursuant to proposed BSTX Rule 17020(b).\358\ Additionally, the
Exchange stated that, regarding costs associated with the end-of-day
Security ownership balance reporting process, it does not believe that
imposing the proposed requirement on BSTX Participants is unfairly
discriminatory or burdens competition because all market

participants are free to choose whether to become a BSTX Participant or
not and there is no limitation imposed by the Exchange on the ability
to trade Securities on other markets.\359\ The Exchange also stated
that its proposal represents an incremental change to incorporate
blockchain technology within the current infrastructure and regulations
for the equities market--including clearance and settlement--and that
any future structural changes would be subject to the rule filing
process pursuant to Section 19 of the Act.\360\
---------------------------------------------------------------------------

    \356\ See BSTX Response Letter III, supra note 207, at 5, n.13.
    \357\ See BSTX Response Letter III, supra note 207, at 6.
    \358\ See BSTX Response Letter III, supra note 207, at 3.
    \359\ See BSTX Response Letter III, supra note 207, at 5-6.
    \360\ See BSTX Response Letter III, supra note 207, at 6-7.
---------------------------------------------------------------------------

2. Analysis
    As stated above, the Commission supports innovation in our
securities markets, and its disapproval does not rest on an evaluation
of the utility or value of blockchain technology as applied to the
functions of a national securities exchange. Due to the Exchange's lack
of analysis about the burden that other national securities exchanges
would face to use an end-of-day Security ownership reporting mechanism
in connection with the trading of Securities on their markets and the
competitive impacts, however, the Commission cannot find that the
proposal does not impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act, consistent with Section 6(b)(8). The Exchange asserts that it is
not proposing any limitation that would prevent another national
securities exchange from participating in the Exchange's end-of-day
Security ownership balance reporting process or establishing its own
alternative or complementary process, and that it is not proposing to
limit another exchange's ability to establish a similar, different, or
integrated reporting structure.
    As discussed below, the Commission believes that the Exchange has
not fully explained critical operational aspects of the end-of-day
Security ownership reporting functionality, particularly with respect
to how another national securities exchange may employ such
functionality, on its own or in coordination with BSTX, and trade BSTX-
listed NMS stock on its exchange.\361\ Without this explanation, the
Commission is unable to comprehensively assess the existence or scope
of any burden resulting from the Exchange's proposed end-of-day
Security ownership reporting functionality and concludes that the
Exchange has not provided sufficient information to support a finding
by the Commission that the proposed rules would not impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of the federal securities laws.
---------------------------------------------------------------------------

    \361\ Commenters raised concerns about the Exchange being an
exclusive provider of a process that would use blockchain technology
to record and disseminate end-of-day Security ownership balances and
that other national securities exchanges would be unable to compete
on this basis. See supra notes 307-315 and accompanying text.
---------------------------------------------------------------------------

    Although the Exchange asserts that BSTX-listed Securities trading
on another national securities exchange could trade, clear, and settle
in the same manner as other NMS stock,\362\ the Exchange will not
accept, at least initially, end-of-day Security ownership balance
reports from non-BSTX Participants that transact on other trading
centers.\363\ The Exchange asserts that another national securities
exchange that wants to trade BSTX-listed Securities would be able to
leverage the Exchange's pre-established Security architecture to
facilitate similar end-of-day reporting requirements, or could develop
and pursue its own approach,\364\ and provides some broad examples of
how it believes another exchange could develop its own end-of-day
reporting requirement or participate in BSTX's process.\365\ However,
the Exchange has not provided sufficient information for the Commission
to determine whether it would be feasible, and the associated burden,
for another national securities exchange that extends UTP to BSTX-
listed Securities, or another trading center that trades BSTX-listed
Securities, to implement a process that uses blockchain technology for
end-of-day Security ownership balance reporting for its members. The
Exchange has not explained, as proposed, how another national
securities exchange would be able to participate in the Exchange's end-
of-day Security ownership balance reporting mechanism without the
Exchange's permission, and without complying with any conditions that
the Exchange might place on access to this mechanism, including
membership requirements. For example, only BOX would control the end-
of-day reporting mechanism by requiring the issuer to set up the
necessary smart contracts, contracting with the Wallet Manager,
obtaining allowlisted wallet addresses for BSTX Participants,
collecting end-of-day Security ownership balance reports from BSTX
Participants, and instructing the Wallet Manager to update the Ethereum
blockchain to reflect those ownership balances.\366\ It is also unclear
whether the Exchange would make its allowlisting and end-of-day
reporting process available to other national securities exchanges or
trading centers directly. For example, the Exchange provides as an
example of how another exchange could adopt its own end-of-day
reporting requirement, that the other exchange could choose to collect
end-of-day Security ownership balance information from its members and
then relay that information to BSTX to deliver to a Wallet Manager for
recording to the Ethereum blockchain,\367\ but it is unclear what that
process would entail. While the Exchange suggests that the other
exchange would be in a position similar to a BSTX Participant in such a
case,\368\ the Exchange also states that it would not accept voluntary
reporting from non-BSTX Participants.\369\ Further, the Exchange does
not explain what would be necessary for the coordination of end-of-day
reporting mechanisms.\370\
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    \362\ See supra note 299 and accompanying text.
    \363\ See supra note 323.
    \364\ See supra notes 319-322, 327, and accompanying text.
    \365\ See supra note 302.
    \366\ See supra Section III.C.2 for additional discussion of the
process for allowlisting and end-of-day reporting.
    \367\ See supra note 302.
    \368\ See id.
    \369\ See supra note 323. Although the Exchange states that it
may determine to accept voluntary reporting from non-BSTX
Participants in the future (see supra note 323 and accompanying
text), the Commission must evaluate whether the current proposal is
consistent with the Exchange Act.
    \370\ See OIP, supra note 7, 85 FR at 51264, n.104 (discussing
the Exchange's lack of clarity as to whether it would be necessary
for BSTX and another exchange that decides to trade Securities,
establish an end-of-day balance reporting requirement for its
members, and relay the balance information to BSTX for recording to
the Ethereum blockchain to file an NMS plan with respect to
coordinating end-of-day balance reporting mechanisms).
---------------------------------------------------------------------------

    The Exchange also does not provide sufficient detail about how the
end-of-day Security ownership balances of members of another national
securities exchange could be included in the same smart contract on the
Ethereum blockchain that is being used for BSTX Participants, and
whether the Exchange's permission would be required. The Exchange
states that other exchanges would be able to access the distributed
ledger technology that BSTX proposes to use because Ethereum blockchain
technology is an open source public blockchain that supports smart
contract functionality and is not

exclusive to BSTX.\371\ However, the Exchange's proposal suggests that,
for end-of-day Security ownership balances of trading centers' non-BSTX
Participant members to be included in the same smart contract that
contains the records for BSTX Participants, the non-BSTX Participants
would need to obtain allowlisted wallet addresses, and that the
Exchange would control the allowlisting process. In addition, either
the other exchange or its non-BSTX Participant members would need to be
allowed to provide end-of-day Securities ownership balances to the
Exchange or its Wallet Manager, or if the other exchange was to work
with another Wallet Manager, that Wallet Manager would need to have the
necessary security permissions to write to the same smart
contract.\372\ Moreover, the Exchange does not explain the implications
for the recordkeeping process of having more than one Wallet Manager,
particularly if there is a Wallet Manager that does not have a direct
relationship with the Exchange. And the Exchange does not explain how
it would calculate the Securities ownership balance to attribute to the
omnibus wallet address if non-BSTX Participants did not report their
ownership balances to the Exchange, but these ownership balances were
associated with non-BSTX Participants' wallet addresses in the smart
contract on the Ethereum blockchain.\373\
---------------------------------------------------------------------------

    \371\ See supra notes 318-322 and accompanying text.
    \372\ See supra Section III.C.1 for discussion of the process by
which the Wallet Manager would write to the blockchain. For example,
the Exchange indicated that one option might be for the other
exchange to report its members' balances to BSTX's Wallet Manager or
engage its own wallet manager to communicate with BSTX's Wallet
Manager. However, the Exchange has not explained how that other
exchange (or its wallet manager) could coordinate with BSTX's Wallet
Manager, given that BOX has the contractual relationship with its
Wallet Manager.
    \373\ See supra note 57 and accompanying text (stating that the
Exchange would determine the number of Tokens to be allocated to the
omnibus wallet address for a particular Security by subtracting the
sum of the Security ownership balances reported by BSTX Participants
from the total outstanding number).
---------------------------------------------------------------------------

    The Exchange also does not explain, alternatively, the potential
implications of having two separate smart contracts with digital
representations of ownership interest in the same Security if a
national securities exchange extending UTP to BSTX-listed Securities
(or other trading center trading BSTX-listed Securities) were to create
its own smart contracts, using a parallel process for end-of-day
Securities ownership balance reporting that is either similar to or
differs greatly from that developed by the Exchange.\374\ For example,
the existence of competing sets of records could be confusing for
investors and other market participants. One potential source of
confusion is that even if one smart contract represented end-of-day
Security ownership balances for BSTX Participants and a separate smart
contract represented end-of-day Security ownership balances for another
trading center's members, there could be double-counting if some BSTX
Participants were also members of the other trading center. And whereas
an issuer of a BSTX-listed Security must create a smart contract
compliant with BSTX Protocol as a condition of listing on the
Exchange,\375\ that issuer would not have a direct relationship with
another national securities exchange that extends UTP to its Security
(or other trading center that trades its Security). The Exchange does
not explain the likelihood that an issuer would be willing to work with
another national securities exchange that wishes to trade the same
BSTX-listed Security to create a separate smart contract associated
with its Security, or whether there would be any logistical impediments
to doing so post-issuance.
---------------------------------------------------------------------------

    \374\ See also supra note 309 and accompanying text (commenter
asserting that, to the extent that other national securities
exchanges adopt their own distributed ledger technology and varying
forms of technology are used, complications may arise in the
equities markets).
    \375\ See supra Section III.C.4(b) for discussion of the
obligations that companies have to comply with the BSTX Protocol as
a condition of Exchange listing.
---------------------------------------------------------------------------

    These deficiencies in the Exchange's explanation about how another
national securities exchange may be able to use the proposed end-of-day
Security ownership reporting functionality leaves the Commission with
significant concerns about whether it would be feasible for another
national securities exchange to make use of this functionality or
create its own parallel reporting functionality. The Commission finds
that the Exchange has not met its obligation to explain any burden its
proposed end-of-day Security ownership reporting functionality would
place on competition between BSTX and other national securities
exchanges. Without being able to assess this potential burden on
competition, particularly in light of commenters' concerns that
meaningful competition among national securities exchanges with respect
to the use of the end-of-day Security ownership functionality may be
foreclosed, the Commission is unable to assess the necessity or
appropriateness of that burden on competition. Therefore the Commission
does not need to reach the question of whether the Exchange's
assertions about the purpose of its end-of-day Security ownership
reporting functionality demonstrate that the burden on competition is
necessary or appropriate in furtherance of the Exchange Act.\376\
Accordingly, the Commission is unable to find that the Exchange's rules
would not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the federal securities
laws, in accordance with Section 6(b)(8) of the Exchange Act.
---------------------------------------------------------------------------

    \376\ See supra notes 328-360 and accompanying text. Moreover,
the record does not contain any argument that the Exchange's
proposed use of end-of-day Security ownership reporting
functionality is necessary or appropriate in furtherance of the
purposes of the Exchange Act, notwithstanding a significant burden
imposed by such functionality on competition between national
securities exchanges.
---------------------------------------------------------------------------

    For the reasons discussed above, considered independently or in
combination, the Commission concludes that Exchange has not met its
burden of demonstrating that the proposal is consistent with Exchange
Act Sections 6(b)(1), 6(b)(5), or 6(b)(8),\377\ and, accordingly, the
Commission must disapprove the proposal.\378\
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    \377\ 15 U.S.C. 78f(b)(1), (5), and (8).
    \378\ In disapproving the proposed rule change, the Commission
has considered its impact on efficiency, competition, and capital
formation. See U.S.C. 78c(f). For the reasons discussed throughout,
the Commission is disapproving the proposed rule change because it
does not find that the proposed rule change is consistent with the
Exchange Act.
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E. Other Aspects of the Exchange's Proposal and Comments Received

    The Commission is disapproving the proposed rule change for the
reasons discussed above. Therefore the Commission does not reach the
question of whether other aspects of the Exchange's proposal, including
proposed rules relating to participation on BSTX, business conduct for
BSTX Participants, financial and operational provisions for BSTX
Participants, supervision, trading practices, discipline, trading on
the BSTX System, market making, and listing on the Exchange (with the
exception of the specific topics discussed in Section III.C.4 above),
are consistent with the Exchange Act. Other issues have been raised by
commenters, in connection with SR-BOX-2019-19, including the settlement
process for Securities; \379\ what reporting facility would be used for
trade reporting; \380\ the process of trade confirmation reporting;
\381\ the

proposal's compatibility with DTC and NSCC infrastructure; \382\ the
liquidity of Securities; \383\ how the end-of-day Security ownership
balance reporting mechanism would affect short sales, including the
locate process, clearing, settling, and market maker compliance with
short sale rules; \384\ how end-of-day Security ownership balances
would affect the margin methodology for member self-calculation; \385\
the potential liability of custodians for differences between DTC
records and end-of-day Security ownership balances; \386\ the proposed
listing requirements' compliance with penny stock rules; \387\ the
proposal's compliance with the anti-fraud or customer protection
provisions of the Exchange Act or other Commission regulations; \388\
Security ownership verification, including for purposes of compliance
with know-your-customer and anti-money laundering rules; \389\ access
to the end-of-day Security ownership balance records and the
safeguarding of customer non-public information; \390\ the requirements
of Exchange Act Rule 12f-5 relating to the extension of UTP by other
national securities exchanges to BSTX-listed Securities; \391\ the
relationship among tZERO, Overstock.com, Inc. (``Overstock''),\392\ and
entities related to the Exchange; \393\ whether any registered broker-
dealer has indicated its intention to become a BSTX Participant; \394\
and whether the Exchange is still working with FINRA regarding end-of-
day Security ownership balance reporting requirements for FINRA
members.\395\ Additional discussion on these topics is unnecessary, as
they do not bear on the basis for the Commission's decision to
disapprove this proposal.
---------------------------------------------------------------------------

    \379\ See PKA Law Letter, supra note 175, at 1.
    \380\ See PKA Law Letter, supra note 175, at 1.
    \381\ See PKA Law Letter, supra note 175, at 1.
    \382\ See PKA Law Letter, supra note 175, at 2.
    \383\ See PKA Law Letter, supra note 175, at 1.
    \384\ See IEX Letter, supra note 77, at 6; PKA Law Letter, supra
note 175, at 1.
    \385\ See Nasdaq Letter, supra note 77, at 3.
    \386\ See Eversheds Letter, supra note 91, at 2.
    \387\ See IEX Letter, supra note 77, at 6.
    \388\ See Eversheds Letter, supra note 91, at 2; Nasdaq Letter,
supra note 77, at 3.
    \389\ See Nasdaq Letter, supra note 77, at 3; PKA Law Letter,
supra note 175, at 1.
    \390\ See Eversheds Letter, supra note 91, at 2.
    \391\ See Eversheds Letter, supra note 91, at 2-3; IEX Letter,
supra note 77, at 3-4. One commenter also discussed aspects of
requirements might be placed on a national securities exchange
extending UTP to BSTX-listed Securities that the Exchange modified
in Amendment No. 2 to SR-BOX-2019-19. See Eversheds Letter, supra
note 91, at 3.
    \392\ In the Amended BSTX Governance Proposal, the Exchange
states that Overstock, which is a publicly held corporation, wholly
owns Medici Ventures, Inc., which owns 80.07% of tZERO. See Amended
BSTX Governance Proposal, supra note 17, 85 FR at 50851.
    \393\ See PKA Law Letter, supra note 175, at 2.
    \394\ See IEX Letter, supra note 77, at 5.
    \395\ See IEX Letter, supra note 77, at 6.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change, as modified by Amendment No. 1, is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with Sections 6(b)(1), 6(b)(5), and 6(b)(8) of the Exchange
Act.\396\
---------------------------------------------------------------------------

    \396\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\397\ that the proposed rule change (SR-BOX-2020-14), as
modified by Amendment No. 1, be, and hereby is, disapproved.
---------------------------------------------------------------------------

    \397\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-28536 Filed 12-23-20; 8:45 am]
BILLING CODE 8011-01-P