Document ID: SEC-2021-1832-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2021-12-29T05:00Z

[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74166-74180]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28255]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93860; File No. SR-CboeBZX-2021-029]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; 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

December 22, 2021.

I. Introduction

    On April 9, 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 Kryptoin Bitcoin 
ETF 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 April 28, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 91646 (Apr. 22, 
2021), 86 FR 22485 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-029/srcboebzx2021029.htm.
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    On June 9, 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 July 23, 2021, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On September 29, 2021, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92131, 86 FR 31772 
(June 15, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 92476, 86 FR 40883 
(July 29, 2021).
    \8\ See Securities Exchange Act Release No. 93175, 86 FR 55092 
(Oct. 5, 2021).
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    This order disapproves the proposed rule change. The Commission 
concludes that BZX has not met its burden under the Exchange Act and 
the Commission's Rules of Practice to demonstrate that its proposal is 
consistent with the requirements of Exchange Act Section 6(b)(5), and 
in particular, the requirement that the rules of a national

[[Page 74167]]

securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether BZX's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same standard used in its orders 
considering previous proposals to list bitcoin \10\-based commodity 
trusts and bitcoin-based trust issued receipts.\11\ As the Commission 
has explained, an exchange that lists bitcoin-based exchange-traded 
products (``ETPs'') can meet its obligations under Exchange Act Section 
6(b)(5) by demonstrating that the exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to the underlying or reference bitcoin assets.\12\
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    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Notice, 86 FR at 22485.
    \11\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''). See also Order Disapproving a Proposed Rule 
Change, as Modified by Amendment No. 1, Relating to the Listing and 
Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca 
Equities Rule 8.201, Securities Exchange Act Release No. 80319 (Mar. 
28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) 
(``SolidX Order''). The Commission also notes that orders were 
issued by delegated authority on the following matters: Order 
Disapproving a Proposed Rule Change To List and Trade the Shares of 
the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF, 
Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83 FR 
43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) (``ProShares Order''); 
Order Disapproving a Proposed Rule Change To List and Trade the 
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short 
Bitcoin ETF, Securities Exchange Act Release No. 83913 (Aug. 22, 
2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) 
(``GraniteShares Order''); Order Disapproving a Proposed Rule Change 
To List and Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act 
Release No. 93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-
CboeBZX-2021-019).
    \12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since 
they ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur.'' \13\ The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading the underlying assets for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\14\ The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading activity, 
clearing activity, and customer identity; that the parties to the 
agreement have reasonable ability to obtain access to and produce 
requested information; and that no existing rules, laws, or practices 
would impede one party to the agreement from obtaining this information 
from, or producing it to, the other party.\15\
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    \13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See 
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at 
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at 
12596.
    \14\ See NDSP Adopting Release, 63 FR at 70959.
    \15\ See Winklevoss Order, 83 FR at 37592-93; Letter from 
Brandon Becker, Director, Division of Market Regulation, Commission, 
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group 
(June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
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    In the context of this standard, the terms ``significant market'' 
and ``market of significant size'' include a market (or group of 
markets) as to which (a) there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (b) it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\16\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \17\
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    \16\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that will provide guidance to market 
participants. See id.
    \17\ See USBT Order, 85 FR at 12597.
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    Consistent with this standard, for the commodity-trust ETPs 
approved to date for listing and trading, there has been in every case 
at least one significant, regulated market for trading futures on the 
underlying commodity--whether gold, silver, platinum, palladium, or 
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group 
(``ISG'') membership in common with, that market.\18\ Moreover, the 
surveillance-sharing agreements have been consistently present whenever 
the Commission has approved the listing and trading of derivative 
securities, even where the underlying securities were also listed on 
national securities exchanges--such as options based on an index of 
stocks traded on a national securities exchange--and were thus subject 
to the Commission's direct regulatory authority.\19\
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    \18\ See Winklevoss Order, 83 FR at 37594.
    \19\ See USBT Order, 85 FR at 12597; Securities Exchange Act 
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) 
(SR-Amex-93-28) (order approving listing of options on American 
Depository Receipts (``ADRs'')). The Commission has also required a 
surveillance-sharing agreement in the context of index options even 
when (i) all of the underlying index component stocks were either 
registered with the Commission or exempt from registration under the 
Exchange Act; (ii) all of the underlying index component stocks 
traded in the U.S. either directly or as ADRs on a national 
securities exchange; and (iii) effective international ADR arbitrage 
alleviated concerns over the relatively smaller ADR trading volume, 
helped to ensure that ADR prices reflected the pricing on the home 
market, and helped to ensure more reliable price determinations for 
settlement purposes, due to the unique composition of the index and 
reliance on ADR prices. See Securities Exchange Act Release No. 
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the 
exchange on which the index option trades and the markets that trade 
the underlying securities are necessary'' and that ``[t]he exchange 
of surveillance data by the exchange trading a stock index option 
and the markets for the securities comprising the index is important 
to the detection and deterrence of intermarket manipulation.''). And 
the Commission has required a surveillance-sharing agreement even 
when approving options based on an index of stocks traded on a 
national securities exchange. See Securities Exchange Act Release 
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure 
the availability of information necessary to detect and deter 
potential manipulations and other trading abuses'').

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[[Page 74168]]

    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\
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    \20\ See USBT Order, 85 FR at 12597.
    \21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation); see also USBT Order, 85 FR at 
12597.
    \22\ See USBT Order, 85 FR at 12597.
    \23\ See supra note 11.
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    Here, BZX contends that approval of the proposal is consistent with 
Section 6(b)(5) of the Exchange Act, in particular Section 6(b)(5)'s 
requirement that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest.\24\ As discussed in more 
detail below, BZX asserts that the proposal is consistent with Section 
6(b)(5) of the Exchange Act because the Exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size,\25\ and there exist other means to prevent fraudulent and 
manipulative acts and practices that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement.\26\
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    \24\ See Notice, 86 FR at 22495.
    \25\ See id. at 22491-92.
    \26\ See id. at 22492.
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    Although BZX recognizes the Commission's focus on potential 
manipulation of bitcoin ETPs in prior disapproval orders, BZX argues 
that such manipulation concerns have been sufficiently mitigated, 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 and the 
Reference Rate (as defined herein) 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\
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    \27\ See id. at 22487-88, 22491, 22495-96.
    \28\ See id. at 22491, 22495.
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    Further, BZX believes that the proposal would give U.S. investors 
access to bitcoin in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors. According to 
BZX, the proposed listing and trading of the Shares would mitigate risk 
by: (i) Reducing premium and discount volatility; (ii) reducing 
management fees through meaningful competition; (iii) reducing risks 
associated with investing in operating companies that are imperfect 
proxies for bitcoin exposure; and (iv) providing an alternative to 
custodying spot bitcoin.\29\
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    \29\ See id. at 22487.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act by addressing: In Section III.B.1 assertions that other means 
besides surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices; in Section III.B.2 
assertions that BZX has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to bitcoin; and in Section III.C assertions that the proposal is 
consistent with the protection of investors and the public interest. 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. 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 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.\31\
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    \30\ See Notice, supra note 3. See also Amendment No. 2 to 
Registration Statement on Form S-1, dated April 9, 2021, submitted 
to the Commission by Kryptoin Investment Advisors, LLC (``Sponsor'') 
on behalf of the Trust (``Registration Statement'').
    \31\ Although the name of the Trust is the Kryptoin Bitcoin ETF 
Trust, the Trust is a commodity-based ETP. The Trust is not an 
exchange-traded fund, i.e., an ``ETF,'' registered under the 
Investment Company Act of 1940, as amended (``1940 Act''), and is 
not subject to regulation under the 1940 Act.
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    The investment objective of the Trust is to provide exposure to 
bitcoin at a price that is reflective of the actual bitcoin market 
where investors purchase and sell bitcoin, less the expense of the 
Trust's operations.\32\ The Trust would hold bitcoin, and it would 
calculate the Trust's net asset value (``NAV'') daily based on the 
value of bitcoin as reflected by the CF Bitcoin U.S. Settlement Price 
(``Reference Rate''). The administrator of the Reference Rate is CF 
Benchmarks Ltd. (``Benchmark Administrator''). The Reference Rate 
aggregates the trade flow of several bitcoin spot platforms. The 
current platform composition of the Reference

[[Page 74169]]

Rate is Bitstamp, Coinbase, Gemini, itBit, and Kraken. In calculating 
the Reference Rate, the methodology creates a joint list of certain 
trade prices and sizes from the constituent platforms between 3:00 p.m. 
E.T. and 4:00 p.m. E.T. The methodology then divides this list into 12 
equally-sized time intervals of five minutes, and it calculates the 
volume-weighted median trade price for each of those time 
intervals.\33\ The Reference Rate is the arithmetic mean of these 12 
volume-weighted median trade prices.\34\
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    \32\ Delaware Trust Company is the trustee, and The Bank of New 
York Mellon will be the administrator (``Administrator'') and 
transfer agent. Foreside Fund Services, LLC will be the marketing 
agent in connection with the creation and redemption of ``baskets'' 
of Shares, and the Sponsor will provide assistance in the marketing 
of the Shares. Gemini Trust Company, LLC, a third-party custodian 
(``Custodian''), will be responsible for custody of the Trust's 
bitcoin. See Notice, 86 FR at 22485, 22492-93.
    \33\ According to BZX, the Reference Rate is based on materially 
the same methodology (except calculation time, as described herein) 
as the Benchmark Administrator's CME CF Bitcoin Reference Rate 
(``BRR''), which was first introduced on November 14, 2016, and is 
the rate on which bitcoin futures contracts are cash-settled in U.S. 
dollars on CME. The Reference Rate is calculated as of 4:00 p.m. 
E.T., whereas the BRR is calculated as of 4:00 p.m. London Time. The 
Reference Rate aggregates the trade flow of several bitcoin 
platforms, during an observation window between 3:00 p.m. and 4:00 
p.m. E.T. into the U.S. dollar price of one bitcoin at 4:00 p.m. 
E.T. The current constituent bitcoin platforms of the Reference Rate 
are Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent 
Bitcoin Platforms''). See id. at 22493.
    \34\ See id.
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    Each Share represents a fractional undivided beneficial interest in 
the bitcoin held by the Trust. The Trust's assets will consist of 
bitcoin held by the Custodian on behalf of the Trust. The Trust 
generally does not intend to hold cash or cash equivalents. However, 
there may be situations where the Trust will unexpectedly hold cash on 
a temporary basis.\35\
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    \35\ See id. at 22492.
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    The Administrator will determine the NAV and NAV per Share of the 
Trust on each day that the Exchange is open for regular trading, after 
4:00 p.m. E.T. The NAV of the Trust is the aggregate value of the 
Trust's assets less its liabilities (which include estimated accrued 
but unpaid fees and expenses). In determining the Trust's NAV, the 
Administrator will value the bitcoin held by the Trust on the basis of 
the price of bitcoin as determined by the Reference Rate.\36\
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    \36\ See id. at 22494.
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    The Trust will provide information regarding the Trust's bitcoin 
holdings, as well as an Intraday Indicative Value (``IIV'') per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading 
Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during Regular Trading Hours to reflect changes in the value of 
the Trust's bitcoin holdings during the trading day.\37\
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    \37\ See id. at 22493.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 50,000 Shares. When creating the 
Shares, authorized participants will deliver, or facilitate the 
delivery of, bitcoin to the Trust's account with the Custodian in 
exchange for the Shares, and, when redeeming the Shares, the Trust, 
through the Custodian, will deliver bitcoin to such authorized 
participants.\38\
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    \38\ See id.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether BZX's proposal is consistent 
with the Exchange Act. Section 6(b)(5) of the Exchange Act requires, in 
relevant part, that the rules of a national securities exchange be 
designed ``to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \39\ 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\
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    \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 
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).
    \40\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\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\
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    \41\ See id.
    \42\ See id.
    \43\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is 
Designed To Prevent Fraudulent and Manipulative Acts and Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and 
Practices
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with a comprehensive surveillance-sharing agreement with a regulated 
market of significant size, including by demonstrating that the bitcoin 
market as a whole or the relevant underlying bitcoin market is uniquely 
and inherently resistant to fraud and manipulation.\44\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\45\
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    \44\ See USBT Order, 85 FR at 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \45\ See id. at 12597.
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    BZX asserts that bitcoin is resistant to price manipulation. 
According to BZX, the geographically diverse and continuous nature of 
bitcoin trading render it difficult and prohibitively costly to 
manipulate the price of bitcoin.\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

[[Page 74170]]

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\
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    \46\ See Notice, 86 FR at 22491 n.55.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
    \51\ See id.
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    The Sponsor, in a comment letter, states that it agrees with the 
Exchange's assertion that the bitcoin spot market is resistant to price 
manipulation. The Sponsor asserts that the trading of bitcoin on 
hundreds of spot platforms in geographically diverse locations, the 
dispersed nature of market liquidity, and the level of capital 
necessarily deployed across these platforms render an attempted 
manipulation of the global bitcoin spot market ``challenging and highly 
unlikely, if not impossible.'' \52\ The Sponsor further states that 
there exists a large presence of arbitrageurs in the form of automated 
market makers and high-frequency and algorithmic trading firms 
established to specifically seek profits by actively trading any 
temporary dislocations in the bitcoin price between trading venues, and 
that any attempt to manipulate the price of bitcoin where these firms 
are active would require exceeding the liquidity supply of these 
arbitrageurs that are effectively eliminating any cross-market pricing 
deviations.\53\
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    \52\ See letter from Jason Toussaint, Chief Executive Officer, 
Kryptoin Investment Advisors, LLC, dated August 19, 2021 (``Kryptoin 
Letter''), at 3.
    \53\ See id. The Custodian, in a comment letter, states that it 
believes that certain of the Commission's historical concerns about 
the bitcoin markets are ameliorated by the growth of the overall 
bitcoin market and related growth of regulated bitcoin derivatives. 
See letter from Gemini Trust Company, LLC, dated August 19, 2021 
(``Gemini Letter''), at 2. Another commenter, however, asserts that 
the bitcoin network is the preferred network for global criminals 
and is a pyramid scheme in which the top holders encourage existing 
holders to keep holding and entice new retail investors to invest. 
See letter from Maulik Patel, dated July 4, 2021 (``Patel Letter'').
---------------------------------------------------------------------------

    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 and 
the Sponsor assert 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. Neither 
the Exchange nor the Sponsor, however, provides 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.\54\ 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.\55\
---------------------------------------------------------------------------

    \54\ In addition, the Registration Statement states that bitcoin 
spot platforms are not subject to the same regulatory oversight as 
traditional equity exchanges, which could negatively impact the 
ability of authorized participants to implement arbitrage 
mechanisms. See Registration Statement at 22. See also infra note 69 
and accompanying text (referencing statements made in the 
Registration Statement that contradict assertions made by BZX).
    \55\ See supra note 43.
---------------------------------------------------------------------------

    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.\56\ 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.\57\ Here, 
neither the Exchange nor the Sponsor provides evidence to support its 
assertion of efficient price arbitrage across bitcoin platforms, let 
alone any evidence that price arbitrage in the bitcoin market is novel 
or unique so as to warrant the Commission dispensing with the 
requirement of a surveillance-sharing agreement. Moreover, neither the 
Exchange nor the Sponsor takes into account that a market participant 
with a dominant ownership position would not find it prohibitively 
expensive to overcome the liquidity supplied by arbitrageurs and could 
use dominant market share to engage in manipulation.\58\
---------------------------------------------------------------------------

    \56\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR 
at 16256-57; USBT Order, 85 FR at 12601.
    \57\ See, e.g., USBT Order, 85 FR at 12601.
    \58\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01. See also Registration Statement at 10 (stating that, 
as of the date of the Registration Statement, ``the largest 100 
bitcoin wallets held a substantial amount of the outstanding supply 
of bitcoin and it is possible that some of these wallets are 
controlled by the same person or entity''; that ``it is possible 
that other persons or entities control multiple wallets that 
collectively hold a significant number of bitcoin, even if each 
wallet individually only holds a small amount''; and that ``[a]s a 
result of this concentration of ownership, large sales by such 
holders could have an adverse effect on the market price of 
bitcoin.'').
---------------------------------------------------------------------------

    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.\59\ 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.\60\
---------------------------------------------------------------------------

    \59\ See Notice, 86 FR at 22491 n.55.
    \60\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------

    Additionally, the continuous nature of bitcoin trading does not 
eliminate manipulation risk, and neither do linkages among markets, as 
BZX asserts.\61\ 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.\62\
---------------------------------------------------------------------------

    \61\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying 
text.
    \62\ See id. at 37585.
---------------------------------------------------------------------------

    BZX also argues that the significant liquidity in the bitcoin spot 
market and the impact of market orders on the overall price of bitcoin 
mean that attempting to move the price of bitcoin is costly and has 
grown more expensive over the past year.\63\ 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

[[Page 74171]]

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.\64\
---------------------------------------------------------------------------

    \63\ See Notice, 86 FR at 22492, 22496.
    \64\ See id.
---------------------------------------------------------------------------

    However, the data furnished by BZX regarding the cost to move the 
price of bitcoin, and the market impact of such attempts, are 
incomplete. BZX does not provide meaningful analysis pertaining to how 
these figures compare to other markets or why one must conclude, based 
on the numbers provided, that the bitcoin market is costly to 
manipulate. Further, BZX's analysis of the market impact of a mere two 
sample transactions is not sufficient evidence to conclude that the 
bitcoin market is resistant to manipulation.\65\ 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.\66\ 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.
---------------------------------------------------------------------------

    \65\ Aside from stating that the ``statistics are based on 
samples of bitcoin liquidity in USD (excluding stablecoins or Euro 
liquidity) based on executable quotes on Coinbase Pro, Gemini, 
Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during 
February 2021,'' the Exchange provides no other information 
pertaining to the methodology used to enable the Commission to 
evaluate these findings or their significance. See id. at 22492 
n.61.
    \66\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------

    Moreover, BZX does not sufficiently contest the presence of 
possible sources of fraud and manipulation in the bitcoin spot market 
generally that the Commission has raised in previous orders, which have 
included (1) ``wash'' trading,\67\ (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.\68\
---------------------------------------------------------------------------

    \67\ See supra notes 59-60 and accompanying text.
    \68\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28, 
2019), available at https://ssrn.com/abstract=3195066 and published 
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
---------------------------------------------------------------------------

    In addition, BZX does not address risk factors specific to the 
bitcoin blockchain and bitcoin platforms, described in the Trust's 
Registration Statement, that undermine the argument that the bitcoin 
market is inherently resistant to fraud and manipulation. For example, 
the Registration Statement acknowledges that the ``price of bitcoin as 
determined by the bitcoin market has experienced periods of extreme 
volatility and may be influenced by, among other things, trading 
activity and the closing of bitcoin trading platforms due to fraud, 
failure, security breaches or otherwise''; that the bitcoin blockchain 
could be vulnerable to a ``51% attack,'' in which a bad actor or actors 
that control a majority of the processing power dedicated to mining on 
the bitcoin network may be able to alter the bitcoin blockchain on 
which the bitcoin network and bitcoin transactions rely; that the 
nature of the assets held at bitcoin platforms makes them appealing 
targets for hackers, that some bitcoin platforms have been the victim 
of cybercrimes, subject to cybersecurity breaches, or ``hacked,'' 
resulting in losses, and that ``[n]o bitcoin [platform] is immune from 
these risks''; that bitcoin platforms on which bitcoin trade are 
relatively new and, in some cases, largely unregulated, and, therefore, 
may be more exposed to fraud and security breaches than established, 
regulated exchanges for other financial assets or instruments; and that 
``[o]ver the past several years, a number of bitcoin [platforms] have 
been closed or faced issues due to fraud, failure, security breaches or 
governmental regulations.'' \69\
---------------------------------------------------------------------------

    \69\ See Registration Statement at 1, 11, 13. See also 
Winklevoss Order, 83 FR at 37585.
---------------------------------------------------------------------------

    BZX also asserts that other means to prevent fraud and manipulation 
are sufficient to justify dispensing with the requisite surveillance-
sharing agreement. The Exchange mentions that the Reference Rate, which 
is used to value the Trust's bitcoin, is itself resistant to 
manipulation based on the Reference Rate's methodology.\70\ The 
Exchange states that the Reference Rate is calculated based on the 
``Relevant Transactions'' \71\ of all of its Constituent Bitcoin 
Platforms. All Relevant Transactions are added to a joint list, 
recording the time of execution, trade price, and size for each 
transaction, and the list is partitioned by timestamp into 12 equally-
sized time intervals of five minute length.\72\ For each partition 
separately, the volume-weighted median trade price is calculated from 
the trade prices and sizes of all Relevant Transactions.\73\ The 
Reference Rate is then determined by the arithmetic mean of the volume-
weighted medians of all partitions.\74\ According to BZX, ``[b]y 
employing the foregoing steps, the Reference Rate thereby seeks to 
ensure that transactions in bitcoin conducted at outlying prices do not 
have an undue effect on the value of a specific partition, large trades 
or clusters of trades transacted over a short period of time will not 
have an undue influence on the index level, and the effect of large 
trades at prices that deviate from the prevailing price are mitigated 
from having an undue influence on the benchmark level.'' \75\ BZX 
concludes its analysis of the Reference Rate by noting that ``an 
oversight function is implemented by the Benchmark Administrator in 
seeking to ensure that the Reference Rate is administered through 
codified policies for Reference Rate integrity.'' \76\
---------------------------------------------------------------------------

    \70\ See Notice, 86 FR at 22492, 22497.
    \71\ According to the Exchange, a ``Relevant Transaction'' is 
any cryptocurrency versus U.S. dollar spot trade that occurs during 
the observation window between 3:00 p.m. and 4:00 p.m. E.T. on a 
Constituent Bitcoin Platform in the BTC/USD pair that is reported 
and disseminated by a Constituent Bitcoin Platform and observed by 
the Benchmark Administrator. See id. at 22493 n.66.
    \72\ See id. at 22493.
    \73\ See id. According to the Exchange, a volume-weighted median 
differs from a standard median in that a weighting factor, in this 
case trade size, is factored into the calculation. See id.
    \74\ See id.
    \75\ See id.
    \76\ See id.
---------------------------------------------------------------------------

    The Custodian, in a comment letter, agrees that BZX's choice of the 
Reference Rate, which includes a composite of bitcoin prices from 
underlying spot bitcoin platforms, including the Custodian's platform, 
is a further factor in support of the proposed ETP.\77\ The Custodian 
asserts that it and other ``regulated digital asset exchanges'' and 
custodians have a history of operations in compliance with a regulatory 
framework developed specifically to address activities in digital 
assets, including guidance by the New York State Department of 
Financial Services (``NYSDFS'') regarding the implementation of anti-
fraud measures. The Custodian states that it meets this obligation 
through automated systems and robust internal controls and 
surveillance, and that the growing sophistication of market 
surveillance tools and strategies in the bitcoin market

[[Page 74172]]

as well as the growing proportion of bitcoin activity occurring on 
``regulated exchanges'' is a key development to mollify concerns about 
price manipulation or other manipulative practices in the bitcoin 
market.\78\ The Sponsor, in a comment letter, states that global 
bitcoin and cryptocurrency markets are subject to increasing levels of 
regulation, oversight, and enforcement actions by global governments 
and regulatory bodies.\79\
---------------------------------------------------------------------------

    \77\ See Gemini Letter at 2.
    \78\ See id. The Custodian also states that it is registered 
with the Financial Crimes Enforcement Network (``FinCEN'') as a 
money service business and maintains money transmitter licenses (or 
the statutory equivalent) in all states where this is required. See 
Gemini Letter at 3 and infra note 98.
    \79\ See Kryptoin Letter at 7. The Sponsor states that in 
January 2019, the Singapore Government enacted the Payment Services 
Act, bringing cryptocurrency dealing or exchange services under the 
supervision of the Monetary Authority of Singapore, Singapore's 
central bank and financial regulator. See id. The Sponsor, however, 
provides no data, information, or analysis as to how such ``global 
governments and regulatory bodies'' oversee bitcoin markets in 
general, or the Constituent Bitcoin Platforms in particular; or how 
any such regulation makes the listing and trading of the Shares 
inherently resistant to fraud and manipulation.
---------------------------------------------------------------------------

    Simultaneously with these assertions regarding the Reference Rate, 
the Exchange also states that, because the Trust will engage in in-kind 
creations and redemptions only, the ``manipulability of the Reference 
Rate [is] significantly less important.'' \80\ The Exchange elaborates 
further that, ``because the Trust will not accept cash to buy bitcoin 
in order to create new shares or . . . be forced to sell bitcoin to pay 
cash for redeemed shares, the price that the Sponsor uses to value the 
Trust's bitcoin is not particularly important.'' \81\ 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.\82\ 
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.\83\ 
This, according to BZX, not only mitigates the risk associated with 
potential manipulation, but also discourages and disincentivizes 
manipulation of the Reference Rate because there is little financial 
incentive to do so.\84\
---------------------------------------------------------------------------

    \80\ See Notice, 86 FR at 22492.
    \81\ See id.
    \82\ See id.
    \83\ See id.
    \84\ See id.
---------------------------------------------------------------------------

    The Sponsor, in a comment letter, agrees that the in-kind process 
by which the Shares will be created and redeemed makes the Shares 
inherently resistant to manipulation. The Sponsor states that the 
``creation and redemption of Trust Shares through the in-kind exchange 
mechanism is solely dependent on the amount of bitcoin to be received 
or delivered by the Trust and is completely independent of the value of 
bitcoin at that point in time.'' \85\ The Sponsor also states that, in 
contrast to other OTC bitcoin funds that receive cash from investors 
and then purchase bitcoin in the spot market, the size and timing of 
which can contribute to the value of these funds' quoted prices 
deviating from NAV, the Trust and its Shares will not be subjected to 
this potential source of NAV deviation.\86\ The Sponsor further states 
that the fact that the Trust's expenses are paid in bitcoin, not cash, 
makes these expense payments ``completely independent of the value of 
bitcoin or the Reference Rate,'' which mitigates the risk associated 
with potential manipulation and discourages manipulation of the 
Reference Rate because there is little financial incentive to do 
so.\87\
---------------------------------------------------------------------------

    \85\ See Kryptoin Letter at 1-2.
    \86\ See id. at 2.
    \87\ See id. at 14.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the 
Commission can find no basis to conclude that BZX has articulated other 
means to prevent fraud and manipulation that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement.
    First, the record does not demonstrate that the proposed 
methodology for calculating the Reference Rate 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.\88\ Specifically, the Exchange has not assessed the 
possible influence that spot platforms not included among the 
Constituent Bitcoin Platforms would have on bitcoin prices used to 
calculate the Reference Rate.\89\ And 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 calculate the 
Reference Rate affects prices on the Constituent Bitcoin Platforms, the 
characteristics of those other platforms--where various kinds of fraud 
and manipulation from a variety of sources may be present and persist--
affect whether the Reference Rate is resistant to manipulation.
---------------------------------------------------------------------------

    \88\ The Commission has previously considered and rejected 
similar arguments about the valuation of bitcoin according to a 
benchmark or reference price. See, e.g., SolidX Order, 82 FR at 
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at 
12599-601.
    \89\ As 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 or Reference Rate, 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 59-60 and accompanying text.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the Reference Rate's 
methodology helps make the Reference Rate resistant to manipulation are 
contradicted by the Registration Statement's own statements. 
Specifically, the Registration Statement states that ``[b]itcoin 
[platforms] on which bitcoin trades . . . may be more exposed to fraud 
and security breaches than established, regulated exchanges for other 
financial assets or instruments, which could have a negative impact on 
the performance of the Trust.'' \90\ Constituent Bitcoin Platforms are 
a subset of the bitcoin platforms currently in existence. Although the 
Sponsor raises concerns regarding fraud and security of bitcoin 
platforms in the Registration Statement, the Exchange does not explain 
how or why such concerns are consistent with its assertion that the 
Reference Rate is resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \90\ See Registration Statement at 11.
---------------------------------------------------------------------------

    BZX also has not shown that its proposed use of 12 equally-sized 
time intervals of five minute length over the observation window 
between 3:00 p.m. and 4:00 p.m. E.T. to calculate the Reference Rate 
would effectively be able to eliminate fraudulent or manipulative 
activity that is not transient. Fraud and manipulation in the bitcoin 
spot market could persist for a ``significant duration.'' \91\ The 
Exchange does not connect the use of such partitions to the duration of 
the effects of the wash and fictitious trading that may exist in the 
bitcoin spot market.\92\
---------------------------------------------------------------------------

    \91\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
    \92\ See WisdomTree Order, 86 FR at 69327.
---------------------------------------------------------------------------

    The Commission thus concludes that the Exchange has not 
demonstrated that its Reference Rate methodology makes the proposed ETP 
resistant to manipulation. While the proposed procedures for 
calculating the Reference Rate using only prices from the Constituent 
Bitcoin Platforms are intended to provide some degree of protection 
against attempts to

[[Page 74173]]

manipulate the Reference Rate, these procedures are not sufficient for 
the Commission to dispense with the requisite surveillance-sharing 
agreement with a regulated market of significant size.
    Second, the Custodian asserts that the growing sophistication of 
market surveillance tools and strategies used by the Constituent 
Bitcoin Platforms, as well as the growing proportion of bitcoin 
activity occurring on ``regulated exchanges,'' ``mollify concerns about 
price manipulation or other manipulative practices.'' \93\ However, the 
level of regulation on the Constituent Bitcoin Platforms is not 
equivalent to the obligations, authority, and oversight of national 
securities exchanges or futures exchanges and therefore is not an 
appropriate substitute.\94\ 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.'' \95\ Moreover, national 
securities exchanges must file proposed rules with the Commission 
regarding certain material aspects of their operations,\96\ and the 
Commission has the authority to disapprove any such rule that is not 
consistent with the requirements of the Exchange Act.\97\ Thus, 
national securities exchanges are subject to Commission oversight of, 
among other things, their governance, membership qualifications, 
trading rules, disciplinary procedures, recordkeeping, and fees.\98\
---------------------------------------------------------------------------

    \93\ See Gemini Letter at 2.
    \94\ See also USBT Order, 85 FR at 12603-05.
    \95\ See 15 U.S.C. 78f(b)(5).
    \96\ 17 CFR 240.19b-4(a)(6)(i).
    \97\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rules 
changes with the Commission and provides the Commission with the 
authority to disapprove proposed rule changes that are not 
consistent with the Exchange Act. Designated contract markets 
(``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 https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \98\ See Winklevoss Order, 83 FR at 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. 
Nothing in the record evidences whether the Reference Rate's 
Constituent Bitcoin Platforms have complied with this NYSDFS 
guidance. Further, as stated previously, there are substantial 
differences between the NYSDFS and FinCEN versus 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 at 12603 n.101.
---------------------------------------------------------------------------

    The Constituent Bitcoin Platforms, on the other hand, have none of 
these requirements (none are registered as a national securities 
exchange).\99\ Further, although the Custodian claims that the 
Constituent Bitcoin Platforms have market surveillance tools and 
strategies that are growing in sophistication, the Custodian provides 
no supporting evidence to substantiate its claims. Moreover, even 
assuming that the Constituent Bitcoin Platforms are as vigilant towards 
fraud and manipulation as the Custodian describes, neither the Exchange 
nor the Custodian attempts to establish that only the Constituent 
Bitcoin Platforms'' ability to detect and deter fraud and manipulation 
would matter, exclusive of other bitcoin spot markets. In other words, 
neither addresses how fraud and manipulation on other bitcoin spot 
markets may influence the price of bitcoin.
---------------------------------------------------------------------------

    \99\ See 15 U.S.C. 78e, 78f.
---------------------------------------------------------------------------

    Third, the Exchange does not explain the significance of the 
Reference Rate'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 Reference Rate is resistant to 
manipulation, the Trust's NAV, and thereby the Shares as well, would be 
resistant to manipulation, the Exchange has not established in the 
record a basis for such conclusion. That assumption aside, the 
Commission notes that the Shares would trade at market-based prices in 
the secondary market, not at NAV, which then raises the question of the 
significance of the NAV calculation to the manipulation of the Shares.
    Fourth, the Exchange's arguments are contradictory. While arguing 
that the Reference Rate is resistant to manipulation, the Exchange 
simultaneously downplays the importance of the Reference Rate in light 
of the Trust's in-kind creation and redemption mechanism.\100\ The 
Exchange points out that the Trust will create and redeem Shares in-
kind, not in cash, which renders the NAV calculation, and thereby the 
ability to manipulate NAV, ``significantly less important.'' \101\ 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.'' \102\ If the Reference Rate that the Trust 
uses to value the Trust's bitcoin ``is not particularly important,'' it 
follows that the Reference Rate's resistance to manipulation is not 
material to the Shares' susceptibility to fraud and manipulation.\103\ 
As neither the Exchange nor the Sponsor addresses or provides any 
analysis with respect to these issues, the Commission cannot conclude 
that the Reference Rate aids in the determination that the proposal to 
list and trade the Shares is designed to prevent fraudulent and 
manipulative acts and practices.
---------------------------------------------------------------------------

    \100\ See supra notes 80-84 and accompanying text.
    \101\ See Notice, 86 FR at 22492 (``While the Sponsor believes 
that the Reference Rate 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 manipulability of the Reference Rate 
significantly less important.'').
    \102\ See id. (concluding that ``because the Trust will not 
accept cash to buy bitcoin in order to create new shares or, barring 
a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin 
is not particularly important.'').
    \103\ Similarly, the Sponsor asserts that the Trust and the 
Shares are inherently resistant to manipulation due to the in-kind 
create/redeem process. See Kryptoin Letter at 1. Yet in the 
Sponsor's own words, the creation and redemption of Shares is 
``completely independent'' of the value of bitcoin at that point in 
time, i.e., completely independent of the Reference Rate and the 
Trust's NAV. See id. at 2. As such, going by the Sponsor's own 
assertion, it again follows that the Reference Rate's resistance to 
manipulation is not material to the Shares'' susceptibility to fraud 
and manipulation.

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

[[Page 74174]]

    Fifth, the Commission finds that neither BZX nor the Sponsor has 
demonstrated that in-kind creations and redemptions provide the Shares 
with a unique resistance to manipulation.\104\ The Commission has 
previously addressed similar assertions.\105\ 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.\106\ 
Accordingly, the Commission is not persuaded here that the Trust's in-
kind creations and redemptions afford it a unique resistance to 
manipulation.\107\
---------------------------------------------------------------------------

    \104\ The Sponsor asserts that the in-kind create/redeem process 
provides for an arbitrage pricing mechanism whereby authorized 
participants trade the price deviations ``between the Trust's 
secondary market prices and NAV,'' keeping the Shares'' price ``at 
or near NAV'' (emphasis added). See Kryptoin Letter at 2. However, 
this assertion is also contradicted by the Sponsor's statement that 
the in-kind create/redeem process means that the amount of bitcoin 
that an authorized participant delivers to or receives from the 
Trust is ``completely independent'' of the value of bitcoin, i.e., 
completely independent of NAV and the Reference Rate used to compute 
it. See id. Moreover, the prerequisite of an efficient arbitrage 
mechanism is not unique to the proposal here, as it is a fundamental 
premise of any ETP or exchange-traded fund, and the Commission has 
not previously dispensed with the requirement of a surveillance-
sharing agreement based on an efficient arbitrage mechanism.
    \105\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08.
    \106\ See, e.g., iShares COMEX Gold Trust, Securities Exchange 
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26, 
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange 
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24, 
2006) (SR-Amex-2005-072).
    \107\ Putting aside the Exchange's various assertions about the 
nature of bitcoin and the bitcoin market, the Reference Rate, and 
the Shares, the Exchange also does not address concerns the 
Commission has previously identified, including the susceptibility 
of bitcoin markets to potential trading on material, non-public 
information (such as plans of market participants to significantly 
increase or decrease their holdings in bitcoin; new sources of 
demand for bitcoin; the decision of a bitcoin-based investment 
vehicle on how to respond to a ``fork'' in the bitcoin blockchain, 
which would create two different, non-interchangeable types of 
bitcoin), or to the dissemination of false or misleading 
information. See Winklevoss Order, 83 FR at 37585. See also USBT 
Order, 85 FR at 12600-01.
---------------------------------------------------------------------------

    Finally, the Sponsor, in a comment letter, cites to the 
Commission's 2004 approval of the SPDR Gold Trust as evidence that a 
combination of (1) a deep and liquid spot market, (2) an information-
sharing agreement with a commodity futures exchange, and (3) exchange 
trading rules to govern the trading of ETP shares by liquidity 
providers, justify dispensing with the requisite surveillance-sharing 
agreement.\108\ The Sponsor states that the spot bitcoin market is deep 
and liquid; \109\ that the Exchange is a member of ISG, as is the CME 
that lists bitcoin futures; and that the Exchange has rules in place to 
govern the trading of the Trust's Shares.\110\ The Sponsor concludes 
that, therefore, there is a solid base of evidence to support the 
Commission's approval of the proposed ETP.\111\
---------------------------------------------------------------------------

    \108\ See Kryptoin Letter at 13, citing Securities Exchange Act 
Release No. 50604 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) 
(``Gold Order'').
    \109\ The Sponsor states that, for the six-month period ending 
August 13, 2021, average daily spot bitcoin trading volume across 
approximately 40 spot exchanges was $9.88 billion. The Sponsor 
compares this to estimates in the Gold Order of the 2003 high 
average daily gold trading volume of $7.9 billion (19 million troy 
ounces) and low average of $5.67 billion (13.6 million troy ounces). 
The Sponsor believes that the bitcoin spot market therefore meets, 
and exceeds, the Commission's ``definition'' of an extremely deep 
and liquid market. See id. at 4.
    \110\ The Sponsor cites BZX Rule 14.11(e)(4)(G) regarding the 
types of records and information that registered market makers in 
Commodity-Based Trust Shares must provide to the Exchange. See id. 
at 13-14.
    \111\ See id. at 13.
---------------------------------------------------------------------------

    The Commission disagrees. The Commission considered and discussed 
the Gold Order at length in the Winklevoss Order. While the Gold Order 
observes that it is ``not possible . . . to enter into an information 
sharing agreement with the OTC gold market,'' the order continues: 
``Nevertheless, the Commission believes that the unique liquidity and 
depth of the gold market, together with the MOU [Memorandum of 
Understanding] with NYMEX (of which COMEX is a Division) and NYSE Rules 
1300(b) and 1301, create the basis for the [ETP listing exchange] to 
monitor for fraudulent and manipulative practices in the trading of the 
Shares.'' \112\ Thus, even though the Commission found that the OTC 
market for gold was ``extremely deep and liquid,'' \113\ the 
Commission's approval of the first precious metal ETP expressly relied 
on an agreement to share surveillance information between the ETP 
listing exchange and a significant, regulated market for gold 
futures.\114\ The Commission continues to maintain that the Gold Order 
demonstrates the importance of establishing an agreement to share 
surveillance information between the ETP listing exchange and a 
significant, regulated market.\115\ Accordingly, having a surveillance-
sharing agreement with CME is not sufficient--the Exchange must 
demonstrate that CME is ``a significant, regulated market.''
---------------------------------------------------------------------------

    \112\ See Gold Order, 69 FR at 64619.
    \113\ See id.
    \114\ See Winklevoss Order, 83 FR at 37592-94.
    \115\ See id. at 37594. The Commission further stated that 
``[c]onsistent with the discussion of `significant market' . . . , 
the Commission has not previously, and does not now, require that an 
ETP listing exchange be able to enter into a surveillance-sharing 
agreement with each regulated spot or derivatives market relating to 
an underlying asset, provided that the market or markets with which 
there is such an agreement constitute a `significant market'.'' See 
id. at 37595.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size
    As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and 
manipulative acts and practices, the Commission next examines whether 
the record supports the conclusion that BZX has entered into a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size relating to the underlying assets. In this context, 
the term ``market of significant size'' includes a market (or group of 
markets) as to which (i) there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (ii) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\116\
---------------------------------------------------------------------------

    \116\ See id. at 37594. This definition is illustrative and not 
exclusive. There could be other types of ``significant markets'' and 
``markets of significant size,'' but this definition is an example 
that provides guidance to market participants. See id.
---------------------------------------------------------------------------

    As the Commission has stated in the past, it considers two markets 
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate 
bilateral surveillance-sharing agreement.\117\ Accordingly, based on 
the common membership of BZX and CME in the ISG,\118\ BZX has the 
equivalent of a comprehensive surveillance-sharing agreement with CME. 
However, while the Commission recognizes that the CFTC regulates the 
CME futures market,\119\ including the CME bitcoin futures market, and 
thus such market is ``regulated,'' in the context of the

[[Page 74175]]

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.\120\
---------------------------------------------------------------------------

    \117\ See id. at 37580 n.19.
    \118\ See Notice, 86 FR at 22491 nn.56-57 and accompanying text.
    \119\ While the Commission recognizes that the CFTC regulates 
the CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying bitcoin spot market. See Winklevoss 
Order, 83 FR at 37587, 37599.
    \120\ As described above (see supra notes 93-99 and accompanying 
text), in the context of the proposed ETP, the Reference Rate's 
Constituent Bitcoin Platforms are not ``regulated.'' They are not 
registered as ``exchanges'' and lack the obligations, authority, and 
oversight of national securities exchanges. Thus the Commission 
limits the scope of its analysis to the CME.
---------------------------------------------------------------------------

(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.\121\ 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.'' \122\ 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.\123\ 
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.\124\ Similarly, BZX contends that the 
number of large open interest holders \125\ has continued to increase, 
even as the price of bitcoin has risen, as have the number of unique 
accounts trading CME bitcoin futures.\126\
---------------------------------------------------------------------------

    \121\ According to BZX, each contract represents five bitcoin 
and is based on the CME CF Bitcoin Reference Rate. See Notice, 86 FR 
at 22489.
    \122\ See id.
    \123\ See id.
    \124\ See id.
    \125\ BZX represents that a large open interest holder in CME 
bitcoin futures is an entity that holds at least 25 contracts, which 
is the equivalent of 125 bitcoin. According to BZX, at a price of 
approximately $30,000 per bitcoin on December 31, 2020, more than 80 
firms had outstanding positions of greater than $3.8 million in CME 
bitcoin futures. See id. at 22490 n.51.
    \126\ See id. at 22490.
---------------------------------------------------------------------------

    The Sponsor, in a comment letter, adds that CME trading volume has 
continued to increase substantially: Increasing by approximately 220 
percent in July 2021 versus July 2020; increasing by approximately 156 
percent year-to-date July 2021 versus year-to-date July 2020; reaching 
a record daily notional traded value of $7.33 billion on February 23, 
2021, and a record open interest value of $3.17 billion on February 19, 
2021; and in the six-month period ending August 13, 2021, reaching an 
average daily trading volume of $2.20 billion and average open interest 
of $1.98 billion.\127\ The Sponsor states that this exceeds the 2003 
average daily COMEX gold futures trading volume of approximately $2.04 
billion.\128\
---------------------------------------------------------------------------

    \127\ See Kryptoin Letter at 5.
    \128\ See id. at 4.
---------------------------------------------------------------------------

    BZX argues that the significant growth in CME bitcoin futures 
across each of trading volumes, open interest, large open interest 
holders, and total market participants since the USBT Order was issued 
is reflective of that market's growing influence on the spot price. BZX 
asserts that where CME bitcoin futures lead the price in the spot 
market such that a potential manipulator of the bitcoin spot market 
(beyond just the Constituent Bitcoin Platforms) would have to 
participate in the CME bitcoin futures market, it follows that a 
potential manipulator of the Shares would similarly have to transact in 
the CME bitcoin futures market.\129\
---------------------------------------------------------------------------

    \129\ See Notice, 86 FR at 22491.
---------------------------------------------------------------------------

    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.\130\ BZX concludes that a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP.\131\
---------------------------------------------------------------------------

    \130\ See id. at 22491, 22496 & n.52 (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'')).
    \131\ See id. at 22491-92, 22496.
---------------------------------------------------------------------------

    The Sponsor, in a comment letter, also argues that there is a 
reasonable likelihood that a person attempting to manipulate the Shares 
would also have to trade on the CME to manipulate the Shares.\132\ 
Citing Hu, Hou & Oxley as evidence that CME bitcoin futures lead the 
price in the bitcoin spot markets,\133\ the Sponsor states that an 
attempt to manipulate the spot market would require participation in 
the CME bitcoin futures market.\134\ The Sponsor asserts that it 
follows, then, that an attempted manipulation of the Shares would 
similarly require participation in the CME bitcoin futures market, 
because both the CME CF Bitcoin Real-Time Index (``BRTI'') and the BRR, 
upon which CME bitcoin futures are settled, are calculated by observing 
prices in the underlying spot bitcoin markets.\135\ The Sponsor asserts 
that an interrelationship between the CME bitcoin futures market and 
the Trust exists because the Trust's Reference Rate is based materially 
on the same methodology as the BRTI and BRR,\136\ and therefore it is 
reasonable to assume that any effort to manipulate the Trust's NAV or 
Share price would also require an attempted manipulation of the CME 
bitcoin futures prices.\137\ The Sponsor concludes that, because both 
the Exchange and the CME are members of the ISG, such attempted 
misconduct would be effectively detected and deterred.\138\
---------------------------------------------------------------------------

    \132\ See Kryptoin Letter at 12.
    \133\ See id. at 11 n.22.
    \134\ See id. at 12.
    \135\ See id.
    \136\ See id. at 2.
    \137\ See id. at 2-3, 12.
    \138\ See id. at 3, 12.
---------------------------------------------------------------------------

    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 and the Sponsor's 
assertions about the general upward trends from 2018 to August 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 and the Sponsor provide data showing 
absolute growth in the size of the CME bitcoin futures market, they 
provide no data relative to the concomitant growth in either the 
bitcoin spot markets or other bitcoin futures markets (including 
unregulated futures markets). Moreover, even if the CME has grown in 
relative size, as the Commission has previously articulated, the 
interpretation of the term ``market of significant size'' or 
``significant market'' depends on the interrelationship between the 
market with which the listing exchange has a surveillance-sharing 
agreement and the proposed ETP.\139\ BZX's recitation of data 
reflecting the size of the CME bitcoin futures market, alone, either

[[Page 74176]]

currently or in relation to previous years, is not sufficient to 
establish an interrelationship between the CME bitcoin futures market 
and the proposed ETP.\140\
---------------------------------------------------------------------------

    \139\ See USBT Order, 85 FR at 12611.
    \140\ See id. at 12612.
---------------------------------------------------------------------------

    Moreover, while the Sponsor asserts that an interrelationship 
exists between the CME bitcoin futures market and the Trust, on account 
of the Trust's Reference Rate being based materially on the same 
methodology as the BRTI and BRR,\141\ and asserts that it is therefore 
reasonable to assume that any effort to manipulate the Trust's NAV or 
Share price would also require an attempted manipulation of the CME 
bitcoin futures prices,\142\ the Sponsor provides no mechanism or 
example that would demonstrate the accuracy of the assumption. 
Moreover, as addressed above, the Sponsor itself undermines such an 
assumption by its own recognition that the Trust's in-kind create/
redeem process is ``completely independent'' of the value of 
bitcoin,\143\ and thereby completely independent of the Reference Rate 
used to compute such a value.
---------------------------------------------------------------------------

    \141\ See Kryptoin Letter at 2.
    \142\ See id. at 2-3, 12.
    \143\ See id. at 2 and supra notes 100-104 and accompanying 
text.
---------------------------------------------------------------------------

    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.\144\ While BZX and the 
Sponsor state that CME bitcoin futures pricing leads the spot 
market,\145\ they rely on the findings of a price discovery analysis in 
one section of a single academic paper to support the overall 
thesis.\146\ However, the findings of that paper's Granger causality 
analysis, which is widely used to formally test for lead-lag 
relationships, are concededly mixed.\147\ 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.\148\ 
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.\149\ 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.\150\ BZX 
has not addressed either issue.
---------------------------------------------------------------------------

    \144\ See USBT Order, 85 FR at 12611. Listing exchanges have 
attempted to demonstrate such an ``interrelationship'' by presenting 
the results of various econometric ``lead-lag'' analyses. The 
Commission considers such analyses to be central to understanding 
whether it is reasonably likely that a would-be manipulator of the 
ETP would need to trade on the CME bitcoin futures market. See id. 
at 12612.
    \145\ See Notice, 86 FR at 22491; Kryptoin Letter at 12.
    \146\ See supra note 130 and accompanying text. BZX and the 
Sponsor reference the following conclusion from the ``time-varying 
price discovery'' section of Hu, Hou & Oxley: ``There exist no 
episodes where the Bitcoin spot markets dominates the price 
discovery processes with regard to Bitcoin futures. This points to a 
conclusion that the price formation originates solely in the Bitcoin 
futures market. We can, therefore, conclude that the Bitcoin futures 
markets dominate the dynamic price discovery process based upon 
time-varying information share measures. Overall, price discovery 
seems to occur in the Bitcoin futures markets rather than the 
underlying spot market based upon a time-varying perspective . . .'' 
See Notice, 86 FR at 22491 n.52; Kryptoin Letter at 11 n.22.
    \147\ The paper finds that the CME bitcoin futures market 
dominates the spot markets in terms of Granger causality, but that 
the causal relationship is bi-directional, and a Granger causality 
episode from March 2019 to June/July 2019 runs from bitcoin spot 
prices to CME bitcoin futures prices. The paper concludes: ``[T]he 
Granger causality episodes are not constant throughout the whole 
sample period. Via our causality detection methods, market 
participants can identify when markets are being led by futures 
prices and when they might not be.'' See Hu, Hou & Oxley, supra note 
130.
    \148\ See USBT Order, 85 FR at 12609.
    \149\ See id. at 12613 n.244.
    \150\ See id.
---------------------------------------------------------------------------

    Moreover, BZX does not provide results of its own analysis and does 
not present any other data supporting its conclusion. BZX's unsupported 
representations constitute an insufficient basis for approving a 
proposed rule change in circumstances where, as here, the Exchange's 
assertion would form such an integral role in the Commission's analysis 
and the assertion is subject to several challenges.\151\ 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.\152\ In the USBT Order, the 
Commission responded to multiple academic papers that were cited and 
concluded that, in light of the mixed results found, the exchange there 
had not demonstrated that it is reasonably likely that a would-be 
manipulator of the proposed ETP would transact on the CME bitcoin 
futures market.\153\ 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.\154\
---------------------------------------------------------------------------

    \151\ See Susquehanna, 866 F.3d at 447.
    \152\ See, e.g., D. Baur & T. Dimpfl, Price discovery in bitcoin 
spot or futures?, 39 J. Futures Mkts. 803 (2019) (finding that the 
bitcoin spot market leads price discovery); O. Entrop, B. Frijns & 
M. Seruset, The determinants of price discovery on bitcoin markets, 
40 J. Futures Mkts. 816 (2020) (finding that price discovery 
measures vary significantly over time without one market being 
clearly dominant over the other); J. Hung, H. Liu & J. Yang, Trading 
activity and price discovery in Bitcoin futures markets, 62 J. 
Empirical Finance 107 (2021) (finding that the bitcoin spot market 
dominates price discovery); B. Kapar & J. Olmo, An analysis of price 
discovery between Bitcoin futures and spot markets, 174 Econ. 
Letters 62 (2019) (finding that bitcoin futures dominate price 
discovery); 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 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).
    \153\ See USBT Order, 85 FR at 12613 nn.239-244 and accompanying 
text.
    \154\ In addition, the Exchange fails to address the 
relationship (if any) between prices on other bitcoin futures 
markets and the CME bitcoin futures market, the bitcoin spot market, 
and/or the particular Constituent Bitcoin Platforms, or where price 
formation occurs when the entirety of bitcoin futures markets, not 
just CME, is considered.
---------------------------------------------------------------------------

    The Commission accordingly concludes that the information provided 
in the record 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

[[Page 74177]]

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.\155\
---------------------------------------------------------------------------

    \155\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

    BZX asserts that trading in the Shares would not be the predominant 
force on prices in the CME bitcoin futures market (or spot market) 
because of the significant volume in the CME bitcoin futures market, 
the size of bitcoin's market capitalization, which is approximately $1 
trillion, and the significant liquidity available in the spot 
market.\156\ 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.\157\ 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.\158\ 
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.\159\ 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.\160\ The Sponsor agrees.\161\
---------------------------------------------------------------------------

    \156\ See Notice, 86 FR at 22492, 22496.
    \157\ See id. According to BZX, these statistics are based on 
samples of bitcoin liquidity in U.S. dollars (excluding stablecoins 
or Euro liquidity) based on executable quotes on Coinbase Pro, 
Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin 
during February 2021. See id. at 22492 n.61.
    \158\ See id. at 22492, 22496.
    \159\ See id.
    \160\ See id.
    \161\ See Kryptoin Letter at 12.
---------------------------------------------------------------------------

    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 \162\ 
--it will only address below the other two bases--the overall size of, 
and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------

    \162\ See supra notes 144-154 and accompanying text.
---------------------------------------------------------------------------

    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. Moreover, in 
the Trust's Registration Statement, the Sponsor acknowledges that the 
Trust may acquire large size positions in bitcoin, which would increase 
the risk of illiquidity in the underlying bitcoin. Specifically, the 
Sponsor, in the Registration Statement, states that the Trust may 
acquire large size positions in bitcoin, which will increase the risk 
of illiquidity by both making the positions more difficult to liquidate 
and increasing the losses incurred while trying to do so, or by making 
it more difficult for authorized participants to acquire or liquidate 
bitcoin as part of the creation and/or redemption of Shares of the 
Trust.\163\ Although the Trust's Registration Statement concedes that 
the Trust could negatively affect the liquidity of bitcoin, BZX does 
not address this in the proposal or discuss how impacting the liquidity 
of bitcoin can be consistent with the assertion that the Shares are 
unlikely to be the predominant influence on the prices of 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.
---------------------------------------------------------------------------

    \163\ See Registration Statement at 18.
---------------------------------------------------------------------------

    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.\164\ 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.
---------------------------------------------------------------------------

    \164\ See Notice, 86 FR at 22492, 22496 (``For a $10 million 
market order, the cost to buy or sell is roughly 20 basis points 
with a market impact of 50 basis points. Stated another way, a 
market participant could enter a market buy or sell order for $10 
million of bitcoin and only move the market 0.5%.'').
---------------------------------------------------------------------------

    Thus, because BZX 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

[[Page 74178]]

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.\165\ 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.
---------------------------------------------------------------------------

    \165\ See Winklevoss Order, 83 FR at 37602. See also 
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at 
43941; USBT Order, 85 FR at 12615.
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    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.\166\ Specifically, BZX argues 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.\167\ 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.\168\
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    \166\ See Notice, 86 FR at 22487.
    \167\ See 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.
    \168\ See id.
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    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.'' \169\ BZX represents that, historically, OTC 
bitcoin funds have traded at a significant premium to NAV.\170\ 
Although the Exchange concedes that trading at a premium or 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.\171\ 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.\172\
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    \169\ See id. BZX also states that, unlike the Shares, because 
OTC bitcoin funds are not listed on an exchange, they are not 
subject to the same transparency and regulatory oversight by a 
listing exchange. BZX further asserts that the existence of a 
surveillance-sharing agreement between BZX and the CME bitcoin 
futures market would result in increased investor protections for 
the Shares compared to OTC bitcoin funds. See id. at 22487 n.38.
    \170\ See id. at 22487. 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 22487 n.39.
    \171\ See id. at 22488.
    \172\ See id. The Sponsor, in a comment letter, states that 
sophisticated market participants have referred to this potential 
source of profit at the expense of retail investors as a ``free put 
option'' embedded in the OTC bitcoin funds. See Kryptoin Letter at 
9.
---------------------------------------------------------------------------

    One commenter expresses support for the approval of bitcoin ETPs 
because they believe such ETPs would have lower premium/discount 
volatility and lower management fees than an OTC bitcoin fund.\173\ The 
Sponsor, in a comment letter, states that on a year-to-date basis 
through August 13, 2021, the OTC bitcoin fund's total return was 19.91 
percent versus its NAV of 56.56 percent; and on a one-year basis 
through August 13, 2021, the fund's total return was 192.7 percent 
versus its NAV return of 288.6 percent.\174\ The Sponsor also states 
that, because OTC bitcoin funds are not listed on an exchange, they are 
therefore not subject to the same transparency and regulatory oversight 
by a listing exchange as the Trust's Shares would be.\175\
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    \173\ See letter from Anonymous, dated June 17, 2021.
    \174\ See Kryptoin Letter at 8. In addition to the premium/
discount volatility's direct investment risk to retail investors, 
the Sponsor also points to two additional risks of the OTC bitcoin 
fund: (1) The inability to redeem or sell back shares to the fund in 
exchange for bitcoin or cash means that sophisticated investors who 
previously created shares directly with the fund at NAV before its 
shares began trading at a discount are now facing potentially 
substantial and widespread capital losses; and (2) because the fund 
periodically closes and does not accept any further investment 
through private placement, accredited and institutional investors 
could be unable to deploy capital in compliance with their 
investment mandates. See id. at 9.
    \175\ See id.
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    BZX also asserts that exposure to bitcoin through an ETP also 
presents advantages for retail investors compared to buying spot 
bitcoin directly.\176\ BZX asserts that, without the advantages of an 
ETP, an individual retail investor holding bitcoin through a 
cryptocurrency trading platform lacks protections.\177\ 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.\178\ 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.\179\ 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.\180\ Thus, with respect to custody of the 
Trust's bitcoin assets,

[[Page 74179]]

BZX concludes that, compared to owning spot bitcoin directly, the Trust 
presents advantages from an investment protection standpoint for retail 
investors.\181\
---------------------------------------------------------------------------

    \176\ See Notice, 86 FR at 22488.
    \177\ See id.
    \178\ See id.
    \179\ See id.
    \180\ See id.
    \181\ See id.
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    The Custodian, in a comment letter, echoes some of the descriptions 
of the custodial arrangement.\182\ The Custodian also specifies that 
its offline ``cold'' storage solution will hold the Trust's bitcoin in 
Hardware Security Modules that have achieved the highest security level 
of U.S. federal government standards and that are physically protected 
at the Custodian's network of secure facilities and that to carry out a 
transfer from the Trust's account, a quorum of these secure facilities 
must be involved to sign the transaction.\183\ Also, according to the 
Custodian, it maintains digital asset insurance, is regularly audited 
by major financial and audit firms, and is subject to independent 
third-party verification that the Custodian's operations and security 
compliance structures meet the most robust of industry standards.\184\ 
The Sponsor, in a comment letter, adds that the Custodian will perform 
its duties in a manner that meets the definition of a qualified 
custodian under the Investment Advisers Act of 1940, as amended.\185\
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    \182\ See Gemini Letter at 2-3.
    \183\ See id.
    \184\ See id.
    \185\ See Kryptoin Letter at 10.
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    BZX further asserts that a number of operating companies engaged in 
unrelated businesses have announced investments as large as $1.5 
billion in bitcoin.\186\ 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.\187\ 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.\188\
---------------------------------------------------------------------------

    \186\ See Notice, 86 FR at 22487.
    \187\ See id. at 22488-89. The Custodian, in its comment letter, 
agrees that the proposed ETP would offer greater investor protection 
and transparency than existing alternatives for retail customers to 
gain proxy exposure to bitcoin. See Gemini Letter at 2.
    \188\ See Notice, 86 FR at 22489.
---------------------------------------------------------------------------

    BZX also states that investors in many other countries, including 
Canada, are able to use more traditional exchange-listed and traded 
products to gain exposure to bitcoin, disadvantaging U.S. investors and 
leaving them with more risky means of getting bitcoin exposure.\189\ 
The Sponsor, in a comment letter, states that obtaining bitcoin 
exposure through CME bitcoin futures ``generally remain[s] beyond the 
scope of comfort level of retail investors'' because of, among other 
reasons, the risk of margin calls. The Sponsor states that this risk is 
eliminated entirely in the case of investors holding non-margin bitcoin 
investment alternatives, such as a bitcoin ETP.\190\
---------------------------------------------------------------------------

    \189\ See id. at 22487. 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 22487 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 22487 n.37.
    \190\ See Kryptoin Letter at 10.
---------------------------------------------------------------------------

    In essence, BZX asserts that the risky nature of direct investment 
in the underlying bitcoin and the unregulated markets on which bitcoin 
and OTC bitcoin funds trade compel approval of the proposed rule 
change. The Commission disagrees. Pursuant to Section 19(b)(2) of the 
Exchange Act, the Commission must approve a proposed rule change filed 
by a national securities exchange if it finds that the proposed rule 
change is consistent with the applicable requirements of the Exchange 
Act--including the requirement under Section 6(b)(5) that the rules of 
a national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices--and it must disapprove the filing if 
it does not make such a finding.\191\ 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.\192\
---------------------------------------------------------------------------

    \191\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \192\ See SolidX Order, 82 FR at 16259; WisdomTree Order, 86 FR 
at 69334.
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    Here, even if it were true that, compared to trading in unregulated 
bitcoin spot markets, trading a bitcoin-based ETP on a national 
securities exchange provides some additional protection to investors, 
the Commission must consider this potential benefit in the broader 
context of whether the proposal meets each of the applicable 
requirements of the Exchange Act.\193\ 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.
---------------------------------------------------------------------------

    \193\ See supra note 165.
---------------------------------------------------------------------------

    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.\194\
---------------------------------------------------------------------------

    \194\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, BZX has not met its burden of 
demonstrating that the proposal is consistent with Exchange Act Section 
6(b)(5),\195\ and, accordingly, the Commission must disapprove the 
proposal.\196\
---------------------------------------------------------------------------

    \195\ 15 U.S.C. 78f(b)(5).
    \196\ 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).
---------------------------------------------------------------------------

D. Other Comments

    Comment letters also address the general nature and uses of 
bitcoin; \197\ the state of development of bitcoin as a digital asset; 
\198\ the inherent value of, and risks of investing in, bitcoin; \199\ 
the desire of investors to gain access to bitcoin through an ETP; \200\ 
the retirement investment benefits of a

[[Page 74180]]

bitcoin ETP; \201\ and the bitcoin network's effect on the 
environment.\202\ Ultimately, however, additional discussion of these 
topics is unnecessary, as they do not bear on the basis for the 
Commission's decision to disapprove the proposal.
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    \197\ See, e.g., Patel Letter; letter from Sam Ahn, dated April 
28, 2021 (``Ahn Letter'').
    \198\ See, e.g., Ahn Letter; Gemini Letter at 2.
    \199\ See, e.g., Ahn Letter; Patel Letter; letter from Bradley 
M. Kuhn, dated April 25, 2021 (``Kuhn Letter'').
    \200\ See, e.g., Kuhn Letter; Gemini Letter at 2; Kryptoin 
Letter at 7.
    \201\ See, e.g., Kuhn Letter.
    \202\ See, e.g., Patel Letter.
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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-2021-029 be, and 
hereby is, disapproved.

    By the Commission.
Vanessa A. Countryman,
Secretary.
 [FR Doc. 2021-28255 Filed 12-28-21; 8:45 am]
 BILLING CODE 8011-01-P