Federal Register / Vol. 83, No. 148 / Wednesday, August 1, 2018 / Notices 37579 

137 Id. 

138 17 CFR 240.17Ad–22(e)(1). 

139Covered Clearing Agency Standards at 70802. 

140 17 CFR 240.17Ad–22(e)(1). 

1BZX made this filing under Section 19(b)(1) of 

the Securities Exchange Act of 1934, 15 U.S.C. 

78s(b)(1) (‘‘Exchange Act’’) and Rule 19b–4 

thereunder, 17 CFR 240.19b–4. The Commission 

published notice of the proposed rule change in the 

Federal Register on July 14, 2016. See Exchange 

Act Release No. 78262 (July 8, 2016), 81 FR 45554 

(July 14, 2016) (SR–BatsBZX–2016–30). On August 

23, 2016, the Commission designated a longer 

period within which to act on the proposed rule 

change. See Exchange Act Release No. 78653 (Aug. 

23, 2016), 81 FR 59256 (Aug. 29, 2016). On October 

12, 2016, the Commission instituted proceedings 

under Section 19(b)(2)(B) of the Exchange Act, 15 

U.S.C. 78s(b)(2)(B), to determine whether to 

approve or disapprove the proposed rule change. 

See Exchange Act Release No. 79084 (Oct. 12, 

2016), 81 FR 71778 (Oct. 18, 2016). On October 20, 

2016, BZX filed Amendment No. 1 to the proposed 

rule change, replacing the original filing in its 

entirety, and Amendment No. 1 was published for 

comment in the Federal Register on November 3, 

2016. See Exchange Act Release No. 79183 (Oct. 28, 

2016), 81 FR 76650 (Nov. 3, 2016) (‘‘Amendment 

No. 1’’). On January 4, 2017, the Commission 

designated a longer period for Commission action 

on the proposed rule change. See Exchange Act 

Release No. 79725 (Jan. 4, 2017), 82 FR 2425 (Jan. 

9, 2017). On February 22, 2017, BZX filed 

Amendment No. 2 to the proposed rule change 

(‘‘Amendment No. 2’’). Amendment No. 2 is 

available on the Commission’s website at https://

www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx

201630-1594698-132357.pdf. 

2See 17 CFR 200.30–3(a)(12). 

3See Exchange Act Release No. 80206 (Mar. 10, 

2017), 82 FR 14076 (Mar. 16, 2017) (‘‘March 

Disapproval Order’’). 

4On March 17, 2017, pursuant to Rule 430 of the 

Rules of Practice, see 17 CFR 201.430(b)(1), BZX 

submitted a Notice of Intention to Petition for 

Review of Order Disapproving a Proposed Rule 

Change, and on March 24, 2017, BZX submitted its 

Petition for Review (‘‘Petition for Review’’). BZX’s 

Notice of Intention to Petition for Review is 

available on the Commission’s website at: https:// 

www.sec.gov/rules/sro/batsbzx/2017/batsbzxpetitionforreview.pdf. BZX’s Petition for Review is 

available on the Commission’s website at: https:// 

www.sec.gov/rules/sro/batsbzx/2017/petition-forreview-sr-batsbzx-2016-30.pdf. 

5On April 24, 2017, pursuant to Rule 431 of the 

Rules of Practice, see 17 CFR 201.431, the 

Commission issued an order granting the Petition 

for Review, see Exchange Act Release No. 80511 

(Apr. 24, 2017), 82 FR 19770 (Apr. 28, 2017) 

(‘‘Review Order’’), and designated May 15, 2017, as 

the date by which any party to the action or any 

other person could file a written statement in 

support of or in opposition to the March 

Disapproval Order. See id. 

6Commissioner Peirce dissents from the 

Commission’s disapproval of this proposal, and her 

written dissent can be found on the Commission’s 

website, https://www.sec.gov. 

7Pursuant to Rule 431(a) of the Commission’s 

Rules of Practice, the Commission may affirm, 

reverse, modify, set aside, or remand for further 

proceedings, in whole or in part, an action made 

pursuant to delegated authority. 17 CFR 201.431(a). 

8Section 19(b)(2)(C) of the Exchange Act directs 

the Commission to approve a proposed rule change 

of an SRO, such as a national securities exchange, 

if the Commission finds that the proposed rule 

change is consistent with the requirements of the 

Exchange Act and the rules and regulations 

thereunder applicable to the SRO and directs the 

Commission to disapprove the proposed rule 

change if it is unable to make such a finding. See 

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

9 15 U.S.C. 78f(b)(5). 

manage its credit exposures to its 

clearing members by better aligning 

each clearing member’s contributions to 

the credit risk it poses to OCC, thereby 

allowing OCC to better manage its credit 

exposures to its participants. 

Accordingly, based on the foregoing, 

the Commission believes that the 

proposed changes pertaining to the 

sizing, monitoring, and allocation of 

clearing fund requirements are 

consistent with Exchange Act Rule 

17Ad–22(e)(4).137

C. Consistency With Rule 17Ad–22(e)(1) 

Under the Exchange Act 

Rule 17Ad–22(e)(1) under the 

Exchange Act requires that OCC 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to provide for a 

well-founded, clear, transparent, and 

enforceable legal basis for each aspect of 

its activities in all relevant 

jurisdictions.138 The Commission has 

stated that, in establishing and 

maintaining policies and procedures to 

address legal risk, a covered clearing 

agency generally should consider 

whether its rules, policies and 

procedures, and contracts are clear, 

understandable, and consistent with 

relevant laws and regulations.139

The Commission believes that the 

proposed consolidation and 

reorganization of OCC’s Rules described 

above would improve readability by 

locating all rules related to the clearing 

fund in one place, thereby enhancing 

the clarity, transparency, consistency, 

and understandability of OCC’s Rules 

related to the clearing fund. 

Additionally, by amending the Rules to 

accurately reflect OCC’s current margin 

practices, the Commission believes 

OCC’s Rules will be more transparent 

and understandable. 

Accordingly, the Commission believes 

that the proposed textual reorganization 

and clarifications are consistent with 

Rule 17Ad–22(e)(1).140

V. Conclusion 

It is therefore noticed, pursuant to 

Section 806(e)(1)(I) of the Payment 

Supervision Act, that the Commission 

does not object to Advance Notice (SR– 

OCC–2018–803) and that OCC is 

authorized to implement the proposed 

change. 

By the Commission. 

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2018–16417 Filed 7–31–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83723; File No. SR– 

BatsBZX–2016–30] 

Self-Regulatory Organizations; Bats 

BZX Exchange, Inc.; Order Setting 

Aside Action by Delegated Authority 

and Disapproving a Proposed Rule 

Change, as Modified by Amendments 

No. 1 and 2, To List and Trade Shares 

of the Winklevoss Bitcoin Trust 

July 26, 2018. 

I. Introduction 

On June 30, 2016, Bats BZX Exchange, 

Inc. (‘‘BZX’’) filed a proposed rule 

change with the Commission, seeking to 

list and trade shares of the Winklevoss 

Bitcoin Trust.1 The Commission, acting 

through authority delegated to the 

Division of Trading and Markets,2

disapproved the proposed rule change 

on March 10, 2017,3 and BZX then filed 

a timely petition seeking Commission 

review of the disapproval by delegated 

authority.4 The Commission granted 

BZX’s Petition for Review, seeking 

public comments in support of or in 

opposition to the March Disapproval 

Order.5 Today’s order sets aside the 

March Disapproval Order, and, for the 

reasons discussed below, disapproves 

BZX’s proposed rule change.6

In response to BZX’s Petition for 

Review, the Commission has conducted 

a de novo review of BZX’s proposal 7— 

giving careful consideration to the entire 

record, including BZX’s amended 

proposal and Petition for Review and all 

comments and statements submitted by 

BZX and other persons—to determine 

whether the proposal is consistent with 

the requirements of the Exchange Act 

and the rules and regulations issued 

thereunder that are applicable to a 

national securities exchange.8

Specifically, the Commission has 

considered whether the BZX proposal is 

consistent with Exchange Act Section 

6(b)(5), which requires, in relevant part, 

that the rules of a national securities 

exchange be designed ‘‘to prevent 

fraudulent and manipulative acts and 

practices’’ and ‘‘to protect investors and 

the public interest.’’ 9

Under the Commission’s Rules of 

Practice, the ‘‘burden to demonstrate 

that a proposed rule change is 

consistent with the Exchange Act and 

the rules and regulations issued 


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10Rule 700(b)(3), Commission Rules of Practice, 

17 CFR 201.700(b)(3). 

11See id. 

12See id. 

13See Letter from Joanne Moffic-Silver, Executive 

Vice President, General Counsel & Corporate 

Secretary, BZX, at 12 (May 15, 2017) (‘‘BZX Letter 

II’’). 

14 Id. 

15 Id. at 26. 

16 Id. 

17See id. at 22. 

18See id. at 26–27. 

19The Commission considers two markets that 

are members of the Intermarket Surveillance Group 

to have a comprehensive surveillance-sharing 

agreement with one another, even if they do not 

have a separate bilateral surveillance-sharing 

agreement. 

20See Section III.D.2(a), infra. 

21Amendment to Rule Filing Requirements for 

Self-Regulatory Organizations Regarding New 

Derivative Securities Products, Exchange Act 

Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 

70954, 70959 (Dec. 22, 1998) (File No. S7–13–98) 

(‘‘NDSP Adopting Release’’). 

22For example, the Registration Statement for the 

Winklevoss Bitcoin Trust discloses that ‘‘[t]he 

Bitcoin Exchanges on which bitcoin trades are new 

and, in most cases, largely unregulated.’’ See 

Registration Statement on Form S–1, as amended, 

dated February 8, 2017, at 22 (File No. 333–189752) 

(‘‘Registration Statement’’). See also Sections III.E.1 

and III.E.2, infra (discussing the distribution of 

bitcoin trading and the state of regulation of bitcoin 

spot markets). 

23See infra notes 312–316 and accompanying 

text. 

thereunder . . . is on the self-regulatory 

organization [‘SRO’] that proposed the 

rule change.’’ 10 The description of a 

proposed rule change, its purpose and 

operation, its effect, and a legal analysis 

of its consistency with applicable 

requirements must all be sufficiently 

detailed and specific to support an 

affirmative Commission finding,11 and 

any failure of an SRO to provide this 

information may result in the 

Commission not having a sufficient 

basis to make an affirmative finding that 

a proposed rule change is consistent 

with the Exchange Act and the 

applicable rules and regulations.12

BZX argues, among other things, that 

its proposal is consistent with Exchange 

Act Section 6(b)(5) on the grounds that 

the ‘‘geographically diverse and 

continuous nature of bitcoin trading 

makes it difficult and prohibitively 

costly to manipulate the price of 

bitcoin’’ 13—and that therefore the 

bitcoin market ‘‘generally is less 

susceptible to manipulation than the 

equity, fixed income, and commodity 

futures markets’’ 14—and because 

‘‘novel systems intrinsic to this new 

market provide unique additional 

protections that are unavailable in 

traditional commodity markets.’’ 15 BZX 

also asserts that the March Disapproval 

Order failed to appreciate that the 

proposal provides ‘‘traditional means of 

identifying and deterring fraud and 

manipulation,’’ 16 and that the proposal 

meets the criteria that the Commission 

has utilized in approving other 

commodity-trust ETPs as it relates to the 

ability to monitor for, detect, and deter 

fraud and manipulation and violations 

of exchange rules and applicable federal 

securities laws and rules.17 BZX also 

claims that the March Disapproval 

Order overstates the extent to which 

surveillance and regulation of the 

underlying market have been present in 

prior commodity-trust ETP approval 

orders and the extent to which the 

Commission has relied on the existence 

of surveillance-sharing agreements 

between an ETP listing market and 

markets related to the underlying 

assets.18

The Commission addresses each of 

these arguments below. In Section III.B, 

the Commission addresses BZX’s 

assertion that bitcoin and bitcoin 

markets, including the Gemini 

Exchange, are uniquely resistant to 

manipulation and finds that the record 

before the Commission does not support 

such a conclusion. In Section III.C, the 

Commission addresses whether what 

BZX describes as ‘‘traditional means’’ of 

identifying and deterring fraud and 

manipulation are sufficient to meet the 

requirements of Exchange Act Section 

6(b)(5) and also finds that the record 

does not support such a conclusion. 

Then, in Sections III.D and III.E, 

respectively, the Commission addresses 

the use and importance of surveillancesharing agreements to detect and deter 

fraud and manipulation, and whether 

BZX has entered into a comprehensive 

surveillance-sharing agreement with a 

regulated market of significant size 

related to bitcoin.19 Although 

surveillance-sharing agreements are not 

the exclusive means by which an ETP 

listing exchange can meet its obligations 

under Exchange Act Section 6(b)(5), 

such agreements are a widely used 

means for exchanges that list ETPs to 

meet their obligations, and the 

Commission has historically recognized 

their importance.20 And where, as here, 

a listing exchange fails to establish that 

other means to prevent fraudulent and 

manipulative acts and practices will be 

sufficient, the listing exchange must 

enter into a surveillance-sharing 

agreement with a regulated market of 

significant size because ‘‘[s]uch 

agreements provide a necessary 

deterrent to manipulation because they 

facilitate the availability of information 

needed to fully investigate a 

manipulation if it were to occur.’’ 21

Based on the record before it, the 

Commission concludes that—unlike the 

listing exchanges for previously 

approved commodity-trust ETPs—BZX 

has not established that it has entered 

into, or currently could enter into, a 

surveillance-sharing agreement with a 

regulated market of significant size 

related to bitcoin. 

Finally, in Section III.F, the 

Commission addresses arguments raised 

regarding the protection of investors and 

the public interest, and, in Section III.G, 

the Commission discusses additional 

factors supporting disapproval of the 

BZX proposal. 

Although the Commission is 

disapproving this proposed rule change, 

the Commission emphasizes that its 

disapproval does not rest on an 

evaluation of whether bitcoin, or 

blockchain technology more generally, 

has utility or value as an innovation or 

an investment. Rather, the Commission 

is disapproving this proposed rule 

change because, as discussed in detail 

below, BZX has not met its burden 

under the Exchange Act and the 

Commission’s Rules of Practice to 

demonstrate that its proposal is 

consistent with the requirements of the 

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

particular the requirement that its rules 

be designed to prevent fraudulent and 

manipulative acts and practices. 

While the record before the 

Commission indicates that a substantial 

majority of bitcoin trading occurs on 

unregulated venues overseas that are 

relatively new and that, generally, 

appear to trade only digital assets,22 and 

while the record does not support a 

conclusion that bitcoin derivatives 

markets have attained significant size,23

the Commission notes that regulated 

bitcoin-related markets are in the early 

stages of their development. Over time, 

regulated bitcoin-related markets may 

continue to grow and develop. For 

example, existing or newly created 

bitcoin futures markets may achieve 

significant size, and an ETP listing 

exchange may be able to demonstrate in 

a proposed rule change that it will be 

able to address the risk of fraud and 

manipulation by sharing surveillance 

information with a regulated market of 

significant size related to bitcoin, as 

well as, where appropriate, with the 

spot markets underlying relevant bitcoin 

derivatives. Should these circumstances 

develop, or conditions otherwise change 

in a manner that affects the Exchange 

Act analysis, the Commission would 

then have the opportunity to consider 

whether a bitcoin ETP would be 

consistent with the requirements of the 

Exchange Act. 


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24BZX Rule 14.11(e)(4)(C) permits the listing and 

trading of ‘‘Commodity-Based Trust Shares,’’ which 

are defined as a security (a) that is issued by a trust 

that holds a specified commodity deposited with 

the trust; (b) that is issued by the trust in a specified 

aggregate minimum number in return for a deposit 

of a quantity of the underlying commodity; and (c) 

that, when aggregated in the same specified 

minimum number, may be redeemed at a holder’s 

request by the trust, which will deliver to the 

redeeming holder the quantity of the underlying 

commodity. 

25Bitcoins are digital assets that are issued and 

transferred via a decentralized, open-source 

protocol used by a peer-to-peer computer network 

through which transactions are recorded on a 

public transaction ledger known as the ‘‘Bitcoin 

Blockchain.’’ The Bitcoin protocol governs the 

creation of new bitcoins and the cryptographic 

system that secures and verifies bitcoin 

transactions. See Amendment No. 1, supra note 1, 

81 FR at 76652. The proposed rule change describes 

the ETP’s underlying bitcoin asset as a ‘‘digital 

asset’’ and as a ‘‘commodity,’’ see id. at 76652 & 

n.21, and describes the ETP as a Commodity-Based 

Trust. For the purpose of considering this proposal, 

this order describes a bitcoin as a ‘‘digital asset’’ 

and a ‘‘commodity.’’ 

26See id. at 76651–52. 

27See id. at 76651. 

28See id. at 76664–65. See also Amendment No. 

2, supra note 1. 

29See Amendment No. 1, supra note 1, 81 FR at 

76652. 

30See id. at 76652, 76664. In the event that the 

Sponsor determines that the Gemini Auction price, 

because of extraordinary circumstances, is ‘‘not an 

appropriate basis for evaluation of the Trust’s 

bitcoin on a given Business Day,’’ BZX’s proposal 

provides that the Sponsor may use other specified 

criteria to value the holdings of the Trust. See id. 

at 76664. 

31See id. at 76666. 

32See id. at 76668. 

33See Amendments No. 1 and 2, supra note 1. 

34See Registration Statement, supra note 22. BZX 

represents in the proposed rule change that the 

Registration Statement will be effective as of the 

date of any offer and sale pursuant to the 

Registration Statement. See Amendment No. 1, 

supra note 1, 81 FR at 76651. 

35See Letters from Robert D. Miller, VP Technical 

Services, RKL eSolutions (July 11, 2016) (‘‘R.D. 

Miller Letter’’); Jorge Stolfi, Full Professor, Institute 

of Computing UNICAMP (July 13, 2016) (‘‘Stolfi 

Letter I’’); Guillaume Lethuillier (July 26, 2016) 

(‘‘Lethuillier Letter’’); Michael B. Casey (July 31, 

2016) (‘‘Casey Letter I’’); Erik A. Aronesty, Sr. 

Software Engineer, Bloomberg LP (Aug. 2, 2016) 

(‘‘Aronesty Letter’’); Dan Anderson (Aug. 27, 2016) 

(‘‘Anderson Letter’’); Robert Miller (Oct. 12, 2016) 

(‘‘R. Miller Letter’’); Anonymous (Oct. 13, 2016) 

(‘‘Anonymous Letter I’’); Nils Neidhardt (Oct. 13, 

2016) (‘‘Neidhardt Letter’’); Dana K. Barish (2 

letters; Oct. 13, 2016) (‘‘Barish Letter I’’ and ‘‘Barish 

Letter II’’); Xin Lu (Oct. 13, 2016) (‘‘Xin Lu Letter’’); 

Rodger Delehanty CFA (Oct. 14, 2016) (‘‘Delehanty 

Letter’’); Dylan (Oct. 14, 2016) (‘‘Dylan Letter’’); 

Dana K. Barish (Oct. 14, 2016) (‘‘Barish Letter III’’); 

Dana K. Barish (2 letters; Oct. 15, 2016) (‘‘Barish 

Letter IV’’ and ‘‘Barish Letter V’’); Jorge Stolfi, Full 

Professor, Institute of Computing UNICAMP (Nov. 

1, 2016) (‘‘Stolfi Letter II’’); Michael B. Casey (Nov. 

5, 2016) (‘‘Casey Letter II’’); Anonymous (Nov. 8, 

2016) (‘‘Anonymous Letter II’’); Chris Burniske, 

Blockchain Products Lead, ARK Investment 

Management LLC (Nov. 8, 2016) (‘‘ARK Letter’’); 

Colin Keeler (Nov. 14, 2016) (‘‘Keeler Letter’’); 

Robert S. Tull, (Nov. 14, 2016) (‘‘Tull Letter’’); Mark 

T. Williams (Nov. 15, 2016) (‘‘Williams Letter’’); 

Anonymous (Nov. 21, 2016) (‘‘Anonymous Letter 

III’’); XBT OPPS Team (Nov. 21, 2016) (‘‘XBT 

Letter’’); Anonymous (Nov. 22, 2016) (‘‘Anonymous 

Letter IV’’); Ken I. Maher (Nov. 22, 2016) (‘‘Maher 

Letter’’); Kyle Murray, Assistant General Counsel, 

Bats Global Markets, Inc. (Nov. 25, 2016) (‘‘BZX 

Letter I’’); Colin Baird (Nov. 26, 2016) (‘‘Baird 

Letter’’); Scott P. Hall (Jan. 5, 2017) (‘‘Hall Letter’’); 

Suzanne H. Shatto (Jan. 24, 2017) (‘‘Shatto Letter’’); 

Joshua Lim and Dan Matuszewski, Treasury & 

Trading Operations, Circle internet Financial, Inc. 

(Feb. 3, 2017) (‘‘Circle Letter’’); Zachary J. Herbert 

(Feb. 10, 2017) (‘‘Herbert Letter’’); Thomas 

Fernandez (Feb. 12, 2017) (‘‘Fernandez Letter’’); 

Diego Tomaselli (Feb. 17, 2017) (‘‘Tomaselli 

Letter’’); Hans Christensen (Feb. 20, 2017) 

(‘‘Christensen Letter’’); Jake Kim (Feb. 22, 2017) 

(‘‘Kim Letter’’); Andrea Dalla Val (Mar. 4, 2017) 

(‘‘Dalla Val Letter’’); Josh Barraza (Mar. 6, 2017) 

(‘‘Barraza Letter’’); Chad Rigsby (Mar. 6, 2017) 

(‘‘Rigsby Letter’’); Michael Lee (Mar. 6, 2017) (‘‘Lee 

Letter’’); Fabrizio Marchionne (Mar. 6, 2017) 

(‘‘Marchionne Letter’’); Ben Elron (Mar. 6, 2017) 

(‘‘Elron Letter’’); Patrick Miller (Mar. 6, 2017) (‘‘P. 

Miller Letter’’); Situation (Mar. 6, 2017) (‘‘Situation 

Letter’’); Steven Swiderski (Mar. 6, 2017) 

(‘‘Swiderski Letter’’); Marcia Paneque (Mar. 6, 2017) 

(‘‘Paneque Letter’’); Jeremy Nootenboom (Mar. 6, 

2017) (‘‘Nootenboom Letter’’); Alan Struna (Mar. 6, 

2017) (‘‘Struna Letter’’); Mike Johnson (Mar. 6, 

2017) (‘‘Johnson Letter’’); Phil Chronakis (Mar. 7, 

2017) (‘‘Chronakis Letter’’); Anonymous (Mar. 7, 

2017) (‘‘Anonymous Letter V’’); Brian Bang (Mar. 7, 

2017) (‘‘Bang Letter’’); Anthony Schulte (Mar. 7, 

2017) (‘‘Schulte Letter’’); Melissa Whitman (Mar. 7, 

2017) (‘‘Whitman Letter’’); Harold Primm (Mar. 8, 

2017) (‘‘Primm Letter’’); Shad (Mar. 8, 2017) (‘‘Shad 

Letter’’); Anonymous (Mar. 8, 2017) (‘‘Anonymous 

Letter VI’’); Patrick Turley (Mar. 9, 2017) (‘‘Turley 

Letter’’); Anonymous (Mar. 9, 2017) (‘‘Anonymous 

Letter VII’’); Richard Kemble (Mar. 9, 2017) 

(‘‘Kemble Letter’’); Anonymous (Mar. 9, 2017) 

(‘‘Anonymous Letter VIII’’); Daniel Ackerman (Mar. 

10, 2017) (‘‘Ackerman Letter’’); Obed Medina (Mar. 

10, 2017) (‘‘Medina Letter’’); and John Paslaqua 

(Mar. 10, 2017) (‘‘Paslaqua Letter’’). All comments 

on the proposed rule change are available on the 

Commission’s website at: https://www.sec.gov/ 

comments/sr-batsbzx-2016-30/batsbzx

201630.shtml. 

36See Letters from Douglas A. Cifu, Chief 

Executive Officer, Virtu Financial (May 11, 2017) 

(‘‘Virtu Letter’’); James A. Overdahl, Partner, Delta 

Strategy Group (May 12, 2017) (‘‘Overdahl Letter’’); 

Daniel H. Gallancy, SolidX Management LLC (May 

15, 2017) (‘‘SolidX Letter’’); Jonathan G. Harris (May 

15, 2017) (‘‘Harris Letter’’); Mick Kalishman, C&C 

Trading, LLC (May 15, 2017) (‘‘C&C Letter’’); Eric 

W. Noll, President and Chief Executive Officer, 

Convergex Group (May 15, 2017) (‘‘Convergex 

Letter’’); Jeffrey Yass, Managing Director, 

Susquehanna International Group, LLP (May 15, 

2017) (‘‘SIG Letter’’); and BZX Letter II, supra note 

13. All comments submitted in support of or in 

opposition to the March Disapproval Order are 

available on the Commission’s website at: https:// 

www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx

201630.shtml. 

37See infra notes 44–48 and accompanying text. 

38See Sections III.B.1(a) and III.E.2(a), infra. 

39See Sections III.B.2(a) and III.E.1(a), infra. 

40See Section III.D.1, infra. 

41See Section III.E.3(a), infra. 

42See Section III.F.1, infra. 

II. Description of the Proposal 

BZX proposes to list and trade shares 

(‘‘Shares’’) of the Winklevoss Bitcoin 

Trust (‘‘Trust’’) as Commodity-Based 

Trust Shares under BZX Rule 

14.11(e)(4).24 The Trust would hold 

only bitcoins as an asset,25 and the 

bitcoins would be in the custody of, and 

secured by, the Trust’s custodian, 

Gemini Trust Company LLC 

(‘‘Custodian’’), which is a limitedliability trust company chartered by the 

State of New York and supervised by 

the New York State Department of 

Financial Services (‘‘NYSDFS’’).26

Gemini Trust Company is also an 

affiliate of Digital Asset Services LLC, 

the sponsor of the Trust (‘‘Sponsor’’).27

The Trust would issue and redeem the 

Shares only in ‘‘Baskets’’ of 100,000 

Shares and only to ‘‘Authorized 

Participants,’’ and these transactions 

would be conducted ‘‘in-kind’’ for 

bitcoin only.28

The investment objective of the Trust 

would be for the Shares to track the 

price of bitcoin on the Gemini 

Exchange, which is a digital-asset 

exchange owned and operated by the 

Gemini Trust Company.29 The Net Asset 

Value (‘‘NAV’’) of the Trust would be 

calculated each business day, based on 

the clearing price of that day’s 4:00 p.m. 

Eastern Time (‘‘ET’’) Gemini Exchange 

bitcoin auction, a two-sided auction 

open to all Gemini Exchange customers 

(‘‘Gemini Auction’’).30 The Intraday 

Indicative Value (‘‘IIV’’) of the Trust 

would be calculated and disseminated 

by the Sponsor, every 15 seconds during 

BZX’s regular trading session, based on 

the most recent Gemini Auction price.31

BZX represents that it has entered 

into a comprehensive surveillancesharing agreement with the Gemini 

Exchange.32 Further details regarding 

the proposal and the Trust can be found 

in Amendments No. 1 and 2 to the 

proposal,33 and in the registration 

statement for the Trust.34

III. Discussion 

A. Overview 

The comment period for the proposed 

rule change filed by BZX ended 

November 25, 2016. The Commission, 

as of March 10, 2017, received 66 

comment letters on the proposed rule 

change.35 Additionally, in response to 

the Review Order, the Commission, as 

of July 13, 2018, received eight 

comments in connection with the 

Petition for Review.36 The comments 

cover a variety of topics, including the 

analysis of the BZX proposal in the 

March Disapproval Order,37 the nature 

of the worldwide market for bitcoin,38

the characteristics of the Gemini digital 

asset exchange,39 the need for 

surveillance-sharing agreements with 

significant markets,40 the state of the 

market for derivatives on bitcoin,41 and 

the protection of investors,42 as well as 

a number of comments on the nature of 

bitcoin and of the Bitcoin network, the 

structure of the Trust and the Trust’s 

valuation and security protocols, and 


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43See Section III.G, infra. 

44See March Disapproval Order, supra note 3, 82 

FR at 14082–84. 

45See BZX Letter II, supra note 13, at 26. 

46See id. at 12; see also id. at 13, 26. 

47See BZX Letter II, supra note 13, at 13; and 

Overdahl Letter, supra note 36, at 2, 9–11. 

48See BZX Letter II, supra note 13, at 13; and 

Overdahl Letter, supra note 36, at 2, 9–11. 

49See supra notes 10–12 and accompanying text. 

50See BZX Letter II, supra note 13, at 26. 

51 15 U.S.C. 78f(b)(5). 

52BZX Letter II, supra note 13, at 12, 13, 26; see 

also Petition for Review, supra note 4, at 11. 

53See supra note 50 and accompanying text. 

54See BZX Letter I, supra note 35, at 7. 

55See Petition for Review, supra note 4, at 15. 

56See BZX Letter II, supra note 13, at 15–16; 

Petition for Review, supra note 4, at 15. 

the effect that Commission approval of 

the BZX proposal could have on bitcoin 

and the bitcoin markets.43

BZX’s primary argument is that the 

standard set forth in the March 

Disapproval Order—the need for a 

surveillance sharing agreement between 

the ETP listing exchange and 

significant, regulated markets related to 

the underlying asset 44—is not the only 

way that a listing exchange can satisfy 

Section 6(b)(5)’s requirement that its 

rules be designed to prevent fraudulent 

and manipulative acts and practices 

with respect to listing an ETP.45 BZX 

argues that, in the case of a bitcoin 

commodity-trust ETP, traditional 

measures to detect and deter 

manipulation are sufficient.46 BZX and 

certain commenters further argue that 

the March Disapproval Order 

misconstrued Section 6(b)(5) to mean 

that a bitcoin ETP can be listed and 

traded only if bitcoin ‘‘cannot be 

manipulated.’’ 47 They argue that such a 

standard is inconsistent with the ‘‘not 

readily susceptible to manipulation’’ 

standard applied to other commodities 

that underlie ETPs.48

These arguments do not accurately 

reflect the nature of the Commission’s 

inquiry and past practice. The 

Commission agrees that, if BZX had 

demonstrated that bitcoin and bitcoin 

markets are inherently resistant to fraud 

and manipulation, comprehensive 

surveillance-sharing agreements with 

significant, regulated markets would not 

be required, as the function of such 

agreements is to detect and deter fraud 

and manipulation. But because the 

underlying commodities market for this 

proposed commodity-trust ETP is not 

demonstrably resistant to manipulation, 

BZX, as the ETP listing exchange, must 

enter into surveillance-sharing 

agreements with, or hold Intermarket 

Surveillance Group membership in 

common with, at least one significant, 

regulated market relating to bitcoin. 

Moreover, the Commission is not 

applying a ‘‘cannot be manipulated’’ 

standard to this proposal. Instead, the 

Commission is examining whether the 

proposal meets the requirements of the 

Exchange Act and, pursuant to its Rules 

of Practice,49 is placing the burden on 

BZX to demonstrate the validity of its 

contention that the ‘‘novel systems 

intrinsic to this new market provide 

unique additional protections that are 

unavailable in traditional commodity 

markets,’’ 50 and to establish that the 

requirements of the Exchange Act have 

been met. 

Finding that BZX has not 

demonstrated that bitcoin and bitcoin 

markets are inherently resistant to 

manipulation, the Commission subjects 

the proposal to the analysis it has 

historically used to analyze commoditytrust ETPs, focusing particularly on 

whether there are comprehensive 

surveillance-sharing agreements with 

significant, regulated markets. Because 

adequate surveillance-sharing 

agreements are not in place—and any 

current surveillance-sharing agreements 

are with bitcoin-related markets that are 

either not significant, not regulated, or 

both—the Commission concludes that 

the proposal is inconsistent with 

Exchange Act Section 6(b)(5). 

Accordingly, the Commission will 

examine whether the proposed rule 

change is consistent with Section 6(b)(5) 

by first addressing the arguments by 

BZX and certain commenters that 

bitcoin and bitcoin markets are 

inherently resistant to manipulation. 

The Commission will then address 

BZX’s argument that what it describes 

as ‘‘traditional means’’ of identifying 

and deterring fraud and manipulation 

would be sufficient to comply with 

Exchange Act Section 6(b)(5), which 

requires that BZX’s rules be designed to 

‘‘prevent fraudulent and manipulative 

acts and practices’’ and ‘‘to protect 

investors and the public interest.’’ 51

Finding these arguments unpersuasive, 

the Commission concludes that the 

proposal is inconsistent with previously 

approved commodity-trust ETPs, which 

have universally relied on surveillancesharing agreements with significant, 

regulated markets relating to the 

underlying commodity in order to 

prevent fraud and manipulation and to 

protect investors and the public interest. 

Finally, the Commission addresses and 

rejects additional factors that BZX 

contends support approval. 

B. The Susceptibility of Bitcoin and 

Bitcoin Markets to Manipulation 

BZX asserts that intrinsic properties 

of bitcoin and bitcoin markets, 

including the Gemini Exchange, provide 

resistance to manipulation. But BZX has 

failed to carry its burden to demonstrate 

that its assertion is correct. 

1. The Structure of the Spot Market for 

Bitcoin 

(a) Summary of Comments Received 

BZX argues that intrinsic properties of 

bitcoin and bitcoin markets make 

manipulation ‘‘difficult and 

prohibitively costly.’’ 52 BZX argues that 

‘‘novel systems intrinsic to this new 

market provide unique additional 

protections that are unavailable in 

traditional commodity markets.’’ 53 BZX 

asserts that the increasing strength and 

resilience of the global bitcoin 

marketplace serve to reduce the 

likelihood of price manipulation and 

that arbitrage opportunities across 

globally diverse marketplaces allow 

market participants to ensure 

approximately equivalent pricing 

worldwide. But BZX concedes that less 

liquid markets, such as the market for 

bitcoin, may be more susceptible to 

manipulation.54

BZX asserts that a number of new 

bitcoin market participants have 

emerged, changing the once 

concentrated and non-regulated 

landscape of the global bitcoin exchange 

marketplace, and that the emergence of 

these new market participants, who are 

chiefly arbitrageurs, causes global 

bitcoin exchange prices to converge.55

BZX adds that arbitrageurs must have 

funds distributed across multiple 

bitcoin exchanges to take advantage of 

temporary price dislocations, and that 

this distribution of funds discourages 

concentration of funds on any one 

particular bitcoin exchange and 

mitigates the potential for manipulation 

on a bitcoin exchange because doing so 

would require overcoming the liquidity 

supply of arbitrageurs that are actively 

eliminating any cross-market pricing 

differences.56

BZX also asserts that the bitcoin spot 

market generally is less susceptible to 

manipulation than the equity, fixed 

income, and commodity futures 

markets, in part, because: (a) A 

substantial over-the-counter (‘‘OTC’’) 

market provides liquidity and shock 

absorbing capacity; (b) the ‘‘24/7/365’’ 

trading of bitcoin provides constant 

arbitrage opportunities across all trading 

venues and means that there is no single 

market-close for investors to attempt to 

manipulate; and (c) it is unlikely that 

any one actor could obtain a dominant 


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57See BZX Letter II, supra note 13, at 12; see also 

Petition for Review, supra note 4, at 11. 

58See Petition for Review, supra note 4, at 16. 

59See supra note 36. 

60See Overdahl Letter, supra note 36, at 1–2. 

61 Id. 

62The Commodity Exchange Act defines 

‘‘spoofing’’ as bidding or offering for sale with the 

intent to cancel the bid or offer before execution. 

See 7 U.S.C. 6c(a)(5)(C). 

63See Overdahl Letter, supra note 36, at 2, 9; see 

also Petition for Review, supra note 4, at 14. 

64See Overdahl Letter, supra note 36, at 9. 65See Craig M. Lewis, ‘‘SolidX Bitcoin Trust: A 

Bitcoin Exchange Traded Product’’ (Feb. 13, 2017) 

(‘‘Lewis Letter I’’), available at https://www.sec.gov/ 

comments/sr-nysearca-2016-101/nysearca2016101- 

1579480-131874.pdf; Craig M. Lewis, 

‘‘Supplemental Submission to SolidX Bitcoin Trust: 

A Bitcoin Exchange Traded Product’’ (Mar. 3, 2017) 

(‘‘Lewis Letter II’’, and together with Lewis Letter 

I the ‘‘Lewis Letter’’), available at https://

www.sec.gov/comments/sr-nysearca-2016-101/ 

nysearca2016101-1610031-135950.pdf. The Lewis 

Letter was commissioned by SolidX Management 

LLC in support of the SolidX Bitcoin Trust. BZX 

Letter II, supra note 13, at 12; see also Exchange Act 

Release No. 80319 (Mar. 28, 2017), 82 FR 16247, 

16249 n.43 (Apr. 3, 2017) (SR–NYSEArca–2016– 

101) (‘‘SolidX Order’’). The Commission notes that 

the Lewis Letter made additional assertions 

directed to the particular structure and pricing 

mechanism of another proposed bitcoin-based 

commodity-trust ETP, and the Commission does not 

address those arguments in this order. 

66See Lewis Letter I, supra note 65, at 5–8. 

67See Lewis Letter I, supra note 65, at 5–9; Lewis 

Letter II, supra note 65, at 2. 

68See Lewis Letter I, supra note 65, at 6–7. 

69See ARK Letter, supra note 35, at 5. 

70See Maher Letter, supra note 35. 

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

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

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

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

market share.57 BZX also claims that the 

transparency that the Trust will provide 

with respect to its bitcoin holdings, and 

the dissemination of the IIV and NAV of 

the Trust, will reduce the ability of 

market participants to manipulate the 

price of bitcoin or the price of the 

Shares.58

The Overdahl Letter, submitted in 

support of the BZX proposal,59 asserts 

that the fungibility of bitcoin across 

bitcoin exchanges facilitates arbitrage 

and helps keep prices within the 

bounds of arbitrage, constraining the 

possibility of price manipulation on any 

one bitcoin trading venue.60 Because of 

this linkage, the Overdahl Letter 

contends, manipulation of the bitcoin 

price on any one venue would require 

manipulation of the global bitcoin price 

to be effective, which would be 

prohibitively costly and is therefore 

unlikely. But the Overdahl Letter 

concedes that any market can 

potentially be manipulated.61

The Overdahl Letter further claims 

that, to the extent that ‘‘spoofing 

conduct’’ 62 is present in bitcoin 

markets, it is unlikely to have a material 

impact on the value of the Shares. 

According to the Overdahl Letter, this is 

because successful spoofing causes 

price oscillations of extremely small 

magnitudes (such as within the bid/ask 

spread) and does not result in a material 

change in the bitcoin price. This 

commenter also claims that spoofing 

victims are unlikely to be holders of the 

Shares, but rather market makers in the 

spot market, and concludes that the 

likelihood of spoofing in the bitcoin 

spot market is low.63

The Overdahl Letter further claims 

that even a ‘‘dominant’’ exchange (by 

trading volume) cannot dictate the 

global price of bitcoin because an 

exchange does not coordinate trading 

across its membership to influence the 

market price. This commenter argues 

that the existence of a dominant 

exchange in terms of trading volume 

does not imply that there is a dominant 

actor on the dominant exchange with 

the ability to attain a dominant market 

share to manipulate the price of bitcoin. 

Rather, this commenter argues, the 

larger the market share of an exchange, 

the harder it would be for a dominant 

actor to obtain a dominant market share 

of the dominant exchange’s trading 

volume.64

Another analysis—the Lewis 

Letter 65—argues that, as a general 

matter, the underlying market for 

bitcoin is inherently resistant to 

manipulation.66 The Lewis Letter posits 

that the underlying bitcoin market is not 

susceptible to manipulation because: (a) 

There is no inside information related to 

bitcoin, such as earnings 

announcements; (b) the asset is not 

subject to the dissemination of false or 

misleading information; (c) each bitcoin 

market is an independent entity, so that 

a demand for liquidity does not 

necessarily propagate across other 

exchanges; (d) a substantial OTC market 

provides additional liquidity and 

absorption of shocks; (e) there is no 

market-close pricing event to 

manipulate; (f) the market is not subject 

to ‘‘spoofing’’ or other high-frequencytrading tactics; (g) order books on 

exchanges worldwide are publicly 

visible and available through APIs 

(application program interfaces); and (h) 

it is unlikely that any one person could 

obtain a dominant market share because 

of the existence of in-kind creations and 

redemptions, arbitrage across bitcoin 

markets, and the enhanced transparency 

that a bitcoin ETP would bring to 

bitcoin markets.67 The Lewis Letter 

acknowledges the risk that a single 

investor or a small group acting in 

collusion could own a dominant share 

of the available bitcoin, but argues that 

the structure of the spot bitcoin market 

and the arbitrage mechanism reduce 

that risk.68

One commenter observes that the 

bitcoin/Chinese Yuan (BTC/CNY) quote 

is apt to trade at a significant premium 

to the bitcoin/U.S. dollar (BTC/USD) 

quote and points out that large arbitrage 

opportunities would not exist for long 

in efficient markets, but they do persist 

in bitcoin markets.69 Another 

commenter claims that, because trade is 

now sparse on regulated U.S. exchanges, 

including Gemini, arbitrage will not 

occur efficiently or proportionally to 

mitigate manipulation from the 

dominant unregulated bitcoin 

exchanges.70

One commenter asserts that, in 

January 2017, major Chinese bitcoin 

exchanges OKCoin, Huobi, and BTCC 

implemented changes requested by the 

People’s Bank of China to halt margin 

lending and to institute transaction fees. 

This commenter claims that these 

changes were put in place to discourage 

price manipulation, to drive down 

‘‘fake’’ trading volume, and to dampen 

bitcoin volatility, and further claims 

that these changes have had profound 

and beneficial effects on bitcoin spot 

markets worldwide.71

One commenter states that the market 

for bitcoin, by trade volume, is very 

shallow. This commenter states that the 

majority of bitcoin is hoarded by a few 

owners or is out of circulation. The 

commenter also states that ownership 

concentration is high, with 50 percent of 

bitcoin in the hands of fewer than 1,000 

people, and that this high ownership 

concentration creates greater market 

liquidity risk, as large blocks of bitcoin 

are difficult to sell in a timely and 

market efficient manner. This 

commenter claims that daily trade 

volume is only a small fraction of total 

bitcoin mined.72

One commenter asserts that the 

number of spot bitcoin exchanges 

worldwide far exceeds the number of 

venues for many commodity futures, 

some of which are underlying assets of 

existing commodity-trust ETPs. The 

commenter argues that, therefore, 

widespread global bitcoin liquidity 

makes bitcoin less susceptible to 

manipulation via trading activity 

conducted on a single exchange, as 

compared to less-liquid commodity 

futures that trade on a few exchanges.73

One commenter states that bitcoin 

trades on a number of exchanges around 

the world and that most of these 

exchanges can be considered isolated 

liquidity pools, which are more 

vulnerable to manipulation or security 

breach than the broader market.74


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37584 Federal Register / Vol. 83, No. 148 / Wednesday, August 1, 2018 / Notices 

75See BZX Letter II, supra note 13, at 17; 

Overdahl Letter, supra note 36, at 12. The Overdahl 

Letter also notes that the CFTC-regulated CME 

Group recently created a standardized bitcoin 

reference rate and a bitcoin spot price index. 

Overdahl Letter, supra note 36, at 12. 

76See supra notes 69–70 and accompanying text. 

77See supra notes 52–68 and accompanying text. 

78See supra notes 52–68 and accompanying text. 

79While the Overdahl Letter compares the 

Gemini Exchange bitcoin price to the median price 

and the volume-weighted average price of a group 

of USD-denominated bitcoin markets, such an 

analysis does not demonstrate whether the range of 

prices across those other markets is broad or 

narrow. 

80See supra note 71 and accompanying text. 

81See supra note 69 and accompanying text. 

82See BZX Letter II, supra note 13, at 15 n.28 

(citing Letter from Daniel H. Gallancy, SolidX 

Partners, Inc., to Brent J. Fields, Secretary, 

Commission (Mar. 15, 2017) (SR–NYSEArca-2016– 

101)). 

83See supra note 56 and accompanying text. 

84See supra notes 60–61 and accompanying text. 

85See supra notes 67, 74 and accompanying text. 

86See Section III.B.1(b)(ii), infra (discussing the 

potential for market domination). 

87See supra note 57 and accompanying text. 

88See supra note 73 and accompanying text. 

89See Section III.E.1, infra. While the Lewis 

Letter makes a similar argument about the lack of 

a single market close, see supra note 67 and 

accompanying text, it does so in the context of a 

bitcoin ETP proposal that would not base its price 

on a single market auction. 

90For example, the website https://

data.bitcoinity.org/markets/arbitrage/USD tracks 

Finally, both BZX and the Overdahl 

Letter argue that the Commodity Futures 

Trading Commission’s (‘‘CFTC’’) 

granting of registration to bitcoin swapexecution facilities (‘‘SEFs’’) means that 

the CFTC has addressed the issue of 

manipulation and determined that the 

underlying spot markets for bitcoin are 

not susceptible to manipulation.75

(b) Discussion 

BZX has not demonstrated that the 

structure of the spot market for bitcoin 

is uniquely resistant to manipulation. 

(i) Bitcoin Market Structure & Arbitrage 

While two commenters questioned 

the effectiveness of arbitrage across 

bitcoin markets,76 BZX, the Overdahl 

Letter, and the Lewis Letter argue that 

the structure of the bitcoin spot market 

and the availability of arbitrage will 

help keep worldwide bitcoin prices 

aligned, hindering manipulation.77 The 

Overdahl Letter and Lewis Letter claim 

that economic analysis demonstrates 

that bitcoin markets are resistant to 

manipulation. But, as discussed below, 

the arguments submitted in support of 

this claim are incomplete and 

inconsistent, and are unsupported or 

contradicted by data. 

BZX, the Overdahl Letter, and the 

Lewis Letter offer broad assertions that 

the increasing strength and resilience of 

the non-stop global bitcoin market 

place, the emergence of new market 

participants, and the transparency of the 

market have facilitated arbitrage that has 

caused global bitcoin exchange prices to 

converge.78 But BZX, the Overdahl 

Letter, and the Lewis Letter offer no data 

or analysis regarding the actual 

effectiveness of arbitrage in the bitcoin 

spot market, either in terms of how 

closely prices are aligned across 

different bitcoin trading venues or how 

quickly price disparities are arbitraged 

away.79 Similarly, the commenter who 

asserts that regulatory actions by the 

People’s Bank of China were designed to 

discourage price manipulation, and 

have had profound and beneficial 

effects on bitcoin spot markets 

worldwide, has provided no empirical 

evidence to substantiate this claim.80 In 

addition, the Commission notes that one 

commenter asserts that large arbitrage 

opportunities persist in bitcoin 

markets.81

While BZX cites a comment letter 

relating to a different proposed rule 

change for the proposition that price 

discrepancies across four selected USDdenominated bitcoin markets are 

generally arbitraged away in under a 

minute,82 even if that limited factual 

assertion is true, BZX has not explained 

why it is relevant to the Commission’s 

consideration of the proposal, given that 

(a) the worldwide spot market for 

bitcoin is not limited to trading against 

the USD, (b) market participants could 

engage in creation or redemption 

transactions with the Trust using 

bitcoins sourced from any trading venue 

or from OTC transactions, and (c) the 

Gemini Exchange is not among the four 

bitcoin trading venues observed by the 

commenter. Thus, this argument does 

not support BZX’s broad assertion about 

the effectiveness of arbitrage across the 

worldwide bitcoin market. 

BZX also argues that manipulation in 

the bitcoin market is unlikely because 

would-be manipulators would have to 

overcome the liquidity supplied by 

arbitrageurs, who must have funds 

distributed across multiple bitcoin 

markets to engage in arbitrage,83 and the 

Overdahl Letter asserts that the 

manipulation of bitcoin is prohibitively 

expensive because manipulating the 

price of bitcoin on any given venue 

would require manipulation of the 

entire global bitcoin market to be 

effective.84 These theoretical arguments 

depend on effective arbitrage existing 

across bitcoin markets, but, as noted 

above, the Commission concludes that 

BZX has not provided a factual basis in 

the record to conclude that arbitrage 

across bitcoin exchanges is effective. 

Moreover, these arguments are 

inconsistent: If, in fact, market 

participants must disperse their capital 

across multiple trading venues to engage 

in effective arbitrage, then a market 

participant may be able to manipulate 

trading on a single trading venue by 

concentrating its capital and trading 

activity there. The Overdahl Letter’s 

argument that manipulation of one 

bitcoin trading venue would require 

overcoming liquidity on all bitcoin 

venues is also inconsistent with the 

assertion by the Lewis Letter and 

another commenter that each bitcoin 

market is an independent entity and 

that, therefore, demand for liquidity 

does not necessarily propagate across 

other exchanges.85 In addition, BZX, the 

Overdahl Letter, and the Lewis Letter do 

not adequately take into account that a 

market participant with a dominant 

ownership position would not find it 

prohibitively expensive to overcome the 

liquidity supplied by arbitrageurs and 

could use dominant market share to 

engage in manipulation.86 And their 

arguments that substantial liquidity 

provided by the OTC market can absorb 

liquidity shocks and help resist 

manipulative activity are not supported 

by any data in the record on which the 

Commission could base a conclusion 

that OTC activity contributes to 

preventing manipulation. 

BZX also argues that bitcoin markets 

are uniquely resistant to manipulation 

because the 24/7/365 trading of bitcoin 

means that there is no single marketclose for investors to attempt to 

manipulate.87 Similarly, a commenter 

asserts that the large number of bitcoin 

trading venues makes bitcoin less 

susceptible to manipulation than an 

asset, such as a commodity, trading on 

a single exchange or just a few 

exchanges.88 In the context of the Trust, 

however, there is a single market and a 

single market-close event that an 

investor may have incentive to 

manipulate: The Gemini Auction, which 

the Trust would use to calculate NAV.89

And the argument by BZX and a 

commenter that the transparency of a 

bitcoin commodity-trust ETP regarding 

its bitcoin holdings, as well as its 

dissemination of the IIV and NAV, 

would reduce the ability of market 

participants to manipulate the price of 

bitcoin is unpersuasive because: (a) 

There is no comprehensive and accurate 

regulatory data source reflecting bitcoin 

pricing or trading; (b) there is no basis 

to conclude that the Trust’s IIV would 

be considered an authoritative price 

when several other spot prices for 

bitcoin are already disseminated and 

often differ from one another; 90 and (c) 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 148 / Wednesday, August 1, 2018 / Notices 37585 

price differences between last trades on 13 bitcoin 

markets. 

91See supra notes 62–63, 67 and accompanying 

text. 

92Even if transparent order books and transaction 

reports on bitcoin markets would include the 

quoting or trading activity of a person or group 

attempting to manipulate the market, along with the 

activity of all other market participants, such 

information could not, by itself, definitively 

establish in real time which activity represented 

bona fide trading interest and which did not. 

93See In re TeraExchange LLC, CFTC Docket No. 

15–33, 2015 WL 5658082 (CFTC Sept. 24, 2015) 

(Order Instituting Proceedings Pursuant to Sections 

6(c) and 6(d) of the Commodity Exchange Act 

Making Findings and Imposing Remedial Sanctions 

(‘‘TeraExchange Settlement Order’’)), available at 

http://www.cftc.gov/idc/groups/public/@

lrenforcementactions/documents/legalpleading/ 

enfteraexchangeorder92415.pdf. See also Kevin 

Dowd & Martin Hutchinson, Bitcoin Will Bite the 

Dust, 35 Cato J. 357, 374 n.13 (2015) (Bitcoin 

markets are subject to the ‘‘usual market 

manipulation tactics.’’), available at https://

object.cato.org/sites/cato.org/files/serials/files/catojournal/2015/5/cj-v35n2-12.pdf. 

94For example, as described in the Trust’s 

Registration Statement, supra note 22, in the event 

the Bitcoin Network undergoes a ‘‘hard fork’’ into 

two blockchains, the Custodian and the Sponsor 

will determine which of the resulting blockchains 

to use as the basis for the assets of the Trust and, 

under certain circumstances, will have discretion to 

determine which blockchain is ‘‘most likely to be 

supported by a majority of users or miners.’’ Id. at 

113. See also Lee Letter, supra note 35; Johnson 

Letter, supra note 35; Schulte Letter, supra note 35; 

Anonymous Letter V, supra note 35; Anonymous 

Letter VI, supra note 35. The decision of the 

Custodian and Sponsor to support one resulting 

blockchain over another could have a material 

effect on the relative value of the bitcoins in each 

of the blockchains. A fork between bitcoin and 

‘‘Bitcoin Cash’’ occurred on August 1, 2017, and a 

fork between bitcoin and ‘‘Bitcoin Gold’’ occurred 

on October 24, 2017. 

95See Wenjun Feng, Yiming Wang & Zhengjun 

Zhang, Informed Trading in the Bitcoin Market, Fin. 

Res. Letters, Dec. 2, 2017, available at https://

www.sciencedirect.com/science/article/pii/ 

S1544612317306992. 

96Registration Statement, supra note 22, at 21–23, 

29, 60–61. 

97Amir Feder, Neil Gandal, J.T. Hamrick, and 

Tyler Moore, The Impact of DDoS and Other 

Security Shocks on Bitcoin Currency Exchanges: 

Evidence From Mt. Gox, Journal of Cybersecurity 

(Jan. 31, 2018), at 137 (explaining that a profitmotivated hacker can manipulate bitcoin prices up 

or down by hacking larger trading venues while 

trading on smaller trading venues, and thereby 

‘‘create[ ] an unfair financial advantage for the 

perpetrator at the expense of ordinary 

participants’’), available at https://

academic.oup.com/cybersecurity/article/3/2/137/ 

4831474; see also David Groshoff, Kickstarter My 

Heart: Extraordinary Popular Delusions and the 

Madness of Crowdfunding Constraints and Bitcoin 

Bubbles, 5 Wm. Mary Bus. L. Rev. 489, 519 (2014). 

98Registration Statement, supra note 22, at 17, 56. 

The Registration Statement notes that obtaining 

control in excess of 50% of the processing power 

on the Bitcoin network is sufficient, and that ‘‘there 

are some academics and market participants who 

believe the applicable threshold required to exert 

authority over the Bitcoin Network could be less 

than fifty (50) percent, which would increase the 

chances of a malicious actor exerting authority over 

the Bitcoin Network.’’ Id. at 17. 

99Satoshi Nakamoto, Bitcoin: A Peer-to-Peer 

Electronic Cash System, Bitcoin.org (Oct. 31, 2008), 

at 4 (malicious actor could exploit his control of the 

Bitcoin Network by ‘‘using it to generate new 

coins’’), available at https://bitcoin.org/bitcoin.pdf; 

see also Kevin Dowd & Martin Hutchinson, Bitcoin 

Will Bite the Dust, 35 Cato J. 357, 372–74 (2015), 

available at https://object.cato.org/sites/cato.org/ 

files/serials/files/cato-journal/2015/5/cj-v35n2- 

12.pdf; Sanya Samtani and Varun Baliga, On 

Monopolistic Practices in Bitcoin: A Coded 

Solution, 11 Indian J. L. & Tech. 106, 107–08 (2015), 

available at http://ijlt.in/wp-content/uploads/2015/ 

09/Sanya-Samtani-and-Varun-Baliga-5.pdf 

(malicious actor could achieve ‘‘devaluation’’ of 

bitcoin). 

100Registration Statement, supra note 22, at 23. 

the Trust’s NAV would differ from the 

Gemini Auction price only if the 

auction price, which is publicly 

disseminated itself, is determined not to 

reflect a fair price for bitcoin. 

Both the Overdahl Letter and the 

Lewis Letter contend that bitcoin 

markets are not subject to ‘‘spoofing,’’ a 

manipulative quoting strategy.91 Neither 

letter, however, presents any data or 

analysis to support its claim, and there 

is no basis in the record to conclude 

whether bitcoin spot markets are subject 

to spoofing or other deceptive quoting 

practices. As a general matter, the 

manipulation of asset prices can occur 

simply through trading activity that 

creates a false impression of supply or 

demand, whether in the context of a 

closing auction or in the course of 

continuous trading, and does not 

require formal linkages among markets 

(such as consolidated quotations or 

routing requirements) or the complex 

quoting behavior associated with highfrequency trading.92 The Commission 

also notes that, in contrast to the 

theoretical arguments in the Overdahl 

Letter and the Lewis Letter, 

TeraExchange (a market for swaps on 

bitcoin) arranged for participants to 

make manipulative ‘‘wash’’ 

transactions.93

Finally, BZX’s, the Lewis Letter’s, and 

the Overdahl Letter’s discussions of the 

possible sources of manipulation are 

incomplete and do not form a basis to 

find that bitcoin is uniquely resistant to 

manipulation—or to find, by 

implication, that there is no need for a 

surveillance-sharing between an 

exchange listing shares of a bitcoinbased ETP and significant markets 

trading bitcoin or bitcoin derivatives. 

For example, assuming there is no 

inside information related to the 

earnings or revenue of bitcoin, there 

may be material nonpublic information 

related to: The actions of regulators with 

respect to bitcoin; order flow, such as 

plans of market participants to 

significantly increase or decrease their 

holdings in bitcoin; new sources of 

demand, such as new ETPs that would 

hold bitcoin; or the decision of a 

bitcoin-based ETP, a bitcoin trading 

venue, or a bitcoin wallet service 

provider with respect to how it would 

respond to a ‘‘fork’’ in the blockchain, 

which would create two different, noninterchangeable types of bitcoin.94

Moreover, bitcoin is susceptible to the 

dissemination of false or misleading 

information regarding the types of 

material, nonpublic information just 

discussed. The Commission also notes a 

recent academic paper finding empirical 

evidence of trading in bitcoin markets 

based on material nonpublic 

information.95

Two additional risks that the Trust’s 

Registration Statement acknowledges— 

(1) hacking and (2) malicious control of 

the Bitcoin Network—further 

undermine BZX’s argument that bitcoin 

and bitcoin markets are inherently 

resistant to fraud and manipulation. The 

Trust’s Registration Statement 

recognizes that bitcoin trading venues 

can be and have been attacked by 

hackers, which can affect liquidity and 

result in volatile prices.96 Profitmotivated hackers can launch such 

attacks to manipulate bitcoin and 

achieve their ‘‘intended effect of 

artificially raising or lowering prices.’’ 97

The Trust’s Registration Statement also 

recognizes the risk of a ‘‘malicious 

actor’’ obtaining control of the 

processing power dedicated to mining 

on the Bitcoin Network and thus 

‘‘exerting authority’’ over the Bitcoin 

Network.98 Such control can be used to 

manipulate bitcoin pricing.99 And there 

may be material nonpublic information 

related to hacking plans or attempts to 

gain control of the Bitcoin Network, and 

such information could be exploited 

through fraudulent trading. 

Based on the analysis above, the 

Commission concludes that there is an 

insufficient basis in the record before it 

to decide that the bitcoin spot markets 

are inherently resistant to manipulation. 

This conclusion, again, is bolstered by 

the Trust’s Registration Statement, 

which explains: 

Over the past four (4) years, a number of 

Bitcoin Exchanges have been closed due to 

fraud, failure or security breaches. In many 

of these instances, the customers of such 

Bitcoin Exchanges were not compensated or 

made whole for the partial or complete losses 

of their account balances in such Bitcoin 

Exchanges. . . . Further, the collapse of the 

largest Bitcoin Exchange in 2014 suggests 

that the failure of one component of the 

overall Bitcoin ecosystem can have 

consequences for both users of a Bitcoin 

Exchange and the Bitcoin industry as a 

whole.100

Additionally, the Commission notes 

that recent academic papers suggest that 

the price of bitcoin can be, and has 

been, manipulated through activity on 


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101 Griffin, John M. and Amin Shams, Is Bitcoin 

Really Un-Tethered (June 13, 2018) (manuscript at 

33) (‘‘Griffin-Shams Paper’’), available at https://

ssrn.com/abstract_id=3195066. 

102 Id. 

103See id. at 23–24. 

104 Id. at 33; see also id. at 1 (‘‘[P]urchases with 

Tether are timed following market downturns and 

result in sizable increases in Bitcoin prices,’’ thus 

‘‘Tether is used to provide price support and 

manipulate cryptocurrency prices.’’); id. at 2 

(Bitcoin exchanges ‘‘largely operate outside the 

purview of financial regulators’’ and ‘‘[t]rading on 

unregulated exchanges . . . could leave 

cryptocurrencies vulnerable to gaming and 

manipulation.’’); id. at 3 (‘‘[T]he coordinated supply 

of Tether creates an opportunity to manipulate 

cryptocurrencies.’’); id. at 6 (‘‘Tether seems to be 

used both to stabilize and manipulate Bitcoin 

prices.’’). 

105See Neil Gandal, J.T. Hamrick, Tyler Moore & 

Tali Oberman, Price Manipulation in the Bitcoin 

Ecosystem, J. Monetary Econ., Jan. 2, 2018, 

available at https://doi.org/10.1016/ 

j.jmoneco.2017.12.004. According to the authors of 

this paper, the fraudulent and manipulative activity 

led to an average of approximately a four to five 

percent rise in the bitcoin/USD exchange rate in 

2013 on days when that activity occurred, 

compared to a slight decline on days without such 

activity. Id. at 2. 

106While another recent academic paper 

examines the relationship between bitcoin and 

Tether and claims ‘‘not [to] find any evidence 

suggesting that Tether issuances cause subsequent 

increases in Bitcoin returns,’’ W.C. Wei, The Impact 

of Tether Grants on Bitcoin (May 9, 2018) 

(manuscript at 6) (‘‘Wei Paper’’), available at 

https://ssrn.com/abstract=3175876, the 

Commission believes that this paper’s analysis 

reflects significant limitations in the study design 

and is not as persuasive as the empirical papers 

cited herein that conclude there has been fraud and 

manipulative activity in bitcoin markets, including 

the Griffin-Shams Paper. First, the paper uses only 

daily traded price and aggregate trading volume, 

whereas the Griffin-Shams Paper, supra note 101, 

performs a more granular statistical analysis of 

blockchain transactions and finds that the largest 

effects of Tether issuances on bitcoin prices occur 

between three and twelve hours after a Tether 

issuance. Second, the paper uses a single vector 

autoregression specification with 52 coefficients, 

but without any robustness checks. And third, 

while the paper concludes that Tether issuances 

increase bitcoin trading volume but do not affect 

bitcoin returns, the paper does not include any 

discussion of or control for collinearity between 

changes in bitcoin trading volume and prices. Thus, 

the Commission does not believe that the Wei Paper 

supports a conclusion that bitcoin is inherently 

resistant to manipulation. 

107Even if BZX’s argument is that bitcoin and 

bitcoin markets are ‘‘not readily susceptible to 

manipulation,’’ BZX has not demonstrated that 

contention. Indeed, the Commission concludes, 

consistent with its past practice, that surveillancesharing agreements with significant, regulated 

markets ensure that commodity-trust ETPs are ‘‘less 

readily susceptible to manipulation.’’ Exchange Act 

Release No. 35518 (Mar. 21, 1995), 60 FR 15804, 

15807 (Mar. 27, 1995) (SR–Amex–94–30); accord 

Exchange Act Release No. 82538 (Jan. 19, 2018), 83 

FR 3807, 3810 (Jan. 26, 2018) (SR–CboeBZX–2018– 

005) (‘‘The Exchange has in place a surveillance 

program for transactions in ETFs to ensure the 

availability of information necessary to detect and 

deter potential manipulations and other trading 

abuses, thereby making the Shares less readily 

susceptible to manipulation.’’). 

108See supra note 57 and accompanying text. 

109See supra note 68 and accompanying text. 

110See supra note 64 and accompanying text. 

111Lewis Letter I, supra note 65, at 6. The Lewis 

Letter states that there is ‘‘no compelling evidence’’ 

to suggest that any single investor or group has 

acquired a dominant position in bitcoin, but its 

recognition that ‘‘there is no registry showing which 

individuals or entities own bitcoin or the quantity 

owned,’’ and its citation of ‘‘media estimates’’ 

regarding the holdings of certain individuals, 

demonstrates that there is some risk of a person or 

group holding or acquiring a significant proportion 

of bitcoins and that this risk should not be 

dismissed. Id. at 6 & n.7. 

112Lewis Letter I, supra note 65, at 6 (citing 

Amendment No. 4 to Form S–1 of SolidX Bitcoin 

Trust at 16). A recent letter from Commission staff 

notes such concerns of ‘‘potential manipulation in 

the underlying cryptocurrency markets.’’ Engaging 

on Fund Innovation & Cryptocurrency-Related 

Holdings, 2018 WL 480851, at *1–2 (SEC No Action 

Letter Jan. 18, 2018) (citing David Z. Morris, Could 

Bitcoin’s ‘Whales’ Manipulate the Market?, Fortune 

(Dec. 10, 2017)). See also Olga Kharif, The Bitcoin 

Whales: 1,000 People Who Own 40 Percent of the 

Market, Bloomberg Businessweek (Dec. 8, 2017), 

available at https://www.bloomberg.com/news/ 

articles/2017-12-08/the-bitcoin-whales-1-000- 

people-who-own-40-percent-of-the-market. 

113See supra note 72 and accompanying text. 

114See supra note 68 and accompanying text. 

bitcoin trading venues. One recent 

academic paper examined whether the 

growth of the circulating supply of 

Tether (a cryptocurrency that claims to 

be backed by the U.S. dollar) through 

new issuances ‘‘is primarily driven by 

investor demand, or is supplied to 

investors as a scheme to profit from 

pushing cryptocurrency prices up.’’ 101

Through statistical analysis of the 

blockchains of bitcoin and Tether, the 

authors conclude that entities associated 

with a specific cryptocurrency trading 

venue—which the authors link to 

Tether’s founders—‘‘use Tether to 

purchase bitcoin when prices are 

falling’’; that ‘‘[s]uch price supporting 

activities are successful, as Bitcoin 

prices rise after the period of 

intervention,’’ with ‘‘substantial 

aggregate price effects’’ across bitcoin 

trading platforms; and that this activity 

‘‘occurs more aggressively right below 

salient round-number price thresholds 

where the price support might be most 

effective.’’ 102 The paper finds that the 

periods of strongest Tether flows are 

‘‘associated with 50% of Bitcoin 

compounded return’’ from March 1, 

2017, to March 31, 2018.103 Overall, the 

authors conclude that their findings 

‘‘provide substantial support for the 

view that price manipulation may be 

behind substantial distortive effects in 

cryptocurrencies’’ and ‘‘suggest that 

external capital market surveillance and 

monitoring may be necessary to obtain 

a market that is truly free.’’ 104 The 

Commission also notes another recent 

academic paper, which concludes that 

there was fraudulent and manipulative 

activity on a single bitcoin trading 

venue.105

These studies supplement the 

Commission’s conclusion that there is 

an insufficient basis in the record before 

it to decide that the bitcoin spot markets 

are inherently resistant to 

manipulation.106 Even without these 

studies, however, the Commission 

would still find that BZX has not 

demonstrated that the structure of the 

spot market for bitcoin is uniquely 

resistant to manipulation. Moreover, 

even if the record supported the 

proposition that some features of bitcoin 

and bitcoin markets mitigate some types 

of manipulation to some degree, the 

Commission concludes that such 

mitigation is insufficient to justify 

dispensing with the detection and 

deterrence of fraud and manipulation 

provided by surveillance-sharing 

agreements with significant, regulated 

markets.107

(ii) Market Domination 

While BZX argues that it is unlikely 

that any one actor could obtain a 

dominant market share,108 BZX does not 

address the risk of pre-existing 

dominant positions, a risk that the 

Lewis Letter acknowledges.109

Similarly, while the Overdahl Letter 

maintains that the existence of a 

dominant bitcoin exchange would not 

imply the existence of a dominant 

ownership position, and that the 

existence of a market with a large share 

of trading volume would make it more 

difficult for a market participant to 

obtain a dominant ownership 

position,110 the Overdahl Letter does 

not address the risk of pre-existing 

dominant positions in bitcoin. The 

Lewis Letter, however, specifically 

acknowledges this risk, noting: ‘‘One of 

the risks associated with bitcoin is the 

possibility that a single investor or a 

small group acting in collusion could 

own a dominant share of the available 

bitcoin.’’ 111 The Lewis Letter goes on to 

explain that ‘‘[i]t is possible, and in fact, 

reasonably likely that a small group of 

early bitcoin adopters hold a significant 

proportion of the bitcoin that has thus 

far been created.’’ 112 Additionally, 

another commenter contends that the 

majority of bitcoin is held by a few 

owners, estimating that 50% of bitcoins 

are held by fewer than 1,000 people.113

The Lewis Letter argues that the 

nature of the spot bitcoin market and 

the arbitrage mechanism should reduce 

the risk of manipulation through 

ownership of a dominant market 

share,114 but this argument addresses 

whether market participants might 

acquire a dominant share of bitcoin 

ownership by trading in bitcoin markets 


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115See, e.g., Craig Pirrong, The Economics of 

Commodity Market Manipulation: A Survey, J. 

Commodity Mkt., Mar. 2017, at 1 (describing 

manipulation in commodities markets); Franklin 

Allen, Lubomir P. Litov & Jianping Mei, Large 

Investors, Price Manipulation, and Limits to 

Arbitrage: An Anatomy of Market Corners, 10 Rev. 

Finance 645 (2006) (describing manipulation in 

equity and commodities markets). 

116See supra note 75. 

117See Written Testimony of J. Christopher 

Giancarlo, Chairman, Commodity Futures Trading 

Commission, Before the Senate Banking Committee 

at text accompanying n.17 (Feb. 6, 2018) 

(‘‘Giancarlo Testimony’’), available at https://

cftc.gov/PressRoom/SpeechesTestimony/ 

opagiancarlo37. See also infra notes 285–288 

(discussing role of CFTC with respect to underlying 

bitcoin spot markets). 

118CFTC Backgrounder on Oversight of and 

Approach to Virtual Currency Futures Markets (Jan. 

4, 2018) (‘‘CFTC Backgrounder’’), at 1, 2, available 

at http://www.cftc.gov/idc/groups/public/@

newsroom/documents/file/backgrounder_virtual

currency01.pdf. See also infra note 288. 

119 15 U.S.C. 78s(b). 

120See CFTC Backgrounder, supra note 118, at 2. 

121See supra notes 8, 10–12 and accompanying 

text. Compare 7 U.S.C. 7a-2(c) and 17 CFR 40.6 with 

15 U.S.C. 78(b)(1) and 17 CFR 240.19b-4. 

122Futures Market Basics, CFTC, available at 

http://www.cftc.gov/ConsumerProtection/Education

Center/FuturesMarketBasics/index.htm. 

Furthermore, the record does not contain evidence 

about whether CME or CFE can, in practice, 

actually obtain trading information from bitcoin 

exchanges, and thus whether the CFTC can obtain 

such information from CME or CFE. 

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

124See BZX Letter I, supra note 35, at 8; BZX 

Letter II, supra note 13, 10–11. See also SIG Letter, 

supra note 36, at 2–6; C&C Letter, supra note 36, 

at 1. 

125See BZX Letter I, supra note 35, at 8–9. 

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

127See id. at 20. 

128See Overdahl Letter, supra note 36, at 11. 

and does not address the potential 

market effect of large bitcoin positions 

held by early adopters. Multiple 

academic studies have found the 

existence of concentrated holdings in an 

asset presents a meaningful risk of 

manipulation.115 Whether a dominant 

position came from being an early 

adopter of bitcoin or from trading 

activity would not alter the 

Commission’s view that a person or 

group with a dominant position may be 

capable of engaging in manipulative 

activity. The Commission thus cannot, 

on the record before it, conclude that 

bitcoin markets are uniquely resistant to 

manipulation. 

(iii) Prior Regulatory Actions Regarding 

Bitcoin 

Although commenters suggest that the 

CFTC has conclusively determined that 

bitcoin markets are not susceptible to 

manipulation because it has permitted 

the registration of bitcoin swap 

execution facilities as consistent with 

the Commodity Exchange Act 

(‘‘CEA’’),116 the CFTC has made no such 

sweeping finding as to bitcoin or bitcoin 

spot markets either in permitting the 

registration of those swap execution 

facilities or in more recently permitting 

the self-certification by Chicago 

Mercantile Exchange Inc. (‘‘CME’’) and 

Cboe Futures Exchange, LLC (‘‘CFE’’) of 

bitcoin futures contracts. The 

Commission notes that CFTC Chairman 

Giancarlo has described ‘‘heightened 

review’’ of the CME and CFE selfcertifications as addressing the narrower 

question of whether the particular 

bitcoin futures products and cashsettlement processes—under the 

specific terms proposed by those two 

futures exchanges—were ‘‘readily 

susceptible to manipulation.’’ 117 And 

the CFTC stated that the selfcertification process for bitcoin futures 

contracts ‘‘does NOT provide for . . . 

value judgments about the underlying 

spot market,’’ and U.S. law ‘‘does not 

provide for direct, comprehensive 

Federal oversight of underlying Bitcoin 

or virtual currency spot markets.’’ 118

Moreover, the CFTC’s statutory 

authority to review new derivative 

products differs substantially from the 

Commission’s authority, under Section 

19(b) of the Exchange Act,119 with 

respect to the review of proposed rule 

changes by SROs. While there are 

‘‘limited grounds’’ for the CFTC to take 

affirmative action to stay new product 

self-certifications,120 the Commission 

must, to approve a proposed rule 

change, make an affirmative finding that 

the proposed rule change is consistent 

with the Exchange Act, with the burden 

of demonstrating consistency with the 

Exchange Act resting with the SRO 

proposing the rule change.121 The 

Commission is also mindful that the 

primarily institutional markets that the 

CFTC supervises are materially different 

from the securities markets in which 

many retail investors participate 

directly. The CFTC acknowledges that 

‘‘[m]ost participants in the futures 

markets are commercial or institutional 

commodities producers or consumers’’ 

and ‘‘[t]rading commodity futures and 

options is a volatile, complex and risky 

venture that is rarely suitable for 

individual investors or ‘retail 

customers.’ ’’ 122

Accordingly, the Commission cannot 

conclude that actions taken to date by 

the CFTC determine whether the 

proposed bitcoin ETP is consistent with 

the applicable requirements of the 

Exchange Act, and the Commission 

must reach its own decision, under its 

own statutory mandate, to determine 

whether the proposal is designed to 

‘‘protect investors and the public 

interest.’’ 123

2. Manipulation of the Gemini Exchange 

and the Gemini Auction 

(a) Summary of Comments Received 

BZX acknowledges in its comment 

letter that less-liquid markets, such as 

the market for bitcoin, may be more 

easily manipulated, but claims that 

these concerns are mitigated with 

respect to the Shares and the trading on 

the Gemini Exchange. BZX asserts that 

the Gemini Auction price is based on an 

extremely similar mechanism to the one 

leveraged for BZX’s own Opening and 

Closing Auctions and allows full and 

transparent participation from all 

Gemini Exchange participants in the 

price discovery process. BZX states that 

the auction process leverages mechanics 

that have proven over the years to be 

robust and effective on BZX and other 

national listing exchanges in both liquid 

and illiquid securities alike. BZX argues 

that, because the time of the Gemini 

Auction coincides with BZX’s Closing 

Auction, efficient real-time arbitrage 

between the closing price of the Trust 

and the Gemini Auction price will be 

prevalent and will lead to resilient and 

effective pricing of both the Trust and 

the underlying bitcoin asset, leading to 

convergence between the Trust’s closing 

price and its NAV.124 BZX asserts that 

the Gemini Auction price typically 

deviates very little from the prevailing 

price on other bitcoin exchanges, and 

BZX presents statistics purporting to 

show that this price is consistent with 

the prices of other U.S.-based 

exchanges.125

BZX asserts that the Gemini Auction 

price is uniquely resistant to 

manipulation and that it more 

accurately reflects the bitcoin price than 

any other individual event or crossmarket snapshot, because the largest 

bitcoin transactions each day usually 

occur via the Gemini Auction. BZX also 

claims that volumes transacted in the 

Gemini Auction are generally more than 

50% larger than the second-largest trade 

in the world, drawing an average daily 

volume of 1,200 bitcoins compared to 

approximately 800 bitcoins.126

In addition, BZX asserts that the 

Gemini Auction occurs at a scheduled 

time each day to maximize participation 

and price formation, while other 

liquidity events are often unpredictable 

and irregular.127 Another commenter 

claims that the Gemini Auction also 

concentrates liquidity and trading 

volume at a single moment each day.128

BZX further asserts that, from its 

launch through May 12, 2017, the 

Gemini Auction price on business days 

has deviated from the Gemini midpoint 

price (the midrange of the highest bid 


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129See BZX Letter II, supra note 13, at 20. 

130 Id. 

131See Overdahl Letter, supra note 36, at 1. 

132See id. at 4. 

133See id. at 2. Specifically, according to the 

Overdahl Letter, the type of potential manipulation 

most relevant for determining the NAV of the 

Trust’s Shares would be a malicious actor 

attempting to use the Gemini Auction price to 

influence the NAV of the Trust. See id. at 11. 

134See Overdahl Letter, supra note 36, at 11. 135See id. at 2. 136See, e.g., Maher Letter, supra note 35; Stolfi 

Letter I, supra note 35; Anonymous Letter III, supra 

note 35. 

137See Anonymous Letter III, supra note 35. 

138See Stolfi Letter I, supra note 35; see also 

Stolfi Letter II, supra note 35 (concluding that the 

Gemini Auction volume has shown a decreasing 

trend since its inception and is now under $1 

million USD during work days, and considerably 

less during weekends, and that ‘‘[w]ith such low 

volume, it seems possible to manipulate the NAV 

value by entering suitable bids or asks in the 

auction’’). 

139See Stolfi Letter II, supra note 35. 

140See Stolfi Letter I, supra note 35. 

141See Williams Letter, supra note 35, at 2. 

142See Anonymous Letter V, supra note 35. 

143See Stolfi Letter II, supra note 35. 

144See ARK Letter, supra note 35, at 5. 

145See Delehanty Letter, supra note 35 (but 

noting that using the Gemini Auction to value the 

ETP, which is also the sponsor of the ETP, creates 

a potential conflict of interest). 

146See Anonymous Letter VIII, supra note 35. 

147See Anonymous Letter III, supra note 35. 

148See id. 

and lowest offer prices) by 0.22% on 

average and 0.71% at most, that it has 

deviated from the median price of all 

U.S.-based bitcoin exchanges by 0.52% 

on average, and that it has deviated from 

the median price of all global USDdenominated bitcoin exchanges by 

0.70% on average.129 BZX also claims 

that the Gemini Exchange is regularly 

near the top of bitcoin exchanges in 

terms of market-quality metrics for 

overall trading.130

The Overdahl Letter asserts that the 

Gemini Auction price is reliable in that 

it generally reflects bitcoin traded at 

other U.S.-based bitcoin exchanges and 

bitcoin traded at USD-based exchanges 

globally and that, when noticeable 

discrepancies appear, arbitrage 

mechanisms quickly force prices back 

into alignment.131 The Overdahl Letter 

provides some update to the statistics 

provided by BZX and states that, from 

September 21, 2016 (the launch of the 

Gemini Auction), to March 1, 2017, the 

average daily deviation of the Gemini 

Auction price from the median 4:00 

p.m. price of all U.S.-based bitcoin 

exchanges was 0.0058 percent and the 

average absolute deviation (that is, the 

average absolute value of deviations) 

was 0.1804 percent. The Overdahl Letter 

also states that, during the same period, 

the average daily deviation of the 

Gemini Auction price from the median 

4:00 p.m. price of all global USDdenominated bitcoin exchanges was 

0.0489 percent with an average absolute 

deviation of 0.2398 percent.132

The Overdahl Letter also contends 

that the surveillance agreement between 

the Gemini Exchange and BZX allows 

for continuous monitoring of trading 

activity to detect and deter 

manipulation of the Gemini Auction 

price and that BZX’s rules are 

reasonably designed to prevent 

fraudulent and manipulative acts and 

practices with respect to determining 

the NAV of the Trust Shares.133 The 

Overdahl Letter further claims that the 

Gemini Auction is designed to not be 

readily susceptible to manipulation 

because it includes pre-trading 

transparency, which allows for full and 

transparent participation by all 

participants, uses a mechanism similar 

to that used by other exchanges in 

setting opening and closing prices, and 

concentrates liquidity and trading 

volume in a single moment each day.134

Regarding the calculation of NAV, the 

Overdahl Letter also argues that the 

Trust’s valuation procedures greatly 

reduce the risk that a malicious actor 

could influence the NAV of the Trust by 

manipulating the Gemini Auction, 

because alternative means can be used 

to value the Trust’s bitcoin if the Trust 

sponsor determines that the Gemini 

Auction price does not reflect the fair 

value of bitcoin.135

Several commenters claim that the 

Gemini Exchange has low trading 

volumes,136 and one commenter claims 

that, of all the exchanges, Gemini has 

the worst pricing.137 Another 

commenter asserts that the Gemini 

Exchange has relatively low liquidity 

and trade volume and that there is a 

significant risk that the nominal ETP 

share price will be manipulated by 

relatively small trades that manipulate 

the bitcoin price at that exchange.138

This commenter states that, while U.S.- 

based bitcoin exchanges are subjected to 

stricter regulations and auditing for the 

holding of client accounts, the trading 

itself seems to occur in a regulatory 

vacuum and seems impossible to audit 

effectively.139 This commenter 

expresses concerns regarding the 

Gemini Exchange Spot Price, noting that 

the nominal price of the Shares under 

the proposal is supposed to be tied to 

the market price of bitcoins at the 

Gemini Exchange, which is closely tied 

to the ETP proponents.140

One commenter claims that most 

daily trading volume is conducted on 

poorly capitalized, unregulated 

exchanges located outside the United 

States and that these non-U.S. 

exchanges and their practices 

significantly influence the price 

discovery process.141 Another 

commenter states that the biggest and 

most influential bitcoin exchange is 

located outside U.S. jurisdiction.142

One commenter states that, since 

2013, the price of bitcoin has been 

defined mostly by the major Chinese 

exchanges, whose volumes dwarf those 

of exchanges outside China, and that the 

price of bitcoin is defined entirely by 

speculation, without any ties to 

fundamentals.143 Another commenter 

observes that Chinese markets drive 

much of the volume in the bitcoin 

markets.144

One commenter states that it makes 

sense to value the proposed ETP based 

on the Gemini Auction because doing so 

would guarantee sufficient liquidity and 

because other bitcoin trading venues are 

not subject to the same level of oversight 

as the Gemini Exchange.145 Another 

commenter asserts that the Gemini 

Auction is not a robust mechanism for 

price discovery because Gemini’s fee 

structure would make self-trading or 

collusive wash trades between accounts 

profitable, which would artificially 

inflate the volume of the Gemini 

Auction.146

One commenter states that the Gemini 

Auction could be an improvement over 

other bitcoin pricing mechanisms, but 

asserts that the Gemini Auction has not 

improved volume.147 The commenter 

observes that the Gemini Auction data 

show that traders in the auction are 

taking advantage of the discounted 

auction price. The commenter states 

that the daily two-sided Gemini Auction 

process was designed to maximize price 

discovery and reduce price volatility 

that could be the result of momentum 

pricing, but asks what measures have 

been put in place to address traders who 

take advantage of the discounted 

auction price. The commenter also 

states that, while other financial 

products sometimes have auctions to 

determine price, an auction on a stock 

exchange does not require money to be 

deposited in advance with the exchange 

to be in the auction. The commenter 

states that, by contrast, the Gemini 

Exchange requires dollars or bitcoin to 

be deposited before participation. The 

commenter believes that this is a 

problem because the Gemini Auction is 

limited and has failed on at least two 

occasions.148

Other commenters believe that the 

Gemini Exchange conducts sufficient 

volume to support the Winklevoss 

Bitcoin Trust. One commenter states 

that trading volume on the Gemini 

Exchange is sufficient and that 


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149See Anonymous Letter I, supra note 35. 

150See Delehanty Letter, supra note 35. 

151See ARK Letter, supra note 35, at 7–8. 

152See id. at 8–9. 

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

154See Delehanty Letter, supra note 35. 

155See Stolfi Letter II, supra note 35. 

156See id. 

157See Anonymous Letter III, supra note 35. 

158See id. 

159See Williams Letter, supra note 35, at 2. 

160See supra note 130 and accompanying text. 

161See supra notes 149–150 and accompanying 

text. 

162See supra notes 141–144 and accompanying 

text. 

163See supra note 138 and accompanying text. 

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

165See Amendment No. 2, supra note 1 (setting 

size of creation unit at 100,000 shares, with the 

value of a share at 0.01 bitcoin, making content of 

a creation unit 1,000 bitcoins). 

manipulation of these Shares, while 

possible, would equally be possible for 

other exchange-traded funds.149

Another commenter asserts that trading 

volume in the recent Gemini bitcoin 

daily auctions seemed ‘‘to be of 

reasonable size.’’ 150

One commenter claims that there are 

more robust ways to value the Trust’s 

holdings than using the spot price of a 

single exchange, such as the Gemini 

Exchange.151 The commenter also states 

that the Gemini Exchange typically 

processes less than 10% of the total 

volume in the bitcoin/USD pair and 

states that an index of the most reliable 

exchanges should be constructed to 

value the Trust’s holdings. The 

commenter questions whether using 

only the Gemini Exchange’s spot price 

could serve to incentivize Authorized 

Participants and other market 

participants to direct traffic and flow to 

Gemini, at the expense of best 

execution.152

Another commenter takes a different 

view on the merits of single- versus 

multiple-price sources. This commenter 

observes that bitcoin spot prices diverge 

across exchanges due to various factors 

and that some exchanges may suffer 

from lack of oversight and a lack of 

transparency or fairness. The 

commenter claims that these facts 

strengthen the case for an investment 

product that does not rely on the spot 

price of less-credible exchanges to value 

its holdings and instead relies on the 

spot price on the Gemini Exchange, 

which is subject to substantive 

regulation of its exchange activity and 

custody of assets by the NYSDFS. This 

commenter also states that, while 

leveraged trading on some other 

exchanges has historically sparked 

excessive price volatility and instability, 

Gemini does not offer such products 

and would be able to serve as a trusted, 

regulated spot exchange for institutional 

market participants driving the arbitrage 

mechanism that ensures efficient 

pricing between the spot price and the 

Shares. The commenter claims that the 

Gemini Exchange has the potential for 

more-robust price discovery as liquidity 

is concentrated on that exchange.153

One commenter states that there is an 

inherent trade-off to using one exchange 

versus an average of several exchanges, 

some of which may be less scrupulous. 

The commenter acknowledges that 

manipulation is a legitimate concern, 

but notes that it is not uncommon to see 

a very small number of physical trades 

determine the base price for a much 

larger paper market.154

Other commenters view the risk of 

manipulation as more significant. One 

commenter states that it would be 

surprising if manipulative practices that 

would be illegal in other financial 

markets did not occur on certain bitcoin 

exchanges that experience lack of 

regulations and oversight, since these 

practices would be easy to implement, 

impossible to detect, perfectly legal 

under the rules applicable to those 

bitcoin exchanges, and extremely 

lucrative.155 This commenter also states 

that the Gemini Auction closing 

volumes have been low and have shown 

a slight decreasing trend since the 

inception of the Gemini Auction. The 

commenter states that, with low 

volumes, it seems possible to 

manipulate the NAV by entering 

suitable bids or asks in the Gemini 

Auction.156 Another commenter agrees 

that bitcoin traders can manipulate 

trading on the Gemini Exchange because 

of its low trading volumes and notes 

that the Trust’s documentation states 

that momentum pricing of bitcoin has 

resulted, and may continue to result, in 

speculation regarding future 

appreciation in the value of bitcoin, 

making the price of bitcoin more 

volatile.157 The commenter states that 

the value of bitcoin may therefore be 

more likely to fluctuate due to changing 

investor confidence in future 

appreciation in the Gemini Auction 

price, which could adversely affect an 

investment in the Shares.158 According 

to another commenter, in this 

unregulated environment, price 

manipulation and front-running of large 

buy or sell orders can happen and wellconnected customers can gain 

preferential treatment in order 

execution.159

(b) Discussion 

For the reasons discussed below, the 

Commission concludes that BZX has not 

demonstrated that the Gemini Exchange 

and the Gemini Auction are resistant to 

manipulation. Commenters disagree 

about whether the Gemini Exchange and 

the Gemini Auction are susceptible to 

manipulation. BZX promotes the 

Gemini Exchange as one of the top three 

bitcoin exchanges in the United 

States,160 and some commenters believe 

that the Gemini Exchange conducts 

sufficient volume to support the 

Winklevoss Bitcoin Trust.161 Other 

commenters, however, question these 

assertions, some noting that the majority 

of bitcoin trading, including trading 

denominated in USD, occurs on 

unregulated exchanges outside the 

United States,162 and one suggesting 

that the low liquidity and trading 

volume on the Gemini Exchange create 

a significant risk that the ETP share 

price could be manipulated by relatively 

small trades.163

While BZX claims in its May 2017 

comment letter that the average volume 

of the Gemini Auction is 1,200 

bitcoins,164 calculations based on public 

data from the Gemini Exchange website 

show that more recent Gemini Auction 

volume has been significantly lower. As 

of March 31, 2018, the average number 

of bitcoins traded in the Gemini Auction 

on a business day was just 178.07 

bitcoins over the previous month, 

122.20 bitcoins over the previous three 

months, and 138.46 bitcoins over the 

previous six months. Median volume 

figures for the same periods are even 

lower: 146.51 bitcoins, 85.09 bitcoins, 

and 90.42 bitcoins, respectively. 

Although the Gemini Exchange 

conducts the Gemini Auction on each 

calendar day, to better represent auction 

volume for days on which creations or 

redemptions might occur in the Shares, 

these calculations of average and 

median auction volume exclude 

auctions that occurred on weekends and 

days on which the U.S. equities markets 

were closed. Days on which no Gemini 

Auction price was reached were also 

excluded to avoid skewing data. 

The volume of the Gemini Auction is 

of particular relevance to BZX’s 

proposal, and to the susceptibility of the 

ETP shares to manipulation, because the 

Gemini Auction price is used to 

determine the NAV of the Trust, which 

is publicly disseminated and which is 

the price used for creation and 

redemption transactions. Taking into 

account the recent low auction volume 

calculated above, which is a small 

fraction of the 1,000 bitcoins in a 

creation or redemption basket,165 the 

Commission concludes that there is a 

substantial risk that either (1) any 

creation and redemption activity in the 


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166See supra note 30. 

167Registration Statement, supra note 22, at 22. 168See Maher Letter, supra note 35; Overdahl 

Letter, supra note 36, at 3; SIG Letter, supra note 

36, at 8. 169See supra note 130 and accompanying text. 

170See BZX Letter II, supra note 13, at 22, 26. 

171See id. at 23. 

172See id. The surveillance-sharing agreement 

between BZX and the Gemini Exchange is 

discussed in Section III.E.1, infra. 

173See Overdahl Letter, supra note 36, at 2. 

174See id. at 11. 

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

Trust would have a substantial effect on 

the Trust’s pricing or (2) Authorized 

Participants would be forced to source 

bitcoins on other venues where prices 

may or may not be aligned with that of 

the Gemini Auction, limiting the 

purported effectiveness of arbitrage. 

Additionally, given the current 

disparity between the Gemini Auction 

volume and the trading volume that 

would equal a creation unit—and the 

resulting likelihood that creation or 

redemption activity would substantially 

affect the Gemini Auction price—BZX 

has not shown that the ability of the 

Trust to use other criteria to value the 

Trust’s bitcoins in ‘‘extraordinary 

circumstances’’ 166 adequately addresses 

the risk that creations and redemptions, 

or manipulative activity such as front 

running, may affect the Gemini Auction 

price on an ordinary day. In light of the 

risks that creation and redemption 

activity may substantially affect the 

Gemini Auction price—and that the use 

of other valuation criteria may fail to 

address the effects of creation and 

redemption activity or of manipulative 

activity—the Commission cannot 

conclude that the bitcoin pricing 

mechanism of the Trust is uniquely 

resistant to manipulation. 

Further, given that recent Gemini 

Auction volumes are inadequate to 

support creation or redemption activity, 

BZX has not sufficiently supported its 

claim that the design and mechanisms 

of the Gemini Auction would allow for 

efficient arbitrage between the Shares 

and the underlying bitcoin. Similarly, 

the statistics offered by BZX and the 

Overdahl Letter to argue that the Gemini 

Auction creates a price closely aligned 

with U.S.-based and global USDdenominated bitcoin exchanges do not 

establish that bitcoin trading on the 

Gemini Exchange is uniquely resistant 

to manipulation because these statistics 

do not reflect, and cannot predict, the 

dynamics of trading on the Gemini 

Exchange if the Gemini Auction were 

used as the basis to calculate NAV for 

the Trust. Given the small size of the 

Gemini Auction relative to the size of a 

creation unit, the launch of the 

proposed ETP would be likely to 

fundamentally affect supply and 

demand in the Gemini Auction, and the 

use of the Gemini Auction price to 

calculate NAV would introduce a 

significant incentive to manipulate the 

Gemini Auction that does not currently 

exist. The Commission cannot therefore 

conclude that arbitrage would render 

the Shares uniquely resistant to 

manipulation. 

The Trust’s Registration Statement 

acknowledges that the reliance on a 

single bitcoin exchange has risks to 

shareholders in the Trust: ‘‘Trading on 

a single Bitcoin Exchange may result in 

less favorable prices and decreased 

liquidity for the Trust and, therefore, 

could have an adverse effect on the 

Trust and Shareholders.’’ 167 Moreover, 

although commenters have suggested 

that approval of the proposal would 

naturally lead to greater activity in the 

Gemini Auction,168 such speculation 

does not provide an adequate basis to 

decide that future Gemini Auction 

volume would be sufficient to prevent 

manipulation of the Gemini Auction 

from affecting the NAV of the Trust, and 

BZX has not explained how the 

favorable market quality metrics it 

attributes to the Gemini Exchange 

would be affected if trading interest at 

the Gemini Auction were dominated by 

creation and redemption activity.169

Therefore, again, the Commission 

cannot conclude that the pricing 

mechanism of the Trust would render 

the Shares uniquely resistant to 

manipulation. 

C. The Availability of ‘‘Traditional 

Means’’ To Detect and Deter Fraud and 

Manipulation 

BZX has not demonstrated, given the 

current absence of a surveillancesharing agreement with a regulated 

bitcoin market of significant size, that 

the alternative surveillance procedures 

BZX purports to identify—including 

BZX’s assertion that it would be able to 

obtain certain information regarding 

trading in the Shares and in the 

underlying bitcoin or any bitcoin 

derivative—would be sufficient to 

satisfy the requirement of Exchange Act 

Section 6(b)(5) that an exchange’s rules 

be designed to prevent fraudulent and 

manipulative acts and practices. 

1. Summary of Comments Received 

BZX asserts that the March 

Disapproval Order failed to appreciate 

that the proposal provides ‘‘traditional 

means of identifying and deterring fraud 

and manipulation’’ that meet the criteria 

that the Commission has utilized in 

approving other commodity-trust 

ETPs.170 BZX states that a particular 

area of surveillance focus for the 

Commission in prior commodity-trust 

ETP approval orders was the 

implementation of exchange rules 

requiring market makers in the 

commodity-trust ETP shares to disclose 

their dealings in the underlying 

commodities. BZX contends that 

analogous requirements are included in 

this proposal, with BZX Rule 14.11(e)(4) 

mandating that market makers in the 

Shares disclose all of their commodity 

trading accounts, disclose all trading in 

bitcoin or bitcoin derivatives, and make 

available all related books and 

records.171 BZX also contends that, in 

the prior commodity-trust ETP approval 

orders, the Commission also reviewed 

the adequacy of the ETP listing 

exchange’s rules and procedures for 

surveillance of trading activity in the 

ETP shares. According to BZX, similar 

surveillance rules and procedures are in 

place at BZX regarding the proposed 

bitcoin ETP, as the listing exchange can 

obtain information regarding trading in 

Shares from Intermarket Surveillance 

Group members and affiliate members, 

as well as trading information available 

on the blockchain and information 

available through a surveillance-sharing 

agreement with the Gemini 

Exchange.172

The Overdahl Letter also contends 

that BZX’s rules are reasonably designed 

to prevent fraudulent and manipulative 

acts and practices with respect to 

determining the NAV of the Trust 

Shares.173 Specifically, according to the 

Overdahl Letter, the type of potential 

manipulation most relevant for 

determining the NAV of the Trust’s 

Shares would be a malicious actor 

attempting to use the Gemini Auction 

price to influence the NAV of the Trust. 

The Overdahl Letter also asserts that, in 

addition to BZX’s surveillance 

procedures and anti-manipulation rules, 

penalties for engaging in manipulative 

conduct serve as a deterrent against 

manipulation of the Gemini Auction 

price and the resulting Trust’s NAV. 

The Overdahl Letter states that, 

although a penalty is applied after a 

manipulation occurs or is attempted, 

penalties are nonetheless a useful tool 

for deterring, and therefore preventing, 

manipulation.174

Finally, one commenter claims that 

the March Disapproval Order reflects 

the Commission’s ‘‘unspoken but 

obvious concern’’ with bitcoin, and 

argues that this issue can be cured by 

having the bitcoin exchange sign a 

memorandum of understanding with the 

Commission to share information.175


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

177See supra note 171 and accompanying text. 

178See BZX Rule 14.11(e)(4)(G). 

179See Amendment No. 1, supra note 1, 81 FR 

at 76668. 

180See also Section III.B.1(b)(ii), supra 

(discussing market domination). 

181See supra note 174 and accompanying text. 

182 15 U.S.C. 78f(b)(5) (emphasis added). 

183See Section III.D, infra. 

184See infra notes 281–282 and accompanying 

text. 

185See infra notes 286–288 and accompanying 

text. 

186See supra note 175 and accompanying text. 

187See, e.g., Memorandum of Understanding 

Between the Internal Revenue Service and the 

Securities and Exchange Commission for Tax 

Exempt Bonds/Municipal Securities Compliance 

(Mar. 2, 2010), available at https://www.sec.gov/ 

info/municipal/sec-irs-mou030210.pdf; 

Memorandum of Understanding Between the U.S. 

Securities and Exchange Commission and the U.S. 

Commodity Futures Trading Commission Regarding 

Coordination in Areas of Common Regulatory 

Interest (Mar. 11, 2008), available at https://

www.sec.gov/news/press/2008/2008-40_mou.pdf; 

and Memorandum of Understanding Between the 

U.S. Securities and Exchange Commission and the 

U.S. Commodity Futures Trading Commission 

Regarding the Oversight of Security Futures Product 

Trading and the Sharing of Security Futures 

Product Information (Mar. 17, 2004), available at 

http://www.cftc.gov/idc/groups/public/@

internationalaffairs/documents/file/ 

moubetweencftcandsec031704.pdf. 

188See BZX Letter II, supra note 13, at 26–27. 

189See Exchange Act Release No. 61219 (Dec. 22, 

2009), 74 FR 68886 (Dec. 29, 2009) (SR–NYSEArca– 

2009–95) (approving ETFS Platinum Trust); 

Exchange Act Release No. 61220 (Dec. 22, 2009), 74 

FR 68895 (Dec. 29, 2009) (SR–NYSEArca–2009–94) 

(approving ETFS Palladium Trust). 

190See BZX Letter II, supra note 13, at 27. 

2. Discussion 

The Commission concludes that BZX 

has not demonstrated—given the 

current absence of a surveillancesharing agreement with a regulated 

bitcoin market of significant size—that 

the alternative surveillance procedures 

discussed above would, by themselves, 

be sufficient to satisfy the requirement 

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

exchange’s rules be designed to prevent 

fraudulent and manipulative acts and 

practices.176

While BZX would, pursuant to its 

listing rules, be able to obtain certain 

information regarding trading in the 

Shares and in the underlying bitcoin or 

any bitcoin derivative through 

registered market makers,177 this trade 

information would be limited to the 

activities of members who were 

registered with BZX as market makers in 

the Shares and would not encompass all 

BZX market participants.178

Furthermore, neither BZX’s ability to 

surveil trading in the Shares nor its 

ability to share surveillance information 

with other securities exchanges trading 

the Shares would give BZX insight into 

the activity and identity of market 

participants trading in the underlying 

bitcoin in the OTC market or on other 

bitcoin trading venues. 

Additionally, while BZX represents 

that it can obtain information about 

bitcoin trading made publicly available 

through the bitcoin blockchain,179 the 

blockchain identifies parties to a 

transaction only by a pseudonymous 

public-key address, and it does not 

distinguish bitcoin trading activity from 

other transfers of bitcoin (e.g., for 

remittances, purchases of goods or 

services, or other purposes). Therefore, 

the public blockchain ledger, even in 

combination with the other monitoring 

abilities BZX identifies, does not 

provide comprehensive customer 

trading or identity information, which is 

particularly important here because 

pseudonymous bitcoin account holding 

means, among other things, that the 

number of accounts or number of trades 

would not reveal whether a person or 

group has a dominant ownership 

position in bitcoin, or is using or 

attempting to use a dominant ownership 

position to manipulate bitcoin 

pricing.180

One commenter asserts that existing 

‘‘penalties for engaging in manipulative 

conduct’’ can serve to deter 

manipulation of the Gemini Auction 

price and, therefore, the Trust’s NAV.181

However, the Commission concludes 

that, based on the facts and 

circumstances of this proposal, the 

ability of relevant authorities to 

potentially sanction manipulative 

activity after the fact—if it is 

discovered—is insufficient, by itself, to 

meet BZX’s obligation to have rules 

‘‘designed to prevent fraudulent and 

manipulative acts and practices.’’ 182

Before penalties can be imposed for 

engaging in manipulative conduct, such 

conduct must be detected and 

investigated; as discussed below, that is 

the necessary function of 

comprehensive surveillance-sharing 

agreements.183 Moreover, as discussed 

below, a substantial majority of bitcoin 

trading occurs outside the United 

States,184 and even within the United 

States, there is no comprehensive 

federal oversight of bitcoin spot 

markets.185

Another commenter suggests that the 

Commission sign a Memorandum of 

Understanding (‘‘MOU’’) with the 

Gemini Exchange to address what the 

commenter claims is the Commission’s 

unspoken but obvious concern with 

bitcoin.186 While the Commission is a 

party to several MOUs, these are 

generally arrangements with other 

foreign or domestic regulators.187 MOUs 

are tools to assist the Commission in 

performing its regulatory functions, not 

a mechanism for the Commission to 

assume an SRO’s obligations under the 

Exchange Act. 

D. The Use of Surveillance-Sharing 

Agreements To Detect and Deter 

Fraudulent and Manipulative Acts and 

Practices With Respect to CommodityTrust ETPs 

The Commission has historically 

recognized the importance of 

comprehensive surveillance-sharing 

agreements to detect and deter 

fraudulent and manipulative activity. 

Because BZX has not demonstrated that 

bitcoin and bitcoin markets are uniquely 

resistant to manipulation—or that 

alternative means of detecting and 

deterring fraud and manipulation are 

sufficient in the absence of a 

surveillance-sharing agreement with a 

significant, regulated market related to 

bitcoin—the absence of such an 

agreement compels the Commission to 

conclude that the proposed rule change 

must be disapproved. 

1. Summary of Comments Received 

BZX claims that the March 

Disapproval Order overstates the extent 

to which surveillance and regulation of 

the underlying market have been 

present in prior commodity-trust ETP 

approval orders, asserting that none of 

these orders ‘‘offers even a cursory 

analysis about whether the regulated 

markets for trading futures on the 

underlying commodity are ‘wellestablished’ or ‘significant.’ ’’ 188 In 

particular, BZX argues that the 

Commission orders approving the ETFS 

Platinum Trust ETP (‘‘Platinum Order’’) 

and the ETFS Palladium Trust ETP 

(‘‘Palladium Order’’),189 along with their 

exchange filings, discuss neither 

whether the New York Mercantile 

Exchange (‘‘NYMEX’’) and the Tokyo 

Commodity Exchange (‘‘TOCOM’’) are 

well-established or significant, nor the 

relevance of NYMEX being the largest 

exchange in the world for trading 

palladium and platinum derivatives.190

BZX claims that—because the exchange 

filings regarding the platinum and 

palladium ETPs note that TOCOM is not 

a member of the Intermarket 

Surveillance Group and that the 

respective listing exchange did not have 

a comprehensive surveillance-sharing 

agreement with TOCOM—those 

approval orders did not require the 

existence of an information-sharing 

agreement with the underlying 


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191See id. at 27–28. 

192See id. at 27. 

193See Petition for Review, supra note 4, at 12. 

The Overdahl Letter agrees with this assertion by 

BZX. See Overdahl Letter, supra note 36, at 10. 

194See Exchange Act Release No. 68973 (Feb. 22, 

2013), 78 FR 13726 (Feb. 28, 2013) (SR–NYSEArca– 

2012–66) (approving iShares Copper Trust). 

195See BZX Letter II, supra note 13, at 13–14; see 

also id. at 25. 

196See Lewis Letter I, supra note 65, at 6 & n.8 

(referring to the SolidX Bitcoin Trust, see SolidX 

Order, supra note 65, and to the JPM XF Physical 

Copper Trust, Exchange Act Release No. 68440 

(Dec. 14, 2012), 77 FR 75468 (Dec. 20, 2012) (SR– 

NYSEArca–2012–28)). 

197See Exchange Act Release No. 50603 (Oct. 28, 

2004), 69 FR 64614 (Nov. 5, 2004) (SR–NYSE– 

2004–22) (approving streetTRACKS Gold Shares). 

198See BZX Letter II, supra note 13, at 28–29. 

199See id. at 29. 

200See id. at 28 n.59. See also Exchange Act 

Release No. 58365 (Aug. 14, 2008), 73 FR 49522 

(Aug. 21, 2008) (SR–NYSEArca–2008–81) 

(approving CurrencyShares Hong Kong Dollar 

Trust, CurrencyShares Singapore Dollar Trust, and 

two other issues of CurrencyShares based on nonU.S. currencies). 

201See Convergex Letter, supra note 36, at 2. 

202See streetTRACKS Gold Shares, Exchange Act 

Release No. 50603 (Oct. 28, 2004), 69 FR 64614, 

64618–19 (Nov. 5, 2004) (SR–NYSE–2004–22); 

iShares COMEX Gold Trust, Exchange Act Release 

No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751, 3754– 

55 (Jan. 26, 2005) (SR–Amex–2004–38); iShares 

Silver Trust, Exchange Act Release No. 53521 (Mar. 

20, 2006), 71 FR 14967, 14968, 14973–74 (Mar. 24, 

2006) (SR–Amex–2005–072); ETFS Gold Trust, 

Exchange Act Release No. 59895 (May 8, 2009), 74 

FR 22993, 22994–95, 22998, 23000 (May 15, 2009) 

(SR–NYSEArca–2009–40); ETFS Silver Trust, 

Exchange Act Release No. 59781 (Apr. 17, 2009), 74 

FR 18771, 18772, 18775–77 (Apr. 24, 2009) (SR– 

NYSEArca–2009–28); ETFS Palladium Trust, 

Exchange Act Release No. 61220 (Dec. 22, 2009), 74 

FR 68895, 68896 (Dec. 29, 2009) (SR–NYSEArca– 

2009–94) (notice of proposed rule change included 

NYSE Arca’s representation that ‘‘[t]he most 

significant palladium futures exchanges are the 

NYMEX and the Tokyo Commodity Exchange,’’ that 

‘‘NYMEX is the largest exchange in the world for 

trading precious metals futures and options,’’ and 

that NYSE Arca ‘‘may obtain trading information 

via the Intermarket Surveillance Group,’’ of which 

NYMEX is a member, Exchange Act Release No. 

60971 (Nov. 9, 2009), 74 FR 59283, 59285–86, 

59291 (Nov. 17, 2009)); ETFS Platinum Trust, 

Exchange Act Release No. 61219 (Dec. 22, 2009), 74 

FR 68886, 68887–88 (Dec. 29, 2009) (SR– 

NYSEArca–2009–95) (notice of proposed rule 

change included NYSE Arca’s representation that 

‘‘[t]he most significant platinum futures exchanges 

are the NYMEX and the Tokyo Commodity 

Exchange,’’ that ‘‘NYMEX is the largest exchange in 

the world for trading precious metals futures and 

options,’’ and that NYSE Arca ‘‘may obtain trading 

information via the Intermarket Surveillance 

Group,’’ of which NYMEX is a member, Exchange 

Act Release No. 60970 (Nov. 9, 2009), 74 FR 59319, 

59321, 59327 (Nov. 17, 2009)); Sprott Physical Gold 

Trust, Exchange Act Release No. 61496 (Feb. 4, 

2010), 75 FR 6758, 6760 (Feb. 10, 2010) (SR– 

NYSEArca–2009–113) (notice of proposed rule 

change included NYSE Arca’s representation that 

the COMEX is one of the ‘‘major world gold 

markets,’’ that NYSE Arca ‘‘may obtain trading 

information via the Intermarket Surveillance 

Group,’’ and that NYMEX, of which COMEX is a 

division, is a member of the Intermarket 

Surveillance Group, Exchange Act Release No. 

61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 

2010)); Sprott Physical Silver Trust, Exchange Act 

Release No. 63043 (Oct. 5, 2010), 75 FR 62615, 

62616, 62619, 62621 (Oct. 12, 2010) (SR– 

NYSEArca–2010–84); ETFS Precious Metals Basket 

Trust, Exchange Act Release No. 62692 (Aug. 11, 

2010), 75 FR 50789, 50790 (Aug. 17, 2010) (SR– 

NYSEArca–2010–56) (notice of proposed rule 

change included NYSE Arca’s representation that 

‘‘the most significant gold, silver, platinum and 

palladium futures exchanges are the COMEX and 

the TOCOM’’ and that NYSE Arca ‘‘may obtain 

trading information via the Intermarket 

Surveillance Group,’’ of which COMEX is a 

member, Exchange Act Release No. 62402 (Jun. 29, 

exchange.191 BZX further asserts that 

the Platinum Order and Palladium 

Order discuss only whether the listing 

exchange (1) can obtain information 

from market makers relating to their 

trading in the applicable commodity or 

related derivatives; (2) has a rule 

preventing market makers from using 

material, nonpublic information 

regarding trading in the underlying 

commodity or its derivatives; and (3) 

can obtain trading information via the 

Intermarket Surveillance Group from 

other Intermarket Surveillance Group 

member exchanges.192

BZX further asserts that, while the 

potential avenues for manipulation 

noted in the March Disapproval Order 

are a risk, these potential avenues of 

manipulation of the bitcoin market also 

exist in the context of other commoditytrust ETPs.193 BZX asserts that, in the 

Commission order approving the listing 

and trading of shares of iShares Copper 

Trust (‘‘Copper Order’’),194 the 

Commission found that demand from 

new investors would broaden the 

investor base in copper and thereby 

reduce the risk of collusion among 

copper market participants. BZX also 

argues that the Commission ‘‘took 

comfort’’ in approving the iShares 

Copper Trust because trading of the 

shares would be subject to the oversight 

of the listing exchange and the 

Commission, and because the 

manipulation of physical copper would 

be subject to CFTC jurisdiction. BZX 

asserts that the Trust is nearly 

identically situated to the iShares 

Copper Trust.195 Similarly, the Lewis 

Letter asserts that many features of a 

similar bitcoin commodity-trust ETP 

proposal—features that purportedly 

ameliorate the risk of price 

manipulation through a dominant 

market share—are also factors that were 

used as a basis for the Commission’s 

approval of another copper commoditytrust ETP.196

BZX contends that previous ETP 

approvals demonstrate that the factors 

used to determine whether currencyderivative products are consistent with 

the Exchange Act should also apply to 

commodity-trust ETPs. BZX argues that 

the Commission order approving the 

listing and trading of the streetTRACKS 

Gold Shares (‘‘Gold Order’’) 197—the 

first commodity-trust ETP—was based 

on an assumption that the currency 

market and the spot gold market were 

largely unregulated, but found that 

certain factors mitigated the concerns 

arising from the unregulated underlying 

markets.198 BZX claims that, in 

determining whether a commodity-trust 

ETP is consistent with the Exchange 

Act, the Commission’s approval orders 

have included an analysis of previously 

approved derivative products for which 

the underlying reference assets (1) are 

traded OTC; (2) are largely unregulated; 

and (3) are traded on markets with 

which the ETP listing exchange could 

not enter into a surveillance sharing 

agreement.199 While BZX concedes that 

the Commission has not approved a 

commodity-trust ETP when there were 

no derivatives markets related to the 

underlying commodity, BZX points out 

that the Commission has approved a 

number of currency-trust ETPs and 

asserts that the Commission approved 

the listing and trading of the 

CurrencyShares Hong Kong Dollar Trust 

and the CurrencyShares Singapore 

Dollar Trust based largely on the same 

factors that the Commission has 

considered in approving commoditytrust ETPs, despite a statement in the 

approval order for the CurrencyShares 

Hong Kong Dollar Trust and the 

CurrencyShares Singapore Dollar Trust 

that futures or options are not traded on 

the Hong Kong Dollar or Singapore 

Dollar.200 Similarly, one commenter 

argues that there are several commoditybased and other ETPs where the 

underlying market is either unregulated 

or lightly regulated, such as foreignexchange linked or related ETPs, or 

commodity-based ETPs that hold the 

underlying and not the derivative 

product.201

2. Discussion 

(a) The History and Importance of 

Surveillance-Sharing Agreements 

Relating to Derivative Securities 

Products 

Although BZX claims to have 

described ‘‘traditional means’’ of 

identifying and deterring fraud and 

manipulation, it overlooks the fact that 

the Commission has long recognized the 

importance of comprehensive 

surveillance-sharing agreements to 

detect and deter fraudulent and 

manipulative activity.202 The hallmarks 


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2010), 75 FR 39292, 39295, 39298 (July 8, 2010)); 

ETFS White Metals Basket Trust, Exchange Act 

Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 

56158 (Sept. 15, 2010) (SR–NYSEArca–2010–71) 

(notice of proposed rule change included NYSE 

Arca’s representation that ‘‘the most significant 

silver, platinum and palladium futures exchanges 

are the COMEX and the TOCOM’’ and that NYSE 

Arca ‘‘may obtain trading information via the 

Intermarket Surveillance Group,’’ of which COMEX 

is a member, Exchange Act Release No. 62620 (July 

30, 2010), 75 FR 47655, 47657, 47660 (Aug. 6, 

2010)); ETFS Asian Gold Trust, Exchange Act 

Release No. 63464 (Dec. 8, 2010), 75 FR 77926, 

77928 (Dec. 14, 2010) (SR–NYSEArca–2010–95) 

(notice of proposed rule change included NYSE 

Arca’s representation that ‘‘the most significant gold 

futures exchanges are the COMEX and the Tokyo 

Commodity Exchange,’’ that ‘‘COMEX is the largest 

exchange in the world for trading precious metals 

futures and options,’’ and that NYSE Arca ‘‘may 

obtain trading information via the Intermarket 

Surveillance Group,’’ of which COMEX is a 

member, Exchange Act Release No. 63267 (Nov. 8, 

2010), 75 FR 69494, 69496, 69500–01 (Nov. 12, 

2010)); Sprott Physical Platinum and Palladium 

Trust, Exchange Act Release No. 68430 (Dec. 13, 

2012), 77 FR 75239, 75240–41 (Dec. 19, 2012) (SR– 

NYSEArca–2012–111) (notice of proposed rule 

change included NYSE Arca’s representation that 

‘‘[f]utures on platinum and palladium are traded on 

two major exchanges: The New York Mercantile 

Exchange . . . and Tokyo Commodities Exchange’’ 

and that NYSE Arca ‘‘may obtain trading 

information via the Intermarket Surveillance 

Group,’’ of which COMEX is a member, Exchange 

Act Release No. 68101 (Oct. 24, 2012), 77 FR 65732, 

65733, 65739 (Oct. 30, 2012)); APMEX Physical— 

1 oz. Gold Redeemable Trust, Exchange Act Release 

No. 66930 (May 7, 2012), 77 FR 27817, 27818 (May 

11, 2012) (SR–NYSEArca– 2012–18) (notice of 

proposed rule change included NYSE Arca’s 

representation that NYSE Arca ‘‘may obtain trading 

information via the Intermarket Surveillance 

Group,’’ of which COMEX is a member, and that 

gold futures are traded on COMEX and the Tokyo 

Commodity Exchange, with a cross-reference to the 

proposed rule change to list and trade shares of the 

ETFS Gold Trust, in which NYSE Arca represented 

that COMEX is one of the ‘‘major world gold 

markets,’’ Exchange Act Release No. 66627 (Mar. 

20, 2012), 77 FR 17539, 17542–43, 17547 (Mar. 26, 

2012)); JPM XF Physical Copper Trust, Exchange 

Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 

75469–70, 75472, 75485–86 (Dec. 20, 2012) (SR– 

NYSEArca–2012–28); iShares Copper Trust, 

Exchange Act Release No. 68973 (Feb. 22, 2013), 78 

FR 13726, 13727, 13729–30, 13739–40 (Feb. 28, 

2013) (SR–NYSEArca–2012–66); First Trust Gold 

Trust, Exchange Act Release No. 70195 (Aug. 14, 

2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR– 

NYSEArca–2013–61) (notice of proposed rule 

change included NYSE Arca’s representation that 

FINRA, on behalf of the exchange, may obtain 

trading information regarding gold futures and 

options on gold futures from members of the 

Intermarket Surveillance Group, including COMEX, 

or from markets ‘‘with which [NYSE Arca] has in 

place a comprehensive surveillance sharing 

agreement,’’ and that gold futures are traded on 

COMEX and the Tokyo Commodity Exchange, with 

a cross-reference to the proposed rule change to list 

and trade shares of the ETFS Gold Trust, in which 

NYSE Arca represented that COMEX is one of the 

‘‘major world gold markets,’’ Exchange Act Release 

No. 69847 (June 25, 2013), 78 FR 39399, 39400, 

39405 (July 1, 2013)); Merk Gold Trust, Exchange 

Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 

4786–87 (Jan. 29, 2014) (SR–NYSEArca–2013–137) 

(notice of proposed rule change included NYSE 

Arca’s representation that ‘‘COMEX is the largest 

gold futures and options exchange’’ and that NYSE 

Arca ‘‘may obtain trading information via the 

Intermarket Surveillance Group,’’ including with 

respect to transactions occurring on COMEX 

pursuant to CME and NYMEX’s membership, or 

from exchanges ‘‘with which [NYSE Arca] has in 

place a comprehensive surveillance sharing 

agreement,’’ Exchange Act Release No. 71038 (Dec. 

11, 2013), 78 FR 76367, 76369, 76374 (Dec. 17, 

2013)); Long Dollar Gold Trust, Exchange Act 

Release No. 79518 (Dec. 9, 2016), 81 FR 90876, 

90881, 90886, 90888 (Dec. 15, 2016) (SR– 

NYSEArca–2016–84). 

203See, e.g., Letter from Brandon Becker, Director, 

Division of Market Regulation, Commission, to 

Gerard D. O’Connell, Chairman, Intermarket 

Surveillance Group (June 3, 1994), available at 

https://www.sec.gov/divisions/marketreg/mrnoaction/isg060394.htm. 

204See Exchange Act Release No. 27877 (Apr. 4, 

1990), 55 FR 13344, 13345 (Apr. 10, 1990) (SR– 

NYSE–90–14). 

205Exchange Act Release No. 33555 (Jan. 31, 

1994), 59 FR 5619, 5621 (Feb. 7, 1994) (SR–Amex– 

93–28) (order approving listing of options on 

American Depositary Receipts). The Commission 

further stated that it ‘‘generally believes that having 

a comprehensive surveillance sharing agreement in 

place, between the exchange where the ADR option 

trades and the exchange where the foreign security 

underlying the ADR primarily trades, will ensure 

the integrity of the marketplace. The Commission 

further believes that the ability to obtain relevant 

surveillance information, including, among other 

things, the identity of the ultimate purchasers and 

sellers of securities, is an essential and necessary 

component of a comprehensive surveillance sharing 

agreement.’’ Id. 

206See Exchange Act Release No. 35518 (Mar. 21, 

1995), 60 FR 15804, 15807 (Mar. 27, 1995) (SRAmex–94–30). In that matter, the Commission 

noted that the listing exchange had comprehensive 

surveillance-sharing agreements with all of the 

exchanges upon which the futures contracts 

overlying the notes traded and was able to obtain 

market surveillance information, including 

customer identity information, for transactions 

occurring on NYMEX and other futures exchanges. 

See id. at 15807 n.21; see also Exchange Act Release 

No. 36885 (Feb. 26, 1996), 61 FR 8315, 8319 n.17 

(Mar. 4, 1996) (SR–Amex–95–50) (approving the 

exchange listing and trading of Commodity Indexed 

Securities, and noting: (a) That through the 

comprehensive surveillance-sharing agreements, 

the listing exchange was able to obtain market 

surveillance information, including customer 

identity information, for transactions occurring on 

NYMEX and COMEX and that, through the 

Intermarket Surveillance Group information-sharing 

agreement, the listing exchange was able to obtain, 

upon request, surveillance information with respect 

to trades effected on the London Metal Exchange, 

including client identity information and (b) that, 

if a different market were utilized for purposes of 

calculating the value of a designated futures 

contract, the listing exchange had represented that 

it would ensure that it entered into a surveillancesharing agreement with respect to the new relevant 

market). The Commission has made similar 

statements about surveillance-sharing agreements 

with respect to the listing and trading of stockindex, currency, and currency-index warrants. See, 

e.g., Exchange Act Release No. 36166 (Aug. 29, 

1995), 60 FR 46660 (Sept. 7, 1995) (SR–PSE–94–28) 

(approving a proposal to adopt uniform listing and 

trading guidelines for stock-index, currency, and 

currency-index warrants). Specifically, the 

Commission noted that ‘‘a surveillance sharing 

agreement should provide the parties with the 

ability to obtain information necessary to detect and 

deter market manipulation and other trading 

abuses’’ and stated that the Commission ‘‘generally 

requires that a surveillance sharing agreement 

require that the parties to the agreement provide 

each other, upon request, information about market 

trading activity, clearing activity, and the identity 

of the ultimate purchasers for securities.’’ Id. at 

Continued 

of such an agreement are that the 

agreement provides for the sharing of 

information about market trading 

activity, clearing activity, and customer 

identity; that the parties to the 

agreement have reasonable ability to 

obtain access to and produce requested 

information; and that no existing rules, 

laws, or practices would impede one 

party to the agreement from obtaining 

this information from, or producing it 

to, the other party.203

Since at least 1990, the Commission 

has explained that the ability of a 

national securities exchange to enter 

into surveillance-sharing agreements 

‘‘furthers the protection of investors and 

the public interest because it will enable 

the [e]xchange to conduct prompt 

investigations into possible trading 

violations and other regulatory 

improprieties.’’ 204 The Commission has 

also long taken the position that 

surveillance-sharing agreements are 

important in the context of exchange 

listing of derivative security products, 

such as equity options. In 1994, the 

Commission stated: 

As a general matter, the Commission 

believes that the existence of a surveillance 

sharing agreement that effectively permits the 

sharing of information between an exchange 

proposing to list an equity option and the 

exchange trading the stock underlying the 

equity option is necessary to detect and deter 

market manipulation and other trading 

abuses. In particular, the Commission notes 

that surveillance sharing agreements provide 

an important deterrent to manipulation 

because they facilitate the availability of 

information needed to fully investigate a 

potential manipulation if it were to occur. 

These agreements are especially important in 

the context of derivative products based on 

foreign securities because they facilitate the 

collection of necessary regulatory, 

surveillance and other information from 

foreign jurisdictions.205

With respect to ETPs, when approving 

in 1995 the listing and trading of one of 

the first commodity-linked ETPs—a 

commodity-linked exchange-traded 

note—on a national securities exchange, 

the Commission continued to 

emphasize the importance of 

surveillance-sharing agreements, noting 

that the listing exchange had entered 

into surveillance-sharing agreements 

with each of the futures markets on 

which pricing of the ETP would be 

based and stating that ‘‘[t]hese 

agreements should help to ensure the 

availability of information necessary to 

detect and deter potential 

manipulations and other trading abuses, 

thereby making [the commodity-linked 

notes] less readily susceptible to 

manipulation.’’ 206


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46665 n.35. In addition, the Commission stated that 

‘‘[t]he ability to obtain relevant surveillance 

information, including, among other things, the 

identity of the ultimate purchasers and sellers of 

securities, is an essential and necessary component 

of a comprehensive surveillance sharing 

agreement.’’ Id. at 46665 n.36. 

207 17 CFR 240.19b–4(e). 

208NDSP Adopting Release, supra note 21. 

209See supra note 202. 

210See Gold Order, supra note 197, 69 FR at 

64614–15, 64618–19; Platinum Order, supra note 

189, 74 FR at 68887–88; Palladium Order, supra 

note 189, 74 FR at 68896. 

211See supra notes 197–199 and accompanying 

text. Another commenter also asserts that the 

Commission has approved several commoditybased ETPs where the underlying market is either 

unregulated or lightly regulated. See supra note 201 

and accompanying text. 

212 Gold Order, supra note 197, 69 FR at 64619. 

213 Id. 

214 Id. (emphasis added). 

215 Id. 

216See id. In the Gold Order, the Commission 

also stated that the ETP listing exchange had 

‘‘entered into a reciprocal Memorandum of 

Understanding (‘MOU’) with the NYMEX (of which 

COMEX is a division) for the sharing of information 

relating to any financial instrument based, in whole 

or in part, upon an interest in or performance of 

gold.’’ Id. at 64618. The Gold Order also notes 

volume figures for spot gold trading provided by the 

London Bullion Market Association and gold 

futures trading provided by COMEX. See id. at 

64619. 

217See supra note 202. 

In 1998, in adopting Exchange Act 

Rule 19b–4(e) 207 to permit the generic 

listing and trading of certain new 

derivatives securities products— 

including ETPs—the Commission again 

emphasized the importance of the 

listing exchange’s ability to obtain from 

underlying markets, through 

surveillance-sharing agreements (called 

information-sharing agreements or 

‘‘ISAs’’ in the release), the information 

necessary to detect and deter 

manipulative activity. Specifically, in 

adopting rules governing the generic 

listing of new derivatives securities 

products, the Commission stated that 

the Rule 19b–4(e) procedures would 

‘‘enable the Commission to continue to 

effectively protect investors and 

promote the public interest’’ and stated 

that: 

It is essential that the SRO have the ability 

to obtain the information necessary to detect 

and deter market manipulation, illegal 

trading and other abuses involving the new 

derivative securities product. Specifically, 

there should be a comprehensive ISA 

[information-sharing agreement] that covers 

trading in the new derivative securities 

product and its underlying securities in place 

between the SRO listing or trading a 

derivative product and the markets trading 

the securities underlying the new derivative 

securities product. Such agreements provide 

a necessary deterrent to manipulation 

because they facilitate the availability of 

information needed to fully investigate a 

manipulation if it were to occur.208

Consistent with this principle, for the 

commodity-trust ETPs approved to date 

for listing and trading, there has been in 

every case at least one significant, 

regulated market for trading futures on 

the underlying commodity—whether 

gold, silver, platinum, palladium, or 

copper—and the ETP listing exchange 

has entered into surveillance-sharing 

agreements with, or held Intermarket 

Surveillance Group membership in 

common with, that market.209

In light of the history and purpose of 

looking to surveillance-sharing 

agreements, with respect to markets for 

assets underlying an ETP or for 

derivatives on those assets, the 

Commission interprets the terms 

‘‘significant market’’ and ‘‘market of 

significant size’’ to include a market (or 

group of markets) as to which (a) there 

is a reasonable likelihood that a person 

attempting to manipulate the ETP 

would also have to trade on that market 

to successfully manipulate the ETP, so 

that a surveillance-sharing agreement 

would assist the ETP listing market in 

detecting and deterring misconduct, and 

(b) it is unlikely that trading in the ETP 

would be the predominant influence on 

prices in that market. This definition is 

illustrative and not exclusive. There 

could be other types of ‘‘significant 

markets’’ and ‘‘markets of significant 

size,’’ but this definition is an example 

that will provide guidance to market 

participants. 

(b) Response to Comments Regarding 

Surveillance-Sharing Agreements and 

Prior Commodity-Trust ETP Approvals 

Prior ETP approval orders are 

consistent with the standards the 

Commission is applying to the BZX 

proposal. However, more recent 

approval orders for the well-established 

model of a precious-metal trust—for 

example, the Platinum Order and the 

Palladium Order—found it unnecessary 

to perform the exhaustive analysis of 

underlying markets and surveillance 

sharing provided by the first approval 

order for a precious metal commoditytrust ETP, the Gold Order, especially 

since the proposed rule change for 

platinum and palladium ETPs discussed 

surveillance-sharing agreements with 

significant, regulated platinum and 

palladium markets.210

BZX argues that even the Gold Order 

relied on alternative factors—primarily 

the depth and liquidity of the spot gold 

market—to mitigate Commission 

concerns about approving a commoditytrust ETP based on an asset that traded 

in unregulated, over-the-counter 

markets with which no surveillance 

sharing agreement could be executed.211

The Gold Order does note the depth and 

liquidity of the gold market, likening the 

spot gold market to the ‘‘extremely 

large, diverse market’’ for OTC foreign 

exchange trading.212 Significantly, 

however, the Gold Order demonstrates 

that the Commission did take into 

account the availability of surveillancesharing agreements in approving the 

first commodity-trust ETP. 

The Gold Order states that 

‘‘[i]nformation sharing agreements with 

markets trading securities underlying a 

derivative are an important part of a 

self-regulatory organization’s ability to 

monitor for trading abuses in derivative 

products.’’ 213 And, while the Gold 

Order observes that that it is ‘‘not 

possible . . . to enter into an 

information sharing agreement with the 

OTC gold market,’’ the order continues: 

‘‘Nevertheless, the Commission believes 

that the unique liquidity and depth of 

the gold market, together with the MOU 

[Memorandum of Understanding] with 

NYMEX (of which COMEX is a Division) 

and NYSE Rules 1300(b) and 1301, 

create the basis for the [ETP listing 

exchange] to monitor for fraudulent and 

manipulative practices in the trading of 

the Shares.’’ 214 Thus, even though the 

Commission found that the over-thecounter market for gold was ‘‘extremely 

deep and liquid,’’ 215 the Commission’s 

approval of the first precious metal ETP 

expressly relied on an agreement to 

share surveillance information between 

the listing exchange and a significant, 

regulated market for gold futures.216

In the years after the approval of the 

first precious-metal commodity-trust 

ETP, several other, virtually identical, 

commodity-trust ETPs have been 

approved.217 Among the approval 

orders were the Platinum Order and the 

Palladium Order, which BZX cites as 

examples of the Commission approving 

a commodity-trust ETP without 

requiring that there be a surveillancesharing agreement with a significant, 

regulated market for an underlying 

exchange. While neither the Platinum 

Order nor the Palladium Order 

expressly discusses such agreements, 

the record before the Commission at the 

time it issued those orders (including 

the notices of the proposed rule 

changes) shows that the ETP listing 

exchange was able to share surveillance 

information with the ‘‘largest exchange 

in the world for trading precious metal 

futures and options,’’ which had been 

trading both platinum futures and 

palladium futures for approximately 35 

years at the time the Commission 


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218See Exchange Act Release No. 60971 (Nov. 9, 

2009), 74 FR 59283, 59285–86, 59291 (Nov. 17, 

2009) (SR–NYSEArca–2009–94) (notice of proposed 

rule change for ETFS Palladium Trust includes 

NYSE Arca’s representation that ‘‘NYMEX is the 

largest exchange in the world for trading precious 

metals futures and options and has been trading 

palladium since 1974,’’ and that NYSE Arca ‘‘may 

obtain trading information via the Intermarket 

Surveillance Group,’’ of which NYMEX is a 

member); Exchange Act Release No. 60970 (Nov. 9, 

2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009) 

(SR–NYSEArca–2009–95) (notice of proposed rule 

change for ETFS Platinum Trust includes NYSE 

Arca’s representation that ‘‘NYMEX is the largest 

exchange in the world for trading precious metals 

futures and options and has been trading platinum 

since 1974,’’ and that NYSE Arca ‘‘may obtain 

trading information via the Intermarket 

Surveillance Group,’’ of which NYMEX is a 

member). See also supra note 189 and 

accompanying text. 

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

220The proposal does not involve an ETP that is 

based on an index of commodities where the 

component commodities are subject to surveillancesharing agreements with significant, regulated 

markets. See, e.g., Exchange Act Release No. 53105 

(Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) 

(SR–Amex–2005–059) (approving DB Commodity 

Index Tracking Fund based on an index that tracks 

the performance of futures contracts on crude oil, 

heating oil, aluminum, gold, corn, and wheat). 

221See supra notes 194–195 and accompanying 

text. The Lewis Letter makes a similar argument. 

See supra note 196 and accompanying text. 

222See Copper Order, supra note 194, 78 FR at 

13727 n.7, and 13730. 

223See id. at 13731–33. 

224See supra note 200 and accompanying text. 

Another commenter also asserts that the 

Commission has approved several foreign 

exchange-linked ETPs where the underlying market 

is either unregulated or lightly regulated. See 

Convergex Letter, supra note 36, at 2. 

225See Amendment No. 1, supra note 1, 81 FR 

at 76651. 

226See In re Bitcoin Inv. Tr., Exchange Act 

Release No. 78282, 2016 WL 4363462, at *1 n.1 

(July 11, 2016); In re Btc Trading, Corp., Securities 

Act Release No. 9685, Exchange Act Release No. 

73783, 2014 WL 6872955, at *1 n.1 (Dec. 8, 2014); 

In re Voorhees, Securities Act Release No. 9592, 

2014 WL 2465620, at *1 n.1 (June 3, 2014). The 

CFTC has concluded that Bitcoin is a virtual 

currency that is a commodity, ‘‘distinct from ‘real’ 

currencies, which are the coin and paper money of 

the United States or another country that are 

designated as legal tender, circulate, and are 

customarily used and accepted as a medium of 

exchange in the country of issuance.’’ In re Coinflip, 

Inc., CFTC No. 15–29, 2015 WL 5535736, at *1 n.2 

(Sept. 17, 2015). The Treasury Department’s 

Financial Crimes Enforcement Network has noted: 

‘‘In contrast to real currency, ‘virtual’ currency is 

a medium of exchange that operates like a currency 

in some environments, but does not have all the 

attributes of real currency. In particular, virtual 

currency does not have legal tender status in any 

jurisdiction.’’ Guidance: Application of FinCEN’s 

Regulations to Persons Administering, Exchanging, 

or Using Virtual Currencies (Mar. 18, 2013) 

(discussing 31 CFR 1010.100(m)), available at 

https://www.fincen.gov/resources/statutesregulations/guidance/application-fincensregulations-persons-administering. The IRS has 

concluded that ‘‘virtual currency is not treated as 

currency’’ for purposes of federal tax laws. IRS 

Virtual Currency Guidance, I.R.S. Notice 2014–21, 

2014–16 I.R.B. 938, 2014 WL 1224474 (Apr. 14, 

2014). 

227Exchange Act Release No. 19133 (Oct. 14, 

1982), 47 FR 46946, 1982 WL 521987, at *5 (Oct. 

21, 1982) (SR–Phlx–81–4). 

228Exchange Act Release No. 31627 (Dec. 21, 

1992), 57 FR 62399, 1992 WL 394554, at *4–5 (Dec. 

30, 1992) (SR–Amex–92–36). 

229See Gold Order, supra note 197, 69 FR at 

64619. 

approved commodity-trust ETPs 

holding those metals.218

Consistent with the discussion of 

‘‘significant market’’ described above,219

the Commission has not previously, and 

does not now, require that an ETP 

listing exchange be able to enter into a 

surveillance-sharing agreement with 

each regulated spot or derivatives 

market relating to an underlying asset, 

provided that the market or markets 

with which there is such an agreement 

constitute a ‘‘significant market.’’ 

While BZX and the Overdahl Letter 

assert that the potential avenues for 

manipulation of the bitcoin market also 

exist in the context of other commoditytrust ETPs, this argument merely 

reinforces the Commission’s view that 

similar market structures—namely, 

surveillance-sharing agreements with 

significant, regulated markets—should 

be in place for a bitcoin-trust ETP just 

as they are for commodity-trust ETPs.220

BZX also argues that the proposal 

should be approved because it is 

‘‘nearly identically situated’’ to the 

iShares Copper Trust. In particular, BZX 

asserts that the Commission approved 

the iShares Copper Trust because the 

Commission believed that approval of 

the ETP could reduce the risk of 

manipulation in the underlying spot 

market and that the Commission could 

rely on surveillance by the listing 

exchange and CFTC jurisdiction to 

address concerns about manipulation— 

factors it argues support approval 

here.221 The Copper Order, however, 

specifically noted the existence of 

surveillance-sharing agreements not 

only between the ETP listing market and 

copper futures markets, but also 

between the ETP listing market and a 

significant copper spot market, the 

London Metal Exchange.222 And the 

Copper Order’s analysis of the 

underlying physical market for copper 

does not reflect a determination that 

these factors could serve as an adequate 

alternative to a surveillance-sharing 

agreement, but was instead a response 

to certain commenters’ arguments that 

approving the iShares Copper Trust 

would affirmatively disrupt the physical 

copper market.223

BZX argues that the Commission 

should approve the proposal because it 

has previously approved currency-trust 

ETPs—the CurrencyShares Hong Kong 

Dollar Trust and the CurrencyShares 

Singapore Dollar Trust—without 

requiring the existence of a surveillancesharing agreement with underlying 

markets.224 However, BZX has proposed 

to list and trade the Shares as a 

commodity-based ETP, not a currencybased ETP,225 and the Commission as 

well as other agencies have 

distinguished bitcoin from currency.226

Even if the Commission were to apply 

the approach it took in approving 

currency-trust ETPs, the Commission 

would still conclude that the proposal is 

not consistent with the Exchange Act, 

because the deep, liquid, and 

longstanding markets for currencies, 

which are dominated by regulated 

entities, bear little resemblance to the 

current state of bitcoin markets. Foreign 

currency derivatives traded on national 

securities exchanges for decades before 

the Commission approved currencytrust ETPs. And when it approved the 

first foreign currency derivatives in 

1982—options on the British pound, the 

German mark, the Swiss franc, the 

Canadian dollar, and the Japanese yen, 

each the sovereign currency of a 

developed nation—the Commission 

explained that ‘‘[t]he magnitude of the 

related foreign currency markets would 

appear to militate against a successful 

manipulation through inter-market 

trading activity.’’ 227 Similarly, when 

approving the listing and trading of 

additional foreign currency derivatives 

in 1992, the Commission recognized the 

‘‘developed markets for the component 

foreign currencies’’ and observed that 

‘‘the interbank foreign currency spot 

market is an extremely large, diverse 

market comprised of banks and other 

financial institutions worldwide.’’ 228

The Gold Order echoed this view of 

the currency markets.229 And the 

approval order for the CurrencyShares 

products that BZX cites includes the 

following representations by the listing 

exchange regarding the foreign currency 

markets: 

Most trading in the global over-the-counter 

(‘‘OTC’’) foreign currency markets is 

conducted by regulated financial institutions 

such as banks and broker-dealers. In 

addition, in the United States, the Foreign 

Exchange Committee of the New York 

Federal Reserve Bank has issued Guidelines 

for Foreign Exchange Trading, and centralbank sponsored committees in Japan and 

Singapore have published similar best 

practice guidelines. In the United Kingdom, 

the Bank of England has published the NonInvestment Products Code, which covers 

foreign currency trading. The Financial 

Markets Association, whose members 

include major international banking 

organizations, has also established best 

practices guidelines called the Model Code. 

Participants in the U.S. OTC market for 


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230Exchange Act Release No. 58365, supra note 

200, 73 FR at 49523. 

231See Amendment No. 1, supra note 1, 81 FR 

at 76663, 76668; BZX Letter II, supra note 13, at 29– 

30. 

232See Overdahl Letter, supra note 36, at 11. 

233See Amendment No. 1, supra note 1, 81 FR 

at 76651–52. 

234See id. at 76652. 

235See id. 

236See BZX Letter II, supra note 13, at 20; but see 

Section III.B.2(b), supra. 

237See BZX Letter I, supra note 35, at 9; see also 

Petition for Review, supra note 4, at 15–16. 

238See BZX Letter II, supra note 13, at 19–20. 

239See Maher Letter, supra note 35 (noting that 

the market is very concentrated and is controlled 

by a small group of exchanges operating in China, 

three of which represented 96% of all bitcoin trade 

volume over a six-month period, and noting that the 

Gemini Exchange had a 0.07% share of bitcoin 

volume worldwide during that period, with a 3% 

share of USD-exchange volume). 

240See id. 

241See Anonymous Letter III, supra note 35. 

242See SIG Letter, supra note 36, at 7. The itBit 

Exchange is a commercial bitcoin trading venue 

based in New York, NY. The NYSDFS has granted 

a charter under New York Banking Law to itBit 

Trust Company, LLC. See Press Release, NYSDFS, 

NY[S]DFS Grants First Charter to a New York 

Virtual Currency Company(May 7, 2015), available 

at http://www.dfs.ny.gov/about/press/ 

pr1505071.htm. 

foreign currencies are generally regulated by 

their oversight regulators.230

Neither BZX nor any of the 

commenters has provided data that 

would justify treating the markets for 

bitcoin similarly to the deep and liquid 

markets for fiat currencies. Moreover, 

the description of the worldwide market 

for bitcoin, in which both the trading 

venues and the participants are 

unregulated, bears little resemblance to 

the OTC markets for foreign currency, 

on which most trading is conducted by 

regulated financial institutions. 

Accordingly, the Commission’s previous 

approvals of derivatives securities 

products based on foreign currencies are 

not a basis for the Commission to 

approve the proposal despite the 

absence of a surveillance-sharing 

agreement with a regulated market of 

significant size related to bitcoin. 

E. Whether BZX Has Entered Into 

Surveillance-Sharing Agreements With 

Regulated Markets of Significant Size 

Related to Bitcoin 

Although BZX asserts that it has 

entered into a comprehensive 

surveillance-sharing agreement with the 

Gemini Exchange with respect to bitcoin 

trading and that the Gemini Exchange is 

supervised by the NYSDFS, the record 

does not establish that the Gemini 

Exchange is a ‘‘regulated market’’ 

comparable to a national securities 

exchange or to the futures exchanges 

that are associated with the underlying 

assets of the commodity-trust ETPs 

approved to date. Even if the Gemini 

Exchange were ‘‘regulated,’’ the record 

does not support a finding that the 

Gemini Exchange represents a 

‘‘significant’’ bitcoin-related market. 

Accordingly, the Commission finds that 

the surveillance-sharing agreement 

between BZX and the Gemini Exchange, 

even in combination with alternative 

means of detecting and deterring fraud 

and manipulation, is insufficient to 

demonstrate that the proposed rule 

change is consistent with Exchange Act 

Section 6(b)(5). Nor has BZX 

demonstrated that any of the current 

trading venues in the worldwide bitcoin 

spot market is a regulated market such 

that a comprehensive surveillancesharing agreement with those venues 

would satisfy the requirements of 

Section 6(b)(5). And BZX has likewise 

failed to carry its burden to demonstrate 

that there is a regulated market of 

significant size in derivatives related to 

bitcoin with which the ETP listing 

market has entered into a 

comprehensive surveillance-sharing 

agreement. 

1. The Gemini Exchange 

(a) Summary of Comments Received 

BZX asserts that it has entered into a 

comprehensive surveillance-sharing 

agreement with the Gemini Exchange 

through which it can obtain customer 

identity information about bitcoin 

transactions and market data.231

Similarly, the Overdahl Letter claims 

that the surveillance-sharing agreement 

between the Gemini Exchange and BZX 

aims to detect and deter such conduct 

and that the agreement allows for 

continuous monitoring of trading 

activity to effectively conduct 

surveillance of the Gemini Auction 

price.232

BZX represents that the Gemini 

Exchange operates under the direct 

supervision and regulatory authority of 

the NYSDFS.233 This is because, BZX 

argues, the Gemini Exchange is a facility 

of the Custodian, which is a New York 

State-chartered limited liability trust 

company.234 BZX also represents that 

the Custodian is a fiduciary and that it 

must meet the capitalization, 

compliance, anti-money-laundering, 

consumer protection, and cyber security 

requirements set forth by the 

NYSDFS.235

BZX asserts that the Gemini Auction 

typically already transacts a volume 

greater than the proposed creation 

basket size for the Trust and that the 

Gemini Auction would likely support 

the needs of Authorized Participants to 

engage in basket creation or 

redemption.236 BZX claims that the 

global bitcoin marketplace has the 

potential to provide even more liquidity 

and to be a source of bitcoin for basket 

creation and hedging. BZX also asserts 

that all intraday order-book and trade 

information on the Gemini Exchange is 

publicly available through various 

electronic formats and is also 

redistributed by various online 

aggregators, and that, with the launch of 

the proposed Trust, the Sponsor must 

make important pricing data available in 

real time.237 As noted above, BZX also 

claims that the volume transacted in the 

Gemini Auction is generally more than 

50% larger than the second-largest trade 

in the world, drawing an average daily 

volume of 1,200 bitcoins compared to 

approximately 800 bitcoins.238

One commenter claims that among 

USD bitcoin exchanges, Gemini has a 

3% share and its liquidity measured by 

order book depth is significantly lower 

than that of several other exchanges. 

The commenter states that it is possible 

that, after the launch of an ETP, 

Gemini’s liquidity and volume will 

increase, but claims that the nature of 

bitcoin trading that leads to the 

concentration of volume and liquidity 

outside of U.S. borders makes any 

significant future increase unlikely.239

This commenter also observes that 

while Gemini is locally regulated by the 

NYSDFS, the global landscape of many 

unregulated bitcoin exchanges exerts 

huge influence on the Gemini Exchange 

and consequently on the proposed 

ETP.240 Another commenter claims that 

the Gemini Exchange has the lowest 

liquidity of the three exchanges in the 

United States and is one of the leastliquid of all exchanges that trade bitcoin 

for USD.241

One commenter asserts that the size 

and importance of the Gemini Exchange 

and the itBit Exchange have grown 

substantially and claims that, from 

January 23, 2017, to May 10, 2017, the 

combined market share of these 

exchanges jumped from just 0.33% to 

7.14% of total worldwide bitcoin 

volume, equivalent to more than 10,000 

bitcoins per day on average.242 This 

commenter also asserts that the 

geographic distribution of bitcoin spot 

trading has shifted in focus from 

Chinese-based platforms towards U.S.- 

based venues, which indicates increased 

transparency and safer regulation in the 

near future. The commenter asserts 

that—although the Gemini Exchange 

and the itBit Exchange remain the only 

two NYSDFS-regulated bitcoin 

exchanges, and while a market share of 

7.14% leaves much room for growth— 


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243See SIG Letter, supra note 36, at 7. 

244See id. at 7–8. 

245See id. at 8. 

246See Overdahl Letter, supra note 36, at 8. 

247See id. at 1, 7. 

248See id. at 13–14. 

249See Amendment No. 1, supra note 1, 81 FR 

at 76652, 76663, 76668; BZX Letter II, supra note 

13, at 29–30. 

250See supra notes 233–235 and accompanying 

text. 

251 15 U.S.C. 78f(b)(5). 

252 17 CFR 240.19b–4(a)(6)(i). 

253Section 6 of the Exchange Act, 15 U.S.C. 78f, 

requires national securities exchanges to register 

with the Commission and requires an exchange’s 

registration to be approved by the Commission, and 

Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 

requires national securities exchanges to file 

proposed rule changes with the Commission and 

provides the Commission with the authority to 

disapprove proposed rule changes that are not 

consistent with the Exchange Act. Designated 

Contract Markets (commonly called ‘‘futures 

markets’’) registered with and regulated by the 

CFTC must comply with, among other things, a 

similarly comprehensive range of regulatory 

principles and must file rule changes with the 

CFTC. See, e.g., Designated Contract Markets 

(DCMs), CFTC, available at http://www.cftc.gov/ 

IndustryOversight/TradingOrganizations/DCMs/ 

index.htm. 

254The Commission notes that the NYSDFS 

recently issued ‘‘guidance’’ to supervised virtual 

currency business entities, including the Gemini 

Exchange, stating that these entities must 

‘‘implement measures designed to effectively 

detect, prevent, and respond to fraud, attempted 

fraud, and similar wrongdoing.’’ See Maria T. Vulio, 

Superintendent of Financial Services, NYSDFS, 

Guidance on Prevention of Market Manipulation 

and Other Wrongful Activity (Feb. 7, 2018), 

available at http://www.dfs.ny.gov/legal/industry/ 

il180207.pdf. This guidance was issued after the 

comment period for this proposed rule change 

ended, and there is nothing in the record regarding 

how this guidance has been implemented by the 

NYSDFS or by the affected entities. 

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

the migration of global bitcoin trading 

volumes since mid-January 2017 is a 

positive trend.243

This commenter further asserts that, 

alongside Gemini Exchange and itBit 

Exchange, two other U.S.-based 

exchanges, GDAX and Kraken, have 

become significant spot bitcoin trading 

venues. According to this commenter, 

these four exchanges—the largest U.S. 

bitcoin exchanges—together now 

represent over 29% of worldwide 

bitcoin volume, up from just 1.47% on 

January 23, 2017. The commenter 

claims that, with almost a third of global 

spot bitcoin volume now occurring on 

these four U.S.-based trading venues, 

regulatory agencies and SROs have the 

opportunity to develop a robust 

framework of regulatory oversight and 

transparency that would support fair 

and orderly markets for both spot 

bitcoin and listed bitcoin-based ETPs.244

This commenter predicts that the 

launch of a regulated, U.S.-listed bitcoin 

ETP will help drive more bitcoin trading 

volume onto U.S.-based exchanges, and 

this commenter asserts that this 

supplemental liquidity is likely to 

manifest itself mainly on U.S.-based 

bitcoin exchanges such as Gemini, itBit, 

GDAX, and Kraken, which will be the 

most liquid venues during U.S. trading 

hours.245

The Overdahl Letter asserts that, 

between September 21, 2016, and March 

1, 2017, the Gemini Exchange accounted 

for 24.03% of bitcoin trading volume on 

U.S. exchanges and 7.35% of the global 

USD market for bitcoin.246 The 

Overdahl Letter contends that the 

Gemini Auction price is reliable in that 

it generally reflects both prices for 

bitcoin traded at other U.S.-based 

bitcoin exchanges and prices for bitcoin 

traded at USD-based exchanges globally. 

The Overdahl Letter claims that 

significant deviations between the 

Gemini price and other prices are 

quickly reduced to normal (small) levels 

and that the Gemini price does not 

primarily cause these deviations. In 

addition, the Overdahl Letter concludes 

that, when price deviations are 

observed, pricing across exchanges 

tends to converge.247 The Overdahl 

Letter also notes the concern expressed 

by some commenters that the Gemini 

Exchange had relatively low trading 

volume and that, as a result, the 

exchange price was less reliable than if 

the volumes were larger. In response to 

this concern, the Overdahl Letter 

provides a list of ETPs approved by the 

Commission that, the Overdahl Letter 

claims, have underlying assets with 

lower average daily volume than the 

average daily volume of the Gemini 

Exchange.248

(b) Discussion 

BZX represents that it has entered 

into a comprehensive surveillancesharing agreement with the Gemini 

Exchange with respect to bitcoin trading 

and that the Gemini Exchange is 

supervised by the NYSDFS and is 

thereby subject to capitalization, antimoney-laundering, compliance, 

consumer protection, and cybersecurity 

requirements.249 The record, however, 

does not support a conclusion that the 

Gemini Exchange is a ‘‘regulated 

market’’ comparable to a national 

securities exchange or to the futures 

exchanges that are associated with the 

underlying assets of the commoditytrust ETPs approved to date. 

The record does not establish that the 

Gemini Exchange’s rules, including its 

trading rules, are subject to regulatory 

review or approval or that its trading 

operations are subject to regulatory 

examination. Commission regulation of 

the securities markets includes the 

elements of NYSDFS supervision 

described above,250 but national 

securities exchanges are also, among 

other things, required to have rules that 

are ‘‘designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, processing 

information with respect to, and 

facilitating transactions in securities, to 

remove impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest.’’ 251 Moreover, national 

securities exchanges must file proposed 

rules with the Commission regarding 

certain material aspects of their 

operations,252 and the Commission has 

the authority to disapprove any such 

rule that is not consistent with the 

requirements of the Exchange Act.253

Thus, national securities exchanges are 

subject to Commission oversight of, 

among other things, their governance, 

membership qualifications, trading 

rules, disciplinary procedures, 

recordkeeping, and fees.254

Even if the Gemini Exchange were 

‘‘regulated,’’ the record would not 

support a conclusion that the Gemini 

Exchange conducts a significant volume 

of trading in bitcoin because there is no 

evidence in the record that there is a 

reasonable likelihood that a person 

attempting to manipulate the ETP 

would also have to trade on the Gemini 

Exchange (or any record evidence 

addressing how trading in the proposed 

ETP would or would not influence 

prices on the Gemini Exchange). 

Furthermore, there is insufficient 

evidence in the record to determine 

whether it is unlikely that trading in the 

ETP would be the predominant 

influence on prices on the Gemini 

Exchange. Indeed, if anything, the 

Gemini Auction size is currently so 

small that the proposed ETP could 

fundamentally affect supply and 

demand (and thus pricing) on the 

Gemini Exchange, not the other way 

around.255

The record thus includes at best 

uncertain information regarding the 

volume or liquidity of the Gemini 

Exchange, how the Gemini Exchange 

may influence the price of any ETP 

based on bitcoin, or how the existence 

of ETPs based on bitcoin may affect the 

Gemini Exchange. Commenters have 

provided varying estimates of the 

current and future volume of trading on 


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256See supra notes 237–248 and accompanying 

text. 

257See also supra note 239 and accompanying 

text. 

258Registration Statement, supra note 22, at 62. 

Additionally, while the Overdahl Letter asserts that, 

between September 21, 2016, and March 1, 2017, 

the Gemini Exchange accounted for 7.35% of the 

global USD-denominated bitcoin market, which 

does not include trading in bitcoin against other fiat 

currencies, see supra note 246 and accompanying 

text, the Overdahl Letter does not explain why the 

bitcoin-USD market—a subset of the global bitcoin 

market—is the appropriate measure when 

Authorized Participants in the Trust would be able 

to source their bitcoins through any market or OTC 

transaction. 

259See supra note 165 and accompanying text. 

260See supra note 248 and accompanying text. 

261See also infra notes 263–268, 270 and 

accompanying text (summarizing commenters’ 

views that most bitcoin trading volume occurs 

outside the U.S. on unregulated exchanges). 

262See Section III.C.2, supra. 

263See Williams Letter, supra note 35, at 2. 

264See Anonymous Letter V, supra note 35. 

265See Stolfi Letter II, supra note 35. 

266See Maher Letter, supra note 35; see also 

Johnson Letter, supra note 35; Anonymous Letter V, 

supra note 35. 

267See ARK Letter, supra note 35, at 5. 

268See Maher Letter, supra note 35. 

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

270See BZX Letter I, supra note 35, at 2–3 (noting 

that only a minority of global bitcoin exchanges are 

fully regulated for their fiduciary and custodial 

activities, and naming Gemini Trust Company LLC 

and itBit Trust Company LLC as the only two 

exchange operators that are subject to substantive 

regulation, each overseen by the NYSDFS). 

271See BZX Letter II, supra note 13, at 15; see 

also Petition for Review, supra note 4, at 15. 

272See BZX Letter I, supra note 35, at 3; BZX 

Letter II, supra note 13, at 17; Overdahl Letter, 

supra note 36, at 2. 

273See BZX Letter I, supra note 35, at 3. The 

Commission notes that the CFTC has since obtained 

a federal court injunction against fraudulent activity 

related to ‘‘virtual currency.’’ See CFTC v. 

McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018). 

274See BZX Letter I, supra note 35, at 3; BZX 

Letter II, supra note 13, at 18. 

the Gemini Exchange.256 Moreover, 

because bitcoin markets are still 

evolving in significant ways, and 

because there is no comprehensive data 

source reflecting bitcoin trading, it is 

not currently possible to state with 

confidence what share of volume any 

particular spot trading venue has 

captured or will capture.257 Bitcoin 

trading activity is dispersed across 

markets and OTC transactions 

worldwide, and there is no centralized, 

regulatory data source for bitcoin 

trading statistics. Accordingly, any 

analysis of worldwide trading activity 

must use unofficial sources that gather 

and disseminate trading data, and even 

these sources cannot capture OTC 

transactions, or transactions that take 

place in what the Registration Statement 

characterizes as ‘‘dark pools.’’ 258

Further, as discussed above,259 recent 

volume in the Gemini Auction is a 

fraction of the size of a creation unit of 

the Trust, and therefore the Commission 

does not agree with the assertion by 

BZX that the Gemini Auction would 

support the needs of Authorized 

Participants to engage in basket creation 

or redemption. 

Finally, the comparison offered by the 

Overdahl Letter between the average 

trading volume on the Gemini Exchange 

and the average trading volume of the 

underlying assets of other ETPs is 

inapt.260 The issue here is not that the 

Gemini Exchange has low trading 

volume in an absolute sense but, rather, 

that the Trust would value its holdings 

using the Gemini Auction price, even 

though there is no basis in the record to 

find that the Gemini Auction represents 

a significant portion of worldwide 

bitcoin trading.261

Therefore, the Commission cannot 

conclude that the surveillance-sharing 

agreement between BZX and the Gemini 

Exchange, even in combination with the 

other means of detecting and deterring 

fraud and manipulation discussed 

above,262 is sufficient to find that the 

proposal is consistent with Exchange 

Act Section 6(b)(5). 

2. Other Bitcoin Spot Markets 

(a) Summary of Comments Received 

Several comment letters state that the 

majority of bitcoin trading occurs on 

exchanges outside the United States. 

One commenter claims that most daily 

trading volume is conducted on poorly 

capitalized, unregulated exchanges 

located outside the United States and 

that these non-U.S. exchanges and their 

practices significantly influence the 

price discovery process.263 Another 

commenter states that the biggest and 

most influential bitcoin exchange is 

located outside U.S. jurisdiction.264

One commenter states that, since 

2013, the price of bitcoin has been 

defined mostly by the major Chinese 

exchanges, whose volumes dwarf those 

of exchanges outside China. According 

to the commenter, the Chinese 

exchanges are not regulated or audited 

and are suspected of engaging in 

unethical practices such as frontrunning, wash trades, and trading with 

insufficient funds. The commenter 

interprets pricing data from these 

Chinese exchanges to mean that the 

price of bitcoin is defined entirely by 

speculation, without any ties to 

fundamentals.265

One commenter claims that a sizeable 

number of traders and owners of bitcoin 

do not desire to trade in a well-regulated 

environment for reasons including tax 

evasion, evading capital controls, and 

money laundering. This commenter also 

states that U.S. bitcoin exchanges do not 

offer products such as fee-free trading, 

margin trading, or options, which drive 

traffic to the top non-U.S. exchanges. 

This commenter also claims that several 

Chinese exchanges actively engage in 

bitcoin mining operations, creating a 

conflict of interest, and notes that these 

exchanges are unaudited and 

unaccountable.266

One commenter observes that Chinese 

markets drive much of the volume in 

the bitcoin markets.267Another 

commenter also claims that the Chinese 

exchanges that account for the bulk of 

trading are subject to little regulatory 

oversight and that existing know-yourcustomer or identity-verification 

measures are lax and can be easily 

bypassed.268

One commenter asserts that bitcoin is 

more transparent than the illiquid or 

opaque underlying assets of some other 

exchange-traded funds, because a large 

percentage of bitcoin transactions take 

place on electronic exchanges with 

actionable quotes and relatively tight 

bid/ask spreads and because transferring 

actual bitcoin between accounts at 

exchanges and other storage systems is 

also a transparent process, as 

transactions are printed using 

blockchain technology.269

BZX concedes in a comment letter 

that only a minority of the global spot 

bitcoin exchanges are subject to any 

regulatory regime.270 BZX also argues 

that, as the bitcoin exchange market has 

matured, a number of new entrants, 

including two New York limitedpurpose trust companies, have emerged 

and that these new entrants have 

markedly changed the onceconcentrated and non-regulated 

landscape of the bitcoin exchange 

market.271

BZX and the Overdahl Letter note that 

the CFTC has designated bitcoin as a 

commodity and assert that the CFTC is 

‘‘broadly responsible for the integrity’’ 

of bitcoin spot markets.272 BZX 

acknowledges that the CFTC had not yet 

(as of the date of BZX’s submissions) 

brought any enforcement actions based 

on the anti-manipulation provisions of 

the Commodity Exchange Act,273 but 

notes that the CFTC has issued orders 

against U.S. and non-U.S. bitcoin 

exchanges for engaging in other activity 

prohibited by the Commodity Exchange 

Act and argues that, therefore, a 

regulatory framework for providing 

oversight and deterring market 

manipulation currently exists in the 

U.S.274

The Overdahl Letter asserts that any 

market can potentially be manipulated 

and states that this manipulation risk is 


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275See Overdahl Letter, supra note 36, at 2, 9– 

10. 

276See id. at 12–13. 

277See supra notes 263–268, 270 and 

accompanying text. The Commission also notes 

more recent reporting that a large portion of bitcoin 

trading volume continues to take place overseas, 

see, e.g., Russo, et al., This Is Where People Are 

Buying Bitcoin All Over the World (Jan. 11, 2018), 

https://www.bloomberg.com/graphics/2017-bitcoinvolume/, although such reports are unnecessary to 

the Commission’s finding, based on the record 

before it, that BZX has not shown that any of the 

current trading venues in the worldwide bitcoin 

spot market is a regulated market. 

278See supra notes 263–268 and accompanying 

text. 

279See https://www.isgportal.org/isgPortal/ 

public/members.htm (listing the current members 

and affiliate members of the Intermarket 

Surveillance Group). 

280See Section III.C.2, supra. 

281See supra notes 243–244 and accompanying 

text. 

282See, supra notes 244, 264–265, 267 and 

accompanying text. 

283See supra note 270 and accompanying text. 

While BZX asserts that the Gemini Exchange is a 

regulated market, as discussed above, the 

Commission does not agree with that assessment. 

See Section III.E.1(b), supra. 

284Registration Statement, supra note 22, at 22. 

285See supra notes 272–274 and accompanying 

text. 

286Commodity Exchange Act Section 2(c)(2)(D), 7 

U.S.C. 2(c)(2)(D). See also Commodity Exchange 

Act Section 2(c)(2)(A)(i), 7 U.S.C. 2(c)(2)(A)(i) 

(defining CFTC jurisdiction to specifically cover 

contracts of sale of a commodity for future delivery 

(or options on such contracts), or an option on a 

commodity (other than foreign currency or a 

security or a group or index of securities), that is 

executed or traded on an organized exchange). 

287The Gemini Exchange is not registered with 

the CFTC. 

288CFTC Backgrounder, supra note 118, at 1. The 

Commission also notes the testimony of CFTC 

Chairman Giancarlo before the Senate Banking 

Committee that ‘‘the CFTC does not have authority 

to conduct regulatory oversight over spot virtual 

currency platforms or other cash commodities, 

including imposing registration requirements, 

surveillance and monitoring, transaction reporting, 

compliance with personnel conduct standards, 

customer education, capital adequacy, trading 

system safeguards, cyber security examinations or 

other requirements.’’ Giancarlo Testimony, supra 

note 117, Section I (CFTC Authority and Oversight 

Over Virtual Currencies). See also Section 

III.B.1(b)(iii), supra (discussing CFTC statutory 

authority over bitcoin derivatives products). 

289See supra note 276 and accompanying text. 

290 Id. 

291See Section III.E.1(b), supra. 

why the CFTC and the Commission 

have anti-manipulation authority.275

The Overdahl Letter also asserts that a 

host of other jurisdictions, including the 

U.K., Australia, Hong Kong, Singapore, 

Indonesia, and Thailand, have 

established some form of ‘‘regulatory 

sandbox’’ for blockchain, the technology 

that underlies bitcoin. The Overdahl 

Letter further asserts that, in March 

2016, the Japanese cabinet approved 

bills treating bitcoin and other digital 

currencies as forms of money and that, 

in April 2017, Japan’s parliament 

recognized bitcoin as an authorized 

method of payment. The Overdahl 

Letter claims that Japan regulates 

bitcoin as a form of prepaid payment 

and is approving regulated virtualcurrency exchanges on which the 

Japanese regulator imposes capital, 

audit, and anti-money-laundering, and 

know-your-customer requirements. The 

Overdahl Letter concludes that, 

therefore, aside from the CFTC, another 

competent regulator with whom the 

Commission has a memorandum of 

understanding maintains a regulated 

bitcoin market.276

(b) Discussion 

Based on the record before it, the 

Commission concludes that BZX has not 

shown that any of the current trading 

venues in the worldwide bitcoin spot 

market is a regulated market. 

With respect to spot bitcoin trading 

outside the United States, BZX and 

commenters agree that the bulk of 

bitcoin trading has occurred in non-U.S. 

markets where there is little to no 

regulation governing trading,277 and 

thus no sufficient and verifiable 

governmental market oversight designed 

to detect and deter fraudulent and 

manipulative activity.278 And because 

no bitcoin spot market is currently a 

member of the Intermarket Surveillance 

Group, BZX is unable to use its 

membership in the Intermarket 

Surveillance Group to share 

surveillance information with those 

markets.279 Further, as noted above,280

the Bitcoin blockchain, while freely 

available to the public, identifies parties 

to a transaction only by a 

pseudonymous public-key address, and 

it does not distinguish bitcoin trading 

activity from other transfers of bitcoin, 

limiting its usefulness as a substitute for 

a surveillance-sharing agreement. 

One commenter asserts that 

substantial trading volume has recently 

migrated away from Chinese exchanges 

in response to regulatory efforts by the 

Chinese government. But, according to 

statistics provided by other 

commenters,281 a substantial majority of 

bitcoin trading continues to occur 

overseas,282 and BZX concedes in a 

comment letter that only a minority of 

the global spot bitcoin exchanges are 

subject to any regulatory regime.283

Moreover, the Registration Statement for 

the Winklevoss Bitcoin Trust states: 

The Bitcoin Exchanges on which bitcoin 

trades are new and, in most cases, largely 

unregulated. Furthermore, many Bitcoin 

Exchanges (including several of the most 

prominent U.S. Dollar-denominated Bitcoin 

Exchanges) do not provide the public with 

significant information regarding their 

ownership structure, management teams, 

corporate practices or regulatory 

compliance.284

Nor does the CFTC’s oversight of 

bitcoin-derivative trading venues 

indicate that the CFTC is, as BZX and 

the Overdahl Letter argue, ‘‘broadly 

responsible for the integrity of the 

bitcoin spot market’’ or that the CFTC’s 

enforcement powers with respect to spot 

trading mean that a ‘‘regulatory 

framework for providing oversight and 

deterring market manipulation currently 

exists in the United States.’’ 285 Spot 

bitcoin markets are not required to 

register with the CFTC, unless they offer 

leveraged, margined, or financed trading 

to retail customers.286 In all other cases, 

including the Gemini Exchange, the 

CFTC does not set standards for, 

approve the rules of, examine, or 

otherwise regulate bitcoin spot 

markets.287 As the CFTC itself has 

stated, while the CFTC ‘‘has an 

important role to play,’’ U.S. law ‘‘does 

not provide for direct, comprehensive 

Federal oversight of underlying Bitcoin 

or virtual currency spot markets.’’ 288

Additionally, establishment by 

foreign regulators of what one 

commenter called ‘‘regulatory 

sandboxes’’ for blockchain 

technology,289 or the regulation of 

bitcoin as a method of prepaid payment 

by others,290 is not a sufficient basis for 

concluding that bitcoin trades 

worldwide on regulated markets with 

which the listing exchange can enter 

into a surveillance-sharing agreement. 

There is no evidence in the record 

before the Commission that any 

‘‘regulatory sandbox,’’ however defined, 

has created a comprehensive regulatory 

regime for bitcoin trading venues, and, 

as explained in greater detail above in 

the context of the Gemini Exchange,291

a ‘‘regulated’’ market means a market 

that can detect and prevent fraud and 

manipulation under Exchange Act 

Section 6(b)(5). 

3. The Derivatives Markets 

(a) Summary of Comments Received 

One commenter claims that the 

bitcoin markets are not yet efficient and 

attributes this inefficiency, in part, to 

the nascent state of the bitcoin 

derivatives market. This commenter 

states that derivatives provide investors 

more ways to hedge against bitcoin’s 

potential price movements, introduce 

more volume and liquidity, and 

generally give the markets more points 

of information about bitcoin’s future 

prospects, leading to tighter bid/ask 

spreads. The commenter claims that 


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292See ARK Letter, supra note 35, at 5–6. 293See id. at 6. This commenter also states that, 

within the United States, one market offers bitcoin 

forwards and no one currently offers regulated 

bitcoin futures or options, see id., but, as discussed 

below, see infra notes 310–311 and accompanying 

text, futures on bitcoin have begun trading on 

regulated U.S. designated contract markets. 294See ARK Letter, supra note 35, at 13–14. 295See id. at 2. 296See Anonymous Letter IV, supra note 35. 

Several commenters also assert that regulation by 

BZX of activity in the ETP could substitute for a 

lack of regulation in underlying or derivatives 

markets. See, e.g., Baird Letter, supra note 35; 

Keeler Letter, supra note 35; Marchionne Letter, 

supra note 35; Bang Letter, supra note 35. 

297See Anonymous Letter IV, supra note 35. 

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

299See Lewis Letter I, supra note 65, at 8. 

300See id. at 8. 

301See supra note 296 and accompanying text; 

Lewis Letter I, supra note 65, at 8. 

302See also Section III.D.2(a), supra (discussion 

of Commission interpretation of the terms 

‘‘significant market’’ and ‘‘market of significant 

size’’). 

303See supra note 209 and accompanying text. 

304See Amendment No. 1, supra note 1, 81 FR 

at 76661. 

305See id. 

306See id.; see also ARK Letter, supra note 35, at 

6 (noting that TeraExchange offers bitcoin 

forwards). 

most derivatives activity within the 

bitcoin markets is offered by entities 

outside of the purview of U.S. 

regulators.292 The commenter observes 

that the lack of a robust and regulated 

derivatives market means that market 

participants do not have a broad basket 

of tools at their disposal, making 

hedging difficult and keeping away 

many market makers that provide 

significant liquidity to traditional 

capital markets. The commenter claims 

that, while derivative products may be 

in development, a full suite of investor 

tools that will drive market efficiency 

and eliminate price disparities is likely 

at least a couple of years away.293 The 

commenter also states that, without a 

robust derivatives market for 

institutional investors to short the 

underlying asset or otherwise hedge 

their positions, there likely would be 

little counterbalance to the new demand 

generated by the ETP, and Authorized 

Participants could then have trouble 

sourcing bitcoin and hedging their 

positions, stalling the creation 

process.294 The commenter concludes 

that it would be premature to launch a 

bitcoin ETP because bitcoin markets are 

not liquid enough to support an openend fund and because an ecosystem of 

institutional-grade infrastructure players 

is not yet available to support such a 

product.295

One commenter disagrees with 

assertions linking inefficient bitcoin 

markets to nascent derivatives markets, 

stating that no evidence has been 

provided regarding the would-be effect 

of derivatives on the bitcoin market. The 

commenter claims that these assertions 

assume that bitcoin pricing is 

inefficient, which the commenter claims 

is not the case. The commenter also 

claims that these assertions assume that 

the lack of a derivatives market causes 

pricing to be inefficient, stating instead 

that there is direct evidence that many 

securities trade successfully and 

efficiently on U.S. and non-U.S. 

exchanges despite not having a direct 

derivatives market.296 The commenter 

also disagrees with the claim that, 

absent a robust derivatives market, there 

would be little counterbalance to the 

new demand generated by the ETP, 

stating that it is impossible to predict 

the success or failure of the ETP. The 

commenter states that Authorized 

Participants may be able to source 

bitcoin from China.297

Another commenter claims that there 

are several bitcoin futures markets that 

have a significant impact on the spot 

price along with several OTC markets— 

such as the one that this commenter 

claims was recently launched by the 

Gemini Exchange—that also offer 

liquidity.298

The Lewis Letter states that one of the 

key differences between bitcoin and 

other commodities is the lack of a liquid 

and transparent derivatives market and 

that, although there have been nascent 

attempts to establish derivatives trading 

in bitcoin, bitcoin derivatives markets 

are not at this time sufficiently liquid to 

be useful to Authorized Participants and 

market makers who would like to use 

derivatives to hedge exposures.299 The 

Lewis Letter claims that, for physical 

commodities that are not traded on 

exchanges, the presence of a liquid 

derivatives market is a necessary 

condition, but claims that for digital 

assets like bitcoin, derivatives markets 

are not necessary because price 

discovery occurs on the OTC market 

and exchanges instead.300

(b) Discussion 

One commenter and the Lewis Letter 

assert that the existence of bitcoin 

derivative markets is not a necessary 

condition for a bitcoin ETP.301 The key 

standard the Commission is applying 

here, however, is not that a futures or 

derivatives market is required for every 

commodity-trust ETP, but that—when 

the spot market is unregulated—the 

requirement of preventing fraudulent 

and manipulative acts may possibly be 

satisfied by showing that the ETP listing 

market has entered into a surveillancesharing agreement with a regulated 

market of significant size in derivatives 

related to the underlying asset. That is 

because, where a market of significant 

size exists with respect to derivatives on 

the asset underlying a commodity-trust 

ETP, the Commission believes that there 

is a reasonable likelihood that a person 

attempting to manipulate the ETP by 

manipulating the underlying spot 

market would also have to trade in the 

derivatives market in order to succeed, 

since arbitrage between the derivative 

and spot markets would tend to counter 

an attempt to manipulate the spot 

market alone.302 Thus, the Commission 

believes that there is a reasonable 

likelihood that a surveillance-sharing 

agreement with that derivatives market 

would assist the ETP listing market in 

detecting and deterring an attempt to 

manipulate the commodity-trust ETP. 

As noted above, the commodity-trust 

ETPs previously approved by the 

Commission have had—in lieu of 

regulated spot markets of significant 

size—a regulated futures market of 

significant size associated with the 

underlying commodity, and the listing 

exchange had entered into a 

surveillance-sharing agreement with 

that futures market or was able to obtain 

surveillance information through 

membership in the Intermarket 

Surveillance Group.303 Based on the 

record before it, the Commission cannot 

conclude that a regulated bitcoin futures 

market of significant size currently 

exists because, similar to the Gemini 

Exchange, there is no evidence in the 

record that there is a reasonable 

likelihood that a person attempting to 

manipulate the ETP would also have to 

trade on the bitcoin futures market, or 

any record evidence addressing how 

trading in the proposed ETP would or 

would not influence prices in the 

futures bitcoin market. 

Consistent with the view of 

commenters summarized above, BZX’s 

proposal describes the current 

derivative markets for bitcoin as 

‘‘[n]ascent.’’ 304 BZX notes that certain 

types of options, futures, contracts for 

differences, and other derivative 

instruments are available in certain 

jurisdictions, but that many of them are 

not available in the United States and 

that these derivatives instruments are 

generally not regulated ‘‘to the degree 

that U.S. investors expect derivatives 

instruments to be regulated.’’ 305 BZX 

notes that the CFTC has approved the 

registration of TeraExchange LLC as a 

swap execution facility (‘‘SEF’’) and 

that, on October 9, 2014, TeraExchange 

announced that it had hosted the first 

executed bitcoin swap traded on a 

CFTC-regulated platform.306 Further, 


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307See Amendment No. 1, supra note 1, 81 FR 

at 76661 (referring to Ledger X LLC). 

308See TeraExchange Settlement Order, supra 

note 93. 

309See Order of Registration in the Matter of the 

Application of LedgerX LLC for Registration as a 

Swap Execution Facility (CFTC July 6, 2017), 

available at http://www.cftc.gov/idc/groups/public/ 

@otherif/documents/ifdocs/ 

orgledgerxord170706.pdf; Order of Registration in 

the Matter of the Application of LedgerX, LLC for 

Registration as a Derivatives Clearing Organization 

(CFTC July 24, 2017), available at http://

www.cftc.gov/idc/groups/public/@otherif/ 

documents/ifdocs/ledgerxdcoregorder72417.pdf. 

310See Letter from Andrew Lowenthal, Senior 

Managing Director, CFE to Christopher J. 

Kirkpatrick, Secretary, CFTC (Dec. 1, 2017), 

available at http://www.cftc.gov/filings/ptc/ 

ptc120117cfedcm001.pdf; Letter from Christopher 

Bowen, Managing Director and Chief Regulatory 

Counsel, CME Group to Christopher J. Kirkpatrick, 

Office of the Secretariat, CFTC (Dec. 1, 2017), 

available at http://www.cftc.gov/filings/ptc/ 

ptc120117cmedcm001.pdf. 

311The Commission notes that the Cantor 

Exchange has also self-certified bitcoin binary 

options, see CFTC Backgrounder, supra note 118, at 

2, but this product has not yet begun to trade. 

312These futures volume figures were calculated 

by Commission staff using data published by CME 

and CFE on their websites. 

313These derivative contract volume figures were 

calculated by Commission staff using data 

published by LedgerX on its website. 

314See Section III.B.1(b)(i), supra. 

315CFTC Chairman Giancarlo testified: ‘‘It is 

important to put the new Bitcoin futures market in 

perspective. It is quite small with open interest at 

the CME of 6,695 bitcoin and at Cboe Futures 

Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 

2018). At a price of approximately $7,700 per 

Bitcoin, this represents a notional amount of about 

$94 million. In comparison, the notional amount of 

the open interest in CME’s WTI crude oil futures 

was more than one thousand times greater, about 

$170 billion (2,600,000 contracts) as of Feb[.] 2, 

2018 and the notional amount represented by the 

open interest of Comex gold futures was about $74 

billion (549,000 contracts).’’ Giancarlo Testimony, 

supra note 117, text accompanying nn.14–15. 

316Letter from Chris Concannon, President and 

COO, Cboe Global Markets, to Dalia Blass, Director, 

Division of Investment Management, Commission, 

at 5 (Mar. 23, 2018), available at https://

www.sec.gov/divisions/investment/cboe-globalmarkets-innovation-cryptocurrency.pdf. 

317See Baird Letter, supra note 35. Bitfinex and 

Mt. Gox are bitcoin trading venues that have 

reportedly suffered significant losses from hacking. 

See Nathaniel Popper and Rachel Abrams, 

Apparent Theft at Mt. Gox Shakes Bitcoin World, 

The New York Times (Feb. 25, 2014), available at 

https://www.nytimes.com/2014/02/25/business/ 

apparent-theft-at-mt-gox-shakes-bitcoin-world.html; 

Amie Tsang, Bitcoin Plunges After Hacking of 

Exchange in Hong Kong, The New York Times 

(Aug. 3, 2016), available at https://

www.nytimes.com/2016/08/04/business/dealbook/ 

bitcoin-bitfinex-hacked.html. 

BZX’s proposal notes that, in 2015, 

CFTC temporarily registered another 

SEF that would trade swaps on 

bitcoin.307

The Commission acknowledges that 

TeraExchange, a market for swaps on 

bitcoin, has registered with the CFTC, 

but BZX’s description of trading activity 

on that market fails to note that the very 

activity it cites was the subject of an 

enforcement action by the CFTC. The 

CFTC found that TeraExchange had 

improperly arranged for participants to 

make prearranged, offsetting ‘‘wash’’ 

transactions of the same price, notional 

amount, and time period and had then 

issued a press release ‘‘to create the 

impression of actual trading in the 

Bitcoin swap.’’ 308 Neither BZX nor any 

commenter provides evidence of 

meaningful trading volume in bitcoin 

derivatives on any regulated 

marketplace. 

The CFTC has also registered 

LedgerX, a venue for trading bitcoin 

derivatives, as a SEF and a Derivatives 

Clearing Organization.309 Additionally, 

on December 1, 2017, the CFE and the 

CME self-certified new contracts with 

the CFTC for bitcoin futures 

contracts.310 CFE launched trading in its 

bitcoin futures contracts on December 

10, 2017, and CME launched trading in 

its bitcoin futures contracts on 

December 17, 2017 (for a trade date of 

December 18, 2017).311

The record before the Commission, 

however, does not establish that the 

bitcoin derivatives markets are regulated 

markets of significant size. The record 

also does not establish how these 

markets may influence the price of any 

ETP based on bitcoin or how the 

existence of ETPs based on bitcoin may 

affect these markets. Publicly available 

data show that the median daily 

notional trading volume, from inception 

through April 24, 2018, has been 9,180 

bitcoins on CME and 5,440 bitcoins on 

CFE, and that the median daily notional 

value of open interest on CME and CFE 

during the same period has been 7,875 

bitcoins and 5,787 bitcoins, 

respectively.312 For all bitcoin contracts 

traded on LedgerX from inception 

through April 24, 2018, publicly 

available data show that the median 

daily notional volume has been 55 

bitcoins and that the median daily 

notional value of open interest has been 

663 bitcoins.313 But while these futures 

and derivative contract figures are 

readily available, meaningful analysis of 

the size of the CME, CFE, and LedgerX 

markets relative to the underlying 

bitcoin spot market is challenging, 

because reliable data about the spot 

market, including its overall size, are 

unavailable.314 The Commission notes 

that in recent testimony CFTC Chairman 

Giancarlo characterized the volume of 

the bitcoin futures markets as ‘‘quite 

small.’’ 315 The Commission also notes 

that the President and COO of Cboe 

recently acknowledged in a letter to the 

Commission staff that ‘‘the current 

bitcoin futures trading volumes on Cboe 

Futures Exchange and CME may not 

currently be sufficient to support ETPs 

seeking 100% long or short exposure to 

bitcoin.’’ 316 These statements reinforce 

the Commission’s conclusion that there 

is insufficient evidence to determine 

that the bitcoin derivatives markets are 

significant. 

Thus, while LedgerX, CME, and CFE 

are regulated markets for bitcoin 

derivatives, there is no basis in the 

record for the Commission to conclude 

that these markets are of significant size. 

Additionally, because bitcoin futures 

have been trading on CME and CFE only 

since December 2017, the Commission 

has no basis on which to predict how 

these markets may grow or develop over 

time, or whether or when they may 

reach significant size. 

Although BZX has not demonstrated 

that a regulated bitcoin futures market 

of significant size currently exists, the 

Commission is not suggesting that the 

development of such a market would 

automatically require approval of a 

proposed rule change seeking to list and 

trade shares of an ETP holding bitcoins 

as an asset. The Commission would 

need to analyze the facts and 

circumstances of any particular 

proposal and examine whether any 

unique features of a bitcoin futures 

market would warrant further analysis 

before approval. 

F. The Protection of Investors and the 

Public Interest 

BZX contends that, if approved, its 

ETP would protect investors and 

promote the public interest, but the 

Commission finds that BZX has not 

made such a showing on the current 

record. The Commission must consider 

any potential benefits in the broader 

context of whether the proposal meets 

each of the applicable requirements of 

the Exchange Act. And because BZX has 

not demonstrated that its proposed rule 

change is designed to prevent 

fraudulent and manipulative acts and 

practices, the Commission must 

disapprove the proposal. 

1. Summary of Comments Received 

Several commenters asserted that 

access to bitcoin through an ETP would 

extend regulatory protections to 

investors. One commenter asserts that, if 

the U.S. were to approve an ETP and 

bring regulatory standards and oversight 

to cryptocurrencies, investors would not 

see major problems as they did with the 

Bitfinex and Mt. Gox hacks and that, if 

the ETP were not approved, investors 

would be forced to use those less-thanideal exchanges.317 One commenter 

asserts that the alternative to a regulated 

ETP is investors having to purchase 


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318See Keeler Letter, supra note 35. 

319See Bang Letter, supra note 35. 

320See Convergex Letter, supra note 36, at 2. 

321See Virtu Letter, supra note 36, at 2. 

322See BZX Letter II, supra note 13, at 8. 

323See id. at 3, 8. 

324See id. at 17; Petition for Review, supra note 

4, at 16; Overdahl Letter, supra note 36, at 13; Virtu 

Letter, supra note 36, at 2. 

325See BZX Letter II, supra note 13, at 20–21. 

326See Overdahl Letter, supra note 36, at 13. 

327See Overdahl Letter, supra note 36, at 13. 

328See Overdahl Letter, supra note 36, at 3, 8. 

329See Lewis Letter I, supra note 65, at 11–16. 

330See id. at 7. See also Petition for Review, 

supra note 4, at 16. 

331See Virtu Letter, supra note 36, at 2. 

332See Williams Letter, supra note 35, at 2–3. 

333See id. at 1. 

334See Section III.F.1, supra. 

335See supra notes 324–326, 330 and 

accompanying text. 

336See supra note 327 and accompanying text. 

337See supra notes 326, 329 and accompanying 

text. 

338See Exchange Act Section 19(b)(2)(C), 15 

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

339The Commission also notes that, according to 

the Trust’s Registration Statement, investors in the 

Trust would still be subject to some of the risks of 

holding bitcoin directly. See Registration Statement, 

supra note 22, at 29 (‘‘Security breaches, ‘cyber 

attacks,’ computer malware and computer hacking 

attacks have been a prevalent concern in the Bitcoin 

Exchange Market since the launch of the Bitcoin 

Network. Any cyber security breach caused by 

hacking . . . could harm the Trust’s business 

operations or result in loss of the Trust’s assets.’’). 

bitcoin at unregulated exchanges 

lacking SEC oversight.318 One 

commenter asserts that disapproval of 

the ETP would create a more risky 

environment for investors, who will not 

have the option of investing through 

regulated exchanges.319 One commenter 

argues that, because of the use of an 

auction process to determine NAV, the 

use of well-known and respected 

Authorized Participants, and the 

environment that allows market 

participants to use arbitrage techniques 

to hold pricing where it should be, the 

risk to investors who invest in the ETP 

may be lower than the risk borne by 

those who buy or sell bitcoin 

directly.320 And another commenter 

asserts that, with innovative use cases 

emerging for bitcoin and for the 

associated technology of blockchain 

each passing day, investors seeking 

exposure to bitcoin should have options 

similar to those currently available for 

physical bullion.321

BZX argues that the Shares would 

significantly reduce or eliminate costs 

and inefficiencies and would expand 

opportunities for investors by providing 

an inexpensive vehicle to gain exposure 

to bitcoin in a secure and easily 

accessible product that is familiar, 

transparent, and meaningfully 

regulated.322 BZX asserts that, for 

prospective investors in bitcoin, direct 

investment brings with it significant 

inconvenience, complexity, expense, 

and risk. As investor demand for 

exposure to bitcoin continues to 

increase, BZX asserts, these problems 

grow larger. BZX argues that the Shares 

would significantly reduce or 

completely remove each of these 

hurdles.323 BZX also argues that 

Commission should approve the 

proposal because Commission oversight 

of the trading of the ETP shares on a 

national securities exchange would 

enhance the transparency of the 

underlying bitcoin markets.324 BZX also 

asserts that the Gemini Exchange is 

uniquely positioned, because of its 

regulatory status and licensing, to be a 

venue on which traditional financial 

institutions will be comfortable 

transacting in bitcoin, and BZX posits 

that these financial institutions provide 

a bridge to the equities markets and 

other capital markets, improving price 

discovery, liquidity, and 

transparency.325

The Overdahl Letter asserts that the 

approval of the proposed bitcoin ETP 

would facilitate a cost-effective and 

convenient means for investors to gain 

exposure to bitcoin similar to a direct 

investment in bitcoin, improving 

portfolio diversification opportunities 

for investors, and would help make 

bitcoin markets more transparent.326

The Overdahl Letter also argues that a 

bitcoin ETP will protect current 

investors in bitcoin by providing 

regulatory certainty.327 The Overdahl 

Letter predicts that the availability of a 

bitcoin ETP would help attract 

professional market makers to the spot 

market, as well as the market for bitcoin 

ETPs, and that the presence of these 

professional market makers would add 

to the resilience of the spot price on the 

exchange, improve liquidity and other 

measures of market quality, and 

promote trading volume at the 

exchange.328

The Lewis Letter asserts that bitcoin 

is relatively uncorrelated with other 

assets, enabling investors to construct 

more efficient portfolios.329 BZX and 

the Lewis Letter also assert that listing 

the shares on a national securities 

exchange and a shift from OTC trading 

to trading on exchanges would make the 

overall bitcoin market more 

transparent.330 Similarly, one 

commenter asserts that trading in the 

Shares and the adoption of best 

practices, such as IIV and NAV 

dissemination, will enhance the 

resiliency and efficiency of the market 

for bitcoin.331

One commenter believes that lack of 

regulation and consumer protection also 

increases the chance and incentives for 

market price manipulation and states 

that approving the ETP before structural 

protections and controls are firmly in 

place would put investors at undue 

risk.332 This commenter asserts that 

several fundamental flaws make bitcoin 

a dangerous asset class to force into an 

exchange-traded structure, including 

shallow trade volume, extreme 

hoarding, low liquidity, hyper price 

volatility, a global web of unregulated 

bucket-shop exchanges, high 

bankruptcy risk, and oversized exposure 

to trading in countries where there is no 

regulatory oversight.333

2. Discussion 

BZX, the Overdahl Letter, and other 

commenters assert that investment in 

bitcoin through a ETP would reduce the 

expense, complexity, and risk of bitcoin 

exposure.334 BZX, the Overdahl Letter, 

and the Lewis Letter further assert that 

approval of the Winklevoss Bitcoin 

Trust would make bitcoin markets more 

transparent,335 and the Overdahl Letter 

argues that approval of the proposal 

would protect investors by providing 

regulatory certainty.336 Additionally, 

the Overdahl Letter and Lewis Letter 

argue that approval of the proposal 

would improve the availability of 

investment and portfolio diversification 

opportunities for investors.337

The Commission acknowledges that 

each of these is a potential benefit of a 

bitcoin ETP. The Commission, however, 

must consider these potential benefits in 

the broader context of whether the 

proposal meets each of the applicable 

requirements of the Exchange Act. 

Pursuant to Section 19(b)(2) of the 

Exchange Act, the Commission must 

disapprove a proposed rule change filed 

by a national securities exchange if it 

does not find that the proposed rule 

change is consistent with the applicable 

requirements of the Exchange Act— 

including the requirement under 

Section 6(b)(5) that the rules of a 

national securities exchange be 

designed to prevent fraudulent and 

manipulative acts and practices.338

Thus, even if a proposed rule change 

would provide certain benefits to 

investors and the markets, the proposed 

rule change may still fail to meet other 

requirements under the Exchange 

Act.339 For the reasons discussed above, 

BZX has not met its burden of 

demonstrating an adequate basis in the 

record for the Commission to find that 

the proposal is consistent with 


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340 15 U.S.C. 78f(b)(5). 

341Petition for Review, supra note 4, at 6–7 & 

n.17; see also BZX Letter II, supra note 13, at 22– 

25. 

342Registration Statement, supra note 22, at 22. 

343 Gold Order, supra note 197, 69 FR at 64619. 

344See Section III.E.3(a), supra. 

345Registration Statement, supra note 22, at 59. 

346See Section III.E.3(b), supra. 

347See Section III.B.1, supra. 

348Registration Statement, supra note 22, at 61. 

349See Section II, supra. 

350Registration Statement, supra note 22, at 22. 

351See supra note 148 and accompanying text. 

352The Commission also received comments 

expressing support for the proposal, without 

articulating any argument in favor of the proposal. 

See Barraza Letter, supra note 35; Shad Letter, 

supra note 35. 

353See Stolfi Letter I, supra note 35; Stolfi Letter 

II, supra note 35; Chronakis Letter, supra note 35; 

Anonymous Letter VII, supra note 35. 

354See Stolfi Letter II, supra note 35; Barish Letter 

IV, supra note 35; ARK Letter, supra note 35; Lee 

Letter, supra note 35; Chronakis Letter, supra note 

35; Struna Letter, supra note 35; Johnson Letter, 

supra note 35; Anonymous Letter V, supra note 35; 

Whitman Letter, supra note 35; Anonymous Letter 

VI, supra note 35; Barish Letter II, supra note 35; 

Ackerman Letter, supra note 35; Medina Letter, 

supra note 35; Paslaqua Letter, supra note 35; BZX 

Letter II, supra note 13, at 7–8. 

355See Xin Lu Letter, supra note 35; Anonymous 

Letter VI, supra note 35; Harris Letter, supra note 

36, at 2. 

356See Stolfi Letter I, supra note 35; Stolfi Letter 

II, supra note 35; Shatto Letter, supra note 35; 

Lethuillier Letter, supra note 35; Delehanty Letter, 

supra note 35; Xin Lu Letter, supra note 35; 

Neidhardt Letter, supra note 35; XBT Letter, supra 

note 35; Williams Letter, supra note 35; ARK Letter, 

supra note 35; Kim Letter, supra note 35; Dalla Val 

Letter, supra note 35; Paneque Letter, supra note 35; 

Lee Letter, supra note 35; Chronakis Letter, supra 

note 35; Struna Letter, supra note 35; Johnson 

Letter, supra note 35; Whitman Letter, supra note 

35; Primm Letter; supra note 35; Anonymous Letter 

VI, supra note 35; Barish Letter III, supra note 35; 

Barish Letter V, supra note 35; Anonymous Letter 

VII, supra note 35; Ackerman Letter, supra note 35; 

Paslaqua Letter, supra note 35; Harris Letter, supra 

note 36, at 2. 

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

358See R.D. Miller Letter, supra note 35; R. Miller 

Letter, supra note 35; Hall Letter, supra note 35; 

Keeler Letter, supra note 35; Lethuillier Letter, 

supra note 35, at 2; Anonymous Letter I, supra note 

35; Herbert Letter, supra note 35; Fernandez Letter, 

supra note 35; Tomaselli Letter, supra note 35; 

Circle Letter, supra note 35; Baird Letter, supra note 

35; Stolfi Letter I, supra note 35; Anderson Letter, 

supra note 35; P. Miller Letter, supra note 35; 

Continued 

Exchange Act Section 6(b)(5),340 and, 

accordingly, the Commission must 

disapprove the proposal. 

G. Additional Factors Supporting 

Disapproval 

As addressed in detail above, the 

Commission is disapproving the 

proposed rule change because BZX has 

not met its burden to demonstrate that 

its proposal is consistent with Exchange 

Act Section 6(b)(5). BZX has neither 

entered into surveillance-sharing 

agreements with regulated, bitcoinrelated markets of significant size nor 

demonstrated that alternative means of 

compliance with Exchange Act Section 

6(b)(5) would be sufficient. Because 

BZX has failed to carry its burden, the 

proposed rule change must be 

disapproved. 

The Commission also notes several 

inconsistencies between the BZX’s 

proposed rule change and the Trust’s 

Registration Statement that reinforce the 

need to disapprove BZX’s proposal. For 

example, in its proposal, BZX points to 

the following factors that, in its view, 

weigh in favor of approval. Those 

factors include ‘‘the liquidity of the 

market in the underlying commodity,’’ 

‘‘the trading volume in derivatives 

based on the underlying commodity,’’ 

‘‘listing exchange rules and procedures 

prohibiting use of material nonpublic 

information,’’ and ‘‘listing exchange 

rules regarding trading halts.’’ 341 But 

those factors cannot be reconciled with 

BZX’s current proposal and thus 

provide independent confirmation that 

the proposed rule change must be 

disapproved. 

Liquidity of bitcoin markets. The 

Trust’s Registration Statement concedes 

that underlying bitcoin markets are 

insufficiently liquid to protect against 

credible threats to those markets’ 

integrity. The Trust’s Registration 

Statement, for example, acknowledges 

that ‘‘operational interruption’’ in large 

bitcoin exchanges ‘‘may limit the 

liquidity of bitcoin’’ and ‘‘result in 

volatile prices and a reduction in 

confidence’’ and that ‘‘[t]rading on a 

single Bitcoin Exchange may result in 

less favorable prices and decreased 

liquidity.’’ 342 The Trust’s 

characterizations of the bitcoin markets 

contrast with, for example, the over-thecounter gold market, which the 

Commission noted had ‘‘unique 

liquidity and depth.’’ 343 This factor 

accordingly weighs against approval of 

the proposed rule change. 

Trading volume in derivatives based 

on the underlying commodity. The 

Trust’s Registration Statement 

recognizes that bitcoin derivatives 

markets are nascent and insufficiently 

developed in regulated marketplaces to 

serve meaningful purposes such as, for 

example, providing investors with 

credible information regarding bitcoin’s 

future prospects.344 As the Trust’s 

Registration Statement acknowledges, 

‘‘[a] limited market currently exists for 

bitcoin-based derivatives.’’ 345 As 

explained above, the market for bitcoinbased derivatives is not yet well 

developed.346 That differs, for example, 

from platinum and palladium markets, 

where futures products on those metals 

had been trading for several decades 

before commodity-trust ETPs were 

launched, and where the Commission 

has noted that exchanges are able to 

adequately ‘‘obtain information 

regarding trading’’ in regulated 

derivatives. This factor accordingly 

weighs against approval of the proposed 

rule change. 

Listing exchange rules and procedures 

prohibiting use of material nonpublic 

information. Regardless of BZX’s rules 

and procedures regarding insider 

trading, many underlying bitcoin 

markets are, at present, opaque.347

According to the Trust’s Registration 

Statement, for example, ‘‘[m]any Bitcoin 

Exchanges do not provide the public 

with significant information regarding 

their ownership structure, management 

teams, corporate practices or regulatory 

compliance.’’ 348 The Trust itself thus 

recognizes that there is a significant risk 

that material nonpublic information 

may be used in a manner that could 

affect bitcoin prices and, in turn, any 

ETP using bitcoin as an underlying 

asset. This factor weighs against 

approval of the proposed rule change. 

Listing exchange rules regarding 

trading halts. Regardless of BZX’s rules 

regarding trading halts, BZX has not 

explained how it will respond to 

disruptions in trading in underlying 

bitcoin markets.349 The Trust’s 

Registration Statement acknowledges 

the unusual and severe nature of such 

trading halts in bitcoin, noting that 

‘‘[e]ven the largest Bitcoin Exchanges 

have been subject to operational 

interruption (e.g., the temporary 

shutdown of Mt. Gox due to distributed 

denial of service attacks (‘DDoS’) attacks 

by hackers and/or malware, and its 

permanent closure in February 

2014).’’ 350 Moreover, as one commenter 

noted, the Gemini Auction has failed on 

at least two occasions.351 Such trading 

halts could result in volatile prices and 

reduced confidence in any ETP that 

uses bitcoin as an underlying asset. 

Accordingly, this factor weighs against 

approval of the proposed rule change. 

H. Other Comments 

Comment letters also addressed the 

following topics: 352

• The nature and uses of bitcoin; 353

• the state of development of bitcoin 

as a digital asset; 354

• the use of bitcoin for illegal 

activities; 355

• the inherent value of, and risks of 

investing in, bitcoin; 356

• the cost of electricity required to 

maintain the Bitcoin network; 357

• the desire of investors to gain access 

to bitcoin through an ETP; 358


sradovich on DSK3GMQ082PROD with NOTICES
37604 Federal Register / Vol. 83, No. 148 / Wednesday, August 1, 2018 / Notices 

Swiderski Letter, supra note 35; Situation Letter, 

supra note 35; Paneque Letter, supra note 35; 

Nootenboom Letter, supra note 35; Chronakis 

Letter, supra note 35; Turley Letter, supra note 35; 

Kemble Letter, supra note 35; BZX Letter II, supra 

note 13, at 3, 8. 

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

360See Barish Letter I, supra note 35; Barish 

Letter IV, supra note 35; Neidhardt Letter, supra 

note 35; Dylan Letter, supra note 35; Keeler Letter, 

supra note 35; Casey Letter I, supra note 35; 

Aronesty Letter, supra note 35; ARK Letter, supra 

note 35, at 10–11; Tull Letter, supra note 35; Stolfi 

Letter I, supra note 35; Stolfi Letter II, supra note 

35; Anonymous Letter I, supra note 35; Lethuillier 

Letter, supra note 35, at 2–3; Delehanty Letter, 

supra note 35; Casey Letter II, supra note 35; 

Anonymous Letter IV, supra note 35; BZX Letter I, 

supra note 35, at 3, 6–7; Struna Letter, supra note 

35. 

361See Lethuillier Letter, supra note 35, at 2–3; 

Aronesty Letter, supra note 35; Delehanty Letter, 

supra note 35; XBT Letter, supra note 35; ARK 

Letter, supra note 35, at 10–11; Anonymous Letter 

IV, supra note 35; BZX Letter I, supra note 35, at 

6–7. 

362See Schulte Letter, supra note 35. 

363See Anonymous Letter II, supra note 35, at 3; 

Tull Letter, supra note 35. 

364See XBT Letter, supra note 35; Tull Letter, 

supra note 35; Stolfi Letter II, supra note 35; ARK 

Letter, supra note 35, at 9–10; Anonymous Letter 

III, supra note 35; BZX Letter I, supra note 35, at 

5–6; Harris Letter, supra note 36. 

365See Stolfi Letter I, supra note 35; Circle Letter, 

supra note 35; Kim Letter, supra note 35; Delehanty 

Letter, supra note 35; Baird Letter, supra note 35; 

Anonymous Letter II, supra note 35, at 3; Keeler 

Letter, supra note 35; Dalla Val Letter, supra note 

35; Elron Letter, supra note 35; P. Miller Letter, 

supra note 35; Marchionne Letter, supra note 35; 

Situation Letter, supra note 35; Paneque Letter, 

supra note 35; Nootenboom Letter, supra note 35; 

Chronakis Letter, supra note 35; Johnson Letter, 

supra note 35; Bang Letter, supra note 35; Primm 

Letter, supra note 35; Christensen Letter, supra note 

35; Rigsby Letter, supra note 35. 

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

367The Commission also received a statement 

from SolidX Management LLC, asserting that ‘‘[t]o 

the extent the Commission is inclined to reverse, 

modify, set aside or remand for further proceedings 

the BatsBZX Proposed Rule Change, then in 

accordance with Rule 431 and the factors set forth 

in Rule 411(b)(2) of the Rules of Practice, the 

Commission should, as a matter of equity . . . 

reverse, modify, set aside or remand for further 

proceedings its March 28, 2017 Order Disapproving 

a Proposed Rule Change, as Modified by 

Amendment No. 1, Relating to the Listing and 

Trading of Shares of the SolidX Bitcoin Trust under 

NYSE Arca Equities Rule 8.201 (Release No. 34– 

80319; File No. SR–NYSEArca-2016–101).’’ SolidX 

Letter, supra note 36, at 1. No timely petition to 

review the March 28, 2017, disapproval order has 

been received from any party and, under the Rule 

431(c) of Commission’s Rules of Practice, the period 

for the Commission to order review of the issuance 

of that disapproval order by delegated authority 

ended on April 7, 2017. 

368See Section I, supra. 

369 15 U.S.C. 78f(b)(5). 

370See Sections III.B.1(a) and III.B.2(a), supra. 

371See Section III.C.1, supra. 

372See Sections III.B.1(b), III.B.2(b), and III.C.2, 

supra. 

373See Section III.D.2, supra. 

374See Sections III.E.1(b), III.E.2(b), and III.E.3(b), 

supra. 

375 In disapproving the proposed rule change, as 

modified by Amendments No. 1 and 2, the 

Commission has considered its impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f); see also supra notes 322–326, 329 

and accompanying text. According to BZX, the 

Sponsor believes that the Shares will represent a 

cost-effective and convenient means of gaining 

investment exposure to bitcoin similar to a direct 

investment in bitcoin, allowing investors to more 

effectively implement strategic and tactical asset 

allocation strategies that use bitcoin, with lower 

cost than that associated with the direct purchase, 

storage, and safekeeping of bitcoin. See Amendment 

No. 1, supra note 1, 81 FR at 76662; see also 

Overdahl Letter, supra note 36, at 13 (asserting that 

approval of bitcoin ETP would improve the 

availability of investment and portfolio 

diversification opportunities for investors); Lewis 

Letter I, supra note 65, at 3, 11–16 (asserting that 

a bitcoin-based ETP would enable ordinary 

investors to construct more efficient portfolios). 

Regarding competition, BZX has asserted that 

approval of the proposed rule change ‘‘will enhance 

competition among market participants, to the 

benefit of investors and the marketplace.’’ 

Amendment No. 1, supra note 1, 81 FR at 76669. 

BZX also asserts that the Shares ‘‘would facilitate 

capital formation in the bitcoin marketplace in a 

manner nearly identical to other commodity-trust 

exchange traded products.’’ BZX Letter II, supra 

note 13, at 3, 30. Additionally, one commenter 

asserts that approval of the Proposal would allow 

the United States to continue its ‘‘historic 

technological leadership,’’ Baird Letter, supra note 

35, while another commenter asserts that, with the 

approval of the Proposal, ‘‘bitcoin might become a 

much larger part of the world economy at risk.’’ 

Barish Letter III, supra note 35. The Commission 

recognizes that BZX and commenters assert the 

economic benefits described above, but, for the 

reasons discussed throughout, the Commission is 

disapproving the proposed rule change because it 

does not find that the proposed rule change is 

consistent with the Exchange Act. 

376See Section III.G, supra. 

377 15 U.S.C. 78f(b)(5). 

• investor understanding about 

bitcoin; 359

• the appropriate measures for the 

Trust to secure its bitcoin holdings 

against theft or loss; 360

• whether the Trust should insure its 

bitcoin holdings against theft or loss; 361

• the adequacy of the Trust’s 

procedures for handling potential 

‘‘forks’’ in the bitcoin blockchain; 362

• the blockchain treatment of 

positions in the Shares, including short 

positions or derivative positions; 363

• the potential conflicts of interest 

related to the affiliations among the 

Sponsor, the Custodian, and the Gemini 

Exchange; 364

• the legitimacy or enhanced 

regulatory protection that Commission 

approval of the proposed ETP might 

confer upon bitcoin as a digital asset; 365

and 

• the value to the Commission of 

enhanced oversight over bitcoin markets 

from approving the proposal.366

Ultimately, however, additional 

discussion of these tangential topics is 

unnecessary, as they do not bear on the 

basis for the Commission’s decision to 

disapprove BZX’s proposal.367

I. Basis for Disapproval 

As discussed above,368 the central 

factor for the Commission in its current 

consideration of the BZX proposal is 

whether it is consistent with Exchange 

Act Section 6(b)(5), which requires, 

among other things, that the rules of a 

national securities exchange be 

designed to prevent fraudulent and 

manipulative acts and practices and to 

protect investors and the public 

interest.369 Although BZX argues that its 

proposal can satisfy these requirements 

because bitcoin markets are inherently 

difficult to manipulate,370 and because 

alternative means of identifying fraud 

and manipulation would be 

sufficient,371 the Commission concludes 

that, as discussed above, BZX has not 

established that these proffered means 

of compliance—alone or in 

combination—are sufficient to meet the 

requirements of Exchange Act Section 

6(b)(5).372

Thus, the Commission believes that 

BZX must demonstrate with respect to 

this proposal that—like the listing 

exchanges for previously approved 

commodity-trust ETPs 373—it can enter 

into a surveillance-sharing agreement 

with a regulated, bitcoin-related market 

of significant size. As discussed above, 

however, BZX has not shown that it can 

enter into such an agreement, because 

the proposal does not support a 

conclusion that the markets for bitcoin 

or derivatives on bitcoin are regulated 

markets of significant size.374 Therefore, 

BZX has not met its burden to 

demonstrate that the proposed rule 

change is consistent with Exchange Act 

Section 6(b)(5), and, accordingly, the 

Commission is disapproving the 

proposed rule change.375

While the Commission concludes that 

BZX must demonstrate the ability to 

enter into a surveillance-sharing 

agreement with a regulated market of 

significant size related to bitcoin, and 

while this factor strongly supports 

disapproval of BZX’s proposed rule 

change, the other factors BZX asks the 

Commission to weigh 376 also support 

the disapproval of the proposed rule 

change. Even considering these other 

factors, the Commission does not find 

BZX’s proposed rule change to be 

consistent with Exchange Act Section 

6(b)(5)’s requirement that the rules of a 

national securities exchange be 

designed ‘‘to prevent fraudulent and 

manipulative acts and practices’’ and 

‘‘to protect investors and the public 

interest.’’ 377

IV. Conclusion 

For the reasons set forth above, the 

Commission does not find, pursuant to 

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


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 148 / Wednesday, August 1, 2018 / Notices 37605 

that the proposed rule change, as 

modified by Amendments No. 1 and 2, 

is consistent with the requirements of 

the Exchange Act and the rules and 

regulations thereunder applicable to a 

national securities exchange, and in 

particular, with Section 6(b)(5) of the 

Exchange Act. 

It is therefore ordered, pursuant to 

Rule 431 of the Commission’s Rules of 

Practice, that the earlier action taken by 

delegated authority, Exchange Act 

Release No. 80206 (Mar. 10, 2017), 82 

FR 14076 (Mar. 16, 2017), is set aside 

and, pursuant to Section 19(b)(2) of the 

Exchange Act, SR-BatsBZX–2016–30 is 

disapproved. 

By the Commission. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–16427 Filed 7–31–18; 8:45 am] 

BILLING CODE 8011–01–P 

SMALL BUSINESS ADMINISTRATION 

[License No. 06/06–0346] 

Stellus Capital SBIC, L.P.; Notice 

Seeking Exemption Under Section 312 

of the Small Business Investment Act, 

Conflicts of Interest 

Notice is hereby given that Stellus 

Capital SBIC, L.P., 4400 Post Oak 

Parkway, Suite 2200, Houston, TX 

77027, a Federal Licensee under the 

Small Business Investment Act of 1958, 

as amended (‘‘the Act’’), in connection 

with the financing of a small concern, 

has sought an exemption under Section 

312 of the Act and Section 107.730, 

Financings which Constitute Conflicts 

of Interest of the Small Business 

Administration (‘‘SBA’’) Rules and 

Regulations (13 CFR 107.730). Stellus 

Capital SBIC, L.P. proposes to provide 

loan financing to KelleyAmerit 

Holdings, Inc. (d/b/a Amerit Fleet 

Solutions), 1331 North California Blvd., 

Suite 150, Walnut Creek, CA 94596. 

The financing is brought within the 

purview of § 107.730(a)(4) of the 

Regulations because Stellus Capital 

SBIC, L.P., seeks to purchase the loan 

financing to KelleyAmerit Holdings, Inc. 

from Stellus Capital Investment Corp., 

an Associate of Stellus Capital SBIC, 

L.P. Therefore, this transaction is 

considered discharging an obligation of 

an Associate, requiring a prior SBA 

exemption. 

Notice is hereby given that any 

interested person may submit written 

comments on this transaction within 

fifteen days of the date of this 

publication to the Associate 

Administrator, Office of Investment and 

Innovation, U.S. Small Business 

Administration, 409 Third Street SW, 

Washington, DC 20416. 

A. Joseph Shepard, 

Associate Administrator for Office of 

Investment and Innovation. 

[FR Doc. 2018–16414 Filed 7–31–18; 8:45 am] 

BILLING CODE P 

SMALL BUSINESS ADMINISTRATION 

[License No. 01/01–0435] 

Ironwood Mezzanine Fund IV–A, L.P.; 

Notice Seeking Exemption Under 

Section 312 of the Small Business 

Investment Act, Conflicts of Interest 

Notice is hereby given that Ironwood 

Mezzanine Fund IV–A, L.P., 45 Nod 

Road, Suite 2, Avon, CT 06001, a 

Federal Licensee under the Small 

Business Investment Act of 1958, as 

amended (‘‘the Act’’), in connection 

with a financing of a small concern, has 

sought an exemption under Section 312 

of the Act and Section 107.730, 

Financings which Constitute Conflicts 

of Interest of the Small Business 

Administration (‘‘SBA’’) Rules and 

Regulations (13 CFR 107.730). Ironwood 

Mezzanine Fund IV–A, L.P. proposes to 

provide debt and equity financing for 

the purpose of purchasing a subsidiary 

(Capewell Intermediate Holding, LLC) 

from an Associate, Capewell Holding, 

LLC. Capewell Holding, LLC is an 

Associate because Ironwood Mezzanine 

Fund III–A L.P., an Associate of 

Mezzanine Fund IV–A, L.P., owns more 

than ten percent of Capewell Holding, 

LLC. 

The financing is brought within the 

purview of § 107.730(a) of the 

Regulations because proceeds from the 

transaction will directly benefit 

Associates Ironwood Mezzanine Fund 

III, L.P. and Ironwood Mezzanine Fund 

III–A, L.P. 

Notice is hereby given that any 

interested person may submit written 

comments on this transaction within 

fifteen days of the date of this 

publication to the Associate 

Administrator, Office of Investment and 

Innovation, U.S. Small Business 

Administration, 409 Third Street SW, 

Washington, DC 20416. 

A. Joseph Shepard, 

Associate Administrator, Office of Investment 

and Innovation. 

[FR Doc. 2018–16415 Filed 7–31–18; 8:45 am] 

BILLING CODE P 

SURFACE TRANSPORTATION BOARD 

[Docket No. FD 36208] 

Progressive Rail Incorporated— 

Continuance in Control Exemption— 

St. Paul & Pacific Railroad Company, 

LLC 

Progressive Rail Incorporated (PGR), a 

Class III rail carrier, has filed a verified 

notice of exemption under 49 CFR 

1180.2(d)(2) to continue in control of St. 

Paul & Pacific Railroad Company, LLC 

(SPR), upon SPR’s becoming a Class III 

rail carrier. 

This transaction is related to a 

concurrently filed verified notice of 

exemption in St. Paul & Pacific Railroad 

Company, LLC—Change in Operator 

Exemption—Santa Cruz and Monterey 

Bay Railway Company, Docket No. FD 

36207. In that proceeding, SPR seeks an 

exemption under 49 CFR 1150.31 to 

assume operations over approximately 

31 miles of rail line (the Line) owned by 

the Santa Cruz County Regional 

Transportation Commission extending 

from milepost 0.433 at Watsonville 

Junction to milepost 31.39 at Davenport, 

Cal. 

The earliest this transaction may be 

consummated is August 15, 2018, the 

effective date of the exemption (30 days 

after the verified notice was filed). PGR 

states that it intends to consummate the 

transaction on August 16, 2018. 

PGR will continue in control of SPR 

upon SPR’s becoming a Class III rail 

carrier and remains in control of Class 

III carriers Airlake Terminal Railway 

Company, LLC, Central Midland 

Railway Company, Iowa Traction 

Railway Company, Iowa Southern 

Railway Company, Piedmont & 

Northern Railroad Company, and 

Chicago Junction Railway Company. 

PGR states that: (1) The rail line to be 

operated by SPR does not connect with 

any other railroads in the PGR corporate 

family; (2) the continuance in control is 

not part of a series of anticipated 

transactions that would connect this 

line with any other railroad in the PGR 

corporate family; and (3) the transaction 

does not involve a Class I rail carrier. 

Therefore, the transaction is exempt 

from the prior approval requirements of 

49 U.S.C. 11323. See 49 CFR 

1180.2(d)(2). 

Under 49 U.S.C. 10502(g), the Board 

may not use its exemption authority to 

relieve a rail carrier of its statutory 

obligation to protect the interests of its 

employees. Section 11326(c), however, 

does not provide for labor protection for 

transactions under §§ 11324 and 11325 

that involve only Class III rail carriers. 

Accordingly, the Board may not impose 

labor protective conditions here because 


sradovich on DSK3GMQ082PROD with NOTICES