14912 Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 92689 

(Aug. 17, 2021), 86 FR 47176 (‘‘Notice’’). Comments 

on the proposed rule change can be found at: 

https://www.sec.gov/comments/sr-cboebzx-2021- 

052/srcboebzx2021052.htm. 

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

5See Securities Exchange Act Release No. 93174, 

86 FR 55043 (Oct. 5, 2021). 

6 15 U.S.C. 78s(b)(2)(B). 

7See Securities Exchange Act Release No. 93608, 

86 FR 67094 (Nov. 24, 2021). 

8See Securities Exchange Act Release No. 94202, 

87 FR 8628 (Feb. 15, 2022). 

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

10Bitcoins 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 47177. 

11See 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 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) (‘‘Valkyrie 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) (‘‘Kryptoin Order’’); 

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 

(Commodity-Based Trust Shares), Securities 

Exchange Act Release No. 94006 (Jan. 20, 2022), 87 

FR 3869 (Jan. 25, 2022) (SR–NYSEArca–2021–37) 

(‘‘SkyBridge Order’’); and 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, 

Securities Exchange Act Release No. 94080 (Jan. 27, 

2022), 87 FR 5527 (Feb. 1, 2022) (SR–CboeBZX– 

2021–039) (‘‘Wise Origin Order’’). 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) (‘‘VanEck Order’’). 

12See USBT Order, 85 FR 12596. See also 

Winklevoss Order, 83 FR 37592 n.202 and 

accompanying text (discussing previous 

Commission approvals of commodity-trust ETPs); 

GraniteShares Order, 83 FR 43925–27 nn.35–39 and 

accompanying text (discussing previous 

Commission approvals of commodity-futures ETPs). 

13See 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 37594; ProShares 

Order, 83 FR 43936; GraniteShares Order, 83 FR 

43924; USBT Order, 85 FR 12596. 

14See NDSP Adopting Release, 63 FR 70959. 

www.regulations.gov/docket/NTSB2021-0009. 

Jennifer Homendy, 

Chair. 

[FR Doc. 2022–05513 Filed 3–15–22; 8:45 am] 

BILLING CODE 7533–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94396; File No. SR– 

CboeBZX–2021–052] 

Self-Regulatory Organizations; Cboe 

BZX Exchange, Inc.; Order 

Disapproving a Proposed Rule Change 

To List and Trade Shares of the Global 

X Bitcoin Trust Under BZX Rule 

14.11(e)(4), Commodity-Based Trust 

Shares 

March 10, 2022. 

I. Introduction 

On August 3, 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 Global X 

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 August 23, 2021.3

On September 29, 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 November 18, 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 February 9, 2022, the Commission 

designated a longer period for 

Commission action on the proposed rule 

change.8

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

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 

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

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 surveillancesharing 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 


jspears on DSK121TN23PROD with NOTICES1
Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 14913 

15See Winklevoss Order, 83 FR 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. 

16See Winklevoss Order, 83 FR 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. 

17See USBT Order, 85 FR 12597. 

18See Winklevoss Order, 83 FR 37594. 

19See USBT Order, 85 FR 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 surveillancesharing agreements ‘‘ensure the availability of 

information necessary to detect and deter potential 

manipulations and other trading abuses’’). 

20See USBT Order, 85 FR 12597. 

21See Winklevoss Order, 83 FR 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 12597. 

22See USBT Order, 85 FR 12597. 

23See supra note 11. 

24See Notice, 86 FR 47183. 

25See id. at 47183–84. 

26See id. at 47184. 

27See id. at 47179. 

28See id. at 47183. 

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

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

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

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’’ 

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

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

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, and that the 

growing and quantifiable investor 

protection concerns should be the 

central consideration of the 

Commission.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 

mitigate potential manipulation 

concerns to the point that the investor 

protection issues that have arisen from 

the rapid growth of over-the-counter 

(‘‘OTC’’) bitcoin funds, including 

premium/discount volatility and 

management fees, should be the central 

consideration as the Commission 

determines whether to approve this 

proposal.28

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 risks associated with investing 

in operating companies that are 


jspears on DSK121TN23PROD with NOTICES1
14914 Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 

29See id. at 47179. 

30See Notice, supra note 3. See also Registration 

Statement on Form S–1, dated July 21, 2021, 

submitted to the Commission by Global X Digital 

Assets, LLC (‘‘Sponsor’’) on behalf of the Trust 

(‘‘Registration Statement’’). 

31See Notice, 86 FR 47184–85. Delaware Trust 

Company is the trustee. The Sponsor will select the 

administrator, transfer agent, and marketing agent 

in connection with the creation and redemption of 

the Shares, and a third-party regulated custodian 

that will be responsible for custody of the Trust’s 

bitcoin. See id. at 47184. 

32See id. at 47184. 

33See id. at 47185. 

34See id. at 47186. 

35The Sponsor would first determine which 

markets are likely to be active markets with orderly 

transactions for bitcoin. Currently, the Sponsor has 

determined that such markets are those that provide 

relevant and reliable price and volume information 

because the venues that support such markets: (1) 

Conduct trading for bitcoin in U.S. dollars; (2) are 

appropriately licensed to engage in bitcoin trading 

involving New York-based customers; and (3) 

otherwise have sufficient indicia of an active 

market with orderly transactions. Next, among the 

venues supporting active markets with orderly 

transactions, the Sponsor would determine to 

which such venues the Trust has access, and refer 

to these as eligible venues. Eligible venues consist 

of eligible OTC venues and eligible exchanges. The 

Sponsor would then determine the principal market 

for bitcoin as either the market that the Trust 

normally transacts in for bitcoin, or, if the Trust 

does not normally transact in any market or the 

Sponsor has sufficient evidence that a particular 

market has the highest trading volume and level of 

activity, such market. The Trust will not purchase 

or, barring the liquidation of the Trust or the Trust 

incurring certain extraordinary expenses or 

liabilities not contractually assumed by the 

Sponsor, sell bitcoin directly. As a result, the 

Sponsor expects that the principal market will 

generally be the market with the highest trading 

volume and level of activity, which the Sponsor 

expects will typically be an eligible exchange. The 

Sponsor would determine the principal market for 

bitcoin at least quarterly and more frequently as 

circumstances warrant. See id. at 47185. 

36See id. 

37See id. at 47185–86. 

38See id. at 47184. 

39 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 

imperfect proxies for bitcoin exposure; 

and (iv) providing an alternative to 

custodying spot bitcoin.29

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 surveillancesharing 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. 

The investment objective of the Trust 

is to reflect the performance of the price 

of bitcoin less the expenses of the 

Trust’s operations. The Trust would not 

be actively managed and would not seek 

to reflect the performance of any 

benchmark or index.31 Each Share 

would represent a fractional undivided 

beneficial interest in the bitcoin held by 

the Trust. The Trust’s assets would 

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 hold 

cash on a temporary basis.32 In seeking 

to achieve its investment objective, the 

Trust would hold bitcoin and value its 

assets daily in accordance with 

Generally Accepted Accounting 

Principles (‘‘GAAP’’), which generally 

value bitcoin by reference to orderly 

transactions in the principal active 

market for bitcoin.33

The net asset value (‘‘NAV’’) for the 

Trust would be calculated by the 

administrator once a day and would be 

disseminated daily to all market 

participants at the same time.34 The 

Sponsor would use fair value standards 

according to GAAP to value the assets 

and liabilities of the Trust. According to 

the Exchange, the fair value of an asset 

that is traded on a market would be 

generally measured by reference to the 

orderly transactions on an active 

market. Among all active markets with 

orderly transactions, the market that is 

used to determine the fair value of an 

asset is the principal market (with 

exceptions), which is either the market 

on which the Trust actually transacts or, 

if there is sufficient evidence, the 

market with the most trading volume 

and level of activity for the asset.35

Where there is no active market with 

orderly transactions for an asset, the 

Sponsor’s valuation committee would 

follow policies and procedures to 

determine the fair value.36

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.37

When the Trust sells or redeems its 

Shares, it will do so in ‘‘in-kind’’ 

transactions in blocks of Shares (in an 

amount to be determined). 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 Shares, and when redeeming the 

Shares, the Trust, through the 

custodian, will deliver bitcoin to such 

authorized participants.38

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.’’ 39


jspears on DSK121TN23PROD with NOTICES1
Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 14915 

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). 

40Rule 700(b)(3), Commission Rules of Practice, 

17 CFR 201.700(b)(3). 

41See id. 

42See id. 

43Susquehanna Int’l Group, LLP v. Securities and 

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

2017) (‘‘Susquehanna’’). 

44See USBT Order, 85 FR 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. 

45See id. at 12597. 

46See Notice, 86 FR 47183 n.54. 

47See id. 

48See id. 

49See id. 

50See id. 

51See id. 

52 Indeed, the Registration Statement states that 

‘‘[b]itcoin faces significant scaling obstacles that can 

lead to high fees or slow settlement times, and 

attempts to increase the volume of transactions may 

not be effective.’’ See Registration Statement at 14. 

BZX does not, however, 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 67 and 

accompanying text (referencing statements made in 

the Registration Statement that contradict assertions 

made by BZX). 

53See supra note 43. 

54See Winklevoss Order, 83 FR 37586; SolidX 

Order, 82 FR 16256–57; USBT Order, 85 FR 12601; 

WisdomTree Order, 86 FR 69325; Valkyrie Order, 

86 FR 74159–60; Kryptoin Order, 86 FR 74170; 

Wise Origin Order, 87 FR 5531. 

55See, e.g., USBT Order, 85 FR 12601; 

WisdomTree Order, 86 FR 69329; Valkyrie Order, 

86 FR 74160; Kryptoin Order, 86 FR 74170; Wise 

Origin Order, 87 FR 5531. 

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.’’ 40

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,41 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.42

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.43

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.44 Such 

resistance to fraud and manipulation 

must be novel and beyond those 

protections that exist in traditional 

commodities or securities markets.45

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.46 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.47 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.48

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.49 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.50 As a result, BZX 

concludes that ‘‘the potential for 

manipulation on a [bitcoin] trading 

platform would require overcoming the 

liquidity supply of such arbitrageurs 

who are effectively eliminating any 

cross-market pricing differences.’’ 51

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.52 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.53

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.54 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.55 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 surveillancesharing 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 


jspears on DSK121TN23PROD with NOTICES1
14916 Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 

56See, e.g., Winklevoss Order, 83 FR 37584; 

USBT Order, 85 FR 12600–01; WisdomTree Order, 

86 FR 69325; Valkyrie Order, 86 FR 74160; 

Kryptoin Order, 86 FR 74170; SkyBridge Order, 87 

FR 3783–84; Wise Origin Order, 87 FR 5531. See 

also Registration Statement at 29 (stating that ‘‘[i]t 

is possible, and in fact, reasonably likely, that a 

small group of early bitcoin adopters hold a 

significant proportion of the bitcoin that has been 

created to date. There are no regulations in place 

that would prevent a large holder of bitcoin from 

selling bitcoin it holds. To the extent such large 

holders of bitcoin engage in large-scale sales or 

distributions . . . it could result in a reduction in 

the price of bitcoin and adversely affect an 

investment in the Shares.’’). 

57See Notice, 86 FR 47183 n.54. 

58See USBT Order, 85 FR 12601. See also 

WisdomTree Order, 86 FR 69325; Kryptoin Order, 

86 FR 74170; Wise Origin Order, 87 FR 5531. 

59See Winklevoss Order, 83 FR 37585 n.92 and 

accompanying text. See also WisdomTree Order, 86 

FR 69325–26; Kryptoin Order, 86 FR 74170; 

SkyBridge Order, 87 FR 3783–84; Wise Origin 

Order, 87 FR 5531. 

60See Winklevoss Order, 83 FR 37585. 

61See Notice, 86 FR 47184. 

62See id. 

63Aside 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 47184 nn.59–60. 

64See USBT Order, 85 FR 12601. See also 

Kryptoin Order, 86 FR 74171. 

65See supra notes 57–58 and accompanying text. 

66See USBT Order, 85 FR 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 

37585–86; Valkyrie Order, 86 FR 74160; SkyBridge 

Order, 87 FR 3872. 

dominant market share to engage in 

manipulation.56

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.57 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.58

Additionally, the continuous nature 

of bitcoin trading does not eliminate 

manipulation risk, and neither do 

linkages among markets, as BZX 

asserts.59 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.60

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.61 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.62

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.63 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.64 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. 

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,65 (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.66

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 

and manipulation. For example, the 

Registration Statement acknowledges 

that ‘‘[t]he venues through which 

bitcoin trades are relatively new and 

may be more exposed to operational 

problems or failure’’; that ‘‘[o]ver the 

past several years, a number of bitcoin 

exchangs have been closed due to fraud, 

failure or security breaches’’; that 

‘‘[s]ecurity breaches, computer malware, 

ransomware and computer hacking 

attacks have been a prevalent concern in 

relation to digital assets’’; that ‘‘the 

Trust’s bitcoin held in the Trust’s 

account with the [custodian] will be an 

appealing target to hackers or malware 

distributors seeking to destroy, damage 

or steal the Trust’s bitcoin and will only 

become more appealing as the Trust’s 

assets grow’’; that the bitcoin blockchain 

could be vulnerable: To exploitation of 

flaws in the bitcoin source code, to a 

‘‘51% attack,’’ in which a malicious 

actor or actors that control a majority of 

the processing power on the bitcoin 

network would be able to gain full 

control of the network and the ability to 

alter the blockchain, to ‘‘cancer nodes,’’ 

through which a malicious actor can 

disconnect users from the bitcoin 

network, and to ‘‘double-spend’’ attacks; 

that it is ‘‘reasonably likely’’ that a 

‘‘small group of early bitcoin adopters 

hold a signficiant proportion of the 

bitcoin that has been created to date,’’ 

there are ‘‘no regulations in place that 

would prevent a large holder from 

selling the bitcoin it holds,’’ and such 

large holders could engage in ‘‘largescale sales’’ that would affect the ‘‘price 

of bitcoin’’; and that ‘‘[t]he trading for 

spot bitcoin occurs on multiple trading 

venues that have various levels and 

types of regulation, but are not regulated 

in the same manner as traditional stock 

and bond exchanges,’’ and if these spot 

markets ‘‘do not operate smoothly or 

face technical, security or regulatory 

issues, that could impact the ability of 

Authorized Participants to make 

markets in the Shares’’ which could 


jspears on DSK121TN23PROD with NOTICES1
Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 14917 

67See Registration Statement at 21, 27, 29, 34, 44– 

45. See also Winklevoss Order, 83 FR 37585. 68See supra notes 34–36 and accompanying text. 69See Notice, 86 FR 47184. 70See id. 

71See id. 

72See id. 

73See id. 

74See id. 

75See id. at 47185. 

76As discussed above, while the Exchange asserts 

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 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 notes 57–58 and 

accompanying text. 

77See Registration Statement at 27. 

78See Registration Statement at 48; Notice, 86 FR 

47185. 

79See Registration Statement at 49. 

80See Registration Statement at 48; Notice, 86 FR 

47185. 

81See Notice, 86 FR 47185. 

82See also USBT Order, 85 FR 12603–05; VanEck 

Order, 86 FR 64545; WisdomTree Order, 86 FR 

69328; Kryptoin Order, 86 FR 74173. 

83See 15 U.S.C. 78f(b)(5). 

84 17 CFR 240.19b–4(a)(6)(i). 

85Section 6 of the Exchange Act, 15 U.S.C. 78f, 

requires national securities exchanges to register 

with the Commission and requires an exchange’s 

registration to be approved by the Commission, and 

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

requires national securities exchanges to file 

proposed rules changes with the Commission and 

provides the Commission with the authority to 

Continued 

lead to ‘‘trading in the Shares [to] occur 

at a material premium or discount 

against the NAV.’’ 67

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 methodology that it uses to value the 

Trust’s bitcoin 68 is itself resistant to 

manipulation.69 Simultaneously, the 

Exchange also states that, because the 

Trust will engage in in-kind creations 

and redemptions only, ‘‘the valuation 

methodology [is] significantly less 

important.’’ 70 The Exchange elaborates 

further that, ‘‘because the Trust will not 

accept cash to buy bitcoin in order to 

create new shares, will charge fees as a 

percentage of the Trust’s bitcoin 

holdings measure[d] in bitcoin and not 

in dollars, and . . . will not 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.’’ 71 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.72 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.73 This, 

according to BZX, not only mitigates the 

risk associated with potential 

manipulation, but also discourages and 

disincentivizes manipulation of the 

valuation methodology because there is 

little financial incentive to do so.74

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 valuation 

methodology 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. The 

Exchange states that both ‘‘certain’’ 

bitcoin venues and ‘‘the OTC market’’ 

have met the Sponsor’s criteria to be 

considered ‘‘active markets with orderly 

transactions for bitcoin’’ and thus to 

potentially be deemed the ‘‘principal 

market’’ whose prices the Sponsor will, 

generally, use to value its bitcoin.75

However, the Exchange does not 

identify which bitcoin venues, or what 

portions of ‘‘the OTC market,’’ meet its 

criteria, nor does the Exchange assess 

the possible influence that spot 

platforms that do not meet the Sponsor’s 

criteria would have on the ‘‘principal 

market’’ that is ultimately used for 

valuation.76 In addition, 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 platforms not 

directly used to value the Trust’s bitcoin 

affects prices on the market(s) that the 

Sponsor does use for such valuation, the 

characteristics of those other 

platforms—where various kinds of fraud 

and manipulation from a variety of 

sources may be present and persist— 

may affect whether the valuation 

methodology is resistant to 

manipulation. 

Moreover, the Exchange’s assertions 

that the valuation methodology is 

resistant to manipulation are 

contradicted by the Registration 

Statement’s own statements. 

Specifically, the Registration Statement 

states that ‘‘[o]ver the past several years, 

a number of bitcoin exchanges have 

been closed due to fraud, failure or 

security breaches.’’ 77 And both the 

Registration Statement and the 

Exchange acknowledge that: ‘‘[W]hether 

the principal market for bitcoin is an 

eligible exchange or the OTC market, 

the price on such principal market may 

not always represent fair value or the 

transactions on such market may not 

always represent orderly 

transactions.’’ 78 As such, the valuation 

methodology allows for ‘‘subjective 

determinations’’ by the Sponsor’s 

valuation committee 79 ‘‘based on 

consideration of any information or 

factors the Sponsor’s valuation 

committee deems appropriate.’’ 80

Although the Sponsor raises concerns 

regarding fraud and security of bitcoin 

platforms in the Registration Statement, 

leading to the potential need for 

‘‘subjective’’ fair value determinations, 

the Exchange does not explain how or 

why such concerns are consistent with 

its assertion that the valuation 

methodology is resistant to fraud and 

manipulation. 

In addition, among the criteria that 

the Sponsor would use to identify 

‘‘active markets with orderly 

transactions’’ is whether a venue is 

‘‘appropriately licensed to engage in 

bitcoin trading involving New Yorkbased customers (and therefore, among 

other things, have programs to 

effectively detect, prevent, and respond 

to fraud).’’ 81 However, even assuming 

that this means that the venue would be 

regulated by the New York State 

Department of Financial Services 

(‘‘NYSDFS’’), the level of oversight of 

bitcoin spot platforms is not equivalent 

to the obligations, authority, and 

oversight of national securities 

exchanges or futures exchanges and 

therefore is not an appropriate 

substitute.82 National securities 

exchanges are required to have rules 

that are ‘‘designed to prevent fraudulent 

and manipulative acts and practices, to 

promote just and equitable principles of 

trade, to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, processing 

information with respect to, and 

facilitating transactions in securities, to 

remove impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest.’’ 83 Moreover, national 

securities exchanges must file proposed 

rules with the Commission regarding 

certain material aspects of their 

operations,84 and the Commission has 

the authority to disapprove any such 

rule that is not consistent with the 

requirements of the Exchange Act.85


jspears on DSK121TN23PROD with NOTICES1
14918 Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 

disapprove proposed rule changes that are not 

consistent with the Exchange Act. Designated 

contract markets (‘‘DCMs’’) (commonly called 

‘‘futures markets’’) registered with and regulated by 

the Commodity Futures Trading Commission 

(‘‘CFTC’’) must comply with, among other things, 

a similarly comprehensive range of regulatory 

principles and must file rule changes with the 

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

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

IndustryOversight/TradingOrganizations/DCMs/ 

index.htm. 

86See Winklevoss Order, 83 FR 37597. The 

Commission notes that the NYSDFS has issued 

‘‘guidance’’ to supervised virtual currency business 

entities, stating that these entities must ‘‘implement 

measures designed to effectively detect, prevent, 

and respond to fraud, attempted fraud, and similar 

wrongdoing.’’ See Maria T. Vullo, Superintendent 

of Financial Services, NYSDFS, Guidance on 

Prevention of Market Manipulation and Other 

Wrongful Activity (Feb. 7, 2018), available at 

https://www.dfs.ny.gov/docs/legal/industry/ 

il180207.pdf. The NYSDFS recognizes that its 

‘‘guidance is not intended to limit the scope or 

applicability of any law or regulation’’ (id.), which 

would include the Exchange Act. Further, as stated 

previously, there are substantial differences 

between the NYSDFS and the Commission’s 

regulation. Anti-Money Laundering (‘‘AML’’) and 

Know-Your-Customer (‘‘KYC’’) policies and 

procedures, for example, have been referenced in 

other bitcoin-based ETP proposals as a purportedly 

alternative means by which such ETPs would be 

uniquely resistant to manipulation. The 

Commission has previously concluded that such 

AML and KYC policies and procedures do not serve 

as a substitute for, and are not otherwise dispositive 

in the analysis regarding the importance of, having 

a surveillance sharing agreement with a regulated 

market of significant size relating to bitcoin. For 

example, AML and KYC policies and procedures do 

not substitute for the sharing of information about 

market trading activity or clearing activity and do 

not substitute for regulation of a national securities 

exchange. See USBT Order, 85 FR 12603 n.101. See 

also, e.g., WisdomTree Order, 86 FR 69328 n.95; 

Kryptoin Order, 86 FR 74173 n.98. 

87See 15 U.S.C. 78e, 78f. 

88See Notice, 86 FR 47185. 

89See supra notes 70–74 and accompanying text. 

90See Notice, 86 FR 47184 (‘‘While the Sponsor 

believes that the methodology 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 only available in-kind makes the 

valuation methodology significantly less 

important.’’). 

91See id. (concluding that ‘‘because the Trust will 

not accept cash to buy bitcoin in order to create 

new shares, will charge fees as a percentage of the 

Trust’s bitcoin holdings measure[d] in bitcoin and 

not in dollars, and, barring a forced redemption of 

the Trust or under other extraordinary 

circumstances, will not 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.’’). 

92See Winklevoss Order, 83 FR 37589–90; USBT 

Order, 85 FR 12607–08; VanEck Order, 86 FR 

64546; WisdomTree Order, 86 FR 69329; Kryptoin 

Order, 86 FR 74174; SkyBridge Order, 87 FR 3874; 

Wise Origin Order, 87 FR 5533. 

93See, 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). 

94Putting aside the Exchange’s various assertions 

about the nature of bitcoin and the bitcoin market, 

the valuation methodology, 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, noninterchangeable types of bitcoin), or to the 

dissemination of false or misleading information. 

See Winklevoss Order, 83 FR 37585. See also USBT 

Order, 85 FR 12600–01; WisdomTree Order, 86 FR 

69329 n.114; Kryptoin Order, 86 FR 74174 n.107; 

SkyBridge Order, 87 FR 3872; Wise Origin Order, 

87 FR 5533 n.89. 

Thus, national securities exchanges are 

subject to Commission oversight of, 

among other things, their governance, 

membership qualifications, trading 

rules, disciplinary procedures, 

recordkeeping, and fees.86 Bitcoin spot 

trading platforms, on the other hand, 

have none of these requirements (none 

are registered as a national securities 

exchange) 87—even if they may be 

‘‘licensed to engage in bitcoin trading 

involving New York-based 

customers.’’ 88

The Commission thus concludes that 

the Exchange has not demonstrated that 

the proposed valuation methodology 

makes the proposed ETP resistant to 

manipulation. While the proposed 

valuation methodology may be intended 

to provide some degree of protection 

against manipulation in bitcoin markets, 

the methodology is not sufficient for the 

Commission to dispense with the 

requisite surveillance-sharing agreement 

with a regulated market of significant 

size. 

Second, the Exchange does not 

explain the significance of the valuation 

methodology’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 

valuation methodology 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. 

Third, the Exchange’s arguments are 

contradictory. While arguing that the 

valuation methodology is resistant to 

manipulation, the Exchange 

simultaneously downplays its 

importance in light of the Trust’s inkind creation and redemption 

mechanism.89 The Exchange points out 

that the Trust will create and redeem 

Shares in-kind, not in cash, which 

renders the valuation methodology, and 

thereby the ability to manipulate NAV, 

‘‘significantly less important.’’ 90 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.’’ 91 If the methodology that 

the Trust uses to value the Trust’s 

bitcoin ‘‘is not particularly important,’’ 

it follows that the methodology’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 valuation methodology aids in 

the determination that the proposal to 

list and trade the Shares is designed to 

prevent fraudulent and manipulative 

acts and practices. 

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.92 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.93 Accordingly, the Commission 

is not persuaded here that the Trust’s inkind creations and redemptions afford it 

a unique resistance to manipulation.94

(2) Assertions That BZX Has Entered 

Into a Comprehensive SurveillanceSharing Agreement With a Regulated 

Market of Significant Size 

As BZX has not demonstrated that 

other means besides surveillancesharing 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 surveillancesharing 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 


jspears on DSK121TN23PROD with NOTICES1
Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 14919 

95See Winklevoss Order, 83 FR 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. 

96See id. at 37580 n.19. 

97See Notice, 86 FR 47183 n.56 and 

accompanying text. BZX also states that it has 

surveillance-sharing agreements with ‘‘several spot 

bitcoin exchanges’’ with ‘‘material volume.’’ See id. 

at 47183 & n.55. BZX does not identify the 

platforms with which it has such agreements and 

does not provide any information on the scope, 

terms, or enforcement authority for such 

surveillance-sharing agreements. Further, as 

described above, spot bitcoin platforms are not 

‘‘regulated.’’ They are not registered as ‘‘exchanges’’ 

and lack the obligations, authority, and oversight of 

national securities exchanges. See supra notes 82– 

88 and accompanying text. 

98While 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 37587, 37599. See also WisdomTree 

Order, 86 FR 69330 n.118; Kryptoin Order, 86 FR 

74174 n.119; SkyBridge Order, 87 FR 3874 n.80; 

Wise Origin Order, 87 FR 5534 n.93. 

99According to BZX, each contract represents five 

bitcoin and is based on the CME CF Bitcoin 

Reference Rate. See Notice, 86 FR 47181. 

100See id. 

101See id. 

102See id. 

103BZX 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 47181 n.50. 

104See id. at 47181. 

105See id. at 47183. 

106See id. at 47182 & n.51 (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’’)). 

107See id. at 47183. 

108See USBT Order, 85 FR 12611. See also 

WisdomTree Order, 86 FR 69330; Kryptoin Order, 

86 FR 74175; SkyBridge Order, 87 FR 3875; Wise 

Origin Order, 87 FR 5534. 

109See USBT Order, 85 FR 12612. The 

Commission has previously considered and rejected 

similar arguments. See, e.g., VanEck Order, 86 FR 

64547; Kryptoin Order, 86 FR 74175–76; SkyBridge 

Order, 87 FR 3875–76; Wise Origin Order, 87 FR 

5534–35. As for the Exchange’s statement that a 

potential manipulator of the Shares would have to 

transact in the CME bitcoin futures market ‘‘because 

the NAV is based on the price of bitcoin on the 

principal market, which identified market must be 

an active market with orderly transactions,’’ the 

Exchange does not elaborate further, and the 

statement is nonsensical. The Exchange does not 

Continued 

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.95

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.96

Accordingly, based on the common 

membership of BZX and the CME in the 

ISG,97 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,98 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. 

(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 

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 2017.99

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.’’ 100 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.101 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 

2019.102 Similarly, BZX contends that 

the number of large open interest 

holders 103 has continued to increase, 

even as the price of bitcoin has risen, as 

have the number of unique accounts 

trading CME bitcoin futures.104

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 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 ‘‘because the 

NAV is based on the price of bitcoin on 

the principal market, which identified 

market must be an active market with 

orderly transactions.’’ 105

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 

2019.106 BZX concludes that a person 

attempting to manipulate the Shares 

would also have to trade on that market 

to manipulate the ETP.107

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 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 surveillancesharing agreement and the proposed 

ETP.108 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 

bitcoin futures market and the proposed 

ETP.109


jspears on DSK121TN23PROD with NOTICES1
14920 Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 

explain, for example, the connection between the 

CME bitcoin futures market and the principal 

market or the NAV. Moreover, the Trust does not 

create or redeem in cash based on NAV and the 

Shares do not trade based on NAV but on marketbased prices in the secondary market. 

110See USBT Order, 85 FR 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. See also VanEck Order, 86 FR 64547; 

WisdomTree Order, 86 FR 69330–31; Kryptoin 

Order, 86 FR 74176 n.144; SkyBridge Order, 87 FR 

3876 n.101; Wise Origin Order, 87 FR 5535 n.107. 

111See Notice, 86 FR 47182. 

112See supra note 106 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 47182 n.51. 

113The 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 106. 

114See USBT Order, 85 FR 12609. 

115See id. at 12613 n.244. 

116See id. 

117See VanEck Order, 86 FR 64547; WisdomTree 

Order, 86 FR 69331; Kryptoin Order, 86 FR 74176; 

Wise Origin Order, 87 FR 5535. 

118See Susquehanna, 866 F.3d at 447. 

119See, 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); 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); 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). 

120See USBT Order, 85 FR 12613 nn.239–244 and 

accompanying text. 

121 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 any 

particular spot platform that could be the ‘‘principal 

market’’ for purposes of the Trust’s valuation 

methodology, or where price formation occurs 

when the entirety of bitcoin futures markets, not 

just CME, is considered. See VanEck Order, 86 FR 

64547–48; WisdomTree Order, 86 FR 69331; 

Kryptoin Order, 86 FR 74176; Wise Origin Order, 

87 FR 5535. 

122See Winklevoss Order, 83 FR 37594; USBT 

Order, 85 FR 12596–97. 

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.110 While BZX states that CME 

bitcoin futures pricing leads the spot 

market,111 it relies on the findings of a 

price discovery analysis in one section 

of a single academic paper to support 

the overall thesis.112 However, the 

findings of that paper’s Granger 

causality analysis, which is widely used 

to formally test for lead-lag 

relationships, are concededly mixed.113

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.114 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.115 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.116 BZX has not 

addressed either issue.117

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.118 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.119 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 wouldbe manipulator of the proposed ETP 

would transact on the CME bitcoin 

futures market.120 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.121

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.122

BZX asserts that trading in the Shares 

would not be the predominant force on 


jspears on DSK121TN23PROD with NOTICES1
Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 14921 

123See Notice, 86 FR 47184. 124See 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. at 47184 

nn.59–60. 

125See id. at 47184. 

126See id. 

127See id. 

128See supra notes 110–121 and accompanying 

text. 

129See VanEck Order, 86 FR 64548–59; 

WisdomTree Order, 86 FR 69332–33; Kryptoin 

Order, 86 FR 74177; SkyBridge Order, 87 FR 3879; 

Wise Origin Order, 87 FR 5537. 130See Notice, 86 FR 47184 (‘‘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%.’’). 

131See VanEck Order, 86 FR 64549; WisdomTree 

Order, 86 FR 69333; Kryptoin Order, 86 FR 74177; 

SkyBridge Order, 87 FR 3879; Wise Origin Order, 

87 FR 5537. 

132See Winklevoss Order, 83 FR 37602. See also 

GraniteShares Order, 83 FR 43931; ProShares 

Order, 83 FR 43941; USBT Order, 85 FR 12615. See 

also WisdomTree Order, 86 FR 69333; Valkyrie 

Order, 86 FR 74163; Kryptoin Order, 86 FR 74178; 

SkyBridge Order, 87 FR 3880; Wise Origin Order, 

87 FR 5537. 

133See Notice, 86 FR 47179. 

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.123 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.124 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 

buy or sell order for $10 million of 

bitcoin and only move the market 0.5 

percent.125 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.126 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 in-kind 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.127

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 assertion—that CME 

bitcoin futures leads price 

discovery 128—it will only address 

below the other two bases: The overall 

size of, and the impact of buys and sells 

on, the bitcoin market. 

BZX’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 statements 

alone and absent any evidence or 

analysis in support of BZX’s assertions, 

that it is unlikely that trading in the ETP 

would be the predominant influence on 

prices in the CME bitcoin futures 

market.129

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.130 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.131

Thus, because BZX has 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.132 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. 

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.133 Specifically, BZX argues 


jspears on DSK121TN23PROD with NOTICES1
14922 Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 

134See id. BZX states that while it understands 

the Commission’s previous focus on potential 

manipulation of a bitcoin ETP in prior disapproval 

orders, it now believes that ‘‘such concerns have 

been sufficiently mitigated and that the growing 

and quantifiable investor protection concerns 

should be the central consideration as the 

Commission reviews this proposal.’’ See id. 

135See id. 

136See 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 47179 

n.38. 

137See id. at 47179. BZX further represents that 

the inability to trade in line with NAV may at some 

point result in OTC bitcoin funds trading at a 

discount to their NAV. According to BZX, while 

that has not historically been the case, trading at a 

discount would give rise to nearly identical 

potential issues related to trading at a premium. See 

id. at 47179 n.39. 

138See id. at 47180. 

139See id. 

140See id. 

141See id. 

142See id. 

143See id. 

144See id. 

145See id. 

146See id. 

147See id. 

148See id. 

149See id. at 47181. 

150See id. at 47179. BZX represents that the 

Purpose Bitcoin ETF, a retail 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 47179 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 

47179 n.37. 

that premium and discount volatility, 

high fees, insufficient disclosures, and 

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.134 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 risks associated with 

investing in operating companies that 

are imperfect proxies for bitcoin 

exposure.135

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.’’ 136 BZX represents 

that, historically, OTC bitcoin funds 

have traded at a significant premium to 

NAV.137 Although the Exchange 

concedes that trading at a premium (or 

potentially a discount) is not unique to 

OTC bitcoin funds and not inherently 

problematic, BZX believes that it raises 

certain investor protections issues. First, 

according to BZX, investors are buying 

shares of a fund for a price that is not 

reflective of the per share value of the 

fund’s underlying assets.138 Second, 

according to BZX, because only 

accredited investors, generally, are able 

to create or redeem shares with the 

issuing trust and can buy or sell shares 

directly with the trust at NAV (in 

exchange for either cash or bitcoin) 

without having to pay the premium or 

sell into the discount, these investors 

that are allowed to interact directly with 

the trust are able to hedge their bitcoin 

exposure as needed to satisfy holding 

requirements and collect on the 

premium or discount opportunity. BZX 

argues, therefore, that the premium in 

OTC bitcoin funds essentially creates a 

direct payment from retail investors to 

more sophisticated investors.139

BZX also asserts that exposure to 

bitcoin through an ETP also presents 

advantages for retail investors compared 

to buying spot bitcoin directly.140 BZX 

asserts that, without the advantages of 

an ETP, an individual retail investor 

holding bitcoin through a 

cryptocurrency trading platform lacks 

protections.141 BZX explains that, 

typically, retail platforms hold most, if 

not all, retail investors’ bitcoin in ‘‘hot’’ 

(internet-connected) storage and do not 

make any commitments to indemnify 

retail investors or to observe any 

particular cybersecurity standard.142

Meanwhile, a retail 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.143 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.144 In addition, BZX represents 

that the custodian would be a chartered 

trust company that carries insurance 

covering both hot and cold storage, and 

‘‘will custody the Trust’s bitcoin assets 

in a manner so that it meets the 

definition of qualified custodian’’ under 

the Investment Advisers Act of 1940, as 

amended.145 Thus, with respect to 

custody of the Trust’s bitcoin assets, 

BZX concludes that, compared to 

owning spot bitcoin directly, the Trust 

presents advantages from an investment 

protection standpoint for retail 

investors.146

BZX further asserts that a number of 

operating companies engaged in 

unrelated businesses have announced 

investments as large as $1.5 billion in 

bitcoin.147 Without access to bitcoin 

ETPs, BZX argues that retail investors 

seeking investment exposure to bitcoin 

may purchase shares in these companies 

in order to gain the exposure to bitcoin 

that they seek.148 BZX contends that 

such operating companies, however, are 

imperfect bitcoin proxies and provide 

investors with partial bitcoin exposure 

paired with additional risks associated 

with whichever operating company they 

decide to purchase. BZX concludes that 

investors seeking bitcoin exposure 

through publicly traded companies are 

gaining only partial exposure to bitcoin 

and are not fully benefitting from the 

risk disclosures and associated investor 

protections that come from the 

securities registration process.149

BZX also states that investors in many 

other countries, including Canada, are 

able to use more traditional exchangelisted and traded products to gain 

exposure to bitcoin, disadvantaging U.S. 

investors and leaving them with more 

risky and more expensive means of 

getting bitcoin exposure.150

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 


jspears on DSK121TN23PROD with NOTICES1
Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Notices 14923 

151See Exchange Act Section 19(b)(2)(C), 15 

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

152See SolidX Order, 82 FR 16259; VanEck Order, 

86 FR 54550–51; WisdomTree Order, 86 FR 69344; 

Kryptoin Order, 86 FR 74179; Valkyrie Order, 86 FR 

74163; SkyBridge Order, 87 FR 3881; Wise Origin 

Order, 87 FR 5538. 

153See supra note 132. 

154See 15 U.S.C. 78s(b)(2)(C). 

155 15 U.S.C. 78f(b)(5). 

156 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). 

157See letter from Sam Ahn (Aug. 31, 2021). 

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

2 17 CFR 240.19b–4. 

3See Exchange Rule 1.5(p). 

4A ‘‘Retail Order’’ means an agency or riskless 

principal order that meets the criteria of FINRA 

Continued 

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.151 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.152

Here, even if it were true that, 

compared to trading in unregulated 

bitcoin spot markets, trading a bitcoinbased 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.153 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 

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. 

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.154

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),155 and, 

accordingly, the Commission must 

disapprove the proposal.156

D. Other Comments 

One comment letter also addresses the 

general nature and uses of bitcoin.157

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. 

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–2021–052 be, and hereby is, 

disapproved. 

By the Commission. 

Eduardo A. Aleman, 

Deputy Secretary. 

[FR Doc. 2022–05500 Filed 3–15–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94394; File No. SR–MEMX– 

2022–01] 

Self-Regulatory Organizations; MEMX 

LLC; Notice of Filing and Immediate 

Effectiveness of a Proposed Rule 

Change To Amend the Exchange’s Fee 

Schedule 

March 10, 2022. 

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

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on February 

28, 2022, MEMX LLC (‘‘MEMX’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is filing with the 

Commission a proposed rule change to 

amend the Exchange’s fee schedule 

applicable to Members 3 (the ‘‘Fee 

Schedule’’) pursuant to Exchange Rules 

15.1(a) and (c). The Exchange proposes 

to implement the changes to the Fee 

Schedule pursuant to this proposal on 

March 1, 2022. The text of the proposed 

rule change is provided in Exhibit 5. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The purpose of the proposed rule 

change is to amend the Fee Schedule to: 

(i) Adopt a new NBBO Setter Tier that 

provides an additive rebate for 

executions of orders in securities priced 

at or above $1.00 per share that add 

displayed liquidity to the Exchange 

(such orders, ‘‘Added Displayed 

Volume’’) and that establish the national 

best bid or offer (‘‘NBBO’’); (ii) modify 

the Exchange’s pricing for executions of 

orders in securities priced at or above 

$1.00 per share that add non-displayed 

liquidity to the Exchange (such orders, 

‘‘Added Non-Displayed Volume’’) by 

reducing the standard rebates for such 

executions and adopting tiered pricing 

under new Non-Display Add Tiers that 

provide enhanced rebates for such 

executions; (iii) modify the required 

criteria under Liquidity Provision Tier 

3; (iv) reduce the standard rebate for 

executions of Added Displayed Volume; 

(v) reduce the standard rebate for 

executions of Retail Orders 4 in 


jspears on DSK121TN23PROD with NOTICES1