(Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX
Physical--1 oz. Gold Redeemable Trust, Exchange Act Release No.
66930 (May 7, 2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-
2012-18) (notice of proposed rule change included NYSE Arca's
representation that NYSE Arca ``may obtain trading information via
the Intermarket Surveillance Group,'' of which COMEX is a member,
and that gold futures are traded on COMEX and the Tokyo Commodity
Exchange, with a cross-reference to the proposed rule change to list
and trade shares of the ETFS Gold Trust, in which NYSE Arca
represented that COMEX is one of the ``major world gold markets,''
Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17542-
43, 17547 (Mar. 26, 2012)); JPM XF Physical Copper Trust, Exchange
Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-70, 75472,
75485-86 (Dec. 20, 2012) (SR-NYSEArca-2012-28); iShares Copper
Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726,
13727, 13729-30, 13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66);
First Trust Gold Trust, Exchange Act Release No. 70195 (Aug. 14,
2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61)
(notice of proposed rule change included NYSE Arca's representation
that FINRA, on behalf of the exchange, may obtain trading
information regarding gold futures and options on gold futures from
members of the Intermarket Surveillance Group, including COMEX, or
from markets ``with which [NYSE Arca] has in place a comprehensive
surveillance sharing agreement,'' and that gold futures are traded
on COMEX and the Tokyo Commodity Exchange, with a cross-reference to
the proposed rule change to list and trade shares of the ETFS Gold
Trust, in which NYSE Arca represented that COMEX is one of the
``major world gold markets,'' Exchange Act Release No. 69847 (June
25, 2013), 78 FR 39399, 39400, 39405 (July 1, 2013)); Merk Gold
Trust, Exchange Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786,
4786-87 (Jan. 29, 2014) (SR-NYSEArca-2013-137) (notice of proposed
rule change included NYSE Arca's representation that ``COMEX is the
largest gold futures and options exchange'' and that NYSE Arca ``may
obtain trading information via the Intermarket Surveillance Group,''
including with respect to transactions occurring on COMEX pursuant
to CME and NYMEX's membership, or from exchanges ``with which [NYSE
Arca] has in place a comprehensive surveillance sharing agreement,''
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369,
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15,
2016) (SR-NYSEArca-2016-84).
    \203\ See, e.g., 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.
---------------------------------------------------------------------------

    Since at least 1990, the Commission has explained that the ability
of a national securities exchange to enter into surveillance-sharing
agreements ``furthers the protection of investors and the public
interest because it will enable the [e]xchange to conduct prompt
investigations into possible trading violations and other regulatory
improprieties.'' \204\ The Commission has also long taken the position
that surveillance-sharing agreements are important in the context of
exchange listing of derivative security products, such as equity
options. In 1994, the Commission stated:
---------------------------------------------------------------------------

    \204\ See Exchange Act Release No. 27877 (Apr. 4, 1990), 55 FR
13344, 13345 (Apr. 10, 1990) (SR-NYSE-90-14).

    As a general matter, the Commission believes that the existence
of a surveillance sharing agreement that effectively permits the
sharing of information between an exchange proposing to list an
equity option and the exchange trading the stock underlying the
equity option is necessary to detect and deter market manipulation
and other trading abuses. In particular, the Commission notes that
surveillance sharing agreements provide an important deterrent to
manipulation because they facilitate the availability of information
needed to fully investigate a potential manipulation if it were to
occur. These agreements are especially important in the context of
derivative products based on foreign securities because they
facilitate the collection of necessary regulatory, surveillance and
other information from foreign jurisdictions.\205\
---------------------------------------------------------------------------

    \205\ Exchange Act Release No. 33555 (Jan. 31, 1994), 59 FR
5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order approving listing
of options on American Depositary Receipts). The Commission further
stated that it ``generally believes that having a comprehensive
surveillance sharing agreement in place, between the exchange where
the ADR option trades and the exchange where the foreign security
underlying the ADR primarily trades, will ensure the integrity of
the marketplace. The Commission further believes that the ability to
obtain relevant surveillance information, including, among other
things, the identity of the ultimate purchasers and sellers of
securities, is an essential and necessary component of a
comprehensive surveillance sharing agreement.'' Id.

    With respect to ETPs, when approving in 1995 the listing and
trading of one of the first commodity-linked ETPs--a commodity-linked
exchange-traded note--on a national securities exchange, the Commission
continued to emphasize the importance of surveillance-sharing
agreements, noting that the listing exchange had entered into
surveillance-sharing agreements with each of the futures markets on
which pricing of the ETP would be based and stating that ``[t]hese
agreements should help to ensure the availability of information
necessary to detect and deter potential manipulations and other trading
abuses, thereby making [the commodity-linked notes] less readily
susceptible to manipulation.'' \206\
---------------------------------------------------------------------------

    \206\ See Exchange Act Release No. 35518 (Mar. 21, 1995), 60 FR
15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). In that matter, the
Commission noted that the listing exchange had comprehensive
surveillance-sharing agreements with all of the exchanges upon which
the futures contracts overlying the notes traded and was able to
obtain market surveillance information, including customer identity
information, for transactions occurring on NYMEX and other futures
exchanges. See id. at 15807 n.21; see also Exchange Act Release No.
36885 (Feb. 26, 1996), 61 FR 8315, 8319 n.17 (Mar. 4, 1996) (SR-
Amex-95-50) (approving the exchange listing and trading of Commodity
Indexed Securities, and noting: (a) That through the comprehensive
surveillance-sharing agreements, the listing exchange was able to
obtain market surveillance information, including customer identity
information, for transactions occurring on NYMEX and COMEX and that,
through the Intermarket Surveillance Group information-sharing
agreement, the listing exchange was able to obtain, upon request,
surveillance information with respect to trades effected on the
London Metal Exchange, including client identity information and (b)
that, if a different market were utilized for purposes of
calculating the value of a designated futures contract, the listing
exchange had represented that it would ensure that it entered into a
surveillance-sharing agreement with respect to the new relevant
market). The Commission has made similar statements about
surveillance-sharing agreements with respect to the listing and
trading of stock-index, currency, and currency-index warrants. See,
e.g., Exchange Act Release No. 36166 (Aug. 29, 1995), 60 FR 46660
(Sept. 7, 1995) (SR-PSE-94-28) (approving a proposal to adopt
uniform listing and trading guidelines for stock-index, currency,
and currency-index warrants). Specifically, the Commission noted
that ``a surveillance sharing agreement should provide the parties
with the ability to obtain information necessary to detect and deter
market manipulation and other trading abuses'' and stated that the
Commission ``generally requires that a surveillance sharing
agreement require that the parties to the agreement provide each
other, upon request, information about market trading activity,
clearing activity, and the identity of the ultimate purchasers for
securities.'' Id. at 46665 n.35. In addition, the Commission stated
that ``[t]he ability to obtain relevant surveillance information,
including, among other things, the identity of the ultimate
purchasers and sellers of securities, is an essential and necessary
component of a comprehensive surveillance sharing agreement.'' Id.
at 46665 n.36.

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

    In 1998, in adopting Exchange Act Rule 19b-4(e) \207\ to permit the
generic listing and trading of certain new derivatives securities
products--including ETPs--the Commission again emphasized the
importance of the listing exchange's ability to obtain from underlying
markets, through surveillance-sharing agreements (called information-
sharing agreements or ``ISAs'' in the release), the information
necessary to detect and deter manipulative activity. Specifically, in
adopting rules governing the generic listing of new derivatives
securities products, the Commission stated that the Rule 19b-4(e)
procedures would ``enable the Commission to continue to effectively
protect investors and promote the public interest'' and stated that:
---------------------------------------------------------------------------

    \207\ 17 CFR 240.19b-4(e).

    It is essential that the SRO have the ability to obtain the
information necessary to detect and deter market manipulation,
illegal trading and other abuses involving the new derivative
securities product. Specifically, there should be a comprehensive
ISA [information-sharing agreement] that covers trading in the new
derivative securities product and its underlying securities in place
between the SRO listing or trading a derivative product and the
markets trading the securities underlying the new derivative
securities product. Such agreements provide a necessary deterrent to
manipulation because they facilitate the availability of information
needed to fully investigate a manipulation if it were to occur.\208\
---------------------------------------------------------------------------

    \208\ NDSP Adopting Release, supra note 21.

    Consistent with this principle, 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
membership in common with, that market.\209\
---------------------------------------------------------------------------

    \209\ See supra note 202.
---------------------------------------------------------------------------

    In light of the history and purpose of looking to surveillance-
sharing agreements, with respect to markets for assets underlying an
ETP or for derivatives on those assets, the Commission interprets the
terms ``significant market'' and ``market of significant size'' to
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 the ETP
listing market 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. 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.
(b) Response to Comments Regarding Surveillance-Sharing Agreements and
Prior Commodity-Trust ETP Approvals
    Prior ETP approval orders are consistent with the standards the
Commission is applying to the BZX proposal. However, more recent
approval orders for the well-established model of a precious-metal
trust--for example, the Platinum Order and the Palladium Order--found
it unnecessary to perform the exhaustive analysis of underlying markets
and surveillance sharing provided by the first approval order for a
precious metal commodity-trust ETP, the Gold Order, especially since
the proposed rule change for platinum and palladium ETPs discussed
surveillance-sharing agreements with significant, regulated platinum
and palladium markets.\210\
---------------------------------------------------------------------------

    \210\ See Gold Order, supra note 197, 69 FR at 64614-15, 64618-
19; Platinum Order, supra note 189, 74 FR at 68887-88; Palladium
Order, supra note 189, 74 FR at 68896.
---------------------------------------------------------------------------

    BZX argues that even the Gold Order relied on alternative factors--
primarily the depth and liquidity of the spot gold market--to mitigate
Commission concerns about approving a commodity-trust ETP based on an
asset that traded in unregulated, over-the-counter markets with which
no surveillance sharing agreement could be executed.\211\ The Gold
Order does note the depth and liquidity of the gold market, likening
the spot gold market to the ``extremely large, diverse market'' for OTC
foreign exchange trading.\212\ Significantly, however, the Gold Order
demonstrates that the Commission did take into account the availability
of surveillance-sharing agreements in approving the first commodity-
trust ETP.
---------------------------------------------------------------------------

    \211\ See supra notes 197-199 and accompanying text. Another
commenter also asserts that the Commission has approved several
commodity-based ETPs where the underlying market is either
unregulated or lightly regulated. See supra note 201 and
accompanying text.
    \212\ Gold Order, supra note 197, 69 FR at 64619.
---------------------------------------------------------------------------

    The Gold Order states that ``[i]nformation sharing agreements with
markets trading securities underlying a derivative are an important
part of a self-regulatory organization's ability to monitor for trading
abuses in derivative products.'' \213\ And, while the Gold Order
observes that that it is ``not possible . . . to enter into an
information sharing agreement with the OTC gold market,'' the order
continues: ``Nevertheless, the Commission believes that the unique
liquidity and depth of the gold market, together with the MOU
[Memorandum of Understanding] with NYMEX (of which COMEX is a Division)
and NYSE Rules 1300(b) and 1301, create the basis for the [ETP listing
exchange] to monitor for fraudulent and manipulative practices in the
trading of the Shares.'' \214\ Thus, even though the Commission found
that the over-the-counter market for gold was ``extremely deep and
liquid,'' \215\ the Commission's approval of the first precious metal
ETP expressly relied on an agreement to share surveillance information
between the listing exchange and a significant, regulated market for
gold futures.\216\
---------------------------------------------------------------------------

    \213\ Id.
    \214\ Id. (emphasis added).
    \215\ Id.
    \216\ See id. In the Gold Order, the Commission also stated that
the ETP listing exchange had ``entered into a reciprocal Memorandum
of Understanding (`MOU') with the NYMEX (of which COMEX is a
division) for the sharing of information relating to any financial
instrument based, in whole or in part, upon an interest in or
performance of gold.'' Id. at 64618. The Gold Order also notes
volume figures for spot gold trading provided by the London Bullion
Market Association and gold futures trading provided by COMEX. See
id. at 64619.
---------------------------------------------------------------------------

    In the years after the approval of the first precious-metal
commodity-trust ETP, several other, virtually identical, commodity-
trust ETPs have been approved.\217\ Among the approval orders were the
Platinum Order and the Palladium Order, which BZX cites as examples of
the Commission approving a commodity-trust ETP without requiring that
there be a surveillance-sharing agreement with a significant, regulated
market for an underlying exchange. While neither the Platinum Order nor
the Palladium Order expressly discusses such agreements, the record
before the Commission at the time it issued those orders (including the
notices of the proposed rule changes) shows that the ETP listing
exchange was able to share surveillance information with the ``largest
exchange in the world for trading precious metal futures and options,''
which had been trading both platinum futures and palladium futures for
approximately 35 years at the time the Commission

approved commodity-trust ETPs holding those metals.\218\
---------------------------------------------------------------------------

    \217\ See supra note 202.
    \218\ See Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR
59283, 59285-86, 59291 (Nov. 17, 2009) (SR-NYSEArca-2009-94) (notice
of proposed rule change for ETFS Palladium Trust includes NYSE
Arca's representation that ``NYMEX is the largest exchange in the
world for trading precious metals futures and options and has been
trading palladium since 1974,'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which NYMEX is a member); Exchange Act Release No. 60970 (Nov. 9,
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009) (SR-NYSEArca-2009-
95) (notice of proposed rule change for ETFS Platinum Trust includes
NYSE Arca's representation that ``NYMEX is the largest exchange in
the world for trading precious metals futures and options and has
been trading platinum since 1974,'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which NYMEX is a member). See also supra note 189 and accompanying
text.
---------------------------------------------------------------------------

    Consistent with the discussion of ``significant market'' described
above,\219\ the Commission has not previously, and does not now,
require that an ETP listing exchange be able to enter into a
surveillance-sharing agreement with each regulated spot or derivatives
market relating to an underlying asset, provided that the market or
markets with which there is such an agreement constitute a
``significant market.''
---------------------------------------------------------------------------

    \219\ See Section III.D.2(a), supra.
---------------------------------------------------------------------------

    While BZX and the Overdahl Letter assert that the potential avenues
for manipulation of the bitcoin market also exist in the context of
other commodity-trust ETPs, this argument merely reinforces the
Commission's view that similar market structures--namely, surveillance-
sharing agreements with significant, regulated markets--should be in
place for a bitcoin-trust ETP just as they are for commodity-trust
ETPs.\220\ BZX also argues that the proposal should be approved because
it is ``nearly identically situated'' to the iShares Copper Trust. In
particular, BZX asserts that the Commission approved the iShares Copper
Trust because the Commission believed that approval of the ETP could
reduce the risk of manipulation in the underlying spot market and that
the Commission could rely on surveillance by the listing exchange and
CFTC jurisdiction to address concerns about manipulation--factors it
argues support approval here.\221\ The Copper Order, however,
specifically noted the existence of surveillance-sharing agreements not
only between the ETP listing market and copper futures markets, but
also between the ETP listing market and a significant copper spot
market, the London Metal Exchange.\222\ And the Copper Order's analysis
of the underlying physical market for copper does not reflect a
determination that these factors could serve as an adequate alternative
to a surveillance-sharing agreement, but was instead a response to
certain commenters' arguments that approving the iShares Copper Trust
would affirmatively disrupt the physical copper market.\223\
---------------------------------------------------------------------------

    \220\ The proposal does not involve an ETP that is based on an
index of commodities where the component commodities are subject to
surveillance-sharing agreements with significant, regulated markets.
See, e.g., Exchange Act Release No. 53105 (Jan. 11, 2006), 71 FR
3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059) (approving DB
Commodity Index Tracking Fund based on an index that tracks the
performance of futures contracts on crude oil, heating oil,
aluminum, gold, corn, and wheat).
    \221\ See supra notes 194-195 and accompanying text. The Lewis
Letter makes a similar argument. See supra note 196 and accompanying
text.
    \222\ See Copper Order, supra note 194, 78 FR at 13727 n.7, and
13730.
    \223\ See id. at 13731-33.
---------------------------------------------------------------------------

    BZX argues that the Commission should approve the proposal because
it has previously approved currency-trust ETPs--the CurrencyShares Hong
Kong Dollar Trust and the CurrencyShares Singapore Dollar Trust--
without requiring the existence of a surveillance-sharing agreement
with underlying markets.\224\ However, BZX has proposed to list and
trade the Shares as a commodity-based ETP, not a currency-based
ETP,\225\ and the Commission as well as other agencies have
distinguished bitcoin from currency.\226\ Even if the Commission were
to apply the approach it took in approving currency-trust ETPs, the
Commission would still conclude that the proposal is not consistent
with the Exchange Act, because the deep, liquid, and longstanding
markets for currencies, which are dominated by regulated entities, bear
little resemblance to the current state of bitcoin markets. Foreign
currency derivatives traded on national securities exchanges for
decades before the Commission approved currency-trust ETPs. And when it
approved the first foreign currency derivatives in 1982--options on the
British pound, the German mark, the Swiss franc, the Canadian dollar,
and the Japanese yen, each the sovereign currency of a developed
nation--the Commission explained that ``[t]he magnitude of the related
foreign currency markets would appear to militate against a successful
manipulation through inter-market trading activity.'' \227\ Similarly,
when approving the listing and trading of additional foreign currency
derivatives in 1992, the Commission recognized the ``developed markets
for the component foreign currencies'' and observed that ``the
interbank foreign currency spot market is an extremely large, diverse
market comprised of banks and other financial institutions worldwide.''
\228\
---------------------------------------------------------------------------

    \224\ See supra note 200 and accompanying text. Another
commenter also asserts that the Commission has approved several
foreign exchange-linked ETPs where the underlying market is either
unregulated or lightly regulated. See Convergex Letter, supra note
36, at 2.
    \225\ See Amendment No. 1, supra note 1, 81 FR at 76651.
    \226\ See In re Bitcoin Inv. Tr., Exchange Act Release No.
78282, 2016 WL 4363462, at *1 n.1 (July 11, 2016); In re Btc
Trading, Corp., Securities Act Release No. 9685, Exchange Act
Release No. 73783, 2014 WL 6872955, at *1 n.1 (Dec. 8, 2014); In re
Voorhees, Securities Act Release No. 9592, 2014 WL 2465620, at *1
n.1 (June 3, 2014). The CFTC has concluded that Bitcoin is a virtual
currency that is a commodity, ``distinct from `real' currencies,
which are the coin and paper money of the United States or another
country that are designated as legal tender, circulate, and are
customarily used and accepted as a medium of exchange in the country
of issuance.'' In re Coinflip, Inc., CFTC No. 15-29, 2015 WL
5535736, at *1 n.2 (Sept. 17, 2015). The Treasury Department's
Financial Crimes Enforcement Network has noted: ``In contrast to
real currency, `virtual' currency is a medium of exchange that
operates like a currency in some environments, but does not have all
the attributes of real currency. In particular, virtual currency
does not have legal tender status in any jurisdiction.'' Guidance:
Application of FinCEN's Regulations to Persons Administering,
Exchanging, or Using Virtual Currencies (Mar. 18, 2013) (discussing
31 CFR 1010.100(m)), available at https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering. The IRS has concluded that ``virtual currency
is not treated as currency'' for purposes of federal tax laws. IRS
Virtual Currency Guidance, I.R.S. Notice 2014-21, 2014-16 I.R.B.
938, 2014 WL 1224474 (Apr. 14, 2014).
    \227\ Exchange Act Release No. 19133 (Oct. 14, 1982), 47 FR
46946, 1982 WL 521987, at *5 (Oct. 21, 1982) (SR-Phlx-81-4).
    \228\ Exchange Act Release No. 31627 (Dec. 21, 1992), 57 FR
62399, 1992 WL 394554, at *4-5 (Dec. 30, 1992) (SR-Amex-92-36).
---------------------------------------------------------------------------

    The Gold Order echoed this view of the currency markets.\229\ And
the approval order for the CurrencyShares products that BZX cites
includes the following representations by the listing exchange
regarding the foreign currency markets:
---------------------------------------------------------------------------

    \229\ See Gold Order, supra note 197, 69 FR at 64619.

    Most trading in the global over-the-counter (``OTC'') foreign
currency markets is conducted by regulated financial institutions
such as banks and broker-dealers. In addition, in the United States,
the Foreign Exchange Committee of the New York Federal Reserve Bank
has issued Guidelines for Foreign Exchange Trading, and central-bank
sponsored committees in Japan and Singapore have published similar
best practice guidelines. In the United Kingdom, the Bank of England
has published the Non-Investment Products Code, which covers foreign
currency trading. The Financial Markets Association, whose members
include major international banking organizations, has also
established best practices guidelines called the Model Code.
Participants in the U.S. OTC market for

foreign currencies are generally regulated by their oversight
regulators.\230\
---------------------------------------------------------------------------

    \230\ Exchange Act Release No. 58365, supra note 200, 73 FR at
49523.

    Neither BZX nor any of the commenters has provided data that would
justify treating the markets for bitcoin similarly to the deep and
liquid markets for fiat currencies. Moreover, the description of the
worldwide market for bitcoin, in which both the trading venues and the
participants are unregulated, bears little resemblance to the OTC
markets for foreign currency, on which most trading is conducted by
regulated financial institutions. Accordingly, the Commission's
previous approvals of derivatives securities products based on foreign
currencies are not a basis for the Commission to approve the proposal
despite the absence of a surveillance-sharing agreement with a
regulated market of significant size related to bitcoin.

E. Whether BZX Has Entered Into Surveillance-Sharing Agreements With
Regulated Markets of Significant Size Related to Bitcoin

    Although BZX asserts that it has entered into a comprehensive
surveillance-sharing agreement with the Gemini Exchange with respect to
bitcoin trading and that the Gemini Exchange is supervised by the
NYSDFS, the record does not establish that the Gemini Exchange is a
``regulated market'' comparable to a national securities exchange or to
the futures exchanges that are associated with the underlying assets of
the commodity-trust ETPs approved to date. Even if the Gemini Exchange
were ``regulated,'' the record does not support a finding that the
Gemini Exchange represents a ``significant'' bitcoin-related market.
Accordingly, the Commission finds that the surveillance-sharing
agreement between BZX and the Gemini Exchange, even in combination with
alternative means of detecting and deterring fraud and manipulation, is
insufficient to demonstrate that the proposed rule change is consistent
with Exchange Act Section 6(b)(5). Nor has BZX demonstrated that any of
the current trading venues in the worldwide bitcoin spot market is a
regulated market such that a comprehensive surveillance-sharing
agreement with those venues would satisfy the requirements of Section
6(b)(5). And BZX has likewise failed to carry its burden to demonstrate
that there is a regulated market of significant size in derivatives
related to bitcoin with which the ETP listing market has entered into a
comprehensive surveillance-sharing agreement.
1. The Gemini Exchange
(a) Summary of Comments Received
    BZX asserts that it has entered into a comprehensive surveillance-
sharing agreement with the Gemini Exchange through which it can obtain
customer identity information about bitcoin transactions and market
data.\231\ Similarly, the Overdahl Letter claims that the surveillance-
sharing agreement between the Gemini Exchange and BZX aims to detect
and deter such conduct and that the agreement allows for continuous
monitoring of trading activity to effectively conduct surveillance of
the Gemini Auction price.\232\
---------------------------------------------------------------------------

    \231\ See Amendment No. 1, supra note 1, 81 FR at 76663, 76668;
BZX Letter II, supra note 13, at 29-30.
    \232\ See Overdahl Letter, supra note 36, at 11.
---------------------------------------------------------------------------

    BZX represents that the Gemini Exchange operates under the direct
supervision and regulatory authority of the NYSDFS.\233\ This is
because, BZX argues, the Gemini Exchange is a facility of the
Custodian, which is a New York State-chartered limited liability trust
company.\234\ BZX also represents that the Custodian is a fiduciary and
that it must meet the capitalization, compliance, anti-money-
laundering, consumer protection, and cyber security requirements set
forth by the NYSDFS.\235\
---------------------------------------------------------------------------

    \233\ See Amendment No. 1, supra note 1, 81 FR at 76651-52.
    \234\ See id. at 76652.
    \235\ See id.
---------------------------------------------------------------------------

    BZX asserts that the Gemini Auction typically already transacts a
volume greater than the proposed creation basket size for the Trust and
that the Gemini Auction would likely support the needs of Authorized
Participants to engage in basket creation or redemption.\236\ BZX
claims that the global bitcoin marketplace has the potential to provide
even more liquidity and to be a source of bitcoin for basket creation
and hedging. BZX also asserts that all intraday order-book and trade
information on the Gemini Exchange is publicly available through
various electronic formats and is also redistributed by various online
aggregators, and that, with the launch of the proposed Trust, the
Sponsor must make important pricing data available in real time.\237\
As noted above, BZX also claims that the volume transacted in the
Gemini Auction is generally more than 50% larger than the second-
largest trade in the world, drawing an average daily volume of 1,200
bitcoins compared to approximately 800 bitcoins.\238\
---------------------------------------------------------------------------

    \236\ See BZX Letter II, supra note 13, at 20; but see Section
III.B.2(b), supra.
    \237\ See BZX Letter I, supra note 35, at 9; see also Petition
for Review, supra note 4, at 15-16.
    \238\ See BZX Letter II, supra note 13, at 19-20.
---------------------------------------------------------------------------

    One commenter claims that among USD bitcoin exchanges, Gemini has a
3% share and its liquidity measured by order book depth is
significantly lower than that of several other exchanges. The commenter
states that it is possible that, after the launch of an ETP, Gemini's
liquidity and volume will increase, but claims that the nature of
bitcoin trading that leads to the concentration of volume and liquidity
outside of U.S. borders makes any significant future increase
unlikely.\239\ This commenter also observes that while Gemini is
locally regulated by the NYSDFS, the global landscape of many
unregulated bitcoin exchanges exerts huge influence on the Gemini
Exchange and consequently on the proposed ETP.\240\ Another commenter
claims that the Gemini Exchange has the lowest liquidity of the three
exchanges in the United States and is one of the least-liquid of all
exchanges that trade bitcoin for USD.\241\
---------------------------------------------------------------------------

    \239\ See Maher Letter, supra note 35 (noting that the market is
very concentrated and is controlled by a small group of exchanges
operating in China, three of which represented 96% of all bitcoin
trade volume over a six-month period, and noting that the Gemini
Exchange had a 0.07% share of bitcoin volume worldwide during that
period, with a 3% share of USD-exchange volume).
    \240\ See id.
    \241\ See Anonymous Letter III, supra note 35.
---------------------------------------------------------------------------

    One commenter asserts that the size and importance of the Gemini
Exchange and the itBit Exchange have grown substantially and claims
that, from January 23, 2017, to May 10, 2017, the combined market share
of these exchanges jumped from just 0.33% to 7.14% of total worldwide
bitcoin volume, equivalent to more than 10,000 bitcoins per day on
average.\242\ This commenter also asserts that the geographic
distribution of bitcoin spot trading has shifted in focus from Chinese-
based platforms towards U.S.-based venues, which indicates increased
transparency and safer regulation in the near future. The commenter
asserts that--although the Gemini Exchange and the itBit Exchange
remain the only two NYSDFS-regulated bitcoin exchanges, and while a
market share of 7.14% leaves much room for growth--

the migration of global bitcoin trading volumes since mid-January 2017
is a positive trend.\243\
---------------------------------------------------------------------------

    \242\ See SIG Letter, supra note 36, at 7. The itBit Exchange is
a commercial bitcoin trading venue based in New York, NY. The NYSDFS
has granted a charter under New York Banking Law to itBit Trust
Company, LLC. See Press Release, NYSDFS, NY[S]DFS Grants First
Charter to a New York Virtual Currency Company(May 7, 2015),
available at http://www.dfs.ny.gov/about/press/pr1505071.htm.
    \243\ See SIG Letter, supra note 36, at 7.
---------------------------------------------------------------------------

    This commenter further asserts that, alongside Gemini Exchange and
itBit Exchange, two other U.S.-based exchanges, GDAX and Kraken, have
become significant spot bitcoin trading venues. According to this
commenter, these four exchanges--the largest U.S. bitcoin exchanges--
together now represent over 29% of worldwide bitcoin volume, up from
just 1.47% on January 23, 2017. The commenter claims that, with almost
a third of global spot bitcoin volume now occurring on these four U.S.-
based trading venues, regulatory agencies and SROs have the opportunity
to develop a robust framework of regulatory oversight and transparency
that would support fair and orderly markets for both spot bitcoin and
listed bitcoin-based ETPs.\244\ This commenter predicts that the launch
of a regulated, U.S.-listed bitcoin ETP will help drive more bitcoin
trading volume onto U.S.-based exchanges, and this commenter asserts
that this supplemental liquidity is likely to manifest itself mainly on
U.S.-based bitcoin exchanges such as Gemini, itBit, GDAX, and Kraken,
which will be the most liquid venues during U.S. trading hours.\245\
---------------------------------------------------------------------------

    \244\ See id. at 7-8.
    \245\ See id. at 8.
---------------------------------------------------------------------------

    The Overdahl Letter asserts that, between September 21, 2016, and
March 1, 2017, the Gemini Exchange accounted for 24.03% of bitcoin
trading volume on U.S. exchanges and 7.35% of the global USD market for
bitcoin.\246\ The Overdahl Letter contends that the Gemini Auction
price is reliable in that it generally reflects both prices for bitcoin
traded at other U.S.-based bitcoin exchanges and prices for bitcoin
traded at USD-based exchanges globally. The Overdahl Letter claims that
significant deviations between the Gemini price and other prices are
quickly reduced to normal (small) levels and that the Gemini price does
not primarily cause these deviations. In addition, the Overdahl Letter
concludes that, when price deviations are observed, pricing across
exchanges tends to converge.\247\ The Overdahl Letter also notes the
concern expressed by some commenters that the Gemini Exchange had
relatively low trading volume and that, as a result, the exchange price
was less reliable than if the volumes were larger. In response to this
concern, the Overdahl Letter provides a list of ETPs approved by the
Commission that, the Overdahl Letter claims, have underlying assets
with lower average daily volume than the average daily volume of the
Gemini Exchange.\248\
---------------------------------------------------------------------------

    \246\ See Overdahl Letter, supra note 36, at 8.
    \247\ See id. at 1, 7.
    \248\ See id. at 13-14.
---------------------------------------------------------------------------

(b) Discussion
    BZX represents that it has entered into a comprehensive
surveillance-sharing agreement with the Gemini Exchange with respect to
bitcoin trading and that the Gemini Exchange is supervised by the
NYSDFS and is thereby subject to capitalization, anti-money-laundering,
compliance, consumer protection, and cybersecurity requirements.\249\
The record, however, does not support a conclusion that the Gemini
Exchange is a ``regulated market'' comparable to a national securities
exchange or to the futures exchanges that are associated with the
underlying assets of the commodity-trust ETPs approved to date.
---------------------------------------------------------------------------

    \249\ See Amendment No. 1, supra note 1, 81 FR at 76652, 76663,
76668; BZX Letter II, supra note 13, at 29-30.
---------------------------------------------------------------------------

    The record does not establish that the Gemini Exchange's rules,
including its trading rules, are subject to regulatory review or
approval or that its trading operations are subject to regulatory
examination. Commission regulation of the securities markets includes
the elements of NYSDFS supervision described above,\250\ but national
securities exchanges are also, among other things, 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.'' \251\ Moreover, national securities exchanges must file
proposed rules with the Commission regarding certain material aspects
of their operations,\252\ and the Commission has the authority to
disapprove any such rule that is not consistent with the requirements
of the Exchange Act.\253\ Thus, national securities exchanges are
subject to Commission oversight of, among other things, their
governance, membership qualifications, trading rules, disciplinary
procedures, recordkeeping, and fees.\254\
---------------------------------------------------------------------------

    \250\ See supra notes 233-235 and accompanying text.
    \251\ 15 U.S.C. 78f(b)(5).
    \252\ 17 CFR 240.19b-4(a)(6)(i).
    \253\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rule changes
with the Commission and provides the Commission with the authority
to disapprove proposed rule changes that are not consistent with the
Exchange Act. Designated Contract Markets (commonly called ``futures
markets'') registered with and regulated by the CFTC must comply
with, among other things, a similarly comprehensive range of
regulatory principles and must file rule changes with the CFTC. See,
e.g., Designated Contract Markets (DCMs), CFTC, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \254\ The Commission notes that the NYSDFS recently issued
``guidance'' to supervised virtual currency business entities,
including the Gemini Exchange, stating that these entities must
``implement measures designed to effectively detect, prevent, and
respond to fraud, attempted fraud, and similar wrongdoing.'' See
Maria T. Vulio, Superintendent of Financial Services, NYSDFS,
Guidance on Prevention of Market Manipulation and Other Wrongful
Activity (Feb. 7, 2018), available at http://www.dfs.ny.gov/legal/industry/il180207.pdf. This guidance was issued after the comment
period for this proposed rule change ended, and there is nothing in
the record regarding how this guidance has been implemented by the
NYSDFS or by the affected entities.
---------------------------------------------------------------------------

    Even if the Gemini Exchange were ``regulated,'' the record would
not support a conclusion that the Gemini Exchange conducts a
significant volume of trading in bitcoin because there is no evidence
in the record that there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on the Gemini
Exchange (or any record evidence addressing how trading in the proposed
ETP would or would not influence prices on the Gemini Exchange).
Furthermore, there is insufficient evidence in the record to determine
whether it is unlikely that trading in the ETP would be the predominant
influence on prices on the Gemini Exchange. Indeed, if anything, the
Gemini Auction size is currently so small that the proposed ETP could
fundamentally affect supply and demand (and thus pricing) on the Gemini
Exchange, not the other way around.\255\
---------------------------------------------------------------------------

    \255\ See Section III.B.2(b), supra.
---------------------------------------------------------------------------

    The record thus includes at best uncertain information regarding
the volume or liquidity of the Gemini Exchange, how the Gemini Exchange
may influence the price of any ETP based on bitcoin, or how the
existence of ETPs based on bitcoin may affect the Gemini Exchange.
Commenters have provided varying estimates of the current and future
volume of trading on

the Gemini Exchange.\256\ Moreover, because bitcoin markets are still
evolving in significant ways, and because there is no comprehensive
data source reflecting bitcoin trading, it is not currently possible to
state with confidence what share of volume any particular spot trading
venue has captured or will capture.\257\ Bitcoin trading activity is
dispersed across markets and OTC transactions worldwide, and there is
no centralized, regulatory data source for bitcoin trading statistics.
Accordingly, any analysis of worldwide trading activity must use
unofficial sources that gather and disseminate trading data, and even
these sources cannot capture OTC transactions, or transactions that
take place in what the Registration Statement characterizes as ``dark
pools.'' \258\ Further, as discussed above,\259\ recent volume in the
Gemini Auction is a fraction of the size of a creation unit of the
Trust, and therefore the Commission does not agree with the assertion
by BZX that the Gemini Auction would support the needs of Authorized
Participants to engage in basket creation or redemption.
---------------------------------------------------------------------------

    \256\ See supra notes 237-248 and accompanying text.
    \257\ See also supra note 239 and accompanying text.
    \258\ Registration Statement, supra note 22, at 62.
Additionally, while the Overdahl Letter asserts that, between
September 21, 2016, and March 1, 2017, the Gemini Exchange accounted
for 7.35% of the global USD-denominated bitcoin market, which does
not include trading in bitcoin against other fiat currencies, see
supra note 246 and accompanying text, the Overdahl Letter does not
explain why the bitcoin-USD market--a subset of the global bitcoin
market--is the appropriate measure when Authorized Participants in
the Trust would be able to source their bitcoins through any market
or OTC transaction.
    \259\ See supra note 165 and accompanying text.
---------------------------------------------------------------------------

    Finally, the comparison offered by the Overdahl Letter between the
average trading volume on the Gemini Exchange and the average trading
volume of the underlying assets of other ETPs is inapt.\260\ The issue
here is not that the Gemini Exchange has low trading volume in an
absolute sense but, rather, that the Trust would value its holdings
using the Gemini Auction price, even though there is no basis in the
record to find that the Gemini Auction represents a significant portion
of worldwide bitcoin trading.\261\
---------------------------------------------------------------------------

    \260\ See supra note 248 and accompanying text.
    \261\ See also infra notes 263-268, 270 and accompanying text
(summarizing commenters' views that most bitcoin trading volume
occurs outside the U.S. on unregulated exchanges).
---------------------------------------------------------------------------

    Therefore, the Commission cannot conclude that the surveillance-
sharing agreement between BZX and the Gemini Exchange, even in
combination with the other means of detecting and deterring fraud and
manipulation discussed above,\262\ is sufficient to find that the
proposal is consistent with Exchange Act Section 6(b)(5).
---------------------------------------------------------------------------

    \262\ See Section III.C.2, supra.
---------------------------------------------------------------------------

2. Other Bitcoin Spot Markets
(a) Summary of Comments Received
    Several comment letters state that the majority of bitcoin trading
occurs on exchanges outside the United States. One commenter claims
that most daily trading volume is conducted on poorly capitalized,
unregulated exchanges located outside the United States and that these
non-U.S. exchanges and their practices significantly influence the
price discovery process.\263\ Another commenter states that the biggest
and most influential bitcoin exchange is located outside U.S.
jurisdiction.\264\
---------------------------------------------------------------------------

    \263\ See Williams Letter, supra note 35, at 2.
    \264\ See Anonymous Letter V, supra note 35.
---------------------------------------------------------------------------

    One commenter states that, since 2013, the price of bitcoin has
been defined mostly by the major Chinese exchanges, whose volumes dwarf
those of exchanges outside China. According to the commenter, the
Chinese exchanges are not regulated or audited and are suspected of
engaging in unethical practices such as front-running, wash trades, and
trading with insufficient funds. The commenter interprets pricing data
from these Chinese exchanges to mean that the price of bitcoin is
defined entirely by speculation, without any ties to fundamentals.\265\
---------------------------------------------------------------------------

    \265\ See Stolfi Letter II, supra note 35.
---------------------------------------------------------------------------

    One commenter claims that a sizeable number of traders and owners
of bitcoin do not desire to trade in a well-regulated environment for
reasons including tax evasion, evading capital controls, and money
laundering. This commenter also states that U.S. bitcoin exchanges do
not offer products such as fee-free trading, margin trading, or
options, which drive traffic to the top non-U.S. exchanges. This
commenter also claims that several Chinese exchanges actively engage in
bitcoin mining operations, creating a conflict of interest, and notes
that these exchanges are unaudited and unaccountable.\266\
---------------------------------------------------------------------------

    \266\ See Maher Letter, supra note 35; see also Johnson Letter,
supra note 35; Anonymous Letter V, supra note 35.
---------------------------------------------------------------------------

    One commenter observes that Chinese markets drive much of the
volume in the bitcoin markets.\267\Another commenter also claims that
the Chinese exchanges that account for the bulk of trading are subject
to little regulatory oversight and that existing know-your-customer or
identity-verification measures are lax and can be easily bypassed.\268\
---------------------------------------------------------------------------

    \267\ See ARK Letter, supra note 35, at 5.
    \268\ See Maher Letter, supra note 35.
---------------------------------------------------------------------------

    One commenter asserts that bitcoin is more transparent than the
illiquid or opaque underlying assets of some other exchange-traded
funds, because a large percentage of bitcoin transactions take place on
electronic exchanges with actionable quotes and relatively tight bid/
ask spreads and because transferring actual bitcoin between accounts at
exchanges and other storage systems is also a transparent process, as
transactions are printed using blockchain technology.\269\
---------------------------------------------------------------------------

    \269\ See C&C Letter, supra note 36, at 2.
---------------------------------------------------------------------------

    BZX concedes in a comment letter that only a minority of the global
spot bitcoin exchanges are subject to any regulatory regime.\270\ BZX
also argues that, as the bitcoin exchange market has matured, a number
of new entrants, including two New York limited-purpose trust
companies, have emerged and that these new entrants have markedly
changed the once-concentrated and non-regulated landscape of the
bitcoin exchange market.\271\
---------------------------------------------------------------------------

    \270\ See BZX Letter I, supra note 35, at 2-3 (noting that only
a minority of global bitcoin exchanges are fully regulated for their
fiduciary and custodial activities, and naming Gemini Trust Company
LLC and itBit Trust Company LLC as the only two exchange operators
that are subject to substantive regulation, each overseen by the
NYSDFS).
    \271\ See BZX Letter II, supra note 13, at 15; see also Petition
for Review, supra note 4, at 15.
---------------------------------------------------------------------------

    BZX and the Overdahl Letter note that the CFTC has designated
bitcoin as a commodity and assert that the CFTC is ``broadly
responsible for the integrity'' of bitcoin spot markets.\272\ BZX
acknowledges that the CFTC had not yet (as of the date of BZX's
submissions) brought any enforcement actions based on the anti-
manipulation provisions of the Commodity Exchange Act,\273\ but notes
that the CFTC has issued orders against U.S. and non-U.S. bitcoin
exchanges for engaging in other activity prohibited by the Commodity
Exchange Act and argues that, therefore, a regulatory framework for
providing oversight and deterring market manipulation currently exists
in the U.S.\274\
---------------------------------------------------------------------------

    \272\ See BZX Letter I, supra note 35, at 3; BZX Letter II,
supra note 13, at 17; Overdahl Letter, supra note 36, at 2.
    \273\ See BZX Letter I, supra note 35, at 3. The Commission
notes that the CFTC has since obtained a federal court injunction
against fraudulent activity related to ``virtual currency.'' See
CFTC v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018).
    \274\ See BZX Letter I, supra note 35, at 3; BZX Letter II,
supra note 13, at 18.
---------------------------------------------------------------------------

    The Overdahl Letter asserts that any market can potentially be
manipulated and states that this manipulation risk is

why the CFTC and the Commission have anti-manipulation authority.\275\
The Overdahl Letter also asserts that a host of other jurisdictions,
including the U.K., Australia, Hong Kong, Singapore, Indonesia, and
Thailand, have established some form of ``regulatory sandbox'' for
blockchain, the technology that underlies bitcoin. The Overdahl Letter
further asserts that, in March 2016, the Japanese cabinet approved
bills treating bitcoin and other digital currencies as forms of money
and that, in April 2017, Japan's parliament recognized bitcoin as an
authorized method of payment. The Overdahl Letter claims that Japan
regulates bitcoin as a form of prepaid payment and is approving
regulated virtual-currency exchanges on which the Japanese regulator
imposes capital, audit, and anti-money-laundering, and know-your-
customer requirements. The Overdahl Letter concludes that, therefore,
aside from the CFTC, another competent regulator with whom the
Commission has a memorandum of understanding maintains a regulated
bitcoin market.\276\
---------------------------------------------------------------------------

    \275\ See Overdahl Letter, supra note 36, at 2, 9-10.
    \276\ See id. at 12-13.
---------------------------------------------------------------------------

(b) Discussion
    Based on the record before it, the Commission concludes that BZX
has not shown that any of the current trading venues in the worldwide
bitcoin spot market is a regulated market.
    With respect to spot bitcoin trading outside the United States, BZX
and commenters agree that the bulk of bitcoin trading has occurred in
non-U.S. markets where there is little to no regulation governing
trading,\277\ and thus no sufficient and verifiable governmental market
oversight designed to detect and deter fraudulent and manipulative
activity.\278\ And because no bitcoin spot market is currently a member
of the Intermarket Surveillance Group, BZX is unable to use its
membership in the Intermarket Surveillance Group to share surveillance
information with those markets.\279\ Further, as noted above,\280\ the
Bitcoin blockchain, while freely available to the public, identifies
parties to a transaction only by a pseudonymous public-key address, and
it does not distinguish bitcoin trading activity from other transfers
of bitcoin, limiting its usefulness as a substitute for a surveillance-
sharing agreement.
---------------------------------------------------------------------------

    \277\ See supra notes 263-268, 270 and accompanying text. The
Commission also notes more recent reporting that a large portion of
bitcoin trading volume continues to take place overseas, see, e.g.,
Russo, et al., This Is Where People Are Buying Bitcoin All Over the
World (Jan. 11, 2018), https://www.bloomberg.com/graphics/2017-bitcoin-volume/, although such reports are unnecessary to the
Commission's finding, based on the record before it, that BZX has
not shown that any of the current trading venues in the worldwide
bitcoin spot market is a regulated market.
    \278\ See supra notes 263-268 and accompanying text.
    \279\ See https://www.isgportal.org/isgPortal/public/members.htm
(listing the current members and affiliate members of the
Intermarket Surveillance Group).
    \280\ See Section III.C.2, supra.
---------------------------------------------------------------------------

    One commenter asserts that substantial trading volume has recently
migrated away from Chinese exchanges in response to regulatory efforts
by the Chinese government. But, according to statistics provided by
other commenters,\281\ a substantial majority of bitcoin trading
continues to occur overseas,\282\ and BZX concedes in a comment letter
that only a minority of the global spot bitcoin exchanges are subject
to any regulatory regime.\283\ Moreover, the Registration Statement for
the Winklevoss Bitcoin Trust states:
---------------------------------------------------------------------------

    \281\ See supra notes 243-244 and accompanying text.
    \282\ See, supra notes 244, 264-265, 267 and accompanying text.
    \283\ See supra note 270 and accompanying text. While BZX
asserts that the Gemini Exchange is a regulated market, as discussed
above, the Commission does not agree with that assessment. See
Section III.E.1(b), supra.

    The Bitcoin Exchanges on which bitcoin trades are new and, in
most cases, largely unregulated. Furthermore, many Bitcoin Exchanges
(including several of the most prominent U.S. Dollar-denominated
Bitcoin Exchanges) do not provide the public with significant
information regarding their ownership structure, management teams,
corporate practices or regulatory compliance.\284\
---------------------------------------------------------------------------

    \284\ Registration Statement, supra note 22, at 22.

    Nor does the CFTC's oversight of bitcoin-derivative trading venues
indicate that the CFTC is, as BZX and the Overdahl Letter argue,
``broadly responsible for the integrity of the bitcoin spot market'' or
that the CFTC's enforcement powers with respect to spot trading mean
that a ``regulatory framework for providing oversight and deterring
market manipulation currently exists in the United States.'' \285\ Spot
bitcoin markets are not required to register with the CFTC, unless they
offer leveraged, margined, or financed trading to retail
customers.\286\ In all other cases, including the Gemini Exchange, the
CFTC does not set standards for, approve the rules of, examine, or
otherwise regulate bitcoin spot markets.\287\ As the CFTC itself has
stated, while the CFTC ``has an important role to play,'' U.S. law
``does not provide for direct, comprehensive Federal oversight of
underlying Bitcoin or virtual currency spot markets.'' \288\
---------------------------------------------------------------------------

    \285\ See supra notes 272-274 and accompanying text.
    \286\ Commodity Exchange Act Section 2(c)(2)(D), 7 U.S.C.
2(c)(2)(D). See also Commodity Exchange Act Section 2(c)(2)(A)(i), 7
U.S.C. 2(c)(2)(A)(i) (defining CFTC jurisdiction to specifically
cover contracts of sale of a commodity for future delivery (or
options on such contracts), or an option on a commodity (other than
foreign currency or a security or a group or index of securities),
that is executed or traded on an organized exchange).
    \287\ The Gemini Exchange is not registered with the CFTC.
    \288\ CFTC Backgrounder, supra note 118, at 1. The Commission
also notes the testimony of CFTC Chairman Giancarlo before the
Senate Banking Committee that ``the CFTC does not have authority to
conduct regulatory oversight over spot virtual currency platforms or
other cash commodities, including imposing registration
requirements, surveillance and monitoring, transaction reporting,
compliance with personnel conduct standards, customer education,
capital adequacy, trading system safeguards, cyber security
examinations or other requirements.'' Giancarlo Testimony, supra
note 117, Section I (CFTC Authority and Oversight Over Virtual
Currencies). See also Section III.B.1(b)(iii), supra (discussing
CFTC statutory authority over bitcoin derivatives products).
---------------------------------------------------------------------------

    Additionally, establishment by foreign regulators of what one
commenter called ``regulatory sandboxes'' for blockchain
technology,\289\ or the regulation of bitcoin as a method of prepaid
payment by others,\290\ is not a sufficient basis for concluding that
bitcoin trades worldwide on regulated markets with which the listing
exchange can enter into a surveillance-sharing agreement. There is no
evidence in the record before the Commission that any ``regulatory
sandbox,'' however defined, has created a comprehensive regulatory
regime for bitcoin trading venues, and, as explained in greater detail
above in the context of the Gemini Exchange,\291\ a ``regulated''
market means a market that can detect and prevent fraud and
manipulation under Exchange Act Section 6(b)(5).
---------------------------------------------------------------------------

    \289\ See supra note 276 and accompanying text.
    \290\ Id.
    \291\ See Section III.E.1(b), supra.
---------------------------------------------------------------------------

3. The Derivatives Markets
(a) Summary of Comments Received
    One commenter claims that the bitcoin markets are not yet efficient
and attributes this inefficiency, in part, to the nascent state of the
bitcoin derivatives market. This commenter states that derivatives
provide investors more ways to hedge against bitcoin's potential price
movements, introduce more volume and liquidity, and generally give the
markets more points of information about bitcoin's future prospects,
leading to tighter bid/ask spreads. The commenter claims that

most derivatives activity within the bitcoin markets is offered by
entities outside of the purview of U.S. regulators.\292\ The commenter
observes that the lack of a robust and regulated derivatives market
means that market participants do not have a broad basket of tools at
their disposal, making hedging difficult and keeping away many market
makers that provide significant liquidity to traditional capital
markets. The commenter claims that, while derivative products may be in
development, a full suite of investor tools that will drive market
efficiency and eliminate price disparities is likely at least a couple
of years away.\293\ The commenter also states that, without a robust
derivatives market for institutional investors to short the underlying
asset or otherwise hedge their positions, there likely would be little
counterbalance to the new demand generated by the ETP, and Authorized
Participants could then have trouble sourcing bitcoin and hedging their
positions, stalling the creation process.\294\ The commenter concludes
that it would be premature to launch a bitcoin ETP because bitcoin
markets are not liquid enough to support an open-end fund and because
an ecosystem of institutional-grade infrastructure players is not yet
available to support such a product.\295\
---------------------------------------------------------------------------

    \292\ See ARK Letter, supra note 35, at 5-6.
    \293\ See id. at 6. This commenter also states that, within the
United States, one market offers bitcoin forwards and no one
currently offers regulated bitcoin futures or options, see id., but,
as discussed below, see infra notes 310-311 and accompanying text,
futures on bitcoin have begun trading on regulated U.S. designated
contract markets.
    \294\ See ARK Letter, supra note 35, at 13-14.
    \295\ See id. at 2.
---------------------------------------------------------------------------

    One commenter disagrees with assertions linking inefficient bitcoin
markets to nascent derivatives markets, stating that no evidence has
been provided regarding the would-be effect of derivatives on the
bitcoin market. The commenter claims that these assertions assume that
bitcoin pricing is inefficient, which the commenter claims is not the
case. The commenter also claims that these assertions assume that the
lack of a derivatives market causes pricing to be inefficient, stating
instead that there is direct evidence that many securities trade
successfully and efficiently on U.S. and non-U.S. exchanges despite not
having a direct derivatives market.\296\ The commenter also disagrees
with the claim that, absent a robust derivatives market, there would be
little counterbalance to the new demand generated by the ETP, stating
that it is impossible to predict the success or failure of the ETP. The
commenter states that Authorized Participants may be able to source
bitcoin from China.\297\
---------------------------------------------------------------------------

    \296\ See Anonymous Letter IV, supra note 35. Several commenters
also assert that regulation by BZX of activity in the ETP could
substitute for a lack of regulation in underlying or derivatives
markets. See, e.g., Baird Letter, supra note 35; Keeler Letter,
supra note 35; Marchionne Letter, supra note 35; Bang Letter, supra
note 35.
    \297\ See Anonymous Letter IV, supra note 35.
---------------------------------------------------------------------------

    Another commenter claims that there are several bitcoin futures
markets that have a significant impact on the spot price along with
several OTC markets--such as the one that this commenter claims was
recently launched by the Gemini Exchange--that also offer
liquidity.\298\
---------------------------------------------------------------------------

    \298\ See Dylan Letter, supra note 35, at 1.
---------------------------------------------------------------------------

    The Lewis Letter states that one of the key differences between
bitcoin and other commodities is the lack of a liquid and transparent
derivatives market and that, although there have been nascent attempts
to establish derivatives trading in bitcoin, bitcoin derivatives
markets are not at this time sufficiently liquid to be useful to
Authorized Participants and market makers who would like to use
derivatives to hedge exposures.\299\ The Lewis Letter claims that, for
physical commodities that are not traded on exchanges, the presence of
a liquid derivatives market is a necessary condition, but claims that
for digital assets like bitcoin, derivatives markets are not necessary
because price discovery occurs on the OTC market and exchanges
instead.\300\
---------------------------------------------------------------------------

    \299\ See Lewis Letter I, supra note 65, at 8.
    \300\ See id. at 8.
---------------------------------------------------------------------------

(b) Discussion
    One commenter and the Lewis Letter assert that the existence of
bitcoin derivative markets is not a necessary condition for a bitcoin
ETP.\301\ The key standard the Commission is applying here, however, is
not that a futures or derivatives market is required for every
commodity-trust ETP, but that--when the spot market is unregulated--the
requirement of preventing fraudulent and manipulative acts may possibly
be satisfied by showing that the ETP listing market has entered into a
surveillance-sharing agreement with a regulated market of significant
size in derivatives related to the underlying asset. That is because,
where a market of significant size exists with respect to derivatives
on the asset underlying a commodity-trust ETP, the Commission believes
that there is a reasonable likelihood that a person attempting to
manipulate the ETP by manipulating the underlying spot market would
also have to trade in the derivatives market in order to succeed, since
arbitrage between the derivative and spot markets would tend to counter
an attempt to manipulate the spot market alone.\302\ Thus, the
Commission believes that there is a reasonable likelihood that a
surveillance-sharing agreement with that derivatives market would
assist the ETP listing market in detecting and deterring an attempt to
manipulate the commodity-trust ETP.
---------------------------------------------------------------------------

    \301\ See supra note 296 and accompanying text; Lewis Letter I,
supra note 65, at 8.
    \302\ See also Section III.D.2(a), supra (discussion of
Commission interpretation of the terms ``significant market'' and
``market of significant size'').
---------------------------------------------------------------------------

    As noted above, the commodity-trust ETPs previously approved by the
Commission have had--in lieu of regulated spot markets of significant
size--a regulated futures market of significant size associated with
the underlying commodity, and the listing exchange had entered into a
surveillance-sharing agreement with that futures market or was able to
obtain surveillance information through membership in the Intermarket
Surveillance Group.\303\ Based on the record before it, the Commission
cannot conclude that a regulated bitcoin futures market of significant
size currently exists because, similar to the Gemini Exchange, there is
no evidence in the record that there is a reasonable likelihood that a
person attempting to manipulate the ETP would also have to trade on the
bitcoin futures market, or any record evidence addressing how trading
in the proposed ETP would or would not influence prices in the futures
bitcoin market.
---------------------------------------------------------------------------

    \303\ See supra note 209 and accompanying text.
---------------------------------------------------------------------------

    Consistent with the view of commenters summarized above, BZX's
proposal describes the current derivative markets for bitcoin as
``[n]ascent.'' \304\ BZX notes that certain types of options, futures,
contracts for differences, and other derivative instruments are
available in certain jurisdictions, but that many of them are not
available in the United States and that these derivatives instruments
are generally not regulated ``to the degree that U.S. investors expect
derivatives instruments to be regulated.'' \305\ BZX notes that the
CFTC has approved the registration of TeraExchange LLC as a swap
execution facility (``SEF'') and that, on October 9, 2014, TeraExchange
announced that it had hosted the first executed bitcoin swap traded on
a CFTC-regulated platform.\306\ Further,

BZX's proposal notes that, in 2015, CFTC temporarily registered another
SEF that would trade swaps on bitcoin.\307\
---------------------------------------------------------------------------

    \304\ See Amendment No. 1, supra note 1, 81 FR at 76661.
    \305\ See id.
    \306\ See id.; see also ARK Letter, supra note 35, at 6 (noting
that TeraExchange offers bitcoin forwards).
    \307\ See Amendment No. 1, supra note 1, 81 FR at 76661
(referring to Ledger X LLC).
---------------------------------------------------------------------------

    The Commission acknowledges that TeraExchange, a market for swaps
on bitcoin, has registered with the CFTC, but BZX's description of
trading activity on that market fails to note that the very activity it
cites was the subject of an enforcement action by the CFTC. The CFTC
found that TeraExchange had improperly arranged for participants to
make prearranged, offsetting ``wash'' transactions of the same price,
notional amount, and time period and had then issued a press release
``to create the impression of actual trading in the Bitcoin swap.''
\308\ Neither BZX nor any commenter provides evidence of meaningful
trading volume in bitcoin derivatives on any regulated marketplace.
---------------------------------------------------------------------------

    \308\ See TeraExchange Settlement Order, supra note 93.
---------------------------------------------------------------------------

    The CFTC has also registered LedgerX, a venue for trading bitcoin
derivatives, as a SEF and a Derivatives Clearing Organization.\309\
Additionally, on December 1, 2017, the CFE and the CME self-certified
new contracts with the CFTC for bitcoin futures contracts.\310\ CFE
launched trading in its bitcoin futures contracts on December 10, 2017,
and CME launched trading in its bitcoin futures contracts on December
17, 2017 (for a trade date of December 18, 2017).\311\
---------------------------------------------------------------------------

    \309\ See Order of Registration in the Matter of the Application
of LedgerX LLC for Registration as a Swap Execution Facility (CFTC
July 6, 2017), available at<EMAIL_ADDRESS>Order of
Registration in the Matter of the Application of LedgerX, LLC for
Registration as a Derivatives Clearing Organization (CFTC July 24,
2017), available at<EMAIL_ADDRESS>    \310\ See Letter from Andrew Lowenthal, Senior Managing
Director, CFE to Christopher J. Kirkpatrick, Secretary, CFTC (Dec.
1, 2017), available at http://www.cftc.gov/filings/ptc/ptc120117cfedcm001.pdf; Letter from Christopher Bowen, Managing
Director and Chief Regulatory Counsel, CME Group to Christopher J.
Kirkpatrick, Office of the Secretariat, CFTC (Dec. 1, 2017),
available at http://www.cftc.gov/filings/ptc/ptc120117cmedcm001.pdf.
    \311\ The Commission notes that the Cantor Exchange has also
self-certified bitcoin binary options, see CFTC Backgrounder, supra
note 118, at 2, but this product has not yet begun to trade.
---------------------------------------------------------------------------

    The record before the Commission, however, does not establish that
the bitcoin derivatives markets are regulated markets of significant
size. The record also does not establish how these markets may
influence the price of any ETP based on bitcoin or how the existence of
ETPs based on bitcoin may affect these markets. Publicly available data
show that the median daily notional trading volume, from inception
through April 24, 2018, has been 9,180 bitcoins on CME and 5,440
bitcoins on CFE, and that the median daily notional value of open
interest on CME and CFE during the same period has been 7,875 bitcoins
and 5,787 bitcoins, respectively.\312\ For all bitcoin contracts traded
on LedgerX from inception through April 24, 2018, publicly available
data show that the median daily notional volume has been 55 bitcoins
and that the median daily notional value of open interest has been 663
bitcoins.\313\ But while these futures and derivative contract figures
are readily available, meaningful analysis of the size of the CME, CFE,
and LedgerX markets relative to the underlying bitcoin spot market is
challenging, because reliable data about the spot market, including its
overall size, are unavailable.\314\ The Commission notes that in recent
testimony CFTC Chairman Giancarlo characterized the volume of the
bitcoin futures markets as ``quite small.'' \315\ The Commission also
notes that the President and COO of Cboe recently acknowledged in a
letter to the Commission staff that ``the current bitcoin futures
trading volumes on Cboe Futures Exchange and CME may not currently be
sufficient to support ETPs seeking 100% long or short exposure to
bitcoin.'' \316\ These statements reinforce the Commission's conclusion
that there is insufficient evidence to determine that the bitcoin
derivatives markets are significant.
---------------------------------------------------------------------------

    \312\ These futures volume figures were calculated by Commission
staff using data published by CME and CFE on their websites.
    \313\ These derivative contract volume figures were calculated
by Commission staff using data published by LedgerX on its website.
    \314\ See Section III.B.1(b)(i), supra.
    \315\ CFTC Chairman Giancarlo testified: ``It is important to
put the new Bitcoin futures market in perspective. It is quite small
with open interest at the CME of 6,695 bitcoin and at Cboe Futures
Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 2018). At a price of
approximately $7,700 per Bitcoin, this represents a notional amount
of about $94 million. In comparison, the notional amount of the open
interest in CME's WTI crude oil futures was more than one thousand
times greater, about $170 billion (2,600,000 contracts) as of Feb[.]
2, 2018 and the notional amount represented by the open interest of
Comex gold futures was about $74 billion (549,000 contracts).''
Giancarlo Testimony, supra note 117, text accompanying nn.14-15.
    \316\ Letter from Chris Concannon, President and COO, Cboe
Global Markets, to Dalia Blass, Director, Division of Investment
Management, Commission, at 5 (Mar. 23, 2018), available at https://www.sec.gov/divisions/investment/cboe-global-markets-innovation-cryptocurrency.pdf.
---------------------------------------------------------------------------

    Thus, while LedgerX, CME, and CFE are regulated markets for bitcoin
derivatives, there is no basis in the record for the Commission to
conclude that these markets are of significant size. Additionally,
because bitcoin futures have been trading on CME and CFE only since
December 2017, the Commission has no basis on which to predict how
these markets may grow or develop over time, or whether or when they
may reach significant size.
    Although BZX has not demonstrated that a regulated bitcoin futures
market of significant size currently exists, the Commission is not
suggesting that the development of such a market would automatically
require approval of a proposed rule change seeking to list and trade
shares of an ETP holding bitcoins as an asset. The Commission would
need to analyze the facts and circumstances of any particular proposal
and examine whether any unique features of a bitcoin futures market
would warrant further analysis before approval.

F. The Protection of Investors and the Public Interest

    BZX contends that, if approved, its ETP would protect investors and
promote the public interest, but the Commission finds that BZX has not
made such a showing on the current record. The Commission must consider
any potential benefits in the broader context of whether the proposal
meets each of the applicable requirements of the Exchange Act. And
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.
1. Summary of Comments Received
    Several commenters asserted that access to bitcoin through an ETP
would extend regulatory protections to investors. One commenter asserts
that, if the U.S. were to approve an ETP and bring regulatory standards
and oversight to cryptocurrencies, investors would not see major
problems as they did with the Bitfinex and Mt. Gox hacks and that, if
the ETP were not approved, investors would be forced to use those less-
than-ideal exchanges.\317\ One commenter asserts that the alternative
to a regulated ETP is investors having to purchase

bitcoin at unregulated exchanges lacking SEC oversight.\318\ One
commenter asserts that disapproval of the ETP would create a more risky
environment for investors, who will not have the option of investing
through regulated exchanges.\319\ One commenter argues that, because of
the use of an auction process to determine NAV, the use of well-known
and respected Authorized Participants, and the environment that allows
market participants to use arbitrage techniques to hold pricing where
it should be, the risk to investors who invest in the ETP may be lower
than the risk borne by those who buy or sell bitcoin directly.\320\ And
another commenter asserts that, with innovative use cases emerging for
bitcoin and for the associated technology of blockchain each passing
day, investors seeking exposure to bitcoin should have options similar
to those currently available for physical bullion.\321\
---------------------------------------------------------------------------

    \317\ See Baird Letter, supra note 35. Bitfinex and Mt. Gox are
bitcoin trading venues that have reportedly suffered significant
losses from hacking. See Nathaniel Popper and Rachel Abrams,
Apparent Theft at Mt. Gox Shakes Bitcoin World, The New York Times
(Feb. 25, 2014), available at https://www.nytimes.com/2014/02/25/business/apparent-theft-at-mt-gox-shakes-bitcoin-world.html; Amie
Tsang, Bitcoin Plunges After Hacking of Exchange in Hong Kong, The
New York Times (Aug. 3, 2016), available at https://www.nytimes.com/2016/08/04/business/dealbook/bitcoin-bitfinex-hacked.html.
    \318\ See Keeler Letter, supra note 35.
    \319\ See Bang Letter, supra note 35.
    \320\ See Convergex Letter, supra note 36, at 2.
    \321\ See Virtu Letter, supra note 36, at 2.
---------------------------------------------------------------------------

    BZX argues that the Shares would significantly reduce or eliminate
costs and inefficiencies and would expand opportunities for investors
by providing an inexpensive vehicle to gain exposure to bitcoin in a
secure and easily accessible product that is familiar, transparent, and
meaningfully regulated.\322\ BZX asserts that, for prospective
investors in bitcoin, direct investment brings with it significant
inconvenience, complexity, expense, and risk. As investor demand for
exposure to bitcoin continues to increase, BZX asserts, these problems
grow larger. BZX argues that the Shares would significantly reduce or
completely remove each of these hurdles.\323\ BZX also argues that
Commission should approve the proposal because Commission oversight of
the trading of the ETP shares on a national securities exchange would
enhance the transparency of the underlying bitcoin markets.\324\ BZX
also asserts that the Gemini Exchange is uniquely positioned, because
of its regulatory status and licensing, to be a venue on which
traditional financial institutions will be comfortable transacting in
bitcoin, and BZX posits that these financial institutions provide a
bridge to the equities markets and other capital markets, improving
price discovery, liquidity, and transparency.\325\
---------------------------------------------------------------------------

    \322\ See BZX Letter II, supra note 13, at 8.
    \323\ See id. at 3, 8.
    \324\ See id. at 17; Petition for Review, supra note 4, at 16;
Overdahl Letter, supra note 36, at 13; Virtu Letter, supra note 36,
at 2.
    \325\ See BZX Letter II, supra note 13, at 20-21.
---------------------------------------------------------------------------

    The Overdahl Letter asserts that the approval of the proposed
bitcoin ETP would facilitate a cost-effective and convenient means for
investors to gain exposure to bitcoin similar to a direct investment in
bitcoin, improving portfolio diversification opportunities for
investors, and would help make bitcoin markets more transparent.\326\
The Overdahl Letter also argues that a bitcoin ETP will protect current
investors in bitcoin by providing regulatory certainty.\327\ The
Overdahl Letter predicts that the availability of a bitcoin ETP would
help attract professional market makers to the spot market, as well as
the market for bitcoin ETPs, and that the presence of these
professional market makers would add to the resilience of the spot
price on the exchange, improve liquidity and other measures of market
quality, and promote trading volume at the exchange.\328\
---------------------------------------------------------------------------

    \326\ See Overdahl Letter, supra note 36, at 13.
    \327\ See Overdahl Letter, supra note 36, at 13.
    \328\ See Overdahl Letter, supra note 36, at 3, 8.
---------------------------------------------------------------------------

    The Lewis Letter asserts that bitcoin is relatively uncorrelated
with other assets, enabling investors to construct more efficient
portfolios.\329\ BZX and the Lewis Letter also assert that listing the
shares on a national securities exchange and a shift from OTC trading
to trading on exchanges would make the overall bitcoin market more
transparent.\330\ Similarly, one commenter asserts that trading in the
Shares and the adoption of best practices, such as IIV and NAV
dissemination, will enhance the resiliency and efficiency of the market
for bitcoin.\331\
---------------------------------------------------------------------------

    \329\ See Lewis Letter I, supra note 65, at 11-16.
    \330\ See id. at 7. See also Petition for Review, supra note 4,
at 16.
    \331\ See Virtu Letter, supra note 36, at 2.
---------------------------------------------------------------------------

    One commenter believes that lack of regulation and consumer
protection also increases the chance and incentives for market price
manipulation and states that approving the ETP before structural
protections and controls are firmly in place would put investors at
undue risk.\332\ This commenter asserts that several fundamental flaws
make bitcoin a dangerous asset class to force into an exchange-traded
structure, including shallow trade volume, extreme hoarding, low
liquidity, hyper price volatility, a global web of unregulated bucket-
shop exchanges, high bankruptcy risk, and oversized exposure to trading
in countries where there is no regulatory oversight.\333\
---------------------------------------------------------------------------

    \332\ See Williams Letter, supra note 35, at 2-3.
    \333\ See id. at 1.
---------------------------------------------------------------------------

2. Discussion
    BZX, the Overdahl Letter, and other commenters assert that
investment in bitcoin through a ETP would reduce the expense,
complexity, and risk of bitcoin exposure.\334\ BZX, the Overdahl
Letter, and the Lewis Letter further assert that approval of the
Winklevoss Bitcoin Trust would make bitcoin markets more
transparent,\335\ and the Overdahl Letter argues that approval of the
proposal would protect investors by providing regulatory
certainty.\336\ Additionally, the Overdahl Letter and Lewis Letter
argue that approval of the proposal would improve the availability of
investment and portfolio diversification opportunities for
investors.\337\
---------------------------------------------------------------------------

    \334\ See Section III.F.1, supra.
    \335\ See supra notes 324-326, 330 and accompanying text.
    \336\ See supra note 327 and accompanying text.
    \337\ See supra notes 326, 329 and accompanying text.
---------------------------------------------------------------------------

    The Commission acknowledges that each of these is a potential
benefit of a bitcoin ETP. The Commission, however, must consider these
potential benefits in the broader context of whether the proposal meets
each of the applicable requirements of the Exchange Act. 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.\338\ Thus, even if a proposed rule change would provide
certain benefits to investors and the markets, the proposed rule change
may still fail to meet other requirements under the Exchange Act.\339\
For the reasons discussed above, BZX has not met its burden of
demonstrating an adequate basis in the record for the Commission to
find that the proposal is consistent with

Exchange Act Section 6(b)(5),\340\ and, accordingly, the Commission
must disapprove the proposal.
---------------------------------------------------------------------------

    \338\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
    \339\ The Commission also notes that, according to the Trust's
Registration Statement, investors in the Trust would still be
subject to some of the risks of holding bitcoin directly. See
Registration Statement, supra note 22, at 29 (``Security breaches,
`cyber attacks,' computer malware and computer hacking attacks have
been a prevalent concern in the Bitcoin Exchange Market since the
launch of the Bitcoin Network. Any cyber security breach caused by
hacking . . . could harm the Trust's business operations or result
in loss of the Trust's assets.'').
    \340\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

G. Additional Factors Supporting Disapproval

    As addressed in detail above, the Commission is disapproving the
proposed rule change because BZX has not met its burden to demonstrate
that its proposal is consistent with Exchange Act Section 6(b)(5). BZX
has neither entered into surveillance-sharing agreements with
regulated, bitcoin-related markets of significant size nor demonstrated
that alternative means of compliance with Exchange Act Section 6(b)(5)
would be sufficient. Because BZX has failed to carry its burden, the
proposed rule change must be disapproved.
    The Commission also notes several inconsistencies between the BZX's
proposed rule change and the Trust's Registration Statement that
reinforce the need to disapprove BZX's proposal. For example, in its
proposal, BZX points to the following factors that, in its view, weigh
in favor of approval. Those factors include ``the liquidity of the
market in the underlying commodity,'' ``the trading volume in
derivatives based on the underlying commodity,'' ``listing exchange
rules and procedures prohibiting use of material nonpublic
information,'' and ``listing exchange rules regarding trading halts.''
\341\ But those factors cannot be reconciled with BZX's current
proposal and thus provide independent confirmation that the proposed
rule change must be disapproved.
---------------------------------------------------------------------------

    \341\ Petition for Review, supra note 4, at 6-7 & n.17; see also
BZX Letter II, supra note 13, at 22-25.
---------------------------------------------------------------------------

    Liquidity of bitcoin markets. The Trust's Registration Statement
concedes that underlying bitcoin markets are insufficiently liquid to
protect against credible threats to those markets' integrity. The
Trust's Registration Statement, for example, acknowledges that
``operational interruption'' in large bitcoin exchanges ``may limit the
liquidity of bitcoin'' and ``result in volatile prices and a reduction
in confidence'' and that ``[t]rading on a single Bitcoin Exchange may
result in less favorable prices and decreased liquidity.'' \342\ The
Trust's characterizations of the bitcoin markets contrast with, for
example, the over-the-counter gold market, which the Commission noted
had ``unique liquidity and depth.'' \343\ This factor accordingly
weighs against approval of the proposed rule change.
---------------------------------------------------------------------------

    \342\ Registration Statement, supra note 22, at 22.
    \343\ Gold Order, supra note 197, 69 FR at 64619.
---------------------------------------------------------------------------

    Trading volume in derivatives based on the underlying commodity.
The Trust's Registration Statement recognizes that bitcoin derivatives
markets are nascent and insufficiently developed in regulated
marketplaces to serve meaningful purposes such as, for example,
providing investors with credible information regarding bitcoin's
future prospects.\344\ As the Trust's Registration Statement
acknowledges, ``[a] limited market currently exists for bitcoin-based
derivatives.'' \345\ As explained above, the market for bitcoin-based
derivatives is not yet well developed.\346\ That differs, for example,
from platinum and palladium markets, where futures products on those
metals had been trading for several decades before commodity-trust ETPs
were launched, and where the Commission has noted that exchanges are
able to adequately ``obtain information regarding trading'' in
regulated derivatives. This factor accordingly weighs against approval
of the proposed rule change.
---------------------------------------------------------------------------

    \344\ See Section III.E.3(a), supra.
    \345\ Registration Statement, supra note 22, at 59.
    \346\ See Section III.E.3(b), supra.
---------------------------------------------------------------------------

    Listing exchange rules and procedures prohibiting use of material
nonpublic information. Regardless of BZX's rules and procedures
regarding insider trading, many underlying bitcoin markets are, at
present, opaque.\347\ According to the Trust's Registration Statement,
for example, ``[m]any Bitcoin Exchanges do not provide the public with
significant information regarding their ownership structure, management
teams, corporate practices or regulatory compliance.'' \348\ The Trust
itself thus recognizes that there is a significant risk that material
nonpublic information may be used in a manner that could affect bitcoin
prices and, in turn, any ETP using bitcoin as an underlying asset. This
factor weighs against approval of the proposed rule change.
---------------------------------------------------------------------------

    \347\ See Section III.B.1, supra.
    \348\ Registration Statement, supra note 22, at 61.
---------------------------------------------------------------------------

    Listing exchange rules regarding trading halts. Regardless of BZX's
rules regarding trading halts, BZX has not explained how it will
respond to disruptions in trading in underlying bitcoin markets.\349\
The Trust's Registration Statement acknowledges the unusual and severe
nature of such trading halts in bitcoin, noting that ``[e]ven the
largest Bitcoin Exchanges have been subject to operational interruption
(e.g., the temporary shutdown of Mt. Gox due to distributed denial of
service attacks (`DDoS') attacks by hackers and/or malware, and its
permanent closure in February 2014).'' \350\ Moreover, as one commenter
noted, the Gemini Auction has failed on at least two occasions.\351\
Such trading halts could result in volatile prices and reduced
confidence in any ETP that uses bitcoin as an underlying asset.
Accordingly, this factor weighs against approval of the proposed rule
change.
---------------------------------------------------------------------------

    \349\ See Section II, supra.
    \350\ Registration Statement, supra note 22, at 22.
    \351\ See supra note 148 and accompanying text.
---------------------------------------------------------------------------

H. Other Comments

    Comment letters also addressed the following topics: \352\
---------------------------------------------------------------------------

    \352\ The Commission also received comments expressing support
for the proposal, without articulating any argument in favor of the
proposal. See Barraza Letter, supra note 35; Shad Letter, supra note
35.
---------------------------------------------------------------------------

     The nature and uses of bitcoin; \353\
---------------------------------------------------------------------------

    \353\ See Stolfi Letter I, supra note 35; Stolfi Letter II,
supra note 35; Chronakis Letter, supra note 35; Anonymous Letter
VII, supra note 35.
---------------------------------------------------------------------------

     the state of development of bitcoin as a digital asset;
\354\
---------------------------------------------------------------------------

    \354\ See Stolfi Letter II, supra note 35; Barish Letter IV,
supra note 35; ARK Letter, supra note 35; Lee Letter, supra note 35;
Chronakis Letter, supra note 35; Struna Letter, supra note 35;
Johnson Letter, supra note 35; Anonymous Letter V, supra note 35;
Whitman Letter, supra note 35; Anonymous Letter VI, supra note 35;
Barish Letter II, supra note 35; Ackerman Letter, supra note 35;
Medina Letter, supra note 35; Paslaqua Letter, supra note 35; BZX
Letter II, supra note 13, at 7-8.
---------------------------------------------------------------------------

     the use of bitcoin for illegal activities; \355\
---------------------------------------------------------------------------

    \355\ See Xin Lu Letter, supra note 35; Anonymous Letter VI,
supra note 35; Harris Letter, supra note 36, at 2.
---------------------------------------------------------------------------

     the inherent value of, and risks of investing in, bitcoin;
\356\
---------------------------------------------------------------------------

    \356\ See Stolfi Letter I, supra note 35; Stolfi Letter II,
supra note 35; Shatto Letter, supra note 35; Lethuillier Letter,
supra note 35; Delehanty Letter, supra note 35; Xin Lu Letter, supra
note 35; Neidhardt Letter, supra note 35; XBT Letter, supra note 35;
Williams Letter, supra note 35; ARK Letter, supra note 35; Kim
Letter, supra note 35; Dalla Val Letter, supra note 35; Paneque
Letter, supra note 35; Lee Letter, supra note 35; Chronakis Letter,
supra note 35; Struna Letter, supra note 35; Johnson Letter, supra
note 35; Whitman Letter, supra note 35; Primm Letter; supra note 35;
Anonymous Letter VI, supra note 35; Barish Letter III, supra note
35; Barish Letter V, supra note 35; Anonymous Letter VII, supra note
35; Ackerman Letter, supra note 35; Paslaqua Letter, supra note 35;
Harris Letter, supra note 36, at 2.
---------------------------------------------------------------------------

     the cost of electricity required to maintain the Bitcoin
network; \357\
---------------------------------------------------------------------------

    \357\ See Harris Letter, supra note 36, at 2.
---------------------------------------------------------------------------

     the desire of investors to gain access to bitcoin through
an ETP; \358\
---------------------------------------------------------------------------

    \358\ See R.D. Miller Letter, supra note 35; R. Miller Letter,
supra note 35; Hall Letter, supra note 35; Keeler Letter, supra note
35; Lethuillier Letter, supra note 35, at 2; Anonymous Letter I,
supra note 35; Herbert Letter, supra note 35; Fernandez Letter,
supra note 35; Tomaselli Letter, supra note 35; Circle Letter, supra
note 35; Baird Letter, supra note 35; Stolfi Letter I, supra note
35; Anderson Letter, supra note 35; P. Miller Letter, supra note 35;
Swiderski Letter, supra note 35; Situation Letter, supra note 35;
Paneque Letter, supra note 35; Nootenboom Letter, supra note 35;
Chronakis Letter, supra note 35; Turley Letter, supra note 35;
Kemble Letter, supra note 35; BZX Letter II, supra note 13, at 3, 8.

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

     investor understanding about bitcoin; \359\
---------------------------------------------------------------------------

    \359\ See Harris Letter, supra note 36, at 1.
---------------------------------------------------------------------------

     the appropriate measures for the Trust to secure its
bitcoin holdings against theft or loss; \360\
---------------------------------------------------------------------------

    \360\ See Barish Letter I, supra note 35; Barish Letter IV,
supra note 35; Neidhardt Letter, supra note 35; Dylan Letter, supra
note 35; Keeler Letter, supra note 35; Casey Letter I, supra note
35; Aronesty Letter, supra note 35; ARK Letter, supra note 35, at
10-11; Tull Letter, supra note 35; Stolfi Letter I, supra note 35;
Stolfi Letter II, supra note 35; Anonymous Letter I, supra note 35;
Lethuillier Letter, supra note 35, at 2-3; Delehanty Letter, supra
note 35; Casey Letter II, supra note 35; Anonymous Letter IV, supra
note 35; BZX Letter I, supra note 35, at 3, 6-7; Struna Letter,
supra note 35.
---------------------------------------------------------------------------

     whether the Trust should insure its bitcoin holdings
against theft or loss; \361\
---------------------------------------------------------------------------

    \361\ See Lethuillier Letter, supra note 35, at 2-3; Aronesty
Letter, supra note 35; Delehanty Letter, supra note 35; XBT Letter,
supra note 35; ARK Letter, supra note 35, at 10-11; Anonymous Letter
IV, supra note 35; BZX Letter I, supra note 35, at 6-7.
---------------------------------------------------------------------------

     the adequacy of the Trust's procedures for handling
potential ``forks'' in the bitcoin blockchain; \362\
---------------------------------------------------------------------------

    \362\ See Schulte Letter, supra note 35.
---------------------------------------------------------------------------

     the blockchain treatment of positions in the Shares,
including short positions or derivative positions; \363\
---------------------------------------------------------------------------

    \363\ See Anonymous Letter II, supra note 35, at 3; Tull Letter,
supra note 35.
---------------------------------------------------------------------------

     the potential conflicts of interest related to the
affiliations among the Sponsor, the Custodian, and the Gemini Exchange;
\364\
---------------------------------------------------------------------------

    \364\ See XBT Letter, supra note 35; Tull Letter, supra note 35;
Stolfi Letter II, supra note 35; ARK Letter, supra note 35, at 9-10;
Anonymous Letter III, supra note 35; BZX Letter I, supra note 35, at
5-6; Harris Letter, supra note 36.
---------------------------------------------------------------------------

     the legitimacy or enhanced regulatory protection that
Commission approval of the proposed ETP might confer upon bitcoin as a
digital asset; \365\ and
---------------------------------------------------------------------------

    \365\ See Stolfi Letter I, supra note 35; Circle Letter, supra
note 35; Kim Letter, supra note 35; Delehanty Letter, supra note 35;
Baird Letter, supra note 35; Anonymous Letter II, supra note 35, at
3; Keeler Letter, supra note 35; Dalla Val Letter, supra note 35;
Elron Letter, supra note 35; P. Miller Letter, supra note 35;
Marchionne Letter, supra note 35; Situation Letter, supra note 35;
Paneque Letter, supra note 35; Nootenboom Letter, supra note 35;
Chronakis Letter, supra note 35; Johnson Letter, supra note 35; Bang
Letter, supra note 35; Primm Letter, supra note 35; Christensen
Letter, supra note 35; Rigsby Letter, supra note 35.
---------------------------------------------------------------------------

     the value to the Commission of enhanced oversight over
bitcoin markets from approving the proposal.\366\
---------------------------------------------------------------------------

    \366\ See Convergex Letter, supra note 36, at 2.
---------------------------------------------------------------------------

    Ultimately, however, additional discussion of these tangential
topics is unnecessary, as they do not bear on the basis for the
Commission's decision to disapprove BZX's proposal.\367\
---------------------------------------------------------------------------

    \367\ The Commission also received a statement from SolidX
Management LLC, asserting that ``[t]o the extent the Commission is
inclined to reverse, modify, set aside or remand for further
proceedings the BatsBZX Proposed Rule Change, then in accordance
with Rule 431 and the factors set forth in Rule 411(b)(2) of the
Rules of Practice, the Commission should, as a matter of equity . .
. reverse, modify, set aside or remand for further proceedings its
March 28, 2017 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 (Release No. 34-80319; File No. SR-NYSEArca-2016-101).''
SolidX Letter, supra note 36, at 1. No timely petition to review the
March 28, 2017, disapproval order has been received from any party
and, under the Rule 431(c) of Commission's Rules of Practice, the
period for the Commission to order review of the issuance of that
disapproval order by delegated authority ended on April 7, 2017.
---------------------------------------------------------------------------

I. Basis for Disapproval

    As discussed above,\368\ the central factor for the Commission in
its current consideration of the BZX proposal is whether it is
consistent with Exchange Act Section 6(b)(5), which requires, among
other things, 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.\369\ Although BZX argues
that its proposal can satisfy these requirements because bitcoin
markets are inherently difficult to manipulate,\370\ and because
alternative means of identifying fraud and manipulation would be
sufficient,\371\ the Commission concludes that, as discussed above, BZX
has not established that these proffered means of compliance--alone or
in combination--are sufficient to meet the requirements of Exchange Act
Section 6(b)(5).\372\
---------------------------------------------------------------------------

    \368\ See Section I, supra.
    \369\ 15 U.S.C. 78f(b)(5).
    \370\ See Sections III.B.1(a) and III.B.2(a), supra.
    \371\ See Section III.C.1, supra.
    \372\ See Sections III.B.1(b), III.B.2(b), and III.C.2, supra.
---------------------------------------------------------------------------

    Thus, the Commission believes that BZX must demonstrate with
respect to this proposal that--like the listing exchanges for
previously approved commodity-trust ETPs \373\--it can enter into a
surveillance-sharing agreement with a regulated, bitcoin-related market
of significant size. As discussed above, however, BZX has not shown
that it can enter into such an agreement, because the proposal does not
support a conclusion that the markets for bitcoin or derivatives on
bitcoin are regulated markets of significant size.\374\ Therefore, BZX
has not met its burden to demonstrate that the proposed rule change is
consistent with Exchange Act Section 6(b)(5), and, accordingly, the
Commission is disapproving the proposed rule change.\375\
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    \373\ See Section III.D.2, supra.
    \374\ See Sections III.E.1(b), III.E.2(b), and III.E.3(b),
supra.
    \375\ In disapproving the proposed rule change, as modified by
Amendments No. 1 and 2, the Commission has considered its impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f); see also supra notes 322-326, 329 and accompanying text.
According to BZX, the Sponsor believes that the Shares will
represent a cost-effective and convenient means of gaining
investment exposure to bitcoin similar to a direct investment in
bitcoin, allowing investors to more effectively implement strategic
and tactical asset allocation strategies that use bitcoin, with
lower cost than that associated with the direct purchase, storage,
and safekeeping of bitcoin. See Amendment No. 1, supra note 1, 81 FR
at 76662; see also Overdahl Letter, supra note 36, at 13 (asserting
that approval of bitcoin ETP would improve the availability of
investment and portfolio diversification opportunities for
investors); Lewis Letter I, supra note 65, at 3, 11-16 (asserting
that a bitcoin-based ETP would enable ordinary investors to
construct more efficient portfolios). Regarding competition, BZX has
asserted that approval of the proposed rule change ``will enhance
competition among market participants, to the benefit of investors
and the marketplace.'' Amendment No. 1, supra note 1, 81 FR at
76669. BZX also asserts that the Shares ``would facilitate capital
formation in the bitcoin marketplace in a manner nearly identical to
other commodity-trust exchange traded products.'' BZX Letter II,
supra note 13, at 3, 30. Additionally, one commenter asserts that
approval of the Proposal would allow the United States to continue
its ``historic technological leadership,'' Baird Letter, supra note
35, while another commenter asserts that, with the approval of the
Proposal, ``bitcoin might become a much larger part of the world
economy at risk.'' Barish Letter III, supra note 35. The Commission
recognizes that BZX and commenters assert the economic benefits
described above, but, for the reasons discussed throughout, the
Commission is disapproving the proposed rule change because it does
not find that the proposed rule change is consistent with the
Exchange Act.
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    While the Commission concludes that BZX must demonstrate the
ability to enter into a surveillance-sharing agreement with a regulated
market of significant size related to bitcoin, and while this factor
strongly supports disapproval of BZX's proposed rule change, the other
factors BZX asks the Commission to weigh \376\ also support the
disapproval of the proposed rule change. Even considering these other
factors, the Commission does not find BZX's proposed rule change to be
consistent with Exchange Act 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.'' \377\
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    \376\ See Section III.G, supra.
    \377\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act,

that the proposed rule change, as modified by Amendments No. 1 and 2,
is consistent with the requirements of the Exchange Act and the rules
and regulations thereunder applicable to a national securities
exchange, and in particular, with Section 6(b)(5) of the Exchange Act.
    It is therefore ordered, pursuant to Rule 431 of the Commission's
Rules of Practice, that the earlier action taken by delegated
authority, Exchange Act Release No. 80206 (Mar. 10, 2017), 82 FR 14076
(Mar. 16, 2017), is set aside and, pursuant to Section 19(b)(2) of the
Exchange Act, SR-BatsBZX-2016-30 is disapproved.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2018-16427 Filed 7-31-18; 8:45 am]
 BILLING CODE 8011-01-P