[Federal Register Volume 87, Number 21 (Tuesday, February 1, 2022)]
[Notices]
[Pages 5527-5541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02001]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94080; File No. SR-CboeBZX-2021-039]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Wise Origin Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares

January 27, 2022.

I. Introduction

    On May 10, 2021, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares (``Shares'') of the Wise Origin Bitcoin 
Trust (``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares. The proposed rule change was published for comment in the 
Federal Register on June 1, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 91994 (May 25, 
2021), 86 FR 29321 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039.htm.
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    On July 13, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On August 23, 2021, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On November 15, 2021, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92388, 86 FR 38163 
(July 19, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 92721, 86 FR 48272 
(Aug. 27, 2021).
    \8\ See Securities Exchange Act Release No. 93571, 86 FR 64979 
(Nov. 19, 2021). On December 27, 2021, the Exchange filed Amendment 
No. 1 to the proposal. As discussed below, however, see Section 
III.E, infra, the Commission views this amendment as untimely. 
Furthermore, even if this amendment had been timely filed, it would 
not alter the Commission's conclusion that the Exchange's proposal 
is not consistent with the Exchange Act. See Section III.E.
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    This order disapproves the proposed rule change. The Commission 
concludes that 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 Exchange Act Section 6(b)(5), and 
in particular, the 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.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether BZX's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same standard used in its orders 
considering previous proposals to list bitcoin \10\-based

[[Page 5528]]

commodity trusts and bitcoin-based trust issued receipts.\11\ As the 
Commission has explained, an exchange that lists bitcoin-based 
exchange-traded products (``ETPs'') can meet its obligations under 
Exchange Act Section 6(b)(5) by demonstrating that the exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying or reference bitcoin 
assets.\12\
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    \10\ 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, e.g., 
Notice, 86 FR at 29321.
    \11\ See 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, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Kryptoin Bitcoin ETF Trust Under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 93860 (Dec. 22, 2021), 86 FR 74166 (Dec. 29, 2021) 
(SR-CboeBZX-2021-029); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31); Order Disapproving a Proposed Rule Change to List 
and Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust 
Under NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 
94006 (Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-
37). See also 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, 
Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 
16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order''). The 
Commission also notes that orders were issued by delegated authority 
on the following matters: Order Disapproving a Proposed Rule Change 
To List and Trade the Shares of the ProShares Bitcoin ETF and the 
ProShares Short Bitcoin ETF, Securities Exchange Act Release No. 
83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (SR-NYSEArca-
2017-139) (``ProShares Order''); Order Disapproving a Proposed Rule 
Change To List and Trade the Shares of the GraniteShares Bitcoin ETF 
and the GraniteShares Short Bitcoin ETF, Securities Exchange Act 
Release No. 83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-
CboeBZX-2018-001) (``GraniteShares Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the VanEck Bitcoin 
Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 
Securities Exchange Act Release No. 93559 (Nov. 12, 2021), 86 FR 
64539 (Nov. 18, 2021) (SR-CboeBZX-2021-019).
    \12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since 
they ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur.'' \13\ The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading the underlying assets for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\14\ The 
hallmarks of a surveillance-sharing 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.\15\
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    \13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See 
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at 
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at 
12596.
    \14\ See NDSP Adopting Release, 63 FR at 70959.
    \15\ See Winklevoss Order, 83 FR at 37592-93; 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.
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    In the context of this standard, the terms ``significant market'' 
and ``market of significant size'' 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 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.\16\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \17\
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    \16\ See Winklevoss Order, 83 FR at 37594. 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. See id.
    \17\ See USBT Order, 85 FR at 12597.
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    Consistent with this standard, 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 
(``ISG'') membership in common with, that market.\18\ Moreover, the 
surveillance-sharing agreements have been consistently present whenever 
the Commission has approved the listing and trading of derivative 
securities, even where the underlying securities were also listed on 
national securities exchanges--such as options based on an index of 
stocks traded on a national securities exchange--and were thus subject 
to the Commission's direct regulatory authority.\19\
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    \18\ See Winklevoss Order, 83 FR at 37594.
    \19\ See USBT Order, 85 FR at 12597; Securities 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 
Depository Receipts (``ADRs'')). The Commission has also required a 
surveillance-sharing agreement in the context of index options even 
when (i) all of the underlying index component stocks were either 
registered with the Commission or exempt from registration under the 
Exchange Act; (ii) all of the underlying index component stocks 
traded in the U.S. either directly or as ADRs on a national 
securities exchange; and (iii) effective international ADR arbitrage 
alleviated concerns over the relatively smaller ADR trading volume, 
helped to ensure that ADR prices reflected the pricing on the home 
market, and helped to ensure more reliable price determinations for 
settlement purposes, due to the unique composition of the index and 
reliance on ADR prices. See Securities Exchange Act Release No. 
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the 
exchange on which the index option trades and the markets that trade 
the underlying securities are necessary'' and that ``[t]he exchange 
of surveillance data by the exchange trading a stock index option 
and the markets for the securities comprising the index is important 
to the detection and deterrence of intermarket manipulation.''). And 
the Commission has required a surveillance-sharing agreement even 
when approving options based on an index of stocks traded on a 
national securities exchange. See Securities Exchange Act Release 
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure 
the availability of information necessary to detect and deter 
potential manipulations and other trading abuses'').
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    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin market 
is ``uniquely'' and ``inherently''

[[Page 5529]]

resistant to fraud and manipulation.\20\ In response, the Commission 
has agreed that, if a listing exchange could establish that the 
underlying market inherently possesses a unique resistance to 
manipulation beyond the protections that are utilized by traditional 
commodity or securities markets, it would not necessarily need to enter 
into a surveillance-sharing agreement with a regulated significant 
market.\21\ Such resistance to fraud and manipulation, however, must be 
novel and beyond those protections that exist in traditional commodity 
markets or equity markets for which the Commission has long required 
surveillance-sharing agreements in the context of listing derivative 
securities products.\22\ No listing exchange has satisfied its burden 
to make such demonstration.\23\
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    \20\ See USBT Order, 85 FR at 12597.
    \21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation); see also USBT Order, 85 FR at 
12597.
    \22\ See USBT Order, 85 FR at 12597.
    \23\ See supra note 11.
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    Here, BZX contends that approval of the proposal is consistent with 
Section 6(b)(5) of the Exchange Act, in particular 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.\24\ As discussed in more 
detail below, BZX asserts that the proposal is consistent with Section 
6(b)(5) of the Exchange Act because the Exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size,\25\ and there exist other means to prevent fraudulent and 
manipulative acts and practices that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement.\26\
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    \24\ See Notice, 86 FR at 29331.
    \25\ See id. at 29332.
    \26\ See id. at 29332-33.
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    Although BZX recognizes the Commission's focus on potential 
manipulation of bitcoin ETPs in prior disapproval orders, BZX argues 
that such manipulation concerns have been sufficiently mitigated.\27\ 
Specifically, as discussed in more detail below, the Exchange asserts 
that the significant increase in trading volume in bitcoin futures on 
the Chicago Mercantile Exchange (``CME''), the growth of liquidity in 
the spot market for bitcoin, and certain features of the Shares and the 
Index (as defined herein) mitigate potential manipulation concerns and 
should be the central consideration as the Commission determines 
whether to approve this proposal.\28\
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    \27\ See id. at 29324, 29327.
    \28\ See id. at 29327.
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    Further, BZX believes that the proposal would give U.S. investors 
access to bitcoin in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors. According to 
BZX, the proposed listing and trading of the Shares would mitigate risk 
by: (i) Reducing premium and discount volatility; (ii) reducing 
management fees through meaningful competition; (iii) reducing certain 
risks associated with investing in operating companies that are proxies 
for bitcoin exposure; and (iv) providing an alternative to custodying 
spot bitcoin.\29\
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    \29\ See id. at 29324.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act by addressing: In Section III.B.1 assertions that other means 
besides surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices; in Section III.B.2 
assertions that BZX has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to bitcoin; and in Section III.C assertions that the proposal is 
consistent with the protection of investors and the public interest.
    Based on its analysis, the Commission concludes that BZX has not 
established that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Commission further 
concludes that BZX has not established that it has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to bitcoin. As discussed further below, BZX repeats 
various assertions made in prior bitcoin-based ETP proposals that the 
Commission has previously addressed and rejected--and more importantly, 
BZX does not respond to the Commission's reasons for rejecting those 
assertions but merely repeats them. As a result, the Commission is 
unable to find that the proposed rule change is consistent with the 
statutory requirements of Exchange Act Section 6(b)(5).
    The Commission again emphasizes that its disapproval of this 
proposed rule change 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 below, BZX has not met 
its burden to demonstrate that its proposal is consistent with the 
requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\30\ the Exchange 
proposes to list and trade the Shares of the Trust under BZX Rule 
14.11(e)(4), which governs the listing and trading of Commodity-Based 
Trust Shares on the Exchange.
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    \30\ See Notice, supra note 3. See also draft Registration 
Statement on Form S-1, dated March 24, 2021, submitted to the 
Commission by the Sponsor on behalf of the Trust (``Registration 
Statement'').
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    The investment objective of the Trust is to seek to track the 
performance of bitcoin, as measured by the Fidelity Bitcoin Index PR 
(``Index''), adjusted for the Trust's expenses and other 
liabilities.\31\ Each Share will represent a fractional undivided 
beneficial interest in and ownership of the Trust. The Trust's assets 
will consist of bitcoin held by the Custodian on behalf of the Trust. 
The Trust generally does not intend to hold cash or cash equivalents. 
However, there may be situations where the Trust will unexpectedly hold 
cash on a temporary basis.\32\
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    \31\ FD Funds Management LLC (``Sponsor'') is the sponsor of the 
Trust, Delaware Trust Company is the trustee, and Fidelity Service 
Company, Inc. will be the administrator (``Administrator''). A 
third-party transfer agent will facilitate the issuance and 
redemption of Shares of the Trust, respond to correspondence by 
Trust shareholders and others relating to its duties, maintain 
shareholder accounts, and make periodic reports to the Trust. An 
affiliate of the Sponsor, Fidelity Distributors Corporation, will be 
the marketing agent in connection with the creation and redemption 
of ``baskets'' of Shares, and the Sponsor will provide assistance in 
the marketing of the Shares. Fidelity Digital Asset Services, LLC 
will serve as the Trust's custodian (``Custodian''). The Index 
methodology was developed by Fidelity Product Services, LLC (``Index 
Provider'') and is administered by the Fidelity Index Committee. 
Coin Metrics, Inc. is the third-party calculation agent for the 
Index. The Sponsor's affiliates have an ownership interest in Coin 
Metrics, Inc. See Notice, 86 FR at 29321, 29327 n.57, 29328-29, 
29329 n.63.
    \32\ See id. at 29328.
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    In seeking to achieve its investment objective, the Trust would 
hold bitcoin and value its Shares daily as of 4:00 p.m. E.T. using the 
same methodology used to calculate the Index. The Index is designed to 
reflect the performance of bitcoin in U.S. dollars and is calculated 
using bitcoin price feeds from eligible bitcoin spot platforms. The 
current platform composition of the Index is Bitstamp, Coinbase, 
Gemini, itBit, and Kraken. The Index market value would be the volume-
weighted median price of bitcoin in U.S. dollars over the previous

[[Page 5530]]

five minutes, which would be calculated by (1) ordering all individual 
transactions on eligible spot platforms over the previous five minutes 
by price, and then (2) selecting the price associated with the 50th 
percentile of total volume.\33\
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    \33\ See id. at 29329.
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    The net asset value (``NAV'') of the Trust is the total assets of 
the Trust including, but not limited to, all bitcoin and cash, if any, 
less total liabilities of the Trust, each determined on the basis of 
generally accepted accounting principles. The NAV per Share of the 
Trust would be calculated by taking the fair market value of its total 
assets based on the volume-weighted median price of bitcoin used for 
the calculation of the Index, subtracting any liabilities (which 
include accrued expenses), and dividing that total by the total number 
of outstanding Shares. The Administrator would calculate the NAV of the 
Trust once each Exchange trading day. The NAV for a normal trading day 
will be released after 4:00 p.m. E.T.\34\
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    \34\ See id. at 29329-30.
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    The Trust will provide information regarding the Trust's bitcoin 
holdings, as well as an Intraday Indicative Value (``IIV'') per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading 
Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during Regular Trading Hours to reflect changes in the value of 
the Trust's bitcoin holdings during the trading day.\35\
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    \35\ See id. at 29329.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of Shares. When creating the Shares, 
authorized participants will deliver, or facilitate the delivery of, 
bitcoin to the Trust's account with the Custodian in exchange for the 
Shares, and when redeeming the Shares, the Trust, through the 
Custodian, will deliver bitcoin to such authorized participants.\36\
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    \36\ See id. at 29328-29.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether BZX's proposal is consistent 
with the Exchange Act. Section 6(b)(5) of the Exchange Act 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.'' \37\ 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 thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \38\
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    \37\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), 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. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange 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; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \38\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    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,\39\ 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.\40\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\41\
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    \39\ See id.
    \40\ See id.
    \41\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is 
Designed To Prevent Fraudulent and Manipulative Acts and Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and 
Practices
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with a comprehensive surveillance-sharing agreement with a regulated 
market of significant size, including by demonstrating that the bitcoin 
market as a whole or the relevant underlying bitcoin market is uniquely 
and inherently resistant to fraud and manipulation.\42\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\43\
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    \42\ See USBT Order, 85 FR at 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \43\ See id. at 12597.
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    BZX asserts that bitcoin is resistant to price manipulation. 
According to BZX, the geographically diverse and continuous nature of 
bitcoin trading render it difficult and prohibitively costly to 
manipulate the price of bitcoin.\44\ Fragmentation across bitcoin 
platforms, the relatively slow speed of transactions, and the capital 
necessary to maintain a significant presence on each trading platform 
make manipulation of bitcoin prices through continuous trading activity 
challenging.\45\ To the extent that there are bitcoin platforms engaged 
in, or allowing, wash trading or other activity intended to manipulate 
the price of bitcoin on other markets, such pricing does not normally 
impact prices on other platforms because participants will generally 
ignore markets with quotes that they deem non-executable.\46\ BZX 
further argues that the linkage between the bitcoin markets and the 
presence of arbitrageurs in those markets means that the manipulation 
of the price of bitcoin on any single venue would require manipulation 
of the global bitcoin price in order to be effective.\47\ Arbitrageurs 
must have funds distributed across multiple trading platforms in order 
to take advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin trading venue.\48\ As a result, BZX concludes that 
``the potential for manipulation on a [bitcoin] trading platform would 
require overcoming the liquidity supply of such arbitrageurs

[[Page 5531]]

who are effectively eliminating any cross-market pricing differences.'' 
\49\
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    \44\ See Notice, 86 FR at 29327 n.51.
    \45\ See id.
    \46\ See id.
    \47\ See id.
    \48\ See id.
    \49\ See id.
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    As with the previous proposals, the Commission here concludes that 
the record does not support a finding that the bitcoin market is 
inherently and uniquely resistant to fraud and manipulation. BZX 
asserts that, because of how bitcoin trades occur, including through 
continuous means and through fragmented platforms, arbitrage across the 
bitcoin platforms essentially helps to keep global bitcoin prices 
aligned with one another, thus hindering manipulation. The Exchange, 
however, does not provide any data or analysis to support its 
assertions, either in terms of how closely bitcoin prices are aligned 
across different bitcoin trading venues or how quickly price 
disparities may be arbitraged away.\50\ As stated above, 
``unquestioning reliance'' on an SRO's representations in a proposed 
rule change is not sufficient to justify Commission approval of a 
proposed rule change.\51\
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    \50\ For example, the Registration Statement states that ``[a]s 
the use of digital asset networks increases without a corresponding 
increase in throughput of the networks, average fees and settlement 
times can increase significantly,'' and that such ``[i]ncreased fees 
and decreased settlement speeds . . . could adversely impact the 
value of the Shares.'' See Registration Statement at 15. BZX does 
not provide data or analysis to address, among other things, whether 
such risks of increased fees and bitcoin transaction settlement 
times may affect the arbitrage effectiveness that BZX asserts. See 
also infra note 64 and accompanying text (referencing statements 
made in the Registration Statement that contradict assertions made 
by BZX).
    \51\ See supra note 41.
---------------------------------------------------------------------------

    Efficient price arbitrage, moreover, is not sufficient to support 
the finding that a market is uniquely and inherently resistant to 
manipulation such that the Commission can dispense with surveillance-
sharing agreements.\52\ The Commission has stated, for example, that 
even for equity options based on securities listed on national 
securities exchanges, the Commission relies on surveillance-sharing 
agreements to detect and deter fraud and manipulation.\53\ Here, the 
Exchange provides no evidence to support its assertion of efficient 
price arbitrage across bitcoin platforms, let alone any evidence that 
price arbitrage in the bitcoin market is novel or unique so as to 
warrant the Commission dispensing with the requirement of a 
surveillance-sharing agreement. Moreover, BZX does not 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.\54\
---------------------------------------------------------------------------

    \52\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR 
at 16256-57; USBT Order, 85 FR at 12601.
    \53\ See, e.g., USBT Order, 85 FR at 12601.
    \54\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01.
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that bitcoin 
prices on platforms with wash trades or other activity intended to 
manipulate the price of bitcoin do not influence the ``real'' price of 
bitcoin. The Exchange also asserts that, to the extent that there are 
bitcoin platforms engaged in or allowing wash trading or other 
manipulative activities, market participants will generally ignore 
those platforms. However, without the necessary data or other evidence, 
the Commission has no basis on which to conclude that bitcoin platforms 
are insulated from prices of others that engage in or permit fraud or 
manipulation.\55\
---------------------------------------------------------------------------

    \55\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------

    Additionally, the continuous nature of bitcoin trading does not 
eliminate manipulation risk, and neither do linkages among markets, as 
BZX asserts.\56\ Even in the presence of continuous trading or linkages 
among markets, formal (such as those with consolidated quotations or 
routing requirements) or otherwise (such as in the context of the 
fragmented, global bitcoin markets), manipulation of asset prices, as a 
general matter, can occur simply through trading activity that creates 
a false impression of supply or demand.\57\
---------------------------------------------------------------------------

    \56\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying 
text.
    \57\ See id. at 37585.
---------------------------------------------------------------------------

    BZX also argues that the significant liquidity in the bitcoin spot 
market and the impact of market orders on the overall price of bitcoin 
mean that attempting to move the price of bitcoin is costly and has 
grown more expensive over the past year.\58\ According to BZX, in 
January 2020, for example, the cost to buy or sell $5 million worth of 
bitcoin averaged roughly 30 basis points (compared to 10 basis points 
in February 2021) with a market impact of 50 basis points (compared to 
30 basis points in February 2021). For a $10 million market order, the 
cost to buy or sell was roughly 50 basis points (compared to 20 basis 
points in February 2021) with a market impact of 80 basis points 
(compared to 50 basis points in February 2021). BZX contends that as 
the liquidity in the bitcoin spot market increases, it follows that the 
impact of $5 million and $10 million orders will continue to 
decrease.\59\
---------------------------------------------------------------------------

    \58\ See Notice, 86 FR at 29328.
    \59\ See id.
---------------------------------------------------------------------------

    However, the data furnished by BZX regarding the cost to move the 
price of bitcoin, and the market impact of such attempts, are 
incomplete. BZX does not provide meaningful analysis pertaining to how 
these figures compare to other markets or why one must conclude, based 
on the numbers provided, that the bitcoin market is costly to 
manipulate. Further, BZX's analysis of the market impact of a mere two 
sample transactions is not sufficient evidence to conclude that the 
bitcoin market is resistant to manipulation.\60\ Even assuming that the 
Commission agreed with BZX's premise, that it is costly to manipulate 
the bitcoin market and it is becoming increasingly so, any such 
evidence speaks only to establish that there is some resistance to 
manipulation, not that it establishes unique resistance to manipulation 
to warrant dispensing with the standard surveillance-sharing 
agreement.\61\ The Commission thus concludes that the record does not 
demonstrate that the nature of bitcoin trading renders the bitcoin 
market inherently and uniquely resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \60\ Aside from stating that the ``statistics are based on 
samples of bitcoin liquidity in USD (excluding stablecoins or Euro 
liquidity) based on executable quotes on Coinbase Pro, Gemini, 
Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during 
February 2021,'' the Exchange provides no other information 
pertaining to the methodology used to enable the Commission to 
evaluate these findings or their significance. See id. at 29328 
nn.58-59.
    \61\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------

    Moreover, BZX does not sufficiently contest the presence of 
possible sources of fraud and manipulation in the bitcoin spot market 
generally that the Commission has raised in previous orders, which have 
included (1) ``wash'' trading,\62\ (2) persons with a dominant position 
in bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin 
network and trading platforms, (4) malicious control of the bitcoin 
network, (5) trading based on material, non-public information, 
including the dissemination of false and misleading information, (6) 
manipulative activity involving the purported ``stablecoin'' Tether 
(``USDT''), and (7) fraud and manipulation at bitcoin trading 
platforms.\63\
---------------------------------------------------------------------------

    \62\ See supra note 55 and accompanying text.
    \63\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28, 
2019), available at https://ssrn.com/abstract=3195066 and published 
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
---------------------------------------------------------------------------

    In addition, BZX does not address risk factors specific to the 
bitcoin blockchain and bitcoin platforms, described in the Trust's 
Registration Statement, that undermine the argument that the bitcoin 
market is inherently resistant to fraud

[[Page 5532]]

and manipulation. For example, the Registration Statement acknowledges 
that ``[platforms] on which bitcoin trades are relatively new and 
largely unregulated, and, therefore, may be more exposed to fraud and 
security breaches than established, regulated exchanges for other 
financial assets or instruments''; that ``[o]ver the past several 
years, a number of bitcoin spot markets have been closed or faced 
issues due to fraud, failure, security breaches or governmental 
regulations''; that ``[t]he nature of the assets held at bitcoin spot 
markets makes them appealing targets for hackers and a number of 
bitcoin spot markets have been victims of cybercrimes'' and that ``[n]o 
bitcoin [platform] is immune from these risks''; that ``many [bitcoin] 
spot markets lack certain safeguards put in place by more traditional 
exchanges to enhance the stability of trading on the [platform]''; that 
``[a] lack of stability in the bitcoin spot markets, manipulation of 
bitcoin spot markets by customers and/or the closure or temporary 
shutdown of such [platforms] due to fraud, business failure, hackers or 
malware, or government-mandated regulation may reduce confidence in 
bitcoin generally and result in greater volatility in the market price 
of bitcoin and the Shares of the Trust'' and that such ``closure or 
temporary shutdown of a bitcoin spot market may impact the Trust's 
ability to determine the value of its bitcoin holdings or for the 
Trust's [a]uthorized [p]articipants to effectively arbitrage the 
Trust's Shares''; that ``[t]he potential consequences of a spot 
market's failure or failure to prevent market manipulation could 
adversely affect the value of the Shares''; that many spot markets and 
over-the-counter (``OTC'') market venues ``do not provide the public 
with significant information regarding their ownership structure, 
management teams, corporate practices or oversight of customer 
trading''; and that the bitcoin blockchain could be vulnerable to a 
``51% attack,'' in which a bad actor or actors that control a majority 
of the processing power dedicated to mining on the bitcoin network may 
be able to alter the bitcoin blockchain on which the bitcoin network 
and bitcoin transactions rely.'' \64\
---------------------------------------------------------------------------

    \64\ See Registration Statement at 3, 8-9, 13. See also 
Winklevoss Order, 83 FR at 37585.
---------------------------------------------------------------------------

    BZX also asserts that other means to prevent fraud and manipulation 
are sufficient to justify dispensing with the requisite surveillance-
sharing agreement. The Exchange mentions that the Index, which is used 
to value the Trust's bitcoin, is itself resistant to manipulation based 
on the Index's methodology, as described above.\65\ According to the 
Exchange, ``using rolling five-minute segments [to calculate the Index] 
means malicious actors would need to sustain efforts to manipulate the 
market over an extended period of time, or would need to replicate 
efforts multiple times across exchanges, potentially triggering 
review.'' \66\ The use of a median price reduces the ability of outlier 
prices to impact the NAV, as it systematically excludes those prices 
from the NAV calculation. The Exchange asserts that the use of a 
volume-weighted median (as opposed to a traditional median) serves as 
an additional protection against attempts to manipulate the NAV by 
executing a large number of low-dollar trades, because any manipulation 
attempt would have to involve a majority of global spot bitcoin volume 
in a three-minute window to have any influence on the NAV.\67\ Further, 
removing the highest and lowest prices further protects against 
attempts to manipulate the NAV, requiring bad actors to act on multiple 
exchanges at once to have any ability to influence the price.\68\
---------------------------------------------------------------------------

    \65\ See Notice, 86 FR at 29328.
    \66\ See id. at 29329. According to the Exchange, this extended 
period also supports authorized participant activity by capturing 
volume over a longer time period, rather than forcing authorized 
participants to mark an individual close or auction. See id.
    \67\ See id.
    \68\ See id.
---------------------------------------------------------------------------

    Simultaneously with the Exchange's assertions regarding the Index, 
the Exchange also states that, because the Trust will engage in in-kind 
creations and redemptions, the ``manipulability of the Index [is] 
significantly less important.'' \69\ The Exchange elaborates further 
that, ``because the Trust will not accept cash to buy bitcoin in order 
to create new shares or . . . be forced to sell bitcoin to pay cash for 
redeemed shares, the price that the Sponsor uses to value the Trust's 
bitcoin is not particularly important.'' \70\ According to BZX, when 
authorized participants create Shares with the Trust, they would need 
to deliver a certain number of bitcoin per share (regardless of the 
valuation used), and when they redeem with the Trust, they would 
similarly expect to receive a certain number of bitcoin per share.\71\ 
As such, BZX argues that even if the price used to value the Trust's 
bitcoin is manipulated, the ratio of bitcoin per Share does not change, 
and the Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value.\72\ 
This, according to BZX, not only mitigates the risk associated with 
potential manipulation, but also discourages and disincentivizes 
manipulation of the Index because there is little financial incentive 
to do so.\73\
---------------------------------------------------------------------------

    \69\ See id. at 29328.
    \70\ See id.
    \71\ See id.
    \72\ See id.
    \73\ See id.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the 
Commission can find no basis to conclude that BZX has articulated other 
means to prevent fraud and manipulation that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement.
    First, the record does not demonstrate that the proposed 
methodology for calculating the Index would make the proposed ETP 
resistant to fraud or manipulation such that a surveillance-sharing 
agreement with a regulated market of significant size is 
unnecessary.\74\ Specifically, the Exchange has not assessed the 
possible influence that spot platforms not included among the Index's 
constituent bitcoin platforms would have on bitcoin prices used to 
calculate the Index.\75\ As discussed above, the record does not 
establish that the broader bitcoin market is inherently and uniquely 
resistant to fraud and manipulation. Accordingly, to the extent that 
trading on other spot bitcoin platforms not directly used to calculate 
the Index affects prices on the Index's constituent bitcoin platforms, 
the characteristics of those other spot bitcoin platforms--where 
various kinds of fraud and manipulation from a variety of sources may 
be present and persist \76\--may affect whether the Index is resistant 
to manipulation.
---------------------------------------------------------------------------

    \74\ The Commission has previously considered and rejected 
similar arguments about the valuation of bitcoin according to a 
benchmark or reference price. See, e.g., SolidX Order, 82 FR at 
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at 
12599-601.
    \75\ As discussed above, the Commission has no basis on which to 
conclude that bitcoin platforms are insulated from prices of others 
that engage in or permit fraud or manipulation. See supra note 55 
and accompanying text.
    \76\ See supra note 64 and accompanying text (describing, among 
other things, the risks associated with spot bitcoin markets that 
are new and largely unregulated).
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the Index's methodology 
helps make the Index resistant to manipulation are contradicted by the 
Registration Statement's own statements. Specifically, the Registration 
Statement states that ``[s]pot markets on which bitcoin trades are 
relatively new and largely unregulated, and, therefore, may be more 
exposed to fraud and

[[Page 5533]]

security breaches than established, regulated exchanges for other 
financial assets or instruments''; that ``[o]ver the past several 
years, a number of bitcoin spot markets have been closed or faced 
issues due to fraud, failure, security breaches or governmental 
regulations''; and that ``[n]o bitcoin [platform] is immune from these 
risks'' \77\ Moreover, the Registration Statement specifically 
acknowledges that ``[p]ricing sources used by the Index are digital 
asset spot markets that facilitate the buying and selling of bitcoin 
and other digital assets'' and that ``[a]lthough many pricing sources 
refer to themselves as `exchanges,' they are not registered with, or 
supervised by, the SEC or CFTC and do not meet the regulatory standards 
of a national securities exchange or designated contract market.'' \78\ 
The Registration Statement further admits that ``[t]he Index is based 
on various inputs which include price data from various third-party 
bitcoin spot markets'' and [t]he Index Provider does not guarantee the 
validity of any of these inputs, which may be subject to technological 
error, manipulative activity, or fraudulent reporting from their 
initial source.'' \79\ The Registration Statement concludes that 
``[f]or these reasons, among others, purchases and sales of bitcoin may 
be subject to temporary distortions or other disruptions due to various 
factors . . . [which] could affect the price of bitcoin used in Index 
calculations and, therefore, could adversely affect the level of the 
Index.'' \80\
---------------------------------------------------------------------------

    \77\ See Registration Statement at 8.
    \78\ See id. at 25.
    \79\ See id.
    \80\ See id.
---------------------------------------------------------------------------

    The Index constituent bitcoin platforms are a subset of the spot 
bitcoin trading venues currently in existence. Although the Sponsor 
raises concerns regarding fraud and security of bitcoin platforms in 
the Registration Statement, the Exchange does not explain how or why 
such concerns are consistent with its assertion that the Index is 
resistant to fraud and manipulation. In addition, as described above, 
for purposes of calculating the Trust's NAV per Share, the Trust's 
holdings of bitcoin would be valued using the Index.\81\ Even though 
the Sponsor also raises concerns in the Registration Statement 
regarding manipulative activity and fraudulent reporting with respect 
to the inputs from the Index's constituent bitcoin platforms, the 
Exchange does not sufficiently explain how or why such concerns are 
consistent with its assertion that the Index methodology, and therefore 
the Trust's NAV calculation, is resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \81\ See Notice, 86 FR at 29329.
---------------------------------------------------------------------------

    Second, BZX has not shown that its proposed use of a volume-
weighted median price of bitcoin over time intervals of five minutes to 
calculate the Index market value would effectively be able to eliminate 
fraudulent or manipulative activity that is not transient. Fraud and 
manipulation in the bitcoin spot market could persist for a 
``significant duration.'' \82\ The Exchange does not connect the use of 
such partitions to the duration of the effects of fraudulently reported 
prices or other manipulative activity that may exist in the bitcoin 
spot market.\83\
---------------------------------------------------------------------------

    \82\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
    \83\ See WisdomTree Order, 86 FR at 69327.
---------------------------------------------------------------------------

    Third, the Exchange does not explain the significance of the 
Index's purported resistance to manipulation to the overall analysis of 
whether the proposal to list and trade the Shares is designed to 
prevent fraud and manipulation. Even assuming that the Exchange's 
argument is that, if the Index is resistant to manipulation, the 
Trust's NAV, and thereby the Shares as well, would be resistant to 
manipulation, the Exchange has not established in the record a basis 
for such conclusion. That assumption aside, the Commission notes that 
the Shares would trade at market-based prices in the secondary market, 
not at NAV, which then raises the question of the significance of the 
NAV calculation to the manipulation of the Shares.
    Fourth, the Exchange's arguments are contradictory. While arguing 
that the Index is resistant to manipulation, the Exchange 
simultaneously downplays the importance of the Index in light of the 
Trust's in-kind creation and redemption mechanism.\84\ The Exchange 
points out that the Trust will create and redeem Shares in-kind, not in 
cash, which renders the NAV calculation, and thereby the ability to 
manipulate NAV, ``significantly less important.'' \85\ In BZX's own 
words, the Trust will not accept cash to buy bitcoin in order to create 
shares or sell bitcoin to pay cash for redeemed shares, so the price 
that the Sponsor uses to value the Trust's bitcoin ``is not 
particularly important.'' \86\ If the Index that the Trust uses to 
value the Trust's bitcoin ``is not particularly important,'' it follows 
that the Index's resistance to manipulation is not material to the 
Shares' susceptibility to fraud and manipulation. As the Exchange does 
not address or provide any analysis with respect to these issues, the 
Commission cannot conclude that the Index aids in the determination 
that the proposal to list and trade the Shares is designed to prevent 
fraudulent and manipulative acts and practices.
---------------------------------------------------------------------------

    \84\ See supra notes 69-73 and accompanying text.
    \85\ See Notice, 86 FR at 29328 (``While the Sponsor believes 
that the Index which it uses to value the Trust's bitcoin is itself 
resistant to manipulation based on the methodology further described 
below, the fact that creations and redemptions are available in-kind 
makes the manipulability of the Index significantly less 
important.'').
    \86\ See id. (concluding that ``because the Trust will not 
accept cash to buy bitcoin in order to create new shares or, barring 
a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin 
is not particularly important.'').
---------------------------------------------------------------------------

    Finally, the Commission finds that BZX has not demonstrated that 
in-kind creations and redemptions provide the Shares with a unique 
resistance to manipulation. The Commission has previously addressed 
similar assertions.\87\ As the Commission stated before, in-kind 
creations and redemptions are a common feature of ETPs, and the 
Commission has not previously relied on the in-kind creation and 
redemption mechanism as a basis for excusing exchanges that list ETPs 
from entering into surveillance-sharing agreements with significant, 
regulated markets related to the portfolio's assets.\88\ Accordingly, 
the Commission is not persuaded here that the Trust's in-kind creations 
and redemptions afford it a unique resistance to manipulation.\89\
---------------------------------------------------------------------------

    \87\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08.
    \88\ See, e.g., iShares COMEX Gold Trust, Securities Exchange 
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26, 
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange 
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24, 
2006) (SR-Amex-2005-072).
    \89\ Putting aside the Exchange's various assertions about the 
nature of bitcoin and the bitcoin market, the Index, and the Shares, 
the Exchange also does not address concerns the Commission has 
previously identified, including the susceptibility of bitcoin 
markets to potential trading on material, non-public information 
(such as plans of market participants to significantly increase or 
decrease their holdings in bitcoin; new sources of demand for 
bitcoin; the decision of a bitcoin-based investment vehicle on how 
to respond to a ``fork'' in the bitcoin blockchain, which would 
create two different, non-interchangeable types of bitcoin), or to 
the dissemination of false or misleading information. See Winklevoss 
Order, 83 FR at 37585. See also USBT Order, 85 FR at 12600-01.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size
    As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and 
manipulative acts and practices, the Commission next examines whether 
the record supports the conclusion that BZX has entered into a 
comprehensive surveillance-

[[Page 5534]]

sharing agreement with a regulated market of significant size relating 
to the underlying assets. In this context, the term ``market of 
significant size'' includes a market (or group of markets) as to which 
(i) 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 in detecting and deterring misconduct, and (ii) 
it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\90\
---------------------------------------------------------------------------

    \90\ See Winklevoss Order, 83 FR at 37594. 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 provides guidance to market 
participants. See id.
---------------------------------------------------------------------------

    As the Commission has stated in the past, it considers two markets 
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate 
bilateral surveillance-sharing agreement.\91\ Accordingly, based on the 
common membership of BZX and the CME in the ISG,\92\ BZX has the 
equivalent of a comprehensive surveillance-sharing agreement with the 
CME. However, while the Commission recognizes that the CFTC regulates 
the CME futures market,\93\ including the CME bitcoin futures market, 
and thus such market is ``regulated,'' in the context of the proposed 
ETP, the record does not, as explained further below, establish that 
the CME bitcoin futures market is a ``market of significant size'' as 
that term is used in the context of the applicable standard here.\94\
---------------------------------------------------------------------------

    \91\ See id. at 37580 n.19.
    \92\ See Notice, 86 FR at 29327 n.54 and accompanying text.
    \93\ While the Commission recognizes that the CFTC regulates the 
CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying bitcoin spot market. See Winklevoss 
Order, 83 FR at 37587, 37599.
    \94\ In the context of the proposed ETP, the Index's constituent 
bitcoin platforms are not ``regulated.'' They are not registered as 
``exchanges'' and lack the obligations, authority, and oversight of 
national securities exchanges. Thus, the Commission limits the scope 
of its analysis to the CME. See WisdomTree Order, 86 FR at 69330 
n.119.
---------------------------------------------------------------------------

(i) Whether There is a Reasonable Likelihood That a Person Attempting 
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin 
Futures Market To Successfully Manipulate the ETP
(a) Assertions by BZX
    The first prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' is the 
determination that there is a reasonable likelihood that a person 
attempting to manipulate the ETP would have to trade on the CME bitcoin 
futures market to successfully manipulate the ETP.
    BZX notes that the CME began to offer trading in bitcoin futures in 
2017.\95\ According to BZX, nearly every measurable metric related to 
CME bitcoin futures contracts, which trade and settle like other cash-
settled commodity futures contracts, has ``trended consistently up 
since launch and/or accelerated upward in the past year.'' \96\ For 
example, according to BZX, there was approximately $28 billion in 
trading in CME bitcoin futures in December 2020 compared to $737 
million, $1.4 billion, and $3.9 billion in total trading in December 
2017, December 2018, and December 2019, respectively.\97\ Additionally, 
CME bitcoin futures traded over $1.2 billion per day in December 2020 
and represented $1.6 billion in open interest compared to $115 million 
in December 2019.\98\ Similarly, BZX contends that the number of large 
open interest holders \99\ has continued to increase, even as the price 
of bitcoin has risen, as have the number of unique accounts trading CME 
bitcoin futures.\100\ In addition, the Sponsor, in a separate 
submission to the Commission, represents that ``[b]etween Q1 2019 & Q2 
2021, quarterly CME bitcoin futures volume grew more than 20x.'' \101\
---------------------------------------------------------------------------

    \95\ According to BZX, each contract represents five bitcoin and 
is based on the CME CF Bitcoin Reference Rate. See Notice, 86 FR at 
29325.
    \96\ See id.
    \97\ See id.
    \98\ See id.
    \99\ BZX represents that a large open interest holder in CME 
bitcoin futures is an entity that holds at least 25 contracts, which 
is the equivalent of 125 bitcoin. According to BZX, at a price of 
approximately $30,000 per bitcoin on December 31, 2020, more than 80 
firms had outstanding positions of greater than $3.8 million in CME 
bitcoin futures. See id. at 29325 n.47.
    \100\ See id. at 29325.
    \101\ See Submission by the Sponsor to the Commission in 
connection with a meeting between representatives of the Sponsor, 
BZX, and Commission staff on September 8, 2021, (``Sponsor 
Submission'') at 4, available at: https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf.
---------------------------------------------------------------------------

    BZX argues that the significant growth in CME bitcoin futures 
across each of trading volumes, open interest, large open interest 
holders, and total market participants since the USBT Order was issued 
is reflective of that market's growing influence on the spot price. BZX 
asserts that where CME bitcoin futures lead the price in the spot 
market such that a potential manipulator of the bitcoin spot market 
(beyond just the Index's constituent bitcoin platforms) would have to 
participate in the CME bitcoin futures market, it follows that a 
potential manipulator of the Shares would similarly have to transact in 
the CME bitcoin futures market.\102\
---------------------------------------------------------------------------

    \102\ See Notice, 86 FR at 29327.
---------------------------------------------------------------------------

    BZX further states that academic research corroborates the overall 
trend outlined above and supports the thesis that CME bitcoin futures 
pricing leads the spot market. BZX asserts that academic research 
demonstrates that the CME bitcoin futures market was already leading 
the spot price in 2018 and 2019.\103\ BZX concludes that a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP.\104\
---------------------------------------------------------------------------

    \103\ See id. at 29327 & n.48 (citing Y. Hu, Y. Hou & L. Oxley, 
What role do futures markets play in Bitcoin pricing? Causality, 
cointegration and price discovery from a time-varying perspective, 
72 Int'l Rev. of Fin. Analysis 101569 (2020) (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu, Hou & 
Oxley'')).
    \104\ See id. at 29327.
---------------------------------------------------------------------------

    The Commission disagrees. The record does not demonstrate that 
there is a reasonable likelihood that a person attempting to manipulate 
the proposed ETP would have to trade on the CME bitcoin futures market 
to successfully manipulate it. Specifically, BZX's assertions about the 
general upward trends from 2018 to February 2021 in trading volume and 
open interest of, and in the number of large open interest holders and 
number of unique accounts trading in, CME bitcoin futures, as well as 
the Sponsor's assertions about the growth in quarterly CME bitcoin 
futures volume from 2019 to 2021, do not establish that the CME bitcoin 
futures market is of significant size. While BZX provides data showing 
absolute growth in the size of the CME bitcoin futures market, it 
provides no data relative to the concomitant growth in either the 
bitcoin spot markets or other bitcoin futures markets (including 
unregulated futures markets). Moreover, even if the CME has grown in 
relative size, as the Commission has previously articulated, the 
interpretation of the term ``market of significant size'' or 
``significant market'' depends on the interrelationship between the 
market with which the listing exchange has a surveillance-sharing 
agreement and the proposed ETP.\105\ BZX's recitation of data 
reflecting the size of the CME bitcoin futures market, alone, either 
currently or in relation to previous years, is not sufficient to 
establish an interrelationship between the CME

[[Page 5535]]

bitcoin futures market and the proposed ETP.\106\
---------------------------------------------------------------------------

    \105\ See USBT Order, 85 FR at 12611.
    \106\ See id. at 12612.
---------------------------------------------------------------------------

    Further, the econometric evidence in the record for this proposal 
also does not support a conclusion that an interrelationship exists 
between the CME bitcoin futures market and the bitcoin spot market such 
that it is reasonably likely that a person attempting to manipulate the 
proposed ETP would also have to trade on the CME bitcoin futures market 
to successfully manipulate the proposed ETP.\107\ While BZX states that 
CME bitcoin futures pricing leads the spot market,\108\ it relies on 
the findings of a price discovery analysis in one section of a single 
academic paper to support the overall thesis.\109\ However, the 
findings of that paper's Granger causality analysis, which is widely 
used to formally test for lead-lag relationships, are concededly 
mixed.\110\ In addition, the Commission considered an unpublished 
version of the paper in the USBT Order, as well as a comment letter 
submitted by the authors on that record.\111\ In the USBT Order, as 
part of the Commission's conclusion that ``mixed results'' in academic 
studies failed to demonstrate that the CME bitcoin futures market 
constitutes a market of significant size, the Commission noted the 
paper's inconclusive evidence that CME bitcoin futures prices lead spot 
prices--in particular that the months at the end of the paper's sample 
period showed that the spot market was the leading market--and stated 
that the record did not include evidence to explain why this would not 
indicate a shift towards prices in the spot market leading the futures 
market that would be expected to persist into the future.\112\ The 
Commission also stated that the paper's use of daily price data, as 
opposed to intraday prices, may not be able to distinguish which market 
incorporates new information faster.\113\ BZX has not addressed either 
issue.
---------------------------------------------------------------------------

    \107\ See id. at 12611. Listing exchanges have attempted to 
demonstrate such an ``interrelationship'' by presenting the results 
of various econometric ``lead-lag'' analyses. The Commission 
considers such analyses to be central to understanding whether it is 
reasonably likely that a would-be manipulator of the ETP would need 
to trade on the CME bitcoin futures market. See id. at 12612.
    \108\ See Notice, 86 FR at 29327.
    \109\ See supra note 103 and accompanying text. BZX references 
the following conclusion from the ``time-varying price discovery'' 
section of Hu, Hou & Oxley: ``There exist no episodes where the 
Bitcoin spot markets dominates the price discovery processes with 
regard to Bitcoin futures. This points to a conclusion that the 
price formation originates solely in the Bitcoin futures market. We 
can, therefore, conclude that the Bitcoin futures markets dominate 
the dynamic price discovery process based upon time-varying 
information share measures. Overall, price discovery seems to occur 
in the Bitcoin futures markets rather than the underlying spot 
market based upon a time-varying perspective . . .'' See Notice, 86 
FR at 29327 n.48.
    \110\ The paper finds that the CME bitcoin futures market 
dominates the spot markets in terms of Granger causality, but that 
the causal relationship is bi-directional, and a Granger causality 
episode from March 2019 to June/July 2019 runs from bitcoin spot 
prices to CME bitcoin futures prices. The paper concludes: ``[T]he 
Granger causality episodes are not constant throughout the whole 
sample period. Via our causality detection methods, market 
participants can identify when markets are being led by futures 
prices and when they might not be.'' See Hu, Hou & Oxley, supra note 
103.
    \111\ See USBT Order, 85 FR at 12609.
    \112\ See id. at 12613 n.244.
    \113\ See id.
---------------------------------------------------------------------------

    Moreover, BZX does not provide results of its own analysis and does 
not present any other data supporting its conclusion. BZX's unsupported 
representations constitute an insufficient basis for approving a 
proposed rule change in circumstances where, as here, the Exchange's 
assertion would form such an integral role in the Commission's analysis 
and the assertion is subject to several challenges.\114\ In this 
context, BZX's reliance on a single paper, whose own lead-lag results 
are inconclusive, is especially lacking because the academic literature 
on the lead-lag relationship and price discovery between bitcoin spot 
and futures markets is unsettled.\115\ In the USBT Order, the 
Commission responded to multiple academic papers that were cited and 
concluded that, in light of the mixed results found, the exchange there 
had not demonstrated that it is reasonably likely that a would-be 
manipulator of the proposed ETP would transact on the CME bitcoin 
futures market.\116\ Likewise, here, given the body of academic 
literature to indicate to the contrary, the Commission concludes that 
the information that BZX provides is not a sufficient basis to support 
a determination that it is reasonably likely that a would-be 
manipulator of the proposed ETP would have to trade on the CME bitcoin 
futures market.\117\
---------------------------------------------------------------------------

    \114\ See Susquehanna, 866 F.3d at 447.
    \115\ See, e.g., D. Baur & T. Dimpfl, Price discovery in bitcoin 
spot or futures?, 39 J. Futures Mkts. 803 (2019) (finding that the 
bitcoin spot market leads price discovery); O. Entrop, B. Frijns & 
M. Seruset, The determinants of price discovery on bitcoin markets, 
40 J. Futures Mkts. 816 (2020) (finding that price discovery 
measures vary significantly over time without one market being 
clearly dominant over the other); J. Hung, H. Liu & J. Yang, Trading 
activity and price discovery in Bitcoin futures markets, 62 J. 
Empirical Finance 107 (2021) (finding that the bitcoin spot market 
dominates price discovery); B. Kapar & J. Olmo, An analysis of price 
discovery between Bitcoin futures and spot markets, 174 Econ. 
Letters 62 (2019) (finding that bitcoin futures dominate price 
discovery) (``Kapar & Olmo''); E. Akyildirim, S. Corbet, P. 
Katsiampa, N. Kellard & A. Sensoy, The development of Bitcoin 
futures: Exploring the interactions between cryptocurrency 
derivatives, 34 Fin. Res. Letters 101234 (2020) (finding that 
bitcoin futures dominate price discovery); A. Fassas, S. Papadamou, 
& A. Koulis, Price discovery in bitcoin futures, 52 Res. Int'l Bus. 
Fin. 101116 (2020) (finding that bitcoin futures play a more 
important role in price discovery) (``Fassas et al''); S. Aleti & B. 
Mizrach, Bitcoin spot and futures market microstructure, 41 J. 
Futures Mkts. 194 (2021) (finding that relatively more price 
discovery occurs on the CME as compared to four spot exchanges); J. 
Wu, K. Xu, X. Zheng & J. Chen, Fractional cointegration in bitcoin 
spot and futures markets, 41 J. Futures Mkts. 1478 (2021) (finding 
that CME bitcoin futures dominate price discovery). See also C. 
Alexander & D. Heck, Price discovery in Bitcoin: The impact of 
unregulated markets, 50 J. Financial Stability 100776 (2020) 
(finding that, in a multi-dimensional setting, including the main 
price leaders within futures, perpetuals, and spot markets, CME 
bitcoin futures have a very minor effect on price discovery; and 
that faster speed of adjustment and information absorption occurs on 
the unregulated spot and derivatives platforms than on CME bitcoin 
futures) (``Alexander & Heck'').
    \116\ See USBT Order, 85 FR at 12613 nn.239-244 and accompanying 
text.
    \117\ In addition, the Exchange fails to address the 
relationship (if any) between prices on other bitcoin futures 
markets and the CME bitcoin futures market, the bitcoin spot market, 
and/or the particular Index constituent bitcoin platforms, or where 
price formation occurs when the entirety of bitcoin futures markets, 
not just the CME, is considered.
---------------------------------------------------------------------------

(b) Sponsor Submission
    While BZX does not provide in its filing results of its own 
analysis nor presents any other data to support its conclusion that CME 
bitcoin futures pricing leads the spot market, the Sponsor in the 
Sponsor Submission provides information to show that the CME bitcoin 
futures market leads price discovery across global USD and USDT bitcoin 
futures and spot markets. The Sponsor states that its findings are 
based on tick level trade data aggregated in one-second intervals for 
USD and USDT bitcoin spot and futures prices from Coin Metrics spanning 
January 1, 2019, to March 31, 2021. According to the Sponsor, the data 
for futures includes both ordinary and perpetual futures. The Sponsor 
explains that its dataset is limited to BTC-USD and BTC-USDT trades to 
exclude any impact caused by exchange rate movements.
    With respect to whether the CME bitcoin futures market leads the 
spot markets or vice versa, the Sponsor concedes that ``conclusions are 
mixed.'' The Sponsor attributes the lack of agreement to the use of 
classic metrics derived from the Vector Error Correction Model 
(``VECM''), which it states likely involves ``substantial imputation'' 
when used with data sets such as CME bitcoin futures trading data. This 
imputation,

[[Page 5536]]

the Sponsor argues, ``can produce biased results.'' \118\
---------------------------------------------------------------------------

    \118\ See Sponsor Submission at 8. The Sponsor states that prior 
lead-lag studies employ methods that assume that the prices/returns 
under consideration are synchronous and so adjustments need to be 
made for non-synchronous and/or infrequent data. According to the 
Sponsor, adjustments such as imputation or synchronous sampling can 
lead to ``spurious results'' for these methods. See id. at 19.
---------------------------------------------------------------------------

    In contrast, the Sponsor argues that its analysis accounts for the 
characteristics of CME bitcoin futures trading data by applying the 
Hayashi-Yoshida (``HY'') estimator. According to the Sponsor, the use 
of the HY estimator is more suitable for ``disparate and infrequent 
data,'' as it is free from imputation, and it has also previously 
proven useful in price discovery research, including bitcoin spot 
markets.\119\ Based on its analysis, the Sponsor argues that the 
results demonstrate that the CME bitcoin futures market has 
consistently led bitcoin price discovery across global USD bitcoin 
markets.\120\ As a result of its study, the Sponsor concludes that 
there is a reasonable likelihood that a person attempting to manipulate 
the ETP would have to trade in the CME bitcoin futures market because: 
(1) The CME bitcoin futures market leads in bitcoin price discovery 
across USD-based trading in bitcoin futures and spot markets globally; 
and (2) arbitrage between the CME bitcoin futures market and spot 
markets would tend to counter an attempt to manipulate the spot market 
alone.\121\
---------------------------------------------------------------------------

    \119\ See id. at 8. The Sponsor further explains that, due to 
the ``high sparsity'' of CME futures data, the framework of 
correlation-based lead-lag analysis using the HY estimator is more 
suitable because this approach is free from any imputation or 
sampling and has proven useful in price discovery research. See id. 
at 19.
    \120\ See id. at 9.
    \121\ See id. at 7.
---------------------------------------------------------------------------

    The Sponsor Submission does not provide sufficient evidence for the 
Commission to conclude that it is reasonably likely that a would-be 
manipulator of the proposed ETP would have to trade on the CME bitcoin 
futures market to successfully manipulate the proposed ETP. By applying 
its selected analytical method, the Sponsor presents conclusory results 
that suggest that CME bitcoin futures lead price discovery. Even if the 
Commission were to accept these results at face value, the Sponsor has 
not demonstrated that other analyses that reached different and 
opposite conclusions were, in fact, ``spurious'' results, or otherwise 
were results on which the Commission cannot reasonably rely. In fact, 
the Sponsor highlights that in the academic literature, ``conclusions 
are mixed'' on the lead-lag relationship between bitcoin spot and 
futures markets. Namely, there are analytical methodologies that lead 
to the conclusion that the spot market price leads the CME futures 
price, those that conclude that the CME futures price leads the spot 
market price, as well as those that conclude that unregulated futures 
markets lead the CME futures market in price discovery.\122\ While the 
Sponsor dismisses the validity of these other results due to the 
theoretical possibility that imputation or synchronous sampling can 
lead to spurious or unreliable results, it does not provide any detail 
to support that any of the other results are actually inaccurate.
---------------------------------------------------------------------------

    \122\ The Sponsor points to Kapar & Olmo and Fassas et al. as 
results that suggest that CME futures lead the spot markets, and to 
Alexander & Heck as results that suggest that CME futures lag. See 
id. at 8. See also supra note 115.
---------------------------------------------------------------------------

    Moreover, the Commission cannot accept the Sponsor's results at 
face value based on the extent of the information it provides. While 
the Sponsor provides in graphs aggregate average ``lead'' times (in 
seconds) that suggest that the CME futures market has the largest 
``lead'' in each quarter of the sample period, the Sponsor does not 
provide the specific results of each of its pairwise assessments (e.g., 
CME compared to Coinbase; CME compared to Gemini; etc.) or--crucially--
the Sponsor's confidence intervals around each such pairwise result. 
Provision of pairwise results and confidence intervals is common in the 
academic literature that the Sponsor itself cites in the Sponsor 
Submission.\123\ The Commission is thus unable to assess the Sponsor's 
specific results or statistical significance of those results. 
Confidence intervals are particularly important, given that the 
Sponsor's results show that the ``lead'' of the CME bitcoin futures 
market has steadily decreased over the sample period to within about 
one second of ``lead'' time, which is the tick data aggregation 
interval for the study, and to below one second compared to the leading 
non-regulated USD bitcoin futures market. The Sponsor also has not 
discussed whether its findings are sensitive to its choice to aggregate 
tick level trade data into one-second intervals, particularly as the 
estimated ``lead'' times decrease over the sample period; or whether 
the Sponsor's critique of other studies--that imputation or synchronous 
sampling can lead to ``spurious'' or otherwise unreliable results--
applies to its findings as well because of the aggregation that the 
Sponsor used. Further, the Sponsor has not discussed the robustness of 
its two-dimensional methodology--which examines pairwise lead-lag 
relationships within and across the bitcoin spot and futures markets--
to the critique in the multi-dimensional Alexander & Heck study that: 
``omitting substantial information flows from other markets can produce 
misleading results . . . . [I]n a two-dimensional model one or other of 
the instruments must necessarily be identified as price leader.'' \124\
---------------------------------------------------------------------------

    \123\ See, e.g., Sponsor Submission (citing B. Schei, High 
Frequency Lead-Lag Relationships in the Bitcoin Market, Copenhagen 
Business School Master's Thesis (2019) (unpublished)).
    \124\ See Alexander & Heck, supra note 115, at 2.
---------------------------------------------------------------------------

    The Commission accordingly concludes that the information provided 
in the record for this proposal does not establish a reasonable 
likelihood that a would-be manipulator of the proposed ETP would have 
to trade on the CME bitcoin futures market to successfully manipulate 
the proposed ETP. Therefore, the information in the record also does 
not establish that the CME bitcoin futures market is a ``market of 
significant size'' with respect to the proposed ETP.
(ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be 
the Predominant Influence on Prices in the CME Bitcoin Futures Market
    The second prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' is the 
determination that it is unlikely that trading in the proposed ETP 
would be the predominant influence on prices in the CME bitcoin futures 
market.\125\
---------------------------------------------------------------------------

    \125\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

    BZX asserts that trading in the Shares would not be the predominant 
force on prices in the CME bitcoin futures market (or spot market) 
because of the significant volume in the CME bitcoin futures market, 
the size of bitcoin's market capitalization, which is approximately $1 
trillion, and the significant liquidity available in the spot 
market.\126\ BZX provides that, according to February 2021 data, the 
cost to buy or sell $5 million worth of bitcoin averages roughly 10 
basis points with a market impact of 30 basis points.\127\ For a $10 
million market order, the cost to buy or sell is roughly 20 basis 
points with a market impact of 50 basis points. Stated another way, BZX 
states that a market participant could enter a market

[[Page 5537]]

buy or sell order for $10 million of bitcoin and only move the market 
0.5 percent.\128\ BZX further asserts that more strategic purchases or 
sales (such as using limit orders and executing through OTC bitcoin 
trade desks) would likely have less obvious impact on the market, which 
is consistent with MicroStrategy, Tesla, and Square being able to 
collectively purchase billions of dollars in bitcoin.\129\ Thus, BZX 
concludes that the combination of CME bitcoin futures leading price 
discovery, the overall size of the bitcoin market, and the ability for 
market participants (including authorized participants creating and 
redeeming with the Trust) to buy or sell large amounts of bitcoin 
without significant market impact, will help prevent the Shares from 
becoming the predominant force on pricing in either the bitcoin spot or 
the CME bitcoin futures market.\130\
---------------------------------------------------------------------------

    \126\ See Notice, 86 FR at 29328.
    \127\ See id. According to BZX, these statistics are based on 
samples of bitcoin liquidity in U.S. dollars (excluding stablecoins 
or Euro liquidity) based on executable quotes on Coinbase Pro, 
Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin 
during February 2021. See id. nn.58-59.
    \128\ See id. at 29328.
    \129\ See id.
    \130\ See id.
---------------------------------------------------------------------------

    In its submission, the Sponsor similarly argues that the CME 
futures market-leading price discovery across USD-based bitcoin trading 
markets, as well as its aggregate significant trading volume and 
liquidity, make it unlikely that trading in a bitcoin ETP would be the 
predominant influence on prices in CME bitcoin futures.\131\ 
Specifically, the Sponsor concludes that it is unlikely that trading in 
a bitcoin ETP would be the predominant influence on CME bitcoin futures 
market or bitcoin spot prices because of: (1) The CME bitcoin futures 
market leading in bitcoin price discovery across USD-based trading in 
bitcoin futures and spot markets globally; (2) significant trading 
volume in USD-based bitcoin futures; and (3) the highly liquid bitcoin 
spot market.\132\
---------------------------------------------------------------------------

    \131\ See Sponsor Submission at 7.
    \132\ See id. The Sponsor states that bitcoin trading volume and 
market capitalization has continued to grow (2019 Q1-2021 Q2), see 
Sponsor Submission at 10, and that spot trading costs and market 
impact have decreased over the last year (January 2020-February 
2021), see id.
---------------------------------------------------------------------------

    The Commission does not agree. The record does not demonstrate that 
it is unlikely that trading in the proposed ETP would be the 
predominant influence on prices in the CME bitcoin futures market. As 
the Commission has already addressed and rejected one of the bases of 
BZX's and the Sponsor's assertions--that CME bitcoin futures leads 
price discovery \133\--the Commission will only address below the other 
bases--the overall size, volume, and liquidity of, and the impact of 
buys and sells on, the CME bitcoin futures market and spot bitcoin 
market.
---------------------------------------------------------------------------

    \133\ See supra notes 107-124 and accompanying text.
---------------------------------------------------------------------------

    BZX's and the Sponsor's assertions about the potential effect of 
trading in the Shares on the CME bitcoin futures market and bitcoin 
spot market are general and conclusory, repeating the aforementioned 
trade volume of the CME bitcoin futures market and the size and 
liquidity of the bitcoin spot market, as well as the market impact of a 
large transaction, without any analysis or evidence to support these 
assertions. For example, there is no limit on the amount of mined 
bitcoin that the Trust may hold. Yet BZX does not provide any 
information on the expected growth in the size of the Trust and the 
resultant increase in the amount of bitcoin held by the Trust over 
time, or on the overall expected number, size, and frequency of 
creations and redemptions--or how any of the foregoing could (if at 
all) influence prices in the CME bitcoin futures market. Thus, the 
Commission cannot conclude, based on BZX's and the Sponsor's statements 
alone and absent any evidence or analysis in support of BZX's and the 
Sponsor's assertions, that it is unlikely that trading in the ETP would 
be the predominant influence on prices in the CME bitcoin futures 
market.
    The Commission also is not persuaded by BZX's assertions about the 
minimal effect a large market order to buy or sell bitcoin would have 
on the bitcoin market.\134\ While BZX concludes by way of a $10 million 
market order example that buying or selling large amounts of bitcoin 
would have insignificant market impact, the conclusion does not analyze 
the extent of any impact on the CME bitcoin futures market. Even 
assuming that BZX is suggesting that a single $10 million order in 
bitcoin would have immaterial impact on the prices in the CME bitcoin 
futures market, this prong of the ``market of significant size'' 
determination concerns the influence on prices from trading in the 
proposed ETP, which is broader than just trading by the proposed ETP. 
While authorized participants of the Trust might only transact in the 
bitcoin spot market as part of their creation or redemption of Shares, 
the Shares themselves would be traded in the secondary market on BZX. 
The record does not discuss the expected number or trading volume of 
the Shares, or establish the potential effect of the Shares' trade 
prices on CME bitcoin futures prices. For example, BZX does not provide 
any data or analysis about the potential effect the quotations or trade 
prices of the Shares might have on market-maker quotations in CME 
bitcoin futures contracts and whether those effects would constitute a 
predominant influence on the prices of those futures contracts.
---------------------------------------------------------------------------

    \134\ See Notice, 86 FR at 29328 (``For a $10 million market 
order, the cost to buy or sell is roughly 20 basis points with a 
market impact of 50 basis points. Stated another way, a market 
participant could enter a market buy or sell order for $10 million 
of bitcoin and only move the market 0.5%.'').
---------------------------------------------------------------------------

    Thus, because BZX and the Sponsor have not provided sufficient 
information to establish both prongs of the ``market of significant 
size'' determination, the Commission cannot conclude that the CME 
bitcoin futures market is a ``market of significant size'' such that 
BZX would be able to rely on a surveillance-sharing agreement with the 
CME to provide sufficient protection against fraudulent and 
manipulative acts and practices.
    The requirements of Section 6(b)(5) of the Exchange Act apply to 
the rules of national securities exchanges. Accordingly, the relevant 
obligation for a comprehensive surveillance-sharing agreement with a 
regulated market of significant size, or other means to prevent 
fraudulent and manipulative acts and practices that are sufficient to 
justify dispensing with the requisite surveillance-sharing agreement, 
resides with the listing exchange. Because there is insufficient 
evidence in the record demonstrating that BZX has satisfied this 
obligation, the Commission cannot approve the proposed ETP for listing 
and trading on BZX.

C. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is 
Designed To Protect Investors and the Public Interest

    BZX contends that, if approved, the proposed ETP would protect 
investors and the public interest. However, the Commission must 
consider these potential benefits in the broader context of whether the 
proposal meets each of the applicable requirements of the Exchange 
Act.\135\ 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.
---------------------------------------------------------------------------

    \135\ See Winklevoss Order, 83 FR at 37602. See also 
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at 
43941; USBT Order, 85 FR at 12615.
---------------------------------------------------------------------------

    BZX asserts that, with the growth of U.S. investor exposure to 
bitcoin through OTC bitcoin funds, so too has grown the potential risk 
to U.S. investors.\136\ Specifically, BZX argues that premium and 
discount volatility, high fees, insufficient disclosures, and

[[Page 5538]]

technical hurdles are putting U.S. investor money at risk on a daily 
basis and that such risk could potentially be eliminated through access 
to a bitcoin ETP.\137\ As such, the Exchange believes that approving 
this proposal (and comparable proposals submitted hereafter) would give 
U.S. investors access to bitcoin in a regulated and transparent 
exchange-traded vehicle that would act to limit risk to U.S. investors 
by: (i) Reducing premium and discount volatility; (ii) reducing 
management fees through meaningful competition; (iii) providing an 
alternative to custodying spot bitcoin; and (iv) reducing certain risks 
associated with investing in operating companies that are proxies for 
bitcoin exposure.\138\
---------------------------------------------------------------------------

    \136\ See Notice, 86 FR at 29331.
    \137\ See id.
    \138\ See id. at 29324.
---------------------------------------------------------------------------

    According to BZX, OTC bitcoin funds are generally designed to 
provide exposure to bitcoin in a manner similar to the Shares. However, 
unlike the Shares, BZX states that ``OTC bitcoin funds are unable to 
freely offer creation and redemption in a way that incentivizes market 
participants to keep their shares trading in line with their NAV and, 
as such, frequently trade at a price that is out of line with the value 
of their assets held.'' \139\ BZX represents that, historically, OTC 
bitcoin funds have traded at significant premiums or discounts compared 
to their NAV.\140\ BZX argues that, in contrast, a bitcoin ETP would 
provide an alternative to OTC bitcoin funds offering investors access 
to direct bitcoin exposure with real time trading and transparency on 
pricing/valuation, liquidity, and active arbitrage--advantages of the 
ETP structure.\141\ One commenter expresses support for the approval of 
bitcoin ETPs because they believe such ETPs would have lower premium/
discount volatility and lower management fees than an OTC bitcoin 
fund.\142\
---------------------------------------------------------------------------

    \139\ See id. BZX also states that, unlike the Shares, because 
OTC bitcoin funds are not listed on an exchange, they are not 
subject to the same transparency and regulatory oversight by a 
listing exchange. BZX further asserts that the existence of a 
surveillance-sharing agreement between BZX and the CME bitcoin 
futures market would result in increased investor protections for 
the Shares compared to OTC bitcoin funds. See id. at 29324 n.39.
    \140\ See id. at 29324.
    \141\ See id.
    \142\ See letter from Anonymous, dated June 17, 2021 
(``Anonymous Letter'').
---------------------------------------------------------------------------

    BZX also asserts that exposure to bitcoin through an ETP also 
presents advantages for investors compared to buying spot bitcoin 
directly.\143\ BZX asserts that, without the advantages of an ETP, an 
investor holding bitcoin through a cryptocurrency trading platform 
lacks protections.\144\ BZX explains that, typically, OTC trading 
platforms hold most, if not all, investors' bitcoin in ``hot'' 
(internet-connected) storage and do not make any commitments to 
indemnify investors or to observe any particular cybersecurity 
standard.\145\ Meanwhile, an investor holding spot bitcoin directly in 
a self-hosted wallet may suffer from inexperience in private key 
management (e.g., insufficient password protection, lost key, etc.), 
which could cause them to lose some or all of their bitcoin 
holdings.\146\ BZX represents that the Custodian would, by contrast, 
use ``cold'' (offline) storage to hold private keys, employ a certain 
degree of cybersecurity measures and operational best practices, be 
highly experienced in bitcoin custody, and be accountable for 
failures.\147\ Thus, with respect to custody of the Trust's bitcoin 
assets, BZX concludes that, compared to owning spot bitcoin directly, 
the Trust presents advantages for investors.\148\
---------------------------------------------------------------------------

    \143\ See Notice, 86 FR at 29324.
    \144\ See id.
    \145\ See id.
    \146\ See id.
    \147\ See id.
    \148\ See id.
---------------------------------------------------------------------------

    BZX further asserts that a number of operating companies engaged in 
unrelated businesses have announced investments as large as $1.5 
billion in bitcoin.\149\ Without access to bitcoin ETPs, BZX argues 
that investors seeking investment exposure to bitcoin may purchase 
shares in these companies in order to gain the exposure to bitcoin that 
they seek.\150\ BZX contends that such operating companies, however, 
are imperfect bitcoin proxies and provide investors with partial or 
indirect bitcoin exposure paired with additional risks associated with 
whichever operating company they decide to purchase.\151\
---------------------------------------------------------------------------

    \149\ See id.
    \150\ See id.
    \151\ See id.
---------------------------------------------------------------------------

    BZX also states that investors in many other countries, including 
Canada, are able to use more traditional exchange-listed and traded 
products to gain exposure to bitcoin, disadvantaging U.S. investors and 
leaving them with more risky means of getting bitcoin exposure.\152\
---------------------------------------------------------------------------

    \152\ See id. at 29323. BZX represents that the Purpose Bitcoin 
ETF, a bitcoin-based ETP launched in Canada, reportedly reached 
$421.8 million in assets under management in two days, demonstrating 
the demand for a North American market listed bitcoin ETP. BZX 
contends that the Purpose Bitcoin ETF also offers a class of units 
that is U.S. dollar denominated, which could appeal to U.S. 
investors. BZX also argues that without an approved bitcoin ETP in 
the U.S. as a viable alternative, U.S. investors could seek to 
purchase these shares in order to get access to bitcoin exposure. 
BZX believes that, given the separate regulatory regime and the 
potential difficulties associated with any international litigation, 
such an arrangement would create more risk exposure for U.S. 
investors than they would otherwise have with a U.S. exchange-listed 
ETP. See id. at 29323 n.36. BZX also notes that regulators in other 
countries have either approved or otherwise allowed the listing and 
trading of bitcoin-based ETPs. See id. at 29323 n.37. See also 
Anonymous Letter (stating that ``institutions can simply buy the 
Canadian ETFs, leaving US retail investors holding the bag'' and 
that ``[a]pproving an [ETP] in the US will correct this imbalance 
quickly and give relief to US-based investors who are stuck with an 
asset that is trading at a discount to NAV.'').
---------------------------------------------------------------------------

    In essence, BZX asserts that the risky nature of direct investment 
in the underlying bitcoin and the unregulated markets on which bitcoin 
and OTC bitcoin funds trade compel approval of the proposed rule 
change. The Commission disagrees. Pursuant to Section 19(b)(2) of the 
Exchange Act, the Commission must approve a proposed rule change filed 
by a national securities exchange if it finds 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--and it must disapprove the filing if 
it does not make such a finding.\153\ Thus, even if a proposed rule 
change purports to protect investors from a particular type of 
investment risk--such as the susceptibility of an asset to loss or 
theft--the proposed rule change may still fail to meet the requirements 
under the Exchange Act.\154\
---------------------------------------------------------------------------

    \153\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \154\ See SolidX Order, 82 FR at 16259; WisdomTree Order, 86 FR 
at 69334.
---------------------------------------------------------------------------

    Here, even if it were true that, compared to trading in unregulated 
bitcoin spot markets, trading a bitcoin-based ETP on a national 
securities exchange provides some additional protection to investors, 
the Commission must consider this potential benefit in the broader 
context of whether the proposal meets each of the applicable 
requirements of the Exchange Act.\155\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing 
exchange have a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to bitcoin, or demonstrate 
that other means to prevent fraudulent and manipulative acts and 
practices are sufficient to justify dispensing with the requisite 
surveillance-sharing agreement. The

[[Page 5539]]

listing exchange has not met that requirement here. Therefore, the 
Commission is unable to find that the proposed rule change is 
consistent with the statutory standard.
---------------------------------------------------------------------------

    \155\ See supra note 135.
---------------------------------------------------------------------------

    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.\156\
---------------------------------------------------------------------------

    \156\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, BZX has not met its burden of 
demonstrating that the proposal is consistent with Exchange Act Section 
6(b)(5),\157\ and, accordingly, the Commission must disapprove the 
proposal.\158\
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    \157\ 15 U.S.C. 78f(b)(5).
    \158\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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D. Other Comments

    Comment letters also address the general nature and uses of 
bitcoin; \159\ the inherent value of bitcoin; \160\ and the desire of 
investors to gain access to bitcoin through an ETP.\161\ Ultimately, 
however, additional discussion of these topics is unnecessary, as they 
do not bear on the basis for the Commission's decision to disapprove 
the proposal.
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    \159\ See letter from Sam Ahn, dated June 8, 2021 (``Ahn 
Letter'').
    \160\ See Ahn Letter.
    \161\ See Anonymous Letter; Sponsor Submission at 4-5.
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E. The Exchange's Untimely Amendment to the Proposal

    The deadline for rebuttal comments in response to the Order 
Instituting Proceedings was October 1, 2021.\162\ On December 27, 2021, 
the Exchange filed Amendment No. 1 to the proposed rule change to amend 
and replace in its entirety the proposal as submitted on May 10, 2021. 
Because this amendment was filed months after the deadline for comments 
on the proposed rule change, the Commission deems Amendment No. 1 to 
have been untimely filed.\163\
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    \162\ See supra note 7.
    \163\ The untimely filing of Amendment No. 1 also does not allow 
the Commission sufficient time to solicit public comment.
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    Even if the amendment had been timely filed, the Commission would 
still conclude that the Exchange has not met its burden to demonstrate 
that its proposal is consistent with Exchange Act Section 6(b)(5). The 
Exchange makes four primary changes in the amendment.\164\ First, the 
Exchange argues that, based on a review of the Commission's past 
approvals and disapprovals of ETPs, the applicable standard does not 
require the underlying commodity market to be regulated, but rather 
requires that the listing exchange has in place a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to the underlying commodity. The Exchange states that, 
therefore, the CME bitcoin futures market is the proper market for the 
Commission to consider in determining whether the proposal is 
consistent with the Exchange Act.
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    \164\ In addition, in Amendment No. 1, among other things, the 
Exchange amends its description of the Trust, the Index, the 
Custodian, and the CME bitcoin futures market.
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    The Commission does not disagree. As the Commission has clearly and 
consistently stated, an exchange that lists bitcoin-based ETPs can meet 
its obligation under Exchange Act Section 6(b)(5) that its rules be 
designed to prevent fraudulent and manipulative acts and practices by 
demonstrating that the exchange has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to the underlying or reference bitcoin assets.\165\ As discussed in 
detail in Section III.B.2, the Commission has considered the Exchange's 
arguments with respect to the CME bitcoin futures market, and the 
Commission concludes that the Exchange has failed to demonstrate that 
the CME bitcoin futures market is such a ``market of significant 
size.''
---------------------------------------------------------------------------

    \165\ See supra notes 11 and 12 and accompanying text.
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    Second, the Exchange incorporates a version of the Sponsor 
Submission's lead-lag analysis into the amendment.\166\ The Exchange 
states that the Sponsor attributes the ``mixed results'' in previous 
academic studies that have failed to demonstrate that the CME bitcoin 
futures market constitutes a market of significant size to the problems 
associated with high sparsity of some of the data used, the VECM 
econometric approach, and imputation of price data. The Sponsor 
believes that its framework of correlation-based lead-lag analysis 
using the HY estimator is more suitable.\167\ The amendment includes a 
new table, not in the original Sponsor Submission, that asserts that--
although the ``lead'' in seconds of the CME bitcoin futures market has 
steadily decreased over the sample period--the ``strength'' of CME 
bitcoin futures price leadership has not deteriorated based on the 
``ratio'' of the CME bitcoin futures market's ``average lead among all 
markets over the absolute average of every market's overall lead-lag.''
---------------------------------------------------------------------------

    \166\ See supra Section III.B.2.i.b.
    \167\ See supra note 119 and accompanying text.
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    However, the incorporation of the Sponsor's lead-lag analysis still 
contains the same shortcomings as the Sponsor's original 
submission.\168\ The amendment elaborates on the potential bias that 
imputation or sampling for non-synchronous and/or infrequent data can 
introduce into results by citing an academic study by Buccheri et 
al.\169\ that investigates the difficulties to identifying price 
discovery with VECM models due to the high sparsity of data in markets 
that record trades at the sub-millisecond level. The Exchange asserts 
that there is such ``high sparsity'' in CME bitcoin futures data, but 
provides no information that verifies this assertion. Further, even 
assuming CME bitcoin futures data has such ``high sparsity'' and that 
VECM-derived metrics using CME bitcoin futures data ``are potentially 
biased,'' neither the Exchange nor the Sponsor demonstrates that the 
Buccheri et al. critique of VECM methods applications to sub-
millisecond frequencies actually applies to the bitcoin price data 
analyses and that the mixed conclusions in previous academic studies on 
whether the CME bitcoin futures market leads or lags bitcoin price 
discovery were inaccurate or misleading.
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    \168\ See supra Section III.B.2.i.b.
    \169\ G. Buccheri, G. Bormetti, F. Corsi & F. Lillo, Comment on: 
Price discovery in high resolution, 19 J. Financial Econometrics 439 
(2021).
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    With respect to the Sponsor's own results using the HY estimator, 
the amendment still does not provide the specific results for each 
pairwise lead-lag analysis, or confidence intervals around such 
results; it merely provides aggregated results that show the average 
lead-lag that a market has with all other markets in a quarter.\170\ 
Even accepting the results at face value and assuming their statistical 
significance, the Exchange has not explained why the ``ratio'' of the 
CME bitcoin futures market's lead over other markets is a better 
indicator of the ``strength'' of price leadership than the absolute 
average lead time in seconds. In particular, the Exchange has not 
explained how such ``ratio'' provides evidence that it is reasonably 
likely that a would-be manipulator of the proposed ETP would have to 
trade on the CME bitcoin futures market to manipulate the proposed ETP, 
notwithstanding that--accepting the Sponsor's results--the CME's 
absolute average lead in seconds

[[Page 5540]]

has steadily decreased over time as, in the Exchange's words, ``the 
window of arbitrage opportunity has closed with increasing speed.'' The 
Sponsor's analysis is thus flawed for these reasons. In any event, the 
Sponsor's analysis would constitute a result that is merely part of the 
``mixed conclusions'' of studies on this topic without establishing a 
more definitive result from which the Commission could conclude that 
there is a reasonable likelihood that a would-be manipulator of the 
proposed ETP would have to trade on the CME bitcoin futures market to 
successfully manipulate the proposed ETP, and thus the Sponsor has not 
established that that the CME bitcoin futures market is a ``market of 
significant size'' with respect to the proposed ETP.
---------------------------------------------------------------------------

    \170\ See supra note 123 and accompanying text.
---------------------------------------------------------------------------

    Third, the amendment sets forth new arguments to establish that it 
is unlikely that trading in the proposed ETP would be the predominant 
influence on prices in the CME bitcoin futures market. According to the 
Exchange, a lead-lag analysis performed by the Sponsor concludes that 
the CME bitcoin futures market continues to ``lead'' price discovery 
after the launch of the ProShares Bitcoin Strategy ETF (``BITO''),\171\ 
even though the trading volume on CME increased significantly after the 
launch. The Exchange states that it would be unreasonable to assume 
that such price leadership would deteriorate with increased trade 
activity in the spot market. The Exchange also presents a lead-lag 
analysis of BITO performed by the Sponsor to show that there is no 
significant lead-lag relationship between BITO and other bitcoin 
markets, and that BITO, as a general bitcoin ETP example, only has a 
minor impact on price discovery in the bitcoin markets. The Exchange 
states that it believes there would similarly be no material 
relationship between the Shares and the CME bitcoin futures market. The 
Exchange further states that, in the gold market, which it believes is 
an analogous market to bitcoin in terms of price discovery, futures 
lead price discovery despite the spot market having 10 times more 
volume. Finally, the Exchange states that trading of the Shares on the 
secondary market could have a ``positive impact'' on the CME bitcoin 
futures market's leading position because CME bitcoin futures are used 
in hedging activities by market participants. The Exchange states that 
``[g]iven there is a lag between the secondary market transaction, the 
striking of NAV per Share in the primary market and the settlement of 
the primary market transaction,'' authorized participants will seek to 
hedge their exposure through the use of bitcoin futures.
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    \171\ The Exchange states that the Sponsor selected BITO for its 
analysis as BITO is a Commission-registered ETF that seeks to invest 
primarily in CME bitcoin futures contracts, is listed and traded on 
a US regulated national securities exchange, and was launched on 
October 18, 2021.
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    The Commission does not have the opportunity to consider these new 
``predominant influence'' contentions and the statistical analyses that 
underlie them given the untimeliness of Amendment No. 1. In any event, 
no contention has sufficient detail to demonstrate that it is unlikely 
that trading in the proposed ETP would be the predominant influence on 
prices in the CME bitcoin futures market. Among other things, the 
description of the lead-lag analysis regarding the launch of BITO lacks 
confidence intervals, and thus the Commission is unable to assess the 
specific results or statistical significance of those results. 
Moreover, even accepting the results at face value and assuming their 
statistical significance, the Exchange does not explain why results 
that show that increased trading volume in CME bitcoin futures did not 
reduce CME bitcoin futures' price leadership should also be considered 
to support the proposition that increased trading volume in spot 
bitcoin as a result of the proposed ETP also would not reduce CME 
bitcoin futures' price leadership. Moreover, the relevant question is 
not the impact of the proposed ETP on CME bitcoin futures' price 
leadership, but on CME bitcoin futures prices themselves. The Sponsor's 
lead-lag analysis does not address this. Further, with respect to the 
BITO lead-lag analysis, neither the Exchange nor the Sponsor provides 
any rationale for why it is reasonable to consider BITO--a CME bitcoin 
futures-based fund--to be relevant in the analysis regarding a spot 
bitcoin-based product such as the proposed ETP. Nor does the Exchange 
or the Sponsor explain why results that purport to indicate that BITO 
does not have significant price leadership over other bitcoin markets 
in general should also be considered evidence that the proposed ETP 
likely would not have significant price leadership over CME bitcoin 
futures in particular.\172\ Further, even assuming the Exchange's 
summary of the academic literature regarding price discovery in the 
gold market is accurate, it does not help the Exchange to meet its 
burden with respect to the proposed ETP.\173\ For example, except to 
conclude summarily that gold and bitcoin markets are ``analogous,'' the 
Exchange provides no explanation as to why price discovery results from 
the gold market would shed light on price discovery in the bitcoin 
market. In any event, as noted above, the Exchange has not explained 
the connection between price discovery results and whether trading in 
the proposed ETP would likely be the predominant influence on prices in 
the CME bitcoin futures market. Finally, even if, as the Exchange 
claims, authorized participants would use bitcoin futures to hedge any 
gap between their primary market and secondary market transactions, the 
Exchange has not explained why such participants would use the CME 
bitcoin futures market, as opposed to other bitcoin futures markets.
---------------------------------------------------------------------------

    \172\ Nor does the Exchange explain why the results should be 
considered evidence that trading in the proposed ETP likely would 
not have a predominant influence on CME bitcoin futures prices, as 
the applicable standard requires.
    \173\ See USBT Order, 85 FR at 12613.
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    Fourth, citing the recent launch of exchange-traded funds that 
provide exposure to bitcoin through CME bitcoin futures (``Bitcoin 
Futures ETFs''), the Exchange claims that ``there is no basis for 
determining that the Bitcoin Futures ETFs satisfy Section 6(b)(5) of 
the Exchange Act while the Trust does not.'' The Exchange asserts that 
Bitcoin Futures ETFs and the Trust are ``exposed to the same underlying 
pricing data and the same risks of manipulation,'' and thus are 
``substantially similar products.''
    The Commission disagrees with the premise of these arguments. Among 
other things, the proposed rule change does not relate to the same 
underlying holdings as the Bitcoin Futures ETFs. The Commission 
considers the proposed rule change on its own merits and under the 
standards applicable to it. Namely, with respect to this proposed rule 
change, the Commission must apply the standards as provided by Section 
6(b)(5) of the Exchange Act, which it has applied in connection with 
its orders considering previous proposals to list bitcoin-based 
commodity trusts and bitcoin-based trust issued receipts.\174\
---------------------------------------------------------------------------

    \174\ See supra note 11. Moreover, the Exchange has not 
established that the Trust and the Bitcoin Futures ETFs have the 
``same pricing sources.'' While the five constituent bitcoin 
platforms that currently underlie the Index are the same platforms 
that currently underlie the CME CF Bitcoin Reference Rate, even 
assuming the Index would generally track the CME CF Bitcoin 
Reference Rate, as discussed above in Section III.B.1, the Index is 
only used to value the Trust's bitcoin for purposes of calculating 
NAV. The Shares, by contrast, would trade at market-based prices in 
the secondary market, not at NAV. See supra note 81 and subsequent 
text.

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[[Page 5541]]

    Accordingly, even if the Exchange's Amendment No. 1 had been timely 
filed, there is no additional information in such amendment that would 
enable the Commission to approve the proposed rule change as amended.

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change 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 Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-CboeBZX-2021-039 be, and 
hereby is, disapproved.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-02001 Filed 1-31-22; 8:45 am]
BILLING CODE 8011-01-P