Federal Register / Vol. 85, No. 248 / Monday, December 28, 2020 / Notices 84403 

11 ‘‘Parent’’ means any company of which an 

entity is a direct or indirect wholly-owned 

subsidiary. 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See 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). 

5See 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. 

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 endof-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 BSTXlisted 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-box2020-14/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. 

7See Securities Exchange Act Release No. 89536 

(August 12, 2020), 85 FR 51250 (August 19, 2020) 

(‘‘Order Instituting Proceedings’’ or ‘‘OIP’’). 

deemed to limit or prevent the 

disposition of an investment by a CoInvestor: 

(a) To its direct or indirect whollyowned subsidiary, to a Parent 11 of 

which the Co-Investor is a direct or 

indirect wholly-owned subsidiary or to 

a direct or indirect wholly-owned 

subsidiary of such Parent; 

(b) to immediate family members of 

the Co-Investor or to a trust or other 

investment vehicle established for any 

such family member; and 

(c) when the investment is comprised 

of securities that are (i) listed on any 

exchange registered as a national 

exchange under section 6 of the 

Exchange Act; (ii) NMS stocks, pursuant 

to section 11A(a)(2) of the Exchange Act 

and rule 600(a) of Regulation NMS 

thereunder; (iii) government securities 

as defined in section 2(a)(16) of the Act, 

or (iv) listed or traded on any foreign 

securities exchange or board of trade 

that satisfies regulatory requirements 

under the law of the jurisdiction in 

which such foreign securities exchange 

or board of trade is organized similar to 

those that apply to a national securities 

exchange or a national market system 

for securities. 

4. Each ESC Fund and its Managing 

Member will maintain and preserve, for 

the life of such ESC Fund and at least 

six years thereafter, such accounts, 

books, and other documents as 

constitute the record forming the basis 

for the audited financial statements that 

are to be provided to the Members of 

such ESC Fund, and each annual report 

of such ESC Fund required to be sent to 

such Members, and agree that all such 

records will be subject to examination 

by the Commission and its staff. Each 

ESC Fund will preserve the accounts, 

books and other documents required to 

be maintained in an easily accessible 

place for the first two years after the life 

of such ESC Fund. 

5. Within 120 days after the end of the 

fiscal year of each ESC Fund, or as soon 

as practicable thereafter, the Managing 

Member of each ESC Fund will send to 

each person who was a Member having 

an Interest in the ESC Fund at any time 

during the fiscal year then ended 

(except for the first fiscal year of 

operations of an ESC Fund if no 

investment activities took place in such 

fiscal year), audited financial statements 

with respect to those ESC Funds in 

which the Member held Interests. At the 

end of each fiscal year, the Managing 

Member will make a valuation or have 

a valuation made of all of the assets of 

the ESC Fund as of such fiscal year end 

in a manner consistent with customary 

practice with respect to the valuation of 

assets of the kind held by the ESC Fund. 

In addition, within 120 days after the 

end of each fiscal year of each ESC Fund 

or as soon as practicable thereafter, the 

Managing Member will send a report to 

each person who was a Member at any 

time during the fiscal year then ended, 

setting forth such tax information as 

shall be necessary for the preparation by 

the Member of his, her or its U.S. federal 

and state income tax returns and a 

report of the investment activities of the 

ESC Fund during that fiscal year. 

6. If an ESC Fund makes purchases 

from, or sales to, an entity affiliated 

with the ESC Fund by reason of an 

officer, director or employee of Citadel 

(a) serving as an officer, director, 

managing member, general partner or 

investment adviser of the entity, or (b) 

having a 5% or more investment in the 

entity, such individual will not 

participate in the ESC Fund’s 

determination of whether or not to effect 

the purchase or sale. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2020–28492 Filed 12–23–20; 8:45 am] 

BILLING CODE 8011–01–P 

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

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 


tkelley on DSKBCP9HB2PROD with NOTICES
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8See Securities Exchange Act Release No. 90512 

(Nov. 24, 2020), 85 FR 77327 (Dec. 1, 2020). 

9See OIP, supra note 7, 85 FR at 51251, n.14. 

10See 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. 

11Comments 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. 

12See Securities Exchange Act Release No. 89018 

(June 4, 2020), 85 FR 35458 (June 10, 2020) (Notice 

of Withdrawal of a Proposed Rule Change). 

13With 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. 

14A ‘‘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’’). 

designated a longer period within which 

to issue an order approving or 

disapproving the proposed rule change, 

as modified by Amendment No. 1.8

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 previouslyfiled 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

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. 

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-ofday 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, 


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15See OIP, supra note 7. 

16See 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). 

17See 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. 

18See OIP, supra note 7, 85 FR at 51253, 51257. 

19See OIP, supra note 7, 85 FR at 51254–56. 

20See 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. 

21See 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. 

22The 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). 

23See OIP, supra note 7, 85 FR at 51258–59. 

24See OIP, supra note 7, 85 FR at 51260; 

proposed BSTX Rule 17020(e)(1). 

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 endof-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

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-ofday report that has not already been 

corrected or superseded.24 If the 

Exchange has reason to believe that 

Security balances reported by one or 


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25See OIP, supra note 7, 85 FR at 51260; 

proposed BSTX Rule 17020(e)(2). 

26See OIP, supra note 7, 85 FR at 51260; 

proposed BSTX Rule 17020(f). 

27See OIP, supra note 7, 85 FR at 51257. 

28See 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.’’). 

29See OIP, supra note 7, 85 FR at 51259; 

proposed BSTX Rule 17020(d). 

30Proposed BSTX Rule 17020 sets forth the 

proposed end-of-day reporting requirements for 

BSTX Participants. See proposed BSTX Rule 17020. 

31See OIP, supra note 7, 85 FR at 51259–60. 

32See OIP, supra note 7, 85 FR at 51260, 51262. 

33See OIP, supra note 7, 85 FR at 51261. 

34See OIP, supra note 7, 85 FR at 51262. 

35See 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. 

36See OIP, supra note 7, 85 FR at 51277. 

37See OIP, supra note 7, 85 FR at 51278. 

38See 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. 

39See OIP, supra note 7, 85 FR at 51253. 40See OIP, supra note 7, 85 FR at 51253. 41See OIP, supra note 7, 85 FR at 51254. 42See 15 U.S.C. 78s(b)(2)(C)(i). 43Rule 700(b)(3), Commission Rules of Practice, 

17 CFR 201.700(b)(3). 44See id. 45See id. 46Susquehanna Int’l Group, LLP v. Securities and 

Exchange Commission, 866 F.3d 442, 447 (D.C. Cir. 

2017). 

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-ofday Security ownership balances, and 

would not be able to voluntarily report 

end-of-day Security ownership balances 

to BSTX.27

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

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

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

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

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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47A ‘‘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. 

48The 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. 

49See 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. 

50This 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. 

51See 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. 

52See 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). 

53See 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). 

54See OIP, supra note 7, 85 FR at 51261. The endof-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). 

55See OIP, supra note 7, 85 FR at 51259. 

56See OIP, supra note 7, 85 FR at 51259. 

57See OIP, supra note 7, 85 FR at 51259. See also 

proposed BSTX Rule 17020(d). 

58See OIP, supra note 7, 85 FR at 51260, n.80. 

59See OIP, supra note 7, 85 FR at 51261. 

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 endof-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

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-ofday 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

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 


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60See 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). 

61See 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. 

62See OIP, supra note 7, 85 FR at 51261. 

63See OIP, supra note 7, 85 FR at 51261. 

64See 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. 

65See 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. 

66OIP, 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. 

67See 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. 

68See OIP, supra note 7, 85 FR at 51260. 

69See 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 overreport (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. 

70See 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. 

71See 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 endof-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). 

72See OIP, supra note 7, 85 FR at 51261. 

73See OIP, supra note 7, 85 FR at 51261. 

74See OIP, supra note 7, 85 FR at 51261. 

75See OIP, supra note 7, 85 FR at 51262, n.95. 

76See 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). 

77See 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. 

78See Nasdaq Letter, supra note 77, at 3. 

79See Nasdaq Letter, supra note 77, at 3. 

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

The Exchange recognizes that end-ofday 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

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

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 


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80See IEX Letter, supra note 77, at 5. 

81See IEX Letter, supra note 77, at 5. 

82See Letter from Lisa J. Fall, President, BOX 

Exchange LLC (April 9, 2020) (‘‘BSTX Response 

Letter I’’), at 6. 

83See BSTX Response Letter I, supra note 82, at 

6. 

84See BSTX Response Letter I, supra note 82, at 

6. 

85See BSTX Response Letter I, supra note 82, at 

6. See also id. at 11–12. 

86See 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. 

87See BSTX Response Letter I, supra note 82, at 

8. 

88See BSTX Response Letter I, supra note 82, at 

8. 

89See BSTX Response Letter I, supra note 82, at 

8. 

90See BSTX Response Letter I, supra note 82, at 

8. 

91See 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. 

92See 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. 

93See IEX Letter, supra note 77, at 6. 94See 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). 95See IEX Letter, supra note 77, at 6. This 

commenter questioned whether, in the case of overreporting, 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. 96See IEX Letter, supra note 77, at 6. 97See Eversheds Letter, supra note 91, at 2. 98See Eversheds Letter, supra note 91, at 2. 99See BSTX Response Letter I, supra note 82, at 

5. 

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 ‘‘besteffort’’ 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

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-ofday 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

In response to the commenter’s 

question in the context of SR–BOX– 

2019–19 about whether there is a ‘‘besteffort’’ 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

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 endof-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 overreporting 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

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 


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100See BSTX Response Letter I, supra note 82, at 

5–6. 

101See BSTX Response Letter I, supra note 82, at 

13–14. See also id. at 15. 

102See BSTX Response Letter I, supra note 82, at 

10. 

103See BSTX Response Letter I, supra note 82, at 

11. 

104See BSTX Response Letter I, supra note 82, at 

11. 

105See 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). 

106See 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 endof-day Security ownership balances would include 

any borrowed shares. See BSTX Response Letter I, 

supra note 82, at 10. 

107See BSTX Response Letter I, supra note 82, at 

10. 

108See BSTX Response Letter I, supra note 82, at 

14. 

109See BSTX Response Letter I, supra note 82, at 

14. 

110See 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. 

111See SIFMA Letter II, supra note 110, at 5. 

112See SIFMA Letter II, supra note 110, at 5. 

113See OIP, supra note 7, 85 FR at 51262, n.100. 

See also BSTX Response Letter II, supra note 105, 

at 4. 114See OIP, supra note 7, 85 FR at 51262, n.100. 

See also BSTX Response Letter II, supra note 105, 

at 4. 115See 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). 116See OIP, supra note 7, 85 FR at 51260. See 

also proposed BSTX Rule 17020(e)(1). 117See 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). 

balances available to them through DTC 

and report such balances to the 

Exchange.100

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 overreporting.104

According to the Exchange, the 

Ethereum blockchain is public, so 

anyone would have access to the endof-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 transactionlevel 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

One commenter questioned, in the 

context of SR–BOX–2019–19, what the 

implications might be of making end-ofday 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

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 


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118See OIP, supra note 7, 85 FR at 51260, n.83. 

119See OIP, supra note 7, 85 FR at 51260 (citing 

17 CFR 242.304(a)(2)(i)(C); FINRA, Trade Reporting 

FAQ, Section 311). 

120See 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. 

121See IEX Letter, supra note 77, at 6. 

122See IEX Letter, supra note 77, at 6. 

123See Nasdaq Letter, supra note 77, at 3; 

Eversheds Letter, supra note 91, at 2. 

124See IEX Letter, supra note 77, at 6. 

125See BSTX Response Letter I, supra note 82, at 

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

11, 16. 127See supra notes 66–70 and accompanying text. 128See 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). 129See supra note 70 and accompanying text. 130See supra notes 93, 102, and accompanying 

text. 

131Moreover, 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. 

132See 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. 

133See supra note 66 and accompanying text. 

134For 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. 

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

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

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

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-ofday 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. 

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 


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135See supra notes 56–57 and accompanying text. 

136See supra notes 63–64 and accompanying text. 

137See supra note 64 and accompanying text. 

138See 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. 

139See 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). 

140See supra note 117 and accompanying text. 

141See supra note 117. See also supra notes 125– 

126 and accompanying text. 

142See supra notes 76, 119, and accompanying 

text. 

143See 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’’). 

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. 

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. 

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. 

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-ofday 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. 

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 


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144For 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). 

145See supra notes 56, 120, and accompanying 

text. See also infra note 262 and accompanying text. 

146See 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. 

147See supra note 72 and accompanying text. 

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

149Although 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. 

150See supra note 115 and accompanying text. 

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. 

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. 

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. 

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. 

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-ofday 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. 

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. 


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151See infra Section III.C.1. 

152See infra Section III.C.2. 

153See infra Section III.C.3. 

154See infra Section III.C.4(a). 

155See infra Section III.C.4(b). 

156See 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. 

157See 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. 

158See 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. 

159OIP, 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. 

160See 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. 

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

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

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

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

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 endof-day Security balances that may result 

from, among other things, trading and 

lending activity.160

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-ofday 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 


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161See 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-ofday 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. 

162See 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. 

163See 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. 

164See 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). 

165See 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. 

166See OIP, supra note 7, 85 FR at 51256. 

167See id. 

168See 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’’). 

169See OIP, supra note 7, 85 FR at 51283. 

170See OIP, supra note 7, 85 FR at 51286. The 

Exchange filed the BSTX Protocol Summary 

Overview as Exhibit 3N. See supra note 92. 

171See 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. 

172See BSTX Protocol Summary Overview, supra 

note 92, at 344. 

173See id. at 346. 

174See id. at 347. 

175See Letter from David A. Schrader, Partner, 

Paykin Krieg & Adams, LLP (February 25, 2020) 

(‘‘PKA Law Letter’’), at 1. 

176PKA Law Letter, supra note 175, at 1–2. 

Tokens attributed to each wallet address 

based on the end-of-day Security 

ownership balance reports.161

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

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 BSTXlisted Security from one address to 

another, as recorded in the ledger of the 

Asset Smart Contract.174

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 


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177See IEX Letter, supra note 77, at 5. 

178See BSTX Response Letter I, supra note 82, at 

18. See also OIP, supra note 7, 85 FR at 51257–58. 

179See BSTX Response Letter I, supra note 82, at 

18. The Commission notes that the Exchange did 

not provide any other reasons in its response. 

180See id. 

181See supra notes 175–177 and accompanying 

text. 

182See 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. 

183See 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. 

184See supra note 60 and accompanying text. See 

also supra Section III.B.2. 

185See 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). 

186See supra note 161. 

allowing direct reporting from BSTX 

Participants to Wallet Managers.177

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

(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. 

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 endof-day Security ownership balances to 

the Exchange for recording to the 

Ethereum blockchain.183

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 


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187See supra note 161 discussing the Exchange’s 

examples regarding how reallocations would be 

effectuated. 188While 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. 

189See OIP, supra note 7, 85 FR at 51256–57. 

According to the Exchange, an allowlisted wallet 

address is a permissioned wallet address associated 

with a market participant to which end-of-day 

Security ownership balances may be recorded. See 

id. 

190See proposed BSTX Rule 17020(a). 

191See OIP, supra note 7, 85 FR at 51257. The 

Exchange likens the requirement for BSTX 

Participants to obtain a wallet address to that of 

other exchanges requiring a market participant 

identifier (MPID), because it is establishing an 

identifier that can be attributed to a particular BSTX 

Participant for reporting requirements. See id. 

192See OIP, supra note 7, 85 FR at 51257, n.59. 

In the context of SR–BOX–2019–19, in response to 

a commenter’s question about whether the a BSTX 

Participant could use multiple wallets, (see supra 

note 94), the Exchange stated that, pursuant to 

proposed BSTX Rule 17020, BSTX Participants 

would be required to contact the Exchange as part 

of the allowlisting process, and the Exchange 

intends to discuss related operational issues with 

BSTX Participants as appropriate (see supra note 

107 and accompanying text). 

193See OIP, supra note 7, 85 FR at 51257. 

194See id. 

195See OIP, supra note 7, 85 FR at 51258. For 

BSTX Participants that are participants at DTC, the 

report to BSTX would consist of the total number 

of Securities for each class of Security that is 

credited to each DTC account of the BSTX 

Participant, and for those that are not participants 

at DTC, the report would consist of the total number 

of Securities that are credited to the BSTX 

Participant by its carrying firm. See id. 

196See OIP, supra note 7, 85 FR at 51259. See 

also proposed BSTX Rule 17020(c). 

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. 

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. 

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-ofday 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-ofday 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 may be 

recorded. Furthermore, a BSTX 

Participant must obtain this wallet 

address within five business days after 

the Exchange approves its 

application.190 The Exchange states that 

the process of obtaining a wallet address 

will generally occur contemporaneously 

with the application to become a BSTX 

Participant, but states that if a BSTX 

Participant is unable to obtain a wallet 

address within the five day period, the 

BSTX Participant’s end-of-day Security 

ownership balances would be attributed 

to the omnibus wallet address until the 

BSTX Participant obtains a wallet 

address.191 The Exchange proposes not 

to require a BSTX Participant to have a 

separate wallet address for each 

Security issuance that it trades, because 

multiple Security issuances can be 

attributed to a BSTX Participant’s wallet 

address.192 The Exchange states that the 

requirement for BSTX Participants to 

obtain a wallet address is not 

discriminatory because all BSTX 

Participants must do so, and the 

Exchange will not propose to charge a 

fee for obtaining a wallet address.193

Finally, the Exchange states that once 

the Exchange assigns a BSTX 

Participant a wallet address, the only 

further obligation of the BSTX 

Participant is to report its end-of-day 

Security ownership balances to 

BSTX.194

In the proposal, the Exchange 

describes the process for BSTX 

Participants reporting end-of-day 

Security ownership balances. The 

Exchange proposes to require each 

BSTX Participant, either directly or 

through its carrying firm, to report each 

business day to BSTX, in a manner and 

form acceptable to BSTX, the total 

number of Securities for each class of 

Security credited to either the BSTX 

Participant’s DTC account or the BSTX 

Participant by its carrying firm.195 The 

Exchange states that it would require 

BSTX Participants to provide the endof-day Security ownership balance 

report to the Exchange each business 

day when DTC is open for business after 

such time as DTC has completed its 

end-of-day settlement process.196 The 

Exchange represents that DTC typically 

makes end-of-day security position 

reports available to participants at 

approximately 7:30 p.m. Eastern time, 

and that it would notify BSTX 

Participants, via Regulatory Circular, of 


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197See OIP, supra note 7, 85 FR at 51259. See 

also proposed BSTX Rule 17020(c). 

198See OIP, supra note 7, 85 FR at 51261. 

199See id. The Exchange likens the requirement 

of BSTX Participants to report end-of-day Security 

ownership balances to BSTX to other exchanges’ 

ability to request that members or participants 

furnish to the exchange records pertaining to 

transactions executed on or through the exchange 

in a time and manner required by such exchange. 

See id. 

200See OIP, supra note 7, 85 FR at 51262, n.95. 

201See OIP, supra note 7, 85 FR at 51258–59. See 

also proposed BSTX Rule 17020(d). 

202See proposed BSTX Rule 17020(d). 

203See OIP, supra note 7, 85 FR at 51259. 

204See OIP, supra note 7, 85 FR at 51261. As 

described in more detail above, the Exchange also 

states that as part of the end-of-day reporting 

process, the Exchange would provide information 

to the Wallet Manager(s) which would allow the 

Wallet Manager(s) to allocate Tokens (which 

represent Securities) among BSTX Participants 

consistent with their end-of-day Security balance 

reports, and to attribute the unreported Security 

balance for a given Security to an omnibus wallet 

address for each Security. See OIP, supra note 7, 85 

FR at 51259. See also supra Sections III.B and 

III.C.1. 

205OIP, supra note 7, 85 FR at 51261. 

206See OIP, supra note 7, 85 FR at 51262, n.94. 

207See id. The Exchange also asserts that the endof-day Security ownership balance reporting 

process would not impose a substantial burden on 

BSTX Participants, because it would not require 

them to expend significant resources or time. See 

id. See also Letter from Lisa J. Fall, President, BOX 

Exchange LLC (September 17, 2020) (‘‘BSTX 

Response Letter III’’), at 5. 

208See OIP, supra note 7, 85 FR at 51252. The 

Exchange also states that while BSTX may 

eventually support a wider variety of securities, 

subject to Commission approval, at the time that 

BSTX commences operations it would only support 

trading in Securities that are equity securities. See 

id. 

209See OIP, supra note 7, 85 FR at 51286. The 

Exchange states that it will extend its Regulatory 

Services Agreement with FINRA to cover BSTX 

Participants and trading on the BSTX System, and 

this Regulatory Services Agreement will govern 

many aspects of the regulation and discipline of 

BSTX Participants, similar to how it functions for 

options regulation. See id. The Exchange also states 

that, as is the case with the Exchange’s options 

trading platform, the Exchange will supervise 

FINRA and continue to bear ultimate regulatory 

responsibility for BSTX. See id. The Exchange 

further states that it plans to join the Plan for the 

Allocation of Regulatory Responsibilities Regarding 

Regulation NMS and may choose to join certain 

Rule 17d–2 agreements such as the agreement 

allocating responsibility for insider trading rules. 

See id. 

210See OIP, supra note 7, 85 FR at 51286. The 

Exchange states that it will perform automated 

surveillance of trading on BSTX for the purpose of 

maintaining a fair and orderly market at all times 

and monitor BSTX to identify unusual trading 

patterns and determine whether particular trading 

activity requires further regulatory investigation by 

FINRA. See id. at 51286–87. The Exchange also 

states that it will oversee the process for 

determining and implementing trade halts, 

identifying and responding to unusual market 

conductions, and administering the process for 

identifying and remediating ‘‘clearly erroneous 

trades.’’ See id. at 51287. 

211See OIP, supra note 7, 85 FR at 51287. 

212See supra notes 116–126 and accompanying 

text. See also OIP, supra note 7, 85 FR at 51260; 

proposed BSTX Rule 17020(e). 

213See PKA Law Letter, supra note 175, at 1. 

214See SIFMA Letter II, supra note 110, at 5. 

the time after 7:30 p.m. Eastern time by 

which they must report end-of-day 

Security ownership balances to 

BSTX.197 Furthermore, the Exchange 

represents that it would notify BSTX 

Participants of the precise manner in 

which Securities should be reported via 

a Regulatory Circular.198 The Exchange 

states that, in general, the report would 

simply require certain identifying 

information regarding the BSTX 

Participant (e.g., name, carrying firm, 

MPID) and a list of the end-of-day 

Security ownership balances of the 

BSTX Participant.199 Furthermore, the 

Exchange states that BSTX Participants 

would be subject to potential 

disciplinary action for failing to comply 

with the requirement to report their 

end-of-day Security ownership 

balances.200

Once BSTX Participants have 

reported their end-of-day Security 

ownership balances to BSTX, BSTX 

would provide this information to the 

Wallet Manager (or Wallet Managers) to 

update the Ethereum blockchain with 

Security ownership balances.201

Pursuant to proposed BSTX Rule 

17020(d), the updates to the Ethereum 

blockchain would reflect updates in 

Security ownership balances in Token 

form.202 The Exchange also represents 

that it would notify BSTX Participants 

via Regulatory Circular of the time by 

which BSTX would need to provide 

Security ownership balance information 

to the Wallet Manager so that the Wallet 

Manager would have sufficient time to 

update the Ethereum blockchain prior to 

the commencement of trading on BSTX 

the next trading day.203 According to 

the Exchange, the result of the end-ofday Security ownership balance 

reporting requirement would be that the 

Ethereum blockchain, for each Security, 

would reflect the end-of-day ownership 

balance associated with each BSTX 

Participant’s wallet address.204

Furthermore, the Exchange states that 

the end-of-day Security balance 

reporting by BSTX Participants would 

‘‘reflect a relatively more robust use of 

the functionality of the smart contracts,’’ 

than just the use of the omnibus wallet, 

and that ‘‘[p]romoting this more robust 

use of the functionality of the smart 

contracts and their ability to allocate 

and re-allocate Security balances across 

multiple wallet addresses will enhance 

the ability of market participants, 

including the Exchange, to observe and 

evaluate the capabilities of blockchain 

technology as an ancillary 

recordkeeping mechanism.’’ 205

The Exchange asserts that imposing 

the end-of-day Security ownership 

balance reporting requirement on BSTX 

Participants would not be unfairly 

discriminatory or burden competition 

because all market participants would 

be free to choose whether or not to 

become a BSTX Participant.206 The 

Exchange states that market participants 

that voluntarily choose to become BSTX 

Participants must comply with the rules 

of the Exchange, but remain free to 

become a member of another national 

securities exchange that supports 

trading of BSTX-listed Securities or to 

purchase BSTX-listed Securities 

OTC.207

In its notice of the proposal, the 

Exchange states that it currently 

functions as an exchange only for 

standardized options, and that equity 

securities would represent a new asset 

class for the Exchange.208 According to 

the Exchange, in connection with the 

operation of BSTX, the Exchange would 

leverage many of the regulatory 

structures that it established to operate 

a national securities exchange in 

compliance with Section 6 of the 

Exchange Act.209 The Exchange states 

that it will perform Security listing 

regulation, authorize BSTX Participants 

to trade on the BSTX System, and 

conduct surveillance of Security trading 

on the BSTX System.210 In addition, the 

Exchange states that it will oversee the 

onboarding and application process for 

BSTX Participants and compliance by 

issuers of Securities with the applicable 

initial and continued listing 

requirements, including those 

pertaining to compliance with the BSTX 

Protocol.211 As discussed in more detail 

above, the Exchange also proposes to 

address the potential for inaccurate 

reporting by BSTX Participants with 

proposed BSTX Rule 17020(e), which, 

among other things, provides that the 

Exchange may request additional 

information regarding applicable reports 

and balances from any BSTX Participant 

if the Exchange has reason to believe 

that reported Security balances may be 

inaccurate.212

With respect to the end-of-day 

reporting requirements, in the context of 

SR–BOX–2019–19, one commenter 

raised a concern that BSTX might place 

additional reporting requirements on 

market participants.213 Another 

commenter questioned how a BSTX 

Participant would obtain an allowlisted 

address, how the permissioning would 

be determined for the allowlisted wallet, 

and who would control this 

permissioning.214 This commenter also 

asked how allowlisting would be 

maintained for the entire life-cycle of a 


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215See SIFMA Letter II, supra note 110, at 5. 

216See OIP, supra note 7, 85 FR at 51256–57, 

n.58. See also BSTX Response Letter II, supra note 

105, at 5. 

217See OIP, supra note 7, 85 FR at 51256–57, 

n.58. See also BSTX Response Letter II, supra note 

105, at 5. 

218See OIP, supra note 7, 85 FR at 51256–57, 

n.58. See also BSTX Response Letter II, supra note 

105, at 5. 

219See OIP, supra note 7, 85 FR at 51256–57, 

n.58. See also BSTX Response Letter II, supra note 

105, at 5. 

220See SIFMA Letter II, supra note 110, at 3. In 

the context of SR–BOX–2020–14, this commenter 

stated that it continues to believe that the Proposal 

contains novel aspects related to the current 

recordkeeping processes for equity securities that 

are potentially inconsistent with the Exchange Act, 

and that it continues to have some concerns about 

the proposal’s ‘‘ancillary’’ recordkeeping 

requirements. 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 

(September 10, 2020) (‘‘SIFMA Letter IV’’), at 3. 

This commenter also noted its previously stated 

concerns, citing its comments in the context of SR– 

BOX–2019–19. See id. at 4. 

221See SIFMA Letter II, supra note 110, at 3. 222See SIFMA Letter II, supra note 110, at 3. 223See SIFMA Letter IV, supra note 220, at 4 

(citing SIFMA Letter III). 224See SIFMA Letter IV, supra note 220, at 4–5. 

This commenter stated that, for example, order 

consolidators for other firms may need to become 

BSTX Participants if customers of those other firms 

trade BSTX-listed Securities. See SIFMA Letter IV, 

supra note 220, at 5. 

225Rule 611 of Regulation NMS under the 

Exchange Act is also known as the ‘‘Order 

Protection Rule’’ or ‘‘Trade-through Rule,’’ and 

requires a trading center to implement policies and 

procedures that are reasonably designed to prevent 

trade-throughs on that trading center of protected 

quotations in NMS stocks that do not fall within 

one of certain specified exceptions. See 17 CFR 

242.611. 

226See SIFMA Letter IV, supra note 220, at 5. 

This commenter also stated that it is unclear from 

the Proposal whether a firm that is a member of 

other exchanges and is also a BSTX Participant 

would be subject to the end-of-day Security 

ownership balance reporting obligation in 

connection with effecting or clearing trades in 

Securities that are trading on other exchanges 

pursuant to UTP. See id. 

227See id. This commenter stated that it has 

concerns when new processes and technology with 

wider implications for the equity market 

infrastructure are considered in the framework of a 

proposed rule change by a single exchange. See 

SIFMA Letter IV, supra note 220, at 5–6. 

228See OIP, supra note 7, 85 FR at 51263. 

229See OIP, supra note 7, 85 FR at 51263, n.106. 

Additionally, with respect to the ability of market 

participants to trade Securities OTC, the Exchange 

states its belief that the additional requirements of 

acquiring a wallet address and end-of-day Security 

balance reporting impose only a minimal burden on 

BSTX Participants and should not have any 

material or undue burden or impact on competition 

between BSTX Participants and non-BSTX 

Participants. See OIP, supra note 7, 85 FR at 51289. 

In response to comments in the context of SR– 

BOX–2019–19, the Exchange also stated that the 

end-of-day Security ownership balance reporting 

process would impose only a ‘‘minimal’’ reporting 

burden on BSTX Participants that would be similar 

to other reporting obligations currently required by 

SROs, such as large options position reporting. See 

BSTX Response Letter II, supra note 105, at 3. See 

also OIP, supra note 7, 85 FR at 51288 (analogizing 

the end-of-day reporting requirement to reporting of 

end-of-day large options position reporting); and 

infra note 347 (discussing the purpose of large 

options position reporting). 

230See OIP, supra note 7, 85 FR at 51263, n.105. 

231See OIP, supra note 7, 85 FR at 51287. 

232See BSTX Response Letter II, supra note 105, 

at 3, n.13. 

Security and for the life-cycle of 

participant accounts.215

The Exchange responds that it would 

be the only source for obtaining wallet 

addresses and that the Exchange would 

be responsible for permissioning wallet 

addresses.216 According to the 

Exchange, a BSTX Participant would 

not have the ability to move Tokens to 

or from its wallet address or otherwise 

‘‘control’’ the wallet address, and the 

process of reallocating Token balances 

among different wallet addresses would 

be a function performed by the 

Exchange in coordination with a Wallet 

Manager.217 The Exchange states that 

the use of the blockchain technology 

would be ‘‘almost entirely passive’’ for 

the BSTX Participants, excluding the 

obtaining of a wallet address and the 

end-of-day reporting of ownership 

balances.218 Lastly, the Exchange 

responds that the Exchange would be 

responsible for maintenance of 

allowlisting for the entire life-cycle of 

the allowlisted wallet address and that 

an unlimited number of wallet 

addresses may be established for a 

Security and could be removed as 

necessary.219

A commenter asserted, in the context 

of SR–BOX–2019–19, that the proposed 

rule change did not explore in sufficient 

detail the costs or other impacts to firms 

associated with adopting systems to 

accommodate the infrastructure needed 

to manage the Securities’ distributed 

ledger technology, including allowlisted 

wallet addresses and associated 

recordkeeping.220 This commenter 

stated that although the Exchange 

suggests that firms could avoid these 

impacts by not becoming BSTX 

Participants, that would not be the case 

if the Securities start trading on other 

exchanges pursuant to UTP.221 This 

commenter further stated that, in that 

scenario, firms would likely need to 

implement systems and other 

infrastructure to be able to submit 

reports of end-of-day Security 

ownership balances to the Exchange, 

assuming they determine that they need 

to become BSTX Participants.222 In the 

context of SR–BOX–2020–14, this 

commenter noted its prior comment that 

if exchanges were to adopt different 

forms of distributed ledger technology 

to track ownership of equity securities, 

that could cause additional costs to 

market participants.223

Also in the context of SR–BOX–2020– 

14, this commenter noted that certain 

firms, by virtue of their business (such 

as order consolidation), may need to 

become BSTX Participants.224 This 

commenter also stated that as a result of 

the Order Protection Rule under 

Regulation NMS,225 trading centers such 

as OTC market makers and firms that 

internalize order flow may need to 

become BSTX Participants to satisfy 

their firms’ policies and procedures 

reasonably designed to prevent tradethroughs. This commenter stated that 

firms in these lines of business would 

take on additional burdens if subject to 

the end-of-day Security ownership 

balance reporting obligations or 

potentially be subject to regulatory 

exposure from BSTX if they err in 

reporting end-of-day ownership 

balances.226 This commenter stated that 

although the Exchange asserts, in 

response to its concerns, that the endof-day Security ownership balance 

reporting obligations are no different 

than other reporting obligations 

imposed on firms, such as the large 

options positions reporting 

requirements adopted by the options 

exchanges and FINRA that obligate 

firms to report large options positions at 

the end of the day to the exchanges and 

FINRA, the end-of-day Security 

ownership balance reporting obligation 

is not related to any regulatory 

objectives.227

The Exchange states that, to the extent 

any market participant does not want to 

perform the end-of-day Security 

ownership reporting obligations, it 

could avoid these obligations by 

choosing not to become a BSTX 

Participant.228 The Exchange also states 

that a BSTX Participant would only 

need to obtain a wallet address from the 

Exchange and comply with the end-ofday Security ownership balance 

reporting requirement.229 According to 

the Exchange, the proposal would not 

require BSTX Participants to make a 

technological investment related to the 

use of distributed ledger technology,230

and the Exchange does not propose any 

fees associated with the end-of-day 

Security ownership balance 

recordkeeping process.231 In the context 

of SR–BOX–2019–19, the Exchange 

stated, however, that BSTX Participants 

would likely need to include in their 

policies and procedures a process for 

complying with the end-of-day Security 

ownership balance reporting 

requirement to promote compliance 

with the proposed BSTX rules.232

The Exchange also responded that no 

market participant would be forced to 


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233See BSTX Response Letter III, supra note 207, 

at 2–3. The Exchange stated that a routing broker 

that chooses to become a BSTX Participant would 

be acting on an agency basis and would not have 

an end-of-day balance in Securities arising from this 

function, and that accordingly, reporting a zero endof-day balance to the Exchange would not be 

burdensome. See id. 

234See id. 

235See BSTX Response Letter III, supra note 207, 

at 4. See also infra notes 330–331 and 

accompanying text. 

236See BSTX Response Letter III, supra note 207, 

at 5–6. See also supra note 206. 

237See BSTX Response Letter III, supra note 207, 

at 6. 

238 Id. 

239See supra note 207. 

240 Id. 

241See supra note 232 and accompanying text. 

242See supra note 230 and accompanying text. 

243See supra note 222 and accompanying text 

(commenter stating that firms would likely need to 

implement systems and other infrastructure to be 

able to submit reports of end-of-day Security 

ownership balances to the Exchange). 

244See supra note 238 and accompanying text. 245The Exchange asserts that market participants 

can decide voluntarily whether to become a BSTX 

Participant (see supra notes 206–207 and 

accompanying text), and although the Exchange 

recognizes that a firm may need to execute a trade 

on BSTX to comply with the Order Protection Rule 

if BSTX is the protected quote, it further states that 

the firm could choose to execute the trade through 

a BSTX Participant instead of becoming a BSTX 

Participant. See supra note 233 and accompanying 

text. And a firm could also choose not to execute 

a trade that would trade through a protected quote 

on BSTX. However, the Exchange does not examine 

whether there may be additional factors for brokerdealer firms, including compliance with bestexecution requirements, that might influence 

whether a broker-dealer firm decides to become a 

BSTX Participant. Also, as one commenter 

recognized, whether BSTX-listed Securities traded 

on other national securities exchanges pursuant to 

UTP may influence whether a broker-dealer firm 

would need to become a BSTX Participant. See 

supra notes 224–225 and accompanying text. 

246See supra note 116 and accompanying text 

(discussing proposed BSTX Rule 17020(e)). 

247See supra note 235 and accompanying text. 

become a BSTX Participant as a result 

of the proposal, including if operating as 

a carrying firm or order consolidator; 

that the only potential circumstance in 

which a firm would be required to 

execute a trade in a Security on BSTX 

would be to comply with the Order 

Protection Rule, if the firm wanted to 

trade through on an away market a 

protected quotation on BSTX; and that 

even then the firm could choose to 

execute the trade through a BSTX 

Participant instead of becoming a BSTX 

Participant.233 The Exchange further 

responded that the Exchange has 

addressed in the Proposal the issue of 

whether a market participant that trades 

Securities on multiple exchanges would 

be subject to the end-of-day Security 

ownership balance reporting obligation 

in connection with effecting or clearing 

trades in Securities that are trading on 

another exchange, and that a BSTX 

Participant would be required to report 

its end-of-day balance in Securities at 

DTC (or at its carrying firm) in the 

relevant Security pursuant to proposed 

BSTX Rule 17020(b).234 In addition, the 

Exchange responded that it disagrees 

with a commenter’s assertion that the 

end-of-day Security ownership balance 

reporting obligation is not related to any 

regulatory objective, citing its assertion 

in the proposal that the requirement 

will allow market participants to 

observe and increase their familiarity 

with the capabilities and potential 

benefits of blockchain technology in a 

context that advances and protects the 

public’s interest.235

Additionally, the Exchange responded 

that it maintains its views expressed in 

the Proposal, including that the 

Exchange does not believe that 

imposing the end-of-day Security 

ownership balance reporting 

requirements on BSTX Participants is 

unfairly discriminatory or burdens 

competition, and that the end-of-day 

Security ownership balance reporting 

process would not impose a substantial 

burden on BSTX Participants.236 While 

the Exchange stated that it recognizes a 

commenter’s assertion that the Proposal 

may require market participants that 

wish to become BSTX Participants to 

bear certain costs, the Exchange 

contends that it is incorrect that the 

costs related to the end-of-day Security 

ownership balance reporting obligation 

will be significant.237 The Exchange also 

stated that the Proposal is not 

inconsistent with the Exchange Act, 

‘‘simply because market participants 

might not want to take on the additional 

operational processes and minimal costs 

associated with’’ the end-of-day 

Security ownership balance reporting 

obligation.238

(b) Analysis 

The Commission concludes that the 

Exchange’s proposed rules concerning 

the process for obtaining an allowlisted 

wallet address and reporting end-of-day 

Security ownership balances does not 

contain sufficient detail about how 

BSTX Participants must satisfy their 

obligations. The Commission also does 

not believe that the Exchange has 

addressed commenters’ concerns 

regarding the costs or other burdens that 

would be imposed on market 

participants as a result of the end-of-day 

Security ownership balance reporting 

process. 

The Exchange does not provide 

support for its assertion that BSTX 

Participants would not need to expend 

significant resources or time on the endof-day Security ownership balance 

reporting process.239 The Exchange 

concedes that market participants will 

have to bear costs from the Proposal, 

and then characterizes those costs as 

‘‘minimal,’’ 240 but the Commission 

finds no support for that 

characterization. The Exchange 

acknowledges that BSTX Participants 

may need to add to their policies and 

procedures a process to comply with the 

end-of-day Security ownership balance 

reporting requirement,241 but does not 

discuss the potential outlines of that 

process. The Exchange states that BSTX 

Participants would not need to make a 

technological investment related to the 

distributed ledger technology,242 but 

does not discuss whether BSTX 

Participants would need to update their 

systems to facilitate the reporting of 

end-of-day Security ownership 

balances.243 The Exchange states that a 

commenter’s assertion that market 

participants might not want to take on 

the additional operational processes and 

minimal costs associated with the endof-day Security ownership balance 

reporting obligation does not make the 

proposal inconsistent with the Exchange 

Act.244 But the Exchange has not 

clarified what those processes and costs 

may be and why, in light of the 

additional burden, the proposed end-ofday Security ownership reporting 

obligations are consistent with the 

Exchange Act.245 Also, pursuant to 

proposed BSTX Rule 17020(e), a BSTX 

Participant would be required to 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.246 Yet the Exchange does 

not explain whether BSTX Participants 

would be obligated to monitor the endof-day Security ownership balances on 

the blockchain associated with their 

assigned wallet addresses and whether 

the Exchange would provide any 

process by which BSTX Participants 

could contest or rectify discrepancies 

between their reported end-of-day 

Security ownership balances and the 

balances attributed to their addresses as 

observable on the blockchain. 

The Exchange asserts that the end-ofday Security balance reporting by BSTX 

Participants and recording to the 

Ethereum blockchain will allow market 

participants to observe and increase 

their familiarity with the capabilities 

and potential benefits of blockchain 

technology in a context that advances 

and protects the public’s interest,247 but 

the fact that the information on the 

blockchain will not be accurate 

undercuts the benefit. Moreover, the 


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248See supra note 115 and accompanying text. 249See supra Section III.B. 250See supra note 135. Pursuant to proposed 

BSTX Rule 17020(d), the Exchange would 

determine any difference between the Security 

position balance(s) reported to BSTX regarding a 

Security and the number of shares outstanding for 

the Security, and provide that information to the 

Wallet Manager(s) for allocation to an omnibus 

wallet address for the Security. See proposed BSTX 

Rule 17020(d). 

251See supra notes 56–57 and accompanying text. 

As described above, BSTX Participants would 

report their Security ownership balances at the end 

of each trading day and the Wallet Manager would 

reallocate Tokens (representing Securities) as 

needed to reflect the reported balances, without 

regard to whether these transfers correspond with 

actual transactions. See supra Section III.C.1. 

Therefore, if a BSTX Participant fails to report its 

end-of-day Security ownership balance or 

inaccurately reports such balance, and the 

Exchange allocates Securities owned by such BSTX 

Participant to the omnibus account, or if a BSTX 

Participant that previously failed to report or 

inaccurately reported subsequently reports its endof-day Security ownership balance, the Wallet 

Manager’s reallocation of Tokens to reflect reported 

balances may not include a transfer between the 

wallet addresses associated with that BSTX 

Participant and the omnibus account. 

252See supra note 69 and accompanying text. 

253The Commission notes that, while in the case 

of over-reporting by BSTX Participants in a 

particular Security, the Exchange would have the 

ability to use its discretion, pursuant to proposed 

BSTX Rule 17020(f), to suspend the requirements 

regarding reporting of end-of-day Security balances 

for that Security, the Exchange has not indicated 

that it would necessarily do so in such 

circumstances. See supra note 104 and 

accompanying text; infra Section III.C.3. See also 

BSTX Response Letter I, supra note 82, at 11. 

254See supra note 209. 

255See supra Section III.B for additional 

discussion about whether or how the Exchange 

would surveil the end-of-day Security ownership 

balance reporting. 

256See supra notes 121–122 and accompanying 

text. 

257See supra notes 123–124 and accompanying 

text. 

258See supra notes 125–126 and accompanying 

text. Pursuant to proposed BSTX Rule 17020(e), the 

Exchange may also request additional information 

regarding the applicable reports and balances from 

any BSTX Participant, if the Exchange has reason 

to believe that Security balances reported by one or 

more BSTX Participants may be inaccurate. See 

supra note 117 and accompanying text. 

259See supra Section III.B.2. 

Exchange asserts that the balance 

information that will be publicly 

observable on the Ethereum blockchain 

would not be useful to inform a market 

participant’s trading in Securities.248

BOX does not explain how knowingly 

recording and disseminating to the 

public inaccurate information regarding 

BSTX Securities ownership on the 

blockchain is consistent with the 

purposes of the Exchange Act, or even 

with BOX’s stated purposes of the 

proposed rule change.249

The Exchange also does not propose 

a standard for how the Exchange will 

determine what to include and remove 

from the omnibus account, beyond 

stating that the omnibus account will 

comprise the unreported Security 

balance for a given Security.250 While 

the Exchange states that the Security 

ownership balance that it would 

allocate to the omnibus account would 

account for instances in which a BSTX 

Participant fails to report its end-of-day 

Security ownership balance or 

inaccurately reports such balance, and 

for the positions of Security holders that 

are not BSTX Participants,251 the 

Exchange has not described how it will 

determine when a BSTX Participant’s 

report is late or inaccurate, other than 

stating that it will provide additional 

information about the time, after 7:30 

p.m. Eastern time, by which reports are 

due. 

The Exchange also acknowledges that 

it is possible that, due to inaccurate 

reporting, the total of the Security 

ownership balances reported to BSTX 

could exceed the number of Securities 

actually issued,252 but does not explain, 

given that it is not possible to overallocate Token balances on the 

blockchain, how the Exchange would 

then determine how to allocate balances 

to wallet addresses.253 For example, the 

Exchange does not address whether, in 

the case of over-reporting by BSTX 

Participants, it might assign a negative 

balance to the omnibus wallet address 

or take some other action. And the 

proposal does not indicate whether, if 

the BSTX Participants’ wallet addresses 

account for the full balance of the 

Securities, the wallet address associated 

with the omnibus account would appear 

on the Ethereum blockchain with a 

balance of zero or the wallet address for 

the omnibus account would be omitted. 

This lack of information about how the 

Exchange will carry out its functions 

with respect to determining the Security 

balance to be associated with the 

omnibus account for a particular 

Security would impede the Commission 

from being able to carry out its 

obligations to ensure that the Exchange 

is complying with its own rules. 

Further, the Commission concludes 

that the record does not demonstrate 

that the Exchange’s proposed use of 

surveillance will enable the Exchange to 

carry out its necessary functions or 

enforce BSTX Participants’ compliance 

with its rules. Specifically, while the 

Exchange states that it will extend its 

Regulatory Services Agreement with 

FINRA to BSTX Participants and trading 

in the BSTX Market,254 the record does 

not demonstrate how the Exchange will 

perform surveillance regarding and 

enforce the unique obligations that it 

would impose on BSTX Participants to 

obtain an allowlisted wallet address and 

report end-of-day-Security ownership 

balances, including whether or how it 

would surveil for or reconcile 

inaccurate reporting of these end-of-day 

Security ownership balances.255 For 

example, as discussed above, in 

response to commenters’ concerns 

regarding surveillance and enforcement 

of the end-of day-reporting requirement 

to ensure that BSTX Participants 

accurately report their Security 

ownership balances,256 as well as 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,257 the Exchange stated that 

it could use its general authority under 

BSTX rules to request from a BSTX 

Participant records related to its 

business, which could include 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.258 As the Commission stated 

above, the record does not, however, 

demonstrate how the Exchange will 

perform surveillance for BSTX 

Participant compliance, particularly 

with respect to the end-of-day Security 

ownership balance reporting 

requirement, such as whether it would 

request such records from BSTX 

Participants on a routine basis or use 

alternative means to determine whether 

a BSTX Participant has accurately 

reported its end-of-day Security 

ownership balances, and how it might 

surveil for and correct against late 

reporting by BSTX Participants.259

For these reasons, the Exchange has 

not provided sufficient information for 

the Commission to be able to find 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. In the absence of 

information about, among other things, 

when and how a BSTX participant must 

obtain an allowlisted wallet address and 

the associated costs, as well as the time 

and manner by which a BSTX 

Participant must submit end-of-day 

Security balances to BSTX and the costs 

to comply with the reporting obligation, 

the Commission cannot evaluate 

whether imposing a burden on BSTX 

Participants to obtain an allowlisted 

wallet address and report end-of-day 

Security balance information to BSTX is 

reasonable in light of the intended 

purpose for recording end-of-day 

balances on the Ethereum blockchain. 

Particularly given that BSTX 


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260See supra notes 116–120 and accompanying 

text. 

261See OIP, supra note 7, 85 FR at 51260 and 

n.81. 

262See proposed BSTX Rule 17020(f). The 

Exchange states that suspension of the ancillary 

recordkeeping process would not impact trading in 

a Security and that trading and clearance and 

settlement of Securities can operate entirely 

independently from the ‘‘ancillary’’ recordkeeping 

process. See OIP, supra note 7, 85 FR at 51258, 

n.67. 

263See id. 

264See id. 

265See OIP, supra note 7, 85 FR at 51260, n.86. 

266See id. 

267For example, while the Exchange states that it 

may use its suspension authority in the case of 

over-reporting of end-of-day Security ownership 

balances, it does not state, and the proposed rule 

does not require, that it would necessarily do so. 

See supra note 253. The Exchange also does not 

explain how it would mitigate any potential 

conflicts of interest that may impact its 

discretionary use of its suspension authority with 

respect to an Affiliate Security. The Exchange 

would define ‘‘Affiliate Security’’ as ‘‘any security 

or Security issued by an Exchange Affiliate or any 

Exchange-listed option on any such security.’’ See 

proposed BSTX Rule 26140(a)(2). The Exchange 

would define ‘‘Exchange Affiliate’’ as ‘‘the 

Exchange and any entity that directly or indirectly, 

through one or more intermediaries, controls, is 

controlled by, or is under common control with the 

Exchange, where ‘control’ means that the one entity 

possesses, directly or indirectly, voting control of 

the other entity either through ownership of capital 

stock or equity securities or through majority 

representation on the board of directors or other 

managements body of such entity.’’ See proposed 

BSTX Rule 26140(a)(1). The Exchange would define 

‘‘Exchange’’ to mean ‘‘BOX Exchange LLC and its 

facilities.’’ See proposed BSTX Rule 17000(a)(20). 

Participants would be subject to 

disciplinary action if they fail to comply 

with either obligation, the Commission 

is not able to find that the obligations to 

obtain a wallet address and to report 

end-of-day Security balances are 

consistent with the requirements of 

Exchange Act Section 6(b)(5), and, in 

particular, the requirement that the 

rules of a national securities exchange 

be designed to remove impediments to 

and perfect the mechanism of a free and 

open market and a national market 

system. 

Also, due to the lack of information 

discussed above regarding, among other 

things, anticipated timeframe regarding 

when BSTX must provide the reported 

information to the Wallet Manager, the 

way in which balances are allocated to 

the omnibus account, and the 

Exchange’s infrastructure to surveil and 

enforce compliance by BSTX 

Participants to accurately report end-ofday Security ownership balances, the 

Commission cannot assess whether the 

Exchange would be able to carry out its 

responsibilities and enforce compliance 

by BSTX Participants with their 

obligations. Therefore, the Commission 

is not able to find 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. 

Suspension of Allowlisting and End-ofDay Reporting Requirements 

(a) Exchange’s Representations 

The Exchange states that, in addition 

to controls and mechanisms for 

ensuring the accuracy of reported 

records,260 the Exchange may need to 

implement further measures in 

situations where the ability to update 

blockchain records may be affected by 

‘‘exogenous factors,’’ for example a 

disruption to the website through which 

ownership balances may be observed 

(i.e., Etherscan.io), to the Ethereum 

blockchain itself that prevents the 

updating of end-of-day balances, or to 

the architecture or functioning of a 

particular Security.261 To account for 

these situations, the Exchange proposes 

that the Exchange would, in its 

discretion, be able to suspend the 

allowlisting and end-of-day reporting 

requirements regarding any BSTX 

Participant and/or regarding one or 

more Securities.262 The Exchange also 

proposes that in the case of such a 

suspension, the Exchange would be 

required to provide prompt notice, 

including the reasons for the 

suspension, to BSTX Participants, and 

must also notify the Commission within 

two hours.263 The Exchange proposes 

that the suspension may not continue 

for more than thirty days unless the 

Exchange submits a proposed rule 

change to the Commission seeking 

approval of the suspension, in which 

case the suspension may continue until 

the Commission approves or 

disapproves the proposed rule 

change.264 The Exchange states its belief 

that the proposal to allow for 

suspension of the allowlisting and endof-day reporting requirements may 

foster coordination with persons 

processing information with respect to 

Securities and is not designed to permit 

unfair discrimination, because it will 

allow the Exchange to suspend certain 

rule requirements in events where there 

may be difficulty coordinating or 

sharing pertinent information with 

BSTX Participants or Wallet 

Managers.265 The Exchange also states 

that its proposed suspension provision 

is designed to apply to all market 

participants equally, and to provide 

notice to affected participants and 

regulators of BSTX, in order to allow 

such individuals and entities to 

coordinate with the Exchange and react 

to potential issues as deemed 

necessary.266

(b) Analysis 

The Commission concludes that the 

Exchange’s proposal, which would give 

the Exchange discretion to suspend the 

requirements for obtaining an 

allowlisted wallet address or the end-ofday reporting requirements, is 

insufficient to support a finding that the 

Exchange’s proposed rules are 

consistent with the Exchange Act, and 

with Section 6(b)(5) in particular. The 

Exchange failed to propose in its 

suspension provision a standard for the 

Exchange to suspend the allowlisting 

and end-of-day ownership reporting 

requirements. Under the proposal, the 

Exchange appears to retain complete 

discretion to suspend the allowlisting 

and end-of-day ownership balance 

reporting requirements as to some BSTX 

Participants or Securities but not others. 

The Exchange also appears to have 

discretion to suspend its own reporting 

of information to Wallet Managers to in 

turn update the Ethereum blockchain. 

Absent a standard for determining the 

suspension of allowlisting and end-ofday ownership reporting that would 

mitigate against the Exchange 

differently treating BSTX Participants or 

classes of Securities, the Commission 

has concerns about the potential for 

unfair discrimination among brokersdealers, and also among issuers. 

While the Exchange states that the 

proposed suspension provision is 

designed to apply to all market 

participants equally, and has listed 

several examples of when it may be 

appropriate to suspend the allowlisting 

or end-of-day ownership balance 

reporting requirements, the proposal 

does not provide any specificity 

regarding when the Exchange would be 

required to suspend these requirements 

or any conditions that must be met to 

warrant suspension.267 Furthermore, 

while the Exchange states that it will 

provide prompt notice to market 

participants in the case of a suspension, 

the proposal does not describe who at 

BSTX is empowered to make the 

decision to suspend or the standard that 

would be applied when deciding 

whether to suspend. Specific 

information regarding the extent of the 

Exchange’s discretion and standards 

that it would apply in determining 

when to suspend the allowlisting and 

end-of-day ownership balance reporting 

requirements is necessary for the 

Commission to assess whether the 

Exchange’s rules are not designed to 

permit unfair discrimination between 

issuers and between brokers or dealers, 


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268Additionally, the Exchange has not addressed 

how it would mitigate any potential conflicts of 

interest that could arise if Affiliate Securities were 

listed and traded on BSTX or if a broker-dealer 

affiliate of BSTX or the Exchange were to trade 

Securities as a BSTX Participant or otherwise, 

which could impact the Exchange’s determination 

to use its suspension authority. 

269See OIP, supra note 7, 85 FR at 51277 (citing 

Parts 1–12 of the NYSE American LLC Company 

Guide). 

270The Commission’s conclusions that the 

Exchange has not demonstrated that its proposal is 

consistent with the Exchange Act focus on these 

two specific aspects of the Exchange’s proposed 

listing rules. The Commission does not reach a 

conclusion about whether other aspects of the 

Exchange’s proposed listing rules are consistent 

with the Exchange Act. 

271See OIP, supra note 7, 85 FR at 51253. 

272See OIP, supra note 7, 85 FR at 51253. 

273See SIFMA Letter II, supra note 110, at 5. 

274See SIFMA Letter II, supra note 110, at 5. 

275See OIP, supra note 7, 85 FR at 51253, n.34. 

See also BSTX Response Letter II, supra note 105, 

at 4. 

276See BSTX Response Letter II, supra note 105, 

at 4, n.22. 

277See infra note 339 and accompanying text. For 

a discussion of other trading centers’ ability to trade 

BSTX-listed Securities, see infra Section III.D. 

278See supra notes 271–272, 275–276, and 

accompanying text. 

279See supra Section III.C.3 for discussion about 

the Exchange’s ability to suspend the allowlisting 

and end-of-day reporting requirements. 

consistent with the requirements of 

Section 6(b)(5). 

Due to the proposal’s failure to 

explain how the Exchange’s broad 

discretion to suspend requirements 

related to end-of-day reporting, which is 

the cornerstone of the Security as an 

NMS stock, is consistent with the 

Exchange Act, the Commission cannot 

find 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.268 Further, due to the lack of 

information regarding how the 

Exchange will determine whether to 

suspend the requirements for 

allowlisting and end-of-day reporting, 

the Commission is not able to find that 

the Exchange would be able to carry out 

its necessary functions, in accordance 

with Section 6(b)(1) of the Exchange 

Act. 

4. Listed Companies 

The proposal contains proposed rules 

concerning the listing of Securities, and 

the Exchange states that its proposed 

listing rules are substantially similar to 

the listing rules of another national 

securities exchange, with certain 

additions or modifications to the rules 

that are specific to the Exchange’s 

market.269 The Commission considers 

the proposed lack of fungibility between 

BSTX-listed Securities and other classes 

of securities of the same issuer, and 

concludes that the Exchange has not 

sufficiently addressed the potential 

implications on the trading of these 

securities and how these securities 

would trade in a manner consistent with 

the Exchange Act. In addition, the 

Commission considers the Exchange’s 

proposed rules requiring that a Security 

comply and continue to comply with 

the BSTX Protocol, and concludes that 

the record does not demonstrate how 

the Exchange will apply these 

provisions in a manner that is consistent 

with the Exchange Act.270

(a) Fungibility of BSTX-Listed Securities 

Exchange’s Representations and 

Comments Received 

The Exchange states that potential 

issuers on BSTX could include (1) new 

issuers that do not currently have any 

class of securities registered on a 

national securities exchange; and (2) 

issuers who currently have securities 

registered on another national securities 

exchange, and who are seeking 

registration of a separate class of equity 

securities for listing on BSTX.271 The 

Exchange also states that BSTX does not 

intend for Securities listed on BSTX to 

be fungible with any other class of 

securities from the same issuer.272

In the context of SR–BOX–2019–19, 

one commenter questioned why a class 

of BSTX-listed Securities would not be 

fungible with any other class of 

securities from the same issuer.273 This 

commenter also questioned what 

implications a lack of fungibility would 

have for the overall equity market 

infrastructure.274 In response, the 

Exchange stated that Securities would 

not be fungible with another class of 

securities of the same issuer, because no 

class of an issuer’s securities would be 

fungible with a separate class of its 

securities, and that it was not proposing 

any changes to the existing framework 

for different classes of securities.275 The 

Exchange gave as an example that two 

classes of shares of the same issuer, each 

of which have different ticker symbols, 

different rights (such as different voting 

rights), and different dividend rates, 

would not, according to the Exchange, 

be fungible with one another.276

(b) Analysis 

The Exchange asserts that its 

proposed use of blockchain technology 

to record and disseminate end-of-day 

Security ownership balances would 

operate separately from the existing 

market infrastructure and would not 

have an impact on the trading, clearing, 

or settlement of BSTX-listed 

Securities.277 For the Commission to 

make a finding that the rules of the 

Exchange are designed to, among other 

things, prevent fraudulent and 

manipulative practices, it is important 

for the Exchange to comprehensively 

analyze the potential relationship 

between a Security listed on BSTX and 

another class of securities from the same 

issuer that is listed on another national 

securities exchange. The Exchange 

asserts that, while issuers who have a 

class of securities listed on another 

national securities exchange may issue 

a separate class of securities to list on 

BSTX, the Securities listed on BSTX 

would not be fungible with any other 

class of securities from the same 

issuer.278 However, the proposal does 

not address whether BSTX would 

require that there be any differences in 

the rights and obligations associated 

with two classes of securities from the 

same issuer, only one of which is a 

Security listed on BSTX, other than that 

the BSTX-listed Security would have to 

have associated smart contracts that are 

compliant with the BSTX Protocol and 

adhere to the associated obligations 

relating to allowlisting and end-of-day 

reporting, which according to the 

Exchange would not impact trading, 

clearing or settling of BSTX-listed 

Securities. 

Moreover, as discussed above, the 

Exchange would be able to suspend the 

allowlisting and end-of-day reporting 

requirements for Securities listed on 

BSTX without an articulated standard in 

its rules.279 The Exchange does not 

address the possibility that, if the 

Exchange suspended these requirements 

with respect to a particular BSTX-listed 

Security, there might not be any 

difference in the rights and obligations 

associated with two classes of securities, 

or whether this lack of different 

characteristics would impact the 

fungibility of the classes. The Exchange 

also does not explain whether there 

might be possibilities for arbitrage 

between the two classes of securities of 

same issuer, if, due to a suspension of 

the allowlisting and end-of-day 

reporting requirements for the particular 

BSTX-listed Security, there are no 

remaining differences between the 

rights and obligations of the two classes 

of securities. Further, the Exchange does 

not explain whether a lack of remaining 

differences between the two classes of 

securities would impact trading in the 

securities. For example, in the instance 

the Exchange suspends allowlisting, 

which could occur at any time and for 

any reason as proposed under the 

Exchange’s rules, the Exchange does not 

explain whether it anticipates the two 

classes of securities would trade at the 


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280See OIP, supra note 7, 85 FR at 51256. See 

also proposed BSTX Rule 26138. 

281See proposed BSTX Rule 26230(a). In 

addition, an applicant that was denied initial listing 

pursuant to this section would be able to appeal the 

decision via the process outlined in the proposed 

BSTX Rule 27200 Series. See id. 

282See OIP, supra note 7, 85 FR at 51278. 

283See OIP, supra note 7, 85 FR at 51278. The 

Exchange states that it expects that some issuers 

may choose to use an outside vendor to help build 

their Security smart contract in a manner that 

complies with the BSTX Protocol, and that it 

understands that there are numerous technology 

companies that offer this service. See id. at 51278, 

n.300. 

284See proposed BSTX Rule 26230(b). 

285See OIP, supra note 7, 85 FR at 51278. 

286See OIP, supra note 7, 85 FR at 51278. 

287See proposed BSTX Rule 26230(b). 

288See proposed BSTX Rule 26230(b). See supra 

Section III.C.3 for a discussion of suspension of the 

end-of-day ownership balance reporting 

requirement. 

289See OIP, supra note 7, 85 FR at 51278. 

290See OIP, supra note 7, 85 FR at 51278–79. 

291See OIP, supra note 7, 85 FR at 51279. 

292See OIP, supra note 7, 85 FR at 51279. 

293See supra notes 284–287, 289, and 

accompanying text. 

294See supra note 284 and accompanying text. 

same or different prices and why there 

might be a discrepancy in prices. The 

lack of clarity about differences between 

multiple classes of securities of the 

same issuer, particularly where only one 

is a Security with an associated Token 

representation and that Token 

representation for a Security is 

suspended by the Exchange, and how 

this may impact the fungibility of the 

classes or how they trade, prevents the 

Commission from determining whether 

the relationship between the classes 

might create the potential for fraudulent 

or manipulative trading practices. Due 

to the Exchange’s failure to explain 

whether or how its proposed use of 

blockchain technology to record and 

disseminate end-of-day Security 

ownership balances could impact 

trading of the BSTX-listed Securities, 

the Commission cannot find that 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. 

(b) Compliance With BSTX Protocol 

(1) Exchange’s Representations 

Proposed BSTX Rule 26230 would 

provide listing requirements relating to 

the architecture of a Security’s 

associated smart contract that an issuer 

must satisfy to list and remain listed on 

the Exchange. The Exchange states that 

all listed companies’ Securities must 

comply with the BSTX Protocol to 

ensure that all Securities are governed 

by the same set of specifications and 

controls that allow for their ownership 

to be recorded on the Ethereum 

blockchain using Tokens as an 

‘‘ancillary’’ recordkeeping 

mechanism.280 Prior to approving a 

Security for trading on the Exchange, 

the Exchange would conduct an audit of 

the Security’s smart contract 

architecture to ensure compliance with 

the BSTX Protocol.281 The Exchange 

states that the purpose of this initial 

listing requirement is to ensure that the 

design and structure of a prospective 

BSTX-listed company’s Security smart 

contract is compatible with the BSTX 

Protocol, for purposes of facilitating 

updates to the blockchain as an 

ancillary recordkeeping mechanism.282

The Exchange states that it may use 

third party service providers that have 

demonstrated sufficient technical 

expertise in blockchain technology and 

an understanding of the BSTX Protocol 

to conduct this audit on behalf of the 

Exchange.283

After being listed on the Exchange, as 

a continued listing requirement, a 

BSTX-listed company would remain 

responsible for ensuring that its Security 

smart contract remains compatible with 

the BSTX Protocol and accurately 

reflects the number of shares 

outstanding.284 The Exchange states that 

it recognizes that there may be 

circumstances in which it becomes 

necessary to modify certain aspects of 

the smart contract corresponding to the 

Security.285 The Exchange adds that, for 

example, in the case of a stock split, a 

BSTX-listed company may need to 

increase the total supply of Securities as 

programmed into its Security smart 

contract.286 Under the proposal, the 

BSTX-listed company would be 

required to provide notice to the 

Exchange at least five days prior to 

implementing any modification that it 

would make to a smart contract 

corresponding to a Security (e.g., to 

increase the total supply), to allow the 

Exchange to audit the proposed 

modification.287 If additional time is 

needed to implement the modification, 

the Exchange would be able to exercise 

its authority to suspend the ancillary 

recordkeeping process relating to that 

Security pursuant to proposed BSTX 

Rule 17020(f).288

The Exchange asserts that the primary 

circumstances under which a 

modification to a smart contract 

corresponding to a Security may be 

necessary would be where there is a 

change to the total supply of the 

Security, which could occur in the case 

of a stock split, a reverse stock split, a 

buy-back, or a dividend in kind.289 The 

Exchange states that any delay in the 

implementation of a change to a smart 

contract that corresponds to a Security 

would not impact the record date or exdividend date for any dividend, 

distribution, or other action.290

According to the Exchange, it believes 

that proposed BSTX Rule 26230 

facilitates end-of-day Security 

ownership balance reporting for BSTXlisted Securities, and that this reporting 

is a first step towards the potential 

integration of blockchain technology to 

securities transactions.291 The Exchange 

states that, without ensuring that BSTXlisted companies’ Securities are 

compatible with the BSTX Protocol, the 

use of blockchain technology as an 

ancillary recordkeeping mechanism 

could be impaired.292

(2) Analysis 

The record fails to explain clearly 

how the Exchange will implement its 

proposed continued listing requirement 

that smart contracts associated with 

BSTX-listed Securities must remain in 

compliance with the BSTX Protocol. 

The proposal contemplates 

circumstances in which the smart 

contracts associated with Securities 

would need to be changed due to 

corporate actions by the BSTX-listed 

company that would change the 

outstanding number of Securities.293

However, the record does not contain 

any discussion about the impact on a 

BSTX-listed company’s obligations 

under circumstances in which the 

Exchange initiates changes to the BSTX 

Protocol. In such circumstances, 

proposed BSTX Rule 26230(b) would 

require an issuer to make changes to the 

smart contract associated with its 

Security so that its Security remains 

compliant with the BSTX Protocol.294

Yet the proposal does not contain any 

discussion about what policies and 

procedures the Exchange would use to 

evaluate the ability of BSTX-listed 

companies to respond to changes in the 

BSTX Protocol initiated by the 

Exchange or resulting from changes to 

the Ethereum blockchain itself and to 

ensure that the BSTX-listed company’s 

Securities continue to meet this 

continued listing requirement under 

BSTX’s proposed rules. The lack of 

procedures increases the risk of the 

Exchange unfairly discriminating 

between issuers. 

In particular, the proposal does not 

address whether any protections would 

be in place to ensure that the BSTXVerDate Sep<11>2014 16:40 Dec 26, 2020 Jkt 253001 PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 E:\FR\FM\28DEN1.SGM 28DEN1

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295See supra note 283. 

296See supra note 281. 

297See OIP, supra note 7, 85 FR at 51262. 

298See OIP, supra note 7, 85 FR at 51262. 

299See OIP, supra note 7, 85 FR at 51289. 

300See OIP, supra note 7, 85 FR at 51263. 

301See OIP, supra note 7, 85 FR at 51289. See 

infra notes 328–331 and accompanying text 

(discussing the Exchange’s assertions concerning 

the benefits of the proposal). 

302See OIP, supra note 7, 85 FR at 51262–63. The 

Exchange gives as examples of potential alternatives 

that another national securities exchange could 

employ: Collecting end-of-day Security ownership 

balance information from its members and then 

relaying that information to BSTX to deliver to a 

Wallet Manager for recording to the Ethereum 

blockchain; trading BSTX-listed Securities without 

any end-of-day reporting requirement; engaging its 

own version of a wallet manager to communicate 

with BSTX’s Wallet Manager(s) to facilitate updates 

to the Ethereum blockchain; or designing its own 

reporting process and technology, with no nexus to 

the BSTX end-of-day Security balance reporting 

structure. See OIP, supra note 7, 85 FR at 51263. 

In the case of a national securities exchange that 

determined to relay balance information from its 

members to BSTX, the Exchange states that no 

development of blockchain technology, smart 

contract functionality, or other similar technology 

would be required, because an exchange that adopts 

such a reporting structure would be in a position 

similar to a BSTX Participant, in that it would 

simply deliver end-of-day Security balance 

information to BSTX (or a Wallet Manager). See 

OIP, supra note 7, 85 FR at 51263, n.103 and 

accompanying text. 

303See OIP, supra note 7, 85 FR at 51263. 

listed company has adequate notice of 

changes to the BSTX Protocol and has 

the technical capability to make any 

changes necessary to its Security smart 

contract to maintain its Security in 

compliance with the BSTX Protocol. 

Although a BSTX-listed company may 

hire an external vendor prior to initial 

listing to help it build its smart 

contracts,295 assessing capabilities to 

comply with the BSTX Protocol prior to 

listing, when an issuer can decide 

whether to undertake the work 

necessary to ensure that its smart 

contracts comply with the BSTX 

Protocol, presents different concerns 

than what is needed to make changes to 

maintain compliance with the BSTX 

Protocol after listing, when the failure to 

comply can lead to the delisting of a 

listed and actively-traded security. In 

addition, it is unclear how a fork in the 

Ethereum blockchain might impact the 

BSTX Protocol and the steps necessary 

for a BSTX-listed company to maintain 

compliance. Moreover, the proposed 

rule provision concerning the 

Exchange’s audit of the architecture of 

a Security’s associated smart contract 

prior to listing states explicitly that an 

applicant denied listing pursuant to that 

provision would be able to appeal that 

decision via the process outlined in the 

proposed BSTX Rule 27200 Series,296

but the proposal does not set forth 

procedures for appeal of a decision by 

the Exchange that a Security has fallen 

outside of compliance with the BSTX 

Protocol. To the extent that the general 

procedures in the proposed BSTX Rule 

27000 Series (Suspension and Delisting) 

would apply, the Exchange has not 

demonstrated that these procedures are 

adequate for technical determinations 

about compliance with the BSTX 

Protocol. 

For the Commission to conclude that 

the proposal is not designed to, among 

other things, impose continued listing 

requirements on issuers in an arbitrary 

manner or permit unfair discrimination 

between issuers, it is important for the 

Exchange to provide sufficient 

explanation about how the Exchange 

will implement its continued listing 

requirement that a BSTX-listed Security 

remain compliant with the BSTX 

Protocol, and how issuers will be able 

to ensure that their listed Securities 

remain compliant. Due to the lack of 

such information, the Commission is 

unable to find 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. 

D. Whether BOX Has Sufficiently 

Explained the Burden the Proposal 

Would Place on Other National 

Securities Exchanges’ Ability To Trade 

BSTX-Listed Securities and Met its 

Burden To Demonstrate That the 

Proposal Is Consistent With Section 

6(b)(8) of the Exchange Act 

The Commission examines below 

whether the Exchange has 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. As 

discussed further below, the Exchange 

has not sufficiently explained the 

burden that the proposal would place 

on national securities exchanges to 

provide end-of-day reporting of Security 

ownership balances for their members. 

Moreover, the Exchange has not 

adequately addressed the potential 

burden on competition that would 

result from the Exchange’s control over 

the end-of-day reporting process or the 

burden on other national securities 

exchanges that seek to either participate 

in the end-of-day reporting process of 

the Exchange or develop their own. 

Accordingly, the Commission does not 

have sufficient information to assess 

whether the burden on competition 

imposed by the proposed end-of-day 

reporting functionality is necessary or 

appropriate in furtherance of the 

Exchange Act, in accordance with 

Section 6(b)(8) of the Exchange Act. 

1. Exchange’s Representations and 

Comments Received 

The Exchange states that the end-ofday Security ownership balance 

reporting by BSTX Participants and the 

public dissemination of the end-of-day 

Security ownership balances on the 

blockchain does not impact the ability 

of Securities to trade on other national 

securities exchanges or OTC.297 The 

Exchange states that Securities would be 

eligible for trading on other national 

security exchanges that extend UTP to 

them, and therefore Securities would be 

able to trade on other national securities 

exchanges and OTC in the same manner 

as other NMS stocks.298 Specifically, the 

Exchange states that because Securities 

would trade, clear, and settle in the 

same manner as other NMS stock, other 

national securities exchanges could 

extend UTP to BSTX-listed Securities 

that are NMS stock in accordance with 

Commission rules.299 Additionally, the 

Exchange states that a national 

securities exchange that chooses to 

extend UTP to Securities could trade 

them without any end-of-day or 

blockchain reporting structure.300

Furthermore, the Exchange states that, 

with regard to other national securities 

exchanges extending UTP to Securities, 

the Exchange does not believe that the 

proposed BSTX Rules would impose a 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act.301

The Exchange states that there are 

many ways another national securities 

exchange could adopt its own end-ofday Security ownership balance 

reporting requirement. The Exchange 

also states that it cannot predict whether 

another exchange would want to adopt 

its own reporting requirement, and if it 

did, what model it would choose, and 

how or whether that model would 

interact with the Exchange’s end-of-day 

Security ownership reporting 

structure.302 Further, the Exchange 

states that it is not proposing any 

limitation that would prevent another 

national securities exchange from 

participating in the Exchange’s end-ofday Security ownership balance 

reporting process or establishing its own 

alternative or complementary process, 

and that it is not proposing to limit 

another exchange’s ability to establish a 

similar, different, or integrated reporting 

structure.303 If another exchange 


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304See OIP, supra note 7, 85 FR at 51263, n.105. 

305See id. 

306See SIFMA Letter II, supra note 110, at 6. 

307See SIFMA Letter II, supra note 110, at 4. This 

commenter also asked, if the distributed ledger 

technology and its source code is exclusive to 

BSTX, what other national securities exchanges 

would have to do to gain access. See id. at 4–5. 

308See SIFMA Letter II, supra note 110, at 6. This 

commenter also stated that it is unclear whether the 

Exchange could limit UTP trading in BSTX-listed 

Securities in the future. See id. 

309See SIFMA Letter II, supra note 110, at 3. This 

commenter also questioned whether other market 

participants would have the ability to change the 

source code underlying the distributed ledger 

technology. See id. at 5. 

310See IEX Letter, supra note 77, at 5. 

311See Nasdaq Letter, supra note 77, at 1. 

312See Nasdaq Letter, supra note 77, at 2. 

313See Nasdaq Letter, supra note 77, at 3. 

314See Nasdaq Letter, supra note 77, at 3. 

315See Nasdaq Letter, supra note 77, at 3. 

316See BSTX Response Letter I, supra note 82, at 

3. Also, with respect to other exchanges extending 

UTP to Securities, the Exchange states that it does 

not believe that the proposal would impose a 

burden on competition that is not necessary or 

appropriate in furtherance of the purposes of the 

Exchange Act, in that Securities would trade, clear, 

and settle in the same manner as other NMS stock, 

and accordingly, other exchanges would be able to 

extend UTP to Securities in accordance with 

Commission rules. See OIP, supra note 7, 85 FR at 

51289. See also supra notes 301, 303, and 

accompanying text (discussing the Exchange’s 

statement regarding burden on competition in the 

context of other exchanges extending UTP). 

317See OIP, supra note 7, 85 FR at 51262; BSTX 

Response Letter I, supra note 82, at 3. See also id. 

at 16 (stating that Securities are fully capable of 

trading on other national securities exchanges or 

OTC without an ‘‘ancillary’’ recordkeeping 

mechanism); BSTX Response Letter II, supra note 

105, at 5 (same). 

318See BSTX Response Letter I, supra note 82, at 

3. See also BSTX Response Letter II, supra note 105, 

at 5 (stating that any national securities exchange 

would be free to extend UTP to Securities 

consistent with applicable regulatory requirements). 

The Exchange also states, in response to whether 

other exchanges would be able to access the 

distributed ledger technology that BSTX proposes 

to use, that use of Ethereum blockchain technology, 

which is an open source public blockchain that 

supports smart contract functionality, is not 

exclusive to BSTX, and thus, all market participants 

would have open access to the distributed ledger 

technology associated with the Exchange’s 

proposal. See OIP, supra note 7, 85 FR at 51289, 

n.366. 319See OIP, supra note 7, 85 FR at 51290; BSTX 

Response Letter I, supra note 82, at 3, 4. 320See BSTX Response Letter I, supra note 82, at 

4. 321See BSTX Response Letter I, supra note 82, at 

4. See also BSTX Response Letter II, supra note 105, 

at 2–3 (reiterating that the distributed ledger 

technology that would be used is the Ethereum 

blockchain, which is not exclusive to BSTX, and is 

an open source public blockchain that supports 

smart contract functionality). 

322See BSTX Response Letter I, supra note 82, at 

4. 

323See BSTX Response Letter I, supra note 82, at 

4. See also OIP, supra note 7, 85 FR at 51257 

(stating that the Exchange will not accept voluntary 

reports of end-of-day Security balances from nonBSTX Participants, but may consider doing so in 

the future, subject to any applicable or necessary 

rule filing requirements with the Commission); 

BSTX Response Letter III, supra note 207, at 3. 

decides to trade Securities, but not to 

use blockchain technology to record 

end-of-day ownership balances reported 

by its members, the Exchange states that 

the other exchange’s process would not 

be able to leverage the smart contract 

functionality built into BSTX-listed 

issuers’ Securities pursuant to the BSTX 

Protocol.304 The Exchange states that in 

such a case, there would be separate sets 

of end-of-day ownership balance 

records—the balances of BSTX 

Participants would be recorded on the 

Ethereum blockchain and the balances 

of the other exchange’s members would 

be separately reflected.305

One commenter questioned, in the 

context of SR–BOX–2019–19, whether 

other national securities exchanges 

would be in a position to extend UTP 

to BSTX-listed Securities.306 This 

commenter asked if the distributed 

ledger technology proposed by BSTX 

would be exclusive to BSTX and if other 

national securities exchanges would 

have access to the technology or its 

source code.307 This commenter asked if 

other national securities exchanges 

would have the ability currently to trade 

BSTX-listed Securities, and, if not, what 

changes they would need to make to be 

able to do so.308 This commenter stated 

that, to the extent that other national 

securities exchanges adopt their own 

distributed ledger technology to track 

ownership of equity securities traded on 

their markets, complications may arise 

in the equities markets if varying forms 

of this technology are used.309 Another 

commenter, in the context of SR–BOX– 

2019–19, stated its belief that the 

Exchange should address the 

implications in terms of burden on 

competition for other national securities 

exchanges that would like to extend 

UTP to BSTX-listed stocks.310

Also in the context of SR–BOX–2019– 

19, one commenter stated that the 

proposal appears to provide insufficient 

detail regarding the digital security 

infrastructure and how technology 

would pair with existing equities market 

infrastructure.311 This commenter stated 

that to avail itself of the blockchain 

technology associated with the 

proposed Securities (which this 

commenter asserted is the only unique 

characteristic of the Securities), the 

purchaser must be a BSTX 

Participant.312 This commenter further 

stated that the proposal is designed to 

provide an advantage to the Exchange as 

the exclusive provider of blockchain 

technology for Securities, because the 

Exchange will not accept end-of-day 

Security ownership balance reports 

from non-BSTX Participants.313 This 

commenter asserted that, as such, the 

Exchange’s proposal places an 

‘‘unreasonable’’ burden on 

competition.314 This commenter also 

stated it would be inappropriate, and 

perhaps beyond the scope of the 

Commission’s authority, to allow NMS 

plans to be used for the ‘‘specialized 

competitive purposes’’ of an individual 

national securities exchange.315

In response, in the context of SR– 

BOX–2019–19, the Exchange asserted 

that the trading of Securities does not 

impose any additional burden compared 

to the trading of other NMS stocks.316

The Exchange stated that end-of-day 

Security ownership balance reporting 

and the publication of such information 

on the Ethereum blockchain does not 

impact the ability of Securities to trade 

on other national securities exchanges 

or OTC, and that Securities are fully 

capable of trading on other national 

securities exchanges or OTC without an 

‘‘ancillary’’ recordkeeping 

mechanism.317 Therefore, according to 

the Exchange, if any other national 

securities exchange sought to extend 

UTP to a BSTX-listed Security, it could 

do so under the existing regulatory 

framework.318

The Exchange responded further that 

there is no limitation in its proposal that 

would prevent another national 

securities exchange from adopting its 

own process and requirements to record 

and disseminate end-of-day Security 

ownership balances.319 The Exchange 

stated that it encourages other national 

securities exchanges to consider taking 

steps to promote the use of blockchain 

technology and help familiarize market 

participants with its potential uses and 

benefits.320 The Exchange also stated 

that it proposes to use a ‘‘common 

distributed ledger’’ in the form of the 

public Ethereum blockchain that any 

other national securities exchange could 

use to implement its own recordkeeping 

process.321 According to the Exchange, 

any other national securities exchange 

that wants to trade Securities would 

have access to the publicly available, 

open-source code from the BSTX 

Protocol, and also would be able to 

leverage the pre-established Security 

architecture to facilitate any similar 

end-of-day reporting requirements.322

The Exchange stated that it would 

impose the end-of-day reporting 

requirement only on BSTX Participants 

because of the limits of its legal 

authority, and that while it would not 

initially accept voluntary reporting from 

non-BSTX Participants, it may consider 

accepting such voluntary reports in the 

future.323


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324See BSTX Response Letter I, supra note 82, at 

4. The Exchange also stated that it was not 

proposing a fee related to the reporting of end-ofday ownership balances to the Ethereum 

blockchain, and therefore Securities trading on 

other national securities exchanges would not offer 

a unique benefit to the Exchange in this respect. See 

id. at 5. 

325See BSTX Response Letter I, supra note 82, at 

4, 5. 

326See BSTX Response Letter I, supra note 82, at 

4–5. 

327See BSTX Response Letter I, supra note 82, at 

5, 9–10. The Exchange also asserted its 

disagreement with a commenter’s statement that it 

would be inappropriate to allow national market 

system plans to be used for the specialized 

competitive purposes of an individual national 

securities exchange, and stated that the point is not 

relevant because the Exchange had not proposed 

any national market system plan relating to its 

proposal. See id. at 4, n.15. 

328See OIP, supra note 7, 85 FR at 51262. The 

Exchange also states that it believes that the public 

has an interest in exploring the use of new 

technology, such as blockchain technology, and that 

such technology may be able to help perfect the 

mechanism of a free and open market and a 

national market system. See id. 

329See OIP, supra note 7, 85 FR at 51287. See 

also id. at 51262 (stating that the Exchange’s 

contention that the proposal is reasonably designed 

to introduce blockchain technology in a gradual 

way, and in coordination and cooperation with the 

industry, the Commission, and the existing 

regulatory framework). 

330See OIP, supra note 7, 85 FR at 51263. 

331See id. See also BSTX Response Letter I, supra 

note 82, at 13. The Exchange also states that, while 

it believes that its proposal represents an 

introductory step in pairing the benefits of 

blockchain technology with the current equity 

market structure, other market participants and 

FINRA have recognized additional potential 

benefits to blockchain technology in various 

applications related to the securities markets. See 

OIP, supra note 7, 85 FR at 51263, n.110. 

332See Eversheds Letter, supra note 91, at 1–2; 

IEX Letter, supra note 77, at 5; PKA Law Letter, 

supra note 175, at 1–2; SIFMA Letter II, supra note 

110, at 3. 

333See PKA Law Letter, supra note 175, at 1–2. 

334See PKA Law Letter, supra note 175, at 2. 

335See IEX Letter, supra note 77, at 5. 

336See IEX Letter, supra note 77, at 5. 

337See Eversheds Letter, supra note 91, at 1–2. 

See also IEX Letter, supra note 77, at 5, n.8 

(agreeing with the concerns identified in the 

Eversheds Letter and stating that these concerns 

were not fully or clearly addressed by Amendment 

No. 2). 

338See Eversheds Letter, supra note 91, at 2. 

339See BSTX Response Letter I, supra note 82, at 

13. 

340BSTX Response Letter I, supra note 82, at 13. 

341See BSTX Response Letter I, supra note 82, at 

14. 

In response to comments on SR– 

BOX–2019–19, the Exchange stated its 

disagreement with a commenter’s 

assertion that the Exchange is proposing 

to use UTP to promote trading that 

uniquely benefits the Exchange, and 

states that it is not ‘‘using’’ UTP in any 

manner.324 The Exchange asserted its 

belief that its proposal would not 

impose any burden on competition 

because other national securities 

exchanges would be free to determine 

whether to extend UTP to Securities.325

The Exchange further asserted that there 

is no mechanism by which one national 

securities exchange can force another 

national securities exchange to extend 

UTP to its listed securities, and 

therefore any national securities 

exchange would be free to extend UTP 

to BSTX-listed Securities consistent 

with applicable regulatory 

requirements.326 The Exchange also 

stated that, if a national securities 

exchange were to choose to extend UTP 

to BSTX-listed Securities and adopt a 

recordkeeping process utilizing the 

blockchain, it could do so in a manner 

consistent with BSTX’s proposed 

requirements and end-of-day reporting 

structure, or could develop and pursue 

another approach.327

With respect to the Exchange’s stated 

purpose for recording and publicly 

disseminating Security ownership 

balances, the Exchange states that it 

believes that initially using blockchain 

technology as an ‘‘ancillary’’ 

recordkeeping mechanism, pursuant to 

which the Securities represented on the 

blockchain in Token form would not 

convey legal ownership, is the 

appropriate way to explore the potential 

benefits of blockchain technology 

consistent with the protection of 

investors and the public interest.328

According to the Exchange, it believes 

that using blockchain technology to 

record and disseminate end-of-day 

Security ownership balances in parallel 

with the traditional trading, 

recordkeeping, and clearance and 

settlement structures that market 

participants are familiar with is an 

important first step toward exploring 

the potential uses and benefits of 

blockchain technology in securities 

transactions.329 The Exchange further 

states that it believes that promoting the 

use of the functionality of smart 

contracts and their ability to allocate 

and re-allocate Securities balances in 

Token form across multiple wallet 

addresses in connection with end-of-day 

Security ownership balance information 

of BSTX Participants will allow market 

participants to observe and increase 

their familiarity with the ‘‘capabilities 

and potential benefits’’ of blockchain 

technology in a context that parallels 

the current equity market 

infrastructure.330 Thereby, according to 

the Exchange, its proposal would 

advance and protect the public’s interest 

in the use and development of new data 

processing techniques that may create 

opportunities for more efficient, 

effective, and safe securities markets.331

In the context of SR–BOX–2019–19, 

several commenters raised questions 

about the purpose of the Exchange’s 

proposed use of blockchain technology 

to record and disseminate end-of-day 

Security ownership balances.332 One 

commenter asserted that it is unclear 

what efficiencies or purposes an end-ofday Security ownership balance would 

provide or that Securities would offer to 

the global securities marketplace, and 

that the proposed structure would 

introduce potential burdens on market 

participants.333 According to this 

commenter, it seemed likely that the 

introduction and use of Securities 

would create an undue burden on 

market participants, exchanges, 

custodians, clearing firms, and retail 

and institutional investors.334 Another 

commenter asked what the purpose of 

the proposed end-of-day Security 

ownership balance reporting 

mechanism would be.335 This 

commenter further asked, if the purpose 

was to gradually introduce blockchain 

technology, what the next steps would 

be.336 Another commenter asserted that 

the proposal did not provide sufficient 

detail regarding the ultimate purpose of 

the records of end-of-day Security 

ownership balances and the specific 

content and design of such records, and 

that therefore the purpose and design of 

these records was unclear and could not 

be evaluated under the Exchange Act.337

According to this commenter, a reader 

of the proposal could not identify and 

evaluate the ways in which the end-ofday Security ownership balance may 

benefit investors or add transactional, 

operational, and other types of risk.338

In response, in the context of SR– 

BOX–2019–19, the Exchange reiterated 

the purpose of the end-of-day Security 

ownership balances as previously stated 

and asserted its belief that the proposed 

‘‘ancillary’’ recordkeeping process, 

which is designed to operate separate 

and apart from the existing market 

infrastructure and would not impact 

trading, clearance, or settlement of 

Securities, would not pose any 

transactional or operational risks.339

According to the Exchange, it believed 

that its explanation about the purpose of 

the end-of-day Security ownership 

balances that it provided in SR–BOX– 

2019–19 as amended by Amendment 

No. 2 provided ‘‘sufficient information 

for market participants to independently 

arrive at this same conclusion.’’ 340 The 

Exchange stated that the record of endof-day Security balances on the 

blockchain is for the public benefit.341

The Exchange asserted its belief that 

blockchain technology may offer 

benefits to the trading of securities, and 

that the Exchange had proposed a 


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342See BSTX Response Letter I, supra note 82, at 

14. 

343See BSTX Response Letter I, supra note 82, at 

9. 

344See Eversheds Letter, supra note 91, at 3. 

345See also OIP, supra note 7, 85 FR at 51288. 

346See OIP, supra note 7, 85 FR at 51288 (quoting 

15 U.S.C. 78(b) (emphasis in OIP)). See also BSTX 

Response Letter I, supra note 82, at 16. 

347See OIP, supra note 7, 85 FR at 51288; BSTX 

Response Letter I, supra note 82, at 16–17. The 

Exchange states that, for example, all of the U.S. 

options exchanges and FINRA maintain rules 

approved by the Commission that require their 

member broker-dealers to prepare and submit daily 

large options position reports, and that these reports 

do not concern the trading or clearance and 

settlement of securities transactions themselves, but 

instead are reports relating to end-of day positions. 

The Exchange asserts that the requirements 

regarding the end-of-day Security ownership 

balance reporting process would similarly require 

BSTX Participants to provide reports regarding their 

end-of-day ownership balances in Securities. See 

OIP, supra note 7, 85 FR at 51288. See also BSTX 

Response Letter I, supra note 82, at 17. 

348See OIP, supra note 7, 85 FR at 51288. See 

also BOX Response Letter I, supra note 82, at 13; 

OIP, supra note 7, 85 FR at 51289, n.371 and 

accompanying text. See also supra notes 328–331 

and accompanying text. 

349See SIFMA Letter II, supra note 110, at 3. 

350See SIFMA Letter II, supra note 110, at 3. 

351SIFMA Letter II, supra note 110, at 3. 

352See SIFMA Letter II, supra note 110, at 3–4. 

This commenter suggested that the novel equity 

market infrastructure issues presented by the 

proposal are better suited for a concept release or 

other type of release by the Commission that is 

geared toward soliciting market-wide feedback, 

rather than an ad hoc proposal by a single national 

securities exchange. See id. at 4. See also SIFMA 

Letter IV, supra note 220, at 5–6 (stating continued 

concerns about new processes and technology with 

wider implications for the equity market structure 

infrastructure being considered in the framework of 

a proposed rule change by a single exchange 

without actively working with and soliciting input 

from the industry). 

353See BSTX Response Letter II, supra note 105, 

at 3. 

354See SIFMA Letter IV, supra note 220, at 4 

(noting its prior comment). 

355See SIFMA Letter IV, supra note 220, at 5. 

356See BSTX Response Letter III, supra note 207, 

at 5, n.13. 

357See BSTX Response Letter III, supra note 207, 

at 6. 

358See BSTX Response Letter III, supra note 207, 

at 3. 

limited use of the technology in the 

form of end-of-day Security ownership 

balances on the blockchain to help it 

evaluate whether such benefits might be 

realized.342 The Exchange stated that it 

may consider a variety of next steps 

towards potential further integration of 

blockchain technology, any of which 

would be subject to the rule filing 

requirements, and public notice and 

comment, pursuant to Section 19 of the 

Exchange Act.343

Also in the context of SR–BOX–2019– 

19, one commenter asserted that the 

proposal’s requirements with respect to 

maintaining end-of-day Security 

ownership balances on the blockchain 

are inconsistent with the requirement in 

Section 6(b)(5) of the Exchange Act that 

a national securities exchange’s rules 

may not regulate matters not related to 

the purposes of this title or the 

administration of the exchange, because 

the maintenance of these records does 

not appear to be necessary for the 

clearance and settlement of the 

Securities, the fair and orderly trading 

of Securities, or any purpose regulated 

by the Exchange Act.344 The Exchange 

responds that it believes that the 

proposal is not designed to regulate 

matters outside those contemplated and 

authorized by the Exchange Act.345 The 

Exchange states that Section 2 of the 

Exchange Act sets forth the reasons for 

the Exchange Act, which include that 

‘‘ transactions in securities as commonly 

conducted upon securities exchanges 

and over-the-counter markets are 

effected with a national public interest 

which makes it necessary to provide for 

regulation and control of such 

transactions and of practices and 

matters related thereto, including . . . 

to require appropriate reports.’ ’’ 346

According to the Exchange, the 

Exchange Act and the rules of SROs 

include reporting requirements that 

regulate and control matters and 

practices related to securities 

transactions conducted on national 

securities exchanges and in OTC 

markets.347 As noted above, the 

Exchange also reasserts its belief that 

the end-of-day reporting requirements 

will allow market participants to 

observe and increase their familiarity 

with the capabilities and potential 

benefits of blockchain technology in a 

context that parallels current equity 

market infrastructure.348

In the context of SR–BOX–2019–19, 

one commenter stated that the Exchange 

appeared to be proposing a proprietary 

Ether-based distributed ledger 

technology to be used to track 

ownership on an ‘‘ancillary’’ basis for 

BSTX-listed Securities.349 This 

commenter asserted that the Exchange is 

encouraging the adoption of this 

technology with the likely eventual goal 

of having it become a system for 

tracking equity security ownership 

outside of the current system 

maintained by DTC and brokerdealers.350 This commenter further 

asserted that the end-of-day Security 

balance reporting ‘‘appears to be 

nothing more than a way to force 

industry participants to sign up for the 

Exchange’s blockchain service, adding 

cost while providing no apparent value 

to firms, institutional clients, or retail 

investors.’’ 351 This commenter stated 

that while it supports adoption of new 

processes and technology to make the 

equity market infrastructure more 

efficient and robust and supports the 

use of technology to strengthen the 

security settlement system, it has 

concerns about the wider implications 

on the equity market infrastructure.352

The Exchange responded that that 

proposal was designed to operate 

entirely within the existing equity 

market structure, including the 

requirements for clearance through 

NSCC and settlement through DTC, and 

that any future changes would be 

subject to the Commission’s rule filing 

process under Section 19 of the 

Exchange Act.353

In the context of SR–BOX–2020–14, 

this commenter stated that it previously 

expressed concerns regarding the endof-day Security balance reporting aspect 

of the Exchange’s proposal, and that it 

had previously raised concerns about 

how other exchanges might trade 

Securities pursuant to UTP, whether 

they might be required to adopt BOX’s 

proprietary technology, and how having 

exchanges adopt different forms of 

distributed ledger technology to track 

equity ownership of equity securities 

could cause additional costs to the 

industry.354 This commenter stated that 

the end-of-day Securities balance 

reporting requirements would serve as a 

potential impediment for other 

exchanges to trade the Securities 

pursuant to UTP, and that other 

exchanges may be hesitant to trade 

Securities pursuant to UTP because of 

the lack of clarity around the 

implications of BSTX’s end-of-day 

Security ownership balance reporting 

requirements for their members.355

In response to the commenter’s 

concerns about ‘‘how other exchanges 

might trade the Securities pursuant to 

UTP,’’ the Exchange stated that no 

comments were submitted by any 

national securities exchanges following 

its filing of Amendment No. 1 to the 

proposal.356 The Exchange also stated 

that a market participant that 

voluntarily chooses to become a BSTX 

Participant must comply with BSTX 

rules,357 and that its proposal is clear 

that a BSTX Participant must report its 

end-of-day balance at DTC or its 

carrying firm in the relevant Security 

pursuant to proposed BSTX Rule 

17020(b).358 Additionally, the Exchange 

stated that, regarding costs associated 

with the end-of-day Security ownership 

balance reporting process, it does not 

believe that imposing the proposed 

requirement on BSTX Participants is 

unfairly discriminatory or burdens 

competition because all market 


tkelley on DSKBCP9HB2PROD with NOTICES
Federal Register / Vol. 85, No. 248 / Monday, December 28, 2020 / Notices 84429 

359See BSTX Response Letter III, supra note 207, 

at 5–6. 

360See BSTX Response Letter III, supra note 207, 

at 6–7. 

361Commenters raised concerns about the 

Exchange being an exclusive provider of a process 

that would use blockchain technology to record and 

disseminate end-of-day Security ownership 

balances and that other national securities 

exchanges would be unable to compete on this 

basis. See supra notes 307–315 and accompanying 

text. 

362See supra note 299 and accompanying text. 

363See supra note 323. 

364See supra notes 319–322, 327, and 

accompanying text. 

365See supra note 302. 

366See supra Section III.C.2 for additional 

discussion of the process for allowlisting and endof-day reporting. 

367See supra note 302. 

368See id. 

369See supra note 323. Although the Exchange 

states that it may determine to accept voluntary 

reporting from non-BSTX Participants in the future 

(see supra note 323 and accompanying text), the 

Commission must evaluate whether the current 

proposal is consistent with the Exchange Act. 

370See OIP, supra note 7, 85 FR at 51264, n.104 

(discussing the Exchange’s lack of clarity as to 

whether it would be necessary for BSTX and 

another exchange that decides to trade Securities, 

establish an end-of-day balance reporting 

requirement for its members, and relay the balance 

information to BSTX for recording to the Ethereum 

blockchain to file an NMS plan with respect to 

coordinating end-of-day balance reporting 

mechanisms). 

participants are free to choose whether 

to become a BSTX Participant or not 

and there is no limitation imposed by 

the Exchange on the ability to trade 

Securities on other markets.359 The 

Exchange also stated that its proposal 

represents an incremental change to 

incorporate blockchain technology 

within the current infrastructure and 

regulations for the equities market— 

including clearance and settlement— 

and that any future structural changes 

would be subject to the rule filing 

process pursuant to Section 19 of the 

Act.360

2. Analysis 

As stated above, the Commission 

supports innovation in our securities 

markets, and its disapproval does not 

rest on an evaluation of the utility or 

value of blockchain technology as 

applied to the functions of a national 

securities exchange. Due to the 

Exchange’s lack of analysis about the 

burden that other national securities 

exchanges would face to use an end-ofday Security ownership reporting 

mechanism in connection with the 

trading of Securities on their markets 

and the competitive impacts, however, 

the Commission cannot find that the 

proposal does not impose any burden 

on competition that is not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act, 

consistent with Section 6(b)(8). The 

Exchange asserts that it is not proposing 

any limitation that would prevent 

another national securities exchange 

from participating in the Exchange’s 

end-of-day Security ownership balance 

reporting process or establishing its own 

alternative or complementary process, 

and that it is not proposing to limit 

another exchange’s ability to establish a 

similar, different, or integrated reporting 

structure. 

As discussed below, the Commission 

believes that the Exchange has not fully 

explained critical operational aspects of 

the end-of-day Security ownership 

reporting functionality, particularly 

with respect to how another national 

securities exchange may employ such 

functionality, on its own or in 

coordination with BSTX, and trade 

BSTX-listed NMS stock on its 

exchange.361 Without this explanation, 

the Commission is unable to 

comprehensively assess the existence or 

scope of any burden resulting from the 

Exchange’s proposed end-of-day 

Security ownership reporting 

functionality and concludes that the 

Exchange has not provided sufficient 

information to support a finding by the 

Commission that the proposed rules 

would not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the federal securities laws. 

Although the Exchange asserts that 

BSTX-listed Securities trading on 

another national securities exchange 

could trade, clear, and settle in the same 

manner as other NMS stock,362 the 

Exchange will not accept, at least 

initially, end-of-day Security ownership 

balance reports from non-BSTX 

Participants that transact on other 

trading centers.363 The Exchange asserts 

that another national securities 

exchange that wants to trade BSTXlisted Securities would be able to 

leverage the Exchange’s pre-established 

Security architecture to facilitate similar 

end-of-day reporting requirements, or 

could develop and pursue its own 

approach,364 and provides some broad 

examples of how it believes another 

exchange could develop its own end-ofday reporting requirement or participate 

in BSTX’s process.365 However, the 

Exchange has not provided sufficient 

information for the Commission to 

determine whether it would be feasible, 

and the associated burden, for another 

national securities exchange that 

extends UTP to BSTX-listed Securities, 

or another trading center that trades 

BSTX-listed Securities, to implement a 

process that uses blockchain technology 

for end-of-day Security ownership 

balance reporting for its members. The 

Exchange has not explained, as 

proposed, how another national 

securities exchange would be able to 

participate in the Exchange’s end-of-day 

Security ownership balance reporting 

mechanism without the Exchange’s 

permission, and without complying 

with any conditions that the Exchange 

might place on access to this 

mechanism, including membership 

requirements. For example, only BOX 

would control the end-of-day reporting 

mechanism by requiring the issuer to set 

up the necessary smart contracts, 

contracting with the Wallet Manager, 

obtaining allowlisted wallet addresses 

for BSTX Participants, collecting end-ofday Security ownership balance reports 

from BSTX Participants, and instructing 

the Wallet Manager to update the 

Ethereum blockchain to reflect those 

ownership balances.366 It is also unclear 

whether the Exchange would make its 

allowlisting and end-of-day reporting 

process available to other national 

securities exchanges or trading centers 

directly. For example, the Exchange 

provides as an example of how another 

exchange could adopt its own end-ofday reporting requirement, that the 

other exchange could choose to collect 

end-of-day Security ownership balance 

information from its members and then 

relay that information to BSTX to 

deliver to a Wallet Manager for 

recording to the Ethereum 

blockchain,367 but it is unclear what 

that process would entail. While the 

Exchange suggests that the other 

exchange would be in a position similar 

to a BSTX Participant in such a case,368

the Exchange also states that it would 

not accept voluntary reporting from 

non-BSTX Participants.369 Further, the 

Exchange does not explain what would 

be necessary for the coordination of 

end-of-day reporting mechanisms.370

The Exchange also does not provide 

sufficient detail about how the end-ofday Security ownership balances of 

members of another national securities 

exchange could be included in the same 

smart contract on the Ethereum 

blockchain that is being used for BSTX 

Participants, and whether the 

Exchange’s permission would be 

required. The Exchange states that other 

exchanges would be able to access the 

distributed ledger technology that BSTX 

proposes to use because Ethereum 

blockchain technology is an open source 

public blockchain that supports smart 

contract functionality and is not 


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84430 Federal Register / Vol. 85, No. 248 / Monday, December 28, 2020 / Notices 

371See supra notes 318–322 and accompanying 

text. 

372See supra Section III.C.1 for discussion of the 

process by which the Wallet Manager would write 

to the blockchain. For example, the Exchange 

indicated that one option might be for the other 

exchange to report its members’ balances to BSTX’s 

Wallet Manager or engage its own wallet manager 

to communicate with BSTX’s Wallet Manager. 

However, the Exchange has not explained how that 

other exchange (or its wallet manager) could 

coordinate with BSTX’s Wallet Manager, given that 

BOX has the contractual relationship with its 

Wallet Manager. 

373See supra note 57 and accompanying text 

(stating that the Exchange would determine the 

number of Tokens to be allocated to the omnibus 

wallet address for a particular Security by 

subtracting the sum of the Security ownership 

balances reported by BSTX Participants from the 

total outstanding number). 

374See also supra note 309 and accompanying 

text (commenter asserting that, to the extent that 

other national securities exchanges adopt their own 

distributed ledger technology and varying forms of 

technology are used, complications may arise in the 

equities markets). 

375See supra Section III.C.4(b) for discussion of 

the obligations that companies have to comply with 

the BSTX Protocol as a condition of Exchange 

listing. 

376See supra notes 328–360 and accompanying 

text. Moreover, the record does not contain any 

argument that the Exchange’s proposed use of endof-day Security ownership reporting functionality is 

necessary or appropriate in furtherance of the 

purposes of the Exchange Act, notwithstanding a 

significant burden imposed by such functionality 

on competition between national securities 

exchanges. 

377 15 U.S.C. 78f(b)(1), (5), and (8). 

378 In disapproving the proposed rule change, the 

Commission has considered its impact on 

efficiency, competition, and capital formation. See 

U.S.C. 78c(f). For the reasons discussed throughout, 

the Commission is disapproving the proposed rule 

change because it does not find that the proposed 

rule change is consistent with the Exchange Act. 

379See PKA Law Letter, supra note 175, at 1. 

380See PKA Law Letter, supra note 175, at 1. 

381See PKA Law Letter, supra note 175, at 1. 

exclusive to BSTX.371 However, the 

Exchange’s proposal suggests that, for 

end-of-day Security ownership balances 

of trading centers’ non-BSTX Participant 

members to be included in the same 

smart contract that contains the records 

for BSTX Participants, the non-BSTX 

Participants would need to obtain 

allowlisted wallet addresses, and that 

the Exchange would control the 

allowlisting process. In addition, either 

the other exchange or its non-BSTX 

Participant members would need to be 

allowed to provide end-of-day 

Securities ownership balances to the 

Exchange or its Wallet Manager, or if the 

other exchange was to work with 

another Wallet Manager, that Wallet 

Manager would need to have the 

necessary security permissions to write 

to the same smart contract.372 Moreover, 

the Exchange does not explain the 

implications for the recordkeeping 

process of having more than one Wallet 

Manager, particularly if there is a Wallet 

Manager that does not have a direct 

relationship with the Exchange. And the 

Exchange does not explain how it 

would calculate the Securities 

ownership balance to attribute to the 

omnibus wallet address if non-BSTX 

Participants did not report their 

ownership balances to the Exchange, 

but these ownership balances were 

associated with non-BSTX Participants’ 

wallet addresses in the smart contract 

on the Ethereum blockchain.373

The Exchange also does not explain, 

alternatively, the potential implications 

of having two separate smart contracts 

with digital representations of 

ownership interest in the same Security 

if a national securities exchange 

extending UTP to BSTX-listed 

Securities (or other trading center 

trading BSTX-listed Securities) were to 

create its own smart contracts, using a 

parallel process for end-of-day 

Securities ownership balance reporting 

that is either similar to or differs greatly 

from that developed by the Exchange.374

For example, the existence of competing 

sets of records could be confusing for 

investors and other market participants. 

One potential source of confusion is that 

even if one smart contract represented 

end-of-day Security ownership balances 

for BSTX Participants and a separate 

smart contract represented end-of-day 

Security ownership balances for another 

trading center’s members, there could be 

double-counting if some BSTX 

Participants were also members of the 

other trading center. And whereas an 

issuer of a BSTX-listed Security must 

create a smart contract compliant with 

BSTX Protocol as a condition of listing 

on the Exchange,375 that issuer would 

not have a direct relationship with 

another national securities exchange 

that extends UTP to its Security (or 

other trading center that trades its 

Security). The Exchange does not 

explain the likelihood that an issuer 

would be willing to work with another 

national securities exchange that wishes 

to trade the same BSTX-listed Security 

to create a separate smart contract 

associated with its Security, or whether 

there would be any logistical 

impediments to doing so post-issuance. 

These deficiencies in the Exchange’s 

explanation about how another national 

securities exchange may be able to use 

the proposed end-of-day Security 

ownership reporting functionality 

leaves the Commission with significant 

concerns about whether it would be 

feasible for another national securities 

exchange to make use of this 

functionality or create its own parallel 

reporting functionality. The 

Commission finds that the Exchange has 

not met its obligation to explain any 

burden its proposed end-of-day Security 

ownership reporting functionality 

would place on competition between 

BSTX and other national securities 

exchanges. Without being able to assess 

this potential burden on competition, 

particularly in light of commenters’ 

concerns that meaningful competition 

among national securities exchanges 

with respect to the use of the end-of-day 

Security ownership functionality may 

be foreclosed, the Commission is unable 

to assess the necessity or 

appropriateness of that burden on 

competition. Therefore the Commission 

does not need to reach the question of 

whether the Exchange’s assertions about 

the purpose of its end-of-day Security 

ownership reporting functionality 

demonstrate that the burden on 

competition is necessary or appropriate 

in furtherance of the Exchange Act.376

Accordingly, the Commission is unable 

to find that the Exchange’s rules would 

not impose any burden on competition 

that is not necessary or appropriate in 

furtherance of the purposes of the 

federal securities laws, in accordance 

with Section 6(b)(8) of the Exchange 

Act. 

For the reasons discussed above, 

considered independently or in 

combination, the Commission 

concludes that Exchange has not met its 

burden of demonstrating that the 

proposal is consistent with Exchange 

Act Sections 6(b)(1), 6(b)(5), or 

6(b)(8),377 and, accordingly, the 

Commission must disapprove the 

proposal.378

E. Other Aspects of the Exchange’s 

Proposal and Comments Received 

The Commission is disapproving the 

proposed rule change for the reasons 

discussed above. Therefore the 

Commission does not reach the question 

of whether other aspects of the 

Exchange’s proposal, including 

proposed rules relating to participation 

on BSTX, business conduct for BSTX 

Participants, financial and operational 

provisions for BSTX Participants, 

supervision, trading practices, 

discipline, trading on the BSTX System, 

market making, and listing on the 

Exchange (with the exception of the 

specific topics discussed in Section 

III.C.4 above), are consistent with the 

Exchange Act. Other issues have been 

raised by commenters, in connection 

with SR–BOX–2019–19, including the 

settlement process for Securities; 379

what reporting facility would be used 

for trade reporting; 380 the process of 

trade confirmation reporting; 381 the 


tkelley on DSKBCP9HB2PROD with NOTICES
Federal Register / Vol. 85, No. 248 / Monday, December 28, 2020 / Notices 84431 

382See PKA Law Letter, supra note 175, at 2. 

383See PKA Law Letter, supra note 175, at 1. 

384See IEX Letter, supra note 77, at 6; PKA Law 

Letter, supra note 175, at 1. 

385See Nasdaq Letter, supra note 77, at 3. 

386See Eversheds Letter, supra note 91, at 2. 

387See IEX Letter, supra note 77, at 6. 

388See Eversheds Letter, supra note 91, at 2; 

Nasdaq Letter, supra note 77, at 3. 

389See Nasdaq Letter, supra note 77, at 3; PKA 

Law Letter, supra note 175, at 1. 

390See Eversheds Letter, supra note 91, at 2. 

391See Eversheds Letter, supra note 91, at 2–3; 

IEX Letter, supra note 77, at 3–4. One commenter 

also discussed aspects of requirements might be 

placed on a national securities exchange extending 

UTP to BSTX-listed Securities that the Exchange 

modified in Amendment No. 2 to SR–BOX–2019– 

19. See Eversheds Letter, supra note 91, at 3. 

392 In the Amended BSTX Governance Proposal, 

the Exchange states that Overstock, which is a 

publicly held corporation, wholly owns Medici 

Ventures, Inc., which owns 80.07% of tZERO. See 

Amended BSTX Governance Proposal, supra note 

17, 85 FR at 50851. 

393See PKA Law Letter, supra note 175, at 2. 

394See IEX Letter, supra note 77, at 5. 

395See IEX Letter, supra note 77, at 6. 

396 15 U.S.C. 78f(b)(5). 

397 15 U.S.C. 78s(b)(2). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 90363 

(Nov. 5, 2020), 85 FR 71964 (Nov. 12, 2020). 

4 15 U.S.C. 78s(b)(2). 

5 Id. 

6 17 CFR 200.30–3(a)(31). 

proposal’s compatibility with DTC and 

NSCC infrastructure; 382 the liquidity of 

Securities; 383 how the end-of-day 

Security ownership balance reporting 

mechanism would affect short sales, 

including the locate process, clearing, 

settling, and market maker compliance 

with short sale rules; 384 how end-of-day 

Security ownership balances would 

affect the margin methodology for 

member self-calculation; 385 the 

potential liability of custodians for 

differences between DTC records and 

end-of-day Security ownership 

balances; 386 the proposed listing 

requirements’ compliance with penny 

stock rules; 387 the proposal’s 

compliance with the anti-fraud or 

customer protection provisions of the 

Exchange Act or other Commission 

regulations; 388 Security ownership 

verification, including for purposes of 

compliance with know-your-customer 

and anti-money laundering rules; 389

access to the end-of-day Security 

ownership balance records and the 

safeguarding of customer non-public 

information; 390 the requirements of 

Exchange Act Rule 12f-5 relating to the 

extension of UTP by other national 

securities exchanges to BSTX-listed 

Securities; 391 the relationship among 

tZERO, Overstock.com, Inc. 

(‘‘Overstock’’),392 and entities related to 

the Exchange; 393 whether any registered 

broker-dealer has indicated its intention 

to become a BSTX Participant; 394 and 

whether the Exchange is still working 

with FINRA regarding end-of-day 

Security ownership balance reporting 

requirements for FINRA members.395

Additional discussion on these topics is 

unnecessary, as they do not bear on the 

basis for the Commission’s decision to 

disapprove this proposal. 

IV. Conclusion 

For the reasons set forth above, the 

Commission does not find, pursuant to 

Section 19(b)(2) of the Exchange Act, 

that the proposed rule change, as 

modified by Amendment No. 1, is 

consistent with the requirements of the 

Exchange Act and the rules and 

regulations thereunder applicable to a 

national securities exchange, and, in 

particular, with Sections 6(b)(1), 6(b)(5), 

and 6(b)(8) of the Exchange Act.396

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,397

that the proposed rule change (SR– 

BOX–2020–14), as modified by 

Amendment No. 1, be, and hereby is, 

disapproved. 

By the Commission. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2020–28536 Filed 12–23–20; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–90726; File No. SR–NYSE– 

2020–89] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Notice of 

Designation of a Longer Period for 

Commission Action on a Proposed 

Rule Change To Amend Rule 7.35C 

December 18, 2020. 

On October 23, 2020, New York Stock 

Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to: (1) Provide the Exchange the 

authority to facilitate a Trading Halt 

Auction if a security has not reopened 

following a Level 1 or Level 2 trading 

halt due to extraordinary market 

volatility under Rule 7.12 (‘‘MWCB 

Halt’’) by 3:30 p.m.; (2) widen the 

Auction Collar for an Exchangefacilitated Trading Halt Auction 

following an MWCB Halt; (3) provide 

that certain DMM Interest would not be 

cancelled following an Exchangefacilitated Auction; and (4) change the 

Auction Reference Price for Exchangefacilitated Core Open Auctions. The 

proposed rule change was published for 

comment in the Federal Register on 

November 12 2020.3

Section 19(b)(2) of the Act 4 provides 

that within 45 days of the publication of 

notice of the filing of a proposed rule 

change, or within such longer period up 

to 90 days as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding, or as to which the 

self-regulatory organization consents, 

the Commission shall either approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether the 

proposed rule change should be 

disapproved. The 45th day after 

publication of the notice for this 

proposed rule change is December 27, 

2020. The Commission is extending this 

45-day time period. 

The Commission finds it appropriate 

to designate a longer period within 

which to take action on the proposed 

rule change so that it has sufficient time 

to consider the proposed rule change. 

Accordingly, the Commission, pursuant 

to Section 19(b)(2) of the Act,5

designates February 10, 2021, as the 

date by which the Commission shall 

either approve or disapprove, or 

institute proceedings to determine 

whether to disapprove, the proposed 

rule change (File No. SR–NYSE–2020– 

89). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.6

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2020–28511 Filed 12–23–20; 8:45 am] 

BILLING CODE P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–90730; File No. SR–NYSE– 

2020–87] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Notice of 

Filing of Amendment No. 1 and Order 

Granting Accelerated Approval of a 

Proposed Rule Change, as Modified by 

Amendment No. 1, To Amend Rule 7.31 

December 18, 2020. 

I. Introduction 

On October 20, 2020, New York Stock 

Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 


tkelley on DSKBCP9HB2PROD with NOTICES