[Federal Register Volume 87, Number 66 (Wednesday, April 6, 2022)]
[Notices]
[Pages 20014-20028]
[FR Doc No: 2022-07193]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94571; File No. SR-CboeBZX-2021-051]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, To
List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares

March 31, 2022.

I. Introduction

    On July 20, 2021, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the ARK 21Shares
Bitcoin ETF (``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares. The proposed rule change was published for comment in the
Federal Register on August 6, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92543 (Aug. 2,
2021), 86 FR 43289. Comments on the proposed rule change can be
found at: https://www.sec.gov/comments/sr-cboebzx-2021-051/srcboebzx2021051.htm.
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    On September 15, 2021, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On November 2, 2021, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On December 9, 2021, the Exchange filed Amendment No. 1, which amended
and replaced the proposed rule change in its entirety, and on December
17, 2021, the Commission published notice of Amendment No. 1 to the
proposed rule change.\8\ On January 25, 2022, the Commission designated
a longer period for Commission action on the proposed rule change, as
modified by Amendment No. 1.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92989, 86 FR 52530
(Sept. 21, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 93510, 86 FR 61820
(Nov. 8, 2021).
    \8\ See Securities Exchange Act Release No. 93822, 86 FR 73360
(Dec. 27, 2021). Amendment No. 1 to the proposed rule change can be
found at: https://www.sec.gov/rules/sro/cboebzx/2021/34-93822.pdf.
    \9\ See Securities Exchange Act Release No. 94055, 87 FR 4980
(Jan. 31, 2022).
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    This order disapproves the proposed rule change, as modified by
Amendment No. 1. The Commission concludes that BZX has not met its
burden under the Exchange Act and the Commission's Rules of Practice to
demonstrate that its proposal is consistent with the requirements of
Exchange Act Section 6(b)(5), and in particular, the requirement that
the rules of a national securities exchange be ``designed to prevent
fraudulent and manipulative acts and practices'' and ``to protect
investors and the public interest.'' \10\
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    \10\ 15 U.S.C. 78f(b)(5).
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    When considering whether BZX's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same standard used in its orders
considering previous proposals to list bitcoin \11\-based commodity
trusts and bitcoin-based trust issued receipts.\12\ As the Commission
has explained, an exchange that lists bitcoin-based exchange-traded
products (``ETPs'') can meet its obligations under Exchange Act Section
6(b)(5) by demonstrating that the exchange has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size

related to the underlying or reference bitcoin assets.\13\
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    \11\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Amendment No. 1, 86 FR at 73362.
    \12\ See Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) and To List and Trade Shares of the United States Bitcoin
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E,
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1,
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024)
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Kryptoin Bitcoin ETF Trust Under BZX
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange
Act Release No. 93860 (Dec. 22, 2021), 86 FR 74166 (Dec. 29, 2021)
(SR-CboeBZX-2021-029) (``Kryptoin Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the Valkyrie
Bitcoin Fund Under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares), Securities Exchange Act Release No. 93859 (Dec. 22, 2021),
86 FR 74156 (Dec. 29, 2021) (SR-NYSEArca-2021-31) (``Valkyrie
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37)
(``Skybridge Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Wise Origin Bitcoin Trust under BZX
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022)
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares),
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10,
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X
Order''). See also Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, Relating to the Listing and Trading of
Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule
8.201, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82
FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order'').
The Commission also notes that orders were issued by delegated
authority on the following matters: Order Disapproving a Proposed
Rule Change To List and Trade the Shares of the ProShares Bitcoin
ETF and the ProShares Short Bitcoin ETF, Securities Exchange Act
Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (SR-
NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a
Proposed Rule Change To List and Trade the Shares of the
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF,
Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR
43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) (``GraniteShares
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares, Securities Exchange Act Release No.
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019) (``VanEck Order'').
    \13\ See USBT Order, 85 FR at 12596. See also Winklevoss Order,
83 FR at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
83 FR at 43925-27 nn.35-39 and accompanying text (discussing
previous Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since
they ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur.'' \14\ The Commission has
emphasized that it is essential for an exchange listing a derivative
securities product to enter into a surveillance-sharing agreement with
markets trading the underlying assets for the listing exchange to have
the ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of exchange
rules and applicable federal securities laws and rules.\15\ The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading activity,
clearing activity, and customer identity; that the parties to the
agreement have reasonable ability to obtain access to and produce
requested information; and that no existing rules, laws, or practices
would impede one party to the agreement from obtaining this information
from, or producing it to, the other party.\16\
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    \14\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at
12596.
    \15\ See NDSP Adopting Release, 63 FR at 70959.
    \16\ See Winklevoss Order, 83 FR at 37592-93; Letter from
Brandon Becker, Director, Division of Market Regulation, Commission,
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group
(June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
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    In the context of this standard, the terms ``significant market''
and ``market of significant size'' include a market (or group of
markets) as to which (a) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (b) it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\17\ A surveillance-sharing
agreement must be entered into with a ``significant market'' to assist
in detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to also engage in
trading activity on that ``significant market.'' \18\
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    \17\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that will provide guidance to market
participants. See id.
    \18\ See USBT Order, 85 FR at 12597.
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    Consistent with this standard, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity--whether gold, silver, platinum, palladium, or
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group
(``ISG'') membership in common with, that market.\19\ Moreover, the
surveillance-sharing agreements have been consistently present whenever
the Commission has approved the listing and trading of derivative
securities, even where the underlying securities were also listed on
national securities exchanges--such as options based on an index of
stocks traded on a national securities exchange--and were thus subject
to the Commission's direct regulatory authority.\20\
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    \19\ See Winklevoss Order, 83 FR at 37594.
    \20\ See USBT Order, 85 FR at 12597; Securities Exchange Act
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994)
(SR-Amex-93-28) (order approving listing of options on American
Depository Receipts (``ADRs'')). The Commission has also required a
surveillance-sharing agreement in the context of index options even
when (i) all of the underlying index component stocks were either
registered with the Commission or exempt from registration under the
Exchange Act; (ii) all of the underlying index component stocks
traded in the U.S. either directly or as ADRs on a national
securities exchange; and (iii) effective international ADR arbitrage
alleviated concerns over the relatively smaller ADR trading volume,
helped to ensure that ADR prices reflected the pricing on the home
market, and helped to ensure more reliable price determinations for
settlement purposes, due to the unique composition of the index and
reliance on ADR prices. See Securities Exchange Act Release No.
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the
exchange on which the index option trades and the markets that trade
the underlying securities are necessary'' and that ``[t]he exchange
of surveillance data by the exchange trading a stock index option
and the markets for the securities comprising the index is important
to the detection and deterrence of intermarket manipulation.''). And
the Commission has required a surveillance-sharing agreement even
when approving options based on an index of stocks traded on a
national securities exchange. See Securities Exchange Act Release
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure
the availability of information necessary to detect and deter
potential manipulations and other trading abuses'').
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    Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin market
is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\21\ In response, the Commission has agreed that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, it
would not necessarily need to enter into a surveillance-sharing
agreement with a regulated significant market.\22\ Such resistance to
fraud and manipulation, however, must be novel and beyond those
protections that exist in traditional commodity markets or equity
markets for which the Commission has long required surveillance-sharing
agreements in the context of listing derivative securities
products.\23\ No listing exchange has satisfied its burden to make such
demonstration.\24\
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    \21\ See USBT Order, 85 FR at 12597.
    \22\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation); see also USBT Order, 85 FR at
12597.
    \23\ See USBT Order, 85 FR at 12597.
    \24\ See supra note 12.
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    Here, BZX contends that approval of the proposal is consistent with
Section 6(b)(5) of the Exchange Act, and, in particular, Section
6(b)(5)'s requirement that the rules of a national securities exchange
be designed to prevent fraudulent and manipulative acts and practices
and to protect investors and the public interest.\25\ As discussed in
more detail below, BZX asserts that the proposal is consistent with
Section 6(b)(5) of the Exchange Act because the Exchange has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size,\26\ and there exist other means to prevent fraudulent
and manipulative acts and practices that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement.\27\
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    \25\ See Amendment No. 1, 86 FR at 73370-78.
    \26\ See id. at 73371-72.
    \27\ See id. at 73372-78.
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    Specifically, the Exchange believes that the proposal is consistent
with the requirements of Section 6(b)(5) of the Exchange Act because
the proposal sufficiently demonstrates that the Chicago Mercantile
Exhange (``CME'') bitcoin futures market represents a regulated market
of significant size and

that, on the whole, ``the manipulation concerns previously articulated
by the Commission are sufficiently mitigated to the point that they are
outweighed by quantifiable investor protection issues that would be
resolved by approving this proposal.'' \28\
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    \28\ See id. at 73382.
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    Further, BZX believes that the proposal would give U.S. investors
access to bitcoin in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors. According to
BZX, the proposed listing and trading of the Shares would mitigate risk
by: (i) Reducing premium and discount volatility; (ii) reducing
management fees through meaningful competition; (iii) reducing risks
and costs associated with investing in bitcoin futures exchange-traded
funds and operating companies that are imperfect proxies for bitcoin
exposure; and (iv) providing an alternative to custodying spot
bitcoin.\29\
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    \29\ See id. at 73390.
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    In the analysis that follows, the Commission examines whether the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Exchange Act by addressing: In Section
III.B.1 assertions that other means besides surveillance-sharing
agreements will be sufficient to prevent fraudulent and manipulative
acts and practices; in Section III.B.2 assertions that BZX has entered
into a comprehensive surveillance-sharing agreement with a regulated
market of significant size related to bitcoin; and in Section III.C
assertions that the proposal is consistent with the protection of
investors and the public interest.
    Based on its analysis, the Commission concludes that BZX has not
established that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Commission further
concludes that BZX has not established that it has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to bitcoin. As discussed further below, BZX repeats
certain assertions made in prior bitcoin-based ETP proposals that the
Commission has previously addressed and rejected--and more importantly,
BZX does not respond to the Commission's reasons for rejecting those
assertions but merely repeats them. As a result, the Commission is
unable to find that the proposed rule change is consistent with the
statutory requirements of Exchange Act Section 6(b)(5).
    The Commission again emphasizes that its disapproval of this
proposed rule change, as modified by Amendment No. 1, 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, as
modified by Amendment No. 1, because, as discussed below, BZX has not
met its burden to demonstrate that its proposal is consistent with the
requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1

    As described in more detail in Amendment No. 1,\30\ the Exchange
proposes to list and trade the Shares of the Trust under BZX Rule
14.11(e)(4), which governs the listing and trading of Commodity-Based
Trust Shares on the Exchange.
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    \30\ See Amendment No. 1, supra note 8. See also draft
Registration Statement on Form S-1, dated June 28, 2021, filed with
the Commission on behalf of the Trust (``Registration Statement'').
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    The investment objective of the Trust would be to seek to track the
performance of bitcoin, as measured by the performance of the S&P
Bitcoin Index (``Index''), adjusted for the Trust's expenses and other
liabilities.\31\ Each Share will represent a fractional undivided
beneficial interest in the bitcoin held by the Trust. The Trust's
assets will consist of bitcoin held by the Custodian on behalf of the
Trust. The Trust generally does not intend to hold cash or cash
equivalents. However, there may be situations where the Trust will
unexpectedly hold cash on a temporary basis.\32\
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    \31\ See Amendment No. 1, 86 FR at 73379. 21Shares US LLC
(``Sponsor'') is the sponsor of the Trust, Delaware Trust Company is
the trustee, and The Bank of New York Mellon will be the
administrator (``Administrator'') and transfer agent. Foreside
Global Services, LLC will be the marketing agent in connection with
the creation and redemption of Shares. ARK Investment Management LLC
will provide assistance in the marketing of the Shares. Coinbase
Custody Trust Company, LLC (``Custodian'') will be responsible for
custody of the Trust's bitcoin. See id. at 73361, 73378.
    \32\ See id. at 73378-79.
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    In seeking to achieve its investment objective, the Trust would
hold bitcoin and value the Shares daily based on the Index. The Index
is a U.S. dollar-denominated composite reference rate for the price of
bitcoin. The Index price is currently sourced from the following
platforms: Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase
Pro, Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.\33\ The Index
methodology is intended to determine the fair market value for bitcoin
by determining the principal market for bitcoin as of 4:00 p.m. ET
daily.\34\
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    \33\ The underlying platforms are sourced by Lukka Inc. (``Data
Provider''), which according to BZX, bases its sourcing on a
combination of qualitative and quantitative metrics to analyze a
comprehensive data set and evaluate factors including legal/
regulation, Know-Your-Customer/transaction risk, data provision,
security, team/exchange, asset quality/diversity, market quality,
and negative events. See id. at 73379.
    \34\ According to BZX, the Index methodology uses a ranking
approach that considers several platform characteristics including
oversight and intra-day trading volume. Specifically, to rank the
credibility and quality of each platform, the Data Provider
dynamically assigns a Base Exchange Score (``BES'') to the key
characteristics for each platform. The BES reflects the fundamentals
of a platform and determines which platform should be designated as
the principal market at a given point of time. This score is
determined by computing a weighted average of the values assigned to
four different platform characteristics: (i) Oversight; (ii)
microstructure efficiency; (iii) data transparency; and (iv) data
integrity. The methodology then applies a five-step weighting
process for identifying a principal market and the last price on
that market. Following this weighting process, an ``executed
exchange price'' is assigned for bitcoin as of 4:00 p.m. ET. The
Data Provider takes the last traded prices at that moment in time on
that trading venue for the relevant pair (bitcoin/USD) when
determining the Index price. See id. at 73379-80.
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    The net asset value (``NAV'') of the Trust means the total assets
of the Trust including, but not limited to, all bitcoin and cash, if
any, less total liabilities of the Trust, each determined on the basis
of generally accepted accounting principles. The NAV of the Trust is
the aggregate value of the Trust's assets less its estimated accrued
but unpaid liabilities (which include accrued expenses). In determining
the Trust's NAV, the Administrator values the bitcoin held by the Trust
based on the price set by the Index as of 4:00 p.m. ET. The
Administrator determines the NAV of the Trust on each day that the
Exchange is open for regular trading, as promptly as practical after
4:00 p.m. ET.\35\
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    \35\ See id. at 73381.
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    The Trust will provide information regarding the Trust's bitcoin
holdings, as well as an Intraday Indicative Value (``IIV'') per Share
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading
Hours (9:30 a.m. ET to 4:00 p.m. ET). The IIV will be calculated by
using the prior day's closing NAV per Share as a base and updating that
value during Regular Trading Hours to reflect changes in the value of
the Trust's bitcoin holdings during the trading day.\36\
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    \36\ See id. at 73380.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 Shares. When creating the
Shares, authorized

participants will deliver, or facilitate the delivery of, bitcoin to
the Trust's account with the Custodian in exchange for the Shares, and,
when redeeming the Shares, the Trust, through the Custodian, will
deliver bitcoin to such authorized participants.\37\
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    \37\ See id. at 73379.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether BZX's proposal is consistent
with the Exchange Act. Section 6(b)(5) of the Exchange Act requires, in
relevant part, that the rules of a national securities exchange be
designed ``to prevent fraudulent and manipulative acts and practices''
and ``to protect investors and the public interest.'' \38\ 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.'' \39\
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    \38\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \39\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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    The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\40\ 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.\41\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\42\
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    \40\ See id.
    \41\ See id.
    \42\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is
Designed To Prevent Fraudulent and Manipulative Acts and Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and
Practices
    As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with a comprehensive surveillance-sharing agreement with a regulated
market of significant size, including by demonstrating that the bitcoin
market as a whole or the relevant underlying bitcoin market is uniquely
and inherently resistant to fraud and manipulation.\43\ Such resistance
to fraud and manipulation must be novel and beyond those protections
that exist in traditional commodities or securities markets.\44\
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    \43\ See USBT Order, 85 FR at 12597 n.23. The Commission is not
applying a ``cannot be manipulated'' standard. Instead, the
Commission is examining whether the proposal meets the requirements
of the Exchange Act and, pursuant to its Rules of Practice, places
the burden on the listing exchange to demonstrate the validity of
its contentions and to establish that the requirements of the
Exchange Act have been met. See id.
    \44\ See id. at 12597.
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(i) Assertions Regarding Bitcoin Markets
    BZX asserts that bitcoin is resistant to price manipulation.
According to BZX, the geographically diverse and continuous nature of
bitcoin trading render it difficult and prohibitively costly to
manipulate the price of bitcoin.\45\ Fragmentation across bitcoin
platforms, the relatively slow speed of transactions, and the capital
necessary to maintain a significant presence on each trading platform
make manipulation of bitcoin prices through continuous trading activity
challenging.\46\ To the extent that there are bitcoin platforms engaged
in or allowing wash trading or other activity intended to manipulate
the price of bitcoin on other markets, such pricing does not normally
impact prices on other platforms because participants will generally
ignore markets with quotes that they deem non-executable.\47\ BZX
further argues that the linkage between the bitcoin markets and the
presence of arbitrageurs in those markets means that the manipulation
of the price of bitcoin on any single venue would require manipulation
of the global bitcoin price in order to be effective.\48\ Arbitrageurs
must have funds distributed across multiple trading platforms in order
to take advantage of temporary price dislocations, thereby making it
unlikely that there will be strong concentration of funds on any
particular bitcoin trading venue.\49\ As a result, BZX concludes that
``the potential for manipulation on a [bitcoin] trading platform would
require overcoming the liquidity supply of such arbitrageurs who are
effectively eliminating any cross-market pricing differences.'' \50\
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    \45\ See Amendment No. 1, 86 FR at 73370 n.73.
    \46\ See id.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
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    BZX provides results of statistical analysis by the Sponsor in
support of its assertions regarding linkages between bitcoin markets
and efficient arbitrage across such markets. First, according to BZX,
using daily bitcoin prices, the Sponsor calculated the Pearson
correlation \51\ of returns across certain bitcoin spot markets, non-
U.S. bitcoin ETPs, and the CME, and concluded that there is a high
degree of correlation across these markets.\52\ BZX argues that in
markets that are globally and efficiently integrated, one would expect
changes in prices of an asset across all markets to be highly
correlated, and that ``the rationale behind this is that quick and
efficient arbitrageurs would capture potentially profitable
opportunities, consequently converging prices to the average intrinsic
value very rapidly.'' \53\
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    \51\ According to the Exchange, the Pearson correlation is a
measure of linear association between two variables and indicates
the magnitude as well as direction of this relationship. See id. at
73368 n.68.
    \52\ See id. at 73368. BZX represents that correlations are
between 57% and 99%, with the latter found mainly across centralized
market venues due to their higher level of interconnectedness and
the lower correlations pertaining mainly to the non-U.S. bitcoin
ETPs, which are relatively newer products and are mainly offered by
a few competing market makers who are required to trade in large
blocks, thus making it, according to BZX, economically infeasible to
capture small mispricings. According to BZX, as additional investors
and arbitrageurs enter the market and capture the mispricing
opportunities between these markets, it is likely that there will be
much higher levels of correlations across all markets. See id.
    \53\ See id.
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    Second, BZX asserts that, according to the Sponsor's research, this
high correlation holds true during periods of extreme price volatility.
Employing a statistical component called cokurtosis,

which, according to BZX, measures to what extent two random variables
change together, the Sponsor found, using hourly bitcoin prices, that
the bitcoin markets tend to move very similarly, especially for extreme
price deviations. BZX states that this is evidence of a robust global
bitcoin market ``that quickly reacts in a unanimous manner to extreme
price movements across both the spot markets, futures and [non-U.S.]
ETP markets.'' \54\ According to BZX, this implies that ``no single
[b]itcoin market can deviate significantly from the consensus for a
prolonged period of time, such that the global [b]itcoin market is
sufficiently large and has an inherent unique resistance to
manipulation.'' \55\
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    \54\ According to BZX, if two returns series exhibit a high
degree of cokurtosis, this means that they tend to undergo extreme
positive and negative changes simultaneously. A cokurtosis value
larger than +3 or less than -3 is considered statistically
significant. According to BZX, the Sponsor calculated cokurtosis
using hourly bitcoin returns across ``centralized'' market venues,
two non-U.S. ETPs (21Shares Bitcoin ETP (Ticker: ABTC) and VanEck
Vectors Bitcoin ETN (Ticker: VBTC)), and the CME. See id. at 73369 &
n.69.
    \55\ See id. at 73369.
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    Third, based on the Sponsor's research using daily bitcoin price
series, BZX argues that cross-platform spreads in bitcoin have been
declining consistently over the past several years.\56\ BZX contends
that the ``clear and sharp'' decline in the spread indicates that the
bitcoin market has become more efficient over time.\57\ In addition,
based on the Sponsor's research, BZX argues that the magnitude of
outlier spreads have also declined over time, and that the market has
experienced a 38% year-on-year decline in the annual median spread,
indicating ``a greater degree of [b]itcoin price convergence across
[platforms] and a more efficient market.'' \58\ Further, based on the
Sponsor's calculations of a 7-day rolling standard deviation of the
spread from January 1, 2017, to December 1, 2021, BZX asserts that the
dispersion in bitcoin prices across all platforms has decreased over
time, indicating that prices on all the considered platforms converge
towards the ``intrinsic average'' much more efficiently, and suggesting
that the market has become better at quickly reaching a ``consensus
price'' for bitcoin.\59\ BZX posits that, as the pricing of the bitcoin
market becomes increasingly efficient, pricing methodologies become
``more accurate and less susceptible to manipulation.'' BZX further
asserts that the ``clustering of prices across a variety of sources
within the primary market'' points towards robust price discovery
mechanisms and efficient arbitrage.\60\
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    \56\ According to BZX, the Sponsor calculated the largest cross-
platform percentage spread (defined as ``%C-Spread'') at a given
time by subtracting the highest price across all platforms at that
time from the lowest price across all platforms at that time, and
dividing the result by that lowest price. BZX represents that, for
this calculation, the Sponsor used daily bitcoin price series from
Binance, Bitfinex, Bithumb, Bitstamp, Cexio, Coinbase, Coinone,
Gateio, Gemini, HuobiPro, itBit, Kraken, Kucoin, and OKEX. See id.
at 73372 & n.95.
    \57\ See id. at 73373.
    \58\ See id.
    \59\ See id. at 73374.
    \60\ See id.
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    Fourth, BZX asserts that one factor that has contributed to the
overall efficiency, price discovery, and lower volatility of the
bitcoin market is the increase in the number of participants, and
subsequently, ``the total dollar amount allocated to this market.''
BZX's measure of participation is based on the increase from March 2012
to December 2021 in the number of wallet addresses holding bitcoin.\61\
---------------------------------------------------------------------------

    \61\ See id. at 73375.
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    Finally, BZX contends that this increase in the number of
participants has resulted in higher liquidity in the bitcoin market,
based on the ``daily aggregated dollar notional of the bid and ask
order books within the first 100 price levels across several of the
largest centralized crypto [platforms] from October 2020 to April
2021.'' According to BZX, ``the dollar notional that is allocated
closest to the mid price has increased from around $230 million to $860
million over that period, representing a 270% increase in half a
year.'' \62\ BZX suggests that the ``increased notional order book''
indicates that there is a ``higher degree of consensus'' among
investors regarding the price of bitcoin, and that this ``hampers any
attempt of price manipulation by any single large entity.'' \63\
Additionally, according to BZX, the Sponsor found that movements in the
bid and ask dollar notional of the bitcoin order book within a six-hour
window around ``extreme'' \64\ price events were indicative of an
efficient market, whereby large market movements are ``quickly and
dynamically absorbed'' by a thick order book and market participants'
reactions are ``quick to restore the market back to its equilibrium
level.'' \65\
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    \62\ See id.
    \63\ See id. at 73376.
    \64\ According to BZX, the Sponsor used the top and bottom 0.1%
of hourly price changes from October 2020 to April 2021 as events of
extreme upward and downward market movements. See id.
    \65\ See id.
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    As with the previous proposals, the Commission here concludes that
the record does not support a finding that the bitcoin market is
inherently and uniquely resistant to fraud and manipulation.\66\ BZX
asserts that, because of how bitcoin trades occur, including through
continuous means and through fragmented platforms, arbitrage across the
bitcoin platforms essentially helps to keep global bitcoin prices
aligned with one another, thus hindering manipulation. The Exchange
also provides various statistics from the Sponsor which purport to show
that bitcoin prices are closely and increasingly aligned across markets
and that any price disparities are quickly arbitraged away. However, as
described by BZX, the Sponsor's statistics are based on aggregated
daily or hourly bitcoin prices (for example, according to BZX, the
Pearson correlations were calculated using daily bitcoin prices, and
cokurtosis was calculated using hourly bitcoin prices). Such data does
not capture intra-hour or intra-day price disparities, and provides no
information on how long price disparities typically persist. Nor do the
Sponsor's statistics or BZX's assertions provide any insight into what
size or duration of price disparities would be profitable for a would-
be manipulator, and thus they do not inform BZX's conclusion that
bitcoin pricing has become ``less susceptible to manipulation.'' \67\
The

Commission is thus unable to conclude from the evidence provided that
arbitrage across bitcoin markets is efficient, let alone so efficient
as to make the markets inherently resistant to fraud and
manipulation.\68\
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    \66\ One commenter questions BZX's statement about bitcoin's
resistance to fraud and manipulation. See letter from Adam Girts,
dated November 5, 2021 (``Girts Letter'') (stating that the proposed
ETP does not ``seem resistant to manipulation'' and that the
Exchange's emphasis on the decentralized nature of bitcoin itself
``is a red herring.'').
    \67\ See Amendment No. 1, 86 FR at 73374. Several other
deficiencies in the Sponsor's methodological choices prevent the
Commission from agreeing with the Exchange's conclusions. For
example, one measure of cokurtosis uses the square of the difference
of two random variables from their means, and the squares of the two
variables' standard deviations, and as such, the statistic
calculates magnitude, but not direction. If this is the cokurtosis
statistic that was used by the Sponsor (Amendment No. 1 does not
specify), then while the results may show that the two variables
move together, it would not necessarily mean that the two variables
move in the same direction ``in a unanimous manner'' (see id. at
73369). In addition, by design, the Sponsor's ``%C-Spread''
statistic measures the maximum difference among prices (i.e., the
highest and lowest) across bitcoin platforms at a given point in
time. However, such statistic does not provide any information about
the extent of price dispersion among the intermediary prices across
bitcoin platforms or whether there is any ``intrinsic average'' or
``consensus price'' of bitcoin towards which prices are converging
(see id. at 73374). Moreover, the Commission is not able to assess
the validity of the Sponsor's claims regarding ``higher liquidity''
in the bitcoin market, based upon the Sponsor's calculations of
``increased notional order book'' and reactions to ``extreme'' price
events, because of insufficient detail in the proposal on the
process the Sponsor used to calculate the ``dollar notional'' of a
bitcoin platform's order book, the ``mid price'' on a bitcoin
platform, and the ``first 100 price levels'' across bitcoin
platforms (see id. at 73375-76). Further, even if the calculations
performed by the Sponsor show, as BZX claims, that ``there is a
higher degree of consensus among investors regarding the price of
[b]itcoin'' and that ``market participants' reactions are quick to
restore the market back to its equilibrium level,'' the Exchange has
not demonstrated how either purported showing leads to its
conclusion that this ``hampers any attempt of price manipulation by
any single large entity'' (see id. at 73376). In particular, the
Exchange has not addressed the concerns raised by the Commission in
previous proposals, as well as risk factors raised by the Sponsor in
the Registration Statement, that actions by a single large, dominant
market participant could ``have an adverse effect on the price of
bitcoin'' (see Registration Statement at 24 and infra note 71). That
is, even if, as the Exchange claims, there is a ``high degree of
consensus'' among investors and market participants are ``quick to
restore'' the market back to its equilibrium level, the trading
activity of a dominant market participant could, itself, impact what
that consensus/equilibrium will be. These deficiencies undermine the
Exchange's arguments that linkages between bitcoin markets, and
increasingly efficient arbitrage across such markets, make such
markets less susceptible to manipulation.
    \68\ In addition, the Registration Statement states: ``As the
use of digital asset networks increases without a corresponding
increase in transaction processing speed of the networks, average
fees and settlement times can increase significantly. Bitcoin's
network has been, at times, at capacity, which has led to increased
transaction fees. . . . Increased fees and decreased settlement
speeds . . . could adversely impact the value of the Shares.'' See
Registration Statement at 21. The Registration Statement further
states that ``the [b]itcoin network faces significant obstacles to
increasing the usage of bitcoin without resulting in higher fees or
slower transaction settlement times, and attempts to increase the
volume of transactions may not be effective . . . . which may
adversely affect the price of bitcoin and therefore an investment in
the Shares.'' See Registration Statement at 14. BZX does not provide
data or analysis to address, among other things, whether such risks
of increased fees and bitcoin transaction settlement times may
affect the arbitrage effectiveness that BZX asserts. See also infra
note 81 and accompanying text (referencing statements made in the
Registration Statement that contradict assertions made by BZX). And
without such data or analysis, the Commission cannot accept BZX's
assertions. See Susquehanna, 866 F.3d at 447.
---------------------------------------------------------------------------

    Efficient price arbitrage, moreover, is not sufficient to support
the finding that a market is uniquely and inherently resistant to
manipulation such that the Commission can dispense with surveillance-
sharing agreements.\69\ The Commission has stated, for example, that
even for equity options based on securities listed on national
securities exchanges, the Commission relies on surveillance-sharing
agreements to detect and deter fraud and manipulation.\70\ Here, the
Exchange provides insufficient evidence to support its assertion of
efficient price arbitrage across bitcoin platforms, let alone any
evidence that price arbitrage in the bitcoin market is novel or unique
so as to warrant the Commission dispensing with the requirement of a
surveillance-sharing agreement. Moreover, BZX's data regarding the
increase in the number of wallet addresses holding bitcoin do not
provide any information on the concentration of bitcoin within or among
such wallets, or 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.\71\
---------------------------------------------------------------------------

    \69\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at
74170; Wise Origin Order, 87 FR at 5531.
    \70\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR
at 74170; Wise Origin Order, 87 FR at 5531. The Commission also
notes that equities that underlie such options trade on U.S. equity
markets that are deep, liquid, highly interconnected, and almost
entirely automated, and that operate at high speeds measured in
microseconds and even nanoseconds. See SEC Staff Report on
Algorithmic Trading in U.S. Capital Markets (Aug. 5, 2020),
available at: https://www.sec.gov/files/Algo_Trading_Report_2020.pdf; Market Data Infrastructure Proposing
Release, Securities Exchange Act Release No. 88216 (Feb. 14, 2020),
85 FR 16726, 16728 (Mar. 24, 2020).
    \71\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85
FR at 12600-01; WisdomTree Order, 86 FR at 69325; Valkyrie Order, 86
FR at 74160; Kryptoin Order, 86 FR at 74170; Skybridge Order, 87 FR
at 3783-84; Wise Origin Order, 87 FR at 5531. See also Registration
Statement at 24 (``Some entities hold large amounts of bitcoin
relative to other market participants, and to the extent such
entities engage in large-scale hedging, sales or distributions on
non-market terms, or sales in the ordinary course, it could result
in a reduction in the price of bitcoin and adversely affect the
value of the Shares. . . . As of the date of this [Registration
Statement], the largest 100 bitcoin wallets held a substantial
amount of the outstanding supply of bitcoin and it is possible that
some of these wallets are controlled by the same person or entity.
Moreover, it is possible that other persons or entities control
multiple wallets that collectively hold a significant number of
bitcoin, even if each wallet individually only holds a small amount.
As a result of this concentration of ownership, large sales by such
holders could have an adverse effect on the market price of
bitcoin.''); and supra note 67.
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that, to the
extent that there are bitcoin platforms engaged in or allowing wash
trading or other manipulative activities, market participants will
generally ignore those platforms.\72\ However, without the necessary
data or other evidence, the Commission has no basis on which to
conclude that bitcoin platforms are insulated from prices of others
that engage in or permit fraud or manipulation.\73\ Indeed, the notion
that a platform would be insulated from prices on other platforms is
contradicted by the Exchange's assertions and the Sponsor's statistical
evidence that bitcoin markets are ``highly correlated,'' including
during periods of extreme price volatility.\74\
---------------------------------------------------------------------------

    \72\ See Amendment No. 1, 86 FR at 73370 n.73 (``To the extent
that there are bitcoin exchanges engaged in or allowing wash trading
or other activity intended to manipulate the price of bitcoin on
other markets, such pricing does not normally impact prices on other
exchange because participants will generally ignore markets with
quotes that they deem non-executable.'').
    \73\ See USBT Order, 85 FR at 12601. See also WisdomTree Order,
86 FR at 69325; Kryptoin Order, 86 FR at 74170; Wise Origin Order,
87 FR at 5531.
    \74\ See supra notes 52-54 and accompanying text.
---------------------------------------------------------------------------

    Additionally, the continuous nature of bitcoin trading does not
eliminate manipulation risk, and neither do linkages among markets, as
BZX asserts.\75\ Even in the presence of continuous trading or linkages
among markets, formal (such as those with consolidated quotations or
routing requirements) or otherwise (such as in the context of the
fragmented, global bitcoin markets), manipulation of asset prices, as a
general matter, can occur simply through trading activity that creates
a false impression of supply or demand.\76\
---------------------------------------------------------------------------

    \75\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying
text. See also WisdomTree Order, 86 FR at 69325-26; Kryptoin Order,
86 FR at 74170; Skybridge Order, 87 FR at 3783-84; Wise Origin
Order, 87 FR at 5531.
    \76\ See Winklevoss Order, 83 FR at 37585.
---------------------------------------------------------------------------

    Moreover, BZX does not sufficiently contest the presence of
possible sources of fraud and manipulation in the bitcoin spot market
generally that the Commission has raised in previous orders. Such
possible sources have included (1) ``wash'' trading,\77\ (2) persons
with a dominant position in bitcoin manipulating bitcoin pricing,\78\
(3) hacking of the bitcoin network and trading platforms, (4) malicious
control of the bitcoin network, (5) trading based on material, non-
public information, including the dissemination of false and misleading
information, (6) manipulative activity involving the purported
``stablecoin'' Tether (USDT), and (7) fraud and manipulation at bitcoin
trading platforms.\79\
---------------------------------------------------------------------------

    \77\ See supra notes 72-73 and accompanying text.
    \78\ See supra note 71 and accompanying text.
    \79\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28,
2019), available at https://ssrn.com/abstract=3195066 and published
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
---------------------------------------------------------------------------

    In addition, BZX does not address risk factors specific to the
bitcoin blockchain and bitcoin platforms, described in the

Trust's Registration Statement, that undermine the argument that the
bitcoin market is inherently resistant to fraud and manipulation. For
example, the Registration Statement acknowledges that ``it may be
possible for a bad actor to manipulate the [b]itcoin network and hinder
transactions''; that ``[s]pot markets on which bitcoin trades are
relatively new and largely unregulated, and, therefore, may be more
exposed to fraud and security breaches than established, regulated
exchanges for other financial assets or instruments, which could have a
negative impact on the performance of the Trust''; \80\ that ``[o]ver
the past several years, a number of bitcoin spot markets have been
closed or faced issues due to fraud, failure, security breaches or
governmental regulations''; that ``[t]he nature of the assets held at
bitcoin spot markets makes them appealing targets for hackers and a
number of bitcoin spot markets have been victims of cybercrimes'' and
``[n]o bitcoin [platform] is immune from these risks''; that ``[t]he
potential consequences of a spot market's failure or failure to prevent
market manipulation could adversely affect the value of the Shares[,] .
. . . [t]he blockchain infrastructure could be used by certain market
participants to exploit arbitrage opportunities through schemes such as
front-running, spoofing, pump-and-dump and fraud across different
systems, platforms or geographic locations'' . . . . and ``[a]s a
result of reduced oversight, these schemes may be more prevalent in
digital asset markets than in the general market for financial
products''; that ``many [bitcoin] spot markets and over-the-counter
market venues . . . do not provide the public with significant
information regarding their ownership structure, management teams,
corporate practices or oversight of customer trading'' and ``many
[bitcoin] spot markets lack certain safeguards put in place by more
traditional exchanges to enhance the stability of trading on the
exchange''; that ``[s]ecurity breaches, cyber-attacks, computer malware
and computer hacking attacks have been a prevalent concern in relation
to digital assets''; and that the bitcoin blockchain could be
vulnerable to a ``51% attack,'' in which a bad actor or actors that
control a majority of the processing power dedicated to mining on the
bitcoin network may be able to alter the bitcoin blockchain on which
the bitcoin network and bitcoin transactions rely.\81\
---------------------------------------------------------------------------

    \80\ BZX expressly acknowledges that ``unregulated currency and
commodity markets do not provide the same protections as the markets
that are subject to the Commission's oversight.'' See Amendment No.
1, 86 FR at 73362.
    \81\ See Registration Statement at 4, 12-13, 18-20, 28. See also
Winklevoss Order, 83 FR at 37585.
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(ii) Assertions Regarding the Index and the Create/Redeem Process
    BZX also argues that the Index, which would be used to value the
Trust's bitcoin, is designed to reduce the risk of manipulation based
on the Index's methodology.\82\ BZX states that the Index is a U.S.
dollar-denominated composite reference rate for the price of bitcoin.
The Index price is currently sourced from the following bitcoin
platforms selected by the Data Provider based on a combination of
qualitative and quantitative metrics: Binance, Bitfinex, Bitflyer,
Bittrex, Bitstamp, Coinbase Pro, Gemini, HitBTC, Huobi, Kraken, KuCoin,
and Poloniex.\83\ According to BZX, the Index methodology is intended
to determine the fair market value for bitcoin by determining the
``principal market'' for bitcoin as of 4:00 p.m. ET daily. To rank the
credibility and quality of each underlying bitcoin platform, the Data
Provider dynamically assigns a score to the key characteristics for
each platform.\84\ BZX states that the score determines which platform
should be designated as the ``principal market'' at a given point of
time by computing a weighted average of the values assigned to four
different platform characteristics: (i) Oversight; (ii) microstructure
efficiency; (iii) data transparency; and (iv) data integrity.\85\ The
methodology then applies a five-step weighting process for identifying
a principal market and the last price on that market.\86\ Following
this weighting process, an ``executed exchange price'' is assigned for
bitcoin as of 4:00 p.m. ET. The Data Provider takes the last traded
prices at that moment in time on that trading venue for the relevant
pair (bitcoin/USD) when determining the Index price.\87\
---------------------------------------------------------------------------

    \82\ See Amendment No. 1, 86 FR at 73378.
    \83\ See id. at 73379.
    \84\ See id.
    \85\ See id.
    \86\ See id.
    \87\ See id. at 73379-80.
---------------------------------------------------------------------------

    BZX asserts that the fact that there are multiple bitcoin spot
markets that may contribute prices to the Index price makes
manipulation more difficult in a well-arbitraged and fractured market,
as a malicious actor would need to manipulate multiple spot markets
simultaneously to impact the Index price, or dramatically skew the
historical distribution of volume between the various platforms.\88\ In
addition, BZX asserts that the Data Provider has dedicated resources
and committees established to ensure all prices are representative of
the market, and that any price challenges will result in an independent
analysis of the price. This includes assessing whether the price from
the selected platform is biased according to analyses designed to
recognize patterns consistent with manipulative activity, such as a
quick reversion to previous traded levels following a sharp price
change or any significant deviations from the volume weighted average
price on a particular platform or pricing on any other eligible
platform.\89\ In addition, BZX further represents that, after the
``Lukka Prime price'' \90\ is generated, the S&P DJI (``Index
Provider'') performs independent quality checks as a second layer of
validation to those employed by the Data Provider, and may submit a
price challenge to the Data Provider. In such circumstances, according
to BZX, the Data Provider will perform an independent review of the
price challenge to ensure the price is representative of the fair value
of a particular cryptocurrency.\91\
---------------------------------------------------------------------------

    \88\ See id. at 73380.
    \89\ See id. BZX states that, upon detection or external
referral of suspect manipulative activities, the case is raised to
the Price Integrity Oversight Board. These checks occur on an on-
going, intraday basis, and any investigations are typically resolved
promptly, in clear cases within minutes and in more complex cases
same business day. According to BZX, the evidence uncovered will be
turned over to the Data Provider's Price Integrity Oversight Board
for final decision and action. The Price Integrity Oversight Board
may choose to pick an alternative ``primary market'' and may exclude
such market from future inclusion in the Index methodology or choose
to stand by the original published price upon fully evaluating all
available evidence. It may also initiate an investigation of prior
prices from such markets and shall evaluate evidence presented on a
case-by-case basis. See id.
    \90\ The Exchange appears to use the terms ``Lukka Prime
price,'' ``Lukka price,'' and ``Index price'' interchangeably. The
Commission understands these terms to be interchangeable.
    \91\ See Amendment No. 1, 86 FR at 73380. BZX also notes that
the Index Provider provides certain quality assurance mechanisms
with respect to ``crypto price validation'' based on current market
conditions, internal system processes, and other assessments. See
id.
---------------------------------------------------------------------------

    Simultaneously with its assertions regarding the Index, BZX also
states that, because the Trust will engage in in-kind creations and
redemptions only, the ``manipulability of the Index [is] significantly
less important.'' \92\ BZX elaborates further that, ``because the Trust
will not accept cash to buy bitcoin in order to create new shares or .
. . be forced to sell bitcoin to pay cash for redeemed shares, the
price that the Sponsor uses to value the Trust's bitcoin is not
particularly important.'' \93\

According to BZX, when authorized participants create Shares with the
Trust, they would need to deliver a certain number of bitcoin per Share
(regardless of the valuation used), and when they redeem with the
Trust, they would similarly expect to receive a certain number of
bitcoin per Share.\94\ As such, BZX argues that, even if the price used
to value the Trust's bitcoin is manipulated, the ratio of bitcoin per
Share does not change, and the Trust will either accept (for creations)
or distribute (for redemptions) the same number of bitcoin regardless
of the value.\95\ This, according to BZX, not only mitigates the risk
associated with potential manipulation, but also discourages and
disincentivizes manipulation of the Index because there is little
financial incentive to do so.\96\
---------------------------------------------------------------------------

    \92\ See id. at 73378.
    \93\ See id.
    \94\ See id.
    \95\ See id.
    \96\ See id.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the
Commission can find no basis to conclude that BZX has articulated other
means to prevent fraud and manipulation that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement. First,
the record does not demonstrate that the proposed methodology for
calculating the Index would make the proposed ETP resistant to fraud or
manipulation such that a surveillance-sharing agreement with a
regulated market of significant size is unnecessary. Specifically, BZX
has not assessed the possible influence that spot platforms not
included among the Index's underlying bitcoin platforms would have on
the ``principal market'' that is used to calculate the Index.\97\ And
as discussed above, the record does not establish that the broader
bitcoin market is inherently and uniquely resistant to fraud and
manipulation. Accordingly, to the extent that trading on platforms not
directly used to calculate the Index affects prices on the Index's
underlying bitcoin platforms, the characteristics of those other
platforms--where various kinds of fraud and manipulation from a variety
of sources may be present and persist--may affect whether the Index is
resistant to manipulation.
---------------------------------------------------------------------------

    \97\ As discussed above, while BZX asserts that bitcoin prices
on platforms with wash trades or other activity intended to
manipulate the price of bitcoin do not influence the real price of
bitcoin, the Commission has no basis on which to conclude that
bitcoin platforms are insulated from prices of others that engage in
or permit fraud or manipulation. See supra notes 72-73 and
accompanying text.
---------------------------------------------------------------------------

    Moreover, BZX's assertions that the Index's methodology helps make
the Index resistant to manipulation are contradicted by the
Registration Statement's own statements. Specifically, the Registration
Statement states, among other things, that ``[s]pot markets on which
bitcoin trades are relatively new and largely unregulated, and,
therefore, may be more exposed to fraud and security breaches than
established, regulated exchanges for other financial assets or
instruments''; and that ``[t]he potential consequences of a spot
market's failure or failure to prevent market manipulation could
adversely affect the value of the Shares[,] . . . . [t]he blockchain
infrastructure could be used by certain market participants to exploit
arbitrage opportunities through schemes such as front-running,
spoofing, pump-and-dump and fraud across different systems, platforms
or geographic locations'' . . . . and ``[a]s a result of reduced
oversight, these schemes may be more prevalent in digital asset markets
than in the general market for financial products.'' \98\ The Index's
underlying bitcoin platforms are a subset of the bitcoin trading venues
currently in existence.
---------------------------------------------------------------------------

    \98\ See Registration Statement at 12-13, 32.
---------------------------------------------------------------------------

    The Registration Statement also states, specifically with respect
to the Index, that ``[p]ricing sources used by the Index are digital
asset spot markets that facilitate the buying and selling of bitcoin
and other digital assets'' and that ``[a]lthough many pricing sources
refer to themselves as `exchanges,' they are not registered with, or
supervised by, the [Commission] or [Commodity Futures Trading
Commission] and do not meet the regulatory standards of a national
securities exchange or designated contract market,'' and ``[f]or these
reasons, among others, purchases and sales of bitcoin may be subject to
temporary distortions or other disruptions . . . . [which] could affect
the price of bitcoin used in Index calculations and, therefore, could
adversely affect the bitcoin price as reflected by the Index.'' The
Sponsor further states in the Registration Statement that ``[t]he Index
is based on various inputs which include price data from various third-
party bitcoin spot markets'' and that ``[t]he [index provider] does not
guarantee the validity of any of these inputs, which may be subject to
technological error, manipulative activity, or fraudulent reporting
from their initial source.'' \99\ Moreover, the Exchange describes a
process through which the Data Provider may select an ``alternative
primary market'' upon detection or referral of suspect manipulative
activities.\100\ And, although the Sponsor raises concerns regarding
fraud and security of bitcoin platforms, as well as concerns specific
to the Index's underlying bitcoin platforms, leading to the potential
need for an ``alternative'' basis for the Index price, the Exchange
does not explain how or why such concerns are consistent with its
assertion that the Index is resistant to fraud and manipulation.\101\
---------------------------------------------------------------------------

    \99\ See id. at 32.
    \100\ See Amendment No. 1, 86 FR at 73380.
    \101\ One commenter states that the proposed ETP is ``pegging
the value to a collection of independent exchanges, who
collectively, would be able to manipulate the bitcoin index by
manipulation of their own forums.'' See Girts Letter.
---------------------------------------------------------------------------

    The Commission thus concludes that BZX has not demonstrated that
the Index methodology makes the proposed ETP resistant to manipulation.
    Second, BZX argues that the Data Provider has dedicated resources
and has established committees to ensure all prices are representative
of the market, and that any price challenges will result in an
independent price analysis, which would include assessing whether the
price from the selected ``principal market'' platform is biased
according to analyses designed to recognize patterns consistent with
manipulative activity.\102\ However, the level of oversight of the
Index's underlying bitcoin platforms, whose trade flows might
contribute to the Index, is not equivalent to the obligations,
authority, and oversight of national securities exchanges or futures
exchanges and therefore is not an appropriate substitute.\103\ National
securities exchanges are required to have rules that are ``designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.'' \104\ Moreover, national
securities exchanges must file proposed rules with the Commission
regarding certain material aspects of their

operations,\105\ and the Commission has the authority to disapprove any
such rule that is not consistent with the requirements of the Exchange
Act.\106\ Thus, national securities exchanges are subject to Commission
oversight of, among other things, their governance, membership
qualifications, trading rules, disciplinary procedures, recordkeeping,
and fees.\107\ The Index's underlying bitcoin platforms, on the other
hand, have none of these requirements (none are registered as a
national securities exchange).\108\
---------------------------------------------------------------------------

    \102\ See Amendment No. 1, 86 FR at 73380. BZX represents that
the Data Provider has also ``designed a series of automated
algorithms designed to supplement the core Lukka Prime Methodology
in enhancing the ability to detect potentially anomalous price
activity which could be detrimental to the goal of obtaining a Fair
Market Value price that is representative of the market at a point
in time.'' See id.
    \103\ See also USBT Order, 85 FR at 12603-05; VanEck Order, 86
FR at 64545; WisdomTree Order, 86 FR at 69328; Kryptoin Order, 86 FR
at 74173.
    \104\ See 15 U.S.C. 78f(b)(5).
    \105\ 17 CFR 240.19b-4(a)(6)(i).
    \106\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rules
changes with the Commission and provides the Commission with the
authority to disapprove proposed rule changes that are not
consistent with the Exchange Act. Designated contract markets
(``DCMs'') (commonly called ``futures markets'') registered with and
regulated by the Commodity Futures Trading Commission (``CFTC'')
must comply with, among other things, a similarly comprehensive
range of regulatory principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available
at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \107\ See Winklevoss Order, 83 FR at 37597. The Commission notes
that the New York State Department of Financial Services
(``NYSDFS'') has issued ``guidance'' to supervised virtual currency
business entities, stating that these entities must ``implement
measures designed to effectively detect, prevent, and respond to
fraud, attempted fraud, and similar wrongdoing.'' See Maria T.
Vullo, Superintendent of Financial Services, NYSDFS, Guidance on
Prevention of Market Manipulation and Other Wrongful Activity (Feb.
7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS recognizes that its ``guidance is not
intended to limit the scope or applicability of any law or
regulation'' (id.), which would include the Exchange Act. Nothing in
the record evidences whether the Index's underlying bitcoin
platforms have complied with this NYSDFS guidance. Further, as
stated previously, there are substantial differences between the
NYSDFS and the Commission's regulation. Anti-money laundering
(``AML'') and know-your-customer (``KYC'') policies and procedures,
for example, have been referenced in other bitcoin-based ETP
proposals as a purportedly alternative means by which such ETPs
would be uniquely resistant to manipulation. The Commission has
previously concluded that such AML and KYC policies and procedures
do not serve as a substitute for, and are not otherwise dispositive
in the analysis regarding the importance of, having a surveillance-
sharing agreement with a regulated market of significant size
relating to bitcoin. For example, AML and KYC policies and
procedures do not substitute for the sharing of information about
market trading activity or clearing activity and do not substitute
for regulation of a national securities exchange. See USBT Order, 85
FR at 12603 n.101. See also, e.g., WisdomTree Order, 86 FR at 69328
n.95; Kryptoin Order, 86 FR at 74173 n.98.
    \108\ See 15 U.S.C. 78e, 78f.
---------------------------------------------------------------------------

    In addition, although BZX argues that the Data Provider's various
procedures of oversight of the Index helps to identify patterns
consistent with manipulative activity, the purported procedures and
oversight do not represent a unique measure to resist or prevent
manipulation beyond mechanisms that exist in securities or commodities
markets.\109\
---------------------------------------------------------------------------

    \109\ The Commission has previously considered and rejected
similar arguments about the valuation of bitcoin according to a
benchmark or reference price. See, e.g., SolidX Order, 82 FR at
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at
12599-601.
---------------------------------------------------------------------------

    Further, the oversight performed by the Data Provider of the
Index's underlying bitcoin platforms is for the purpose of ensuring the
accuracy and integrity of the Index.\110\ Such oversight serves a
fundamentally different purpose as compared to the regulation of
national securities exchanges and the requirements of the Exchange Act.
While the Commission recognizes that this may be an important function
in ensuring the integrity of the Index, such requirements do not imbue
either the Data Provider or the Index's underlying bitcoin platforms
with regulatory authority similar to that the Exchange Act confers upon
self-regulatory organizations such as national securities
exchanges.\111\
---------------------------------------------------------------------------

    \110\ See supra notes 84-91 and accompanying text.
    \111\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    Third, BZX does not explain the significance of the Index's
purported resistance to manipulation to the overall analysis of whether
the proposal to list and trade the Shares is designed to prevent fraud
and manipulation. Even assuming that BZX's argument is that, if the
Index is resistant to manipulation, the Trust's NAV, and thereby the
Shares as well, would be resistant to manipulation, BZX has not
established in the record a basis for such conclusion. That assumption
aside, the Commission notes that the Shares would trade at market-based
prices in the secondary market, not at NAV, which then raises the
question of the significance of the NAV calculation to the manipulation
of the Shares.
    Fourth, BZX's arguments are contradictory. While arguing that the
Index is resistant to manipulation, the Exchange simultaneously
downplays the importance of the Index in light of the Trust's in-kind
creation and redemption mechanism.\112\ BZX points out that the Trust
will create and redeem Shares in-kind, not in cash, which renders the
NAV calculation, and thereby the ability to manipulate NAV,
``significantly less important.'' \113\ In BZX's own words, the Trust
will not accept cash to buy bitcoin in order to create Shares or sell
bitcoin to pay cash for redeemed Shares, so the price that the Sponsor
uses to value the Trust's bitcoin ``is not particularly important.''
\114\ If the Index that the Trust uses to value the Trust's bitcoin
``is not particularly important,'' it follows that the Index's
resistance to manipulation is not material to the Shares'
susceptibility to fraud and manipulation. As BZX does not address or
provide any analysis with respect to these issues, the Commission
cannot conclude that the Index aids in the determination that the
proposal to list and trade the Shares is designed to prevent fraudulent
and manipulative acts and practices.
---------------------------------------------------------------------------

    \112\ See supra notes 92-96 and accompanying text.
    \113\ See Amendment No. 1, 86 FR at 73378 (``While the Sponsor
believes that the Index which it uses to value the Trust's bitcoin
is designed to reduce the risk of manipulation based on the
methodology further described below, the fact that creations and
redemptions are only available in-kind makes the manipulability of
the Index significantly less important.'').
    \114\ See id. (concluding that ``because the Trust will not
accept cash to buy bitcoin in order to create new shares or, barring
a forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses to value the Trust's bitcoin
is not particularly important.'').
---------------------------------------------------------------------------

    Finally, the Commission finds that BZX has not demonstrated that
in-kind creations and redemptions provide the Shares with a unique
resistance to manipulation. The Commission has previously addressed
similar assertions.\115\ As the Commission stated before, in-kind
creations and redemptions are a common feature of ETPs, and the
Commission has not previously relied on the in-kind creation and
redemption mechanism as a basis for excusing exchanges that list ETPs
from entering into surveillance-sharing agreements with significant,
regulated markets related to the portfolio's assets.\116\ Accordingly,
the Commission is not persuaded here that the Trust's in-kind creations
and redemptions afford it a unique resistance to manipulation.\117\
---------------------------------------------------------------------------

    \115\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR
at 12607-08; VanEck Order, 86 FR at 64546; WisdomTree Order, 86 FR
at 69329; Kryptoin Order, 86 FR at 74174; Skybridge Order, 87 FR at
3874; Wise Origin Order, 87 FR at 5533.
    \116\ See, e.g., iShares COMEX Gold Trust, Securities Exchange
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26,
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24,
2006) (SR-Amex-2005-072).
    \117\ Putting aside BZX's various assertions about the nature of
bitcoin and the bitcoin market, the Index, and the Shares, BZX also
does not address concerns the Commission has previously identified,
including the susceptibility of bitcoin markets to potential trading
on material, non-public information (such as plans of market
participants to significantly increase or decrease their holdings in
bitcoin; new sources of demand for bitcoin; the decision of a
bitcoin-based investment vehicle on how to respond to a ``fork'' in
the bitcoin blockchain, which would create two different, non-
interchangeable types of bitcoin), or to the dissemination of false
or misleading information. See Winklevoss Order, 83 FR at 37585. See
also USBT Order, 85 FR at 12600-01; WisdomTree Order, 86 FR at 69329
n.114; Kryptoin Order, 86 FR at 74174 n.107; Skybridge Order, 87 FR
at 3872; Wise Origin Order, 87 FR at 5533 n.89.

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

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size
    As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and
manipulative acts and practices, the Commission next examines whether
the record supports the conclusion that BZX has entered into a
comprehensive surveillance-sharing agreement with a regulated market of
significant size relating to the underlying assets. In this context,
the term ``market of significant size'' includes a market (or group of
markets) as to which (i) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (ii) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\118\
---------------------------------------------------------------------------

    \118\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that provides guidance to market
participants. See id.
---------------------------------------------------------------------------

    As the Commission has stated in the past, it considers two markets
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate
bilateral surveillance-sharing agreement.\119\ Accordingly, based on
the common membership of BZX and the CME in the ISG,\120\ BZX has the
equivalent of a comprehensive surveillance-sharing agreement with the
CME. However, while the Commission recognizes that the CFTC regulates
the CME futures market,\121\ including the CME bitcoin futures market,
and thus such market is ``regulated,'' in the context of the proposed
ETP, the record does not, as explained further below, establish that
the CME bitcoin futures market is a ``market of significant size'' as
that term is used in the context of the applicable standard here.
---------------------------------------------------------------------------

    \119\ See id. at 37580 n.19.
    \120\ See Amendment No. 1, 86 FR at 73371 n.75 and accompanying
text.
    \121\ While the Commission recognizes that the CFTC regulates
the CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying bitcoin spot market. See Winklevoss
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; Skybridge Order,
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93.
---------------------------------------------------------------------------

(i) Whether There Is a Reasonable Likelihood That a Person Attempting
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin
Futures Market To Successfully Manipulate the ETP
    The first prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that there is a reasonable likelihood that a person
attempting to manipulate the ETP would have to trade on the CME bitcoin
futures market to successfully manipulate the ETP.
    While BZX states that academic research supports the thesis that
CME bitcoin futures pricing leads the spot market,\122\ BZX
acknowledges that the literature has presented mixed evidence. BZX
states that, on the one hand, an early study by Corbet et al. (2018)
\123\ applied four metrics of price discovery to the CME, CBOE, and
spot prices using data sampled on a one-minute frequency, and found
that price discovery is focused on the spot market.\124\ BZX states
that, in another study, Baur and Dimpfl (2019) \125\ use data sampled
on a five-minute interval and similarly conclude that price discovery
occurs in the spot market.\126\
---------------------------------------------------------------------------

    \122\ See Amendment No. 1, 86 FR at 73370.
    \123\ See id. at 73371 (citing S. Corbet, B. Lucey, M. Peat, &
S. Vigne, Bitcoin futures--What use are they?, 172 Econ. Letters 23
(2018) (``Corbet et al.'')).
    \124\ See id. at 73371.
    \125\ See id. at 73371 (citing D. Baur & T. Dimpfl, Price
discovery in bitcoin spot or futures?, 39 J. Futures Mkts. 803
(2019)).
    \126\ See id. at 73371.
---------------------------------------------------------------------------

    BZX states that, on the other hand, a study by Kapar and Olmo
(2019) \127\ finds contradictory evidence using daily-sampled data,
concluding that the CME bitcoin futures market dominates price
discovery. BZX states that similarly, Akyildirim et al. (2019) \128\
show that bitcoin futures play a significant role in price discovery
relative to the spot market.
---------------------------------------------------------------------------

    \127\ See id. at 73371 (citing B. Kapar & J. Olmo, An analysis
of price discovery between Bitcoin futures and spot markets, 174
Econ. Letters 62 (2019) (``Kapar and Olmo'')).
    \128\ See id. at 73371 (citing E. Akyildirim, S. Corbet, P.
Katsiampa, N. Kellard & A. Sensoy, The development of Bitcoin
futures: Exploring the interactions between cryptocurrency
derivatives, 34 Fin. Res. Letters 101234 (2020)).
---------------------------------------------------------------------------

    BZX surmises that one potential reason for the mixed evidence,
according to BZX's interpretation of Hu, Hou and Oxley (2020),\129\ is
that ``cointegration relationships may go undetected if the underlying
model formulation is constrained to be time-invariant.'' BZX states
that, as such, Hu, Hou and Oxley ``apply time-varying cointegrating
coefficients'' and ``conclude that futures prices Granger-cause spot
prices and that futures prices dominate [b]itcoin price discovery.''
\130\
---------------------------------------------------------------------------

    \129\ See id. at 73371 (citing Y. Hu, Y. Hou & L. Oxley, What
role do futures markets play in Bitcoin pricing? Causality,
cointegration and price discovery from a time-varying perspective,
72 Int'l Rev. of Fin. Analysis 101569 (2020) (``Hu, Hou and
Oxley'')).
    \130\ See id. at 73371.
---------------------------------------------------------------------------

    BZX further asserts that the bitcoin futures market is by orders of
magnitude larger than the entire spot market of all cryptoassets in
terms of traded volume, and that, according to a study by the
Blockchain Lab of Massachusetts Institute of Technology: ``[T]he
derivative market leads price discovery of bitcoin more frequently than
the spot markets. The spot market is more likely to indicate the
direction of the price movement while the derivatives market is more
likely to lead the magnitude of the price movement.'' \131\
---------------------------------------------------------------------------

    \131\ See id. at 73372 (citing L. Eguren, B. Fondufe, C. Hogan,
and C. Matthews, Price Discovery in the Bitcoin Spot and Derivatives
Markets, Massachusetts Institute of Technology Blockchain Lab
Program, May 15, 2020 (``Blockchain Lab Paper''), available at:
https://static1.squarespace.com/static/59aae5e9a803bb10bedeb03e/t/5fa2de64862fbd230d09033d/1604509286275/WG19-20PriceDiscoveryintheBitcoinSpot%26DerivativesMarketsComplete.pdf
(last visited Mar. 3, 2022)). This study was performed by MBA
students at the MIT Sloan School of Management as part of the
Blockchain Lab, an action-learning course offered by MIT. The sudy
considered the relationship between unregulated spot and derivatives
bitcoin markets, and which market leads the other in pricing.
---------------------------------------------------------------------------

    BZX also asserts that the bitcoin futures market has processed more
than $1 trillion in futures volume per month since the start of the
year. In November 2021, bitcoin futures volume accounted for $1.58
trillion, while spot volume, in the same time frame, amounted to $1.4
trillion, including both crypto-only and fiat currency volumes of all
cryptoassets, not just bitcoin. In terms of volume just in the last
month,\132\ BZX asserts that the bitcoin futures market is 12% larger
than the entire spot market. Over the past three months,\133\ the
average monthly spot volume was $1.3 trillion while the average bitcoin
futures volume was significantly greater (approximately 30%) than the
spot at $1.71 trillion.\134\
---------------------------------------------------------------------------

    \132\ Based on the submission of Amendment No. 1 in December
2021, the Commission understands ``last month'' to refer to November
2021.
    \133\ Based on the submission of Amendment No. 1 in December
2021, the Commission understands ``past three months'' to refer to
September-November 2021.
    \134\ See Amendment No. 1, 86 FR at 73372. That is, according to
BZX, since the start of the year, the bitcoin futures market is 52%
larger than the spot volume of all cryptoassets traded on platforms.

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

    In addition, BZX contends that, in the past twelve months, the
average monthly futures volume for bitcoin was $1.89 trillion, while
the monthly spot volume for all cryptoassets was $1.24 trillion.\135\
BZX further states that, as of December 2, 2021, the ratio of bitcoin
spot versus futures volume currently stands at 0.17.\136\ BZX concludes
that, ``where CME bitcoin futures lead the price in the spot market
such that a potential manipulator of the bitcoin spot market (beyond
just the constituents of the Index . . .) would have to participate in
the CME [b]itcoin [f]utures market, it follows that a potential
manipulator of the Shares would similarly have to transact in the CME
[b]itcoin [f]utures market.'' \137\
---------------------------------------------------------------------------

    \135\ See id.
    \136\ See id. Put in another way, according to BZX, the bitcoin
spot market accounts for 17% of the bitcoin futures market in volume
terms.
    \137\ See id.
---------------------------------------------------------------------------

    The Commission disagrees. Specifically, the econometric evidence in
the record for the proposal does not support the conclusion that an
interrelationship exists between the CME bitcoin futures market and the
bitcoin spot market such that it is reasonably likely that a person
attempting to manipulate the proposed ETP would also have to trade on
the CME bitcoin futures market.\138\ While BZX concludes that CME
bitcoin futures pricing leads the spot market,\139\ BZX's own
recitation of the literature on the lead-lag relationship and price
discovery between bitcoin spot and futures markets underscores that the
literature is unsettled.\140\ BZX also has not addressed issues that
the Commission has raised in past disapproval orders with respect to
some of the studies that BZX cites in the present proposal.
Specifically, BZX has not addressed the concern that the use of daily
price data by Kapar and Olmo and Hu, Hou and Oxley, as opposed to
intra-day prices, may hinder the ability to distinguish which market
incorporates new information faster; \141\ or that, as stated in
previous disapproval orders,\142\ the findings of Hu, Hou and Oxley's
Granger causality analysis are concededly mixed; \143\ or why Hu, Hou
and Oxley's inconclusive evidence that CME bitcoin futures prices lead
spot prices--in particular that the months at the end of the paper's
sample period showed that the spot market was the leading market--would
not indicate a shift towards prices in the spot market leading the
futures market that would be expected to persist into the future.\144\
---------------------------------------------------------------------------

    \138\ See USBT Order, 85 FR at 12611. Listing exchanges have
attempted to demonstrate such an ``interrelationship'' by presenting
the results of various econometric ``lead-lag'' analyses. The
Commission considers such analyses to be central to understanding
whether it is reasonably likely that a would-be manipulator of the
ETP would need to trade on the CME bitcoin futures market. See id.
at 12612. See also VanEck Order, 86 FR at 64547; WisdomTree Order,
86 FR at 69330-31; Kryptoin Order, 86 FR at 74176 n.144; Skybridge
Order, 87 FR at 3876 n.101; Wise Origin Order, 87 FR at 5535 n.107.
    \139\ See Amendment No. 1, 86 FR at 73372.
    \140\ See supra notes 123-131 and accompanying text. See also,
e.g., O. Entrop, B. Frijns & M. Seruset, The determinants of price
discovery on bitcoin markets, 40 J. Futures Mkts. 816 (2020)
(finding that price discovery measures vary significantly over time
without one market being clearly dominant over the other); J. Hung,
H. Liu & J. Yang, Trading activity and price discovery in Bitcoin
futures markets, 62 J. Empirical Finance 107 (2021) (finding that
the bitcoin spot market dominates price discovery); A. Fassas, S.
Papadamou, & A. Koulis, Price discovery in bitcoin futures, 52 Res.
Int'l Bus. Fin. 101116 (2020) (finding that bitcoin futures play a
more important role in price discovery); S. Aleti & B. Mizrach,
Bitcoin spot and futures market microstructure, 41 J. Futures Mkts.
194 (2021) (finding that relatively more price discovery occurs on
the CME as compared to four spot exchanges); J. Wu, K. Xu, X. Zheng
& J. Chen, Fractional cointegration in bitcoin spot and futures
markets, 41 J. Futures Mkts. 1478 (2021) (finding that CME bitcoin
futures dominate price discovery). See also C. Alexander & D. Heck,
Price discovery in Bitcoin: The impact of unregulated markets, 50 J.
Financial Stability 100776 (2020) (finding that, in a multi-
dimensional setting, including the main price leaders within
futures, perpetuals, and spot markets, CME bitcoin futures have a
very minor effect on price discovery; and that faster speed of
adjustment and information absorption occurs on the unregulated spot
and derivatives platforms than on CME bitcoin futures) (``Alexander
& Heck'').
    \141\ See USBT Order, 85 FR at 12613 n.244.
    \142\ See, e.g., VanEck Order, 86 FR at 64547; WisdomTree Order,
86 FR at 69331; Kryptoin Order, 86 FR at 74176; Wise Origin Order,
87 FR at 5535.
    \143\ The paper finds that the CME bitcoin futures market
dominates the spot markets in terms of Granger causality, but that
the causal relationship is bi-directional, and a Granger causality
episode from March 2019 to June/July 2019 runs from bitcoin spot
prices to CME bitcoin futures prices. The paper concludes: ``[T]he
Granger causality episodes are not constant throughout the whole
sample period. Via our causality detection methods, market
participants can identify when markets are being led by futures
prices and when they might not be.'' See Hu, Hou and Oxley, supra
note 129.
    \144\ See USBT Order, 85 FR at 12613 n.244.
---------------------------------------------------------------------------

    In addition, the Blockchain Lab Paper \145\ does not appear to have
included CME bitcoin futures in its analysis. Thus, even setting aside
methodological and data issues in this unpublished paper and accepting
its results at face value, the Blockchain Lab Paper's results provide
no evidence that the CME leads price discovery, or that it is
reasonably likely that a would-be manipulator would have to trade on
the CME to successfully manipulate the proposed ETP. According to the
paper's results, the ``derivatives market'' quoted by BZX as
``lead[ing] price discovery of bitcoin more frequently'' were
unregulated derivatives markets such as OkEX and bitMEX.\146\ The
Exchange, however, proposes that the CME is the market of significant
size, not OkEX, bitMEX, or any other unregulated derivatives market.
---------------------------------------------------------------------------

    \145\ See supra note 131.
    \146\ See also supra note 140 (citing Alexander & Heck's finding
that, in a multi-dimensional price discovery analysis, including the
main price leaders within futures, perpetuals, and spot markets, CME
bitcoin futures have a very minor effect on price discovery; and
that faster speed of adjustment and information absorption occurs on
the unregulated spot and derivatives platforms than on CME bitcoin
futures).
---------------------------------------------------------------------------

    The failure to distinguish between the (regulated) CME bitcoin
futures market and unregulated bitcoin derivatives markets is also
prevalent in the data that BZX cites. None of the ``bitcoin futures''
market data that BZX provides in support of the first prong of the
``market of significant size'' determination is specific to the CME
bitcoin futures market. Nor does BZX provide information establishing
what portion of the total ``bitcoin futures'' market the CME
comprises.\147\
---------------------------------------------------------------------------

    \147\ In addition, BZX fails to address the relationship (if
any) between prices on other bitcoin futures markets and the CME
bitcoin futures market, the bitcoin spot market, and/or the bitcoin
platforms underlying the Index, or where price formation occurs when
the entirety of bitcoin futures markets, not just the CME, is
considered. See VanEck Order, 86 FR at 64547-48; WisdomTree Order,
86 FR at 69331; Kryptoin Order, 86 FR at 74176; Wise Origin Order,
87 FR at 5535.
---------------------------------------------------------------------------

    Moreover, BZX does not provide results of its own analysis and does
not present any other data supporting its conclusion.
    BZX's unsupported representations constitute an insufficient basis
for approving this proposed rule change. The Commission thus concludes
that the information that BZX provides is not a sufficient basis to
support a determination that it is reasonably likely that a would-be
manipulator of the proposed ETP would have to trade on the CME bitcoin
futures market to successfully manipulate the proposed ETP. Therefore,
the information in the record also does not establish that the CME
bitcoin futures market is a ``market of significant size'' with respect
to the proposed ETP.
(ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be
the Predominant Influence on Prices in the CME Bitcoin Futures Market
    The second prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that it is unlikely that trading in the proposed ETP
would

be the predominant influence on prices in the CME bitcoin futures
market.\148\
---------------------------------------------------------------------------

    \148\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at
12596-97.
---------------------------------------------------------------------------

    BZX asserts that trading in the Shares would not be the predominant
force on prices in the CME bitcoin futures market (or spot market)
because of the significant volume in the CME bitcoin futures
market,\149\ the size of bitcoin's market capitalization,\150\ and the
significant liquidity available in the spot market.\151\ BZX also
asserts that, because the Shares are created in-kind, they are ``fully
collateralized,'' and the Shares should remain close to NAV given that
investors and market makers would arbitrage any significant price
deviations between the price of the Shares and prices in the spot
market.\152\ BZX further provides that, according to February 2021
data, the cost to buy or sell $5 million worth of bitcoin averages
roughly 10 basis points with a market impact of 30 basis points.\153\
For a $10 million market order, the cost to buy or sell is roughly 20
basis points with a market impact of 50 basis points. Stated another
way, BZX provides that a market participant could enter a market buy or
sell order for $10 million of bitcoin and only move the market 0.5
percent.\154\ BZX further asserts that more strategic purchases or
sales (such as using limit orders and executing through over-the-
counter (``OTC'') bitcoin trade desks) would likely have less obvious
impact on the market, which is consistent with MicroStrategy, Tesla,
and Square being able to collectively purchase billions of dollars in
bitcoin.\155\ Thus, BZX concludes that the combination of CME bitcoin
futures leading price discovery, the overall size of the bitcoin
market, and the ability for market participants (including authorized
participants creating and redeeming in-kind with the Trust) to buy or
sell large amounts of bitcoin without significant market impact, will
help prevent the Shares from becoming the predominant force on pricing
in either the bitcoin spot or the CME bitcoin futures market.\156\
---------------------------------------------------------------------------

    \149\ BZX states that the CME began to offer trading in bitcoin
futures in December 2017. See Amendment No. 1, 86 FR at 73366.
According to BZX, nearly every measurable metric related to CME
bitcoin futures contracts, which trade and settle like other cash-
settled commodity futures contracts, has ``trended consistently up
since launch and/or accelerated upward in the past year.'' See id.
For example, according to BZX, from October 25, 2021, through
November 19, 2021, there was approximately $2.9 billion in notional
trading volume in CME bitcoin futures on a daily basis, and notional
volume was never below $1.2 billion per day. See id. at 73363.
Additionally, BZX states that open interest was over $4 billion for
the entirety of the period, and at one point reached $5.5 billion.
See id. According to the Sponsor, the increase in the volume on the
CME is reflected in a higher proportion of the bitcoin market share,
based on the proportion of the total monthly volume of bitcoin
futures traded on the CME in relation to the total spot bitcoin
volume on digital asset platforms. See id. at 73367. BZX states that
that proportion has increased from less than 5% at inception, to
more than 20% over three and a half years. See id. at 73367-68.
    \150\ According to BZX, as of December 1, 2021, the total market
cap of all bitcoin in circulation was approximately $1.08 trillion.
See id. at 73363 n.30.
    \151\ See id. at 73372.
    \152\ See id.
    \153\ See id. According to BZX, these statistics are based on
samples of bitcoin liquidity in U.S. dollars (excluding stablecoins
or Euro liquidity) based on executable quotes on Coinbase Pro,
Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin
during February 2021. See id. at 73372 n.94.
    \154\ See id. at 73372.
    \155\ See id.
    \156\ See id.
---------------------------------------------------------------------------

    The Commission does not agree. The record does not demonstrate that
it is unlikely that trading in the proposed ETP would be the
predominant influence on prices in the CME bitcoin futures market. As
the Commission has already addressed and rejected one of the bases of
BZX's assertion--that CME bitcoin futures leads price discovery \157\--
it will only address below the other two bases--the overall size of,
and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

    \157\ See supra notes 138-146 and accompanying text.
---------------------------------------------------------------------------

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

    \158\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86
FR at 69332-33; Kryptoin Order, 86 FR at 74177; Skybridge Order, 87
FR at 3879; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    The Commission also is not persuaded by BZX's assertions about the
minimal effect a large market order to buy or sell bitcoin would have
on the bitcoin market.\159\ While BZX concludes by way of a $10 million
market order example that buying or selling large amounts of bitcoin
would have insignificant market impact, the conclusion does not analyze
the extent of any impact on the CME bitcoin futures market. Even
assuming that BZX is suggesting that a single $10 million order in
bitcoin would have immaterial impact on the prices in the CME bitcoin
futures market, this prong of the ``market of significant size''
determination concerns the influence on prices from trading in the
proposed ETP, which is broader than just trading by the proposed ETP.
While authorized participants of the Trust might only transact in the
bitcoin spot market as part of their creation or redemption of Shares,
the Shares themselves would be traded in the secondary market on BZX
and other national securities exchanges. The record does not discuss
the expected number or trading volume of the Shares, or establish the
potential effect of the Shares' trade prices on CME bitcoin futures
prices.\160\ For example, BZX does not provide any data or analysis
about the potential effect the quotations or trade prices of the Shares
might have on market-maker quotations in CME bitcoin futures contracts
and whether those effects would constitute a predominant influence on
the prices of those futures contracts.\161\
---------------------------------------------------------------------------

    \159\ See Amendment No. 1, 86 FR at 73372 (``For a $10 million
market order, the cost to buy or sell is roughly 20 basis points
with a market impact of 50 basis points. Stated another way, a
market participant could enter a market buy or sell order for $10
million of bitcoin and only move the market 0.5%.'').
    \160\ In addition, with respect to the Exchange's assertions
that, because the Shares are created in-kind, they are ``fully
collateralized'' and that the Shares should remain close to NAV
because investors and market makers would arbitrage any significant
price deviations between the price of the Shares and prices in the
spot market (see id. at 73372), the Exchange's statement relates
only to the potential connection between the Shares' trade prices
and NAV. It does not speak to any potential connection between the
Shares' trade prices and CME bitcoin futures prices, which is the
interrelationship relevant to the second prong of the ``market of
significant size'' determination.
    \161\ See VanEck Order, 86 FR at 64549; WisdomTree Order, 86 FR
at 69333; Kryptoin Order, 86 FR at 74177; Skybridge Order, 87 FR at
3879; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    Thus, because BZX has not provided sufficient information to
establish both prongs of the ``market of significant size''
determination, the Commission cannot conclude that the CME bitcoin
futures market is a ``market of significant size'' such that BZX would

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

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

    BZX contends that, if approved, the proposed ETP would protect
investors and the public interest. However, the Commission must
consider these potential benefits in the broader context of whether the
proposal meets each of the applicable requirements of the Exchange
Act.\162\ Because BZX has not demonstrated that its proposed rule
change is designed to prevent fraudulent and manipulative acts and
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

    \162\ See Winklevoss Order, 83 FR at 37602. See also
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at
43941; USBT Order, 85 FR at 12615; WisdomTree Order, 86 FR at 69333;
Valkyrie Order, 86 FR at 74163; Kryptoin Order, 86 FR at 74178;
Skybridge Order, 87 FR at 3880; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    BZX asserts that access for U.S. retail investors to gain exposure
to bitcoin via a transparent and U.S. regulated, U.S. exchange-traded
vehicle remains limited. Specifically, BZX asserts that current options
for U.S. retail investors include paying a potentially high premium
(and high management fees) to buy OTC bitcoin funds, to the advantage
of more sophisticated investors that are able to create shares at NAV
directly with the issuing trust,\163\ facing the technical risk,
complexity, and generally high fees associated with buying spot
bitcoin, purchasing shares of operating companies that they believe
will provide proxy exposure to bitcoin with limited disclosure about
the associated risks, or through the purchase of bitcoin futures
exchange-traded funds.\164\ BZX explains that over the past 1.5 years,
U.S. investor exposure to bitcoin through OTC bitcoin funds has grown
into the tens of billions of dollars and more than a billion dollars of
exposure through bitcoin futures exchange-traded funds.\165\ With that
growth, so too has grown the quantifiable investor protection issues to
U.S. investors through roll costs for bitcoin futures exchange-traded
funds and premium/discount volatility and management fees for OTC
bitcoin funds. BZX asserts that the concerns related to the prevention
of fraudulent and manipulative acts and practices have been
sufficiently addressed to be consistent with the Exchange Act and, as
such, approving the proposal (and comparable proposals) would provide
U.S. investors access to bitcoin in a regulated and transparent
exchange-traded vehicle that would act to limit risk to U.S. investors
by: (i) Reducing premium and discount volatility; (ii) reducing
management fees through meaningful competition; (iii) reducing risks
and costs associated with investing in bitcoin futures exchange-traded
funds and operating companies that are imperfect proxies for bitcoin
exposure; and (iv) providing an alternative for investors to self-
custodying spot bitcoin.\166\
---------------------------------------------------------------------------

    \163\ BZX states that ``[t]he largest OTC Bitcoin Fund has grown
its [assets under management or ``AUM''] from approximately $2.6
billion on February 26, 2020, the date on which the Commission
issued the disapproval order for the United States Bitcoin and
Treasury Investment Trust, to $37.1 billion on December 1, 2021 . .
. .''. See Amendment No. 1, 86 FR at 73364 n.48. According to BZX,
while the price of one bitcoin has increased approximately 690% in
the intervening period, the total AUM has increased by approximately
1,540%, indicating that the increase in AUM was created beyond just
price appreciation in bitcoin and that investors are buying shares
of a fund that experiences significant volatility in its premium and
discount outside of the fluctuations in price of the underlying
asset. See id.
    \164\ See id. at 73364.
    \165\ See id. at 73378.
    \166\ See id.
---------------------------------------------------------------------------

    BZX states that a number of operating companies engaged in
unrelated businesses have announced investments as large as $5.3
billion in bitcoin.\167\ BZX argues that, without access to bitcoin
ETPs, retail investors seeking investment exposure to bitcoin may
purchase shares in these companies in order to gain the exposure to
bitcoin.\168\ BZX contends that such operating companies, however, are
imperfect bitcoin proxies and provide investors with partial bitcoin
exposure paired with additional risks associated with whichever
operating company they decide to purchase. BZX concludes that investors
seeking bitcoin exposure through publicly traded companies are gaining
only partial exposure to bitcoin and are not fully benefitting from the
risk disclosures and associated investor protections that come from the
securities registration process.\169\
---------------------------------------------------------------------------

    \167\ See id. at 73364 n.49.
    \168\ See id.
    \169\ See id.
---------------------------------------------------------------------------

    BZX also states that investors in many other countries, including
Canada and Brazil, are able to use more traditional exchange-listed and
traded products (including exchange-traded funds holding spot bitcoin)
to gain exposure to bitcoin, disadvantaging U.S. investors and leaving
them with more risky means of getting bitcoin exposure.\170\
---------------------------------------------------------------------------

    \170\ See id. at 73364-65. BZX represents that the Purpose
Bitcoin ETF, a retail bitcoin-based ETP launched in Canada,
reportedly reached $1.2 billion in AUM as of October 15, 2021,
demonstrating the demand for a North American market listed bitcoin
ETP. BZX contends that the Purpose Bitcoin ETF also offers a class
of units that is U.S. dollar denominated, which could appeal to U.S.
investors. See id. at 73364 n.50. In addition, BZX states that
investors in other countries, specifically Canada, generally pay
lower fees than U.S. retail investors that invest in OTC bitcoin
funds due to the fee pressure that results from increased
competition among available bitcoin investment options. BZX also
argues that, without an approved bitcoin ETP in the U.S. as a viable
alternative, U.S. investors could seek to purchase shares of non-
U.S. bitcoin vehicles in order to gain access to bitcoin exposure.
BZX believes that, given the separate regulatory regime and the
potential difficulties associated with any international litigation,
such an arrangement would create more risk exposure for U.S.
investors than they would otherwise have with a U.S. exchange-listed
ETP. See id. at 73365. BZX further contends that the lack of a U.S.-
listed spot bitcoin ETP is not preventing U.S. funds from gaining
exposure to bitcoin--several U.S. exchange-traded funds are using
Canadian bitcoin ETPs to gain exposure to spot bitcoin--and that
approving this proposal ``would provide U.S. exchange-traded funds
with a U.S.-listed and regulated product to provide such access
rather than relying on either flawed products or products listed and
primarily regulated in other countries.'' See id. BZX also states
that regulators in other countries have either approved or otherwise
allowed the listing and trading of bitcoin-based ETPs. See id. at
73365 n.51.
---------------------------------------------------------------------------

    In essence, BZX asserts that the risky nature of direct investment
in the underlying bitcoin and the unregulated markets on which bitcoin
and OTC bitcoin funds trade compel approval of the proposed rule
change. The Commission disagrees. Pursuant to Section 19(b)(2) of the
Exchange Act, the Commission must approve a proposed rule change filed
by a national securities exchange if it finds that the proposed rule
change is consistent with the applicable requirements of the Exchange
Act--including the requirement under Section 6(b)(5) that the rules of
a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices--and it must disapprove the filing if
it does not make such a finding.\171\ Thus, even if a proposed rule
change purports to protect investors

from a particular type of investment risk--such as experiencing a
potentially high premium/discount by investing in OTC bitcoin funds--
the proposed rule change may still fail to meet the requirements under
the Exchange Act.\172\
---------------------------------------------------------------------------

    \171\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
    \172\ See SolidX Order, 82 FR at 16259; VanEck Order, 86 FR at
54550-51; WisdomTree Order, 86 FR at 69344; Kryptoin Order, 86 FR at
74179; Valkyrie Order, 86 FR at 74163; Skybridge Order, 87 FR at
3881; Wise Origin Order, 87 FR at 5538.
---------------------------------------------------------------------------

    Here, even if it were true that, compared to trading in unregulated
bitcoin spot markets, trading a bitcoin-based ETP on a national
securities exchange provides some additional protection to investors,
the Commission must consider this potential benefit in the broader
context of whether the proposal meets each of the applicable
requirements of the Exchange Act.\173\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing
exchange have a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to bitcoin, or demonstrate
that other means to prevent fraudulent and manipulative acts and
practices are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The listing exchange has not met that
requirement here. Therefore, the Commission is unable to find that the
proposed rule change is consistent with the statutory standard.
---------------------------------------------------------------------------

    \173\ See supra note 162.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Exchange Act, the Commission
must disapprove a proposed rule change filed by a national securities
exchange if it does not find that the proposed rule change is
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices.\174\
---------------------------------------------------------------------------

    \174\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, BZX has not met its burden of
demonstrating that the proposal is consistent with Exchange Act Section
6(b)(5),\175\ and, accordingly, the Commission must disapprove the
proposal.\176\
---------------------------------------------------------------------------

    \175\ 15 U.S.C. 78f(b)(5).
    \176\ In disapproving the proposed rule change, the Commission
has considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

D. Other Arguments and Comments

    The Exchange makes additional arguments in its Amendment No. 1. The
Exchange argues that, based on a review of the Commission's past
approvals and disapprovals of ETPs, the applicable standard does not
require the underlying commodity market to be regulated, but rather
requires that the listing exchange has in place a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to the underlying commodity.\177\ The Exchange states
that, therefore, the CME bitcoin futures market is the proper market
for the Commission to consider in determining whether the proposal is
consistent with the Exchange Act.
---------------------------------------------------------------------------

    \177\ See Amendment No. 1, 86 FR at 73361-62.
---------------------------------------------------------------------------

    The Commission does not disagree. As the Commission has clearly and
consistently stated, an exchange that lists bitcoin-based ETPs can meet
its obligation under Exchange Act Section 6(b)(5) that its rules be
designed to prevent fraudulent and manipulative acts and practices by
demonstrating that the exchange has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to the underlying or reference bitcoin assets.\178\ As discussed in
detail in Section III.B.2, the Commission has considered the Exchange's
arguments with respect to the CME bitcoin futures market, and the