[Federal Register Volume 85, Number 248 (Monday, December 28, 2020)]
[Notices]
[Pages 84403-84431]
[FR Doc No: 2020-28536]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90735; File No. SR-BOX-2020-14]

Self-Regulatory Organizations; BOX Exchange LLC; Order
Disapproving Proposed Rule Change, as Modified by Amendment No. 1, To
Adopt Rules Governing the Trading of Equity Securities on the Exchange
Through a Facility of the Exchange Known as the Boston Security Token
Exchange LLC

December 18, 2020.

Introduction

    On May 21, 2020, BOX Exchange LLC (``Exchange'' or ``BOX'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
adopt rules governing the listing and trading of equity securities that
would be National Market System (``NMS'') stocks on the Exchange
through a facility of the Exchange known as the Boston Security Token
Exchange LLC (``BSTX''). The proposed rule change was published for
comment in the Federal Register on June 1, 2020.\3\ On July 16, 2020,
pursuant to Section 19(b)(2) of the Exchange Act,\4\ the Commission
designated a longer period within which to either approve the proposed
rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 88946 (May 26,
2020), 85 FR 33454 (June 1, 2020) (SR-BOX-2020-14) (``Notice'').
Comments received on the proposed rule change are available at:
https://www.sec.gov/comments/sr-box-2020-14/srbox202014.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89328 (July 16,
2020), 85 FR 44338 (July 22, 2020). The Commission designated August
30, 2020, as the date by which it should approve, disapprove, or
institute proceedings to determine whether to disapprove the
proposed rule change.
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    On July 31, 2020, the Exchange filed Amendment No. 1 to the
proposed rule change, which replaced and superseded the proposed rule
change as originally filed.\6\ On August 12, 2020, the Commission
published the proposed rule change, as modified by Amendment No. 1, for
notice and comment and instituted proceedings to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.\7\ On November 24, 2020, pursuant to Section 19(b)(2)
of the Exchange Act, the Commission

designated a longer period within which to issue an order approving or
disapproving the proposed rule change, as modified by Amendment No.
1.\8\
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    \6\ In Amendment No. 1, the Exchange revised the proposal to:
(i) Change the name used to refer to BSTX-listed securities from
``security tokens'' to ``Securities''; (ii) eliminate the proposed
requirement for trades on the Exchange to settle one business day
after the trade date (``T+1''), which is not the settlement cycle
for NMS stock; (iii) add proposed rule text that the Exchange
describes as containing measures to ensure the accuracy of end-of-
day Security balance reports; (iv) add proposed rule text specifying
that the time by which Exchange members must report end-of-day
Security balances to the Exchange will be set forth by the Exchange
via regulatory circular; (v) provide additional description of
several aspects of the proposal, including end-of-day Security
balance reporting and implications of the trading of BSTX-listed
Securities on other national securities exchanges on the end-of-day
reporting process; and (vi) make technical and conforming changes.
Amendment No. 1 is available on the Commission's website at: https://www.sec.gov/comments/sr-box-2020-14/srbox202014-7570237-222233.pdf.
On July 31, 2020, the Exchange also submitted a letter to the
Commission requesting that the Commission concur with the Exchange's
conclusion that members that enter orders into BSTX's trading system
satisfy the conditions of Rule 11a2-2(T) under the Exchange Act (17
CFR 240.11a2-2(T)). See Letter from Lisa Fall, President, BOX, to
Vanessa Countryman, Secretary, Commission, and Tyler Raimo,
Assistant Director, Division of Trading and Markets, Commission
(July 31, 2020), available at https://www.sec.gov/comments/sr-box-2020-14/srbox202014-7506169-221931.pdf.
    \7\ See Securities Exchange Act Release No. 89536 (August 12,
2020), 85 FR 51250 (August 19, 2020) (``Order Instituting
Proceedings'' or ``OIP'').
    \8\ See Securities Exchange Act Release No. 90512 (Nov. 24,
2020), 85 FR 77327 (Dec. 1, 2020).
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    In Amendment No. 1 to the proposed rule change, the Exchange states
that the proposed rule change was previously filed with the Commission
as SR-BOX-2019-19, which the Exchange amended twice, and that the
current proposed rule change, SR-BOX-2020-14, is ``substantively
identical'' to previously-filed proposed rule change, SR-BOX-2019-19,
as modified by Amendment No. 2 thereto.\9\ SR-BOX-2019-19, as modified
by Amendment No. 2 thereto, was published for comment in the Federal
Register on March 6, 2020.\10\ The Commission received comments on the
substance of SR-BOX-2019-19, as well as responses submitted by BOX.\11\
BOX withdrew proposed rule change SR-BOX-2019-19 on May 12, 2020.\12\
As applicable and discussed below, the Commission considered comments
submitted on SR-BOX-2019-19 and SR-BOX-2020-14 in its review of SR-BOX-
2020-14.\13\
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    \9\ See OIP, supra note 7, 85 FR at 51251, n.14.
    \10\ See Securities Exchange Act Release No. 88300 (February 28,
2020), 85 FR 13242 (March 6, 2020) (Notice of Filing of Amendment
No. 2 to Proposed Rule Change). See also Securities Exchange Act
Release Nos. 87287 (October 11, 2019), 84 FR 56022 (October 18,
2019) (Notice of Filing of Proposed Rule Change) (noticing SR-BOX-
2019-19 as originally filed); and 88002 (January 16, 2020), 85 FR
4040 (January 23, 2020) (Notice of Filing of Amendment No. 1 and
Order Instituting Proceedings) (noticing Amendment No. 1 to SR-BOX-
2019-19 and instituting proceedings to determine whether to
disapprove the proposed rule change as modified by Amendment No. 1).
The only differences between SR-BOX-2019-19, as modified by
Amendment No. 2, and SR-BOX-2020-14 relate to: Removal of references
to Amendment No. 2; modification of a reference to Exhibit 5 to the
filing; modification of the description of BSTX ownership interests
to reflect the addition of a small percentage (less than 10%) of
non-voting economic interest-holders; updating a reference to a
related filing (SR-BOX-2019-37, which was also withdrawn and refiled
as SR-BOX-2020-16); corrections to citations; and grammatical
corrections.
    \11\ Comments on SR-BOX-2019-19 can be found at: https://www.sec.gov/comments/sr-box-2019-19/srbox201919.htm. These comments
also include response letters from the Exchange.
    \12\ See Securities Exchange Act Release No. 89018 (June 4,
2020), 85 FR 35458 (June 10, 2020) (Notice of Withdrawal of a
Proposed Rule Change).
    \13\ With respect to comments received on SR-BOX-2019-19 that
are discussed below, the Commission notes that the aspects of the
proposal that were the subject of commenters' concerns remain the
same in the current proposal, SR-BOX-2020-14.
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    This order disapproves the proposed rule change, as modified by
Amendment No. 1. The Exchange proposes to list and trade NMS stock that
would be uncertificated securities that are issued, traded, and cleared
like any other NMS stock. Unlike other NMS stock, however, the Exchange
proposes to require issuers and members eligible to participate on the
BSTX trading system (``BSTX Participants'') to comply with a protocol
that would enable BSTX to record and publicly disseminate BSTX
Participants' end-of-day securities ownership balances to the Ethereum
blockchain \14\ (such BSTX-listed stock to be referred to as
``Securities''). According to the Exchange, this information recorded
on the Ethereum blockchain would be ``ancillary'' to the official
ownership records maintained by participants at the securities
depository and would not convey legal ownership of Securities. For each
Security, the Ethereum blockchain would reflect the end-of-day balance
for each BSTX Participant, along with a balance allocated to an
``omnibus'' wallet. The Exchange proposes to use the omnibus wallet to,
among other things, record and publicly disseminate the aggregate
balance of Securities held by non-BSTX Participants, as well as to
account for other discrepancies between the total balance reported by
BSTX Participants and the total number of Securities outstanding. As
discussed in further detail below, this Order finds that that the
Exchange has not met its burden to demonstrate that the proposal is
consistent with Sections 6(b)(1), 6(b)(5), and 6(b)(8) of the Exchange
Act.
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    \14\ A ``blockchain'' is a type of distributed ledger, or peer-
to-peer database spread across a network, that records all
transactions in the network in digitally-recorded data packages
called blocks. The ``Ethereum blockchain'' is an open, or
permissionless, blockchain that is a record of events resulting from
the execution of code (smart contracts) on the blockchain. See
generally, Report of Investigation Pursuant to Section 21(a) of the
Securities Exchange Act of 1934: The DAO, Release No. 81207, 2017 WL
7184670, at *1-*2 & n.6 (July 25, 2017) (``The DAO Report'').
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    Specifically, the Commission examines in Section III.B how the
Exchange's proposal would result in inaccurate BSTX-listed Security
ownership balances being publicly disseminated on the Ethereum
blockchain. As explained in more detail below, there are several ways
in which inaccurate information from BSTX would be publicly available
on the Ethereum blockchain, including: (i) Security balances published
to the Ethereum blockchain would be inaccurate to the extent that BSTX
Participants report inaccurate information or are late in reporting;
(ii) Security balances would be stale because they would represent a
snapshot of a BSTX Participant's depository account balance at the end
of the last trading day and thus fail to reflect transactions that have
not yet settled; (iii) the omnibus wallet would include Security
balances that cannot be attributed to the respective BSTX Participant
due to such inaccurate or late reporting as well as the holdings of
non-BSTX Participants; and (iv) BSTX Participants' short and long
positions, both of which would be reported, would be indistinguishable
when represented on the Ethereum blockchain, and thereby would provide
an economically inaccurate picture of Security balances. Accordingly,
as the Exchange concedes, there are a variety of circumstances in which
the publicly disseminated information reflected on the Ethereum
blockchain would not represent true holdings. Furthermore, exacerbating
the inaccuracy of the information that the Exchange would publicly
disseminate on the Ethereum blockchain, the Exchange has not
demonstrated whether or how it would surveil for, reconcile, or address
these inaccuracies. The Commission finds, based on the significant risk
that this inaccurate information would confuse and mislead investors,
that the Exchange has not met its burden to demonstrate that the
proposed rule change is consistent with the protection of investors and
the public interest, in accordance with Section 6(b)(5) of the Exchange
Act. The Commission separately finds that, based on the significant
risk that investors will use this inaccurate public information about
Security ownership in their investment decisions, the Exchange has not
met its burden to demonstrate that the proposed rule change is
consistent with the protection of investors and the public interest, in
accordance with Section 6(b)(5) of the Exchange Act.
    In addition, the Commission examines in Section III.C significant
operational aspects of the Exchange's proposal that the Exchange has
not sufficiently explained, thereby making it difficult for potential
BSTX Participants and other market participants to understand the
obligations that the Exchange would impose. The Commission examines
below several aspects of the Exchange's proposal, including: (i) The
Exchange's proposed procedures relating to the recording and
dissemination of end-of-day Security ownership balances; (ii) the costs
or other burdens that would be imposed on market participants to comply
with the proposed requirement to report end-of-day Security ownership
balances; (iii) the Exchange's standard or procedures to suspend the
end-of-day Security reporting requirements; and (iv) the requirements
the Exchange would place on listed companies, and in particular,

how trading might be impacted between two classes of securities of an
issuer--one listed on BSTX and one listed on another national
securities exchange--where the only distinction may be that one has the
necessary smart contracts to comply with BSTX's requirements. The
Commission finds, due to the lack of information about BSTX's intended
operations, that the Exchange has not met its burden to demonstrate
that its proposed rule change would prevent fraudulent and manipulative
acts and practices, facilitate transactions in securities, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and protect investors and the public
interest, and is not designed to permit unfair discrimination,
consistent with Section 6(b)(5) of the Exchange Act. The Commission
also finds, due to a lack of explanation about how the Exchange would
carry out these functions and fulfill its obligation to be organized
and be able to carry out the purposes of the Exchange Act, and to
comply and enforce compliance by its members with its own rules, that
the Exchange has not met its burden to show that its proposed rule
change is consistent with Section 6(b)(1) of the Exchange Act.
    Lastly, the Commission examines in Section III.D how another
national securities exchange could provide end-of-day Security
ownership balance reporting functionality for its members. The
Commission finds, due to the lack of explanation of how another
national securities exchange that seeks to extend unlisted trading
privileges (``UTP'') to a BSTX-listed Security could feasibly provide
an end-of-day Security ownership balance reporting functionality to its
members, that the Exchange has not met its burden to demonstrate that
its rules do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act, as
required by Section 6(b)(8) of the Exchange Act. Specifically, the
Exchange has not sufficiently addressed its control over the end-of-day
reporting process or the feasibility of another national securities
exchange setting up its own parallel process for end-of-day reporting.
Without a sufficient understanding of the burdens on competition, the
Commission cannot determine if these burdens are necessary or
appropriate in furtherance of the Exchange Act.
    Although the Commission is disapproving this proposed rule change,
the Commission emphasizes that it encourages and supports innovation
and the application of beneficial technologies in our securities
markets, and its disapproval of this proposed rule change does not rest
on an evaluation of whether blockchain technology has utility or value
as an innovation, generally or as applied to the functions of a
national securities exchange. The Commission believes that there is
value in distributed ledger technology and related innovation, which
offers the ability to share information, transfer value, and record
transactions in a distributed digital environment. However, the public
dissemination of information known to be inaccurate or misleading, as
here, irrespective of whether it takes place through a public
blockchain, a public database, a public website, or a published
circular, is problematic.

Description of the Proposed Rule Change

    As described in the OIP,\15\ the Exchange proposes to adopt listing
standards for certain NMS stocks that the Exchange refers to as
``Securities.'' For each class of ``Securities'' listed by BOX, the
Exchange would employ a functionality to record and publicly
disseminate on the Ethereum blockchain end-of-day ownership balances
reported to the Exchange by BSTX Participants.\16\ The Exchange is also
proposing rules governing the trading of these NMS stocks through a
facility of the Exchange known as BSTX, which would operate a fully
automated, price-time priority execution system (``BSTX System'').\17\
According to the Exchange, the end-of-day Security ownership balance
information would constitute ``ancillary'' or supplemental records of
end-of-day ownership balances and legal ownership would be separately
established and evidenced by operation of commercial law. The Exchange
contends that the official records of security ownership would be
maintained by participants at The Depository Trust Company (``DTC''),
and attribution of a ``Security'' to a particular wallet address on the
Ethereum blockchain would not convey ownership of shareholder equity in
the issuer of the NMS stock.\18\
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    \15\ See OIP, supra note 7.
    \16\ See OIP, supra note 7, 85 FR at 51250-51. A ``BSTX
Participant'' would be a participant that is authorized to trade
Securities on the Exchange. See proposed BSTX Rule 17000(a)(11).
    \17\ See OIP, supra note 7, 85 FR at 51250. Pursuant to a
separate proposed rule change, the Exchange proposes to establish
BSTX as a facility of the Exchange that will operate a market for
the trading of securities (``BSTX Market'') and adopt the BSTX
Second Amended and Restated LLC Agreement. See Securities Exchange
Act Release No. 89537 (August 12, 2020), 85 FR 50850 (August 18,
2020) (SR-BOX-2020-16) (Notice of Filing of Amendment No. 1 and
Order Instituting Proceedings to Determine Whether to Approve or
Disapprove a Proposed Rule Change, as Modified by Amendment No. 1,
in Connection with the Proposed Establishment of the Boston Security
Token Exchange LLC as a Facility of the Exchange) (``Amended BSTX
Governance Proposal''). See also Securities Exchange Act Release No.
88949 (May 26, 2020), 85 FR 33258 (June 1, 2020) (``BSTX Governance
Proposal''). Among other things, the Amended BSTX Governance
Proposal sets forth the proposed ownership structure for BSTX. The
Exchange states that without Commission approval of the trading
rules, the Exchange would not permit BSTX to commence operations of
the BSTX Market, and that the Exchange's regulatory oversight
responsibilities with respect to BSTX would not be triggered unless
SR-BOX-2020-16 is approved by the Commission. See Amended BSTX
Governance Proposal, 85 FR at 50850.
    \18\ See OIP, supra note 7, 85 FR at 51253, 51257.
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    According to the Exchange, the Exchange would record Security
ownership balances on the Ethereum blockchain using a protocol standard
determined by BSTX that each security admitted to trading on BSTX would
be required to follow (the ``BSTX Protocol'').\19\ The Exchange
proposes that each BSTX Participant would be required to establish,
either directly or through a carrying firm, what the Exchange calls a
``whitelisted'' wallet address (hereinafter ``allowlisted'') to which
its end-of-day Security ownership balances may be recorded.\20\ The
Exchange proposes that, each business day, each BSTX Participant would
be required to report to BSTX certain end-of-day Security ownership
balances in a manner and form acceptable to BSTX.\21\ The Exchange
would then provide this information to a Wallet Manager \22\ to update
the Ethereum blockchain to reflect changes in ownership of Securities
and publicly disseminate the ownership balance for each wallet
address.\23\ The Exchange proposes that a BSTX Participant shall
promptly send a corrected end-of-day Security balance report to the
Exchange upon the BSTX Participant's discovery that it submitted an
inaccurate end-of-day report that has not already been corrected or
superseded.\24\ If the Exchange has reason to believe that Security
balances reported by one or

more BSTX Participants may be inaccurate, the Exchange may request
additional information regarding the applicable reports and balances
from any BSTX Participant to which the BSTX Participant shall promptly
respond.\25\ Under the proposal, the Exchange would, in its discretion,
be able to suspend the requirement that a BSTX Participant establish a
wallet address and report its end-of-day ownership balance with respect
to any BSTX Participant and/or with respect to one or more Securities,
as applicable.\26\ Non-BSTX Participants that may trade Securities
would not be subject to the requirement to obtain an allowlisted wallet
address or to report their end-of-day Security ownership balances, and
would not be able to voluntarily report end-of-day Security ownership
balances to BSTX.\27\
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    \19\ See OIP, supra note 7, 85 FR at 51254-56.
    \20\ See OIP, supra note 7, 85 FR at 51256-57. According to the
Exchange, an allowlisted wallet address would be a permissioned
number associated with a particular market participant to which
Securities may be sent. See id. at 51255-56.
    \21\ See OIP, supra note 7, 85 FR at 51258. The Exchange states
that BSTX Participants who fail to comply with the end-of-day
ownership reporting requirement may be subject to disciplinary
action. See OIP, supra note 7, 85 FR at 51259.
    \22\ The Exchange proposes to define a ``Wallet Manager'' as a
party approved by BSTX to operate software compatible with the BSTX
Protocol. See proposed BSTX Rule 17000(a)(31).
    \23\ See OIP, supra note 7, 85 FR at 51258-59.
    \24\ See OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule
17020(e)(1).
    \25\ See OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule
17020(e)(2).
    \26\ See OIP, supra note 7, 85 FR at 51260; proposed BSTX Rule
17020(f).
    \27\ See OIP, supra note 7, 85 FR at 51257.
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    According to the Exchange, the Ethereum blockchain could contain an
imprecise distribution of Securities among holders and display
inaccurate information about Security ownership balances if BSTX
Participants inaccurately report end-of-day Security balances to BSTX
or if the number of reported Securities exceeds the number of
outstanding Securities of a particular issuance.\28\ To account for
instances in which a BSTX Participant fails to report or inaccurately
reports its end-of-day ownership balance, as well as for the Security
positions of non-BSTX Participants who are not subject to the end-of-
day ownership reporting requirement, the Exchange would provide
information to the Wallet Manager to attribute all such unreported
Security ownership balances for a given Security to a single omnibus
wallet address.\29\ The Exchange states that the Ethereum blockchain
would publicly display Security balances that would reflect the end-of-
day ownership balances reported to BSTX by BSTX Participants pursuant
to proposed BSTX Rule 17020 \30\ and a balance allocated to the omnibus
wallet address for any type of Security for which the sum of the
reported positions is less than the number of Securities known by the
Exchange to be issued and outstanding.\31\ The Exchange acknowledges
that there is a risk of situations in which it would be unable to
communicate the end-of-day Security ownership balances to the Wallet
Manager or the Wallet Manager would be unable to update the
blockchain.\32\ The Exchange states that it would not make public which
BSTX Participant is associated with a particular wallet address or
identify which address is the omnibus wallet address.\33\
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    \28\ See OIP, supra note 7, 85 FR at 51260. See also OIP, supra
note 7, 85 FR at 51295 (``The Exchange acknowledges that, in certain
circumstances, a BSTX Participant subject to the requirements of
proposed Rule 17020 could fail to report end-of-day Security
balances to BSTX in a timely manner, inaccurately report such
balances, or fail to obtain a wallet address prior to acquiring a
position in a Security. Such failures would impair the ability of
the Exchange to report complete end-of-day Security balance
information . . . to the Wallet Manager(s) who [would] update the
Security balance information that is reflected on the Ethereum
blockchain.'').
    \29\ See OIP, supra note 7, 85 FR at 51259; proposed BSTX Rule
17020(d).
    \30\ Proposed BSTX Rule 17020 sets forth the proposed end-of-day
reporting requirements for BSTX Participants. See proposed BSTX Rule
17020.
    \31\ See OIP, supra note 7, 85 FR at 51259-60.
    \32\ See OIP, supra note 7, 85 FR at 51260, 51262.
    \33\ See OIP, supra note 7, 85 FR at 51261.
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    The Exchange proposes that Securities would be eligible for trading
on other national securities exchanges that extend unlisted trading
privileges to them. According to the Exchange, the end-of-day Security
ownership balance reporting by BSTX Participants and the public
dissemination of the information on the Ethereum blockchain would not
impact the ability of Securities to trade on other national securities
exchanges or over-the-counter (``OTC'').\34\
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    \34\ See OIP, supra note 7, 85 FR at 51262.
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    The Exchange also proposes rules for participation on BSTX,
business conduct for BSTX Participants, financial and operational
provisions for BSTX Participants, supervision, trading practices,
discipline, trading on the BSTX System, and market making.\35\ In
addition, the Exchange proposes listing standards that, according to
the Exchange, are similar to the listing standards of NYSE
American.\36\ The Exchange proposes that these listing standards would
also specify that all listed Securities comply with the BSTX
Protocol.\37\ The Exchange states that it is not proposing rules that
would support its extension of UTP to NMS stock listed on other
national securities exchanges.\38\
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    \35\ See OIP, supra note 7, 85 FR at 51264-77. The trading rules
that the Exchange proposes include provisions for primary
distributions of securities to be made through the Exchange,
including using an auction process. See id. at 51270.
    \36\ See OIP, supra note 7, 85 FR at 51277.
    \37\ See OIP, supra note 7, 85 FR at 51278.
    \38\ See OIP, supra note 7, 85 FR at 51251. The Exchange also
states that, therefore, it would only trade Securities listed on
BSTX unless and until it proposes and receives Commission approval
for rules that would support trading in other types of securities,
including through the extension of UTP to other NMS stocks. Id.
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    According to the Exchange, all transactions in Securities would
clear and settle in accordance with the rules, policies, and procedures
of registered clearing agencies.\39\ The Exchange states that BSTX
anticipates that DTC would serve as the securities depository for
Securities and that confirmed trades in Securities on BSTX would be
transmitted to National Securities Clearing Corporation (``NSCC'') for
clearing.\40\ The Exchange states that Security transactions occurring
on BSTX would be cleared through NSCC using a T+2 settlement cycle, as
is the case today for all other exchanges that facilitate trading in
NMS stock.\41\
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    \39\ See OIP, supra note 7, 85 FR at 51253.
    \40\ See OIP, supra note 7, 85 FR at 51253.
    \41\ See OIP, supra note 7, 85 FR at 51254.
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Discussion

Applicable Standard for Review

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must
approve the proposed rule change of a self-regulatory organization
(``SRO'') if the Commission finds that the proposed rule change is
consistent with the requirements of the Exchange Act and the applicable
rules and regulations thereunder; if it does not make such a finding,
the Commission must disapprove the proposed rule change.\42\
Additionally, under Rule 700(b)(3) of the Commission's Rules of
Practice, the ``burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change.'' \43\ The description of a proposed rule change, its
purpose and operation, its effect, and a legal analysis of its
consistency with applicable requirements must be sufficiently detailed
and specific to support an affirmative Commission finding.\44\ Any
failure of an SRO to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
applicable rules and regulations issued thereunder that are applicable
to the SRO.\45\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\46\
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    \42\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \43\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
    \44\ See id.
    \45\ See id.
    \46\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).

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    In reviewing the proposed rule change, the Commission has analyzed
information provided by the Exchange and issues raised by commenters.
Based on the information before the Commission, for each of the reasons
discussed below (whether viewed independently or in combination), the
Commission is unable to find that the Exchange has met its burden to
show that the proposed rule change is consistent with the Exchange Act
and the applicable rules and regulations thereunder, including Exchange
Act Sections 6(b)(1), 6(b)(5), and 6(b)(8), and is therefore unable to
find that the proposal is consistent with the Exchange Act.

Whether BOX Has Met its Burden To Demonstrate That the Proposal Is
Consistent With Section 6(b)(5) of the Exchange Act Notwithstanding the
Risk That the Dissemination of Inaccurate Information About BSTX-Listed
Securities Would Mislead Investors

    Pursuant to the Exchange's proposal, the Exchange would disseminate
inaccurate Security ownership balances to the public under many
circumstances. The Commission has grave concerns when an SEC
registrant, such as a national securities exchange that is an SRO,
knowingly disseminates inaccurate information to the public,
irrespective of whether it takes place through a public blockchain, a
public database, a public website, or a published circular. As
discussed below, the Exchange has failed to meet its burden to
demonstrate that its proposal is consistent with protection of
investors and the public interest, pursuant to Section 6(b)(5) of the
Exchange Act, given that the publicly disseminated Security ownership
balances could be inaccurate, which creates a significant risk of
confusing and misleading investors. Furthermore, the Commission has
concerns that the inaccurate Security ownership balance information
disseminated to the public would impact investor decisions, and the
Exchange has also failed to meet its burden to demonstrate how
investors' use of inaccurate Security ownership balance information is
consistent with the protection of investors and the public interest,
pursuant to Section 6(b)(5) of the Exchange Act.
1. Exchange's Representations and Comments Received
    The Exchange states that the proposed rules contemplate the use of
smart contract \47\ functionality to record end-of-day Security \48\
position balance information to the Ethereum blockchain as an
``ancillary'' recordkeeping mechanism.\49\ In the context of its
proposal, the Exchange states that a Token \50\ on the blockchain would
be akin to a digital representation of shareholder equity in a legal
entity that is organized under the authority of state or federal law
and that meets BSTX's listing standards.\51\ The Exchange further
states that attribution of a Token to a particular wallet address would
not convey ownership of shareholder equity in the issuer and that,
instead, official records of ownership would be maintained at DTC.\52\
The Exchange states that, pursuant to its proposal, ownership of
Securities would be able to be transferred without regard to the
blockchain-based recordkeeping functionality.\53\
---------------------------------------------------------------------------

    \47\ A ``smart contract'' has been defined as a computerized
transaction protocol that executes terms of a contract with the
general objectives to satisfy common contractual conditions (such as
payment terms, liens, confidentiality, and even enforcement),
minimize exceptions both malicious and accidental, and minimize the
need for trusted intermediaries. See The DAO Report, supra note 13,
at *2 & n.3.
    \48\ The Exchange defines ``Security'' as an ``NMS stock, as
defined in Rule 600(b)(47) of the Exchange Act, trading on the BSTX
System and for which ancillary blockchain records are maintained
under these Rules.'' See proposed BSTX Rule 17000(a)(30). Exchange
Act Rule 600(b)(47) defines ``NMS security'' as ``any security or
class of securities for which transaction reports are collected,
processed, and made available pursuant to an effective transaction
reporting plan, or an effective national market system plan for
reporting transactions in listed options.'' 17 CFR 242.600(b)(47).
Exchange Act Rule 600(b)(48) then defines ``NMS stock'' as ``any NMS
security other than an option.'' 17 CFR 242.600(b)(48). The Exchange
states that it proposes to use the term ``Security'' to refer to
BSTX-listed securities to distinguish them from other securities
that are not designed to use blockchain technology as an ancillary
recordkeeping mechanism. See OIP, supra note 7, 85 FR at 51251,
n.15. For purposes of this Order, where discussing statements by
commenters on previous versions of the proposal that used the term
``security token,'' which term the Exchange replaced with
``Security'' in Amendment No. 1, this Order will use the term
``Security.'' See supra note 6.
    \49\ See OIP, supra note 7, 85 FR at 51263. The Exchange uses
the term ``tokens'' in its proposal to mean, in the context of
blockchain technology, blockchain-based abstractions that can be
owned and that represent assets, currency, or access rights. See
OIP, supra note 7, 85 FR at 51255.
    \50\ This Order will use the term ``Token'' to refer more
specifically to representations of Securities on a smart contract on
the Ethereum blockchain that the Exchange would use to represent the
reported end-of-day Security ownership balances for a particular
Security. Securities listed and traded on BSTX would not be issued
and/or transferred using distributed ledger or blockchain
technology.
    \51\ See OIP, supra note 7, 85 FR at 51255. The Exchange states
that this digital representation of a Security associated with a
particular wallet address reflects an ancillary record of Security
ownership based on data provided to BSTX by BSTX Participants. See
OIP, supra note 7, 85 FR at 51255, n.52.
    \52\ See OIP, supra note 7, 85 FR at 51255. See also id. at
51261 (stating that the Security balance information as recorded on
the Ethereum blockchain in Token form will not reflect legal
ownership).
    \53\ See OIP, supra note 7, 85 FR at 51252 (also stating that
Securities would trade, clear, and settle in the same manner as all
other NMS stocks traded today).
---------------------------------------------------------------------------

    The Exchange states that, for each Security, the Ethereum
blockchain would reflect the end-of-day Security ownership balance
associated with each BSTX Participant's wallet address, along with a
balance allocated to an omnibus wallet address.\54\ The Exchange states
that it expects that each Security would have a designated omnibus
wallet address.\55\ The Exchange states that it would use an omnibus
wallet address to account for instances in which a BSTX Participant
fails to report or to accurately report its end-of-day Security
ownership balance, as well as to account for the positions of Security
holders that are not BSTX Participants and therefore not subject to the
end-of-day Security ownership balance reporting requirement.\56\
According to the Exchange, it would determine the number of Tokens
(which represent Securities) to be allocated to the omnibus wallet
address by subtracting the sum of the Security ownership balances
reported for a particular Security by BSTX Participants from the total
outstanding number of that particular Security.\57\ The Exchange also
recognizes that the omnibus wallet address would display the entire
outstanding balance of a Security if only non-BSTX Participants hold
the entire outstanding balance of a particular Security.\58\
---------------------------------------------------------------------------

    \54\ See OIP, supra note 7, 85 FR at 51261. The end-of-day
Security ownership balance reported by a BSTX Participant or its
carrying firm to the Exchange would reflect the total number of
Securities for each class of Security that are credited to each
account of the BSTX Participant at the securities depository (i.e.,
DTC), or the total number of Securities for each class of Security
that are credited to the BSTX Participant by its carrying firm. See
proposed BSTX Rule 17020(b).
    \55\ See OIP, supra note 7, 85 FR at 51259.
    \56\ See OIP, supra note 7, 85 FR at 51259.
    \57\ See OIP, supra note 7, 85 FR at 51259. See also proposed
BSTX Rule 17020(d).
    \58\ See OIP, supra note 7, 85 FR at 51260, n.80.
---------------------------------------------------------------------------

    According to the Exchange, Security ownership balance information
reported to the Ethereum blockchain would be publicly available at the
website Etherscan.io.\59\ The Exchange states that, from Etherscan.io,
an individual member of the public would be able to search for the name
of a particular Security and see the holders of Tokens representing the
Securities by wallet address and the quantity associated with each
holder, along with other

information.\60\ The observable quantity would reflect the last end-of-
day Security ownership balances that the Exchange received from BSTX
Participants and provided to the Wallet Manager to update the Ethereum
blockchain.\61\ The Exchange describes that a wallet address is
essentially a string of numbers and characters.\62\ The Exchange
represents that it would not make public which wallet address is
associated with a particular BSTX Participant or with the omnibus
wallet address.\63\ The Exchange states that an individual member of
the public observing Security ownership balances would not be able to
determine whether a particular wallet address represented, for example,
a carrying firm reporting end-of-day Security ownership balances on
behalf of multiple BSTX Participants, an individual BSTX Participant,
or the omnibus wallet address.\64\ In addition, the Exchange states
that an individual member of the public would not to be able to tell
whether a particular wallet address was long or short the shares.\65\
---------------------------------------------------------------------------

    \59\ See OIP, supra note 7, 85 FR at 51261.
    \60\ See OIP, supra note 7, 85 FR at 51261 (stating that, for
example, this other information may include transfers made as a
result of the Wallet Manager's allocation process).
    \61\ See OIP, supra note 7, 85 FR at 51529. See infra Section
III.C.2 for discussion of the process by which each BSTX
Participant, directly or through its carrying firm, would report
end-of-day Security ownership balances to BSTX and BSTX would
provide this information, along with information pertaining to the
balance to be allocated to the omnibus wallet address, to the Wallet
Manager.
    \62\ See OIP, supra note 7, 85 FR at 51261.
    \63\ See OIP, supra note 7, 85 FR at 51261.
    \64\ See OIP, supra note 7, 85 FR at 51261. The Exchange further
states that an individual member of the public would not be able to
determine which underlying customers of a BSTX Participant held the
Securities or whether the BSTX Participant owned the Securities
proprietarily. See id. The Exchange asserts its belief that the
Security ownership balance information that would be publicly
available on the Ethereum blockchain would be sufficiently anonymous
to address privacy concerns related to such information. See id. The
Exchange further states that it believes that the use of anonymized
wallet addresses to track end-of-day ownership balances may prevent
fraudulent and manipulative acts and practices, because, according
to the Exchange, obscuring the identities of the wallet address
owners may make it difficult to misuse any private information
associated with these wallet addresses. See id. at 51262.
    \65\ See OIP, supra note 7, 85 FR at 51261. The Exchange states
that individual members of the public would not be able to know if a
position is long or short because the reported end-of-day Security
ownership balances would reflect balances as reported by DTC to BSTX
Participants and their carrying firms. See id. at 51261, n.90.
Therefore, according to the Exchange, if a BSTX Participant borrowed
Securities and the borrowed Securities were moved to its DTC account
(or the DTC account of its carrying firm on its behalf), the
borrowed Securities would appear to be a long position in the
Security, even if the BSTX Participant was taking a short position.
See id.
---------------------------------------------------------------------------

    The Exchange recognizes that end-of-day Token balances (which
represent Securities) ``may be inaccurate or unavailable.'' \66\ The
Exchange also acknowledges that there are many circumstances where the
end-of-day Security ownership balances published on the Ethereum
blockchain would not reflect the correct distribution of a Security
among holders of the Security, or even among BSTX Participants holding
the Security.\67\ According to the Exchange, the Ethereum blockchain
could reflect inaccurate information if BSTX Participants report
inaccurate end-of-day Security balances.\68\ The Exchange states that
there could be situations where the number of reported Securities
exceeds the number of outstanding Securities of a particular
issuance.\69\ The Exchange also states that there could be situations
in which the Exchange is unable to communicate end-of-day Security
ownership balances to the Wallet Manager or the Wallet Manager is
unable to update the blockchain.\70\ According to the Exchange, even if
there were a disruption relating to the end-of-day Security balance
reporting process, there would not be any impact on the ability to
trade, clear, or settle Security transactions, because the end-of-day
Security balance reporting process is solely an ``ancillary''
recordkeeping mechanism.\71\
---------------------------------------------------------------------------

    \66\ OIP, supra note 7, 85 FR at 51262. As discussed further
below, the Exchange asserts that it believes that inaccuracies in
the reported end-of-day Security ownership balances ``should not be
routine'' and that the Exchange has adopted a number of mechanisms
against potential inaccuracies. Id. at 51262, n.95. See also infra
notes 116-120 and accompanying text. The Exchange states that it has
described ``potential scenarios where potential inaccuracies could
theoretically occur in the interest of full transparency.'' OIP,
supra note 7, 85 FR at 51262, n.95.
    \67\ See OIP, supra note 7, 85 FR at 51260. The Exchange states
that, while the ancillary recordkeeping mechanism will provide
additional transparency into Securities holdings, there are
limitations in what the Ethereum blockchain will reflect with regard
to end-of-day Security ownership balances as an ancillary
recordkeeping mechanism, given that all non-BSTX Participants'
balances will be aggregated and reflected in an omnibus wallet
address for each Security. See id. at 51261-62.
    \68\ See OIP, supra note 7, 85 FR at 51260.
    \69\ See OIP, supra note 7, 85 FR at 51260. The Exchange also
gives examples of how the omnibus wallet address for each Security
could have greater or fewer Tokens as a result of a misreport by a
BSTX Participant, particularly if a Security is held entirely by
BSTX Participants and a BSTX Participant over-reports. See id. In
the case of an under-report by a BSTX Participant (e.g., owns 100 of
XYZ Securities, but reports only 90), the omnibus address for XYZ
would have an additional 10 Tokens allocated to it; and in the case
of an over-report (e.g., owns 100 of XYZ Securities, but reports
110), the omnibus address for XYZ may have 10 additional Tokens
allocated to it. See OIP, supra note 7, 85 FR at 51259-60, n.79.
    \70\ See OIP, supra note 7, 85 FR at 51260. See infra Sections
III.C.1 and III.C.2 for discussion of the process by which BSTX
would provide end-of-day Security balances to the Wallet Manager and
the Wallet Manager would update the blockchain.
    \71\ See OIP, supra note 7, 85 FR at 51260-61. See also id. at
51262 (stating that, in the event of any disruption to the
blockchain, the architecture of the Security (and its Token
representation), or the end-of-day Security ownership balance
reporting process, there would be no impact on the ability of market
participants to trade Securities or on current balances of
Securities held by each market participant through the facilities of
DTC).
---------------------------------------------------------------------------

    The Exchange asserts that it does not believe that the records of
Security ownership balance information published on the blockchain
would be likely to cause investor confusion, because an individual
member of the public observing the blockchain would not have any
similar source of information with which to compare it.\72\ According
to the Exchange, the ownership balances related to Security ownership
of BSTX Participants and other market participants are not available
through another medium.\73\ The Exchange also states that Security
balance information recorded on the Ethereum blockchain would not
reflect legal ownership of Securities, and the identities of BSTX
Participants corresponding to each wallet address, as well as the
identity of the omnibus wallet address, would not be made public.\74\
The Exchange represents that it will not knowingly provide inaccurate
end-of-day Security ownership balance information to the Wallet
Manager.\75\ Further, according to the Exchange, any reporting regime
depends on the accuracy of the information reported to the reporting
authority.\76\
---------------------------------------------------------------------------

    \72\ See OIP, supra note 7, 85 FR at 51261.
    \73\ See OIP, supra note 7, 85 FR at 51261.
    \74\ See OIP, supra note 7, 85 FR at 51261.
    \75\ See OIP, supra note 7, 85 FR at 51262, n.95.
    \76\ See OIP, supra note 7, 85 FR at 51262, n.95 (stating that
this includes reporting regimes administered by the Commission, such
as large trader reporting, ATS quarterly transaction volume data
reporting, and security-based swap reporting).
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, two commenters raised concerns
that the proposal would lead to investor confusion.\77\ One commenter
asserted that the proposal may confuse ``Main Street'' investors and
that the difference between ``official'' and ``ancillary''
recordkeeping is inherently confusing.\78\ This commenter stated that
the proposal does not describe in detail how these two systems will
interact or reconcile, and that this failing is likely to render the
proposal confusing to market participants and investors.\79\ Another

commenter asserted its belief that the Exchange has not sufficiently
addressed the potential for confusion by investors and other
participants because of a discrepancy between DTC ownership records and
records maintained through the Exchange's proposed mechanism to record
and disseminate on the Ethereum blockchain end-of-day Security
ownership balances.\80\ This commenter questioned whether there is some
``best-effort'' threshold around inaccurate or partial end-of-day
Securities ownership balances on the Ethereum blockchain that would
sufficiently address the risk of investor confusion.\81\
---------------------------------------------------------------------------

    \77\ See Letter from Benjamin Connault, Economist, Investors
Exchange LLC (March 26, 2020) (``IEX Letter''), at 5; Letter from
Joan C. Conley, Senior Vice President & Corporate Secretary, The
Nasdaq Stock Market LLC (March 27, 2020) (``Nasdaq Letter''), at 3.
    \78\ See Nasdaq Letter, supra note 77, at 3.
    \79\ See Nasdaq Letter, supra note 77, at 3.
    \80\ See IEX Letter, supra note 77, at 5.
    \81\ See IEX Letter, supra note 77, at 5.
---------------------------------------------------------------------------

    In a response submitted in connection with SR-BOX-2019-19, the
Exchange stated that it is unclear what the commenter finds inherently
confusing between official and ``ancillary'' records, and that
``official'' means that the record is authoritative, while
``ancillary'' means that the record is supplementary.\82\ The Exchange
also stated that the end-of-day Security balance information would
constitute ``ancillary'' records of end-of-day ownership balances and
that legal ownership would be separately established and evidenced by
operation of commercial law.\83\ According to the Exchange, what would
appear on the Ethereum blockchain would be end-of-day Security
ownership balances associated with an anonymous wallet address.\84\ The
Exchange stated that market participants would not have access to the
full position records of DTC regarding Security ownership balances
maintained by its participants, so it would not be possible for a
market participant to see both sets of records and be confused by
them.\85\ Moreover, the Exchange stated that there is no possibility of
an identifiable discrepancy between the DTC records and ``ancillary''
records, because aggregate records regarding DTC position balances are
not available.\86\
---------------------------------------------------------------------------

    \82\ See Letter from Lisa J. Fall, President, BOX Exchange LLC
(April 9, 2020) (``BSTX Response Letter I''), at 6.
    \83\ See BSTX Response Letter I, supra note 82, at 6.
    \84\ See BSTX Response Letter I, supra note 82, at 6.
    \85\ See BSTX Response Letter I, supra note 82, at 6. See also
id. at 11-12.
    \86\ See BSTX Response Letter I, supra note 82, at 8. According
to the Exchange, although a BSTX Participant would be able to
determine whether its own Security ownership balance as reported to
the Exchange is ultimately reflected on the Ethereum blockchain, it
is ``highly unlikely'' that the BSTX Participant, familiar with the
Exchange and its process for recording and disseminating end-of-day
Security ownership balances on the blockchain, would be confused as
to which record is official and which record is ``ancillary.'' See
id. at 8, n.36.
---------------------------------------------------------------------------

    In response to the commenter's question in the context of SR-BOX-
2019-19 about whether there is a ``best-effort'' threshold, the
Exchange stated that Section 19(g) of the Exchange Act requires the
Exchange to comply with the Exchange Act, Commission rules, or its own
rules.\87\ The Exchange stated that this would require the Exchange to
carry out its process for recording and disseminating end-of-day
Security ownership balances as set forth in its rules and the proposal,
or face a potential violation of Section 19(g) of the Exchange Act.\88\
According to the Exchange, as described further below, in the event
that these records become inaccurate, the Exchange would have the
authority to suspend the reporting process with prompt notice to BSTX
Participants and to the Commission.\89\ The Exchange asserted, however,
that even in the case of inaccurate ``ancillary'' records, there is no
risk of investor confusion for the reasons it describes.\90\
---------------------------------------------------------------------------

    \87\ See BSTX Response Letter I, supra note 82, at 8.
    \88\ See BSTX Response Letter I, supra note 82, at 8.
    \89\ See BSTX Response Letter I, supra note 82, at 8.
    \90\ See BSTX Response Letter I, supra note 82, at 8.
---------------------------------------------------------------------------

    Several commenters raised other questions, in the context of SR-
BOX-2019-19, about differences between the end-of-day Security
ownership balances on the blockchain and official records of legal
ownership.\91\ Two commenters asserted that the proposal is not clear
regarding the differences between the records maintained by the
Exchange, DTC, and NSCC and the end-of-day Security ownership
balances.\92\ Another commenter questioned whether the end-of-day
Security ownership balances reported to the Ethereum blockchain would
reflect the most recently completed transactions, or whether they would
match DTC's records, including any reporting lags related to the T+2
settlement cycle.\93\ This commenter questioned what type of
information would be publicly observable from the end-of-day Security
ownership balances and whether the public would be able to track the
daily amount of stocks owned by a given BSTX Participant in its
anonymized wallet address.\94\ This commenter also asked how the
Exchange's proposed recordkeeping mechanism would handle over-reporting
of ownership balances,\95\ and how short positions would be reflected
in the end-of-day Security ownership balance recordkeeping
mechanism.\96\ Another commenter stated that the proposal does not
describe all of the ``ancillary'' data and metadata that will be stored
on the blockchain.\97\ This commenter stated that the investor
protection concerns that potentially flow from the creation of
``ancillary'' records need to be articulated and analyzed, including
who benefits from the record, who will have access to the record, if
the ``ancillary'' record would have any potential impact on the
safeguarding of customer non-public information, and the utility of the
Security for investors.\98\
---------------------------------------------------------------------------

    \91\ See Letter from Holly H. Smith, Eversheds Sutherland (US)
LLP (February 12, 2020) (``Eversheds Letter''), at 2; IEX Letter,
supra note 77, at 6; Nasdaq Letter, supra note 77, at 3.
    \92\ See Nasdaq Letter, supra note 77, at 3; Eversheds Letter,
supra note 91, at 2. One of these commenters stated that the
proposal will require a Security to follow the BSTX Protocol as
distributed by the Exchange via Regulatory Circular, but that
currently there is no draft of the circular or other documentation
that identifies the differences, if any, between the various types
of records. See Eversheds Letter, supra note 91, at 2. The
Commission notes that the Exchange filed a document described as a
summary of the BSTX Protocol as Exhibit 3N to SR-BOX-2019-19, as
modified by Amendment No. 2 and which was available on the
Exchange's website, but, as discussed below, provides limited
description of the protocol. This summary of the BSTX Protocol was
refiled as Exhibit 3N to SR-BOX-2020-14, with minor revisions made
in Amendment No. 1, and is available on the Commission's website at
https://www.sec.gov/rules/sro/box/2020/34-89536-ex3n.pdf (``BSTX
Protocol Summary Overview''). See also infra note 170 and
accompanying text.
    \93\ See IEX Letter, supra note 77, at 6.
    \94\ See IEX Letter, supra note 77, at 5 (also asking whether
BSTX Participants would be allowed to use multiple wallet addresses
or change wallet addresses over time, including for the purpose of
limiting the public's ability to track their positions).
    \95\ See IEX Letter, supra note 77, at 6. This commenter
questioned whether, in the case of over-reporting, the total number
of Securities for a given BSTX Security would fluctuate from one day
to the next, with extra Securities being created and then destroyed
when there is no longer over-reporting. See id.
    \96\ See IEX Letter, supra note 77, at 6.
    \97\ See Eversheds Letter, supra note 91, at 2.
    \98\ See Eversheds Letter, supra note 91, at 2.
---------------------------------------------------------------------------

    In response, in the context of SR-BOX-2019-19, the Exchange stated
that its proposed recordkeeping process using distributed ledger
technology would be entirely separate from the trading, clearance, and
settlement process for Securities, and that all Securities would be
able to trade, clear, and settle in the same manner as any other NMS
stock.\99\ The Exchange stated that the only interaction between the
existing market infrastructure and the Exchange's additional
recordkeeping process would be that BSTX Participants, either directly
or through their carrying firm, would be required to obtain end-of-day
Security ownership

balances available to them through DTC and report such balances to the
Exchange.\100\
---------------------------------------------------------------------------

    \99\ See BSTX Response Letter I, supra note 82, at 5.
    \100\ See BSTX Response Letter I, supra note 82, at 5-6.
---------------------------------------------------------------------------

    The Exchange also responded that the data appearing on the
blockchain would only reflect end-of-day Security ownership balances
associated with each BSTX Participant's anonymized address, as well as
the omnibus address for unreported ownership balances.\101\ With
respect to whether the end-of-day Security ownership balances reflected
on the Ethereum blockchain would reflect the most recent transactions
or match DTC's records, the Exchange stated that the end-of-day
Security ownership balances would represent a moment-in-time snapshot
of each BSTX Participant's balance in each Security at the end of the
day, either as credited to its DTC account or to its account at its
carrying firm.\102\ With respect to the potential for over-reporting,
the Exchange stated that the total supply of Tokens associated with a
particular issuance of a Security for purposes of the recordkeeping
process on the blockchain would be fixed (subject to adjustment in the
case of a corporate action that impacts the total supply) and would not
fluctuate day-to-day.\103\ The Exchange stated that it has proposed
authority to suspend this recordkeeping process in its discretion, with
prompt notice to BSTX Participants and to the Commission, which could
include circumstances involving over-reporting.\104\
---------------------------------------------------------------------------

    \101\ See BSTX Response Letter I, supra note 82, at 13-14. See
also id. at 15.
    \102\ See BSTX Response Letter I, supra note 82, at 10.
    \103\ See BSTX Response Letter I, supra note 82, at 11.
    \104\ See BSTX Response Letter I, supra note 82, at 11.
---------------------------------------------------------------------------

    According to the Exchange, the Ethereum blockchain is public, so
anyone would have access to the end-of-day Security ownership balances
on the blockchain.\105\ The Exchange stated that individual members of
the public observing the Ethereum blockchain would not be able to view
transaction-level or market participant-identifying detail, whether an
ownership balance reflects proprietary or customer positions, whether a
wallet address belongs to a carrying firm reporting on behalf of
multiple BSTX Participants or a single BSTX Participant, or whether the
reported long positions include borrowed shares.\106\ The Exchange
asserted that it has not proposed any limitation on the ability of BSTX
Participants to establish multiple wallet addresses, and that the
Exchange would discuss operational issues with BSTX Participants as
appropriate.\107\ The Exchange stated that, due to the lack of specific
transaction-level details, the end-of-day Security ownership balances
would contain only a small fraction of the records that the Exchange
would retain with respect to transactions on its market.\108\ According
to the Exchange, it believes that DTC and NSCC's records would likely
be extensively more detailed than the proposed end-of-day Security
ownership balances, and likely contain transaction-level and market
participant-identifying information.\109\
---------------------------------------------------------------------------

    \105\ See BSTX Response Letter I, supra note 82, at 14. See also
Letter from Lisa J. Fall, President, BOX Exchange LLC (April 27,
2020) (``BSTX Response Letter II''), at 4, n.21 (stating that all
market participants would have open access to the distributed ledger
technology associated with BSTX, but also noting that market
participants would not have the ability to modify the underlying
source).
    \106\ See BSTX Response Letter I, supra note 82, at 10, 15. See
also BSTX Response Letter II, supra note 105, at 21, n.22. The
Exchange also stated that short positions would not be reflected,
because the end-of-day Security ownership balances would include any
borrowed shares. See BSTX Response Letter I, supra note 82, at 10.
    \107\ See BSTX Response Letter I, supra note 82, at 10.
    \108\ See BSTX Response Letter I, supra note 82, at 14.
    \109\ See BSTX Response Letter I, supra note 82, at 14.
---------------------------------------------------------------------------

    One commenter questioned, in the context of SR-BOX-2019-19, what
the implications might be of making end-of-day Security ownership
balance data publicly available.\110\ This commenter stated that it
would be unclear who would be responsible for ensuring the accuracy of
this data.\111\ This commenter also questioned whether the system for
recording and disseminating end-of-day Security ownership balances
could be gamed (e.g., would a firm be able to publish a large holding
to the blockchain that it does not actually hold, or vice versa).\112\
The Exchange responds that knowingly reporting a false number of
Securities to the Exchange would be a direct violation of proposed BSTX
Rule 17020, violate just and equitable principles of trade, and cause a
BSTX Participant to be subject to disciplinary action by the
Exchange.\113\ The Exchange states that if a BSTX Participant did try
to ``game'' the end-of-day Security ownership balance recordkeeping
process in the manner suggested, it would not have any impact on the
ability of the Securities to trade, clear, or settle.\114\ The Exchange
also asserts that the balance information would not be useful to inform
a market participant's trading in Securities because an individual
member of the public observing the blockchain would not know which
market participant is associated with each wallet address, whether a
wallet address represents a DTC participant reporting on behalf of
multiple Securities holders, whether the position is long or short, or
whether the position represents a proprietary position or the position
of customer of a BSTX Participant.\115\
---------------------------------------------------------------------------

    \110\ See Letter from Ellen Greene, Managing Director, Equities
& Options Market Structure, & Thomas F. Price, Managing Director,
Operations, Technology, Cyber & BCP, Securities Industry and
Financial Markets Association (April 22, 2020) (``SIFMA Letter
II''), at 5. This commenter stated that SR-BOX-2020-14 appears to be
identical to Amendment No. 2 to SR-BOX-2019-19 and that, for that
reason, SIFMA Letter II continues to apply to SR-BOX-2020-14. See
Letter from Ellen Greene, Managing Director, Equities & Options
Market Structure, & Thomas F. Price, Managing Director, Operations,
Technology, Cyber & BCP, Securities Industry and Financial Markets
Association (June 23, 2020) (``SIFMA Letter III''), at 1-2.
    \111\ See SIFMA Letter II, supra note 110, at 5.
    \112\ See SIFMA Letter II, supra note 110, at 5.
    \113\ See OIP, supra note 7, 85 FR at 51262, n.100. See also
BSTX Response Letter II, supra note 105, at 4.
    \114\ See OIP, supra note 7, 85 FR at 51262, n.100. See also
BSTX Response Letter II, supra note 105, at 4.
    \115\ See OIP, supra note 7, 85 FR at 51262, n.100 (stating that
it is unclear what purpose or incentive there would be for a BSTX
Participant to ``game'' the ancillary recordkeeping process, and
noting that such an attempt would expose the BSTX Participant to
disciplinary action).
---------------------------------------------------------------------------

    In its notice of the proposal, the Exchange states that, to address
the potential for inaccurate reporting by BSTX Participants, proposed
BSTX Rule 17020(e) would provide that if a BSTX Participant discovers
that it submitted an inaccurate end-of-day Security balance report that
has not already been corrected or superseded, it must promptly send a
corrected report to the Exchange.\116\ In addition, if the Exchange has
reason to believe that reported Security balances may be inaccurate, it
may request additional information regarding the applicable reports and
balances from any BSTX Participant.\117\ The Exchange would consider a
BSTX Participant's compliance with proposed BSTX Rule 17020(e) by
promptly submitting a corrected report or responding to additional
information requests from the Exchange in determining whether to

bring, or the appropriate consequences of, disciplinary action.\118\
According to the Exchange, similar mechanisms to promote accurate
reporting exist for a wide variety of different market participant
obligations, such as the duty of the broker-dealer operator of an NMS
stock alternative trading system to promptly correct material errors or
omissions discovered in its Form ATS-N and the duty to correct trade
reports submitted to the Financial Industry Regulatory Authority
(``FINRA'').\119\ The Exchange states that its proposed rule sets forth
reasonable processes to help ensure that the Security position balances
published as Token balances on the blockchain are accurate, and that
ensuring the accuracy of this information will better facilitate all
market participants' ability to evaluate the potential uses of
blockchain technology in securities transactions.\120\
---------------------------------------------------------------------------

    \116\ See OIP, supra note 7, 85 FR at 51260. See also proposed
BSTX Rule 17020(e)(1).
    \117\ See OIP, supra note 7, 85 FR at 51260. The BSTX
Participant must promptly respond to any additional information
requests that the Exchange may make regarding its end-of-day
Security balance reports. See id. (stating that these additional
information requests may include asking the BSTX Participant to
confirm its Security balances, or to provide a copy of the
information the BSTX Participant used to provide its end-of-day
Security ownership balance report, or other books and records of the
BSTX Participant relating to its transactions in Securities). See
also proposed BSTX Rule 17020(e)(2).
    \118\ See OIP, supra note 7, 85 FR at 51260, n.83.
    \119\ See OIP, supra note 7, 85 FR at 51260 (citing 17 CFR
242.304(a)(2)(i)(C); FINRA, Trade Reporting FAQ, Section 311).
    \120\ See OIP, supra note 7, 85 FR at 51260. The Exchange states
that, in addition to these controls and mechanisms, it may need to
implement further measures in instances in which the ability to
update the blockchain may be affected by exogenous factors, and
points to proposed BSTX Rule 17020(f) as giving the Exchange the
ability to suspend certain requirements related to end-of-day
Security ownership reporting on the blockchain. See id. For further
discussion of the proposed suspension provisions, see infra Section
III.C.3.
---------------------------------------------------------------------------

    In the context of SR-BOX-2019-19, one commenter expressed concern
over the uncertainty of whether surveillance of the end-of-day
reporting requirement to make sure that a BSTX Participant accurately
reports its Security ownership balances would be done by BSTX, or by
FINRA pursuant to the Regulatory Services Agreement.\121\ This
commenter asked, in either case, what procedures would be used for
surveillance and enforcement of the requirement.\122\ Two commenters
asserted that it is not clear how differences in reporting between the
records maintained by the Exchange, DTC, and NSCC and the end-of-day
Security ownership balances would be reconciled.\123\ Another commenter
questioned whether there would be any mechanism to ensure that
ownership balances reported by a BSTX Participant accurately match
DTC's records.\124\
---------------------------------------------------------------------------

    \121\ See IEX Letter, supra note 77, at 6.
    \122\ See IEX Letter, supra note 77, at 6.
    \123\ See Nasdaq Letter, supra note 77, at 3; Eversheds Letter,
supra note 91, at 2.
    \124\ See IEX Letter, supra note 77, at 6.
---------------------------------------------------------------------------

    The Exchange responded, in the context of SR-BOX-2019-19, that it
has general authority under proposed BSTX Rule 20000 to request that a
BSTX Participant provide the Exchange with copies of records related to
its business.\125\ According to the Exchange, its request to a BSTX
Participant could include a request for the reports provided by DTC to
the BSTX Participant that the BSTX Participant used to report end-of-
day Security ownership balance information to the Exchange.\126\
---------------------------------------------------------------------------

    \125\ See BSTX Response Letter I, supra note 82, at 11, 16.
    \126\ See BSTX Response Letter I, supra note 82, at 11, 16.
---------------------------------------------------------------------------

Analysis
    The Commission concludes that the Exchange has not met its burden
to demonstrate that its proposal to publicly disseminate end-of-day
Security ownership balances associated with certain wallet addresses by
publishing these balances on the Ethereum blockchain on a daily basis
is consistent with the protection of investors and the public interest,
given that the disseminated balances could be inaccurate, which raises
the significant risk that the publicly disseminated information may
confuse and mislead investors. The Exchange acknowledges that, in a
variety of circumstances the Security ownership balances published to
the Ethereum blockchain would be inaccurate.\127\ For example, if BSTX
Participants report end-of-day Security ownership balances to BSTX that
are not accurate, these inaccuracies would be reflected on the public
Ethereum blockchain.\128\ The publicly disseminated end-of-day Security
ownership balances would also become inaccurate if a BSTX Participant
is late in reporting or if the Exchange is unable to communicate
updated ownership balances to the Wallet Manager or the Wallet Manager
is unable to update the blockchain.\129\ In addition, end-of-day
Security ownership balances on the Ethereum blockchain would be stale
because they would represent a snapshot of a BSTX Participant's DTC
account balance at the end of the last trading day and would not
reflect ownership balances that have changed due to transactions that
settled during the day or that will change due to transactions that
have not yet settled.\130\ This latter variance may increase during the
course of the trading day due to continued trading in the Securities.
There is a significant risk that the reported balances of clearing firm
BSTX Participants would create the misimpression of a large position
because the reported balances would not indicate the beneficial owner,
at least to the extent that the beneficial owner is not also a BSTX
Participant.\131\ In addition, BSTX concedes that its Participants'
short and long positions, both of which would be reported, would be
indistinguishable when represented on the Ethereum blockchain.\132\
Given that these two types of transactions reflect opposite economic
positions in the Security, the disseminated end-of-day Security
ownership balances would provide an economically misleading picture.
Moreover, while the Exchange represents that it believes inaccuracies
in the end-of-day Security ownership balances ``should not be
routine,'' \133\ the Exchange does not explain what it would consider
``routine'' or further describe what it would consider to be an
acceptable level of inaccuracy.
---------------------------------------------------------------------------

    \127\ See supra notes 66-70 and accompanying text.
    \128\ See supra note 68 and accompanying text. The Exchange
states that it is possible for BSTX Participants to over-report (see
supra note 69 and accompanying text), but the Exchange does not
explain how it would reconcile this over-reporting for purposes of
updating the blockchain, given that the total supply of Tokens
associated with a given Security is fixed (see supra note 103 and
accompanying text).
    \129\ See supra note 70 and accompanying text.
    \130\ See supra notes 93, 102, and accompanying text.
    \131\ Moreover, the proposal is not clear regarding how BSTX
Participants that are carrying firms will report Security ownership
balances associated with their proprietary holdings versus Security
ownership balances associated with other investors' holdings. The
lack of clarity about how certain investors' Security ownership
balances will be reported to BSTX and subsequently reflected on the
Ethereum blockchain could impact the Security ownership balances
that are viewable to the public.
    \132\ See supra notes 65, 106, and accompanying text. The
Exchange states that end-of-day Security ownership balances may
include borrowed shares in a DTC participant's account (see supra
note 65), but the Exchange does not explain fully how borrowed
shares may impact the end-of-day ownership balances of various types
of participants. For example, the Exchange has not explained what
might occur with respect to ownership balances on the blockchain in
the case of a short sale with a failure to deliver.
    \133\ See supra note 66 and accompanying text.
---------------------------------------------------------------------------

    In addition, the end-of-day Security ownership balances would be
incomplete in that they would be lacking in relevant detail, and thus
there is a significant risk that the investing public would be confused
or misled by the information presented. The Exchange has not explained
how the public would be made aware of what information about Security
ownership balances is actually reflected on the blockchain and the ways
in which the true holdings of investors might be different than
publicly disseminated balances.\134\ The omnibus wallet address itself
represents balances that cannot be attributed to a particular

holder, and would include balances that are unaccounted for because
they represent the holdings of non-BSTX Participants, along with
balances not associated with a BSTX Participant due to a failure to
report on time or inaccurate reporting.\135\ The Exchange has not
explained its standard for how it will determine what to include and
remove from the omnibus account, and this makes it unclear what the
Security balance associated with the omnibus account will represent.
The Exchange also has not proposed, for example, to identify within the
omnibus account what Security ownership balances reflect errors, late
reporting, or unaccounted for ownership because the shares are not
owned by a BSTX Participant.
---------------------------------------------------------------------------

    \134\ For example, the Exchange has not indicated whether it
would be relying on issuers of Securities to inform potential
investors about potential inaccuracies in the public Security
ownership information or how that information would otherwise be
conveyed to market participants.
    \135\ See supra notes 56-57 and accompanying text.
---------------------------------------------------------------------------

    While the Exchange represents that it would not make public which
wallet addresses are associated with particular BSTX Participants or
the omnibus account and asserts that the publicly available information
would be sufficiently anonymous to address privacy concerns,\136\ the
lack of identification of which Security holder is associated with a
particular wallet address itself presents a significant risk of
confusion for investors, potential investors, and other market
participants. In particular, with respect to the omnibus account, a
large associated Security balance could create the misimpression that
there is a significant holder in the Security, when in fact the omnibus
account for a Security reflects the combined holdings of several
holders. As discussed above, if a carrying firm BSTX Participant
reports a large Security ownership balance that represents the
positions of many beneficial owners, the reported balance could create
a similar misimpression.\137\ Furthermore, the inability to
disaggregate short and long positions is inherent in the proposed
reporting scheme and would confuse and mislead investors. The Exchange
does not describe any measures to mitigate these inherent inaccuracies.
---------------------------------------------------------------------------

    \136\ See supra notes 63-64 and accompanying text.
    \137\ See supra note 64 and accompanying text.
---------------------------------------------------------------------------

    Exacerbating the inaccuracy of the information that the Exchange
would publicly disseminate on the Ethereum blockchain, the Exchange has
not demonstrated whether or how it would surveil for or reconcile
inaccurate reporting of end-of-day Security ownership balances by BSTX
Participants, or otherwise address inaccurate information displayed on
the Ethereum blockchain. The lack of a demonstrated ability of the
Exchange to ensure the integrity of the end-of-day Security ownership
balances that would be publicly disseminated by the Exchange increases
the likelihood that these records would be inaccurate.\138\ The
Exchange would impose a unique obligation on BSTX Participants to
obtain an allowlisted wallet address and report end-of-day Security
ownership balances. BSTX Participants that fail to comply with these
requirements may be subject to disciplinary actions.\139\ However, the
record does not demonstrate how the Exchange will perform surveillance
for BSTX Participant compliance, particularly with respect to the end-
of-day Security ownership balance reporting requirement.
---------------------------------------------------------------------------

    \138\ See also supra notes 110-112 and accompanying text
(commenter questioning the accuracy of the end-of-day Security
ownership balances). It is also not clear from the record exactly
what information would be publicly available. For example, it is not
clear what ``other information'' beyond the end-of-day Security
ownership balance information for BSTX Participants and the total
balance attributed to the omnibus account, would be available to
market participants. See supra note 60 and accompanying text. See
also supra note 97 and accompanying text. Accordingly, this ``other
information'' would not clear up the inaccuracies described herein,
and the Exchange does not suggest otherwise.
    \139\ See OIP, supra note 7, at 51259. The Exchange states that
BSTX Participants would be required to comply with applicable
Exchange rules, including the requirement to report their end-of-day
Security balances, and may be subject to disciplinary action for
failing to comply with applicable rules pursuant to proposed BSTX
Rule series 24000 (Discipline and Summary Suspension).
---------------------------------------------------------------------------

    Proposed BSTX Rule 17020(e) provides that the Exchange may request
additional information from a BSTX Participant if the Exchange has
``reason to believe'' that its reported end-of-day Security ownership
balances are inaccurate.\140\ Yet the Exchange provides no evidence
that it would take any affirmative steps to surveil for inaccurate end-
of-day Security ownership balances, including where there are
discrepancies between these reported ownership balances and official
records of legal ownership. Rather, the Exchange would rely on BSTX
Participants' self-reporting of the end-of-day Security ownership
balances and on whether those reported balances reveal any apparent
errors on their face, which the Commission finds to be insufficient to
mitigate these inaccuracies. Moreover, the Exchange does not address
what steps, if any, it will take after finding an inaccuracy. The
proposed requirement that a BSTX Participant must respond to a request
from the Exchange for information about its reported end-of-day
Security ownership balances merely reinforces the Exchange's general
regulatory authority.\141\ While the Exchange has the authority to
request records from a BSTX Participant, including the reports that the
BSTX Participant received from DTC and used to determine its end-of-day
Security ownership balance, the Exchange does not represent that it
would request such records on a routine basis or use such requests to
affirmatively identify inaccuracies in the reported end-of-day Security
ownership balances, as opposed to using them as a tool to investigate
suspected inaccuracies. And the Exchange does not describe alternative
means that it might use to determine whether a BSTX Participant has
accurately reported its end-of-day Security ownership balances, or how
it might surveil for and correct against late reporting by BSTX
Participants.
---------------------------------------------------------------------------

    \140\ See supra note 117 and accompanying text.
    \141\ See supra note 117. See also supra notes 125-126 and
accompanying text.
---------------------------------------------------------------------------

    The Exchange compares its proposal to other reporting regimes and
asserts that other reporting regimes, including reporting regimes
administered by the Commission, depend on the accuracy of the
information reported or explicitly direct their participants to correct
inaccurate reports.\142\ But this assertion does not alleviate the
Commission's concern that the lack of a process for the Exchange to
monitor or address the inaccuracy of end-of-day Security ownership
information would exacerbate the inaccuracy of the publicly
disseminated information, and that disseminating inaccurate information
would not be consistent with the protection of investors and the public
interest, as required by Section 6(b)(5) of the Exchange Act. For
example, the Commission does not rely solely on trust to assure the
integrity of its reporting regime, but rather also conducts
surveillance of its regulated entities, and also relies on the presence
of SROs that surveil these entities.\143\ Moreover, provisions in other
reporting regimes directing participants to correct inaccurate reports
exist within a regulatory framework that includes

other affirmative surveillance measures.\144\ Therefore, this
comparison between other reporting regimes and the obligations on BSTX
Participants to accurately report end-of-day Security balances to the
Exchange and to correct inaccurate reports does not demonstrate that,
without taking reasonable affirmative steps to monitor whether BSTX
Participants have reported accurate information, the Exchange would be
able to mitigate against the dissemination of inaccurate Security
ownership information.
---------------------------------------------------------------------------

    \142\ See supra notes 76, 119, and accompanying text.
    \143\ See Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844, 70908 (December 22, 1998) (File No. S7-12-98)
(Regulation of Exchanges and Alternative Trading Systems) (``As
broker-dealers, alternative trading systems will be inspected on a
regular basis by any SRO of which they are a member, and by the
Commission only on an intermittent basis.''). See also id. at 70848
(``the Commission intends to work with the self-regulatory
organizations (`SROs') to ensure that they can operate ongoing,
real-time surveillance for market manipulation and fraud and develop
surveillance and examination procedures specifically targeted to
alternative trading systems they oversee'').
    \144\ For example, when discussing amendments to Form ATS
recordkeeping requirements to cover Form ATS-N filers, the
Commission stated that it believed that the amendments ``are
necessary to create a meaningful audit trail of an ATS's current and
previous written safeguards and procedures . . . and permit
surveillance and examination staff to help ensure fair and orderly
markets without imposing any undue burden on ATSs.'' Securities
Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768, 38788,
n.278 (August 7, 2018) (File No. S7-23-15) (Regulation of NMS Stock
Alternative Trading Systems). Similarly, when approving amendments
to FINRA's equity trade reporting rules, the Commission stated that
these changes ``should enhance FINRA's audit trail and automated
surveillance program, promote more consistent trade reporting by
members, and aid in the detection of violations of FINRA trade
reporting and other rules.'' Securities Exchange Act Release No.
71623 (February 27, 2014), 79 FR 12558, 12562 (March 5, 2014) (SR-
FINRA-2013-050).
---------------------------------------------------------------------------

    The Exchange's proposed use of an omnibus account to cover
unattributed Security ownership balances arising from inaccurate or
late reporting by BSTX Participants, and discretionary authority to
suspend the end-of-day reporting obligation with respect to a
particular BSTX Participant or a Security, suggest that the Exchange
may rely on one or both of these measures, even though there is a
significant risk that these measures would leave inaccurate information
on the Ethereum blockchain, rather than taking steps to resolve certain
inaccuracies or inconsistencies.\145\ And the Exchange does not
describe any procedures for correcting the end-of-day Security
ownership balances beyond a proposed requirement that a BSTX
Participant correct an inaccurate report, which would have an
insufficient mitigating effect because BSTX Participants also have a
duty to submit accurate reports.\146\ Therefore, the Exchange has not
demonstrated in the proposal how the Exchange would ensure the
integrity of information that the Exchange seeks to publicly
disseminate.
---------------------------------------------------------------------------

    \145\ See supra notes 56, 120, and accompanying text. See also
infra note 262 and accompanying text.
    \146\ See supra note 116 and accompanying text. Further, this
duty to update only applies if the erroneous report has not been
corrected or superseded, and BSTX Participants must submit new end-
of-day Security ownership balances at the end of each day. See id.
---------------------------------------------------------------------------

    The Exchange asserts that it does not believe that the end-of-day
Security balances on the Ethereum blockchain would cause investor
confusion because there is no similar source of information with which
an individual member of the public could make a comparison to the
information disseminated on the blockchain and become confused.\147\
The Commission concludes, however, that it would not be consistent with
the protection of investors and the public interest for the Exchange to
publicly disseminate inaccurate information about Securities ownership,
even if the public is not able to make comparisons to identify
discrepancies with official ownership records. While the lack of a
comparable source of information may prevent the public from being
aware of a discrepancy in ownership balances, the information the
Exchange publishes would still be inaccurate.
---------------------------------------------------------------------------

    \147\ See supra note 72 and accompanying text.
---------------------------------------------------------------------------

    The reliability of public securities records is important to the
integrity of, and investor confidence in, the securities markets, and
the Commission concludes that labeling records as ``ancillary'' does
not minimize the need for such records of securities ownership publicly
disseminated by a national securities exchange to be accurate. Where,
as here, the very purpose of the Exchange's proposal is to publicize
such securities ownership information,\148\ the reliability and
accuracy of that information is particularly important. Further, if a
national securities exchange requires its members to report security
ownership information that the exchange makes publicly available in
some form, that exchange is obligated to take reasonable steps to
surveil the reported information for accuracy, to prevent inaccuracies
from misleading investors and other market participants. The Commission
thus finds that the Exchange has not met its burden to demonstrate how
its proposal is consistent with the requirements of Exchange Act
Section 6(b)(5) that a national securities exchange's rules must be
consistent with the protection of investors and the public interest.
---------------------------------------------------------------------------

    \148\ See OIP, supra note 7, 85 FR at 51251.
---------------------------------------------------------------------------

    Furthermore, once information about end-of-day Security ownership
balances is put into the public domain, there is a significant risk
that market participants, including investors, would interpret those
public records and make use of this information. The Commission is not
persuaded that the Exchange's designation of the end-of-day Security
ownership balances publicly disseminated on the Ethereum blockchain as
an ``ancillary'' record prevents market participants from making use of
the information, including in connection with investment and trading
decisions.\149\ The Commission is also not persuaded by the Exchange's
assertion, when responding to a commenter's concern that a BSTX
Participant might try to ``game'' the system by reporting an inaccurate
end-of-day Security ownership balance, that the balance information
would not seem to be useful to inform a market participant's trading in
a Security because of a lack of detail in the publicly disseminated
information.\150\ To the contrary, the Commission concludes that market
participants put in place various investment strategies that at times
use advantages in obtaining or analyzing information, and that it is
reasonable to assume that some subset of market participants would try
to analyze and make use of a new source of publicly available
information concerning Security ownership, even if such information is
incomplete.
---------------------------------------------------------------------------

    \149\ Although the Exchange states that any disruption to end-
of-day Security ownership reporting would not impact the ability to
trade, clear, or settle Security transactions (see supra notes 71,
114, and accompanying text), the ``ancillary'' nature of the
blockchain-based records does not negate that these records could be
viewed as a publicly available source of information regarding
Security ownership.
    \150\ See supra note 115 and accompanying text.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission concludes that the
public dissemination of inaccurate information about Security ownership
has the significant potential to mislead investors, irrespective of
whether the information is disseminated on the blockchain, the
internet, or in print, and that the Exchange has not met its burden to
demonstrate that its proposal is nonetheless consistent with the
protection of investors and the public interest, pursuant to Section
6(b)(5) of the Exchange Act. The Commission also concludes that this
misleading information creates a significant risk that investors make
investment decisions based on misinterpretations of public information
about Security ownership. Based on the consequences of the Exchange
disseminating securities ownership information that is inaccurate, the
Commission finds that the Exchange has failed to demonstrate that the
proposal would protect investors and the public interest, in accordance
with Section 6(b)(5) of the Exchange Act.

C. Whether BOX Has Met Its Burden To Demonstrate That the Proposal Is
Consistent With Sections 6(b)(1) and 6(b)(5) of the Exchange Act With
Respect to the Operation of the Proposed Reporting of End-of-Day
Security Ownership Balances

    The Commission examines below whether the Exchange has met its
burden to demonstrate that its proposal is consistent with Sections
6(b)(1) and 6(b)(5) of the Exchange Act with respect to additional
aspects of the proposal. The Commission first considers whether the
record explains sufficiently the processes by which a Wallet Manager
will write to the Ethereum blockchain. As discussed below, the
Commission concludes that the Exchange has not met its burden to
demonstrate how the Exchange would, consistent with Section 6(b)(1) of
the Exchange Act, be able to ensure compliance by the Exchange with its
own rules, or that the Exchange's proposed rules would protect
investors and the public interest, in accordance with Section 6(b)(5)
of the Exchange Act.\151\ Next, the Commission considers the processes
by which BSTX Participants will obtain allowlisted wallet addresses,
BSTX Participants will provide end-of-day Security ownership balances
to BSTX, and BSTX will provide Security ownership balances to a Wallet
Manager, as well as the costs or other burdens market participants
would face as a result of the end-of-day Security ownership balance
reporting requirements. As discussed below, the Commission concludes
that the Exchange has not met its burden to demonstrate that the
Exchange would be able to carry out its necessary functions or fulfill
its obligations as an SRO to comply with its own rules, pursuant to
Section 6(b)(1) of the Exchange Act; or that the Exchange's rules would
facilitate transactions in securities, remove impediments to a free and
open market and national market system, or protect investors and the
public interest, in accordance with Section 6(b)(5) of the Exchange
Act.\152\
---------------------------------------------------------------------------

    \151\ See infra Section III.C.1.
    \152\ See infra Section III.C.2.
---------------------------------------------------------------------------

    The Commission examines how the Exchange might use its proposed
discretion to suspend the requirements for BSTX Participants to obtain
allowlisted wallet addresses and report end-of-day Security ownership
balances as to a particular BSTX Participant or Security. As discussed
below, the Commission concludes that the Exchange has not met its
burden to demonstrate that it would be able to carry out its necessary
functions, in accordance with Section 6(b)(1) of the Exchange Act; and
that the Exchange's rules are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, as
required by Section 6(b)(5) of the Exchange Act.\153\
---------------------------------------------------------------------------

    \153\ See infra Section III.C.3.
---------------------------------------------------------------------------

    The Commission then examines specific issues presented by the
Exchange's proposed listing of Securities--specifically, the lack of
fungibility between a BSTX-listed Security and other classes of
securities of the same issuer, whether the Exchange has sufficiently
addressed issues posed by potential listings by the Exchange or its
affiliate, and its proposed continued listing requirement that all
BSTX-listed Securities remain compliant with the BSTX Protocol. As
discussed below, the Commission concludes that the Exchange has not met
its burden to demonstrate that (1) notwithstanding the described lack
of fungibility, the Exchange's rules would prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, remove impediments to a free and open market and national
market system, or protect investors and the public interest, in
accordance with Section 6(b)(5) of the Exchange Act; \154\ and (2)
based on a lack of explanation about issuer compliance with the BSTX
Protocol, that the proposal is designed to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and is not designed to permit unfair discrimination between
issuers, as required under Section 6(b)(5) of the Exchange Act.\155\
---------------------------------------------------------------------------

    \154\ See infra Section III.C.4(a).
    \155\ See infra Section III.C.4(b).
---------------------------------------------------------------------------

1. Wallet Manager Writing to Blockchain
(a) Exchange's Representations and Comments Received
    According to the Exchange, it will enter into a contractual
arrangement with a Wallet Manager as a third-party service provider for
the Exchange that will establish wallet addresses for BSTX Participants
and update the Ethereum blockchain with Security ownership
balances.\156\ The Exchange states that it intends to evaluate each
potential Wallet Manager's capability to receive information from BSTX
related to BSTX Participants' end-of-day Security balances and its
ability to update the Ethereum blockchain.\157\
---------------------------------------------------------------------------

    \156\ See OIP, supra note 7, 85 FR at 51257. The Exchange states
that it believes that the Wallet Manager's functions do not meet the
definition of ``facility'' under Section 3(a)(2) of the Exchange
Act. See id.
    \157\ See OIP, supra note 7, 85 FR at 51258. The Exchange also
describes that it intends to perform due diligence on potential
Wallet Managers and that it will require in its service agreements
with Wallet Managers that they agree to comply with applicable
securities laws. The Exchange states its belief that its listed
criteria for evaluating potential Wallet Managers may prevent
fraudulent and manipulative act and practices, consistent with
Section 6(b)(5) of the Exchange Act. See id.
---------------------------------------------------------------------------

    The Exchange states that, initially, it expects to contract with
only one Wallet Manager, tZERO, who would also be a 50% owner of
BSTX.\158\ According to the Exchange, following the end of a trading
day, BSTX Participants (or their carrying firms) would be required to
send Security balance information to BSTX, and BSTX would deliver that
information to the Wallet Manager (or Wallet Managers) who would be
responsible for updating the Security ownership balances on the
Ethereum blockchain ``by allocating balances among the wallet addresses
of BSTX Participants and the omnibus address.'' \159\ The Exchange
states that the Ethereum blockchain would not reflect any particular
transactions, but would instead record allocations of end-of-day
Security balances that may result from, among other things, trading and
lending activity.\160\
---------------------------------------------------------------------------

    \158\ See OIP, supra note 7, 85 FR at 51258, n.68. The Exchange
also states that there is nothing to preclude the use of another
Wallet Manager capable of operating software that is compatible with
the BSTX Protocol. See id.
    \159\ OIP, supra note 7, 85 FR at 51257. See also proposed BSTX
Rule 17020(d). The Exchange also states that pursuant to the
Exchange's agreement with the Wallet Manager (or Wallet Managers),
the Wallet Manager would be required to record balances to the
Ethereum blockchain following each trading day. Thus, Tokens
representing Security balances of BSTX Participants would be updated
each trading day, but not on non-trading days. See OIP, supra note
7, 85 FR at 51258, n.69.
    \160\ See OIP, supra note 7, 85 FR at 51257. See also supra note
65 discussing how short sales and borrowed shares would appear in
the end-of-day Security ownership balances.
---------------------------------------------------------------------------

    Specifically, the Exchange states that the Wallet Manager would
make updates to the balances associated with wallet addresses by
reallocating Tokens (which represent Securities) between wallet
addresses, including the omnibus wallet address, so that, according to
the Exchange, after each trading day the wallet address account
balances reflect the new Security ownership balances reported to BSTX
pursuant to BSTX Rule 17020. The Exchange also states that these
reallocations based on end-of-day Security ownership balance reports
from BSTX Participants are not designed to reflect actual transactions
that occurred during the trading day, but that instead, the
reallocation process focuses on having the correct number of

Tokens attributed to each wallet address based on the end-of-day
Security ownership balance reports.\161\
---------------------------------------------------------------------------

    \161\ See OIP, supra note 7, 85 FR at 51259, n.76. The Exchange
gives as an example that if there were only two transactions in the
entire marketplace during the trading day--a sale of 100 Securities
from BSTX Participant A to BSTX Participant B and a subsequent sale
of 100 Securities from BSTX Participant B to BSTX Participant C--the
end-of-day reallocation process would result in a reallocation of
100 Tokens from BSTX Participant A to BSTX Participant C, and would
consequently not reflect any actual transactions. See id.
---------------------------------------------------------------------------

    The Exchange states that, to create a new Token on the Ethereum
blockchain for purposes of facilitating the recording and dissemination
of Security ownership balances, the issuer of the securities must
create a new smart contract that is configured to detail, among other
things, the name of the issuer and total supply of the Tokens that
correspond to the BSTX-listed Security.\162\ According to the Exchange,
the recording of Security ownership balances would not commence until
the conclusion of the first day of Security trading on BSTX.\163\ As
discussed above, the Exchange states that, using Etherscan.io, an
individual member of the public would be able to see holders of Tokens
representing the Securities and the associated quantity, as well as
``other information (e.g., transfers made as a result of the Wallet
Manager(s) reallocation process).'' \164\ In describing how the term
``smart contract'' is commonly used, the Exchange asserts that in the
context of Tokens representing Securities, smart contracts generally
may have three components: (i) Functions, (ii) configurations; (iii)
and events; and that ``events'' are the functions of a smart contract
that, when executed, result in a log or record being recorded to the
Ethereum blockchain, such as ``the transfer of tokenized assets from
one address to another.'' \165\ The Exchange also states that with a
Token ``transfer'' no transaction is actually sent to the recipient of
the ``Token.'' \166\ The Exchange explains that a transaction
``transferring'' a Token to an address only changes the state of the
Token contract, and that, instead of a wallet address being full of
``Tokens,'' it is the Token smart contact that contains the wallet
addresses and associated balances.\167\ Additionally, the Exchange
states that in the context of the BSTX Protocol, a ``transfer'' of a
Token refers to a reallocation of the digital representation of a
Security on the Ethereum blockchain as an ``ancillary'' recordkeeping
mechanism to reflect corresponding changes in ownership of the
Security.\168\
---------------------------------------------------------------------------

    \162\ See OIP, supra note 7, 85 FR at 51255. The Exchange states
that the BSTX Protocol would require a BSTX-listed company to use
three related smart contracts as follows: (1) The ``Asset Smart
Contract'' would define and establish the ``Tokens,'' such as
setting the maximum number of Tokens available for a particular
issuance, and record a list of market participant wallet addresses
and the Tokens associated with each address; (2) the ``Registry
Smart Contract'' would define the permissions available to different
types of market participants to perform certain functions and
contain the list of allowlisted wallet addresses and additional
information associated with each address; and (3) the ``Compliance
Smart Contract'' would contain a set of rules that could be
configured to abide by and ensure compliance with applicable laws
and regulations, such as by restricting a movement of Securities to
a wallet address that has not been added to the Registry Smart
Contract. See OIP, supra note 7, 85 FR at 51256-57.
    \163\ See OIP, supra note 7, 85 FR at 51253. According to the
Exchange, all offerings of securities that are intended to be listed
as Securities on BSTX would be conducted in the same general manner
as offerings of exchange-listed equity securities are conducted
today under the federal securities laws. See id. The Exchange states
that an issuer would enter into a firm commitment or best efforts
underwriting agreement with a sole underwriter or underwriting
syndicate, the underwriter or underwriters would market the
securities and distribute them to purchasers, and secondary trading
in the securities (that are intended to trade on BSTX as Securities)
would thereafter commence on BSTX. See id.
    \164\ See OIP, supra note 7, 85 FR at 51261. See also supra note
60 and accompanying text (discussing the Exchange's assertions
regarding what would be publicly available on Etherscan.io).
    \165\ See OIP, supra note 7, 85 FR at 51255. The Exchange states
that in the context of Tokens representing Securities and the
ability to query a particular address to determine the quantity of
Tokens that belong to that address, the term ``address'' refers to a
number that is associated with a particular market participant that
can be updated to ``reflect changes in ownership of tokenized
assets.'' See OIP, supra note 7, 85 FR at 51256, ns.49-50 and
accompanying text.
    \166\ See OIP, supra note 7, 85 FR at 51256.
    \167\ See id.
    \168\ See OIP, supra note 7, 85 FR at 51256, n.54. See supra
Section III.B.1 (discussing the Exchange's use of the term
``ancillary'').
---------------------------------------------------------------------------

    The Exchange states that, in connection with the operation of BSTX,
it proposes to use a series of ``new forms'' to facilitate becoming a
BSTX Participant and for issuers to list their Securities,\169\ and
includes as one of these what it refers to as an overview of the BSTX
Protocol.\170\ Pursuant to the proposed BSTX Protocol Summary Overview,
it is the Asset Smart Contract that will contain the balances of Tokens
associated with each wallet address and carry out the functions
necessary to effect changes in ownership for ``ancillary''
recordkeeping purposes.\171\ Specifically, the proposed BSTX Protocol
Summary Overview states that the Asset Smart Contract defines and
creates the maximum number of Tokens available for a particular
issuance for purposes of recording and disseminating end-of-day
Security ownership balances on the Ethereum blockchain and records a
list of each ``BSTX Participant or non-BSTX Participant broker-dealer
address[ ]'' and the Tokens held at each address.\172\ Pursuant to the
proposed BSTX Protocol Summary Overview, the Asset Smart Contract
includes the function ``Transfer,'' which allows for the transfer of
Tokens to other specified, allowlisted addresses, and requires two
parameters: The receiver address and the amount of Tokens being
sent.\173\ Also, one of the Asset Smart Contract's events, which
generates a record on the Ethereum blockchain that is publicly
viewable, will be ``Transfer.'' According to the proposed BSTX Protocol
Summary Overview, this event records the details of the movement of the
digital Token representation of a BSTX-listed Security from one address
to another, as recorded in the ledger of the Asset Smart Contract.\174\
---------------------------------------------------------------------------

    \169\ See OIP, supra note 7, 85 FR at 51283.
    \170\ See OIP, supra note 7, 85 FR at 51286. The Exchange filed
the BSTX Protocol Summary Overview as Exhibit 3N. See supra note 92.
    \171\ See BSTX Protocol Summary Overview, supra note 92, at 344;
OIP, supra note 7, 85 FR at 51256. The Exchange states that the
Asset Smart Contract defines and creates the Tokens (e.g., the
maximum number of Tokens available for a particular issuance) for
purposes of the Ethereum blockchain ancillary recordkeeping function
and records a list of each BSTX Participant or non-BSTX Participant
broker-dealer addresses and the Tokens held at each address. See
BSTX Protocol Summary Overview, supra note 92, at 344; OIP, supra
note 7, 85 FR at 51255. The Exchange also states that the smart
contracts of a Security cannot run on their own, but rather lie
dormant until a transaction triggers them to carry out a specified
operation, and that a ``transaction'' in this context is an
operation triggering a smart contract to carry out its specified
function, which must ultimately originate from a human source. See
BSTX Protocol Summary Overview, supra note 92, at 342; OIP, supra
note 7, 85 FR at 51256.
    \172\ See BSTX Protocol Summary Overview, supra note 92, at 344.
    \173\ See id. at 346.
    \174\ See id. at 347.
---------------------------------------------------------------------------

    With respect to the role of Wallet Managers under the proposal, in
the context of SR-BOX-2019-19, one commenter stated that further
clarification is warranted for, among other things, ``rules regarding
`Wallet Managers.' '' \175\ This commenter also stated that it is
unclear ``why a `Wallet Manager' would improve rather than complicate
current market structure.'' \176\ Another commenter stated that the
Exchange should address why BSTX will act as an intermediary between
BSTX Participants and Wallet Managers in the reporting of end-of-day
Security ownership balances instead of

allowing direct reporting from BSTX Participants to Wallet
Managers.\177\
---------------------------------------------------------------------------

    \175\ See Letter from David A. Schrader, Partner, Paykin Krieg &
Adams, LLP (February 25, 2020) (``PKA Law Letter''), at 1.
    \176\ PKA Law Letter, supra note 175, at 1-2.
    \177\ See IEX Letter, supra note 77, at 5.
---------------------------------------------------------------------------

    In response, the Exchange contended in the context of SR-BOX-2019-
19 that it added more information regarding Wallet Managers in
Amendment No. 2, and reiterated its discussion from the proposal
without further elaboration.\178\ The Exchange also stated that the
Exchange has determined to have BSTX act as an intermediary between
BSTX Participants and Wallet Managers ``for several reasons,''
including that the Exchange contends that it is less burdensome for a
BSTX Participant to report to BSTX rather than establish a new
relationship with a Wallet Manager.\179\ The Exchange stated that it
may consider other models in the future, which would be subject to the
rule filing requirements of Section 19 of the Exchange Act.\180\
---------------------------------------------------------------------------

    \178\ See BSTX Response Letter I, supra note 82, at 18. See also
OIP, supra note 7, 85 FR at 51257-58.
    \179\ See BSTX Response Letter I, supra note 82, at 18. The
Commission notes that the Exchange did not provide any other reasons
in its response.
    \180\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission believes that the Exchange's proposed rules for
using third-party service providers to act as Wallet Managers to
perform the function of recording and updating Security ownership
balance information on the Ethereum blockchain lacks clarity, and
agrees with commenters that further clarification is warranted with
respect to Wallet Managers.\181\ This lack of clarity prevents the
Commission from assessing whether the publicly available information
about end-of-day Security ownership balances on the Ethereum blockchain
will be inaccurate and misleading, and therefore whether the proposal
would be consistent with the protection of investors and the public
interest pursuant to Section 6(b)(5) of the Exchange Act, and how the
Exchange would enforce compliance with its own rules, pursuant to
Section 6(b)(1) of the Exchange Act. The areas needing clarification
include how Wallet Managers will update BSTX Participants' account
balances and how the smart contracts will be triggered to effectuate
changes in the end-of-day ownership balances that are recorded using
Tokens on the Ethereum blockchain. In addition, as described further
below, the Wallet Manager's process of updating end-of-day Security
ownership balances on the Ethereum blockchain will result in transfers
between wallet addresses being publicly visible on the Ethereum
blockchain, where these transfers may reflect the Wallet Manager's
reallocation process but not correspond to actual transactions between
the particular Securities holders associated with those specific wallet
addresses.
---------------------------------------------------------------------------

    \181\ See supra notes 175-177 and accompanying text.
---------------------------------------------------------------------------

    While the Exchange states that it would provide end-of-day Security
ownership balances to Wallet Mangers to update the Ethereum blockchain,
neither the proposed rules nor the Exchange's description in the
proposal explain how the balances will be updated by the Wallet
Managers, including what procedures the Wallet Manger must follow to
update the account balances of BSTX Participants on the blockchain.
Among other things, the Exchange does not describe in its proposal many
aspects of the proposed BSTX Protocol Summary Overview, such as the
``Transfer'' function and the ``Transfer'' event aspects of the Asset
Smart Contract component of the protocol set forth in the BSTX Protocol
Summary Overview, including what would be ``publicly viewable'' as a
result. Additionally, the Exchange does not explain how the Asset Smart
Contract, Registry Smart Contract, and Compliance Smart Contract
interact, and what roles and authorities BSTX, the Exchange, the Wallet
Manager or Wallet Managers, or other market participants would have
with respect to each of the smart contracts, and whether and how those
roles or authorities may change over time. For example, while the
Exchange states that the process of reallocating Token balances among
different wallet addresses is a function that will be performed by the
Exchange ``in coordination with the Wallet Manager(s),'' \182\ the
Exchange does not specify when the Exchange will direct the Wallet
Manager, and when the Wallet Manager will act according to its
discretion. Furthermore, the proposed BSTX Protocol Summary Overview
states that the Asset Smart Contract will record a list of each non-
BSTX Participant broker-dealer wallet address and the Tokens held at
each wallet address; however, non-BSTX Participants are neither
required to, nor may they voluntarily, report their end-of-day Security
ownership balances to the Exchange for recording to the Ethereum
blockchain.\183\
---------------------------------------------------------------------------

    \182\ See infra note 217. The Exchange states that the process
of reallocating Token balances among different wallets addresses is
a function performed by the Exchange in coordination with the Wallet
Manager, and that the proposed use of blockchain technology is
``almost passive'' for BSTX Participants, but for obtaining a wallet
address and the end-of-day reporting of balances. The Exchange also
states that the Exchange would be responsible for maintaining wallet
addresses for the entire life cycle of a Security and the associated
Token and life cycle of participants' accounts. See OIP, supra note
7, 85 FR at 51257, n.58.
    \183\ See supra note 27 and accompanying text. The proposal also
does not explain how the updating of the Ethereum blockchain will be
achieved if there is a separate Wallet Manager used by another
trading center, such as a national securities exchange trading
Securities pursuant to UTP or an alternative trading center trading
Securities OTC. See infra Section III.D for discussion about other
trading centers' ability to trade BSTX-listed Securities.
---------------------------------------------------------------------------

    As discussed above, the proposal is unclear as to what information
will be publicly observable on the Ethereum blockchain, including what
details beyond the wallet addresses of holders of Securities and
associated quantities may be observable, but the Exchange has indicated
that such information may include transfers made as a result of the
Wallet Manager's reallocation process.\184\ Given that BSTX
Participants will not report individual transactions and will only
update their end-of-day Security ownership balances at the end of each
trading day, it is unclear how a transfer would work and whether issues
could arise that might prevent the Wallet Manager from allocating the
same number of Tokens representing Securities to a BSTX Participant's
wallet address as the number of Securities that the BSTX Participant
reports to the Exchange. The Commission believes that the proposal does
not clearly address, for example, what the role of the Wallet Manager
would be and the procedures the Wallet Manager would follow to
reallocate the end-of-day balances if the total of the Security
ownership balances reported were to exceed the total issuance.\185\
Also, while the Exchange gives examples of what may be viewable as a
result of a reallocation,\186\ the Exchange does not describe whether
the public would be able to view ``transfers'' between specific
accounts for the purpose of reallocating Tokens to

achieve the updated end-of-day balances associated with each wallet
address. The lack of clarity concerning how the Wallet Manager would
update the Ethereum blockchain, and what information may be available
on the Ethereum blockchain that is generated by the Wallet Manager's
actions, is an additional aspect that contributes to the Commission's
concerns regarding the public dissemination of inaccurate or misleading
information and inhibits the Commission's ability to find that the
information to be recorded to the blockchain pursuant to the proposal
is consistent with the protection of investors and the public interest.
For example, if the publicly available information indicates that
transactions have occurred between the holders of certain wallet
addresses, when instead the Wallet Manager reallocated Securities from
one wallet address to another wallet address to arrive at the reported
end-of-day Security ownership balances without regard to what
underlying transactions occurred, this would result in the appearance
of false transactions, seriously risk misleading investors, and
potentially affect investors' investment decisions.\187\ Other market
participants, such as BSTX Participants, could similarly be confused
if, for example, the publicly disseminated information indicates
Securities being reallocated between their wallet address and only one
other wallet address, if in actuality their new balance is attributable
to transactions with multiple counterparties.
---------------------------------------------------------------------------

    \184\ See supra note 60 and accompanying text. See also supra
Section III.B.2.
    \185\ See supra note 69 and accompanying text (discussing the
Exchange's assertion that the Ethereum blockchain may not reflect
the precise distribution of Securities among holders and the
possibility that the number of reported Securities may exceed the
number of outstanding Securities of a particular issuance) and infra
note 253 and accompanying text (discussing the lack of clarity
around whether in the case of over-reporting of an end-of-day
ownership balance by a BSTX Participant to BSTX the Exchange would
suspend the end-of-day reporting process or whether the Exchange
would handle allocations in such a circumstance some other way). See
also supra note 128 (providing an example of the possibility of
over-reporting by a BSTX Participant) and note 172 and accompanying
text (discussing how the Smart Contract will, among other things,
define and create the maximum number of Tokens available for a
particular issuance).
    \186\ See supra note 161.
    \187\ See supra note 161 discussing the Exchange's examples
regarding how reallocations would be effectuated.
---------------------------------------------------------------------------

    The Commission cannot conclude that the proposal is consistent with
the protection of investors and the public interest because the
Exchange has failed to sufficiently describe both the process for
Wallet Managers to produce updates in end-of-day ownership balances to
the Ethereum blockchain and the public information resulting from these
updates. In the absence of clarification about these processes and the
resulting public information, the Commission cannot assess the extent
to which the information on the Ethereum blockchain may be inaccurate
or misleading, and therefore whether the dissemination of that
information would be consistent with the protection of investors and
the public interest.\188\ For these reasons, the Commission finds that
the Exchange has not met its burden to demonstrate that the Exchange's
proposed rules would protect investors and the public interest, in
accordance with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \188\ While the Exchange asserts that its listed criteria for
evaluating potential Wallet Managers may prevent fraudulent and
manipulative acts and practices, consistent with Section 6(b)(5) of
the Exchange Act (see supra note 157), it does not provide a basis
for this assertion and therefore the Commission cannot determine
whether it agrees with this conclusion.
---------------------------------------------------------------------------

    Further, the proposal lacks information regarding the roles and
authorities BSTX, the Exchange, the Wallet Manager or Wallet Managers,
or other market participants would have with respect to smart
contracts, as well as the possibility that these roles or authorities
may change over time. Without such information, the Commission cannot
assess how the Exchange would, consistent with Section 6(b)(1) of the
Exchange Act, ensure compliance by the Exchange with its own rules
requiring BSTX to provide end-of-day Security balance information to
the Wallet Manager or Wallet Managers, and the updating of the
blockchain by the Wallet Manager or Wallet Managers to reflect the end-
of-day balance information reported to BSTX by BSTX Participants.
Allowlisting and End-of-Day Reporting
(a) Exchange's Representations and Comments Received
    According to the Exchange, a BSTX Participant must obtain an
allowlisted wallet address and report certain end-of-day Security
ownership balance information to BSTX.\189\ Specifically, proposed BSTX
Rule 17020(a) states that each BSTX Participant, either directly or
through its carrying firm acting on its behalf, must contact BSTX to
establish a wallet address to which its end-of-day Security balances