[Federal Register Volume 83, Number 148 (Wednesday, August 1, 2018)]
[Notices]
[Pages 37579-37605]
[FR Doc No: 2018-16427]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83723; File No. SR-BatsBZX-2016-30]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order
Setting Aside Action by Delegated Authority and Disapproving a Proposed
Rule Change, as Modified by Amendments No. 1 and 2, To List and Trade
Shares of the Winklevoss Bitcoin Trust

July 26, 2018.

I. Introduction

    On June 30, 2016, Bats BZX Exchange, Inc. (``BZX'') filed a
proposed rule change with the Commission, seeking to list and trade
shares of the Winklevoss Bitcoin Trust.\1\ The Commission, acting
through authority delegated to the Division of Trading and Markets,\2\
disapproved the proposed rule change on March 10, 2017,\3\ and BZX then
filed a timely petition seeking Commission review of the disapproval by
delegated authority.\4\ The Commission granted BZX's Petition for
Review, seeking public comments in support of or in opposition to the
March Disapproval Order.\5\ Today's order sets aside the March
Disapproval Order, and, for the reasons discussed below, disapproves
BZX's proposed rule change.\6\
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    \1\ BZX made this filing under Section 19(b)(1) of the
Securities Exchange Act of 1934, 15 U.S.C. 78s(b)(1) (``Exchange
Act'') and Rule 19b-4 thereunder, 17 CFR 240.19b-4. The Commission
published notice of the proposed rule change in the Federal Register
on July 14, 2016. See Exchange Act Release No. 78262 (July 8, 2016),
81 FR 45554 (July 14, 2016) (SR-BatsBZX-2016-30). On August 23,
2016, the Commission designated a longer period within which to act
on the proposed rule change. See Exchange Act Release No. 78653
(Aug. 23, 2016), 81 FR 59256 (Aug. 29, 2016). On October 12, 2016,
the Commission instituted proceedings under Section 19(b)(2)(B) of
the Exchange Act, 15 U.S.C. 78s(b)(2)(B), to determine whether to
approve or disapprove the proposed rule change. See Exchange Act
Release No. 79084 (Oct. 12, 2016), 81 FR 71778 (Oct. 18, 2016). On
October 20, 2016, BZX filed Amendment No. 1 to the proposed rule
change, replacing the original filing in its entirety, and Amendment
No. 1 was published for comment in the Federal Register on November
3, 2016. See Exchange Act Release No. 79183 (Oct. 28, 2016), 81 FR
76650 (Nov. 3, 2016) (``Amendment No. 1''). On January 4, 2017, the
Commission designated a longer period for Commission action on the
proposed rule change. See Exchange Act Release No. 79725 (Jan. 4,
2017), 82 FR 2425 (Jan. 9, 2017). On February 22, 2017, BZX filed
Amendment No. 2 to the proposed rule change (``Amendment No. 2'').
Amendment No. 2 is available on the Commission's website at https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630-1594698-132357.pdf.
    \2\ See 17 CFR 200.30-3(a)(12).
    \3\ See Exchange Act Release No. 80206 (Mar. 10, 2017), 82 FR
14076 (Mar. 16, 2017) (``March Disapproval Order'').
    \4\ On March 17, 2017, pursuant to Rule 430 of the Rules of
Practice, see 17 CFR 201.430(b)(1), BZX submitted a Notice of
Intention to Petition for Review of Order Disapproving a Proposed
Rule Change, and on March 24, 2017, BZX submitted its Petition for
Review (``Petition for Review''). BZX's Notice of Intention to
Petition for Review is available on the Commission's website at:
https://www.sec.gov/rules/sro/batsbzx/2017/batsbzx-petitionforreview.pdf. BZX's Petition for Review is available on the
Commission's website at: https://www.sec.gov/rules/sro/batsbzx/2017/petition-for-review-sr-batsbzx-2016-30.pdf.
    \5\ On April 24, 2017, pursuant to Rule 431 of the Rules of
Practice, see 17 CFR 201.431, the Commission issued an order
granting the Petition for Review, see Exchange Act Release No. 80511
(Apr. 24, 2017), 82 FR 19770 (Apr. 28, 2017) (``Review Order''), and
designated May 15, 2017, as the date by which any party to the
action or any other person could file a written statement in support
of or in opposition to the March Disapproval Order. See id.
    \6\ Commissioner Peirce dissents from the Commission's
disapproval of this proposal, and her written dissent can be found
on the Commission's website, https://www.sec.gov.
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    In response to BZX's Petition for Review, the Commission has
conducted a de novo review of BZX's proposal \7\--giving careful
consideration to the entire record, including BZX's amended proposal
and Petition for Review and all comments and statements submitted by
BZX and other persons--to determine whether the proposal is consistent
with the requirements of the Exchange Act and the rules and regulations
issued thereunder that are applicable to a national securities
exchange.\8\ Specifically, the Commission has considered whether the
BZX proposal is consistent with Exchange Act Section 6(b)(5), which
requires, in relevant part, that the rules of a national securities
exchange be designed ``to prevent fraudulent and manipulative acts and
practices'' and ``to protect investors and the public interest.'' \9\
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    \7\ Pursuant to Rule 431(a) of the Commission's Rules of
Practice, the Commission may affirm, reverse, modify, set aside, or
remand for further proceedings, in whole or in part, an action made
pursuant to delegated authority. 17 CFR 201.431(a).
    \8\ Section 19(b)(2)(C) of the Exchange Act directs the
Commission to approve a proposed rule change of an SRO, such as a
national securities exchange, if the Commission finds that the
proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to
the SRO and directs the Commission to disapprove the proposed rule
change if it is unable to make such a finding. See 15 U.S.C.
78s(b)(2)(C).
    \9\ 15 U.S.C. 78f(b)(5).
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    Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued

thereunder . . . is on the self-regulatory organization [`SRO'] that
proposed the rule change.'' \10\ The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis of
its consistency with applicable requirements must all be sufficiently
detailed and specific to support an affirmative Commission finding,\11\
and any failure of an SRO to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
applicable rules and regulations.\12\
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    \10\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
    \11\ See id.
    \12\ See id.
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    BZX argues, among other things, that its proposal is consistent
with Exchange Act Section 6(b)(5) on the grounds that the
``geographically diverse and continuous nature of bitcoin trading makes
it difficult and prohibitively costly to manipulate the price of
bitcoin'' \13\--and that therefore the bitcoin market ``generally is
less susceptible to manipulation than the equity, fixed income, and
commodity futures markets'' \14\--and because ``novel systems intrinsic
to this new market provide unique additional protections that are
unavailable in traditional commodity markets.'' \15\ BZX also asserts
that the March Disapproval Order failed to appreciate that the proposal
provides ``traditional means of identifying and deterring fraud and
manipulation,'' \16\ and that the proposal meets the criteria that the
Commission has utilized in approving other commodity-trust ETPs as it
relates to the ability to monitor for, detect, and deter fraud and
manipulation and violations of exchange rules and applicable federal
securities laws and rules.\17\ BZX also claims that the March
Disapproval Order overstates the extent to which surveillance and
regulation of the underlying market have been present in prior
commodity-trust ETP approval orders and the extent to which the
Commission has relied on the existence of surveillance-sharing
agreements between an ETP listing market and markets related to the
underlying assets.\18\
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    \13\ See Letter from Joanne Moffic-Silver, Executive Vice
President, General Counsel & Corporate Secretary, BZX, at 12 (May
15, 2017) (``BZX Letter II'').
    \14\ Id.
    \15\ Id. at 26.
    \16\ Id.
    \17\ See id. at 22.
    \18\ See id. at 26-27.
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    The Commission addresses each of these arguments below. In Section
III.B, the Commission addresses BZX's assertion that bitcoin and
bitcoin markets, including the Gemini Exchange, are uniquely resistant
to manipulation and finds that the record before the Commission does
not support such a conclusion. In Section III.C, the Commission
addresses whether what BZX describes as ``traditional means'' of
identifying and deterring fraud and manipulation are sufficient to meet
the requirements of Exchange Act Section 6(b)(5) and also finds that
the record does not support such a conclusion.
    Then, in Sections III.D and III.E, respectively, the Commission
addresses the use and importance of surveillance-sharing agreements to
detect and deter fraud and manipulation, and whether BZX has entered
into a comprehensive surveillance-sharing agreement with a regulated
market of significant size related to bitcoin.\19\ Although
surveillance-sharing agreements are not the exclusive means by which an
ETP listing exchange can meet its obligations under Exchange Act
Section 6(b)(5), such agreements are a widely used means for exchanges
that list ETPs to meet their obligations, and the Commission has
historically recognized their importance.\20\ And where, as here, a
listing exchange fails to establish that other means to prevent
fraudulent and manipulative acts and practices will be sufficient, the
listing exchange must enter into a surveillance-sharing agreement with
a regulated market of significant size because ``[s]uch agreements
provide a necessary deterrent to manipulation because they facilitate
the availability of information needed to fully investigate a
manipulation if it were to occur.'' \21\ Based on the record before it,
the Commission concludes that--unlike the listing exchanges for
previously approved commodity-trust ETPs--BZX has not established that
it has entered into, or currently could enter into, a surveillance-
sharing agreement with a regulated market of significant size related
to bitcoin.
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    \19\ The Commission considers two markets that are members of
the Intermarket Surveillance Group to have a comprehensive
surveillance-sharing agreement with one another, even if they do not
have a separate bilateral surveillance-sharing agreement.
    \20\ See Section III.D.2(a), infra.
    \21\ Amendment to Rule Filing Requirements for Self-Regulatory
Organizations Regarding New Derivative Securities Products, Exchange
Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70954, 70959
(Dec. 22, 1998) (File No. S7-13-98) (``NDSP Adopting Release'').
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    Finally, in Section III.F, the Commission addresses arguments
raised regarding the protection of investors and the public interest,
and, in Section III.G, the Commission discusses additional factors
supporting disapproval of the BZX proposal.
    Although the Commission is disapproving this proposed rule change,
the Commission emphasizes that its disapproval does not rest on an
evaluation of whether bitcoin, or blockchain technology more generally,
has utility or value as an innovation or an investment. Rather, the
Commission is disapproving this proposed rule change because, as
discussed in detail below, BZX has not met its burden under the
Exchange Act and the Commission's Rules of Practice to demonstrate that
its proposal is consistent with the requirements of the Exchange Act
Section 6(b)(5), in particular the requirement that its rules be
designed to prevent fraudulent and manipulative acts and practices.
    While the record before the Commission indicates that a substantial
majority of bitcoin trading occurs on unregulated venues overseas that
are relatively new and that, generally, appear to trade only digital
assets,\22\ and while the record does not support a conclusion that
bitcoin derivatives markets have attained significant size,\23\ the
Commission notes that regulated bitcoin-related markets are in the
early stages of their development. Over time, regulated bitcoin-related
markets may continue to grow and develop. For example, existing or
newly created bitcoin futures markets may achieve significant size, and
an ETP listing exchange may be able to demonstrate in a proposed rule
change that it will be able to address the risk of fraud and
manipulation by sharing surveillance information with a regulated
market of significant size related to bitcoin, as well as, where
appropriate, with the spot markets underlying relevant bitcoin
derivatives. Should these circumstances develop, or conditions
otherwise change in a manner that affects the Exchange Act analysis,
the Commission would then have the opportunity to consider whether a
bitcoin ETP would be consistent with the requirements of the Exchange
Act.
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    \22\ For example, the Registration Statement for the Winklevoss
Bitcoin Trust discloses that ``[t]he Bitcoin Exchanges on which
bitcoin trades are new and, in most cases, largely unregulated.''
See Registration Statement on Form S-1, as amended, dated February
8, 2017, at 22 (File No. 333-189752) (``Registration Statement'').
See also Sections III.E.1 and III.E.2, infra (discussing the
distribution of bitcoin trading and the state of regulation of
bitcoin spot markets).
    \23\ See infra notes 312-316 and accompanying text.

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II. Description of the Proposal

    BZX proposes to list and trade shares (``Shares'') of the
Winklevoss Bitcoin Trust (``Trust'') as Commodity-Based Trust Shares
under BZX Rule 14.11(e)(4).\24\ The Trust would hold only bitcoins as
an asset,\25\ and the bitcoins would be in the custody of, and secured
by, the Trust's custodian, Gemini Trust Company LLC (``Custodian''),
which is a limited-liability trust company chartered by the State of
New York and supervised by the New York State Department of Financial
Services (``NYSDFS'').\26\ Gemini Trust Company is also an affiliate of
Digital Asset Services LLC, the sponsor of the Trust (``Sponsor'').\27\
The Trust would issue and redeem the Shares only in ``Baskets'' of
100,000 Shares and only to ``Authorized Participants,'' and these
transactions would be conducted ``in-kind'' for bitcoin only.\28\
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    \24\ BZX Rule 14.11(e)(4)(C) permits the listing and trading of
``Commodity-Based Trust Shares,'' which are defined as a security
(a) that is issued by a trust that holds a specified commodity
deposited with the trust; (b) that is issued by the trust in a
specified aggregate minimum number in return for a deposit of a
quantity of the underlying commodity; and (c) that, when aggregated
in the same specified minimum number, may be redeemed at a holder's
request by the trust, which will deliver to the redeeming holder the
quantity of the underlying commodity.
    \25\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``Bitcoin Blockchain.'' The Bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See Amendment
No. 1, supra note 1, 81 FR at 76652. The proposed rule change
describes the ETP's underlying bitcoin asset as a ``digital asset''
and as a ``commodity,'' see id. at 76652 & n.21, and describes the
ETP as a Commodity-Based Trust. For the purpose of considering this
proposal, this order describes a bitcoin as a ``digital asset'' and
a ``commodity.''
    \26\ See id. at 76651-52.
    \27\ See id. at 76651.
    \28\ See id. at 76664-65. See also Amendment No. 2, supra note
1.
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    The investment objective of the Trust would be for the Shares to
track the price of bitcoin on the Gemini Exchange, which is a digital-
asset exchange owned and operated by the Gemini Trust Company.\29\ The
Net Asset Value (``NAV'') of the Trust would be calculated each
business day, based on the clearing price of that day's 4:00 p.m.
Eastern Time (``ET'') Gemini Exchange bitcoin auction, a two-sided
auction open to all Gemini Exchange customers (``Gemini Auction'').\30\
The Intraday Indicative Value (``IIV'') of the Trust would be
calculated and disseminated by the Sponsor, every 15 seconds during
BZX's regular trading session, based on the most recent Gemini Auction
price.\31\
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    \29\ See Amendment No. 1, supra note 1, 81 FR at 76652.
    \30\ See id. at 76652, 76664. In the event that the Sponsor
determines that the Gemini Auction price, because of extraordinary
circumstances, is ``not an appropriate basis for evaluation of the
Trust's bitcoin on a given Business Day,'' BZX's proposal provides
that the Sponsor may use other specified criteria to value the
holdings of the Trust. See id. at 76664.
    \31\ See id. at 76666.
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    BZX represents that it has entered into a comprehensive
surveillance-sharing agreement with the Gemini Exchange.\32\ Further
details regarding the proposal and the Trust can be found in Amendments
No. 1 and 2 to the proposal,\33\ and in the registration statement for
the Trust.\34\
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    \32\ See id. at 76668.
    \33\ See Amendments No. 1 and 2, supra note 1.
    \34\ See Registration Statement, supra note 22. BZX represents
in the proposed rule change that the Registration Statement will be
effective as of the date of any offer and sale pursuant to the
Registration Statement. See Amendment No. 1, supra note 1, 81 FR at
76651.
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III. Discussion

A. Overview

    The comment period for the proposed rule change filed by BZX ended
November 25, 2016. The Commission, as of March 10, 2017, received 66
comment letters on the proposed rule change.\35\ Additionally, in
response to the Review Order, the Commission, as of July 13, 2018,
received eight comments in connection with the Petition for Review.\36\
The comments cover a variety of topics, including the analysis of the
BZX proposal in the March Disapproval Order,\37\ the nature of the
worldwide market for bitcoin,\38\ the characteristics of the Gemini
digital asset exchange,\39\ the need for surveillance-sharing
agreements with significant markets,\40\ the state of the market for
derivatives on bitcoin,\41\ and the protection of investors,\42\ as
well as a number of comments on the nature of bitcoin and of the
Bitcoin network, the structure of the Trust and the Trust's valuation
and security protocols, and

the effect that Commission approval of the BZX proposal could have on
bitcoin and the bitcoin markets.\43\
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    \35\ See Letters from Robert D. Miller, VP Technical Services,
RKL eSolutions (July 11, 2016) (``R.D. Miller Letter''); Jorge
Stolfi, Full Professor, Institute of Computing UNICAMP (July 13,
2016) (``Stolfi Letter I''); Guillaume Lethuillier (July 26, 2016)
(``Lethuillier Letter''); Michael B. Casey (July 31, 2016) (``Casey
Letter I''); Erik A. Aronesty, Sr. Software Engineer, Bloomberg LP
(Aug. 2, 2016) (``Aronesty Letter''); Dan Anderson (Aug. 27, 2016)
(``Anderson Letter''); Robert Miller (Oct. 12, 2016) (``R. Miller
Letter''); Anonymous (Oct. 13, 2016) (``Anonymous Letter I''); Nils
Neidhardt (Oct. 13, 2016) (``Neidhardt Letter''); Dana K. Barish (2
letters; Oct. 13, 2016) (``Barish Letter I'' and ``Barish Letter
II''); Xin Lu (Oct. 13, 2016) (``Xin Lu Letter''); Rodger Delehanty
CFA (Oct. 14, 2016) (``Delehanty Letter''); Dylan (Oct. 14, 2016)
(``Dylan Letter''); Dana K. Barish (Oct. 14, 2016) (``Barish Letter
III''); Dana K. Barish (2 letters; Oct. 15, 2016) (``Barish Letter
IV'' and ``Barish Letter V''); Jorge Stolfi, Full Professor,
Institute of Computing UNICAMP (Nov. 1, 2016) (``Stolfi Letter
II''); Michael B. Casey (Nov. 5, 2016) (``Casey Letter II'');
Anonymous (Nov. 8, 2016) (``Anonymous Letter II''); Chris Burniske,
Blockchain Products Lead, ARK Investment Management LLC (Nov. 8,
2016) (``ARK Letter''); Colin Keeler (Nov. 14, 2016) (``Keeler
Letter''); Robert S. Tull, (Nov. 14, 2016) (``Tull Letter''); Mark
T. Williams (Nov. 15, 2016) (``Williams Letter''); Anonymous (Nov.
21, 2016) (``Anonymous Letter III''); XBT OPPS Team (Nov. 21, 2016)
(``XBT Letter''); Anonymous (Nov. 22, 2016) (``Anonymous Letter
IV''); Ken I. Maher (Nov. 22, 2016) (``Maher Letter''); Kyle Murray,
Assistant General Counsel, Bats Global Markets, Inc. (Nov. 25, 2016)
(``BZX Letter I''); Colin Baird (Nov. 26, 2016) (``Baird Letter'');
Scott P. Hall (Jan. 5, 2017) (``Hall Letter''); Suzanne H. Shatto
(Jan. 24, 2017) (``Shatto Letter''); Joshua Lim and Dan Matuszewski,
Treasury & Trading Operations, Circle internet Financial, Inc. (Feb.
3, 2017) (``Circle Letter''); Zachary J. Herbert (Feb. 10, 2017)
(``Herbert Letter''); Thomas Fernandez (Feb. 12, 2017) (``Fernandez
Letter''); Diego Tomaselli (Feb. 17, 2017) (``Tomaselli Letter'');
Hans Christensen (Feb. 20, 2017) (``Christensen Letter''); Jake Kim
(Feb. 22, 2017) (``Kim Letter''); Andrea Dalla Val (Mar. 4, 2017)
(``Dalla Val Letter''); Josh Barraza (Mar. 6, 2017) (``Barraza
Letter''); Chad Rigsby (Mar. 6, 2017) (``Rigsby Letter''); Michael
Lee (Mar. 6, 2017) (``Lee Letter''); Fabrizio Marchionne (Mar. 6,
2017) (``Marchionne Letter''); Ben Elron (Mar. 6, 2017) (``Elron
Letter''); Patrick Miller (Mar. 6, 2017) (``P. Miller Letter'');
Situation (Mar. 6, 2017) (``Situation Letter''); Steven Swiderski
(Mar. 6, 2017) (``Swiderski Letter''); Marcia Paneque (Mar. 6, 2017)
(``Paneque Letter''); Jeremy Nootenboom (Mar. 6, 2017) (``Nootenboom
Letter''); Alan Struna (Mar. 6, 2017) (``Struna Letter''); Mike
Johnson (Mar. 6, 2017) (``Johnson Letter''); Phil Chronakis (Mar. 7,
2017) (``Chronakis Letter''); Anonymous (Mar. 7, 2017) (``Anonymous
Letter V''); Brian Bang (Mar. 7, 2017) (``Bang Letter''); Anthony
Schulte (Mar. 7, 2017) (``Schulte Letter''); Melissa Whitman (Mar.
7, 2017) (``Whitman Letter''); Harold Primm (Mar. 8, 2017) (``Primm
Letter''); Shad (Mar. 8, 2017) (``Shad Letter''); Anonymous (Mar. 8,
2017) (``Anonymous Letter VI''); Patrick Turley (Mar. 9, 2017)
(``Turley Letter''); Anonymous (Mar. 9, 2017) (``Anonymous Letter
VII''); Richard Kemble (Mar. 9, 2017) (``Kemble Letter''); Anonymous
(Mar. 9, 2017) (``Anonymous Letter VIII''); Daniel Ackerman (Mar.
10, 2017) (``Ackerman Letter''); Obed Medina (Mar. 10, 2017)
(``Medina Letter''); and John Paslaqua (Mar. 10, 2017) (``Paslaqua
Letter''). All comments on the proposed rule change are available on
the Commission's website at: https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630.shtml.
    \36\ See Letters from Douglas A. Cifu, Chief Executive Officer,
Virtu Financial (May 11, 2017) (``Virtu Letter''); James A.
Overdahl, Partner, Delta Strategy Group (May 12, 2017) (``Overdahl
Letter''); Daniel H. Gallancy, SolidX Management LLC (May 15, 2017)
(``SolidX Letter''); Jonathan G. Harris (May 15, 2017) (``Harris
Letter''); Mick Kalishman, C&C Trading, LLC (May 15, 2017) (``C&C
Letter''); Eric W. Noll, President and Chief Executive Officer,
Convergex Group (May 15, 2017) (``Convergex Letter''); Jeffrey Yass,
Managing Director, Susquehanna International Group, LLP (May 15,
2017) (``SIG Letter''); and BZX Letter II, supra note 13. All
comments submitted in support of or in opposition to the March
Disapproval Order are available on the Commission's website at:
https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630.shtml.
    \37\ See infra notes 44-48 and accompanying text.
    \38\ See Sections III.B.1(a) and III.E.2(a), infra.
    \39\ See Sections III.B.2(a) and III.E.1(a), infra.
    \40\ See Section III.D.1, infra.
    \41\ See Section III.E.3(a), infra.
    \42\ See Section III.F.1, infra.
    \43\ See Section III.G, infra.
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    BZX's primary argument is that the standard set forth in the March
Disapproval Order--the need for a surveillance sharing agreement
between the ETP listing exchange and significant, regulated markets
related to the underlying asset \44\--is not the only way that a
listing exchange can satisfy Section 6(b)(5)'s requirement that its
rules be designed to prevent fraudulent and manipulative acts and
practices with respect to listing an ETP.\45\ BZX argues that, in the
case of a bitcoin commodity-trust ETP, traditional measures to detect
and deter manipulation are sufficient.\46\ BZX and certain commenters
further argue that the March Disapproval Order misconstrued Section
6(b)(5) to mean that a bitcoin ETP can be listed and traded only if
bitcoin ``cannot be manipulated.'' \47\ They argue that such a standard
is inconsistent with the ``not readily susceptible to manipulation''
standard applied to other commodities that underlie ETPs.\48\
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    \44\ See March Disapproval Order, supra note 3, 82 FR at 14082-
84.
    \45\ See BZX Letter II, supra note 13, at 26.
    \46\ See id. at 12; see also id. at 13, 26.
    \47\ See BZX Letter II, supra note 13, at 13; and Overdahl
Letter, supra note 36, at 2, 9-11.
    \48\ See BZX Letter II, supra note 13, at 13; and Overdahl
Letter, supra note 36, at 2, 9-11.
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    These arguments do not accurately reflect the nature of the
Commission's inquiry and past practice. The Commission agrees that, if
BZX had demonstrated that bitcoin and bitcoin markets are inherently
resistant to fraud and manipulation, comprehensive surveillance-sharing
agreements with significant, regulated markets would not be required,
as the function of such agreements is to detect and deter fraud and
manipulation. But because the underlying commodities market for this
proposed commodity-trust ETP is not demonstrably resistant to
manipulation, BZX, as the ETP listing exchange, must enter into
surveillance-sharing agreements with, or hold Intermarket Surveillance
Group membership in common with, at least one significant, regulated
market relating to bitcoin.
    Moreover, the Commission is not applying a ``cannot be
manipulated'' standard to this proposal. Instead, the Commission is
examining whether the proposal meets the requirements of the Exchange
Act and, pursuant to its Rules of Practice,\49\ is placing the burden
on BZX to demonstrate the validity of its contention that the ``novel
systems intrinsic to this new market provide unique additional
protections that are unavailable in traditional commodity markets,''
\50\ and to establish that the requirements of the Exchange Act have
been met.
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    \49\ See supra notes 10-12 and accompanying text.
    \50\ See BZX Letter II, supra note 13, at 26.
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    Finding that BZX has not demonstrated that bitcoin and bitcoin
markets are inherently resistant to manipulation, the Commission
subjects the proposal to the analysis it has historically used to
analyze commodity-trust ETPs, focusing particularly on whether there
are comprehensive surveillance-sharing agreements with significant,
regulated markets. Because adequate surveillance-sharing agreements are
not in place--and any current surveillance-sharing agreements are with
bitcoin-related markets that are either not significant, not regulated,
or both--the Commission concludes that the proposal is inconsistent
with Exchange Act Section 6(b)(5).
    Accordingly, the Commission will examine whether the proposed rule
change is consistent with Section 6(b)(5) by first addressing the
arguments by BZX and certain commenters that bitcoin and bitcoin
markets are inherently resistant to manipulation. The Commission will
then address BZX's argument that what it describes as ``traditional
means'' of identifying and deterring fraud and manipulation would be
sufficient to comply with Exchange Act Section 6(b)(5), which requires
that BZX's rules be designed to ``prevent fraudulent and manipulative
acts and practices'' and ``to protect investors and the public
interest.'' \51\ Finding these arguments unpersuasive, the Commission
concludes that the proposal is inconsistent with previously approved
commodity-trust ETPs, which have universally relied on surveillance-
sharing agreements with significant, regulated markets relating to the
underlying commodity in order to prevent fraud and manipulation and to
protect investors and the public interest. Finally, the Commission
addresses and rejects additional factors that BZX contends support
approval.
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    \51\ 15 U.S.C. 78f(b)(5).
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B. The Susceptibility of Bitcoin and Bitcoin Markets to Manipulation

    BZX asserts that intrinsic properties of bitcoin and bitcoin
markets, including the Gemini Exchange, provide resistance to
manipulation. But BZX has failed to carry its burden to demonstrate
that its assertion is correct.
1. The Structure of the Spot Market for Bitcoin
(a) Summary of Comments Received
    BZX argues that intrinsic properties of bitcoin and bitcoin markets
make manipulation ``difficult and prohibitively costly.'' \52\ BZX
argues that ``novel systems intrinsic to this new market provide unique
additional protections that are unavailable in traditional commodity
markets.'' \53\ BZX asserts that the increasing strength and resilience
of the global bitcoin marketplace serve to reduce the likelihood of
price manipulation and that arbitrage opportunities across globally
diverse marketplaces allow market participants to ensure approximately
equivalent pricing worldwide. But BZX concedes that less liquid
markets, such as the market for bitcoin, may be more susceptible to
manipulation.\54\
---------------------------------------------------------------------------

    \52\ BZX Letter II, supra note 13, at 12, 13, 26; see also
Petition for Review, supra note 4, at 11.
    \53\ See supra note 50 and accompanying text.
    \54\ See BZX Letter I, supra note 35, at 7.
---------------------------------------------------------------------------

    BZX asserts that a number of new bitcoin market participants have
emerged, changing the once concentrated and non-regulated landscape of
the global bitcoin exchange marketplace, and that the emergence of
these new market participants, who are chiefly arbitrageurs, causes
global bitcoin exchange prices to converge.\55\ BZX adds that
arbitrageurs must have funds distributed across multiple bitcoin
exchanges to take advantage of temporary price dislocations, and that
this distribution of funds discourages concentration of funds on any
one particular bitcoin exchange and mitigates the potential for
manipulation on a bitcoin exchange because doing so would require
overcoming the liquidity supply of arbitrageurs that are actively
eliminating any cross-market pricing differences.\56\
---------------------------------------------------------------------------

    \55\ See Petition for Review, supra note 4, at 15.
    \56\ See BZX Letter II, supra note 13, at 15-16; Petition for
Review, supra note 4, at 15.
---------------------------------------------------------------------------

    BZX also asserts that the bitcoin spot market generally is less
susceptible to manipulation than the equity, fixed income, and
commodity futures markets, in part, because: (a) A substantial over-
the-counter (``OTC'') market provides liquidity and shock absorbing
capacity; (b) the ``24/7/365'' trading of bitcoin provides constant
arbitrage opportunities across all trading venues and means that there
is no single market-close for investors to attempt to manipulate; and
(c) it is unlikely that any one actor could obtain a dominant

market share.\57\ BZX also claims that the transparency that the Trust
will provide with respect to its bitcoin holdings, and the
dissemination of the IIV and NAV of the Trust, will reduce the ability
of market participants to manipulate the price of bitcoin or the price
of the Shares.\58\
---------------------------------------------------------------------------

    \57\ See BZX Letter II, supra note 13, at 12; see also Petition
for Review, supra note 4, at 11.
    \58\ See Petition for Review, supra note 4, at 16.
---------------------------------------------------------------------------

    The Overdahl Letter, submitted in support of the BZX proposal,\59\
asserts that the fungibility of bitcoin across bitcoin exchanges
facilitates arbitrage and helps keep prices within the bounds of
arbitrage, constraining the possibility of price manipulation on any
one bitcoin trading venue.\60\ Because of this linkage, the Overdahl
Letter contends, manipulation of the bitcoin price on any one venue
would require manipulation of the global bitcoin price to be effective,
which would be prohibitively costly and is therefore unlikely. But the
Overdahl Letter concedes that any market can potentially be
manipulated.\61\
---------------------------------------------------------------------------

    \59\ See supra note 36.
    \60\ See Overdahl Letter, supra note 36, at 1-2.
    \61\ Id.
---------------------------------------------------------------------------

    The Overdahl Letter further claims that, to the extent that
``spoofing conduct'' \62\ is present in bitcoin markets, it is unlikely
to have a material impact on the value of the Shares. According to the
Overdahl Letter, this is because successful spoofing causes price
oscillations of extremely small magnitudes (such as within the bid/ask
spread) and does not result in a material change in the bitcoin price.
This commenter also claims that spoofing victims are unlikely to be
holders of the Shares, but rather market makers in the spot market, and
concludes that the likelihood of spoofing in the bitcoin spot market is
low.\63\
---------------------------------------------------------------------------

    \62\ The Commodity Exchange Act defines ``spoofing'' as bidding
or offering for sale with the intent to cancel the bid or offer
before execution. See 7 U.S.C. 6c(a)(5)(C).
    \63\ See Overdahl Letter, supra note 36, at 2, 9; see also
Petition for Review, supra note 4, at 14.
---------------------------------------------------------------------------

    The Overdahl Letter further claims that even a ``dominant''
exchange (by trading volume) cannot dictate the global price of bitcoin
because an exchange does not coordinate trading across its membership
to influence the market price. This commenter argues that the existence
of a dominant exchange in terms of trading volume does not imply that
there is a dominant actor on the dominant exchange with the ability to
attain a dominant market share to manipulate the price of bitcoin.
Rather, this commenter argues, the larger the market share of an
exchange, the harder it would be for a dominant actor to obtain a
dominant market share of the dominant exchange's trading volume.\64\
---------------------------------------------------------------------------

    \64\ See Overdahl Letter, supra note 36, at 9.
---------------------------------------------------------------------------

    Another analysis--the Lewis Letter \65\--argues that, as a general
matter, the underlying market for bitcoin is inherently resistant to
manipulation.\66\ The Lewis Letter posits that the underlying bitcoin
market is not susceptible to manipulation because: (a) There is no
inside information related to bitcoin, such as earnings announcements;
(b) the asset is not subject to the dissemination of false or
misleading information; (c) each bitcoin market is an independent
entity, so that a demand for liquidity does not necessarily propagate
across other exchanges; (d) a substantial OTC market provides
additional liquidity and absorption of shocks; (e) there is no market-
close pricing event to manipulate; (f) the market is not subject to
``spoofing'' or other high-frequency-trading tactics; (g) order books
on exchanges worldwide are publicly visible and available through APIs
(application program interfaces); and (h) it is unlikely that any one
person could obtain a dominant market share because of the existence of
in-kind creations and redemptions, arbitrage across bitcoin markets,
and the enhanced transparency that a bitcoin ETP would bring to bitcoin
markets.\67\ The Lewis Letter acknowledges the risk that a single
investor or a small group acting in collusion could own a dominant
share of the available bitcoin, but argues that the structure of the
spot bitcoin market and the arbitrage mechanism reduce that risk.\68\
---------------------------------------------------------------------------

    \65\ See Craig M. Lewis, ``SolidX Bitcoin Trust: A Bitcoin
Exchange Traded Product'' (Feb. 13, 2017) (``Lewis Letter I''),
available at https://www.sec.gov/comments/sr-nysearca-2016-101/nysearca2016101-1579480-131874.pdf; Craig M. Lewis, ``Supplemental
Submission to SolidX Bitcoin Trust: A Bitcoin Exchange Traded
Product'' (Mar. 3, 2017) (``Lewis Letter II'', and together with
Lewis Letter I the ``Lewis Letter''), available at https://www.sec.gov/comments/sr-nysearca-2016-101/nysearca2016101-1610031-135950.pdf. The Lewis Letter was commissioned by SolidX Management
LLC in support of the SolidX Bitcoin Trust. BZX Letter II, supra
note 13, at 12; see also Exchange Act Release No. 80319 (Mar. 28,
2017), 82 FR 16247, 16249 n.43 (Apr. 3, 2017) (SR-NYSEArca-2016-101)
(``SolidX Order''). The Commission notes that the Lewis Letter made
additional assertions directed to the particular structure and
pricing mechanism of another proposed bitcoin-based commodity-trust
ETP, and the Commission does not address those arguments in this
order.
    \66\ See Lewis Letter I, supra note 65, at 5-8.
    \67\ See Lewis Letter I, supra note 65, at 5-9; Lewis Letter II,
supra note 65, at 2.
    \68\ See Lewis Letter I, supra note 65, at 6-7.
---------------------------------------------------------------------------

    One commenter observes that the bitcoin/Chinese Yuan (BTC/CNY)
quote is apt to trade at a significant premium to the bitcoin/U.S.
dollar (BTC/USD) quote and points out that large arbitrage
opportunities would not exist for long in efficient markets, but they
do persist in bitcoin markets.\69\ Another commenter claims that,
because trade is now sparse on regulated U.S. exchanges, including
Gemini, arbitrage will not occur efficiently or proportionally to
mitigate manipulation from the dominant unregulated bitcoin
exchanges.\70\
---------------------------------------------------------------------------

    \69\ See ARK Letter, supra note 35, at 5.
    \70\ See Maher Letter, supra note 35.
---------------------------------------------------------------------------

    One commenter asserts that, in January 2017, major Chinese bitcoin
exchanges OKCoin, Huobi, and BTCC implemented changes requested by the
People's Bank of China to halt margin lending and to institute
transaction fees. This commenter claims that these changes were put in
place to discourage price manipulation, to drive down ``fake'' trading
volume, and to dampen bitcoin volatility, and further claims that these
changes have had profound and beneficial effects on bitcoin spot
markets worldwide.\71\
---------------------------------------------------------------------------

    \71\ See SIG Letter, supra note 36, at 6.
---------------------------------------------------------------------------

    One commenter states that the market for bitcoin, by trade volume,
is very shallow. This commenter states that the majority of bitcoin is
hoarded by a few owners or is out of circulation. The commenter also
states that ownership concentration is high, with 50 percent of bitcoin
in the hands of fewer than 1,000 people, and that this high ownership
concentration creates greater market liquidity risk, as large blocks of
bitcoin are difficult to sell in a timely and market efficient manner.
This commenter claims that daily trade volume is only a small fraction
of total bitcoin mined.\72\
---------------------------------------------------------------------------

    \72\ See Williams Letter, supra note 35, at 1-2.
---------------------------------------------------------------------------

    One commenter asserts that the number of spot bitcoin exchanges
worldwide far exceeds the number of venues for many commodity futures,
some of which are underlying assets of existing commodity-trust ETPs.
The commenter argues that, therefore, widespread global bitcoin
liquidity makes bitcoin less susceptible to manipulation via trading
activity conducted on a single exchange, as compared to less-liquid
commodity futures that trade on a few exchanges.\73\
---------------------------------------------------------------------------

    \73\ See SIG Letter, supra note 36, at 4-5.
---------------------------------------------------------------------------

    One commenter states that bitcoin trades on a number of exchanges
around the world and that most of these exchanges can be considered
isolated liquidity pools, which are more vulnerable to manipulation or
security breach than the broader market.\74\
---------------------------------------------------------------------------

    \74\ See ARK Letter, supra note 35, at 8.

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

    Finally, both BZX and the Overdahl Letter argue that the Commodity
Futures Trading Commission's (``CFTC'') granting of registration to
bitcoin swap-execution facilities (``SEFs'') means that the CFTC has
addressed the issue of manipulation and determined that the underlying
spot markets for bitcoin are not susceptible to manipulation.\75\
---------------------------------------------------------------------------

    \75\ See BZX Letter II, supra note 13, at 17; Overdahl Letter,
supra note 36, at 12. The Overdahl Letter also notes that the CFTC-
regulated CME Group recently created a standardized bitcoin
reference rate and a bitcoin spot price index. Overdahl Letter,
supra note 36, at 12.
---------------------------------------------------------------------------

(b) Discussion
    BZX has not demonstrated that the structure of the spot market for
bitcoin is uniquely resistant to manipulation.
(i) Bitcoin Market Structure & Arbitrage
    While two commenters questioned the effectiveness of arbitrage
across bitcoin markets,\76\ BZX, the Overdahl Letter, and the Lewis
Letter argue that the structure of the bitcoin spot market and the
availability of arbitrage will help keep worldwide bitcoin prices
aligned, hindering manipulation.\77\ The Overdahl Letter and Lewis
Letter claim that economic analysis demonstrates that bitcoin markets
are resistant to manipulation. But, as discussed below, the arguments
submitted in support of this claim are incomplete and inconsistent, and
are unsupported or contradicted by data.
---------------------------------------------------------------------------

    \76\ See supra notes 69-70 and accompanying text.
    \77\ See supra notes 52-68 and accompanying text.
---------------------------------------------------------------------------

    BZX, the Overdahl Letter, and the Lewis Letter offer broad
assertions that the increasing strength and resilience of the non-stop
global bitcoin market place, the emergence of new market participants,
and the transparency of the market have facilitated arbitrage that has
caused global bitcoin exchange prices to converge.\78\ But BZX, the
Overdahl Letter, and the Lewis Letter offer no data or analysis
regarding the actual effectiveness of arbitrage in the bitcoin spot
market, either in terms of how closely prices are aligned across
different bitcoin trading venues or how quickly price disparities are
arbitraged away.\79\ Similarly, the commenter who asserts that
regulatory actions by the People's Bank of China were designed to
discourage price manipulation, and have had profound and beneficial
effects on bitcoin spot markets worldwide, has provided no empirical
evidence to substantiate this claim.\80\ In addition, the Commission
notes that one commenter asserts that large arbitrage opportunities
persist in bitcoin markets.\81\
---------------------------------------------------------------------------

    \78\ See supra notes 52-68 and accompanying text.
    \79\ While the Overdahl Letter compares the Gemini Exchange
bitcoin price to the median price and the volume-weighted average
price of a group of USD-denominated bitcoin markets, such an
analysis does not demonstrate whether the range of prices across
those other markets is broad or narrow.
    \80\ See supra note 71 and accompanying text.
    \81\ See supra note 69 and accompanying text.
---------------------------------------------------------------------------

    While BZX cites a comment letter relating to a different proposed
rule change for the proposition that price discrepancies across four
selected USD-denominated bitcoin markets are generally arbitraged away
in under a minute,\82\ even if that limited factual assertion is true,
BZX has not explained why it is relevant to the Commission's
consideration of the proposal, given that (a) the worldwide spot market
for bitcoin is not limited to trading against the USD, (b) market
participants could engage in creation or redemption transactions with
the Trust using bitcoins sourced from any trading venue or from OTC
transactions, and (c) the Gemini Exchange is not among the four bitcoin
trading venues observed by the commenter. Thus, this argument does not
support BZX's broad assertion about the effectiveness of arbitrage
across the worldwide bitcoin market.
---------------------------------------------------------------------------

    \82\ See BZX Letter II, supra note 13, at 15 n.28 (citing Letter
from Daniel H. Gallancy, SolidX Partners, Inc., to Brent J. Fields,
Secretary, Commission (Mar. 15, 2017) (SR-NYSEArca-2016-101)).
---------------------------------------------------------------------------

    BZX also argues that manipulation in the bitcoin market is unlikely
because would-be manipulators would have to overcome the liquidity
supplied by arbitrageurs, who must have funds distributed across
multiple bitcoin markets to engage in arbitrage,\83\ and the Overdahl
Letter asserts that the manipulation of bitcoin is prohibitively
expensive because manipulating the price of bitcoin on any given venue
would require manipulation of the entire global bitcoin market to be
effective.\84\ These theoretical arguments depend on effective
arbitrage existing across bitcoin markets, but, as noted above, the
Commission concludes that BZX has not provided a factual basis in the
record to conclude that arbitrage across bitcoin exchanges is
effective.
---------------------------------------------------------------------------

    \83\ See supra note 56 and accompanying text.
    \84\ See supra notes 60-61 and accompanying text.
---------------------------------------------------------------------------

    Moreover, these arguments are inconsistent: If, in fact, market
participants must disperse their capital across multiple trading venues
to engage in effective arbitrage, then a market participant may be able
to manipulate trading on a single trading venue by concentrating its
capital and trading activity there. The Overdahl Letter's argument that
manipulation of one bitcoin trading venue would require overcoming
liquidity on all bitcoin venues is also inconsistent with the assertion
by the Lewis Letter and another commenter that each bitcoin market is
an independent entity and that, therefore, demand for liquidity does
not necessarily propagate across other exchanges.\85\ In addition, BZX,
the Overdahl Letter, and the Lewis Letter do not adequately take into
account that a market participant with a dominant ownership position
would not find it prohibitively expensive to overcome the liquidity
supplied by arbitrageurs and could use dominant market share to engage
in manipulation.\86\ And their arguments that substantial liquidity
provided by the OTC market can absorb liquidity shocks and help resist
manipulative activity are not supported by any data in the record on
which the Commission could base a conclusion that OTC activity
contributes to preventing manipulation.
---------------------------------------------------------------------------

    \85\ See supra notes 67, 74 and accompanying text.
    \86\ See Section III.B.1(b)(ii), infra (discussing the potential
for market domination).
---------------------------------------------------------------------------

    BZX also argues that bitcoin markets are uniquely resistant to
manipulation because the 24/7/365 trading of bitcoin means that there
is no single market-close for investors to attempt to manipulate.\87\
Similarly, a commenter asserts that the large number of bitcoin trading
venues makes bitcoin less susceptible to manipulation than an asset,
such as a commodity, trading on a single exchange or just a few
exchanges.\88\ In the context of the Trust, however, there is a single
market and a single market-close event that an investor may have
incentive to manipulate: The Gemini Auction, which the Trust would use
to calculate NAV.\89\ And the argument by BZX and a commenter that the
transparency of a bitcoin commodity-trust ETP regarding its bitcoin
holdings, as well as its dissemination of the IIV and NAV, would reduce
the ability of market participants to manipulate the price of bitcoin
is unpersuasive because: (a) There is no comprehensive and accurate
regulatory data source reflecting bitcoin pricing or trading; (b) there
is no basis to conclude that the Trust's IIV would be considered an
authoritative price when several other spot prices for bitcoin are
already disseminated and often differ from one another; \90\ and (c)

the Trust's NAV would differ from the Gemini Auction price only if the
auction price, which is publicly disseminated itself, is determined not
to reflect a fair price for bitcoin.
---------------------------------------------------------------------------

    \87\ See supra note 57 and accompanying text.
    \88\ See supra note 73 and accompanying text.
    \89\ See Section III.E.1, infra. While the Lewis Letter makes a
similar argument about the lack of a single market close, see supra
note 67 and accompanying text, it does so in the context of a
bitcoin ETP proposal that would not base its price on a single
market auction.
    \90\ For example, the website https://data.bitcoinity.org/markets/arbitrage/USD tracks price differences between last trades
on 13 bitcoin markets.
---------------------------------------------------------------------------

    Both the Overdahl Letter and the Lewis Letter contend that bitcoin
markets are not subject to ``spoofing,'' a manipulative quoting
strategy.\91\ Neither letter, however, presents any data or analysis to
support its claim, and there is no basis in the record to conclude
whether bitcoin spot markets are subject to spoofing or other deceptive
quoting practices. As a general matter, the manipulation of asset
prices can occur simply through trading activity that creates a false
impression of supply or demand, whether in the context of a closing
auction or in the course of continuous trading, and does not require
formal linkages among markets (such as consolidated quotations or
routing requirements) or the complex quoting behavior associated with
high-frequency trading.\92\ The Commission also notes that, in contrast
to the theoretical arguments in the Overdahl Letter and the Lewis
Letter, TeraExchange (a market for swaps on bitcoin) arranged for
participants to make manipulative ``wash'' transactions.\93\
---------------------------------------------------------------------------

    \91\ See supra notes 62-63, 67 and accompanying text.
    \92\ Even if transparent order books and transaction reports on
bitcoin markets would include the quoting or trading activity of a
person or group attempting to manipulate the market, along with the
activity of all other market participants, such information could
not, by itself, definitively establish in real time which activity
represented bona fide trading interest and which did not.
    \93\ See In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL
5658082 (CFTC Sept. 24, 2015) (Order Instituting Proceedings
Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act
Making Findings and Imposing Remedial Sanctions (``TeraExchange
Settlement Order'')), available at<EMAIL_ADDRESS>See also Kevin Dowd & Martin
Hutchinson, Bitcoin Will Bite the Dust, 35 Cato J. 357, 374 n.13
(2015) (Bitcoin markets are subject to the ``usual market
manipulation tactics.''), available at https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2015/5/cj-v35n2-12.pdf.
---------------------------------------------------------------------------

    Finally, BZX's, the Lewis Letter's, and the Overdahl Letter's
discussions of the possible sources of manipulation are incomplete and
do not form a basis to find that bitcoin is uniquely resistant to
manipulation--or to find, by implication, that there is no need for a
surveillance-sharing between an exchange listing shares of a bitcoin-
based ETP and significant markets trading bitcoin or bitcoin
derivatives. For example, assuming there is no inside information
related to the earnings or revenue of bitcoin, there may be material
nonpublic information related to: The actions of regulators with
respect to bitcoin; order flow, such as plans of market participants to
significantly increase or decrease their holdings in bitcoin; new
sources of demand, such as new ETPs that would hold bitcoin; or the
decision of a bitcoin-based ETP, a bitcoin trading venue, or a bitcoin
wallet service provider with respect to how it would respond to a
``fork'' in the blockchain, which would create two different, non-
interchangeable types of bitcoin.\94\ Moreover, bitcoin is susceptible
to the dissemination of false or misleading information regarding the
types of material, nonpublic information just discussed. The Commission
also notes a recent academic paper finding empirical evidence of
trading in bitcoin markets based on material nonpublic information.\95\
---------------------------------------------------------------------------

    \94\ For example, as described in the Trust's Registration
Statement, supra note 22, in the event the Bitcoin Network undergoes
a ``hard fork'' into two blockchains, the Custodian and the Sponsor
will determine which of the resulting blockchains to use as the
basis for the assets of the Trust and, under certain circumstances,
will have discretion to determine which blockchain is ``most likely
to be supported by a majority of users or miners.'' Id. at 113. See
also Lee Letter, supra note 35; Johnson Letter, supra note 35;
Schulte Letter, supra note 35; Anonymous Letter V, supra note 35;
Anonymous Letter VI, supra note 35. The decision of the Custodian
and Sponsor to support one resulting blockchain over another could
have a material effect on the relative value of the bitcoins in each
of the blockchains. A fork between bitcoin and ``Bitcoin Cash''
occurred on August 1, 2017, and a fork between bitcoin and ``Bitcoin
Gold'' occurred on October 24, 2017.
    \95\ See Wenjun Feng, Yiming Wang & Zhengjun Zhang, Informed
Trading in the Bitcoin Market, Fin. Res. Letters, Dec. 2, 2017,
available at https://www.sciencedirect.com/science/article/pii/S1544612317306992.
---------------------------------------------------------------------------

    Two additional risks that the Trust's Registration Statement
acknowledges--(1) hacking and (2) malicious control of the Bitcoin
Network--further undermine BZX's argument that bitcoin and bitcoin
markets are inherently resistant to fraud and manipulation. The Trust's
Registration Statement recognizes that bitcoin trading venues can be
and have been attacked by hackers, which can affect liquidity and
result in volatile prices.\96\ Profit-motivated hackers can launch such
attacks to manipulate bitcoin and achieve their ``intended effect of
artificially raising or lowering prices.'' \97\ The Trust's
Registration Statement also recognizes the risk of a ``malicious
actor'' obtaining control of the processing power dedicated to mining
on the Bitcoin Network and thus ``exerting authority'' over the Bitcoin
Network.\98\ Such control can be used to manipulate bitcoin
pricing.\99\ And there may be material nonpublic information related to
hacking plans or attempts to gain control of the Bitcoin Network, and
such information could be exploited through fraudulent trading.
---------------------------------------------------------------------------

    \96\ Registration Statement, supra note 22, at 21-23, 29, 60-61.
    \97\ Amir Feder, Neil Gandal, J.T. Hamrick, and Tyler Moore, The
Impact of DDoS and Other Security Shocks on Bitcoin Currency
Exchanges: Evidence From Mt. Gox, Journal of Cybersecurity (Jan. 31,
2018), at 137 (explaining that a profit-motivated hacker can
manipulate bitcoin prices up or down by hacking larger trading
venues while trading on smaller trading venues, and thereby
``create[ ] an unfair financial advantage for the perpetrator at the
expense of ordinary participants''), available at https://academic.oup.com/cybersecurity/article/3/2/137/4831474; see also
David Groshoff, Kickstarter My Heart: Extraordinary Popular
Delusions and the Madness of Crowdfunding Constraints and Bitcoin
Bubbles, 5 Wm. Mary Bus. L. Rev. 489, 519 (2014).
    \98\ Registration Statement, supra note 22, at 17, 56. The
Registration Statement notes that obtaining control in excess of 50%
of the processing power on the Bitcoin network is sufficient, and
that ``there are some academics and market participants who believe
the applicable threshold required to exert authority over the
Bitcoin Network could be less than fifty (50) percent, which would
increase the chances of a malicious actor exerting authority over
the Bitcoin Network.'' Id. at 17.
    \99\ Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash
System, Bitcoin.org (Oct. 31, 2008), at 4 (malicious actor could
exploit his control of the Bitcoin Network by ``using it to generate
new coins''), available at https://bitcoin.org/bitcoin.pdf; see also
Kevin Dowd & Martin Hutchinson, Bitcoin Will Bite the Dust, 35 Cato
J. 357, 372-74 (2015), available at https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2015/5/cj-v35n2-12.pdf;
Sanya Samtani and Varun Baliga, On Monopolistic Practices in
Bitcoin: A Coded Solution, 11 Indian J. L. & Tech. 106, 107-08
(2015), available at http://ijlt.in/wp-content/uploads/2015/09/Sanya-Samtani-and-Varun-Baliga-5.pdf (malicious actor could achieve
``devaluation'' of bitcoin).
---------------------------------------------------------------------------

    Based on the analysis above, the Commission concludes that there is
an insufficient basis in the record before it to decide that the
bitcoin spot markets are inherently resistant to manipulation. This
conclusion, again, is bolstered by the Trust's Registration Statement,
which explains:

    Over the past four (4) years, a number of Bitcoin Exchanges have
been closed due to fraud, failure or security breaches. In many of
these instances, the customers of such Bitcoin Exchanges were not
compensated or made whole for the partial or complete losses of
their account balances in such Bitcoin Exchanges. . . . Further, the
collapse of the largest Bitcoin Exchange in 2014 suggests that the
failure of one component of the overall Bitcoin ecosystem can have
consequences for both users of a Bitcoin Exchange and the Bitcoin
industry as a whole.\100\
---------------------------------------------------------------------------

    \100\ Registration Statement, supra note 22, at 23.

    Additionally, the Commission notes that recent academic papers
suggest that the price of bitcoin can be, and has been, manipulated
through activity on

bitcoin trading venues. One recent academic paper examined whether the
growth of the circulating supply of Tether (a cryptocurrency that
claims to be backed by the U.S. dollar) through new issuances ``is
primarily driven by investor demand, or is supplied to investors as a
scheme to profit from pushing cryptocurrency prices up.'' \101\ Through
statistical analysis of the blockchains of bitcoin and Tether, the
authors conclude that entities associated with a specific
cryptocurrency trading venue--which the authors link to Tether's
founders--``use Tether to purchase bitcoin when prices are falling'';
that ``[s]uch price supporting activities are successful, as Bitcoin
prices rise after the period of intervention,'' with ``substantial
aggregate price effects'' across bitcoin trading platforms; and that
this activity ``occurs more aggressively right below salient round-
number price thresholds where the price support might be most
effective.'' \102\ The paper finds that the periods of strongest Tether
flows are ``associated with 50% of Bitcoin compounded return'' from
March 1, 2017, to March 31, 2018.\103\ Overall, the authors conclude
that their findings ``provide substantial support for the view that
price manipulation may be behind substantial distortive effects in
cryptocurrencies'' and ``suggest that external capital market
surveillance and monitoring may be necessary to obtain a market that is
truly free.'' \104\ The Commission also notes another recent academic
paper, which concludes that there was fraudulent and manipulative
activity on a single bitcoin trading venue.\105\
---------------------------------------------------------------------------

    \101\ Griffin, John M. and Amin Shams, Is Bitcoin Really Un-
Tethered (June 13, 2018) (manuscript at 33) (``Griffin-Shams
Paper''), available at https://ssrn.com/abstract_id=3195066.
    \102\ Id.
    \103\ See id. at 23-24.
    \104\ Id. at 33; see also id. at 1 (``[P]urchases with Tether
are timed following market downturns and result in sizable increases
in Bitcoin prices,'' thus ``Tether is used to provide price support
and manipulate cryptocurrency prices.''); id. at 2 (Bitcoin
exchanges ``largely operate outside the purview of financial
regulators'' and ``[t]rading on unregulated exchanges . . . could
leave cryptocurrencies vulnerable to gaming and manipulation.'');
id. at 3 (``[T]he coordinated supply of Tether creates an
opportunity to manipulate cryptocurrencies.''); id. at 6 (``Tether
seems to be used both to stabilize and manipulate Bitcoin
prices.'').
    \105\ See Neil Gandal, J.T. Hamrick, Tyler Moore & Tali Oberman,
Price Manipulation in the Bitcoin Ecosystem, J. Monetary Econ., Jan.
2, 2018, available at https://doi.org/10.1016/j.jmoneco.2017.12.004.
According to the authors of this paper, the fraudulent and
manipulative activity led to an average of approximately a four to
five percent rise in the bitcoin/USD exchange rate in 2013 on days
when that activity occurred, compared to a slight decline on days
without such activity. Id. at 2.
---------------------------------------------------------------------------

    These studies supplement the Commission's conclusion that there is
an insufficient basis in the record before it to decide that the
bitcoin spot markets are inherently resistant to manipulation.\106\
Even without these studies, however, the Commission would still find
that BZX has not demonstrated that the structure of the spot market for
bitcoin is uniquely resistant to manipulation. Moreover, even if the
record supported the proposition that some features of bitcoin and
bitcoin markets mitigate some types of manipulation to some degree, the
Commission concludes that such mitigation is insufficient to justify
dispensing with the detection and deterrence of fraud and manipulation
provided by surveillance-sharing agreements with significant, regulated
markets.\107\
---------------------------------------------------------------------------

    \106\ While another recent academic paper examines the
relationship between bitcoin and Tether and claims ``not [to] find
any evidence suggesting that Tether issuances cause subsequent
increases in Bitcoin returns,'' W.C. Wei, The Impact of Tether
Grants on Bitcoin (May 9, 2018) (manuscript at 6) (``Wei Paper''),
available at https://ssrn.com/abstract=3175876, the Commission
believes that this paper's analysis reflects significant limitations
in the study design and is not as persuasive as the empirical papers
cited herein that conclude there has been fraud and manipulative
activity in bitcoin markets, including the Griffin-Shams Paper.
First, the paper uses only daily traded price and aggregate trading
volume, whereas the Griffin-Shams Paper, supra note 101, performs a
more granular statistical analysis of blockchain transactions and
finds that the largest effects of Tether issuances on bitcoin prices
occur between three and twelve hours after a Tether issuance.
Second, the paper uses a single vector autoregression specification
with 52 coefficients, but without any robustness checks. And third,
while the paper concludes that Tether issuances increase bitcoin
trading volume but do not affect bitcoin returns, the paper does not
include any discussion of or control for collinearity between
changes in bitcoin trading volume and prices. Thus, the Commission
does not believe that the Wei Paper supports a conclusion that
bitcoin is inherently resistant to manipulation.
    \107\ Even if BZX's argument is that bitcoin and bitcoin markets
are ``not readily susceptible to manipulation,'' BZX has not
demonstrated that contention. Indeed, the Commission concludes,
consistent with its past practice, that surveillance-sharing
agreements with significant, regulated markets ensure that
commodity-trust ETPs are ``less readily susceptible to
manipulation.'' Exchange Act Release No. 35518 (Mar. 21, 1995), 60
FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30); accord Exchange Act
Release No. 82538 (Jan. 19, 2018), 83 FR 3807, 3810 (Jan. 26, 2018)
(SR-CboeBZX-2018-005) (``The Exchange has in place a surveillance
program for transactions in ETFs to ensure the availability of
information necessary to detect and deter potential manipulations
and other trading abuses, thereby making the Shares less readily
susceptible to manipulation.'').
---------------------------------------------------------------------------

(ii) Market Domination
    While BZX argues that it is unlikely that any one actor could
obtain a dominant market share,\108\ BZX does not address the risk of
pre-existing dominant positions, a risk that the Lewis Letter
acknowledges.\109\ Similarly, while the Overdahl Letter maintains that
the existence of a dominant bitcoin exchange would not imply the
existence of a dominant ownership position, and that the existence of a
market with a large share of trading volume would make it more
difficult for a market participant to obtain a dominant ownership
position,\110\ the Overdahl Letter does not address the risk of pre-
existing dominant positions in bitcoin. The Lewis Letter, however,
specifically acknowledges this risk, noting: ``One of the risks
associated with bitcoin is the possibility that a single investor or a
small group acting in collusion could own a dominant share of the
available bitcoin.'' \111\ The Lewis Letter goes on to explain that
``[i]t is possible, and in fact, reasonably likely that a small group
of early bitcoin adopters hold a significant proportion of the bitcoin
that has thus far been created.'' \112\ Additionally, another commenter
contends that the majority of bitcoin is held by a few owners,
estimating that 50% of bitcoins are held by fewer than 1,000
people.\113\
---------------------------------------------------------------------------

    \108\ See supra note 57 and accompanying text.
    \109\ See supra note 68 and accompanying text.
    \110\ See supra note 64 and accompanying text.
    \111\ Lewis Letter I, supra note 65, at 6. The Lewis Letter
states that there is ``no compelling evidence'' to suggest that any
single investor or group has acquired a dominant position in
bitcoin, but its recognition that ``there is no registry showing
which individuals or entities own bitcoin or the quantity owned,''
and its citation of ``media estimates'' regarding the holdings of
certain individuals, demonstrates that there is some risk of a
person or group holding or acquiring a significant proportion of
bitcoins and that this risk should not be dismissed. Id. at 6 & n.7.
    \112\ Lewis Letter I, supra note 65, at 6 (citing Amendment No.
4 to Form S-1 of SolidX Bitcoin Trust at 16). A recent letter from
Commission staff notes such concerns of ``potential manipulation in
the underlying cryptocurrency markets.'' Engaging on Fund Innovation
& Cryptocurrency-Related Holdings, 2018 WL 480851, at *1-2 (SEC No
Action Letter Jan. 18, 2018) (citing David Z. Morris, Could
Bitcoin's `Whales' Manipulate the Market?, Fortune (Dec. 10, 2017)).
See also Olga Kharif, The Bitcoin Whales: 1,000 People Who Own 40
Percent of the Market, Bloomberg Businessweek (Dec. 8, 2017),
available at https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-000-people-who-own-40-percent-of-the-market.
    \113\ See supra note 72 and accompanying text.
---------------------------------------------------------------------------

    The Lewis Letter argues that the nature of the spot bitcoin market
and the arbitrage mechanism should reduce the risk of manipulation
through ownership of a dominant market share,\114\ but this argument
addresses whether market participants might acquire a dominant share of
bitcoin ownership by trading in bitcoin markets

and does not address the potential market effect of large bitcoin
positions held by early adopters. Multiple academic studies have found
the existence of concentrated holdings in an asset presents a
meaningful risk of manipulation.\115\ Whether a dominant position came
from being an early adopter of bitcoin or from trading activity would
not alter the Commission's view that a person or group with a dominant
position may be capable of engaging in manipulative activity. The
Commission thus cannot, on the record before it, conclude that bitcoin
markets are uniquely resistant to manipulation.
---------------------------------------------------------------------------

    \114\ See supra note 68 and accompanying text.
    \115\ See, e.g., Craig Pirrong, The Economics of Commodity
Market Manipulation: A Survey, J. Commodity Mkt., Mar. 2017, at 1
(describing manipulation in commodities markets); Franklin Allen,
Lubomir P. Litov & Jianping Mei, Large Investors, Price
Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners,
10 Rev. Finance 645 (2006) (describing manipulation in equity and
commodities markets).
---------------------------------------------------------------------------

(iii) Prior Regulatory Actions Regarding Bitcoin
    Although commenters suggest that the CFTC has conclusively
determined that bitcoin markets are not susceptible to manipulation
because it has permitted the registration of bitcoin swap execution
facilities as consistent with the Commodity Exchange Act
(``CEA''),\116\ the CFTC has made no such sweeping finding as to
bitcoin or bitcoin spot markets either in permitting the registration
of those swap execution facilities or in more recently permitting the
self-certification by Chicago Mercantile Exchange Inc. (``CME'') and
Cboe Futures Exchange, LLC (``CFE'') of bitcoin futures contracts. The
Commission notes that CFTC Chairman Giancarlo has described
``heightened review'' of the CME and CFE self-certifications as
addressing the narrower question of whether the particular bitcoin
futures products and cash-settlement processes--under the specific
terms proposed by those two futures exchanges--were ``readily
susceptible to manipulation.'' \117\ And the CFTC stated that the self-
certification process for bitcoin futures contracts ``does NOT provide
for . . . value judgments about the underlying spot market,'' and U.S.
law ``does not provide for direct, comprehensive Federal oversight of
underlying Bitcoin or virtual currency spot markets.'' \118\
---------------------------------------------------------------------------

    \116\ See supra note 75.
    \117\ See Written Testimony of J. Christopher Giancarlo,
Chairman, Commodity Futures Trading Commission, Before the Senate
Banking Committee at text accompanying n.17 (Feb. 6, 2018)
(``Giancarlo Testimony''), available at https://cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo37. See also infra notes 285-288
(discussing role of CFTC with respect to underlying bitcoin spot
markets).
    \118\ CFTC Backgrounder on Oversight of and Approach to Virtual
Currency Futures Markets (Jan. 4, 2018) (``CFTC Backgrounder''), at
1, 2, available at<EMAIL_ADDRESS>See also infra
note 288.
---------------------------------------------------------------------------

    Moreover, the CFTC's statutory authority to review new derivative
products differs substantially from the Commission's authority, under
Section 19(b) of the Exchange Act,\119\ with respect to the review of
proposed rule changes by SROs. While there are ``limited grounds'' for
the CFTC to take affirmative action to stay new product self-
certifications,\120\ the Commission must, to approve a proposed rule
change, make an affirmative finding that the proposed rule change is
consistent with the Exchange Act, with the burden of demonstrating
consistency with the Exchange Act resting with the SRO proposing the
rule change.\121\ The Commission is also mindful that the primarily
institutional markets that the CFTC supervises are materially different
from the securities markets in which many retail investors participate
directly. The CFTC acknowledges that ``[m]ost participants in the
futures markets are commercial or institutional commodities producers
or consumers'' and ``[t]rading commodity futures and options is a
volatile, complex and risky venture that is rarely suitable for
individual investors or `retail customers.' '' \122\
---------------------------------------------------------------------------

    \119\ 15 U.S.C. 78s(b).
    \120\ See CFTC Backgrounder, supra note 118, at 2.
    \121\ See supra notes 8, 10-12 and accompanying text. Compare 7
U.S.C. 7a-2(c) and 17 CFR 40.6 with 15 U.S.C. 78(b)(1) and 17 CFR
240.19b-4.
    \122\ Futures Market Basics, CFTC, available at http://www.cftc.gov/ConsumerProtection/EducationCenter/FuturesMarketBasics/index.htm. Furthermore, the record does not contain evidence about
whether CME or CFE can, in practice, actually obtain trading
information from bitcoin exchanges, and thus whether the CFTC can
obtain such information from CME or CFE.
---------------------------------------------------------------------------

    Accordingly, the Commission cannot conclude that actions taken to
date by the CFTC determine whether the proposed bitcoin ETP is
consistent with the applicable requirements of the Exchange Act, and
the Commission must reach its own decision, under its own statutory
mandate, to determine whether the proposal is designed to ``protect
investors and the public interest.'' \123\
---------------------------------------------------------------------------

    \123\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

2. Manipulation of the Gemini Exchange and the Gemini Auction
(a) Summary of Comments Received
    BZX acknowledges in its comment letter that less-liquid markets,
such as the market for bitcoin, may be more easily manipulated, but
claims that these concerns are mitigated with respect to the Shares and
the trading on the Gemini Exchange. BZX asserts that the Gemini Auction
price is based on an extremely similar mechanism to the one leveraged
for BZX's own Opening and Closing Auctions and allows full and
transparent participation from all Gemini Exchange participants in the
price discovery process. BZX states that the auction process leverages
mechanics that have proven over the years to be robust and effective on
BZX and other national listing exchanges in both liquid and illiquid
securities alike. BZX argues that, because the time of the Gemini
Auction coincides with BZX's Closing Auction, efficient real-time
arbitrage between the closing price of the Trust and the Gemini Auction
price will be prevalent and will lead to resilient and effective
pricing of both the Trust and the underlying bitcoin asset, leading to
convergence between the Trust's closing price and its NAV.\124\ BZX
asserts that the Gemini Auction price typically deviates very little
from the prevailing price on other bitcoin exchanges, and BZX presents
statistics purporting to show that this price is consistent with the
prices of other U.S.-based exchanges.\125\
---------------------------------------------------------------------------

    \124\ See BZX Letter I, supra note 35, at 8; BZX Letter II,
supra note 13, 10-11. See also SIG Letter, supra note 36, at 2-6;
C&C Letter, supra note 36, at 1.
    \125\ See BZX Letter I, supra note 35, at 8-9.
---------------------------------------------------------------------------

    BZX asserts that the Gemini Auction price is uniquely resistant to
manipulation and that it more accurately reflects the bitcoin price
than any other individual event or cross-market snapshot, because the
largest bitcoin transactions each day usually occur via the Gemini
Auction. BZX also claims that volumes transacted in the Gemini Auction
are generally more than 50% larger than the second-largest trade in the
world, drawing an average daily volume of 1,200 bitcoins compared to
approximately 800 bitcoins.\126\
---------------------------------------------------------------------------

    \126\ See BZX Letter II, supra note 13, at 19-20.
---------------------------------------------------------------------------

    In addition, BZX asserts that the Gemini Auction occurs at a
scheduled time each day to maximize participation and price formation,
while other liquidity events are often unpredictable and
irregular.\127\ Another commenter claims that the Gemini Auction also
concentrates liquidity and trading volume at a single moment each
day.\128\
---------------------------------------------------------------------------

    \127\ See id. at 20.
    \128\ See Overdahl Letter, supra note 36, at 11.
---------------------------------------------------------------------------

    BZX further asserts that, from its launch through May 12, 2017, the
Gemini Auction price on business days has deviated from the Gemini
midpoint price (the midrange of the highest bid

and lowest offer prices) by 0.22% on average and 0.71% at most, that it
has deviated from the median price of all U.S.-based bitcoin exchanges
by 0.52% on average, and that it has deviated from the median price of
all global USD-denominated bitcoin exchanges by 0.70% on average.\129\
BZX also claims that the Gemini Exchange is regularly near the top of
bitcoin exchanges in terms of market-quality metrics for overall
trading.\130\
---------------------------------------------------------------------------

    \129\ See BZX Letter II, supra note 13, at 20.
    \130\ Id.
---------------------------------------------------------------------------

    The Overdahl Letter asserts that the Gemini Auction price is
reliable in that it generally reflects bitcoin traded at other U.S.-
based bitcoin exchanges and bitcoin traded at USD-based exchanges
globally and that, when noticeable discrepancies appear, arbitrage
mechanisms quickly force prices back into alignment.\131\ The Overdahl
Letter provides some update to the statistics provided by BZX and
states that, from September 21, 2016 (the launch of the Gemini
Auction), to March 1, 2017, the average daily deviation of the Gemini
Auction price from the median 4:00 p.m. price of all U.S.-based bitcoin
exchanges was 0.0058 percent and the average absolute deviation (that
is, the average absolute value of deviations) was 0.1804 percent. The
Overdahl Letter also states that, during the same period, the average
daily deviation of the Gemini Auction price from the median 4:00 p.m.
price of all global USD-denominated bitcoin exchanges was 0.0489
percent with an average absolute deviation of 0.2398 percent.\132\
---------------------------------------------------------------------------

    \131\ See Overdahl Letter, supra note 36, at 1.
    \132\ See id. at 4.
---------------------------------------------------------------------------

    The Overdahl Letter also contends that the surveillance agreement
between the Gemini Exchange and BZX allows for continuous monitoring of
trading activity to detect and deter manipulation of the Gemini Auction
price and that BZX's rules are reasonably designed to prevent
fraudulent and manipulative acts and practices with respect to
determining the NAV of the Trust Shares.\133\ The Overdahl Letter
further claims that the Gemini Auction is designed to not be readily
susceptible to manipulation because it includes pre-trading
transparency, which allows for full and transparent participation by
all participants, uses a mechanism similar to that used by other
exchanges in setting opening and closing prices, and concentrates
liquidity and trading volume in a single moment each day.\134\
Regarding the calculation of NAV, the Overdahl Letter also argues that
the Trust's valuation procedures greatly reduce the risk that a
malicious actor could influence the NAV of the Trust by manipulating
the Gemini Auction, because alternative means can be used to value the
Trust's bitcoin if the Trust sponsor determines that the Gemini Auction
price does not reflect the fair value of bitcoin.\135\
---------------------------------------------------------------------------

    \133\ See id. at 2. Specifically, according to the Overdahl
Letter, the type of potential manipulation most relevant for
determining the NAV of the Trust's Shares would be a malicious actor
attempting to use the Gemini Auction price to influence the NAV of
the Trust. See id. at 11.
    \134\ See Overdahl Letter, supra note 36, at 11.
    \135\ See id. at 2.
---------------------------------------------------------------------------

    Several commenters claim that the Gemini Exchange has low trading
volumes,\136\ and one commenter claims that, of all the exchanges,
Gemini has the worst pricing.\137\ Another commenter asserts that the
Gemini Exchange has relatively low liquidity and trade volume and that
there is a significant risk that the nominal ETP share price will be
manipulated by relatively small trades that manipulate the bitcoin
price at that exchange.\138\ This commenter states that, while U.S.-
based bitcoin exchanges are subjected to stricter regulations and
auditing for the holding of client accounts, the trading itself seems
to occur in a regulatory vacuum and seems impossible to audit
effectively.\139\ This commenter expresses concerns regarding the
Gemini Exchange Spot Price, noting that the nominal price of the Shares
under the proposal is supposed to be tied to the market price of
bitcoins at the Gemini Exchange, which is closely tied to the ETP
proponents.\140\
---------------------------------------------------------------------------

    \136\ See, e.g., Maher Letter, supra note 35; Stolfi Letter I,
supra note 35; Anonymous Letter III, supra note 35.
    \137\ See Anonymous Letter III, supra note 35.
    \138\ See Stolfi Letter I, supra note 35; see also Stolfi Letter
II, supra note 35 (concluding that the Gemini Auction volume has
shown a decreasing trend since its inception and is now under $1
million USD during work days, and considerably less during weekends,
and that ``[w]ith such low volume, it seems possible to manipulate
the NAV value by entering suitable bids or asks in the auction'').
    \139\ See Stolfi Letter II, supra note 35.
    \140\ See Stolfi Letter I, supra note 35.
---------------------------------------------------------------------------

    One commenter claims that most daily trading volume is conducted on
poorly capitalized, unregulated exchanges located outside the United
States and that these non-U.S. exchanges and their practices
significantly influence the price discovery process.\141\ Another
commenter states that the biggest and most influential bitcoin exchange
is located outside U.S. jurisdiction.\142\
---------------------------------------------------------------------------

    \141\ See Williams Letter, supra note 35, at 2.
    \142\ See Anonymous Letter V, supra note 35.
---------------------------------------------------------------------------

    One commenter states that, since 2013, the price of bitcoin has
been defined mostly by the major Chinese exchanges, whose volumes dwarf
those of exchanges outside China, and that the price of bitcoin is
defined entirely by speculation, without any ties to fundamentals.\143\
Another commenter observes that Chinese markets drive much of the
volume in the bitcoin markets.\144\
---------------------------------------------------------------------------

    \143\ See Stolfi Letter II, supra note 35.
    \144\ See ARK Letter, supra note 35, at 5.
---------------------------------------------------------------------------

    One commenter states that it makes sense to value the proposed ETP
based on the Gemini Auction because doing so would guarantee sufficient
liquidity and because other bitcoin trading venues are not subject to
the same level of oversight as the Gemini Exchange.\145\ Another
commenter asserts that the Gemini Auction is not a robust mechanism for
price discovery because Gemini's fee structure would make self-trading
or collusive wash trades between accounts profitable, which would
artificially inflate the volume of the Gemini Auction.\146\
---------------------------------------------------------------------------

    \145\ See Delehanty Letter, supra note 35 (but noting that using
the Gemini Auction to value the ETP, which is also the sponsor of
the ETP, creates a potential conflict of interest).
    \146\ See Anonymous Letter VIII, supra note 35.
---------------------------------------------------------------------------

    One commenter states that the Gemini Auction could be an
improvement over other bitcoin pricing mechanisms, but asserts that the
Gemini Auction has not improved volume.\147\ The commenter observes
that the Gemini Auction data show that traders in the auction are
taking advantage of the discounted auction price. The commenter states
that the daily two-sided Gemini Auction process was designed to
maximize price discovery and reduce price volatility that could be the
result of momentum pricing, but asks what measures have been put in
place to address traders who take advantage of the discounted auction
price. The commenter also states that, while other financial products
sometimes have auctions to determine price, an auction on a stock
exchange does not require money to be deposited in advance with the
exchange to be in the auction. The commenter states that, by contrast,
the Gemini Exchange requires dollars or bitcoin to be deposited before
participation. The commenter believes that this is a problem because
the Gemini Auction is limited and has failed on at least two
occasions.\148\
---------------------------------------------------------------------------

    \147\ See Anonymous Letter III, supra note 35.
    \148\ See id.
---------------------------------------------------------------------------

    Other commenters believe that the Gemini Exchange conducts
sufficient volume to support the Winklevoss Bitcoin Trust. One
commenter states that trading volume on the Gemini Exchange is
sufficient and that

manipulation of these Shares, while possible, would equally be possible
for other exchange-traded funds.\149\ Another commenter asserts that
trading volume in the recent Gemini bitcoin daily auctions seemed ``to
be of reasonable size.'' \150\
---------------------------------------------------------------------------

    \149\ See Anonymous Letter I, supra note 35.
    \150\ See Delehanty Letter, supra note 35.
---------------------------------------------------------------------------

    One commenter claims that there are more robust ways to value the
Trust's holdings than using the spot price of a single exchange, such
as the Gemini Exchange.\151\ The commenter also states that the Gemini
Exchange typically processes less than 10% of the total volume in the
bitcoin/USD pair and states that an index of the most reliable
exchanges should be constructed to value the Trust's holdings. The
commenter questions whether using only the Gemini Exchange's spot price
could serve to incentivize Authorized Participants and other market
participants to direct traffic and flow to Gemini, at the expense of
best execution.\152\
---------------------------------------------------------------------------

    \151\ See ARK Letter, supra note 35, at 7-8.
    \152\ See id. at 8-9.
---------------------------------------------------------------------------

    Another commenter takes a different view on the merits of single-
versus multiple-price sources. This commenter observes that bitcoin
spot prices diverge across exchanges due to various factors and that
some exchanges may suffer from lack of oversight and a lack of
transparency or fairness. The commenter claims that these facts
strengthen the case for an investment product that does not rely on the
spot price of less-credible exchanges to value its holdings and instead
relies on the spot price on the Gemini Exchange, which is subject to
substantive regulation of its exchange activity and custody of assets
by the NYSDFS. This commenter also states that, while leveraged trading
on some other exchanges has historically sparked excessive price
volatility and instability, Gemini does not offer such products and
would be able to serve as a trusted, regulated spot exchange for
institutional market participants driving the arbitrage mechanism that
ensures efficient pricing between the spot price and the Shares. The
commenter claims that the Gemini Exchange has the potential for more-
robust price discovery as liquidity is concentrated on that
exchange.\153\
---------------------------------------------------------------------------

    \153\ See Circle Letter, supra note 35, at 2.
---------------------------------------------------------------------------

    One commenter states that there is an inherent trade-off to using
one exchange versus an average of several exchanges, some of which may
be less scrupulous. The commenter acknowledges that manipulation is a
legitimate concern, but notes that it is not uncommon to see a very
small number of physical trades determine the base price for a much
larger paper market.\154\
---------------------------------------------------------------------------

    \154\ See Delehanty Letter, supra note 35.
---------------------------------------------------------------------------

    Other commenters view the risk of manipulation as more significant.
One commenter states that it would be surprising if manipulative
practices that would be illegal in other financial markets did not
occur on certain bitcoin exchanges that experience lack of regulations
and oversight, since these practices would be easy to implement,
impossible to detect, perfectly legal under the rules applicable to
those bitcoin exchanges, and extremely lucrative.\155\ This commenter
also states that the Gemini Auction closing volumes have been low and
have shown a slight decreasing trend since the inception of the Gemini
Auction. The commenter states that, with low volumes, it seems possible
to manipulate the NAV by entering suitable bids or asks in the Gemini
Auction.\156\ Another commenter agrees that bitcoin traders can
manipulate trading on the Gemini Exchange because of its low trading
volumes and notes that the Trust's documentation states that momentum
pricing of bitcoin has resulted, and may continue to result, in
speculation regarding future appreciation in the value of bitcoin,
making the price of bitcoin more volatile.\157\ The commenter states
that the value of bitcoin may therefore be more likely to fluctuate due
to changing investor confidence in future appreciation in the Gemini
Auction price, which could adversely affect an investment in the
Shares.\158\ According to another commenter, in this unregulated
environment, price manipulation and front-running of large buy or sell
orders can happen and well-connected customers can gain preferential
treatment in order execution.\159\
---------------------------------------------------------------------------

    \155\ See Stolfi Letter II, supra note 35.
    \156\ See id.
    \157\ See Anonymous Letter III, supra note 35.
    \158\ See id.
    \159\ See Williams Letter, supra note 35, at 2.
---------------------------------------------------------------------------

(b) Discussion
    For the reasons discussed below, the Commission concludes that BZX
has not demonstrated that the Gemini Exchange and the Gemini Auction
are resistant to manipulation. Commenters disagree about whether the
Gemini Exchange and the Gemini Auction are susceptible to manipulation.
BZX promotes the Gemini Exchange as one of the top three bitcoin
exchanges in the United States,\160\ and some commenters believe that
the Gemini Exchange conducts sufficient volume to support the
Winklevoss Bitcoin Trust.\161\ Other commenters, however, question
these assertions, some noting that the majority of bitcoin trading,
including trading denominated in USD, occurs on unregulated exchanges
outside the United States,\162\ and one suggesting that the low
liquidity and trading volume on the Gemini Exchange create a
significant risk that the ETP share price could be manipulated by
relatively small trades.\163\
---------------------------------------------------------------------------

    \160\ See supra note 130 and accompanying text.
    \161\ See supra notes 149-150 and accompanying text.
    \162\ See supra notes 141-144 and accompanying text.
    \163\ See supra note 138 and accompanying text.
---------------------------------------------------------------------------

    While BZX claims in its May 2017 comment letter that the average
volume of the Gemini Auction is 1,200 bitcoins,\164\ calculations based
on public data from the Gemini Exchange website show that more recent
Gemini Auction volume has been significantly lower. As of March 31,
2018, the average number of bitcoins traded in the Gemini Auction on a
business day was just 178.07 bitcoins over the previous month, 122.20
bitcoins over the previous three months, and 138.46 bitcoins over the
previous six months. Median volume figures for the same periods are
even lower: 146.51 bitcoins, 85.09 bitcoins, and 90.42 bitcoins,
respectively. Although the Gemini Exchange conducts the Gemini Auction
on each calendar day, to better represent auction volume for days on
which creations or redemptions might occur in the Shares, these
calculations of average and median auction volume exclude auctions that
occurred on weekends and days on which the U.S. equities markets were
closed. Days on which no Gemini Auction price was reached were also
excluded to avoid skewing data.
---------------------------------------------------------------------------

    \164\ See BZX Letter II, supra note 13, at 20.
---------------------------------------------------------------------------

    The volume of the Gemini Auction is of particular relevance to
BZX's proposal, and to the susceptibility of the ETP shares to
manipulation, because the Gemini Auction price is used to determine the
NAV of the Trust, which is publicly disseminated and which is the price
used for creation and redemption transactions. Taking into account the
recent low auction volume calculated above, which is a small fraction
of the 1,000 bitcoins in a creation or redemption basket,\165\ the
Commission concludes that there is a substantial risk that either (1)
any creation and redemption activity in the

Trust would have a substantial effect on the Trust's pricing or (2)
Authorized Participants would be forced to source bitcoins on other
venues where prices may or may not be aligned with that of the Gemini
Auction, limiting the purported effectiveness of arbitrage.
---------------------------------------------------------------------------

    \165\ See Amendment No. 2, supra note 1 (setting size of
creation unit at 100,000 shares, with the value of a share at 0.01
bitcoin, making content of a creation unit 1,000 bitcoins).
---------------------------------------------------------------------------

    Additionally, given the current disparity between the Gemini
Auction volume and the trading volume that would equal a creation
unit--and the resulting likelihood that creation or redemption activity
would substantially affect the Gemini Auction price--BZX has not shown
that the ability of the Trust to use other criteria to value the
Trust's bitcoins in ``extraordinary circumstances'' \166\ adequately
addresses the risk that creations and redemptions, or manipulative
activity such as front running, may affect the Gemini Auction price on
an ordinary day. In light of the risks that creation and redemption
activity may substantially affect the Gemini Auction price--and that
the use of other valuation criteria may fail to address the effects of
creation and redemption activity or of manipulative activity--the
Commission cannot conclude that the bitcoin pricing mechanism of the
Trust is uniquely resistant to manipulation.
---------------------------------------------------------------------------

    \166\ See supra note 30.
---------------------------------------------------------------------------

    Further, given that recent Gemini Auction volumes are inadequate to
support creation or redemption activity, BZX has not sufficiently
supported its claim that the design and mechanisms of the Gemini
Auction would allow for efficient arbitrage between the Shares and the
underlying bitcoin. Similarly, the statistics offered by BZX and the
Overdahl Letter to argue that the Gemini Auction creates a price
closely aligned with U.S.-based and global USD-denominated bitcoin
exchanges do not establish that bitcoin trading on the Gemini Exchange
is uniquely resistant to manipulation because these statistics do not
reflect, and cannot predict, the dynamics of trading on the Gemini
Exchange if the Gemini Auction were used as the basis to calculate NAV
for the Trust. Given the small size of the Gemini Auction relative to
the size of a creation unit, the launch of the proposed ETP would be
likely to fundamentally affect supply and demand in the Gemini Auction,
and the use of the Gemini Auction price to calculate NAV would
introduce a significant incentive to manipulate the Gemini Auction that
does not currently exist. The Commission cannot therefore conclude that
arbitrage would render the Shares uniquely resistant to manipulation.
    The Trust's Registration Statement acknowledges that the reliance
on a single bitcoin exchange has risks to shareholders in the Trust:
``Trading on a single Bitcoin Exchange may result in less favorable
prices and decreased liquidity for the Trust and, therefore, could have
an adverse effect on the Trust and Shareholders.'' \167\ Moreover,
although commenters have suggested that approval of the proposal would
naturally lead to greater activity in the Gemini Auction,\168\ such
speculation does not provide an adequate basis to decide that future
Gemini Auction volume would be sufficient to prevent manipulation of
the Gemini Auction from affecting the NAV of the Trust, and BZX has not
explained how the favorable market quality metrics it attributes to the
Gemini Exchange would be affected if trading interest at the Gemini
Auction were dominated by creation and redemption activity.\169\
Therefore, again, the Commission cannot conclude that the pricing
mechanism of the Trust would render the Shares uniquely resistant to
manipulation.
---------------------------------------------------------------------------

    \167\ Registration Statement, supra note 22, at 22.
    \168\ See Maher Letter, supra note 35; Overdahl Letter, supra
note 36, at 3; SIG Letter, supra note 36, at 8.
    \169\ See supra note 130 and accompanying text.
---------------------------------------------------------------------------

C. The Availability of ``Traditional Means'' To Detect and Deter Fraud
and Manipulation

    BZX has not demonstrated, given the current absence of a
surveillance-sharing agreement with a regulated bitcoin market of
significant size, that the alternative surveillance procedures BZX
purports to identify--including BZX's assertion that it would be able
to obtain certain information regarding trading in the Shares and in
the underlying bitcoin or any bitcoin derivative--would be sufficient
to satisfy the requirement of Exchange Act Section 6(b)(5) that an
exchange's rules be designed to prevent fraudulent and manipulative
acts and practices.
1. Summary of Comments Received
    BZX asserts that the March Disapproval Order failed to appreciate
that the proposal provides ``traditional means of identifying and
deterring fraud and manipulation'' that meet the criteria that the
Commission has utilized in approving other commodity-trust ETPs.\170\
BZX states that a particular area of surveillance focus for the
Commission in prior commodity-trust ETP approval orders was the
implementation of exchange rules requiring market makers in the
commodity-trust ETP shares to disclose their dealings in the underlying
commodities. BZX contends that analogous requirements are included in
this proposal, with BZX Rule 14.11(e)(4) mandating that market makers
in the Shares disclose all of their commodity trading accounts,
disclose all trading in bitcoin or bitcoin derivatives, and make
available all related books and records.\171\ BZX also contends that,
in the prior commodity-trust ETP approval orders, the Commission also
reviewed the adequacy of the ETP listing exchange's rules and
procedures for surveillance of trading activity in the ETP shares.
According to BZX, similar surveillance rules and procedures are in
place at BZX regarding the proposed bitcoin ETP, as the listing
exchange can obtain information regarding trading in Shares from
Intermarket Surveillance Group members and affiliate members, as well
as trading information available on the blockchain and information
available through a surveillance-sharing agreement with the Gemini
Exchange.\172\
---------------------------------------------------------------------------

    \170\ See BZX Letter II, supra note 13, at 22, 26.
    \171\ See id. at 23.
    \172\ See id. The surveillance-sharing agreement between BZX and
the Gemini Exchange is discussed in Section III.E.1, infra.
---------------------------------------------------------------------------

    The Overdahl Letter also contends that BZX's rules are reasonably
designed to prevent fraudulent and manipulative acts and practices with
respect to determining the NAV of the Trust Shares.\173\ Specifically,
according to the Overdahl Letter, the type of potential manipulation
most relevant for determining the NAV of the Trust's Shares would be a
malicious actor attempting to use the Gemini Auction price to influence
the NAV of the Trust. The Overdahl Letter also asserts that, in
addition to BZX's surveillance procedures and anti-manipulation rules,
penalties for engaging in manipulative conduct serve as a deterrent
against manipulation of the Gemini Auction price and the resulting
Trust's NAV. The Overdahl Letter states that, although a penalty is
applied after a manipulation occurs or is attempted, penalties are
nonetheless a useful tool for deterring, and therefore preventing,
manipulation.\174\
---------------------------------------------------------------------------

    \173\ See Overdahl Letter, supra note 36, at 2.
    \174\ See id. at 11.
---------------------------------------------------------------------------

    Finally, one commenter claims that the March Disapproval Order
reflects the Commission's ``unspoken but obvious concern'' with
bitcoin, and argues that this issue can be cured by having the bitcoin
exchange sign a memorandum of understanding with the Commission to
share information.\175\
---------------------------------------------------------------------------

    \175\ See Convergex Letter, supra note 36, at 2.

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2. Discussion
    The Commission concludes that BZX has not demonstrated--given the
current absence of a surveillance-sharing agreement with a regulated
bitcoin market of significant size--that the alternative surveillance
procedures discussed above would, by themselves, be sufficient to
satisfy the requirement of Exchange Act Section 6(b)(5) that an
exchange's rules be designed to prevent fraudulent and manipulative
acts and practices.\176\
---------------------------------------------------------------------------

    \176\ See 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    While BZX would, pursuant to its listing rules, be able to obtain
certain information regarding trading in the Shares and in the
underlying bitcoin or any bitcoin derivative through registered market
makers,\177\ this trade information would be limited to the activities
of members who were registered with BZX as market makers in the Shares
and would not encompass all BZX market participants.\178\ Furthermore,
neither BZX's ability to surveil trading in the Shares nor its ability
to share surveillance information with other securities exchanges
trading the Shares would give BZX insight into the activity and
identity of market participants trading in the underlying bitcoin in
the OTC market or on other bitcoin trading venues.
---------------------------------------------------------------------------

    \177\ See supra note 171 and accompanying text.
    \178\ See BZX Rule 14.11(e)(4)(G).
---------------------------------------------------------------------------

    Additionally, while BZX represents that it can obtain information
about bitcoin trading made publicly available through the bitcoin
blockchain,\179\ the blockchain identifies parties to a transaction
only by a pseudonymous public-key address, and it does not distinguish
bitcoin trading activity from other transfers of bitcoin (e.g., for
remittances, purchases of goods or services, or other purposes).
Therefore, the public blockchain ledger, even in combination with the
other monitoring abilities BZX identifies, does not provide
comprehensive customer trading or identity information, which is
particularly important here because pseudonymous bitcoin account
holding means, among other things, that the number of accounts or
number of trades would not reveal whether a person or group has a
dominant ownership position in bitcoin, or is using or attempting to
use a dominant ownership position to manipulate bitcoin pricing.\180\
---------------------------------------------------------------------------

    \179\ See Amendment No. 1, supra note 1, 81 FR at 76668.
    \180\ See also Section III.B.1(b)(ii), supra (discussing market
domination).
---------------------------------------------------------------------------

    One commenter asserts that existing ``penalties for engaging in
manipulative conduct'' can serve to deter manipulation of the Gemini
Auction price and, therefore, the Trust's NAV.\181\ However, the
Commission concludes that, based on the facts and circumstances of this
proposal, the ability of relevant authorities to potentially sanction
manipulative activity after the fact--if it is discovered--is
insufficient, by itself, to meet BZX's obligation to have rules
``designed to prevent fraudulent and manipulative acts and practices.''
\182\ Before penalties can be imposed for engaging in manipulative
conduct, such conduct must be detected and investigated; as discussed
below, that is the necessary function of comprehensive surveillance-
sharing agreements.\183\ Moreover, as discussed below, a substantial
majority of bitcoin trading occurs outside the United States,\184\ and
even within the United States, there is no comprehensive federal
oversight of bitcoin spot markets.\185\
---------------------------------------------------------------------------

    \181\ See supra note 174 and accompanying text.
    \182\ 15 U.S.C. 78f(b)(5) (emphasis added).
    \183\ See Section III.D, infra.
    \184\ See infra notes 281-282 and accompanying text.
    \185\ See infra notes 286-288 and accompanying text.
---------------------------------------------------------------------------

    Another commenter suggests that the Commission sign a Memorandum of
Understanding (``MOU'') with the Gemini Exchange to address what the
commenter claims is the Commission's unspoken but obvious concern with
bitcoin.\186\ While the Commission is a party to several MOUs, these
are generally arrangements with other foreign or domestic
regulators.\187\ MOUs are tools to assist the Commission in performing
its regulatory functions, not a mechanism for the Commission to assume
an SRO's obligations under the Exchange Act.
---------------------------------------------------------------------------

    \186\ See supra note 175 and accompanying text.
    \187\ See, e.g., Memorandum of Understanding Between the
Internal Revenue Service and the Securities and Exchange Commission
for Tax Exempt Bonds/Municipal Securities Compliance (Mar. 2, 2010),
available at https://www.sec.gov/info/municipal/sec-irs-mou030210.pdf; Memorandum of Understanding Between the U.S.
Securities and Exchange Commission and the U.S. Commodity Futures
Trading Commission Regarding Coordination in Areas of Common
Regulatory Interest (Mar. 11, 2008), available at https://www.sec.gov/news/press/2008/2008-40_mou.pdf; and Memorandum of
Understanding Between the U.S. Securities and Exchange Commission
and the U.S. Commodity Futures Trading Commission Regarding the
Oversight of Security Futures Product Trading and the Sharing of
Security Futures Product Information (Mar. 17, 2004), available at
<EMAIL_ADDRESS>---------------------------------------------------------------------------

D. The Use of Surveillance-Sharing Agreements To Detect and Deter
Fraudulent and Manipulative Acts and Practices With Respect to
Commodity-Trust ETPs

    The Commission has historically recognized the importance of
comprehensive surveillance-sharing agreements to detect and deter
fraudulent and manipulative activity. Because BZX has not demonstrated
that bitcoin and bitcoin markets are uniquely resistant to
manipulation--or that alternative means of detecting and deterring
fraud and manipulation are sufficient in the absence of a surveillance-
sharing agreement with a significant, regulated market related to
bitcoin--the absence of such an agreement compels the Commission to
conclude that the proposed rule change must be disapproved.
1. Summary of Comments Received
    BZX claims that the March Disapproval Order overstates the extent
to which surveillance and regulation of the underlying market have been
present in prior commodity-trust ETP approval orders, asserting that
none of these orders ``offers even a cursory analysis about whether the
regulated markets for trading futures on the underlying commodity are
`well-established' or `significant.' '' \188\ In particular, BZX argues
that the Commission orders approving the ETFS Platinum Trust ETP
(``Platinum Order'') and the ETFS Palladium Trust ETP (``Palladium
Order''),\189\ along with their exchange filings, discuss neither
whether the New York Mercantile Exchange (``NYMEX'') and the Tokyo
Commodity Exchange (``TOCOM'') are well-established or significant, nor
the relevance of NYMEX being the largest exchange in the world for
trading palladium and platinum derivatives.\190\ BZX claims that--
because the exchange filings regarding the platinum and palladium ETPs
note that TOCOM is not a member of the Intermarket Surveillance Group
and that the respective listing exchange did not have a comprehensive
surveillance-sharing agreement with TOCOM--those approval orders did
not require the existence of an information-sharing agreement with the
underlying

exchange.\191\ BZX further asserts that the Platinum Order and
Palladium Order discuss only whether the listing exchange (1) can
obtain information from market makers relating to their trading in the
applicable commodity or related derivatives; (2) has a rule preventing
market makers from using material, nonpublic information regarding
trading in the underlying commodity or its derivatives; and (3) can
obtain trading information via the Intermarket Surveillance Group from
other Intermarket Surveillance Group member exchanges.\192\
---------------------------------------------------------------------------

    \188\ See BZX Letter II, supra note 13, at 26-27.
    \189\ See Exchange Act Release No. 61219 (Dec. 22, 2009), 74 FR
68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95) (approving ETFS Platinum
Trust); Exchange Act Release No. 61220 (Dec. 22, 2009), 74 FR 68895
(Dec. 29, 2009) (SR-NYSEArca-2009-94) (approving ETFS Palladium
Trust).
    \190\ See BZX Letter II, supra note 13, at 27.
    \191\ See id. at 27-28.
    \192\ See id. at 27.
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    BZX further asserts that, while the potential avenues for
manipulation noted in the March Disapproval Order are a risk, these
potential avenues of manipulation of the bitcoin market also exist in
the context of other commodity-trust ETPs.\193\ BZX asserts that, in
the Commission order approving the listing and trading of shares of
iShares Copper Trust (``Copper Order''),\194\ the Commission found that
demand from new investors would broaden the investor base in copper and
thereby reduce the risk of collusion among copper market participants.
BZX also argues that the Commission ``took comfort'' in approving the
iShares Copper Trust because trading of the shares would be subject to
the oversight of the listing exchange and the Commission, and because
the manipulation of physical copper would be subject to CFTC
jurisdiction. BZX asserts that the Trust is nearly identically situated
to the iShares Copper Trust.\195\ Similarly, the Lewis Letter asserts
that many features of a similar bitcoin commodity-trust ETP proposal--
features that purportedly ameliorate the risk of price manipulation
through a dominant market share--are also factors that were used as a
basis for the Commission's approval of another copper commodity-trust
ETP.\196\
---------------------------------------------------------------------------

    \193\ See Petition for Review, supra note 4, at 12. The Overdahl
Letter agrees with this assertion by BZX. See Overdahl Letter, supra
note 36, at 10.
    \194\ See Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR
13726 (Feb. 28, 2013) (SR-NYSEArca-2012-66) (approving iShares
Copper Trust).
    \195\ See BZX Letter II, supra note 13, at 13-14; see also id.
at 25.
    \196\ See Lewis Letter I, supra note 65, at 6 & n.8 (referring
to the SolidX Bitcoin Trust, see SolidX Order, supra note 65, and to
the JPM XF Physical Copper Trust, Exchange Act Release No. 68440
(Dec. 14, 2012), 77 FR 75468 (Dec. 20, 2012) (SR-NYSEArca-2012-28)).
---------------------------------------------------------------------------

    BZX contends that previous ETP approvals demonstrate that the
factors used to determine whether currency-derivative products are
consistent with the Exchange Act should also apply to commodity-trust
ETPs. BZX argues that the Commission order approving the listing and
trading of the streetTRACKS Gold Shares (``Gold Order'') \197\--the
first commodity-trust ETP--was based on an assumption that the currency
market and the spot gold market were largely unregulated, but found
that certain factors mitigated the concerns arising from the
unregulated underlying markets.\198\ BZX claims that, in determining
whether a commodity-trust ETP is consistent with the Exchange Act, the
Commission's approval orders have included an analysis of previously
approved derivative products for which the underlying reference assets
(1) are traded OTC; (2) are largely unregulated; and (3) are traded on
markets with which the ETP listing exchange could not enter into a
surveillance sharing agreement.\199\ While BZX concedes that the
Commission has not approved a commodity-trust ETP when there were no
derivatives markets related to the underlying commodity, BZX points out
that the Commission has approved a number of currency-trust ETPs and
asserts that the Commission approved the listing and trading of the
CurrencyShares Hong Kong Dollar Trust and the CurrencyShares Singapore
Dollar Trust based largely on the same factors that the Commission has
considered in approving commodity-trust ETPs, despite a statement in
the approval order for the CurrencyShares Hong Kong Dollar Trust and
the CurrencyShares Singapore Dollar Trust that futures or options are
not traded on the Hong Kong Dollar or Singapore Dollar.\200\ Similarly,
one commenter argues that there are several commodity-based and other
ETPs where the underlying market is either unregulated or lightly
regulated, such as foreign-exchange linked or related ETPs, or
commodity-based ETPs that hold the underlying and not the derivative
product.\201\
---------------------------------------------------------------------------

    \197\ See Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR
64614 (Nov. 5, 2004) (SR-NYSE-2004-22) (approving streetTRACKS Gold
Shares).
    \198\ See BZX Letter II, supra note 13, at 28-29.
    \199\ See id. at 29.
    \200\ See id. at 28 n.59. See also Exchange Act Release No.
58365 (Aug. 14, 2008), 73 FR 49522 (Aug. 21, 2008) (SR-NYSEArca-
2008-81) (approving CurrencyShares Hong Kong Dollar Trust,
CurrencyShares Singapore Dollar Trust, and two other issues of
CurrencyShares based on non-U.S. currencies).
    \201\ See Convergex Letter, supra note 36, at 2.
---------------------------------------------------------------------------

2. Discussion
(a) The History and Importance of Surveillance-Sharing Agreements
Relating to Derivative Securities Products
    Although BZX claims to have described ``traditional means'' of
identifying and deterring fraud and manipulation, it overlooks the fact
that the Commission has long recognized the importance of comprehensive
surveillance-sharing agreements to detect and deter fraudulent and
manipulative activity.\202\ The hallmarks

of such an agreement are that the agreement provides for the sharing of
information about market trading activity, clearing activity, and
customer identity; that the parties to the agreement have reasonable
ability to obtain access to and produce requested information; and that
no existing rules, laws, or practices would impede one party to the
agreement from obtaining this information from, or producing it to, the
other party.\203\
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    \202\ See streetTRACKS Gold Shares, Exchange Act Release No.
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22); iShares COMEX Gold Trust, Exchange Act Release No.
51058 (Jan. 19, 2005), 70 FR 3749, 3751, 3754-55 (Jan. 26, 2005)
(SR-Amex-2004-38); iShares Silver Trust, Exchange Act Release No.
53521 (Mar. 20, 2006), 71 FR 14967, 14968, 14973-74 (Mar. 24, 2006)
(SR-Amex-2005-072); ETFS Gold Trust, Exchange Act Release No. 59895
(May 8, 2009), 74 FR 22993, 22994-95, 22998, 23000 (May 15, 2009)
(SR-NYSEArca-2009-40); ETFS Silver Trust, Exchange Act Release No.
59781 (Apr. 17, 2009), 74 FR 18771, 18772, 18775-77 (Apr. 24, 2009)
(SR-NYSEArca-2009-28); ETFS Palladium Trust, Exchange Act Release
No. 61220 (Dec. 22, 2009), 74 FR 68895, 68896 (Dec. 29, 2009) (SR-
NYSEArca-2009-94) (notice of proposed rule change included NYSE
Arca's representation that ``[t]he most significant palladium
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,''
that ``NYMEX is the largest exchange in the world for trading
precious metals futures and options,'' and that NYSE Arca ``may
obtain trading information via the Intermarket Surveillance Group,''
of which NYMEX is a member, Exchange Act Release No. 60971 (Nov. 9,
2009), 74 FR 59283, 59285-86, 59291 (Nov. 17, 2009)); ETFS Platinum
Trust, Exchange Act Release No. 61219 (Dec. 22, 2009), 74 FR 68886,
68887-88 (Dec. 29, 2009) (SR-NYSEArca-2009-95) (notice of proposed
rule change included NYSE Arca's representation that ``[t]he most
significant platinum futures exchanges are the NYMEX and the Tokyo
Commodity Exchange,'' that ``NYMEX is the largest exchange in the
world for trading precious metals futures and options,'' and that
NYSE Arca ``may obtain trading information via the Intermarket
Surveillance Group,'' of which NYMEX is a member, Exchange Act
Release No. 60970 (Nov. 9, 2009), 74 FR 59319, 59321, 59327 (Nov.
17, 2009)); Sprott Physical Gold Trust, Exchange Act Release No.
61496 (Feb. 4, 2010), 75 FR 6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-
2009-113) (notice of proposed rule change included NYSE Arca's
representation that the COMEX is one of the ``major world gold
markets,'' that NYSE Arca ``may obtain trading information via the
Intermarket Surveillance Group,'' and that NYMEX, of which COMEX is
a division, is a member of the Intermarket Surveillance Group,
Exchange Act Release No. 61236 (Dec. 23, 2009), 75 FR 170, 171, 174
(Jan. 4, 2010)); Sprott Physical Silver Trust, Exchange Act Release
No. 63043 (Oct. 5, 2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12,
2010) (SR-NYSEArca-2010-84); ETFS Precious Metals Basket Trust,
Exchange Act Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790
(Aug. 17, 2010) (SR-NYSEArca-2010-56) (notice of proposed rule
change included NYSE Arca's representation that ``the most
significant gold, silver, platinum and palladium futures exchanges
are the COMEX and the TOCOM'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which COMEX is a member, Exchange Act Release No. 62402 (Jun. 29,
2010), 75 FR 39292, 39295, 39298 (July 8, 2010)); ETFS White Metals
Basket Trust, Exchange Act Release No. 62875 (Sept. 9, 2010), 75 FR
56156, 56158 (Sept. 15, 2010) (SR-NYSEArca-2010-71) (notice of
proposed rule change included NYSE Arca's representation that ``the
most significant silver, platinum and palladium futures exchanges
are the COMEX and the TOCOM'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which COMEX is a member, Exchange Act Release No. 62620 (July 30,
2010), 75 FR 47655, 47657, 47660 (Aug. 6, 2010)); ETFS Asian Gold
Trust, Exchange Act Release No. 63464 (Dec. 8, 2010), 75 FR 77926,
77928 (Dec. 14, 2010) (SR-NYSEArca-2010-95) (notice of proposed rule
change included NYSE Arca's representation that ``the most
significant gold futures exchanges are the COMEX and the Tokyo
Commodity Exchange,'' that ``COMEX is the largest exchange in the
world for trading precious metals futures and options,'' and that
NYSE Arca ``may obtain trading information via the Intermarket
Surveillance Group,'' of which COMEX is a member, Exchange Act
Release No. 63267 (Nov. 8, 2010), 75 FR 69494, 69496, 69500-01 (Nov.
12, 2010)); Sprott Physical Platinum and Palladium Trust, Exchange
Act Release No. 68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec.
19, 2012) (SR-NYSEArca-2012-111) (notice of proposed rule change
included NYSE Arca's representation that ``[f]utures on platinum and
palladium are traded on two major exchanges: The New York Mercantile
Exchange . . . and Tokyo Commodities Exchange'' and that NYSE Arca
``may obtain trading information via the Intermarket Surveillance
Group,'' of which COMEX is a member, Exchange Act Release No. 68101