[Federal Register Volume 83, Number 148 (Wednesday, August 1, 2018)]
[Notices]
[Pages 37579-37605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16427]


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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\
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    \1\ BZX 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/batsbzx201630-1594698-132357.pdf.
    \2\ See 17 CFR 200.30-3(a)(12).
    \3\ See Exchange Act Release No. 80206 (Mar. 10, 2017), 82 FR 
14076 (Mar. 16, 2017) (``March Disapproval Order'').
    \4\ On 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/batsbzx-petitionforreview.pdf. BZX's Petition for Review is available on the 
Commission's website at: https://www.sec.gov/rules/sro/batsbzx/2017/petition-for-review-sr-batsbzx-2016-30.pdf.
    \5\ On 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.
    \6\ Commissioner 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.
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    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\
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    \7\ Pursuant 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).
    \8\ Section 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).
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    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

[[Page 37580]]

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\
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    \10\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \11\ See id.
    \12\ See id.
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    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\
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    \13\ See 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.
    \17\ See id. at 22.
    \18\ See id. at 26-27.
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    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 surveillance-sharing 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.
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    \19\ The 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.
    \20\ See Section III.D.2(a), infra.
    \21\ Amendment 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'').
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    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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    \22\ For 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).
    \23\ See infra notes 312-316 and accompanying text.

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[[Page 37581]]

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 limited-liability 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\
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    \24\ BZX 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.
    \25\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``Bitcoin Blockchain.'' The Bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See 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.''
    \26\ See id. at 76651-52.
    \27\ See id. at 76651.
    \28\ See id. at 76664-65. See also Amendment No. 2, supra note 
1.
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    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\
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    \29\ See Amendment No. 1, supra note 1, 81 FR at 76652.
    \30\ See 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.
    \31\ See id. at 76666.
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    BZX represents that it has entered into a comprehensive 
surveillance-sharing 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\
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    \32\ See id. at 76668.
    \33\ See Amendments No. 1 and 2, supra note 1.
    \34\ See 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.
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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

[[Page 37582]]

the effect that Commission approval of the BZX proposal could have on 
bitcoin and the bitcoin markets.\43\
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    \35\ See 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/batsbzx201630.shtml.
    \36\ See 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/batsbzx201630.shtml.
    \37\ See infra notes 44-48 and accompanying text.
    \38\ See Sections III.B.1(a) and III.E.2(a), infra.
    \39\ See Sections III.B.2(a) and III.E.1(a), infra.
    \40\ See Section III.D.1, infra.
    \41\ See Section III.E.3(a), infra.
    \42\ See Section III.F.1, infra.
    \43\ See Section III.G, infra.
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    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\
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    \44\ See March Disapproval Order, supra note 3, 82 FR at 14082-
84.
    \45\ See BZX Letter II, supra note 13, at 26.
    \46\ See id. at 12; see also id. at 13, 26.
    \47\ See BZX Letter II, supra note 13, at 13; and Overdahl 
Letter, supra note 36, at 2, 9-11.
    \48\ See BZX Letter II, supra note 13, at 13; and Overdahl 
Letter, supra note 36, at 2, 9-11.
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    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.
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    \49\ See supra notes 10-12 and accompanying text.
    \50\ See BZX Letter II, supra note 13, at 26.
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    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 commodity-trust 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 surveillance-
sharing 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.
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    \51\ 15 U.S.C. 78f(b)(5).
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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\
---------------------------------------------------------------------------

    \52\ BZX Letter II, supra note 13, at 12, 13, 26; see also 
Petition for Review, supra note 4, at 11.
    \53\ See supra note 50 and accompanying text.
    \54\ See BZX Letter I, supra note 35, at 7.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \55\ See Petition for Review, supra note 4, at 15.
    \56\ See BZX Letter II, supra note 13, at 15-16; Petition for 
Review, supra note 4, at 15.
---------------------------------------------------------------------------

    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

[[Page 37583]]

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\
---------------------------------------------------------------------------

    \57\ See BZX Letter II, supra note 13, at 12; see also Petition 
for Review, supra note 4, at 11.
    \58\ See Petition for Review, supra note 4, at 16.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \59\ See supra note 36.
    \60\ See Overdahl Letter, supra note 36, at 1-2.
    \61\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \62\ The 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).
    \63\ See Overdahl Letter, supra note 36, at 2, 9; see also 
Petition for Review, supra note 4, at 14.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \64\ See Overdahl Letter, supra note 36, at 9.
---------------------------------------------------------------------------

    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-frequency-trading 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\
---------------------------------------------------------------------------

    \65\ See 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.
    \66\ See Lewis Letter I, supra note 65, at 5-8.
    \67\ See Lewis Letter I, supra note 65, at 5-9; Lewis Letter II, 
supra note 65, at 2.
    \68\ See Lewis Letter I, supra note 65, at 6-7.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \69\ See ARK Letter, supra note 35, at 5.
    \70\ See Maher Letter, supra note 35.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

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

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

[[Page 37584]]

    Finally, both BZX and the Overdahl Letter argue that the Commodity 
Futures Trading Commission's (``CFTC'') granting of registration to 
bitcoin swap-execution 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\
---------------------------------------------------------------------------

    \75\ See 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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \76\ See supra notes 69-70 and accompanying text.
    \77\ See supra notes 52-68 and accompanying text.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \78\ See supra notes 52-68 and accompanying text.
    \79\ While 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.
    \80\ See supra note 71 and accompanying text.
    \81\ See supra note 69 and accompanying text.
---------------------------------------------------------------------------

    While BZX cites a comment letter relating to a different proposed 
rule change for the proposition that price discrepancies across four 
selected USD-denominated 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.
---------------------------------------------------------------------------

    \82\ See 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)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \83\ See supra note 56 and accompanying text.
    \84\ See supra notes 60-61 and accompanying text.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \85\ See supra notes 67, 74 and accompanying text.
    \86\ See Section III.B.1(b)(ii), infra (discussing the potential 
for market domination).
---------------------------------------------------------------------------

    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 market-close 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)

[[Page 37585]]

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.
---------------------------------------------------------------------------

    \87\ See supra note 57 and accompanying text.
    \88\ See supra note 73 and accompanying text.
    \89\ See 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.
    \90\ For example, the website https://data.bitcoinity.org/markets/arbitrage/USD tracks price differences between last trades 
on 13 bitcoin markets.
---------------------------------------------------------------------------

    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 
high-frequency 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\
---------------------------------------------------------------------------

    \91\ See supra notes 62-63, 67 and accompanying text.
    \92\ Even 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.
    \93\ See 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/cato-journal/2015/5/cj-v35n2-12.pdf.
---------------------------------------------------------------------------

    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 bitcoin-
based 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, non-
interchangeable 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\
---------------------------------------------------------------------------

    \94\ For 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.
    \95\ See 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.
---------------------------------------------------------------------------

    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\ Profit-motivated 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.
---------------------------------------------------------------------------

    \96\ Registration Statement, supra note 22, at 21-23, 29, 60-61.
    \97\ Amir 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 profit-motivated 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).
    \98\ Registration 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.
    \99\ Satoshi 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \100\ Registration Statement, supra note 22, at 23.

    Additionally, the Commission notes that recent academic papers 
suggest that the price of bitcoin can be, and has been, manipulated 
through activity on

[[Page 37586]]

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\
---------------------------------------------------------------------------

    \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.
    \103\ See 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.'').
    \105\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \106\ While 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.
    \107\ Even 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 surveillance-sharing 
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.'').
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \108\ See supra note 57 and accompanying text.
    \109\ See supra note 68 and accompanying text.
    \110\ See supra note 64 and accompanying text.
    \111\ Lewis 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.
    \112\ Lewis 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.
    \113\ See supra note 72 and accompanying text.
---------------------------------------------------------------------------

    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

[[Page 37587]]

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.
---------------------------------------------------------------------------

    \114\ See supra note 68 and accompanying text.
    \115\ See, 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).
---------------------------------------------------------------------------

(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 self-certifications as 
addressing the narrower question of whether the particular bitcoin 
futures products and cash-settlement processes--under the specific 
terms proposed by those two futures exchanges--were ``readily 
susceptible to manipulation.'' \117\ And the CFTC stated that the self-
certification 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\
---------------------------------------------------------------------------

    \116\ See supra note 75.
    \117\ See 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).
    \118\ CFTC 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_virtualcurrency01.pdf. See also infra 
note 288.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \119\ 15 U.S.C. 78s(b).
    \120\ See CFTC Backgrounder, supra note 118, at 2.
    \121\ See 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.
    \122\ Futures Market Basics, CFTC, available at http://www.cftc.gov/ConsumerProtection/EducationCenter/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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \124\ See 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.
    \125\ See BZX Letter I, supra note 35, at 8-9.
---------------------------------------------------------------------------

    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 cross-market 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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

    \127\ See id. at 20.
    \128\ See Overdahl Letter, supra note 36, at 11.
---------------------------------------------------------------------------

    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

[[Page 37588]]

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 USD-denominated 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\
---------------------------------------------------------------------------

    \129\ See BZX Letter II, supra note 13, at 20.
    \130\ Id.
---------------------------------------------------------------------------

    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 USD-denominated bitcoin exchanges was 0.0489 
percent with an average absolute deviation of 0.2398 percent.\132\
---------------------------------------------------------------------------

    \131\ See Overdahl Letter, supra note 36, at 1.
    \132\ See id. at 4.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \133\ See 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.
    \134\ See Overdahl Letter, supra note 36, at 11.
    \135\ See id. at 2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \136\ See, e.g., Maher Letter, supra note 35; Stolfi Letter I, 
supra note 35; Anonymous Letter III, supra note 35.
    \137\ See Anonymous Letter III, supra note 35.
    \138\ See 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'').
    \139\ See Stolfi Letter II, supra note 35.
    \140\ See Stolfi Letter I, supra note 35.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \141\ See Williams Letter, supra note 35, at 2.
    \142\ See Anonymous Letter V, supra note 35.
---------------------------------------------------------------------------

    One commenter states that, since 2013, the price of bitcoin has 
been defined mostly by the major Chinese exchanges, whose volumes dwarf 
those of exchanges outside China, 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\
---------------------------------------------------------------------------

    \143\ See Stolfi Letter II, supra note 35.
    \144\ See ARK Letter, supra note 35, at 5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \145\ See 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).
    \146\ See Anonymous Letter VIII, supra note 35.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \147\ See Anonymous Letter III, supra note 35.
    \148\ See id.
---------------------------------------------------------------------------

    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

[[Page 37589]]

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\
---------------------------------------------------------------------------

    \149\ See Anonymous Letter I, supra note 35.
    \150\ See Delehanty Letter, supra note 35.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \151\ See ARK Letter, supra note 35, at 7-8.
    \152\ See id. at 8-9.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

    \154\ See Delehanty Letter, supra note 35.
---------------------------------------------------------------------------

    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 well-connected customers can gain preferential 
treatment in order execution.\159\
---------------------------------------------------------------------------

    \155\ See Stolfi Letter II, supra note 35.
    \156\ See id.
    \157\ See Anonymous Letter III, supra note 35.
    \158\ See id.
    \159\ See Williams Letter, supra note 35, at 2.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \160\ See supra note 130 and accompanying text.
    \161\ See supra notes 149-150 and accompanying text.
    \162\ See supra notes 141-144 and accompanying text.
    \163\ See supra note 138 and accompanying text.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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

[[Page 37590]]

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.
---------------------------------------------------------------------------

    \165\ See 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \166\ See supra note 30.
---------------------------------------------------------------------------

    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 USD-denominated 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.
---------------------------------------------------------------------------

    \167\ Registration Statement, supra note 22, at 22.
    \168\ See Maher Letter, supra note 35; Overdahl Letter, supra 
note 36, at 3; SIG Letter, supra note 36, at 8.
    \169\ See supra note 130 and accompanying text.
---------------------------------------------------------------------------

C. The Availability of ``Traditional Means'' To Detect and Deter Fraud 
and Manipulation

    BZX has not demonstrated, given the current absence of a 
surveillance-sharing 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\
---------------------------------------------------------------------------

    \170\ See BZX Letter II, supra note 13, at 22, 26.
    \171\ See id. at 23.
    \172\ See id. The surveillance-sharing agreement between BZX and 
the Gemini Exchange is discussed in Section III.E.1, infra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \173\ See Overdahl Letter, supra note 36, at 2.
    \174\ See id. at 11.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

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

[[Page 37591]]

2. Discussion
    The Commission concludes that BZX has not demonstrated--given the 
current absence of a surveillance-sharing 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\
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \177\ See supra note 171 and accompanying text.
    \178\ See BZX Rule 14.11(e)(4)(G).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \179\ See Amendment No. 1, supra note 1, 81 FR at 76668.
    \180\ See also Section III.B.1(b)(ii), supra (discussing market 
domination).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \181\ See supra note 174 and accompanying text.
    \182\ 15 U.S.C. 78f(b)(5) (emphasis added).
    \183\ See Section III.D, infra.
    \184\ See infra notes 281-282 and accompanying text.
    \185\ See infra notes 286-288 and accompanying text.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \186\ See supra note 175 and accompanying text.
    \187\ See, 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.
---------------------------------------------------------------------------

D. The Use of Surveillance-Sharing Agreements To Detect and Deter 
Fraudulent and Manipulative Acts and Practices With Respect to 
Commodity-Trust 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 
`well-established' 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

[[Page 37592]]

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\
---------------------------------------------------------------------------

    \188\ See BZX Letter II, supra note 13, at 26-27.
    \189\ See 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).
    \190\ See BZX Letter II, supra note 13, at 27.
    \191\ See id. at 27-28.
    \192\ See id. at 27.
---------------------------------------------------------------------------

    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 commodity-trust 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 commodity-trust 
ETP.\196\
---------------------------------------------------------------------------

    \193\ See 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.
    \194\ See Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 
13726 (Feb. 28, 2013) (SR-NYSEArca-2012-66) (approving iShares 
Copper Trust).
    \195\ See BZX Letter II, supra note 13, at 13-14; see also id. 
at 25.
    \196\ See 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)).
---------------------------------------------------------------------------

    BZX contends that previous ETP approvals demonstrate that the 
factors used to determine whether currency-derivative 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 commodity-trust 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 commodity-based and other 
ETPs where the underlying market is either unregulated or lightly 
regulated, such as foreign-exchange linked or related ETPs, or 
commodity-based ETPs that hold the underlying and not the derivative 
product.\201\
---------------------------------------------------------------------------

    \197\ See Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 
64614 (Nov. 5, 2004) (SR-NYSE-2004-22) (approving streetTRACKS Gold 
Shares).
    \198\ See BZX Letter II, supra note 13, at 28-29.
    \199\ See id. at 29.
    \200\ See 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 non-U.S. currencies).
    \201\ See Convergex Letter, supra note 36, at 2.
---------------------------------------------------------------------------

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

[[Page 37593]]

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\
---------------------------------------------------------------------------

    \202\ See 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, 
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).
    \203\ See, e.g., Letter from Brandon Becker, Director, Division 
of Market Regulation, Commission, to Gerard D. O'Connell, Chairman, 
Intermarket Surveillance Group (June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

[[Page 37594]]

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

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

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

    \208\ NDSP Adopting Release, supra note 21.

    Consistent with this principle, for the commodity-trust ETPs 
approved to date for listing and trading, there has been in every case 
at least one significant, regulated market for trading futures on the 
underlying commodity--whether gold, silver, platinum, palladium, or 
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group 
membership in common with, that market.\209\
---------------------------------------------------------------------------

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

    In light of the history and purpose of looking to surveillance-
sharing agreements, with respect to markets for assets underlying an 
ETP or for derivatives on those assets, the Commission interprets the 
terms ``significant market'' and ``market of significant size'' to 
include a market (or group of markets) as to which (a) there is a 
reasonable likelihood that a person attempting to manipulate the ETP 
would also have to trade on that market to successfully manipulate the 
ETP, so that a surveillance-sharing agreement would assist the ETP 
listing market in detecting and deterring misconduct, and (b) it is 
unlikely that trading in the ETP would be the predominant influence on 
prices in that market. This definition is illustrative and not 
exclusive. There could be other types of ``significant markets'' and 
``markets of significant size,'' but this definition is an example that 
will provide guidance to market participants.
(b) Response to Comments Regarding Surveillance-Sharing Agreements and 
Prior Commodity-Trust ETP Approvals
    Prior ETP approval orders are consistent with the standards the 
Commission is applying to the BZX proposal. However, more recent 
approval orders for the well-established model of a precious-metal 
trust--for example, the Platinum Order and the Palladium Order--found 
it unnecessary to perform the exhaustive analysis of underlying markets 
and surveillance sharing provided by the first approval order for a 
precious metal commodity-trust ETP, the Gold Order, especially since 
the proposed rule change for platinum and palladium ETPs discussed 
surveillance-sharing agreements with significant, regulated platinum 
and palladium markets.\210\
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 37595]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 37596]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 37597]]

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

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

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

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

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

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

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

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

    The record does not establish that the Gemini Exchange's rules, 
including its trading rules, are subject to regulatory review or 
approval or that its trading operations are subject to regulatory 
examination. Commission regulation of the securities markets includes 
the elements of NYSDFS supervision described above,\250\ but national 
securities exchanges are also, among other things, required to have 
rules that are ``designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.'' \251\ Moreover, national securities exchanges must file 
proposed rules with the Commission regarding certain material aspects 
of their operations,\252\ and the Commission has the authority to 
disapprove any such rule that is not consistent with the requirements 
of the Exchange Act.\253\ Thus, national securities exchanges are 
subject to Commission oversight of, among other things, their 
governance, membership qualifications, trading rules, disciplinary 
procedures, recordkeeping, and fees.\254\
---------------------------------------------------------------------------

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

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

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

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

[[Page 37598]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 37599]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 37600]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 37601]]

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

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

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

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

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

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

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

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

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

F. The Protection of Investors and the Public Interest

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

[[Page 37602]]

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

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

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

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

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

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

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

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

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

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

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

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

    The Commission acknowledges that each of these is a potential 
benefit of a bitcoin ETP. The Commission, however, must consider these 
potential benefits in the broader context of whether the proposal meets 
each of the applicable requirements of the Exchange Act. Pursuant to 
Section 19(b)(2) of the Exchange Act, the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it does 
not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act--including the requirement 
under Section 6(b)(5) that the rules of a national securities exchange 
be designed to prevent fraudulent and manipulative acts and 
practices.\338\ Thus, even if a proposed rule change would provide 
certain benefits to investors and the markets, the proposed rule change 
may still fail to meet other requirements under the Exchange Act.\339\ 
For the reasons discussed above, BZX has not met its burden of 
demonstrating an adequate basis in the record for the Commission to 
find that the proposal is consistent with

[[Page 37603]]

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

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

G. Additional Factors Supporting Disapproval

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

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

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

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

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

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

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

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

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

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

H. Other Comments

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

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

    <bullet> The nature and uses of bitcoin; \353\
---------------------------------------------------------------------------

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

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

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

    <bullet> the use of bitcoin for illegal activities; \355\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

[[Page 37604]]

    <bullet> investor understanding about bitcoin; \359\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I. Basis for Disapproval

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

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

    Thus, the Commission believes that BZX must demonstrate with 
respect to this proposal that--like the listing exchanges for 
previously approved commodity-trust ETPs \373\--it can enter into a 
surveillance-sharing agreement with a regulated, bitcoin-related market 
of significant size. As discussed above, however, BZX has not shown 
that it can enter into such an agreement, because the proposal does not 
support a conclusion that the markets for bitcoin or derivatives on 
bitcoin are regulated markets of significant size.\374\ Therefore, BZX 
has not met its burden to demonstrate that the proposed rule change is 
consistent with Exchange Act Section 6(b)(5), and, accordingly, the 
Commission is disapproving the proposed rule change.\375\
---------------------------------------------------------------------------

    \373\ See Section III.D.2, supra.
    \374\ See Sections III.E.1(b), III.E.2(b), and III.E.3(b), 
supra.
    \375\ In disapproving the proposed rule change, as modified by 
Amendments No. 1 and 2, the Commission has considered its impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f); see also supra notes 322-326, 329 and accompanying text. 
According to BZX, the Sponsor believes that the Shares will 
represent a cost-effective and convenient means of gaining 
investment exposure to bitcoin similar to a direct investment in 
bitcoin, allowing investors to more effectively implement strategic 
and tactical asset allocation strategies that use bitcoin, with 
lower cost than that associated with the direct purchase, storage, 
and safekeeping of bitcoin. See Amendment No. 1, supra note 1, 81 FR 
at 76662; see also Overdahl Letter, supra note 36, at 13 (asserting 
that approval of bitcoin ETP would improve the availability of 
investment and portfolio diversification opportunities for 
investors); Lewis Letter I, supra note 65, at 3, 11-16 (asserting 
that a bitcoin-based ETP would enable ordinary investors to 
construct more efficient portfolios). Regarding competition, BZX has 
asserted that approval of the proposed rule change ``will enhance 
competition among market participants, to the benefit of investors 
and the marketplace.'' Amendment No. 1, supra note 1, 81 FR at 
76669. BZX also asserts that the Shares ``would facilitate capital 
formation in the bitcoin marketplace in a manner nearly identical to 
other commodity-trust exchange traded products.'' BZX Letter II, 
supra note 13, at 3, 30. Additionally, one commenter asserts that 
approval of the Proposal would allow the United States to continue 
its ``historic technological leadership,'' Baird Letter, supra note 
35, while another commenter asserts that, with the approval of the 
Proposal, ``bitcoin might become a much larger part of the world 
economy at risk.'' Barish Letter III, supra note 35. The Commission 
recognizes that BZX and commenters assert the economic benefits 
described above, but, for the reasons discussed throughout, the 
Commission is disapproving the proposed rule change because it does 
not find that the proposed rule change is consistent with the 
Exchange Act.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \376\ See Section III.G, supra.
    \377\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

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

[[Page 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