[Federal Register Volume 85, Number 161 (Wednesday, August 19, 2020)]
[Notices]
[Pages 51250-51291]
[FR Doc No: 2020-17967]

Vol. 85

Wednesday,

No. 161

August 19, 2020

Part III

 Securities and Exchange Commission

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

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of
Amendment No. 1 and Order Instituting Proceedings To Determine Whether
To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt Rules Governing the Trading of Equity
Securities on the Exchange Through a Facility of the Exchange Known as
the Boston Security Token Exchange; Notice

Federal Register / Vol. 85, No. 161 / Wednesday, August 19, 2020 /
Notices

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89536; File No. SR-BOX-2020-14]

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Amendment No. 1 and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt Rules Governing the Trading of Equity
Securities on the Exchange Through a Facility of the Exchange Known as
the Boston Security Token Exchange

August 12, 2020.
    On May 21, 2020, BOX Exchange LLC (``Exchange'' or ``BOX'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to adopt rules
governing the listing and trading of equity securities that would be
NMS stocks on the Exchange through a facility of the Exchange known as
the Boston Security Token Exchange LLC (``BSTX''). The proposed rule
change was published for comment in the Federal Register on June 1,
2020.\3\ On July 16, 2020, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On July 31, 2020, the Exchange filed Amendment No. 1 to the
proposed rule change, which replaced and superseded the proposed rule
change as originally filed.\6\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 88946 (May 26,
2020), 85 FR 33454 (June 1, 2020) (``Notice''). Comment received on
the Notice is available on the Commission's website at: https://www.sec.gov/comments/sr-box-2020-14/srbox202014.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89328 (July 16,
2020), 85 FR 44338 (July 22, 2020). The Commission designated August
30, 2020, as the date by which the Commission shall approve or
disapprove, or institute proceedings to determine whether to
disapprove, the proposed rule change.
    \6\ In Amendment No. 1, the Exchange revised the proposal to:
(i) Change the name used to refer to BSTX-listed securities from
``security tokens'' to ``Securities''; (ii) eliminate the proposed
requirement for trades on the Exchange to settle one business day
after the trade date (``T+1''), which is not the settlement cycle
for NMS stock; (iii) add proposed rule text that the Exchange
describes as containing measures to ensure the accuracy of end-of-
day security token balance reports; (iv) add proposed rule text
specifying that the time by which Exchange members must report end-
of-day security token balances to the Exchange will be set forth by
the Exchange via regulatory circular; (v) provide additional
description of several aspects of the proposal, including end-of-day
security token balance reporting and implications of the trading of
BSTX-listed security tokens on other national securities exchanges
on the end-of-day reporting process; and (vi) make technical and
conforming changes. Amendment No. 1 is available on the Commission's
website at: https://www.sec.gov/comments/sr-box-2020-14/srbox202014-7570237-222233.pdf.
     On July 31, 2020, the Exchange also submitted a letter to the
Commission requesting that the Commission concur with Exchange's
conclusion that members that enter orders into BSTX's trading system
satisfy the conditions of Rule 11a2-2(T) under the Act (17 CFR
240.11a2-2(T)). See Letter from Lisa Fall, President, BOX, to
Vanessa Countryman, Secretary, Commission, and Tyler Raimo,
Assistant Director, Division of Trading and Markets, Commission
dated January 31, 2020, available at https://www.sec.gov/comments/sr-box-2020-14/srbox202014-7506169-221931.pdf.
---------------------------------------------------------------------------

    In Amendment No. 1 to the proposed rule change, the Exchange states
that the proposed rule change was previously filed with the Commission
as SR-BOX-2019-19, which the Exchange amended twice, and that the
current proposed rule change, SR-BOX-2020-14, is ``substantively
identical'' to previously-filed proposed rule change, SR-BOX-2019-19,
as modified by Amendment No. 2 thereto.\7\ SR-BOX-2019-19, as modified
by Amendment 2 thereto, was published for comment in the Federal
Register on March 6, 2020.\8\ The Commission received comments on the
substance of SR-BOX-2019-19, as well as responses submitted by BOX.\9\
BOX withdrew proposed rule change SR-BOX-2019-19 on May 12, 2020.\10\
As applicable and discussed below, the Commission will consider
comments submitted on SR-BOX-2019-19 and SR-BOX-2020-14 in its review
of SR-BOX-2020-14.
---------------------------------------------------------------------------

    \7\ See Amendment No. 1, supra note 6, at 5, n.3.
    \8\ See Securities Exchange Act Release No. 88300 (February 28,
2020), 85 FR 13242 (March 6, 2020) (Notice of Filing of Amendment
No. 2 to Proposed Rule Change). See also Securities Exchange Act
Release Nos. 87287 (October 11, 2019), 84 FR 56022 (October 18,
2019) (Notice of Filing of Proposed Rule Change) (noticing SR-BOX-
2019-19 as originally filed); and 88002 (January 16, 2020), 85 FR
4040 (January 23, 2020) (Notice of Filing of Amendment No. 1 and
Order Instituting Proceedings) (noticing Amendment No. 1 to SR-BOX-
2019-19 and instituting proceedings to determine whether to
disapprove the proposed rule change as modified by Amendment No. 1).
The only differences between SR-BOX-2019-19, as modified by
Amendment No. 2, and SR-BOX-2020-14 relate to: Removal of references
to Amendment No. 2; modification of a reference to Exhibit 5 to the
filing; modification of the description of BSTX ownership interests
to reflect the addition of a small percentage (less than 10%) of
non-voting economic interest-holders; updating a reference to a
related filing (SR-BOX-2019-37, which was also withdrawn and refiled
as SR-BOX-2020-16); corrections to citations; and grammatical
corrections.
    \9\ Comments on SR-BOX-2019-19 can be found at: https://www.sec.gov/comments/sr-box-2019-19/srbox201919.htm. These comments
also include response letters from the Exchange.
    \10\ See Securities Exchange Act Release No. 89018 (June 4,
2020), 85 FR 35458 (June 10, 2020) (Notice of Withdrawal of a
Proposed Rule Change).
---------------------------------------------------------------------------

    The Commission is publishing this notice and order to solicit
comments on the proposed rule change, as modified by Amendment No. 1,
from interested persons and to institute proceedings pursuant to
Section 19(b)(2)(B) of the Act \11\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

I. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendment No. 1

    Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 as amended (``Exchange Act''),\12\ BOX Exchange
LLC (``BOX or the ``Exchange'') is filing with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change
to adopt rules to govern the trading of equity securities on the
Exchange through a facility of the Exchange known as Boston Security
Token Exchange LLC (``BSTX''). As described more fully below, BSTX
would operate a fully automated, price/time priority execution system
for the trading of ``Securities,'' which would be equity securities
that meet BSTX listing standards and for which ancillary records of
ownership would be able to be created and maintained using distributed
ledger (or ``blockchain'') technology. The proposed additions to the
Exchange's Rules setting forth new Rule Series 17000-28000 are included
as Exhibit 5A. All text set forth in Exhibit 5A would be added to the
Exchange's rules and therefore underlining of the text is omitted to
improve readability. Forms proposed to be used in connection with the
proposed rule change, such as the application to become a BSTX
Participant, are included as Exhibits 3A through 3N.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    In addition, the Exchange proposes to make certain amendments to
several existing BOX Rules to facilitate trading on BSTX. The proposed
changes to the existing BOX Rules would not change the core purpose of
the subject Rules or the functionality of other BOX trading systems and
facilities. Specifically, the Exchange is seeking to amend BOX Rules
100, 2020, 2060, 3180, 7130, 7150, 7230, 7245, IM-8050-3, 11010, 11030,
12030, and 12140. These proposed changes are set forth in Exhibit 5B.
Material proposed to be added to the Rule as currently in effect is
underlined

and material proposed to be deleted is bracketed.
    All capitalized terms not defined herein have the same meaning as
set forth in the Exchange's Rules.\13\
---------------------------------------------------------------------------

    \13\ The Exchange's Rules can be found on the Exchange's public
website: https://boxoptions.com/regulatory/rulebook-filings/.
---------------------------------------------------------------------------

    The text of the proposed rule change is available from the
principal office of the Exchange, at the Commission's Public Reference
Room and also on the Exchange's internet website at http://
http://boxoptions.com">boxoptions.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to adopt a series of rules to govern the
trading of equity securities through a facility of the Exchange known
as BSTX and make certain amendments to the existing BOX rules to
facilitate trading on BSTX.\14\ As described more fully below, BSTX
would operate a fully automated, price/time priority execution system
(``BSTX System'') for the trading of securities that will be considered
``Securities'' under the proposed rules. The ``Securities'' \15\ under
the proposed rules would be equity securities that meet BSTX listing
standards, and that trade on the BSTX System, and for which ancillary
records of ownership would be able to be created and maintained using
distributed ledger technology. These ancillary records of ownership
that would be maintained using distributed ledger technology would not
be official records of Security ownership. Instead, as described
further herein, such records would be ancillary records that would
reflect certain end-of-day Security position balance information as
reported by market participants. All BOX Participants would be eligible
to participate in BSTX provided that they become a BSTX Participant
pursuant to the proposed rules. Under the proposed rules, BSTX would
serve as the listing market for eligible companies that wish to issue
their registered securities as Securities. Securities would trade as
NMS stock.\16\ The Exchange is not proposing rules that would support
its extension of unlisted trading privileges to other NMS stock, and
accordingly the Exchange does not intend to extend any such unlisted
trading privileges in connection with this proposal. The Exchange would
therefore only trade Securities listed on BSTX unless and until it
proposes and receives Commission approval for rules that would support
trading in other types of securities, including through any extension
of unlisted trading privileges to other NMS stock. A guide to the
structure of the proposed rule change is described immediately below.
---------------------------------------------------------------------------

    \14\ The Exchange notes that the proposed rule change was
previously filed with the Commission as SR-BOX-2019-19, Exchange Act
Release No. 87287 (Oct. 11, 2019), 84 FR 56002 (October 18, 2019)
and was amended twice. See Exchange Act Release No. 88634 (Apr. 14,
2020), 85 FR 21906 (Apr. 20, 2020). This proposal (SR-BOX-2020-14)
is substantively identical to SR-BOX-2019-19, as amended. The
Exchange proposes an amendment to SR-BOX-2020-14 to address certain
additional comments received from Commission staff as well as to
address the comment letter received on the proposal. See Letter from
Ellen Greene, Managing Director, Equities & Options Market
Structure, Securities Industry and Financial Markets Association
(``SIFMA'') and Thomas F. Price, Managing Director Operations,
Technology, Cyber & BCP, SIFMA, to Vanessa Countryman, Secretary,
Commission (June 23, 2020) (``SIFMA June Letter''), https://www.sec.gov/comments/sr-box-2020-14/srbox202014-7340739-218667.pdf.
The primary changes to the proposal set forth in this amendment are
to: (i) Eliminate the proposed use of T+1 as the standard settlement
cycle for trades occurring on BSTX, meaning that trades will now
settle ``regular way'' on a T+2 basis; (ii) provide additional
clarifying guidance with respect to certain aspects of the proposal;
and (3) change the name of BSTX-listed securities from ``security
tokens'' to ``Securities.''
    \15\ As discussed further below, BSTX proposes to use the term
``Security'' to refer to BSTX-listed securities to distinguish them
from other securities that are not designed to use blockchain
technology as an ancillary recordkeeping mechanism. Given that an
investor seeking to obtain a Security would go through the normal
channels of investing as he would for other NMS stock (e.g., through
his or her broker) rather than the process for obtaining a
blockchain-native asset by accessing a cryptocurrency exchange and/
or a hardware wallet, there appears to be little opportunity for
confusion. Even if some form of confusion occurred regarding whether
an asset was an uncertificated security held at DTC versus a
blockchain-native asset, such confusion would not be meaningful
since an investor would receive equity rights in the listing company
in either case.
    \16\ 17 CFR 242.600(b)(48).
---------------------------------------------------------------------------

I. Guide to the Scope of the Proposed Rule Change
    The proposal for trading of securities that will be ``Securities''
(under the BSTX Rules, as defined below) through BSTX generally
involves changes to existing BOX Rules and new BOX Rules pertaining
specifically to BSTX (``BSTX Rules''). In addition, BSTX corporate
governance documents as well as certain discrete changes to existing
BOX corporate governance documents are necessary, which the Exchange
has submitted to the Commission through separate proposed rule changes.
To support the trading of Securities through BSTX, certain conforming
changes are proposed to existing BOX Rules and entirely new BSTX Rules
are also proposed as Rule Series 17000 through 28000.\17\ Each of those
new Rule Series and the provisions thereunder are described in greater
detail below. Where the BSTX Rules are based on existing rules of
another national securities exchange, the source rule from the relevant
exchange is noted along with a discussion of notable differences
between the source rule and the proposed BSTX Rule. The proposed BSTX
Rules are addressed in Part III below and they generally cover the
following areas:
---------------------------------------------------------------------------

    \17\ The proposed changes to BOX Rules and the proposed BSTX
Rules are attached as Exhibits 5B and 5A, respectively.

 Section 17000--General Provisions of BSTX;
 Section 18000--Participation on BSTX;
 Section 19000--Business Conduct for BSTX Participants;
 Section 20000--Financial and Operational Rules for BSTX
Participants;
 Section 21000--Supervision;
 Section 22000--Miscellaneous Provisions;
 Section 23000--Trading Practice Rules;
 Section 24000--Discipline and Summary Suspension;
 Section 25000--Trading Rules;
 Section 25200--Market Making on BSTX;
 Section 26000--BSTX Listing Rules;
 Section 27000--Suspension and Delisting;
 Section 27100--Guide to Filing Requirements;
 Section 27200--Procedures for Review of Exchange Listing
Determinations; and
 Section 28000--Dues, Fees, Assessments and Other Charges.
II. Overview of BSTX and Considerations Related to the Listing, Trading
and Clearance and Settlement of Securities
A. The Joint Venture and Ownership of BSTX
    On June 19, 2018, t0.com Inc. (``tZERO'') and BOX Digital Markets

LLC (``BOX Digital'') announced a joint venture to facilitate the
trading of Securities on the Exchange.\18\ As part of the joint
venture, BOX Digital, which is a subsidiary of BOX Holdings Group LLC,
and tZERO each own 50% of the voting class of equity and over 45%
economic interest of BSTX LLC. Pursuant to the BSTX LLC Agreement, BOX
Digital and tZERO will perform certain specified functions with respect
to the operation of BSTX. As noted, these details, as well as the
proposed governance structure of the joint venture and accompanying
changes to the Exchange's current governance documents and bylaws, will
be the subject of a separate proposed rule change that the Exchange
plans to submit to the Commission.
---------------------------------------------------------------------------

    \18\ See tZERO and BOX Digital Markets Sign Deal to Create Joint
Venture, Business Wire (June 19, 2018), available at https://www.businesswire.com/news/home/20180619005897/en/tZERO-BOX-Digital-Markets-Sign-Deal-Create.
---------------------------------------------------------------------------

B. BSTX Is a Facility of BOX That Would Support Trading in the New
Asset Class of Securities for BOX
    BSTX would operate as a facility \19\ of BOX, which is a national
securities exchange registered with the SEC. As a facility of BOX,
BSTX's operations would be subject to applicable requirements in
Sections 6 and 19 of the Exchange Act, among other applicable rules and
regulations.\20\ Currently, BOX functions as an exchange only for
standardized options. 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. Accordingly, this represents a new asset class
for BOX, and this proposal sets forth the changes and additions to the
Exchange's rules to support the trading of equity securities as
Securities on BSTX.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78c(a)(2). Section 3(a)(2) of the Exchange Act,
provides that ``the term `facility' when used with respect to an
exchange includes its premises, tangible or intangible property
whether on the premises or not, any right to the use of such
premises or property or any service thereof for the purpose of
effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent
of the exchange), and any right of the exchange to the use of any
property or service.'' Because BSTX will share certain systems of
the Exchange, BSTX is a facility of the Exchange.
    \20\ 15 U.S.C. 78f; 15 U.S.C. 78s.
---------------------------------------------------------------------------

    The Exchange proposes to use the term ``Security'' \21\ to describe
the BSTX-listed securities that would use blockchain technology as an
ancillary recordkeeping mechanism, as described in further detail
below. However, ownership of securities that are Securities under the
BSTX rules would still be able to be transferred without regard to the
blockchain-based ancillary recordkeeping functionality (as also
described further below). Notwithstanding this, the Exchange believes
that it is appropriate to use the term ``Securities'' to distinguish
them from other securities for which there is no related legal and
regulatory structure that is designed to use blockchain technology as
an ancillary recordkeeping mechanism and as a way of indicating the
additional proposed obligations of BSTX Participants trading Securities
to obtain a wallet address and report end-of-day Security balances to
BSTX.\22\ The legal significance, therefore, of a ``Security'' is that
it will be an equity security that is approved for listing on BSTX, and
that trades on the BSTX System, and for which BSTX Participants are
therefore required under BSTX Rule 17020 to obtain a whitelisted wallet
address and report certain end-of-day Security position balance
information to BSTX. A security that is offered by an issuer with the
intent of it becoming listed on BSTX would therefore not become a
``Security'' under the proposed BSTX Rules unless and until it actually
does become listed on BSTX and trades on the BSTX System. The Exchange
believes that the obligations on a BSTX Participant under the proposal
to obtain a wallet address and to report certain end-of-day Security
position balance information to BSTX are the only legal rights or
obligations associated with Securities that would differ from how NMS
stock is generally traded by market participants today.\23\
---------------------------------------------------------------------------

    \21\ The Exchange proposes to define the term ``Security'' to
mean NMS stock, as defined in Rule 600(b)(47) of the Exchange Act,
trading on the BSTX System and for which ancillary Ethereum
blockchain records are maintained under the BSTX Rules. See proposed
Rule 17000(a)(30).
    \22\ See Part II, Sections G and J for further description of
these obligations.
    \23\ The Exchange notes that its proposed Rule 17000(a)(30)
defines ``Security'' to mean an ``NMS stock, as defined in Rule
600(b)(47) of the Exchange Act, trading on the BSTX System and for
which ancillary Ethereum blockchain records are maintained . . .''
---------------------------------------------------------------------------

C. Securities Would Be NMS Stocks
    The Securities would qualify as NMS stocks pursuant to Regulation
NMS,\24\ which defines the term ``NMS security'' in relevant part to
mean ``any security or class of securities for which transaction
reports are collected, processed and made available pursuant to an
effective transaction reporting plan. . . .'' \25\ The Exchange plans
to join existing transaction reporting plans, as discussed in Part VIII
below, for the purposes of Security quotation and transaction
reporting.\26\ The term ``NMS stock'' means ``any NMS security other
than an option'' \27\ and therefore Securities traded on BSTX that
represent equity securities will be classified as NMS stock.
---------------------------------------------------------------------------

    \24\ 17 CFR 242.600 through 613.
    \25\ 17 CFR 242.600(b)(47).
    \26\ 17 CFR 242.601(a)(1). The Rule states in relevant part that
``every national securities exchange shall file [with the SEC] a
transaction reporting plan regarding transactions in listed equity
and Nasdaq securities executed through its facilities . . . .''
    \27\ 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------

    Securities would meet the definition of NMS stocks and would trade,
clear, and settle in the same manner as all other NMS stocks traded
today. The Exchange will also collect ancillary records related to
Securities, as discussed herein. In this way, Securities are entirely
compatible with the existing NMS structure, with one additional
reporting and recordkeeping component specific to BSTX
Participants.\28\ As described in further detail below, the ancillary
recordkeeping process would in no way modify or alter market
participants' obligations under Regulation NMS.
---------------------------------------------------------------------------

    \28\ The SIFMA June Letter stated primarily that SIFMA believed
that the Exchange had not fully addressed the concerns SIFMA raised
in an earlier comment submitted to SR-BOX-2019-19 in April 2020,
though SIFMA only noted a single specific example regarding the
proposed use of T+1 settlement rather than T+2 settlement. See
Letter from Ellen Greene, Managing Director, Equities & Options
Market Structure, SIFMA and Thomas F. Price, Managing Director
Operations, Technology, Cyber & BCP, SIFMA, to Vanessa Countryman,
Secretary, Commission, re: SR-BOX-2019-19 (Apr. 22, 2020) (``SIFMA
April Letter'') https://www.sec.gov/comments/sr-box-2019-19/srbox201919-7105488-215831.pdf. The Exchange responded to the SIFMA
April Letter on April 27, 2020. See Letter from Lisa Fall,
president, BOX Exchange LLC to Vanessa Countryman, Secretary,
Commission re: SR-BOX-2019-19 (Apr. 27, 2020), https://www.sec.gov/comments/sr-box-2019-19/srbox201919-7105488-215831.pdf. The Exchange
proposes to eliminate T+1 settlement in this amendment and instead
expects that trades would clear through NSCC using T+2 settlement as
is the case today on the other equities exchanges for confirmed
trades in NMS stock. The Exchange has endeavored to address other
concerns raised in the SIFMA April Letter through this amendment 1.
---------------------------------------------------------------------------

D. BSTX Would Support Trading of Registered Securities
    All Securities traded on BSTX would generally be required to be
registered with the Commission under both Section 12 of the Exchange
Act \29\ and Section 6 of the Securities Act of 1933 (``Securities
Act'').\30\ BSTX would not support trading of Securities offered under
an exemption from registration for public offerings, with the exception
of certain offerings under Regulation A

that meet the proposed BSTX listing standards.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78l.
    \30\ 15 U.S.C. 77f.
---------------------------------------------------------------------------

E. Clearance and Settlement of Securities
    BSTX would maintain certain rules, as described below, to address
custody, clearance and settlement in connection with Securities. All
transactions in Securities would clear and settle in accordance with
the rules, policies and procedures of registered clearing agencies.
Specifically, BSTX anticipates that at the time it commences
operations, Securities that are listed and traded on BSTX would be
securities that have been made eligible for services by The Depository
Trust Company (``DTC'') and that DTC would serve as the securities
depository \31\ for such Securities. It is also expected that confirmed
trades in Securities on BSTX would be transmitted to National
Securities Clearing Corporation (``NSCC'') for clearing such that NSCC
would clear the trades through its systems to produce settlement
obligations that would be due for settlement between participants at
DTC. BSTX believes that this custody, clearance and settlement
structure is the same general structure that exists today for other
exchange traded equity securities. Importantly, for purposes of NSCC's
clearing activities and DTC's settlement activities in respect of the
Securities, the relevant securities will be cleared and settled by NSCC
and DTC in exactly the same manner as those activities are performed by
NSCC and DTC currently regarding a class of NMS Stock.\32\ This is
because the ancillary recordkeeping process that will be implemented
through the operation of the proposed BSTX Rules will occur separate
and apart from the clearance and settlement process and the security
itself will not exist in tokenized form. Rather, the security will be
an ordinary equity security for NSCC's and DTC's purposes. The
tokenized feature in connection with the security that will be
implemented through the operation of BSTX's Rules is that there will
also be a separate, ancillary recordkeeping process that will use
distributed ledger technology to record BSTX Participant end-of-day
position balance information for the relevant security.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78c(a)(23)(A). Section 3(a)(23)(A) of the
Exchange Act defines the term ``clearing agency'' to include ``any
person, such as a securities depository, who (i) acts as a custodian
of securities in connection with a system for the handling of
securities whereby all securities of a particular class or series of
any issuer deposited within the system are treated as fungible and
may be transferred, loaned, or pledged by bookkeeping entry without
physical delivery of securities certificates, or (ii) otherwise
permits or facilitates the settlement of securities transactions or
the hypothecation or lending of securities without physical delivery
of securities certificates.''
    \32\ In the SIFMA April Comment Letter, the Exchange believes
SIFMA mischaracterized the Proposal as ``encouraging the adoption of
[distributed ledger] 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.'' SIFMA April Comment Letter at 3. This comment is
unfounded and without merit. The proposal is bounded by its terms
and is designed to operate entirely within the existing equity
market structure--including its requirements for clearance through
NSCC and settlement through DTC. It is precisely because the
Exchange is sensitive to market participants' concerns related to
the introduction and use of new technology that it has proposed a
use of blockchain that is consistent with existing market
infrastructure and regulation. Any future changes to this model
would be subject to the Commission's rule filing process under
Section 19 of the Exchange Act and public notice and comment. The
Exchange further believes as a general matter that it is incorrect
to dismiss any possible application of new technology simply because
it has the potential to disrupt current ways of operating in the
future. Similar claims were voiced with the introduction of computer
technology to trading during the shift away from manual markets to
toward electronic markets.
---------------------------------------------------------------------------

1. Issuance of Equity Securities Eligible To Become a Security
    With the exception of certain offerings under Regulation A that
meet the proposed BSTX listing standards, all Securities traded on BSTX
will have been offered and sold in registered offerings under the
Securities Act, which means that purchasers of the Securities will
benefit from all of the protections of registration. The Division of
Corporation Finance will need to make a public interest finding in
order to accelerate the effectiveness of the registration statements
for these offerings. Because BSTX is a facility of a national
securities exchange, all Securities will be registered under Section
12(b) of the Exchange Act, thereby subjecting all of these issuers to
the reporting regime in Section 13(a) of the Exchange Act.
    All offerings of securities that are intended to be listed as
Securities on BSTX will be conducted in the same general manner in
which offerings of exchange-listed equity securities are conducted
today under the federal securities laws. An issuer will enter into a
firm commitment or best efforts underwriting agreement with a sole
underwriter or underwriting syndicate; the underwriter(s) will market
the securities and distribute them to purchasers; and secondary trading
in the securities (that are intended to trade on BSTX as Securities)
will thereafter commence on BSTX. The ancillary recordkeeping function
associated with the Security will not commence until the conclusion of
the first day of the Security's secondary trading on BSTX pursuant to
proposed BSTX Rule 17020.\33\
---------------------------------------------------------------------------

    \33\ Although the smart contract that would be used to carry out
the ancillary recordkeeping function related to the security would
need to be built by or at the direction of the issuer prior to the
commencement of the security's trading on BSTX, the corresponding
smart contract would effectively remain dormant until the ancillary
recordkeeping process contemplated under the proposed BSTX Rules is
activated due to trading on the BSTX System in that Security.
---------------------------------------------------------------------------

    Issuers on BSTX could include both (1) new issuers who do not
currently have any class of securities registered on a national
securities exchange, and (2) issuers who currently have securities
registered on a national securities exchange and who are seeking
registration of a separate class of equity securities for listing on
BSTX. BSTX does not intend for Securities listed, or intended to be
listed, on BSTX to be fungible with any other class of securities from
the same issuer.\34\ If an issuer sought to list securities on BSTX
that are not a separate class of an issuer's securities, BSTX does not
intend to approve such a class of security for listing on BSTX,
pursuant to BSTX's authority under BSTX Rule 26101. At the commencement
of BSTX's operations, only equity securities would be eligible for
listing as Securities. This would be addressed by BSTX Rules 26102
(Equity Issues), 26103 (Preferred Securities) and 26105 (Warrant
Securities), which would be part of BSTX's listing rules and would
contemplate that only those specified types of equity securities would
be eligible for listing.
---------------------------------------------------------------------------

    \34\ BSTX notes that market participants, including SIFMA, have
asked why Securities listed on BSTX would not be fungible with
another class of securities from the same issuer and what the
implications of this might be. The Exchange notes that Securities
would not be fungible with another class of securities of the same
issuer because no class of an issuer's securities is fungible with a
separate class of its securities--otherwise they would be the same
class of security. Nothing herein proposes any change to existing
framework for different classes of securities.
---------------------------------------------------------------------------

2. Securities Depository Eligibility
    BSTX would maintain rules that would promote a structure in which
Securities would be held in ``street name'' with DTC.\35\ BSTX Rule
26136

would require that for an equity security to be eligible to be a
Security BSTX must have received a representation from the issuer that
a CUSIP number that identifies the security is included in a file of
eligible issues maintained by a securities depository that is
registered with the SEC as a clearing agency. This is based on rules
that are currently maintained by other equities exchanges.\36\ In
practice, BSTX Rule 26136 requires the Security to have a CUSIP number
that is included in a file of eligible securities that is maintained by
DTC because the Exchange believes that DTC currently is the only
clearing agency registered with the SEC that provides securities
depository services.\37\
---------------------------------------------------------------------------

    \35\ The term ``street name'' refers to a securities holding
structure in which DTC, through its nominee Cede & Co., would be the
registered holder of the securities and, in turn, DTC would grant
security entitlements in such securities to relevant accounts of its
participants. Proposed BSTX Rule 26135 would also provide, with
certain exceptions, that securities listed on BSTX must be eligible
for a direct registration program operated by a clearing agency
registered under Section 17A of the Exchange Act. DTC operates the
only such program today, known as the Direct Registration System,
which permits an investor to hold a security as the registered owner
in electronic form on the books of the issuer.
    \36\ Proposed BSTX Rule 26136 is based on current NYSE Rule 777.
    \37\ See Exchange Act Release No. 78963 (September 28, 2016), 81
FR 70744, 70748 (October 13, 2016) (footnote 46 and the accompanying
text acknowledge that DTC is the only registered clearing agency
that provides securities depository services for the U.S. securities
markets).
---------------------------------------------------------------------------

3. Book-Entry Settlement at a Securities Depository
    BSTX would also maintain Proposed BSTX Rule 26137 regarding uniform
book-entry settlement. The rule would require each BSTX Participant to
use the facilities of a securities depository for the book-entry
settlement of all transactions in depository eligible securities with
another BSTX Participant or a member of a national securities exchange
that is not BSTX or a member of a national securities association.\38\
Proposed BSTX Rule 26137 is based on the depository eligibility rules
of other equities exchanges and Financial Industry Regulatory Authority
(``FINRA'').\39\ Those rules were first adopted as part of a
coordinated industry effort in 1995 to promote book-entry settlement
for the vast majority of initial public offerings and ``thereby reduce
settlement risk'' in the U.S. national market system.\40\
---------------------------------------------------------------------------

    \38\ FINRA is currently the only national securities association
registered with the SEC.
    \39\ See e.g., FINRA Rule 11310. Book-Entry Settlement and NYSE
Rule 776. Book-Entry Settlement of Transactions.
    \40\ These coordinated depository eligibility rules resulted
from proposed listing rules amendments developed by the Legal and
Regulatory Subgroup of the U.S. Working Committee, Group of Thirty
Clearance and Settlement Project. See Securities Exchange Act
Release Nos 35774 (May 26, 1995) (SR-NASD-95-24), 60 FR 28813 (June
2, 1995); 35773 (May 26, 1995), 60 FR 28817 (June 2, 1995) (SR-NYSE-
95-19).
---------------------------------------------------------------------------

4. Participation in a Registered Clearing Agency That Uses a Continuous
Net Settlement System
    Under proposed BSTX Rule 25140, each BSTX Participant would be
required to either (i) be a member of a registered clearing agency that
uses a continuous net settlement (``CNS'') system, or (ii) clear
transactions executed on BSTX through a member of such a registered
clearing agency. The Exchange believes that today NSCC is the only
registered clearing agency that uses a CNS system to clear equity
securities, and proposed BSTX Rule 25140 further specifies that BSTX
will maintain connectivity and access to the Universal Trade Capture
system of NSCC to transmit confirmed trade details to NSCC regarding
trades executed on BSTX. The proposed rule would also address the
following: (i) A requirement that each Security transaction executed
through BSTX must be executed on a locked-in basis for automatic
clearance and settlement processing; (ii) the circumstances under which
the identity of contra parties to a Security transaction that is
executed through BSTX would be required to remain anonymous or may be
revealed; and (iii) certain circumstances under which a Security
transaction may be cleared through arrangements with a member of a
foreign clearing agency. Proposed BSTX Rule 25140 is based on a
substantially identical rule of the Investor's Exchange, LLC (``IEX''),
which, in turn, is consistent with the rules of other equities
exchanges.\41\
---------------------------------------------------------------------------

    \41\ See IEX Rule 11.250 (Clearance and Settlement; Anonymity),
which was approved by the Commission in 2016 as part of its approval
of IEX's application for registration as a national securities
exchange. Exchange Act Release No. 78101 (June 17, 2016); 81 FR
41142 (June 23, 2016); see also Cboe BZX Rule 11.14 (Clearance and
Settlement; Anonymity).
---------------------------------------------------------------------------

    BSTX believes that the operation of its depository eligibility rule
and its book-entry services rule would promote a framework in which
Securities that would be eligible to be listed and traded on BSTX would
be equity securities that have been made eligible for services by a
registered clearing agency that operates as a securities depository and
that are settled through the facilities of the securities depository by
book-entry. The Exchange believes that because DTC currently is the
only clearing agency registered with the SEC that provides securities
depository services, at the commencement of BSTX's operations,
Securities would be securities that have been made eligible for
services by DTC, including book-entry settlement services.
5. Settlement Cycle
    Proposed BSTX Rule 25100(d) would address settlement cycle
considerations regarding trades in Securities. Security trades that
result from orders matched against the electronic order book of BSTX
would be required to clear and settle pursuant to the rules, policies
and procedures of a registered clearing agency. As noted above in
connection with the description of proposed BSTX Rule 25140, the
Exchange expects that at the commencement of operations by BSTX it
would transmit confirmed trade details to NSCC regarding Security
trades that occur on BSTX and that NSCC would be the registered
clearing agency that clears Security trades. The Exchange expects that
such trades would be cleared through NSCC using a T+2 settlement cycle,
as is the case today for all other exchanges that facilitate trading in
NMS stock.
F. Compatibility With the BSTX Protocol for BSTX-Listed Securities To
Facilitate Ancillary Recordkeeping
    BSTX would maintain listing standards that would enable Securities
to have an ancillary record of ownership recorded on the Ethereum
blockchain using a protocol standard determined by BSTX (the ``BSTX
Protocol'' or the ``Protocol'').\42\ In this way, the Ethereum
blockchain would serve as a complementary recordkeeping mechanism to
official records of Security ownership maintained by market
participants.\43\
---------------------------------------------------------------------------

    \42\ While BSTX initially intends to support only the trading of
eligible Securities that are compatible with the Ethereum public
blockchain, BSTX may support assets compatible with other
blockchains that support smart contract functionality in the future.
    \43\ In the SIFMA April Letter, SIFMA stated that it believes
that the proposed use of blockchain by the Exchange constitutes
``novel equity market structure issues'' that should be addressed by
the Commission into a concept release. SIFMA April Letter at 4. The
Exchange disagrees. The proposal would not introduce any novel
equity market structure issues that would impact trading, clearance
or settlement, and the proposed, limited used of blockchain
technology is entirely separate from these processes and applicable
only to BSTX Participants. The Exchange believes it is important for
exchanges to have the ability make changes to their rules that
incorporate new features, including uses of new technology that have
no impact on the existing equities market infrastructure, without
necessitating a market-wide referendum.
---------------------------------------------------------------------------

1. Background on Blockchain Technology
    In general, a blockchain is an open, decentralized ledger that can
maintain digital records of assets and transactions that are accessible
to anyone running the same protocol.\44\ The blockchain's

central function is to encode transitions or changes to the ledger,
such as the movement of an asset from one person to another person.
Whenever one change to the blockchain ledger occurs to record a state
transition, the entire blockchain is immutably changed to reflect the
state transition. The purpose of requiring Securities to adopt the BSTX
Protocol is to enable Security ownership to be recorded as a tokenized
asset on the public Ethereum blockchain as an ancillary recordkeeping
mechanism and to ensure uniformity among Securities rather than
permitting each Security to have its own unique specifications that
might complicate updates to the blockchain and add unnecessary
complexity.
---------------------------------------------------------------------------

    \44\ A ``protocol'' for this purpose is a set of rules governing
the format of messages that are exchanged between the participants.
---------------------------------------------------------------------------

2. Background on the Ethereum Blockchain
    The Ethereum blockchain is an open-source, public blockchain that
operates as a computing platform and operating system that supports
smart contract functionality.\45\ Smart contracts are computer
protocols designed to digitally facilitate, verify, and enforce the
performance of a contract. Ethereum-based smart contracts are executed
on the Ethereum Virtual Machine, which can be thought of as a global
computer network upon which the smart contracts run. Ether is the
digital currency used to pay fees associated with operating smart
contracts (known as ``gas'') on the Ethereum networks. This is because
there are costs involved in performing the computations necessary to
execute a smart contract and to record any state transitions onto the
Ethereum blockchain.\46\ Thus, moving tokenized assets from one address
to another address (i.e., a state transition) requires some amount of
Ether to pay the fee (i.e., ``gas'') associated with recording the
movement of tokenized assets to the Ethereum blockchain. Parties to a
transaction in Ethereum-based smart contracts can determine what those
gas costs are depending on how quickly they would like the transaction
to be reflected on the Ethereum blockchain.
---------------------------------------------------------------------------

    \45\ See Ethereum White Paper (last updated Aug. 1, 2018)
available at https://github.com/ethereum/wiki/wiki/White-Paper.
    \46\ See What Is Gas, MyEtherWallet (2018) available at https://kb.myetherwallet.com/posts/transactions/what-is-gas/.
---------------------------------------------------------------------------

3. Background on Smart Contracts
    The term ``smart contract'' is commonly used to describe computer-
coded functions in connection with the Ethereum blockchain. An Ethereum
smart contract is neither ``smart'' nor a legal contract in the
traditional sense. Smart contracts in this context refer to immutable
\47\ computer programs that run deterministically \48\ in the context
of the Ethereum Virtual Machine. Smart contracts operate within a very
limited execution context. They can access their own state, the context
of the transaction that called them, and some information about the
most recent blocks (i.e., the most recent recording of transactions and
other events recorded to the Ethereum blockchain).
---------------------------------------------------------------------------

    \47\ Smart contracts are immutable in that, once deployed, the
code of a smart contract cannot change. Unlike with traditional
software, the only way to modify a smart contract is to deploy a new
instance.
    \48\ Deterministic in this context means that the outcome of the
execution of a smart contract is the same for everyone who runs it,
given the context of the transaction that initiated its execution.
---------------------------------------------------------------------------

    In the context of tokens representing Securities, smart contracts
generally may have three components: (i) Functions, (ii)
configurations; (iii) and events.\49\ Functions describe the basic
operations of a smart contract, such as the ability to query a
particular address to determine the quantity of tokenized assets that
belong to that address.\50\ Configurations are attributes of a smart
contract that are typically set at the launch of a smart contract, such
as designating the name of the smart contract (e.g., as XYZ Security).
Events describe the functions of a smart contract that, when executed,
result in a log or record being recorded to the Ethereum blockchain,
such as the transfer of tokenized assets from one address to another.
Not all functions of a smart contract result in a log or record being
recorded to the Ethereum blockchain. Smart contracts only run if they
are called by a transaction.\51\
---------------------------------------------------------------------------

    \49\ However, a smart contract need not necessarily have each of
these components. Some smart contracts may simply be used to support
the functioning of other smart contracts and may not itself result
in events being recorded to the Ethereum blockchain.
    \50\ An ``address'' in this context refers to a number that is
associated with a particular market participant within the smart
contract that can be updated to reflect changes in ownership of
tokenized assets.
    \51\ The term ``transaction'' in this context refer not to an
actual execution or transaction occurring on BSTX or in the
marketplace, but rather to an operation triggering a smart contract
to carry out its specified function, which must ultimately originate
from a human source.
---------------------------------------------------------------------------

    Smart contracts can call another smart contract, which can call
another contract, and so on. Smart contracts never run ``on their own''
or ``in the background,'' but rather lie dormant until a transaction
triggers them to carry out a specified operation pursuant to the
protocol on which they operate. All transactions execute in their
entirety or not at all, regardless of how many smart contracts they
call or what those smart contracts do. Only if a transaction
successfully executes in its entirety is there an ``event''
representing a change to the state of the blockchain with respect that
transaction. If an execution of a smart contract's operation fails due
to an error, all of its effects (e.g., events) are rolled back as if
the transaction never ran.
4. Background on Tokenized Assets or ``Tokens''
    Tokens historically referred to privately issued, special-purpose
coin-like items (e.g., laundry tokens or arcade game tokens). In the
context of blockchain technology, tokens generally mean blockchain-
based abstractions that can be owned and that represent assets,
currency, or access rights. A token on the blockchain used for
ancillary recordkeeping of ownership can be thought of as a digital
representation of shareholder equity in a legal entity organized under
the authority of state or federal law and that meet BSTX's listing
standards. Having a token attributed to a particular address, however,
would not convey ownership of shareholder equity in the issuer because
the official records of ownership would be maintained by participants
at DTC.\52\
---------------------------------------------------------------------------

    \52\ Rather, a digital representation of a Security associated
with a particular address reflects an ancillary record of Security
ownership based on data provided to BSTX by BSTX Participants. The
records reflected on the Ethereum blockchain regarding Securities
may not be current to reflect the most recent transactions in the
marketplace and may not reflect ownership by all market
participants.
---------------------------------------------------------------------------

    To create a new token (or tokenized asset) on Ethereum, including
for purposes of facilitating ancillary recordkeeping of Security
ownership, one must create a new smart contract. The smart contract
would be configured to detail, among other things, the name of the
issuer and the total supply of the tokens that correspond to the BSTX-
listed Security. Smart contracts can be designed to carry out any event
that one wants, but using a set standard or protocol allows for
participants transacting in those smart contracts to have uniform
expectations and functionality with respect to the tokens.
5. Background on Protocols
    A protocol (also sometimes referred to as a ``standard'' or
``protocol standard'') defines the functions, events, configurations,
and other features of a given smart contract. The most common protocol
used with Ethereum is the ERC-20 protocol, which describes the minimum
functions that are necessary

to be considered an ERC-20 token.\53\ The ERC-20 protocol offers basic
functionalities to transfer tokens, obtain account balances, and query
the total supply of tokens, among other features. The BSTX Protocol is
compliant with the ERC-20 protocol but adds additional requirements and
functionality, as described below.
---------------------------------------------------------------------------

    \53\ See e.g., Jesus Najera, Understanding ERC20, Coin Central
(Jan. 8, 2018), available at https://coincentral.com/understanding-erc20/; Alfonso de la Rocha, Anatomy of an ERC: An Exhaustive
Survey, Medium (May 7, 2018), available at https://medium.com/coinmonks/anatomy-of-an-erc-an-exhaustive-survey-8bc1a323b541.
---------------------------------------------------------------------------

    As noted above, Ether is the digital currency used to pay fees
associated with operating smart contracts (known as ``gas'') on the
Ethereum network. Payment of gas is required to operate smart contracts
because there are costs involved in performing the computations
necessary to execute a smart contract and to record any state
transitions onto the Ethereum blockchain.
    There is an important conceptual distinction between ERC-20 tokens,
including tokens used for ancillary recordkeeping purposes of
Securiteis [sic], and Ether itself. Where Ether is transferred by a
transaction that has a recipient address as its destination, token
transfers occur within the specific token contract state and have the
token smart contract as their destination, not the recipient's address.
The token smart contract tracks balances and issues events to the
Ethereum blockchain. In a token transfer,\54\ no transaction is
actually sent to the recipient of the token. Instead, the recipient's
address is added to a map within the token smart contract itself. In
contrast, a transaction sending Ether to an address changes the state
of an address. A transaction transferring a token to an address only
changes the state of the token contract, not the state of the recipient
address. Thus, an address is not really full of tokens; rather it is
the token smart contract that has the addresses and balances associated
with each address in it.
---------------------------------------------------------------------------

    \54\ A ``transfer'' in the context of the BSTX Protocol
regarding a token refers to a reallocation of the digital
representation of a Security on the Ethereum blockchain as an
ancillary recordkeeping mechanism to reflect corresponding changes
in ownership of the Security.
---------------------------------------------------------------------------

6. BSTX Protocol
    BSTX Rule 26138 requires that a BSTX listed company's Securities
must comply with the Protocol to trade on BSTX. The purpose of this
requirement is to ensure that all Securities are governed by the same
set of specifications and controls that allow for ownership of
Securities to be recorded to the Ethereum blockchain using tokens as an
ancillary recordkeeping mechanism.
    The Protocol involves three smart contracts. The Asset Smart
Contract is the primary smart contract that contains the balances of
Securities associated with each address and carries out the functions
necessary to reflect changes in ownership. There are two ancillary
smart contracts that are called by the Asset Smart Contract in
executing transactions. The first of these is the Registry Smart
Contract (``Registry''), which contains the list of permissioned (or
``whitelisted'') addresses, and the second is the Compliance Smart
Contract, which includes a variable list of additional compliance
related rules that the Asset Smart Contract must comply with in
executing a transaction. Each of these three smart contracts are
described in greater detail below:
    (1) Asset Smart Contract--The Asset Smart Contract defines and
establishes the tokens (e.g., the maximum number of tokens available
for a particular issuance) for purposes of the Ethereum blockchain
ancillary recordkeeping function and records a list of market
participant addresses and the tokens associated with each address.
    (2) Registry Smart Contract--The Registry Smart Contract (or
``Registry'') defines the permissions available to different types of
market participants to perform certain functions. Under the Protocol,
there are five different types of market participants connected with
the Registry, each with different abilities and permissions (as
detailed below):\55\ (1) Contract Owner, (2) Custodian, (3) Broker
Dealer, (4) Custodial-Account, and (5) Investor. The Registry also
contains the list of whitelisted addresses to which tokens may be sent
and additional information associated with each address (e.g., whether
an address has been suspended).
---------------------------------------------------------------------------

    \55\ There are additional roles that are not technically part of
the Registry and are instead specific to certain smart contracts.
For example, an ``Issuer'' is an Asset Smart Contract-specific role.
Also, an ``Administrator'' is a Compliance Smart Contract-specific
role that allows such a user to, for example, freeze the transfer of
tokenized assets for purposes of the ancillary recordkeeping
function under certain circumstances and modify or add compliance
rules to govern a token.
---------------------------------------------------------------------------

    (3) Compliance Smart Contract--The Compliance Smart Contract is the
set of rules held in a separate smart contract that a token can be
configured to abide by to ensure compliance with applicable laws and
regulations (e.g., by restricting a movement of Securities to an
address that has not been added to the Registry for purposes of the
Ethereum blockchain ancillary recordkeeping mechanism). The Compliance
Smart Contract can be modified to add or remove applicable rules in
light of changes to applicable regulatory requirements.
    Each of these three smart contracts work together to facilitate the
ancillary recordkeeping mechanism for Securities using the Ethereum
blockchain. The details of the specific functions, configurations, and
events under the Protocol are set forth in greater detail in Exhibit
3N.
    The Exchange selected the Ethereum blockchain among other possible
blockchains that support smart contracts as the blockchain upon which
Securities would be built in accordance with the BSTX Protocol for
ancillary recordkeeping purposes because of, among other reasons, its
widespread use, the public's familiarity with Ethereum, and its smart
contract functionality. Ethereum has maintained the second largest
market capitalization behind Bitcoin among blockchain-based digital
assets for at least two years and is widely recognized by the
public.\56\ Over 200,000 different ERC-20 tokens have been built on the
Ethereum blockchain, demonstrating its wide-spread use and
functionality. The Exchange believes that the Ethereum blockchain is
able to support all of the necessary functions of the BSTX Protocol to
carry out the Security ancillary recordkeeping function. The Exchange
also believes that using a widely-known smart contract platform as
opposed to a lesser-known smart contract platform may help issuers
become more comfortable with the ancillary recordkeeping process as
well as allow them to more-readily locate service providers as
necessary to assist them in building their Securities in accordance
with the BSTX Protocol. As noted, the Exchange may consider the use of
other blockchains supporting smart contract functionality in the
future, subject to applicable rule filing requirements with the
Commission pursuant to Section 19 of the Exchange Act.\57\
---------------------------------------------------------------------------

    \56\ The Commission has also publicly recognized Ethereum and
its native currency Ether. See William Hinman, Director, Division of
Corporation Finance, Digital Asset Transactions: When Howey Met Gary
(Plastic) (June 14, 2018) available at https://www.sec.gov/news/speech/speech-hinman-061418.
    \57\ 15 U.S.C. 78s.
---------------------------------------------------------------------------

G. Obtaining a Whitelisted Wallet Address \58\
---------------------------------------------------------------------------

    \58\ In the SIFMA April Comment Letter, SIFMA asked for further
detail regarding how a whitelisted wallet address is obtained, how
permissioning is determined for the whitelisted wallet and who
controls it. SIFMA April Comment Letter at 5. The Exchange notes
that BSTX Participants would obtain a whitelisted wallet address by
contacting the Exchange as detailed in this Part II.G. As the only
source for obtaining wallet addresses, the Exchange would be
responsible for permissioning wallet addresses as well. Each wallet
address is an alphanumeric string of characters assigned to a
particular BSTX Participant for the purposes of ancillary
recordkeeping. A BSTX Participant would not have the ability to move
tokenized assets to or from its wallet address or otherwise
``control'' the wallet address. The process of reallocating
tokenized asset balances among different wallet address is a
function performed by the Exchange in coordination with a Wallet
Manager(s). Thus, the proposed use of blockchain technology is
almost entirely passive for BSTX Participants, but for initially
obtaining a wallet address and the end-of-day reporting of balances.
The Exchange would be responsible for maintaining wallet addresses
and whitelisting for the entire life cycle of a Security and the
associated tokenized asset and life cycle of participants' accounts.
An unlimited number of addresses may be established for a Security
and can be removed as necessary.
---------------------------------------------------------------------------

    Pursuant to proposed Rule 17020(a), a BSTX Participant must, either
directly

or through its carrying firm, establish a wallet address to which its
end-of-day Security balances may be recorded by contacting BSTX.\59\ A
BSTX Participant that is a carrying broker-dealer for other BSTX
Participants would be assigned the wallet address with the status of a
Custodian, which would allow that BSTX Participant to request wallet
addresses on behalf of other BSTX Participants (for which it serves as
the carrying broker-dealer) as either a Custodial Account or Broker-
Dealer wallet address, as described above. A BSTX Participant that is
not a carrying broker-dealer could request a Broker-Dealer wallet
address, a Custodial Account wallet address in coordination with its
carrying firm, and an Investor wallet address on behalf of a customer
that would like its ownership of Securities represented by a tokenized
asset to be reflected at its own address for purposes of the Ethereum
blockchain as an ancillary recordkeeping mechanism.\60\
---------------------------------------------------------------------------

    \59\ Multiple Security issuances can be attributed to a BSTX
Participant's wallet address. A BSTX Participant would not need a
separate wallet address for each Security issuance that it trades.
    \60\ A BSTX Participant that is a carrying broker-dealer, and
which therefore has a Custodial Account address, could also request
Investor wallet addresses on behalf of customers.
---------------------------------------------------------------------------

    Contact information for BSTX for the purpose of establishing a
wallet address will be published on the BSTX website. Proposed BSTX
Rule 17020(a) requires a BSTX Participant to establish a wallet address
by contacting BSTX directly or through its carrying firm acting on its
behalf. BSTX expects that this process (i.e., contacting the Exchange
and establishing a wallet address) would occur contemporaneously with
the application by a market participant to become a BSTX Participant.
However, under proposed BSTX Rule 17020(a), a BSTX Participant would
have up until five business days from the date that the Exchange
approves the application of the BSTX Participant to satisfy the
obligation to obtain a wallet address. In the event that a BSTX
Participant has not obtained a wallet address prior to the Exchange's
approval of its application, the BSTX Participant would become subject
to the end-of-day Security balance reporting requirements in proposed
BSTX Rules 17020(b) and (c). However, because the BSTX Participant
would not yet have a wallet address to which the position balance
information could be attributed by a Wallet Manager, the tokenized
assets associated with any Security position balances of such BSTX
Participant would be attributed to the omnibus wallet address (as
described below) until the time the BSTX Participant obtains a wallet
address. For the avoidance of doubt, having end-of-day position balance
information for a tokenized asset related to a Security attributed to a
particular wallet address would not convey ownership of shareholder
equity in the issuer to the person or entity with whom such wallet
address is associated. BSTX-listed Securities will be cleared and
settled in the same manner as other NMS stocks through the facilities
of a registered clearing agency, and the official records of ownership
would be maintained as discussed above in Part II.E. Therefore, any
lack of a wallet address would not affect the official records of
ownership of the BSTX-listed Security.
    Once a BSTX Participant has been assigned a particular wallet
address, the only further obligation of that BSTX Participant is to
report its end-of-day Security position balances to BSTX, as described
below. Non-BSTX Participants that may trade Securities are not subject
to the requirement that they obtain a wallet address prior to trading a
Security or to the end-of-day Security balance position reporting
requirements. 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. The Exchange believes that the
proposed requirement in Rule 17020(a) to obtain a wallet address is
consistent with the Exchange Act and Section 6(b)(5) \61\ in particular
because it would help foster cooperation and coordination with persons
engaged in regulating and facilitating transactions in Securities by
setting forth a process through which BSTX Participants may obtain a
wallet address to which their end-of-day Security balances may be
recorded to the Ethereum blockchain as an ancillary recordkeeping
mechanism. The Exchange believes that the proposed requirement is
similar to obtaining a market participant identifier (``MPID'') in that
it establishes an identifier that can be attributed to a particular
BSTX Participant for reporting purposes. The proposed requirement to
obtain a wallet address is the same for all BSTX Participants, and is
therefore not unfairly discriminatory, and the Exchange does not
propose to charge a fee for obtaining a wallet address.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

H. Wallet Manager \62\
---------------------------------------------------------------------------

    \62\ A ``Wallet Manager'' is defined as a party approved by BSTX
to operate software compatible with the BSTX Protocol. See proposed
Rule 17000(a)(31). A Wallet Manager would be a third-party service
provider for the Exchange that will help facilitate establishing
wallet addresses for BSTX Participants and facilitate updates to the
Ethereum blockchain as an ancillary recordkeeping mechanism
regarding changes in ownership resulting from trading. Approved
Wallet Managers will be listed on the Exchange's website.
---------------------------------------------------------------------------

    As described further below, following the end of a trading day,
BSTX Participants (or their carrying firms) will be required to send
Security position balance information to BSTX. Based on the information
that BSTX receives, BSTX will deliver that information to one or more
Wallet Managers who will be responsible for updates to the Security
position balances on the Ethereum blockchain by allocating balances
among the wallet addresses of BSTX Participants and the omnibus wallet
address.
    The Exchange would enter into a contractual arrangement with a
Wallet Manager as a service provider to the Exchange performing the
function described above. The Exchange does not believe that performing
the ancillary recordkeeping process would make a Wallet Manager a
facility of the Exchange because the Wallet Manager's functions do not
meet the definition of ``facility'' under the Exchange Act. Section
3(a)(2) of the Exchange Act provides that ``the term `facility' when
used with respect to an exchange includes its premises, tangible or
intangible property whether on the premises or not, any right to the
use of such premises or property or any service thereof for the purpose
of effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent of
the exchange), and any right of the exchange to the use of any property
or

service.'' \63\ A Wallet Manager is neither property of the Exchange
nor does a Wallet Manager provide services for effecting or reporting a
transaction taking place on the Exchange. Rather, a Wallet Manager
performs the function of updating end-of-day Security position balance
information provided by the Exchange as part of an ancillary
recordkeeping mechanism. The Ethereum blockchain would not reflect any
particular transaction(s) that occurred in the marketplace but would
instead record allocations of end-of-day Security position balances--
which may result from a variety of activities in the marketplace for
the relevant Securities such as trading activity, lending activity, and
free-of-payment transfers between DTC accounts. The definition of
``facility'' in Section 3(a) of the Exchange Act is instead focused on
``effecting or reporting a transaction'' as part of the operations of
an exchange, namely the bringing together of orders for securities of
multiple buyers and sellers using non-discretionary methods under which
such orders interact with each other, and the buyers and sellers
entering such orders agree to the terms of a trade.\64\ Thus, systems
of communication to the Exchange used to effect trades or to receive
market data would likely be considered facilities of the Exchange, but
an end-of-day ancillary recordkeeping reporting process that does not
provide any real or near-time information regarding transactions in the
market should not.\65\ The Commission ``long has recognized that there
must be some practical limitations on entities encompassed within the
broad definition of the term `exchange.' '' \66\ The ancillary
recordkeeping process would have no impact on, or perform a function
related to, the bringing together of buyers and sellers' orders,
clearance, settlement, market data or routing functions of the exchange
(i.e., all of these functions can continue upon any suspension of the
ancillary recordkeeping process),\67\ and therefore cannot reasonably
be considered a ``facility'' of the exchange. The Exchange intends to
enter into a contractual arrangement with at least one Wallet
Manager.\68\ The Exchange intends to evaluate each potential Wallet
Manager's capability to receive information from BSTX related to BSTX
Participants' end-of-day Security balances along with its ability to
update the Ethereum blockchain upon receipt of such information.
Further, the Exchange intends to perform due diligence on potential
Wallet Managers, including but not limited to checking the list
produced by the U.S. Treasury Department of persons with whom U.S.
citizens are prohibited from doing business (``OFAC List''). Finally,
the Exchange intends to require each Wallet Manager in its service
agreement with the Wallet Manager to agree to comply with all
applicable securities laws.\69\ The Exchange believes that using the
criteria listed above for evaluating potential Wallet Managers may
prevent fraudulent and manipulative acts and practices, consistent with
Section 6(b)(5) of the Exchange Act.\70\ The Exchange believes that
requiring every Wallet Manager to act in a manner consistent with
applicable securities laws and not be on the OFAC List would help
ensure that persons reputed to have committed illegal acts and who
violate securities laws, including any such laws meant to prevent fraud
and market manipulation, will not operate as Wallet Managers.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78c(a)(2).
    \64\ 17 CFR 240.3b-16.
    \65\ The Commission has not defined the term ``facility.'' See
Exchange Act Release No. 26708 (Apr. 11, 1989), 54 FR 15429 (Apr.
18, 1989) (noting that the term ``facility'' has not changed since
it was originally adopted and that no hearing testimony referred to
it because ``the Committee felt that the definition was `self-
explanatory' '').
    \66\ Id.
    \67\ The Exchange notes that suspension of the ancillary
recordkeeping process would not impact trading in the Security.
Trading and the clearance and settlement of Securities can operate
entirely independently from the ancillary recordkeeping process.
    \68\ The Exchange expects that it will initially operate with
one Wallet Manager, but there is nothing to preclude the use of
another Wallet Manager provided the prospective Wallet Manager is
capable of operating software compatible with the BSTX Protocol. The
Exchange expects that tZERO would operate as the initial Wallet
Manager. BOX Exchange LLC, the self-regulatory organization of which
BSTX is a facility, neither controls, directly or indirectly, nor is
under common control with tZERO. The voting class of equity of the
BSTX facility is 50% owned by tZERO and BOX Digital Markets, which
is 100% owned by BOX Holdings Group LLC. BOX Exchange LLC does not
have direct or indirect ownership interest in BOX Holdings LLC or
its subsidiaries. As a result, because BOX Exchange LLC does not
exercise control over tZERO or its affiliates, tZERO would not
constitute ``property'' of the Exchange for purposes of determining
whether it is a facility. In any case, it is the functions of the
particular entity that should matter for purposes of determining
whether an entity or function is a facility of an exchange rather
than whether an entity is affiliated or not with an exchange. See
e.g., Exchange Act Release No. 54538 (Sept. 28, 2006), 71 FR 59184
(Oct. 6, 2006) (order approving PHLX's new equity trading system and
operation of optional outbound router as a facility of PHLX, where
PHLX had no ownership interest in the third party operator).
    \69\ Pursuant to the Exchange's agreement with the Wallet
Manager(s), the Wallet Manager(s) would be required to record
balances to the Ethereum blockchain following each trading day. As a
result, tokenized assets representing Security balances of BSTX
Participants would be updated each trading day, but not on non-
trading days (e.g., holidays).
    \70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

I. Coordination Between BSTX, Registered Clearing Agencies, and Wallet
Managers
    Upon the occurrence of a transaction on BSTX due to the completion
of its order matching process,\71\ BSTX would generate an execution
report, and it would deliver drop copies to its own front-end systems
to update the BSTX Participants and to NSCC.\72\ Where a BSTX
transaction creates a settlement obligation to transfer registered
ownership of a Security, clearance and settlement would be performed in
accordance with the rules, policies and procedures of a registered
clearing agency as described in Part II.E. above. The Wallet Manager
would be provided with end-of-day position balance information of BSTX
Participants necessary to update the Ethereum blockchain through the
end of day reporting mechanism discussed below.
---------------------------------------------------------------------------

    \71\ Order matching would occur through a price-time priority
model, as discussed in greater detail below.
    \72\ The last sale transaction data would also be publicly
disseminated pursuant to the transaction reporting plan, which would
occur before delivery of drop copies to these parties.
---------------------------------------------------------------------------

J. Reporting End-of-Day Security Balances To Facilitate Ancillary
Recordkeeping
    To update the Ethereum blockchain to reflect ownership of
Securities as an ancillary recordkeeping mechanism, the Exchange
proposes to require that each BSTX Participant, either directly or
through its carrying firm, report each business day to BSTX certain
end-of-day Security balances in a manner and form acceptable to
BSTX.\73\ A BSTX Participant that is a participant at DTC would be
required to report to BSTX the total number of Securities for each
class of Security that is credited to each DTC account of the BSTX
Participant.\74\ For a BSTX Participant that is not a DTC participant,
the BSTX Participant would be required to report the total number of
Securities for each class of Security that are credited to the BSTX
Participant by its carrying firm.\75\ Pursuant to proposed Rule
17020(d), upon receipt of the end-of-day Security balances from BSTX
Participants, the Exchange would provide such information to the Wallet
Manager(s) to update the Ethereum blockchain as an ancillary
recordkeeping mechanism to reflect

updates in Security balances.\76\ Proposed Rule 17020(d) would also
provide that unreported Security balances will be determined and
allocated to an omnibus wallet address for each Security as described
further below. The Exchange would determine the number of tokens (which
represent Securities) to be allocated to the omnibus wallet address by
the Wallet Manager(s) by subtracting the sum of the Security position
balances reported for a particular Security by BSTX Participants from
the total outstanding number of that particular Security. BSTX expects
that each Security would have a dedicated omnibus wallet address that
the Wallet Manager(s) would use to allocate the resulting balance to
that address.
---------------------------------------------------------------------------

    \73\ See Proposed Rule 17020(b).
    \74\ See Proposed Rule 17020(b)(1). As described above in Part
II.E., BSTX would maintain rules that would promote a structure in
which Securities would be held in ``street name'' with DTC.
    \75\ See Proposed Rule 17020(b)(2).
    \76\ Notably, because the Ethereum blockchain would be updated
each day using the end-of-day Security balance reports, and is, in
any case, only functioning at this time as an ancillary
recordkeeping function, concerns regarding a loss of private keys or
disruption to the Ethereum blockchain are fully mitigated. For
example, assume a BSTX Participant owns 100 Securities of XYZ at the
end of Day 1 and, as a result of trading on Day 2, ends Day 2 with a
balance of 200 Securities of XYZ. If the BSTX Participant's wallet
address were somehow compromised during the trading day on Day 2 and
the 100 tokenized assets representing Securities were moved to
another address (which could only be moved to another whitelisted
address), this would not substantively impact the functioning of the
blockchain as an ancillary recordkeeping tool. At the end of trading
on Day 2, the BSTX Participant would report its ownership of 200
Securities of XYZ to BSTX, which would then update the Ethereum
blockchain to reflect this end of day balance. The Wallet Manager
makes updates to the balances associated with wallet addresses by
reallocating tokens (which represent Securities) between wallet
addresses, including the omnibus wallet address, so that after each
trading day the wallet address account balances reflect the new
Security balances reported to BSTX pursuant to Rule 17020. These
reallocations based on end-of-day Security balance reports from BSTX
Participants are not designed to reflect actual transactions that
occurred during the trading day. Rather, the reallocation process
focuses on achieving the ends of having the correct number of tokens
(which represent Securities) attributed to each wallet address based
on the end-of-day Security balance reports. For example, if there
were only two transactions in the entire marketplace during the
trading day--a sale of 100 Securities from BSTX Participant A to
BSTX Participant B and a subsequent sale of 100 Securities from BSTX
Participant B to BSTX Participant C--the end of day reallocation
process would result in a reallocation of 100 tokens (which
represent Securities) from BSTX Participant A to BSTX Participant C,
and would consequently not reflect any actual transactions.
---------------------------------------------------------------------------

    The Exchange proposes that these end-of-day Security balance
reports would be required each business day when DTC is also open for
business, but after such time as DTC has completed its end-of-day
settlement process.\77\ The Exchange believes that once DTC has
completed its end-of-day settlement process, DTC participants would be
able to determine the number of Securities credited to their DTC
account(s) and to other market participants that settle through that
DTC participant. Thereafter, BSTX Participants, or their carrying
firms, would be able to obtain their Security balance information and
report it to BSTX by the end of the day. The Exchange understands that
DTC typically makes end-of-day security position reports available to
DTC participants at approximately 7:30 p.m. Eastern time. Therefore,
the Exchange will notify BSTX Participants via Regulatory Circular of
the time after 7:30 p.m. Eastern time by which end-of-day security
position balance reports will be required to be provided to BSTX
pursuant to BSTX Rule 17020(c).\78\ The Exchange will also notify BSTX
Participants via Regulatory Circular of the time by which it will
provide Security position balance information to the Wallet Manager(s)
so that the Wallet Manager(s) will have sufficient time to carry out
their contractual obligation to update the Ethereum blockchain as an
ancillary recordkeeping mechanism prior to the commencement of trading
on BSTX on the next trading day.
---------------------------------------------------------------------------

    \77\ See Proposed Rule 17020(c).
    \78\ The Exchange notes that other exchanges use a similar
formulation whereby the exact timing details for delivery of
information to an exchange are set forth in a regulatory circular.
See e.g., EDGX Rule 4.2.02 and BZX Rule 4.2.02 (setting forth a
``Regulatory Data Submission Requirement'' providing that BZX/EDGX
members ``shall submit to the Exchange such Exchange-related order,
market and transaction data as the Exchange by Regulatory Circular
may specify, in such form and on such schedule as the Exchange may
require.'').
---------------------------------------------------------------------------

    The Exchange acknowledges that, in certain circumstances, a BSTX
Participant subject to the requirements of proposed Rule 17020 could
fail to report end-of-day Security balances to BSTX in a timely manner,
inaccurately report such balances, or fail to obtain a wallet address
prior to acquiring a position in a Security. Such failures would impair
the ability of the Exchange to report complete end-of-day Security
balance information regarding a Security to the Wallet Manager(s) who
will be responsible for using that information, in turn, to update the
Security balance information that is reflected on the Ethereum
blockchain. The Exchange notes that BSTX Participants would be required
to comply with applicable Exchange Rules, including the requirement to
report their end-of-day Security balances, and may be subject to
disciplinary action for failing to comply with applicable rules
pursuant to proposed Rule Series 24000 (Discipline and Summary
Suspension).
    As noted above, to account for instances in which a BSTX
Participant fails to report or to accurately report its end-of-day
Security balance pursuant to proposed Rule 17020, as well as to account
for the positions of Security holders who are not BSTX Participants and
therefore not subject to the end-of-day Security balance reporting
requirement, the Exchange proposes to use an omnibus wallet address to
account for such Securities in the ancillary records that would be
published on the Ethereum blockchain. Specifically, the Exchange would
know the total number of Securities outstanding and would provide
information to the Wallet Manager(s) to allow the Wallet Manager(s) to
attribute the unreported Security balance (which shall be represented
by a token balance on the blockchain) for a given Security to an
omnibus wallet address for each Security. For example, assume that on
Day 1 there are 1,000 Securities for company XYZ outstanding, 800 are
held at DTC in accounts for the benefit of eight BSTX Participants and
200 are otherwise held at DTC. Assume further that BSTX receives timely
and accurate end-of-day XYZ Security balance reports from all eight
BSTX Participants in respect of 800 XYZ Securities. At the end of Day 1
as part of the end-of-day reporting process, the Exchange would provide
information to the Wallet Manager(s) allowing the Wallet Manager(s) to
allocate the 800 XYZ tokens (which represent Securities) among the BSTX
Participants consistent with their end-of-day Security balance reports
and to allocate the remaining balance of 200 to the omnibus wallet
address. In this same example, assume a BSTX Participant who holds 100
XYZ Securities failed to report its XYZ Security balance to BSTX. In
this case, the Exchange would provide information to the Wallet
Manager(s) allowing the Wallet Manager(s) to allocate 300 XYZ tokens
(which represent Securities) to the omnibus wallet address for XYZ
Security. The omnibus wallet address in this example would thus reflect
the sum of XYZ Securities held by non-BSTX Participants who are not
subject to the end-of-day Security balance reporting requirement as
well as any missing end-of-day Security balance reports among BSTX
Participants.\79\ In all cases, the

balances displayed on the Ethereum blockchain would reflect end-of-day
Security balances reported to BSTX pursuant to Rule 17020 and an
omnibus wallet address for any type of Security for which the sum of
the reported positions is less than the number of Securities known by
the Exchange to be issued and outstanding. In this way, it is possible
that the end-of-day balances published on the Ethereum blockchain may
not reflect the precise distribution of a Security among holders of the
Security, even among BSTX Participants.\80\ The Ethereum blockchain
could also reflect information that is not accurate to the extent that
BSTX Participants inaccurately report end-of-day Security balances to
BSTX. There could conceivably be situations where the number of
reported Securities exceeds the number of outstanding Securities of a
particular issuance (e.g., if Security XYZ were held entirely by BSTX
Participants and one BSTX Participant over-reports). There could also
be situations in which the Exchange is unable to communicate end-of-day
Security balances to the Wallet Manager(s) or the Wallet Manager(s) is/
are unable to update the blockchain. Additionally, it is also possible
that there could be a disruption to the website through which token
balances may be observed (i.e., Etherscan.io, discussed below), to the
Ethereum blockchain itself that prevents the updating of end-of-day
balances as an ancillary recordkeeping mechanism, or potentially to the
architecture or functioning of a particular Security.\81\
---------------------------------------------------------------------------

    \79\ The omnibus wallet address for each Security could also
have greater or fewer tokens (which represent Securities) as a
result of a misreport by a BSTX Participant. In the case of an
under-report by a BSTX Participant (e.g., owns 100 of XYZ
Securities, but reports only 90), the omnibus address for XYZ would
have an additional 10 tokens (which represent XYZ Securities)
allocated to it. In the case of an over-report (e.g., owns 100 of
XYZ Securities, but reports 110), the omnibus address for XYZ may
have 10 additional tokens (which represent XYZ Securities) allocated
to it.
    \80\ The Exchange notes, however, that even in such a case, the
total number of shares of the Security outstanding should still be
reflected on the blockchain due to unreported balances being
attributed to the omnibus wallet address. It is also possible the
omnibus wallet address could display the entire outstanding balance
of a Security to the extent only non-BSTX Participants held the
entire outstanding balance of a particular Security.
    \81\ This could potentially occur if, for example, the Ethereum
Virtual Machine were to suffer a ``51% Attack'' whereby an
individual or group acting together gain 51% or more of the
computing power, essentially giving the attackers control over the
Ethereum blockchain and the ability to disrupt or modify
transactions on the Ethereum blockchain. The Exchange believes that
this possibility is remote, but the Exchange will nonetheless
monitor for such possibilities either directly or by using a vendor,
which may include Wallet Managers that agree to perform this
function and promptly alert the Exchange to any compromise of the
Ethereum blockchain or other type of disruption that might impact
the end-of-day Security balance reporting process as an ancillary
recordkeeping mechanism (e.g., inability to access Etherscan.io).
---------------------------------------------------------------------------

    To address the potential for inaccurate reporting by BSTX
Participants, the Exchange is proposing Rule 17020(e), which provides
that a BSTX Participant shall promptly send a corrected end-of-day
Security balance report to the Exchange upon the Participant's
discovery that it submitted an inaccurate end-of-day report that has
not already been corrected or superseded. Rule 17020(e) would also
provide that if the Exchange has reason to believe that the Security
balances reported by one or more BSTX Participants may be inaccurate,
the Exchange may request additional information regarding the
applicable reports and balances from any BSTX Participant. Under the
proposed rule, a BSTX Participant shall promptly respond to any
additional information requests that the Exchange may make regarding
its end-of-day Security balance reports.\82\ The Exchange believes that
it is important for the protection of investors and in the public
interest, consistent with Section 6(b)(5) of the Exchange Act, to
establish mechanisms to help ensure the accuracy of end-of-day Security
balances by requiring BSTX Participants to promptly correct known
errors in their reports and to provide the Exchange with express
authority to seek additional information from BSTX Participants where
the Exchange has reason to believe to that one more reports may be
inaccurate.\83\ Similar mechanisms to promote accurate reporting exist
for a wide variety of different market participant obligations today,
such as the duty of the broker-dealer operator of an NMS stock
alternative trading system to promptly correct material errors or
omissions discovered in their Form ATS-N and the duty to correct trade
reports to FINRA.\84\ The Exchange believes that proposed Rule 17020(e)
sets forth reasonable processes to help ensure the Security position
balances published as token balances on the blockchain are accurate,
and that ensuring the accuracy of this information will better
facilitate all market participants' ability to evaluate the potential
uses of blockchain technology in securities transactions.
---------------------------------------------------------------------------

    \82\ This additional information may include asking the BSTX
Participant to confirm its Security balances, providing a copy of
the information the BSTX Participant used to provide its end-of-day
Security balance position report, or other books and records of the
BSTX Participant relating to its transactions in one more
Securities.
    \83\ 15 U.S.C. 78f(b)(5). As previously noted, failure to comply
with applicable Exchange Rules, including the end-of-day Security
balance reporting process could result in disciplinary action
against a BSTX Participant. The Exchange would consider a BSTX's
Participant's efforts to comply with Rule 17020(e) by promptly
submitting a corrected report or responding to additional
information requests from the Exchange in determining whether to
bring, or the appropriate consequences of, a disciplinary action.
    \84\ See 17 CFR 242.304(a)(2)(i)(C) (requiring correcting
amendments to Form ATS and ATS-N ``promptly'' after discovery of
incorrect information previously filed); FINRA, Trade Reporting FAQ,
Section 311 (Reporting Cancellations, Corrections and Reversals),
https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
---------------------------------------------------------------------------

    In addition to these controls and mechanisms for ensuring the
accuracy of reported records, the Exchange may need to implement
further measures in situations where the ability to update blockchain
records may be affected by exogenous factors, as discussed above. To
account for these types of situations, proposed Rule 17020(f) provides
that the Exchange may suspend the requirements in paragraphs 17020(a)
through (d) regarding any BSTX Participant and/or regarding one or more
Securities, as applicable, in its discretion and in any such case the
Exchange will provide prompt notice thereof and the reason(s) therefore
to BSTX Participants.\85\ The Exchange will notify the Commission
within two hours of its determination to make any such suspension and
the suspension may continue in effect for no more than thirty calendar
days from the date the determination is made unless the Exchange has
submitted a proposed rule change with the Commission seeking approval
of such suspension, in which case the suspension may continue in effect
until the Commission approves or disapproves the proposed rule
change.\86\
---------------------------------------------------------------------------

    \85\ The particular details included in such notice to BSTX
Participants will vary based on the facts and circumstances giving
rise to the suspension, but the Exchange expects that such notice
would describe: (i) The impacted Security (or Securities); (ii) the
nature of the disruption; (iii) the anticipated length of the
suspension; and (iv) any changes to BSTX Participants' obligations
to report end-of-day Security balances.
    \86\ See proposed Rule 17020(f). The Exchange believes that
proposed Rule 17020(f) may foster coordination with persons
processing information with respect to securities and is not
designed to permit unfair discrimination because such provision will
allow the Exchange to suspend certain Rule requirements in events
where there may be difficulty coordinating or sharing pertinent
information with BSTX Participants and/or Wallet Manager(s).
Further, Rule 17020(f) is designed to apply to all market
participants equally and to provide notice to affected market
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.
---------------------------------------------------------------------------

    In all such cases involving these types of disruptions relating to
the end-of-day Security balance reporting process, there would be no
impact on the ability to trade, clear, or settle Security transactions
in the ordinary course.\87\

This is because the end-of-day Security balance reporting is solely as
an ancillary record-keeping mechanism and because the actual trading,
clearance, and settlement of Securities would occur in the same manner
as other NMS stock.
---------------------------------------------------------------------------

    \87\ The Exchange acknowledges, of course, that certain issues
such as a widespread power outage that prevents the Exchange from
being able to transmit information to the Wallet Manager(s) could
also result in a disruption to trading on BSTX and potentially the
declaration of a halt in trading of the Security by the Exchange.
---------------------------------------------------------------------------

    The Exchange would set forth via Regulatory Circular the precise
manner in which Securities should be reported. 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 position balances of the BSTX Participant.\88\
---------------------------------------------------------------------------

    \88\ Pursuant to the BSTX Listing Rules, BSTX will allow listing
of three types of Securities: Equity Securities, preferred
Securities, and warrant Securities. These three types of Securities
will have similar end-of-day reporting processes; each BSTX
Participant will be required to provide end-of-day Security position
balance information to BSTX related to each Security issuance based
on such BSTX Participant's DTC account balance. The BSTX Listing
Rules also discuss paired Securities, which are Securities that may
be transferred and traded only in combination with one another as a
single economic unit. For paired Securities, BSTX expects that BSTX
Participants, when submitting position balance information to BSTX,
will specify the end-of-day balances for each constituent Security
that comprises a paired Security.
---------------------------------------------------------------------------

    As a result of this process, the Ethereum blockchain would in the
ordinary course reflect for each Security the end-of-day balance
associated with each BSTX Participant's wallet address. Wallet
addresses are essentially just a string of numbers and characters, and
it would not be made public which BSTX Participant is associated with
which wallet address or which address is the omnibus wallet
address.\89\ An observer of balances associated with a particular
address would not be able to determine whether a particular address
represented, for example, a carrying firm reporting end-of-day balances
on behalf of multiple BSTX Participants, an individual BSTX
Participant, or the omnibus wallet address. Neither could an observer
determine which underlying customer(s) of a BSTX Participant associated
with a particular wallet address held the Securities or whether the
BSTX Participant owned the Securities proprietarily. In addition, an
observer of the token balances related to a particular Security would
not be able to tell whether a particular wallet address was long or
short the shares.\90\ For these reasons, the Exchange believes that the
balance information that would be publicly available on the Ethereum
blockchain would be sufficiently anonymous to address privacy concerns
related to such information. Balance information for the Ethereum
blockchain is available at Etherscan.io (``Etherscan''). From
Etherscan.io, an observer would be able to search for the name of the
particular Security and see the holders of tokens representing the
Securities and the associated quantity, as well as other information
(e.g., transfers made as a result of the Wallet Manager(s) reallocation
process).\91\
---------------------------------------------------------------------------

    \89\ The Wallet Manager(s) would have information regarding
Security balance information associated with a particular BSTX
Participant. However, as noted in Part II.H, a condition of serving
as a Wallet Manager would include, among other things, a
representation to comply with the federal securities laws, including
trading on the basis of material non-public information.
    \90\ This is because the end-of-day ancillary recordkeeping
process captures only end-of-day balances as reported by DTC to BSTX
Participants or their carrying firms. Thus, if a BSTX Participant
borrowed Securities and the borrowed Securities were moved to its
DTC account (or the DTC account of its carrying firm on its behalf),
the borrowed Securities would appear to be a long position in the
Security, when in fact the BSTX Participant was taking a short
position.
    \91\ This process can be done presently with ERC-20 tokens or
other digital assets built on Ethereum.
---------------------------------------------------------------------------

    The Exchange does not believe that the ancillary records of
Security balance information published on the Ethereum blockchain would
be likely to cause investor confusion because there is no similar
source of information with which an observer of the blockchain data
could be confused. That is, the resting position balances related to
Security ownership of BSTX Participants and other market participants
are not available through another medium (e.g., such as by DTC making
such information available) in a manner that could lead an investor to
be confused as to whether the Ethereum blockchain or some other source
of Security balance information is accurate. Moreover, Security
position balance information as recorded on the Ethereum blockchain in
token form will not reflect legal ownership of Securities and the
identities of BSTX Participants corresponding to each wallet address
(as well as the omnibus wallet address) would not be made public. The
Exchange believes that the proposed end-of-day Security balance
reporting requirement is consistent with the Exchange Act, and Section
6(b)(5) \92\ in particular, because it is designed to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing information with respect to
transactions in Securities and would not unfairly discriminate among
BSTX Participants, all of whom are subject to the same reporting
requirement. The purpose of the reporting obligation is to allow the
Exchange to receive information from BSTX Participants regarding end-
of-day balances in Securities so that the Exchange can provide that
information to the Wallet Manager(s) and the Wallet Manager(s) can, in
turn, use the information to update the Ethereum blockchain as an
ancillary recordkeeping mechanism reflecting changes in Security
ownership (i.e., the recording of end-of-day balance information).
Without this information, all of the outstanding balances regarding a
Security would be attributed by the Wallet Manager(s) in tokenized form
to the omnibus wallet address rather than allocated to multiple wallet
addresses belonging to corresponding BSTX Participants. Accordingly, to
the extent that BTSX Participants have end-of-day balances in
Securities, the allocation of the appropriate balances to their
respective wallet addresses by the Wallet Manager(s) will reflect a
relatively more robust use of the functionality of the smart contracts
than if the entire outstanding balance of a Security is attributed in
tokenized form to the omnibus wallet address. Promoting this more
robust use of the functionality of the smart contracts and their
ability to allocate and re-allocate Security balances in tokenized form
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. The Exchange notes that under the existing authority of
other equity exchanges, the exchange is able to request that exchange
members/participants furnish to the exchange records pertaining to
transactions executed on or through the exchange in a time and manner
required by such exchange.\93\ Accordingly, BSTX believes that the
proposed end-of-day Security balance reporting requirement would be
consistent with authority that the Commission has already approved
regarding furnishment of records by members of exchanges.
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78f(b)(5).
    \93\ See e.g., BOX Rule 10000(a) and (b), Cboe BZX Rule 4.2, and
IEX Rule 4.540. Broker-dealers are also subject to daily or real-
time reporting obligations in a variety of other contexts. For
example, pursuant to the FINRA Rule 7000 Series. See e.g., FINRA
Rule 7230A(b) (noting that ``Participants shall transmit trade
reports to the System for transactions in Reportable Securities as
soon as practicable but no later than 10 seconds after execution . .
.''). Trades in municipal securities are generally required within
15 minutes of the time of trade. See MSRB Rule G-14(a)(ii).
---------------------------------------------------------------------------

    The Exchange recognizes that, while the ancillary recordkeeping
mechanism will provide additional transparency into Security holdings,
there are limitations in what the Ethereum

blockchain will reflect with regard to end-of-day Security balances as
an ancillary recordkeeping mechanism given that all non-BSTX
Participants' balances will be aggregated and reflected in an omnibus
wallet address for each Security.\94\ In addition, the end-of-day token
balances (which represent Securities) may be inaccurate or
unavailable,\95\ such as when a BSTX Participant misreports its balance
or under circumstances in which BSTX is unable to send the balances to
the Wallet Manager or the Wallet Manager is unable to update the
Ethereum blockchain, as discussed above. For these reasons, among
others, the Exchange believes that initially using blockchain
technology as an ancillary recordkeeping mechanism pursuant to which
the Securities represented on the blockchain in tokenized 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.\96\ In the event of
any disruption to the blockchain, the architecture of the Security (and
its tokenized representation), or to the end-of-day Security balance
reporting process, there would be no impact on the ability of market
participants to trade Securities or current balances of Securities
actually held by each market participant through the facilities of DTC,
which the Exchange believes furthers the protection of investors and
the public interest, consistent with Section 6(b)(5) of the Exchange
Act.\97\ Moreover, the Exchange 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,
consistent with Section 6(b)(5) of the Exchange Act.\98\ Finally, the
Exchange believes that use of anonymized wallet addresses to track end-
of-day balances may prevent fraudulent and manipulative acts and
practices, consistent with Section 6(b)(5) of the Exchange Act,\99\
because obscuring the identities of the wallet address owners may make
it difficult to misuse any private information associated with these
wallet addresses. The Exchange believes 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.\100\
---------------------------------------------------------------------------

    \94\ The Exchange does not believe that imposing the end-of-day
Security reporting 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. Market participants
that voluntarily choose to become BSTX Participants must comply with
the rules of the Exchange, but they remain free to become a member
of another exchange that supports trading of Securities or to
purchase the Securities OTC. The Exchange further notes that it
believes the end-of-day Security balance reporting process would not
impose a substantial burden on BSTX Participants, because it would
not require significant resources or time.
    \95\ The Exchange notes that, pursuant to the end-of-day
reporting process as provided in Rule 17020 and as explained in
further detail above, in all cases the Exchange would provide
Security balance information to the Wallet Manager based on reports
provided by BSTX Participants, and in no case will the Exchange
knowingly provide inaccurate information to the Wallet Manager. The
Exchange believes that inaccuracies in end-of-day Security balances
should not be routine, and has adopted a number of mechanisms as
safeguards against potential inaccuracies, including a duty to
promptly correct an inaccurate report, authority for the Exchange to
request additional information, suspension of the reporting process,
and potential disciplinary action against BSTX Participants who do
not meet these requirements. See Proposed Rule 17020(e) and (f).
Nevertheless, the Exchange has described here potential scenarios
where potential inaccuracies could theoretically occur in the
interest of full transparency. Ultimately, any reporting regime
depends on the accuracy of the information reported to the reporting
authority, including reporting regimes administered by the
Commission such as large trader reporting, ATS quarterly transaction
volume data, and security-based swap reporting. See e.g., 17 CFR
13h-1(b)(1)(iii) (requiring prompt filing of a Form 13H filing at
the end of each calendar quarter if any information in a Form 13H
becomes inaccurate for any reason); Exchange Act Release No. 74244,
80 FR 15464 (March 19, 2015) (``any system for transaction reporting
must accommodate the possibility that certain data elements may be
incorrectly reported.'').
    \96\ 15 U.S.C. 78f(b)(5).
    \97\ Id. The Exchange notes that the incidences of blockchain
disruption or balance reporting issues would be mitigated by its
proposals in Rules 17020 (e) and (f).
    \98\ 15 U.S.C. 78f(b)(5).
    \99\ Id.
    \100\ In the SIFMA April Letter, SIFMA asked about the
implications of having end-of-day balance positions publicly
available and whether the reporting system can be ``gamed'' by a
BSTX Participant falsely reporting large holdings. SIFMA April
Letter at 5. The Exchange notes that knowingly reporting a false
number of Securities to the Exchange would be a direct violation of
proposed Rule 17020, violate just and equitable principles of trade,
and would be subject to disciplinary action by the Exchange.
Nevertheless, if a BSTX Participant did try to ``game'' the
ancillary recordkeeping process by, as SIFMA suggests, over- or
under-reporting a quantity, it would not have any impact on the
ability of the Securities to trade, clear or settle. Further, as
described above, the balance information would not be useful to
inform a market participant's trading in Securities because an
observer of the blockchain would not know which market participant
is associated with each wallet address, whether it is a DTC
Participant reporting on behalf of multiple different BSTX
participants, whether the position is long or short, and whether the
position is for a customer or a proprietary position of the BSTX
Participant. See supra notes 94 and 96 and accompanying text.
Accordingly, it is unclear what purpose would be served or incentive
there would be for a BSTX Participant to try to ``game'' the
ancillary recordkeeping process. Attempting to do so offers no
discernable advantage while at the same time exposing a BSTX
Participant to disciplinary action.
---------------------------------------------------------------------------

K. Trading Securities on Other National Securities Exchanges and
Implications Related to End-of-Day Reporting
    Securities would be eligible for trading on other national
securities exchanges that extend unlisted trading privileges (``UTP'')
to them. As described above in Part II.E, Securities would be held in
``street name'' at DTC, have a CUSIP number, and would clear and settle
through the facilities of a clearing agency registered with the SEC
(i.e., NSCC and DTC respectively). As a result, Securities would be
able to trade on other exchanges and OTC in the same manner as other
NMS stock. Accordingly, other exchanges would be able to extend
unlisted trading privileges to Securities in accordance with Commission
rules. The end-of-day Security position balance reporting by BSTX
Participants and the publication of such balance information on the
blockchain does not impact the ability of Securities to trade on other
exchanges or OTC.
    The Exchange proposes to include certain rules that contemplate the
trading of Securities that may be listed on other national securities
exchanges.\101\ Since there are currently no other national securities
exchanges trading Securities, these rules would be implemented in
anticipation of other exchanges eventually listing and trading their
own Securities. BSTX recognizes that another exchange trading
Securities, or the equivalent thereof, may require BSTX to adopt
certain rules specific to such other exchange in order to extend
unlisted trading privileges to the other exchange's Securities
consistent with Rule 12f-5.\102\
---------------------------------------------------------------------------

    \101\ See e.g., proposed Rule 25040(e).
    \102\ 17 CFR 240.12f-5.
---------------------------------------------------------------------------

    The Exchange reiterates that the proposed ancillary recordkeeping
process is entirely separate from the functioning and requirements of
Regulation NMS, as discussed above in II.C. Securities may trade away
from BSTX in a manner identical to all other NMS stocks.
    However, to the extent another exchange sought to adopt its own
ancillary recordkeeping mechanism for BSTX-listed Securities, the
Exchange believes there are multiple ways that this could be done. The
Exchange cannot predict whether an exchange would want to establish an
ancillary recordkeeping mechanism with respect

to BSTX-listed Securities, what model another exchange might choose,
and how or whether such a structure would interact with the Exchange's
end-of-day reporting structure. The Exchange expresses no view on the
merits of any such hypothetical proposal other than to note that there
is no limitation proposed here that would prevent another exchange from
participating in the Exchange's ancillary recordkeeping process or
establishing some alternative or complementary process. One possible
way another exchange could structure its end-of-day Security balance
reporting, would be for the exchange to adopt rules stating that it
will collect end-of-day Security balance information from its members
based on the balance in each participant's DTC account and then such
exchange could send that information to BSTX to deliver to a Wallet
Manager for posting to the Ethereum blockchain. No development of
blockchain technology, smart contract functionality, or other similar
technology would be required.\103\ An exchange could also support
trading in BSTX-listed Securities without implementing such
requirements. An exchange not wishing to report end-of-day balance
positions directly to BSTX could instead engage its own version of a
wallet manager that could communicate with BSTX's Waller Manager(s) to
facilitate updates to the Ethereum blockchain.\104\ A third potential
variation might be for an exchange to design its own reporting process
and technology to facilitate ancillary recordkeeping, with no nexus to
the BSTX reporting structure.\105\ The Exchange notes that it has no
authority to bind another exchange to any particular reporting
structure and is not proposing anything that would limit an exchange's
ability to establish a similar, different, or integrated reporting
structure. As noted above and elsewhere in this proposal, the
Exchange's ancillary recordkeeping mechanism is not a function of
Regulation NMS as it exists today, and this proposal should not be read
to impose conditions on transactions or persons other than BSTX
Participants. Securities clear and settle in the same manner as other
NMS stock and therefore an exchange that chooses to extend UTP to
Securities may trade them in the same manner as any other NMS stock
without any end-of-day or blockchain reporting structure.
---------------------------------------------------------------------------

    \103\ By way of analogy, this is because an exchange that adopts
such a reporting structure would be in a position similar to a BSTX
Participant, in that it would simply be delivering end-of-day
security balance totals to BSTX (or a Wallet Manager). Therefore,
just as with BSTX Participants who need not develop any particular
blockchain reporting technology pursuant to end-of-day reporting, an
exchange that chose to send end-of-day Security balance reports to
BSTX (or a Wallet Manager that BSTX used to update the Ethereum
blockchain) would not need to develop any blockchain technology.
    \104\ Because the ancillary recordkeeping process proposed by
the Exchange is not part of Regulation NMS or designed to facilitate
compliance with Regulation NMS, it is unclear that it would be
necessary for BSTX and such other exchange(s) to file a NMS plan
with respect to coordinating ancillary recordkeeping mechanisms. A
NMS plan is defined under the Exchange Act as any joint SRO plan in
connection with: ``(i) the planning, development, operation or
regulation of a national market system (or a subsystem thereof) or
one or more facilities thereof; or (ii) the development and
implementation of procedures and/or facilities designed to achieve
compliance by a self-regulatory organizations and their members with
any section of this Regulation NMS . . .'' 17 CFR 242.600(b)(44).
Nevertheless, to the extent the Commission believed a NMS plan would
be necessary to facilitate the coordination of ancillary
recordkeeping processes, the Exchange would gladly welcome any such
opportunity as it would promote more complete end-of-day Security
balance records by including more market participants in the
process. No other exchange has yet contacted the Exchange to express
interest in establishing a coordinated ancillary recordkeeping
process, but the Exchange would be pleased to engage other exchanges
in this regard.
    \105\ An exchange need not even necessarily use blockchain
technology to record end-of-day position balance reports of its
members. Such a recordkeeping process would not be able to leverage
the smart contract functionality built into BSTX-listed issuers'
shares pursuant to the BSTX Protocol, but there is nothing in
principle that would prevent another exchange from using its own
systems or technology to create ancillary records of its members'
Security balances. In such a case, the records published by the
other exchange would reflect those of its members while the Etherum
blockchain would reflect the balances of BSTX Participants. These
would be separate sets of ancillary records.
---------------------------------------------------------------------------

    Market participants that wish to trade Securities and choose to
become BSTX Participants or participants of another exchange that
chooses to adopt some ancillary recordkeeping process would subject
themselves to either BSTX's or the other exchange's ancillary reporting
process or both. Of course, any market participant doing this would
have to opt for participation in the relevant exchange, and any costs
or compliance burden would be set forth in the rules of the relevant
exchange.\106\ Any market participant that would not want to perform
the reporting obligations could avoid doing so by simply choosing to
not become a BSTX Participant or participant of any other exchange
imposing end-of-day Security balance reporting requirements on its
members.
---------------------------------------------------------------------------

    \106\ A market participant that chooses to become a BSTX
Participant would only need to obtain a wallet address from the
Exchange and comply with the end-of-day Security balance reporting
requirement pursuant to proposed Rule 17020. There is no
technological investment needed by BSTX Participants under the
proposal related to the use of distributed ledger technology.
---------------------------------------------------------------------------

L. Benefits of a Security
    As described above, the proposed BSTX Rules contemplate the use of
smart contract functionality to record end-of-day Security position
balance information in tokenized form to the Ethereum blockchain as an
ancillary recordkeeping mechanism. The Exchange's proposal thereby
represents an ancillary pairing of blockchain technology with the
existing equities market infrastructure, in a manner consistent with
Section 6(b)(5) and other relevant provisions of the Exchange Act, as
described herein. The Commission has stated that it is ``mindful of the
benefits of increasing use of new technologies for investors and the
markets, and has encouraged experimentation and innovation . . .''
\107\ stating further that ``[i]nformation and communications
technologies are critical to healthy and efficient primary and
secondary markets.'' \108\ Regarding the judgment of whether the
benefits of certain technologies are meritorious, the Commission has
explained its view that ``[t]he market will ultimately prove the worth
of technology--whether the benefits to the industry and its investors
of developing and using new services are greater than the associated
costs.'' \109\ Consistent with these statements, the Exchange believes
that promoting use of the functionality of smart contracts and their
ability to allocate and re-allocate Security balances in tokenized form
across multiple addresses in connection with end-of-day Security
position 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 current equity market infrastructure and thereby
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.\110\ As noted,
because the

blockchain and Security balances recorded on the Ethereum blockchain in
tokenized form do not reflect legal ownership of the actual securities
of BSTX-listed issuers, any disruption to the Ethereum blockchain, the
Security architecture, or the end-of-day reporting process would have
no impact on the ability of Securities to trade on BSTX or otherwise,
which the Exchange believes furthers the protection of investors and
the public interest, consistent with Section 6(b)(5) of the Exchange
Act.\111\
---------------------------------------------------------------------------

    \107\ Securities and Exchange Commission, The Impact of Recent
Technological Advances on the Securities Markets (Sep. 1997),
available at: https://www.sec.gov/news/studies/techrp97.htm.
    \108\ Id.
    \109\ Id.
    \110\ Report of the Senate Committee on Banking, Housing & Urban
Affairs, S. Rep. No. 94-75, at 8 (1975) (expressing Congress'
finding that new data processing and communications systems create