Document ID: SEC-2022-1352-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2022-10-14T04:00Z

[Federal Register Volume 87, Number 198 (Friday, October 14, 2022)]
[Notices]
[Pages 62466-62483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22345]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96011; File No. SR-CboeBZX-2022-006]

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

October 11, 2022.

I. Introduction

    On January 25, 2022, 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 WisdomTree Bitcoin Trust (``Trust'') under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares. The proposed rule change was 
published for comment in the Federal Register on February 14, 2022.\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. 94184 (Feb. 8, 
2022), 87 FR 8318 (``Notice''). Comments received on the proposed 
rule change are available at: https://www.sec.gov/comments/sr-cboebzx-2022-006/srcboebzx2022006.htm. BZX previously filed, and the 
Commission disapproved, a substantially similar proposal to list and 
trade the Shares of the Trust. See Notice of Filing of 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. 91521 (Apr. 9, 2021), 86 FR 19917 (Apr. 15, 
2021); 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'').
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    On March 18, 2022, 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 May 13, 2022, 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\ 
and on August 4, 2022, 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. 94476, 87 FR 16800 
(Mar. 24, 2022).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 94907, 87 FR 30546 
(May 19, 2022).
    \8\ See Securities Exchange Act Release No. 95422, 87 FR 48738 
(Aug. 10, 2022).
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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), which 
requires, in relevant part, that the rules of a national securities 
exchange be ``designed to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \9\
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    \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 analytical framework used in 
its orders considering previous proposals to list bitcoin \10\-based 
commodity trusts and bitcoin-based trust issued receipts to assess 
whether a listing exchange of an exchange-traded product (``ETP'') can 
meet its obligations under Exchange Act Section 6(b)(5).\11\ As the 
Commission

[[Page 62467]]

has explained, an exchange that lists bitcoin-based ETPs \12\ 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.\13\
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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, 87 FR at 8320.
    \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''); 
WisdomTree Order; Order Disapproving a Proposed Rule Change To List 
and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the Kryptoin 
Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021), 
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under 
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006 
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37) 
(``SkyBridge Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022) 
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin 
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), 
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR 
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10, 
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X 
Order''); Order Disapproving a Proposed Rule Change, as Modified by 
Amendment No. 1, To List and Trade Shares of the ARK 21Shares 
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 94571 (Mar. 31, 2022), 
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the One River Carbon Neutral Bitcoin Trust Under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities 
Exchange Act Release No. 94999 (May 27, 2022), 87 FR 33548 (June 2, 
2022) (SR-NYSEArca-2021-67) (``One River Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares), Securities Exchange Act Release No. 95179 (June 
29, 2022), 87 FR 40282 (July 6, 2022) (SR-NYSEArca-2021-89) 
(``Bitwise Order''); Order Disapproving a Proposed Rule Change, as 
Modified by Amendment No. 1, To List and Trade Shares of Grayscale 
Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares), Securities Exchange Act Release No. 95180 (June 29, 2022), 
87 FR 40299 (July 6, 2022) (SR-NYSEArca-2021-90) (``Grayscale 
Order''). In addition, orders were issued by delegated authority on 
the following matters: 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''); 
Order Disapproving a Proposed Rule Change To List and Trade the 
Shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin 
ETF, Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83 
FR 43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) (``ProShares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade the Shares of the GraniteShares Bitcoin ETF and the 
GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No. 
83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-
001) (``GraniteShares Order''); Order Disapproving a Proposed Rule 
Change To List and Trade Shares of the VanEck Bitcoin Trust Under 
BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities 
Exchange Act Release No. 93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 
18, 2021) (SR-CboeBZX-2021-019) (``VanEck Order''); Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 2, 
To List and Trade Shares of the Teucrium Bitcoin Futures Fund Under 
NYSE Arca Rule 8.200-E, Commentary .02 (Trust Issued Receipts), 
Securities Exchange Act Release No. 94620 (Apr. 6, 2022), 87 FR 
21676 (Apr. 12, 2022) (SR-NYSEArca-2021-53) (``Teucrium Order''); 
Order Granting Approval of a Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2, To List and Trade Shares of the Valkyrie 
XBTO Bitcoin Futures Fund Under Nasdaq Rule 5711(g), Securities 
Exchange Act Release No. 94853 (May 5, 2022), 87 FR 28848 (May 11, 
2022) (SR-NASDAQ-2021-066) (``Valkyrie XBTO Order'').
    \12\ As used in this order, the term ``ETFs'' refers to open-end 
exchange-traded funds that register the offer and sale of their 
shares under the Securities Act of 1933 (``Securities Act'') and are 
regulated as investment companies under the Investment Company Act 
of 1940 (``1940 Act''). The term ``ETPs'' refers to exchange-traded 
products that register the offer and sale of their shares under the 
Securities Act but are not regulated under the 1940 Act, such as 
commodity trusts and trust issued receipts.
    \13\ 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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    In this context, 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.\14\ 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.'' \15\
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    \14\ See Winklevoss Order, 83 FR at 37594. See also USBT Order, 
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322.
    \15\ See USBT Order, 85 FR at 12597.
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    Although surveillance-sharing agreements are not the exclusive 
means by which a listing exchange of a commodity-trust ETP can meet its 
obligations under Exchange Act Section 6(b)(5), such agreements have 
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has 
historically recognized their importance. And where, as here, a listing 
exchange fails to establish that other means to prevent fraudulent and 
manipulative acts and practices will be sufficient, the listing 
exchange must enter into a surveillance-sharing agreement with a 
regulated market of significant size because such agreements detect and 
deter fraudulent and manipulative activity.\16\
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    \16\ 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, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98) 
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at 
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43924; USBT Order, 85 FR at 12596.
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    The Commission has long recognized that surveillance-sharing 
agreements ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur'' and thus ``enable the Commission 
to continue to effectively protect investors and promote the public 
interest.'' \17\ As the Commission has emphasized, it is essential for 
an exchange listing a derivative securities product to have the ability 
that surveillance-sharing agreements provide 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.\18\ 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.\19\
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    \17\ NDSP Adopting Release, 63 FR at 70954, 70959. See also id. 
at 70959 (``It is essential that the SRO [self-regulatory 
organization] have the ability to obtain the information necessary 
to detect and deter market manipulation, illegal trading and other 
abuses involving the new derivative securities product. 
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative 
securities product and its underlying securities in place between 
the SRO listing or trading a derivative product and the markets 
trading the securities underlying the new derivative securities 
product.'').
    \18\ See NDSP Adopting Release, 63 FR at 70959.
    \19\ See Winklevoss Order, 83 FR at 37592-93 (discussing 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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    The Commission has explained that the ability of a national 
securities exchange to enter into surveillance-sharing agreements 
``furthers the protection of investors and the public interest because 
it will enable the [e]xchange to conduct prompt investigations into 
possible trading violations and other regulatory improprieties.'' \20\ 
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of 
derivative security products, such as equity options, because a 
surveillance-sharing agreement ``permits the sharing of information'' 
that is ``necessary to detect'' manipulation and ``provide[s] an 
important deterrent to manipulation because [it] facilitate[s] the 
availability of information needed to fully investigate a potential

[[Page 62468]]

manipulation if it were to occur.'' \21\ With respect to ETPs, when 
approving the listing and trading of one of the first commodity-linked 
ETPs--a commodity-linked exchange-traded note--on a national securities 
exchange, the Commission continued to emphasize the importance of 
surveillance-sharing agreements, stating that the listing exchange had 
entered into surveillance-sharing agreements with each of the futures 
markets on which pricing of the ETP would be based and stating that 
``[t]hese agreements should help to ensure the availability of 
information necessary to detect and deter potential manipulations and 
other trading abuses, thereby making [the commodity-linked notes] less 
readily susceptible to manipulation.'' \22\
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    \20\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990), 
55 FR 13344 (Apr. 10, 1990) (Notice of Filing and Order Granting 
Accelerated Approval to Proposed Rule Change Regarding Cooperative 
Agreements With Domestic and Foreign Self-Regulatory Organizations) 
(SR-NYSE-90-14).
    \21\ 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 Depositary Receipts (``ADR'')) (``ADR 
Option Order''). The Commission further stated that it ``generally 
believes that having a comprehensive surveillance sharing agreement 
in place, between the exchange where the ADR option trades and the 
exchange where the foreign security underlying the ADR primarily 
trades, will ensure the integrity of the marketplace. The Commission 
further believes that the ability to obtain relevant surveillance 
information, including, among other things, the identity of the 
ultimate purchasers and sellers of securities, is an essential and 
necessary component of a comprehensive surveillance sharing 
agreement.'' Id.
    \22\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995), 
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also 
Winklevoss Order, 83 FR at 37593 n.206.
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    Consistent with these statements, 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 and the ETP listing exchange has entered into 
surveillance-sharing agreements with, or held Intermarket Surveillance 
Group (``ISG'') membership in common with, that market.\23\ 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.\24\
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    \23\ See Winklevoss Order, 83 FR at 37594. See also SolidX 
Order, 82 FR at 16254-55 n.125 for a discussion of the 
representations the Commission has received from listing exchanges 
in connection with proposals to list commodity-trust ETPs about the 
existence of a significant, regulated market for trading futures on 
the underlying commodity and the listing exchanges' ability to 
obtain trading information with respect to such market. Furthermore, 
the Commission notes that each of those cases dealt with a futures 
market that had been trading for a long period of time before an 
exchange proposed a commodity-trust ETP based on the asset 
underlying those futures. For example, silver futures and gold 
futures began trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETPs based on spot silver and gold were approved for 
listing and trading in 2006 and 2004. See Securities Exchange Act 
Release No. 53521 (Mar. 20, 2006), 71 FR 14967 (Mar. 24, 2006) (SR-
Amex-2005-072) (order approving iShares Silver Trust); Securities 
Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 
2004) (SR-NYSE-2004-22) (order approving streetTRACKS Gold Shares). 
Platinum futures and palladium futures began trading in 1956 and 
1968, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on spot 
platinum and palladium were approved for listing and trading in 
2009. See Securities Exchange Act Release No. 61220 (Dec. 22, 2009), 
74 FR 68895 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (order approving 
ETFS Palladium Trust); Securities Exchange Act Release No. 61219 
(Dec. 22, 2009), 74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95) 
(order approving ETFS Platinum Trust). Copper futures began trading 
in 1988, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html#metals, and the first ETPs based on spot copper 
were approved for listing and trading in 2012. See Securities 
Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468 (Dec. 
20, 2012) (SR-NYSEArca-2012-28) (order approving JPM XF Physical 
Copper Trust).
    \24\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at 
5621. The Commission has also recognized that surveillance-sharing 
agreements provide a necessary deterrent to fraud and manipulation 
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 were 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 explained that surveillance-sharing agreements 
``ensure the availability of information necessary to detect and 
deter potential manipulations and other trading abuses'' 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).
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    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin market 
is ``uniquely'' and ``inherently'' resistant to fraud and 
manipulation.\25\ In response, the Commission has stated 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, the 
listing market would not necessarily need to enter into a surveillance-
sharing agreement with a regulated significant market.\26\ Such 
resistance to fraud and manipulation, however, must be novel and beyond 
those protections that exist in traditional commodity markets or 
securities markets for which surveillance-sharing agreements in the 
context of listing derivative securities products have been 
consistently present.\27\
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    \25\ See USBT Order, 85 FR at 12597.
    \26\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and [spot] bitcoin 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.
    \27\ See USBT Order, 85 FR at 12597, 12599.
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    Here, BZX contends that approval of the proposal is consistent with 
Section 6(b)(5) of the Exchange Act, and, 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.\28\ 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,\29\ and there exist other means to prevent fraudulent 
and manipulative acts and practices that are sufficient to justify 
dispensing with the detection and deterrence of fraud and manipulation 
provided by a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to spot bitcoin.\30\
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    \28\ See Notice, 87 FR at 8327-29, 8331-34.
    \29\ See id. at 8327-28, 8332-33.
    \30\ See id. at 8328-29, 8333.
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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 spot bitcoin; in Section III.B.3 assertions that the

[[Page 62469]]

Commission must approve the proposal because the Commission has 
approved the listing and trading of ETFs and ETPs that hold CME bitcoin 
futures; and in Section III.C assertions that the proposal is 
consistent with the protection of investors and the public interest.
    Based on its analysis, the Commission concludes that BZX has not 
established that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin. 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 spot bitcoin, the underlying bitcoin assets that would 
be held by the Trust. As discussed further below, BZX repeats various 
assertions made in prior bitcoin-based ETP proposals that the 
Commission has previously addressed and rejected, including in the 
prior WisdomTree Order--and more importantly, BZX does not respond to 
the Commission's reasons for rejecting those assertions. 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 emphasizes that its disapproval of this proposed 
rule change does not rest on an evaluation of the relative investment 
quality of a product holding spot bitcoin versus a product holding CME 
bitcoin futures, or an assessment 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,\31\ the Exchange 
proposes to list and trade the Shares of the Trust under BZX Rule 
14.11(e)(4), which governs the listing and trading of Commodity-Based 
Trust Shares on the Exchange.
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    \31\ See supra note 3. According to the Exchange, the Trust has 
filed an amended registration statement on Form S-1 under the 
Securities Act dated December 8, 2021 (File No. 333-254134) 
(``Registration Statement'').
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    The investment objective of the Trust would be to gain exposure to 
the price of bitcoin, less expenses and liabilities of the Trust's 
operation.\32\ The Trust would hold bitcoin and would calculate the 
Trust's net asset value (``NAV'') daily based on the value of bitcoin 
as reflected by the CF Bitcoin US Settlement Price (``Reference 
Rate''). The Reference Rate was created, and is administered, by CF 
Benchmarks Ltd. (``Benchmark Administrator''), an independent 
entity.\33\ The Reference Rate is a once-a-day benchmark rate of the 
U.S. dollar price of bitcoin (USD/BTC), calculated as of 4:00 p.m. 
E.T., and is based on materially the same methodology (except 
calculation time) \34\ as the Benchmark Administrator's CME CF Bitcoin 
Reference Rate (``BRR''), which is the rate on which CME bitcoin 
futures contracts are cash-settled in U.S. dollars.\35\ The Reference 
Rate aggregates the trade flow of several bitcoin platforms (current 
platform composition of the Reference Rate is Bitstamp, Coinbase, 
Gemini, itBit, and Kraken, collectively, ``Constituent Bitcoin 
Platforms''). In calculating the Reference Rate, the methodology 
creates a joint list of the trade prices and sizes from the Constituent 
Bitcoin Platforms between 3:00 p.m. E.T. and 4:00 p.m. E.T. and then 
divides this list into 12 equally-sized time intervals of five minutes 
and calculates the volume-weighted median trade price for each of those 
time intervals. The Reference Rate is the arithmetic mean of these 12 
volume-weighted median trade prices.\36\
---------------------------------------------------------------------------

    \32\ See Notice, 87 FR at 8329. WisdomTree Digital Commodity 
Services, LLC (``Sponsor'') is the sponsor of the Trust, and 
Delaware Trust Company is the trustee. U.S. Bank, N.A. would serve 
as the custodian of the Trust (``Custodian''). U.S. Bancorp Fund 
Services, LLC dba U.S. Bank Global Fund Services would be the 
administrator and transfer agent (``Administrator'') of the Trust. 
Foreside Fund Services LLC would be the marketing agent in 
connection with the creation and redemption of Shares. See id. at 
8318-19, 8329.
    \33\ See id. at 8329. The Commission notes that the Benchmark 
Administrator's website states that the Reference Rate was 
discontinued as of April 2022. See https://www.cfbenchmarks.com/blog/cessation-of-the-cf-bitcoin-us-settlement-price-and-cf-ether-dollar-us-settlement-price. The Exchange has not amended its filing 
to indicate how the Trust would value bitcoin following 
discontinuation of the Reference Rate.
    \34\ 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. See id. 
at 8329 n.77.
    \35\ See id. at 8329.
    \36\ See id. at 8329-30.
---------------------------------------------------------------------------

    Each Share would represent a fractional undivided beneficial 
interest in and ownership of the Trust. The Trust's assets would 
consist of bitcoin held by the Custodian on behalf of the Trust. The 
Trust generally does not intend to hold cash or cash equivalents. 
However, there may be situations where the Trust would unexpectedly 
hold cash on a temporary basis.\37\
---------------------------------------------------------------------------

    \37\ See id. at 8329.
---------------------------------------------------------------------------

    The Administrator would 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. (often by 5:30 p.m. E.T. and almost always by 8:00 p.m. 
E.T.). The NAV of the Trust would be the aggregate value of the Trust's 
assets, less total liabilities of the Trust, each determined on the 
basis of generally accepted accounting principles. In determining the 
Trust's NAV, the Administrator would value the bitcoin held by the 
Trust based on the price set by the Reference Rate as of 4:00 p.m. 
E.T.\38\
---------------------------------------------------------------------------

    \38\ See id. at 8330.
---------------------------------------------------------------------------

    The Trust would 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 would 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.\39\
---------------------------------------------------------------------------

    \39\ See id. at 8334.
---------------------------------------------------------------------------

    When the Trust sells or redeems its Shares, it would do so in ``in-
kind'' transactions in blocks of 50,000 Shares at the Trust's NAV. 
Authorized participants would deliver, or facilitate the delivery of, 
bitcoin to the Trust's account with the Custodian in exchange for 
Shares when they purchase Shares, and the Trust, through the Custodian, 
would deliver bitcoin to such authorized participants when they redeem 
Shares with the Trust.\40\
---------------------------------------------------------------------------

    \40\ See id. at 8329.
---------------------------------------------------------------------------

    Further, BZX represents that, although the Trust would not be an 
investment company registered under the 1940 Act, in seeking to protect 
investors and the public, the Sponsor has taken 1940 Act considerations 
into account in the structure of the Trust's operation.\41\
---------------------------------------------------------------------------

    \41\ See id. at 8323-24. For a more detailed description of 
those considerations, see infra note 221 and accompanying text.
---------------------------------------------------------------------------

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

[[Page 62470]]

prevent fraudulent and manipulative acts and practices'' and ``to 
protect investors and the public interest.'' \42\ 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.'' \43\
---------------------------------------------------------------------------

    \42\ 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).
    \43\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
---------------------------------------------------------------------------

    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,\44\ 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.\45\ 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.\46\
---------------------------------------------------------------------------

    \44\ See id.
    \45\ See id.
    \46\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (DC Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

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
(i) Assertions Regarding the Bitcoin Market
    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 the detection and deterrence of fraud and manipulation provided by 
a comprehensive surveillance-sharing agreement with a regulated market 
of significant size related to the underlying bitcoin assets, 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.\47\ Such resistance to fraud and manipulation, 
however, must be novel and beyond those protections that exist in 
traditional commodities or securities markets.\48\
---------------------------------------------------------------------------

    \47\ 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.
    \48\ See id. at 12597.
---------------------------------------------------------------------------

(a) BZX's Assertions
    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.\49\ BZX asserts that 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.\50\ In addition, BZX states that, to the 
extent that there are bitcoin platforms engaged in or allowing wash 
trading or other activity intended to manipulate the price of bitcoin 
on other markets, such pricing does not normally impact prices on other 
platforms because participants will generally ignore markets with 
quotes that they deem non-executable.\51\ 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.\52\ According to BZX, 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.\53\ 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.\54\
---------------------------------------------------------------------------

    \49\ See Notice, 87 FR at 8327 n.65.
    \50\ See id.
    \51\ See id.
    \52\ See id.
    \53\ See id.
    \54\ See id.
---------------------------------------------------------------------------

    BZX also argues that the significant liquidity in the spot bitcoin 
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.\55\ According to BZX, in 
January 2020, for example, the cost to buy or sell $5 million worth of 
bitcoin averaged roughly 30 basis points (compared to 10 basis points 
in February 2021) with a market impact of 50 basis points (compared to 
30 basis points in February 2021). For a $10 million market order, the 
cost to buy or sell was roughly 50 basis points (compared to 20 basis 
points in February 2021) with a market impact of 80 basis points 
(compared to 50 basis points in February 2021). BZX contends that, as 
the liquidity in the spot bitcoin market increases, it follows that the 
impact of $5 million and $10 million orders will continue to 
decrease.\56\
---------------------------------------------------------------------------

    \55\ See id. at 8328-29.
    \56\ See id.
---------------------------------------------------------------------------

(b) Analysis
    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 does 
not sufficiently contest the presence of possible sources of fraud and 
manipulation in the spot bitcoin market that the Commission has 
identified in previous orders, including: (1) ``wash'' trading; \57\ 
(2) persons with a

[[Page 62471]]

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 (for example, plans of market participants to significantly 
increase or decrease their holdings in bitcoin, new sources of demand 
for bitcoin, or 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 based on 
the dissemination of false and misleading information; (6) manipulative 
activity involving purported ``stablecoins,'' including Tether (USDT); 
and (7) fraud and manipulation at bitcoin trading platforms.\58\
---------------------------------------------------------------------------

    \57\ See also CFTC v. Gemini Trust Co., LLC, No. 22-cv-4563 
(S.D.N.Y. filed June 2, 2022) (alleging, among other things, failure 
by Gemini personnel to disclose to the Commodity Futures Trading 
Commission (``CFTC'') that Gemini customers could and did engage in 
collusive or wash trading).
    \58\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (Oct. 28, 2019), 
available at https://ssrn.com/abstract=3195066 and published in 75 
J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86; 
WisdomTree Order, 86 FR at 69326; Global X Order, 87 FR at 14916; 
ARK 21Shares Order, 87 FR at 20019; One River Order, 87 FR at 33554; 
Bitwise Order, 87 FR at 40283-84; Grayscale Order, 87 FR at 40305.
---------------------------------------------------------------------------

    BZX asserts that, because of how bitcoin trades occur, including 
through continuous means and through fragmented platforms, arbitrage 
across the bitcoin platforms essentially helps to keep global bitcoin 
prices aligned with one another, thus hindering manipulation. The 
Exchange, however, does not provide any data or analysis to support its 
assertions, either in terms of how closely bitcoin prices are aligned 
across different bitcoin trading venues or how quickly price 
disparities may be arbitraged away.\59\ Here, the Exchange provides no 
evidence to support its assertion of efficient price arbitrage across 
bitcoin platforms, let alone any evidence that price arbitrage in the 
bitcoin market is novel or unique so as to warrant the Commission 
dispensing with the detection and deterrence of fraud and manipulation 
provided by a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to spot bitcoin. 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.\60\
---------------------------------------------------------------------------

    \59\ For example, the Registration Statement states that ``[i]f 
increases in throughput on the Bitcoin network lag behind growth in 
usage of bitcoin, average fees and settlement times may increase 
considerably . . . which could adversely impact the value of the 
Shares.'' See Registration Statement at 20. BZX does not provide 
data or analysis to address, among other things, whether such risks 
of increased fees and bitcoin transaction settlement times may 
affect the arbitrage effectiveness that BZX asserts. See also infra 
note 73 and accompanying text (referencing statements made in the 
Registration Statement that contradict assertions made by BZX).
    \60\ See supra note 46.
---------------------------------------------------------------------------

    In any event, the Commission has explained that efficient price 
arbitrage is not sufficient to support the finding that a market is 
uniquely or inherently resistant to manipulation such that the 
Commission can dispense with surveillance-sharing agreements.\61\ 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.\62\ Equities that underlie such options trade on U.S. 
equity markets that are deep, liquid, and highly interconnected.\63\ 
Moreover, BZX does not take into account that a market participant with 
a dominant ownership position would not find it prohibitively expensive 
to overcome the liquidity supplied by arbitrageurs and could use 
dominant market share to engage in manipulation.\64\
---------------------------------------------------------------------------

    \61\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR 
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at 
74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 FR 
at 20019; Grayscale Order, 87 FR at 40306.
    \62\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86 
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR 
at 74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 
FR at 20019; Grayscale Order, 87 FR at 40306-07.
    \63\ See Market Data Infrastructure Adopting Release, Securities 
Exchange Act Release No. 90610 (Dec. 9, 2020); 86 FR 18596, 18606-07 
(Apr. 9, 2021); Market Data Infrastructure Proposing Release, 
Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 
16726, 16728 (Mar. 24, 2020); Concept Release on Equity Market 
Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 
2010), 75 FR 3594 (Jan. 21, 2010). See also ARK 21Shares Order, 87 
FR at 20019 n.70.
    \64\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01; WisdomTree Order, 86 FR at 69325.
---------------------------------------------------------------------------

    In addition, the Exchange makes the unsupported claim that, 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, market participants will generally ignore those 
platforms. However, the record does not demonstrate that wash trading 
and other possible sources of fraud and manipulation in the broader 
bitcoin spot market will be ignored by market participants.\65\ 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.\66\
---------------------------------------------------------------------------

    \65\ See infra note 89 and accompanying text.
    \66\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69325.
---------------------------------------------------------------------------

    Further, the continuous nature of bitcoin trading does not support 
the finding that the bitcoin market is uniquely or inherently resistant 
to manipulation, and neither do linkages among markets, as BZX 
asserts.\67\ 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.\68\
---------------------------------------------------------------------------

    \67\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying 
text.
    \68\ See id. at 37585. See also, e.g., WisdomTree Order, 86 FR 
at 69325-26.
---------------------------------------------------------------------------

    Moreover, the data furnished by BZX regarding the cost to move the 
price of bitcoin, and the market impact of such attempts, are 
incomplete.\69\ 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. In addition, 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.\70\ 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. 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 potentially some resistance to 
manipulation, not that it establishes unique resistance to manipulation 
that would justify dispensing with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to spot 
bitcoin.\71\
---------------------------------------------------------------------------

    \69\ See WisdomTree Order, 86 FR at 69326.
    \70\ 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 Notice, 87 FR at 
8328-29 nn.74-75.
    \71\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69326; Kryptoin Order, 86 FR at 74171; Global X Order, 87 FR at 
14916; Wise Origin Order, 87 FR at 5531; Grayscale Order, 87 FR at 
40306.

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

[[Page 62472]]

    Finally, 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.\72\ For example, the 
Registration Statement acknowledges that ``bitcoin [platforms] on which 
bitcoin trades are relatively new and, in some cases, unregulated, and, 
therefore, may be more exposed to fraud and security breaches than 
established, regulated exchanges for other financial assets or 
instruments''; that ``as an intangible asset without centralized 
issuers or governing bodies, bitcoin has been, and may in the future 
be, subject to security breaches, cyberattacks or other malicious 
activities''; that ``[t]he trading for bitcoin occurs on multiple 
trading venues that have various levels and types of regulation, but 
are not regulated in the same manner as traditional stock and bond 
exchanges'' and if these spot markets ``do not operate smoothly or face 
technical, security or regulatory issues, that could impact the ability 
of Authorized Participants to make markets in the Shares'' which could 
lead to ``trading in the Shares [to] occur at a material premium or 
discount to the NAV''; that the bitcoin blockchain could be vulnerable 
to a ``51% attack,'' in which a bad actor that controls 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 ``some bitcoin [platforms] have been 
closed due to fraud and manipulative activity'' and that larger bitcoin 
platforms are more likely to be ``appealing targets for hackers''; and 
that ``[b]itcoin [platforms] may be more exposed to the risk of market 
manipulation than exchanges for more traditional assets.'' \73\ The 
Exchange also acknowledges in the proposed rule change that ``largely 
unregulated currency and spot commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight.'' \74\
---------------------------------------------------------------------------

    \72\ See WisdomTree Order, 86 FR at 69326.
    \73\ Registration Statement at 11, 18-19, 25, 37-38. See also 
Winklevoss Order, 83 FR at 37585.
    \74\ Notice, 87 FR at 8320.
---------------------------------------------------------------------------

(ii) Assertions Regarding the Reference Rate and the Create/Redeem 
Process
(a) BZX's Assertions
    The Exchange also asserts that the Reference Rate, which it uses to 
value the Trust's bitcoin, is itself resistant to manipulation based on 
the Reference Rate's methodology.\75\ The Exchange states that the 
Reference Rate is calculated based on the ``Relevant Transactions'' 
\76\ 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.\77\ For each partition separately, the volume-weighted 
median trade price is calculated from the trade prices and sizes of all 
Relevant Transactions.\78\ The Reference Rate is then determined by the 
arithmetic mean of the volume-weighted medians of all partitions.\79\ 
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.'' \80\ 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.'' 
\81\
---------------------------------------------------------------------------

    \75\ See Notice, 87 FR at 8333.
    \76\ 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 Bitcon Platform in the BTC/USD pair that is reported and 
disseminated by a Constituent Bitcoin Platform and observed by the 
Benchmark Adminstrator. See id. at 8329 n.78.
    \77\ See id. at 8329.
    \78\ 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.
    \79\ See id. at 8330.
    \80\ Id.
    \81\ Id.
---------------------------------------------------------------------------

    In addition, the Exchange states that to qualify as part of the 
bitcoin pricing input for the Trust, a Constituent Bitcoin Platform 
must: (a) have policies to ensure fair and transparent market 
conditions at all times and have processes in place to identify and 
impede illegal, unfair or manipulative trading practices; and (b) 
comply with applicable law and regulation, including, but not limited 
to, capital markets regulations, money transmission regulations, client 
money custody regulations, know-your-client (``KYC'') regulations and 
anti-money laundering (``AML'') regulations.\82\
---------------------------------------------------------------------------

    \82\ See id.
---------------------------------------------------------------------------

    Simultaneously with its assertions regarding the Reference Rate, 
BZX 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.'' \83\ The Exchange elaborates 
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.'' \84\ 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.\85\ 
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.\86\ 
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.\87\
---------------------------------------------------------------------------

    \83\ See id. at 8333.
    \84\ See id.
    \85\ See id.
    \86\ See id.
    \87\ See id.
---------------------------------------------------------------------------

(b) Analysis
    Based on the assertions made and the information provided with 
respect to the Reference Rate and the create/redeem process, the record 
is inadequate to conclude that BZX has articulated other means to 
prevent fraud and manipulation that are sufficient to justify 
dispensing with the detection and deterrence of fraud and manipulation 
provided by a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to spot bitcoin.
    The record does not demonstrate that the proposed methodology for 
calculating the Reference Rate would make the proposed ETP resistant to

[[Page 62473]]

fraud or manipulation such that the ability to detect and deter fraud 
and manipulation that is provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to spot bitcoin is unnecessary. Specifically, BZX 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.\88\ As discussed above, BZX does not 
sufficiently contest the presence of possible sources of fraud and 
manipulation in the spot bitcoin market generally.\89\ Instead, BZX 
focuses its analysis on the eligibility and attributes of the 
Constituent Bitcoin Platforms, as well as the Reference Rate's 
methodology that calibrates the pricing input generated by the 
Constituent Bitcoin Platforms (such as partitioning the Relevant 
Transactions into equally-sized time intervals and using volume-
weighted median trade prices). What the Exchange does not address, 
however, is that, to the extent that trading on spot bitcoin platforms 
not directly used to calculate the Reference Rate affects prices on the 
Constituent Bitcoin Platforms, the activities on those other 
platforms--where various kinds of fraud and manipulation from a variety 
of sources may be present and persist--may affect whether the Reference 
Rate is resistant to manipulation. Importantly, the record does not 
demonstrate that these possible sources of fraud and manipulation in 
the broader spot bitcoin market do not affect the Constituent Bitcoin 
Platforms that represent a portion of the spot bitcoin market. To the 
extent that fraudulent and manipulative trading on the broader bitcoin 
market could influence prices or trading activity on the Constituent 
Bitcoin Platforms, the Constituent Bitcoin Platforms (and thus the 
Reference Rate) would not be inherently resistant to manipulation.\90\
---------------------------------------------------------------------------

    \88\ 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 would generally be ignored, the 
Commission has no basis on which to conclude that bitcoin platforms 
are insulated from prices of others that engage in or permit fraud 
or manipulation. See supra note 66 and accompanying text.
    \89\ See supra notes 65-66 and accompanying text.
    \90\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69327; Kryptoin Order, 86 FR at 74172; Valkyrie Order, 86 FR at 
74161; SkyBridge Order, 87 FR at 3873; Grayscale Order, 87 FR at 
40309.
---------------------------------------------------------------------------

    In addition, while BZX asserts that aspects of the Reference Rate 
methodology mitigate the impact of fraud and manipulation on the 
Shares, the Commission can find no basis to conclude that the Reference 
Rate methodology constitutes a novel means beyond the protections 
utilized by traditional commodity or securities markets to prevent 
fraud and manipulation that is sufficient to justify dispensing with 
the detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin. BZX 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. As the 
Commission has previously stated, fraud and manipulation in the spot 
bitcoin market could persist for a ``significant duration.'' \91\ The 
Exchange does not explain how the use of such partitions would protect 
against the effects of the wash and fictitious trading that may persist 
in the spot bitcoin market for a significant duration.\92\ While the 
Reference Rate methodology records the time of execution, trade price, 
and size for each Relevant Transaction, partitions the list of Relevant 
Transactions by timestamp into equally-sized time intervals, and 
calculates the weighted median trade price from the trade prices and 
sizes of such Relevant Transactions, this methodology could at most 
attenuate, but not eliminate, the effect of manipulative activity on 
the Constituent Bitcoin Platforms--just as it could at most attenuate, 
but would not eliminate, the effect of bona fide liquidity demand on 
those platforms.\93\
---------------------------------------------------------------------------

    \91\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
    \92\ See WisdomTree Order, 86 FR at 69327.
    \93\ See SolidX Order, 82 FR at 16257.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the Reference Rate's 
methodology helps make the Reference Rate resistant to manipulation 
conflict with the Registration Statement. Specifically, the 
Registration Statement represents, among other things, 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.'' \94\ 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.
---------------------------------------------------------------------------

    \94\ Registration Statement at 19.
---------------------------------------------------------------------------

    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 manipulate the Reference Rate, these procedures are 
not sufficient for the Commission to dispense with the detection and 
deterrence of fraud and manipulation provided by a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to spot bitcoin.\95\
---------------------------------------------------------------------------

    \95\ See WisdomTree Order, 86 FR at 69327-28.
---------------------------------------------------------------------------

    In addition, while BZX represents that a Constituent Bitcoin 
Platform must have policies to ensure fair and transparent market 
conditions at all times and have processes in place to identify and 
impede illegal, unfair, or manipulative trading practices, and comply 
with applicable law and regulation, including, but not limited to, 
capital markets regulations, money transmission regulations, client 
money custody regulations, KYC regulations and AML regulations, any 
oversight relating to such policies, processes, and regulations, 
including KYC and AML regulations, is not a substitute for a 
surveillance-sharing agreement between the Exchange and a regulated 
market of significant size related to the underlying bitcoin assets. 
KYC and AML regulation, for example, do not substitute for the sharing 
of information about market trading activity or clearing activity that 
a surveillance-sharing agreement would afford. As the Commission has 
explained, there are substantial differences between such regulations 
and the Commission's regulation of national securities exchanges.\96\ 
For example, the Commission's market oversight of national securities 
exchanges includes substantial requirements, including the requirement 
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

[[Page 62474]]

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.'' \97\ Moreover, national 
securities exchanges must file proposed rules with the Commission 
regarding certain material aspects of their operations,\98\ and the 
Commission has the authority to disapprove any such rule that is not 
consistent with the requirements of the Exchange Act.\99\ Thus, 
national securities exchanges are subject to Commission oversight of, 
among other things, their governance, membership qualifications, 
trading rules, disciplinary procedures, recordkeeping, and fees.\100\ 
The Constituent Bitcoin Platforms have none of these requirements--none 
are registered as a national securities exchange and none are 
comparable to a national securities exchange or futures exchange.\101\
---------------------------------------------------------------------------

    \96\ KYC and AML regulation have been referenced in other 
bitcoin-based ETP proposals as a purportedly alternative means by 
which such ETPs would be uniquely resistant to manipulation. See 
USBT Order, 85 FR at 12603 n.101 and accompanying text. See also, 
e.g., WisdomTree Order, 86 FR at 69328 n.95; Kryptoin Order, 86 FR 
at 74173 n.98; ARK 21Shares Order, 87 FR at 20022 n.107; Grayscale 
Order, 87 FR at 40308 n.111.
    \97\ 15 U.S.C. 78f(b)(5).
    \98\ 17 CFR 240.19b-4(a)(6)(i).
    \99\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rule changes 
with the Commission and provides the Commission with the authority 
to disapprove proposed rule changes that are not consistent with the 
Exchange Act. Designated contract markets (``DCMs'') (commonly 
called ``futures markets'') registered with and regulated by the 
CFTC must comply with, among other things, a similarly comprehensive 
range of regulatory principles and must file rule changes with the 
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available 
at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \100\ See Winklevoss Order, 83 FR at 37597.
    \101\ See USBT Order, 85 FR at 12603-05 and n.101; VanEck Order, 
86 FR at 64545 and n.89; WisdomTree Order, 86 FR at 69328 and n.95; 
Kryptoin Order, 86 FR at 74173 and n.98; ARK 21Shares Order, 87 FR 
at 20021-22 and n.107; Grayscale Order, 87 FR at 40308 and n.110.
---------------------------------------------------------------------------

    In addition, the Exchange states that the Benchmark Administrator 
would implement an oversight function to ensure that the Reference Rate 
is administered through codified policies for Reference Rate 
integrity.\102\ However, the record does not suggest that the purported 
oversight represents a unique measure to resist or prevent fraud or 
manipulation beyond protections that exist in traditional securities or 
commodities markets.\103\ Rather, the oversight performed by the 
Benchmark Administrator appears to be for the purpose of ensuring the 
accuracy and integrity of the Reference Rate. Such Reference Rate 
accuracy and integrity oversight serves a fundamentally different 
purpose as compared to the regulation of national securities exchanges 
and the requirements of the Exchange Act. While the Commission 
recognizes that this may be an important function in ensuring the 
integrity of the Reference Rate, such requirements do not imbue the 
Benchmark Administrator with regulatory authority similar to that which 
the Exchange Act confers upon self-regulatory organizations such as 
national securities exchanges.\104\ Furthermore, other commodity-based 
ETPs approved by the Commission for listing and trading utilize 
reference rates or indices administered by similar benchmark 
administrators,\105\ and the Commission has not, in those instances, 
dispensed with the need for a surveillance-sharing agreement with a 
significant regulated market.
---------------------------------------------------------------------------

    \102\ See supra note 81 and accompanying text.
    \103\ See, e.g., WisdomTree Order, 86 FR at 69328; Valkyrie 
Order, 86 FR at 74162.
    \104\ See WisdomTree Order, 86 FR at 69329; One River Order, 87 
FR at 33556; Grayscale Order, 87 FR at 40310. The Benchmark 
Administrator does not itself exercise governmental regulatory 
authority. Rather, the Benchmark Administrator is a registered, 
privately-held company in England. See https://blog.cfbenchmarks.com/legal/ (stating that the Benchmark 
Administrator is authorized and regulated by the UK Financial 
Conduct Authority (``FCA'') as a registered Benchmark Administrator 
(FRN 847100) under the EU benchmark regulation, and further noting 
that the Benchmark Administrator is a member of the Crypto Research 
group of companies which is in turn a member of the Payward, Inc. 
group of companies, and Payward, Inc. is the owner and operator of 
the Kraken Exchange, a venue that facilitates the trading of 
cryptocurrencies). The Benchmark Administrator's relationship with 
the Constituent Bitcoin Platforms is based on such platforms' 
participation in the determination of reference rates, such as the 
Reference Rate. While the Benchmark Administrator is regulated by 
the FCA as a benchmark administrator, the FCA's regulations do not 
extend to the Constituent Bitcoin Platforms by virtue of their trade 
prices serving as input data underlying the Reference Rate. See USBT 
Order, 85 FR at 12604. See also WisdomTree Order, 86 FR at 69328-29.
    \105\ See, e.g., Securities Exchange Act Release Nos. 80840 
(June 1, 2017) 82 FR 26534 (June 7, 2017) (SR-NYSEArca-2017-33) 
(approving the listing and trading of shares of certain trusts 
seeking to track the Solactive GLD EUR Gold Index, Solactive GLD GBP 
Gold Index, and the Solactive GLD JPY Gold Index).
---------------------------------------------------------------------------

    Further, BZX 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.\106\ To the extent that BZX's argument 
is that the price of the Trust's Shares would be resistant to 
manipulation if the Reference Rate is resistant to manipulation, BZX 
has not established in the record a basis for this conclusion because 
BZX has not established a link between the price of the Shares and the 
Reference Rate, either in the primary or secondary market. The Trust 
uses the Reference Rate to calculate the value of the bitcoin it holds 
according to the methodology discussed above.\107\ However, the Trust 
will create or redeem baskets in the primary market only upon the 
receipt or distribution of bitcoins from/to authorized participants, 
and only for the amount of bitcoin represented by the Shares in such 
baskets, without reference to the value of such bitcoin as determined 
by the Reference Rate or otherwise.\108\ In the secondary market, the 
Shares would trade at market-based prices, and market partcipants may 
or may not take into account the value of bitcoin as measured by the 
Reference Rate in determining such prices. The Exchange provides no 
information on the relationship between the Reference Rate and 
secondary market prices generally, or how the use of the Reference Rate 
would mitigate fraud and manipulation of the Shares in the secondary 
market.\109\
---------------------------------------------------------------------------

    \106\ 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; WisdomTree Order, 86 FR at 69327-29;Valkyrie Order, 86 FR 
at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale Order, 87 FR 
at 40310.
    \107\ See supra notes 32-36 and accompanying text.
    \108\ See Notice, 87 FR at 8330. According to the Exchange, to 
create, ``the total deposit of bitcoin required is an amount of 
bitcoin that is in the same proportion to the total assets of the 
Trust, net of accrued expenses and other liabilities, on the date 
the order to purchase is properly received, as the number of Shares 
to be created under the purchase order is in proportion to the total 
number of Shares outstanding on the date the order is received.'' 
The required deposit is determined ``for a given day by dividing the 
number of bitcoin held by the Trust as of the opening of business on 
that business day, adjusted for the amount of bitcoin constituting 
estimated accrued but unpaid fees and expenses of the Trust as of 
the opening of business on that business day, by the quotient of the 
number of Shares outstanding at the opening of business divided by 
the aggregation of shares (i.e., 50,000) associated with a creation 
unit.''
    \109\ See WisdomTree Order, 86 FR at 69329 and n.108; Valkyrie 
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022; Grayscale 
Order, 87 FR at 40310.
---------------------------------------------------------------------------

    Moreover, 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.\110\ 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

[[Page 62475]]

important.'' \111\ 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.'' \112\ 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. As the Exchange does not 
address or provide 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.\113\
---------------------------------------------------------------------------

    \110\ See supra notes 83-84 and accompanying text.
    \111\ Notice, 87 FR at 8333 (``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.'').
    \112\ 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.'').
    \113\ See WisdomTree Order, 86 FR at 69329.
---------------------------------------------------------------------------

    Finally, the Commission finds that BZX has not demonstrated that 
in-kind creations and redemptions provide the Shares with a unique 
resistance to manipulation. The Commission has previously addressed 
similar assertions.\114\ 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.\115\ Accordingly, 
the Commission is not persuaded here that the Trust's in-kind creations 
and redemptions afford it a unique resistance to manipulation.\116\
---------------------------------------------------------------------------

    \114\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08; WisdomTree Order, 86 FR at 69329.
    \115\ 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).
    \116\ 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.
---------------------------------------------------------------------------

(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size Related 
to the Underlying Bitcoin Assets
    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 related to the underlying bitcoin 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.\117\
---------------------------------------------------------------------------

    \117\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------

    As the Commission has explained, 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.\118\ Accordingly, based on 
the common membership of BZX and the CME in the ISG,\119\ BZX has the 
equivalent of a comprehensive surveillance-sharing agreement with the 
CME. However, while the Commission recognizes that the CFTC regulates 
the CME futures market,\120\ including the CME bitcoin futures market, 
and thus such market is ``regulated,'' in the context of the proposed 
ETP, the record does not, as explained further below, establish that 
the CME bitcoin futures market is a ``market of significant size'' 
related to spot bitcoin, the underlying bitcoin assets that would be 
held by the Trust.
---------------------------------------------------------------------------

    \118\ See id. at 37580 n.19.
    \119\ See Notice, 87 FR at 8328, 8333.
    \120\ While the Commission recognizes that the CFTC regulates 
the CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying spot bitcoin market. See Winklevoss 
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at 
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; SkyBridge Order, 
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93; ARK 
21Shares Order, 87 FR at 20023 n.121; Bitwise Order, 87 FR at 40286 
n.54; Grayscale Order, 87 FR at 40311 n.138.
---------------------------------------------------------------------------

(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'' related to spot 
bitcoin 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. In 
previous Commission orders, the Commission explained that the lead-lag 
relationship between the bitcoin futures market and the spot market is 
``central'' to understanding this first prong.\121\
---------------------------------------------------------------------------

    \121\ See, e.g., USBT Order, 85 FR at 12612 (``[E]stablishing a 
lead-lag relationship between the bitcoin futures market and the 
spot market is central to understanding whether it is reasonably 
likely that a would-be manipulator of the ETP would need to trade on 
the bitcoin futures market to successfully manipulate prices on 
those spot platforms that feed into the proposed ETP's pricing 
mechanism. In particular, if the spot market leads the futures 
market, this would indicate that it would not be necessary to trade 
on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move 
to meet the spot price.''). When considering past proposals for spot 
bitcoin ETPs, the Commission has discussed whether there is a lead-
lag relationship between the regulated market (e.g., the CME) and 
the market on which the assets held by the ETP would have traded 
(i.e., spot bitcoin platforms), as part of an analysis of whether a 
would-be manipulator of the spot bitcoin ETP would need to trade on 
the regulated market to effect such manipulation. See, e.g., USBT 
Order, 85 FR at 12612. See also VanEck Order, 86 FR at 64547; 
WisdomTree Order, 86 FR at 69330-31; Kryptoin Order, 86 FR at 74175-
76; SkyBridge Order, 87 FR at 3875-76; Wise Origin Order, 87 FR at 
5535-36, 5539-40; ARK 21Shares Order, 87 FR at 20023-24; Bitwise 
Order, 87 FR at 40287-89; Grayscale Order, 87 FR at 40311-13.
---------------------------------------------------------------------------

(a) BZX's Assertions
    The Exchange asserts in its proposal that the significant growth in 
CME bitcoin futures across each of trading volumes, open interest, 
large open interest holders, and total market participants over the 
last two years are reflective of that market's growing influence on the 
spot price.\122\ The Exchange represents that, from October 25, 2021, 
through November 19, 2021, CFTC-regulated bitcoin futures represented 
approximately $2.9 billion in notional trading volume on CME on a daily 
basis, and notional volume was

[[Page 62476]]

never below $1.2 billion per day.\123\ The Exchange also represents 
that ``[o]pen interest was over $4 billion for the entirety of the 
period and at one point reached $5.5 billion.'' \124\ BZX further 
asserts that ``[n]early every measurable metric related to CME Bitcoin 
Futures has trended consistently up since launch and/or accelerated 
upward in the past year.'' \125\ As an example, the Exchange states 
that ``there was approximately $12 billion in trading in Bitcoin 
Futures in August 2021 compared to $3.9 billion, $4.5[] billion, and 
$9[ ] billion in total trading in August 2017, August 2018, and August 
2019, respectively.'' \126\ The Exchange states that ``Bitcoin Futures 
traded over $500m and represented $1.5 billion in open interest 
compared to $115 million in December 2019.'' \127\ BZX also asserts 
that the number of large open interest holders \128\ ``has continued to 
increase even as the price of bitcoin has risen, as have the number of 
unique accounts trading Bitcoin Futures.'' \129\
---------------------------------------------------------------------------

    \122\ See Notice, 87 FR at 8328, 8333.
    \123\ See id. at 8321.
    \124\ Id.
    \125\ Id. at 8325.
    \126\ Id. The Exchange does not define the term ``Bitcoin 
Futures'' in its filing.
    \127\ Id.
    \128\ The Exchange states that a ``large open interest holder in 
Bitcoin Futures is an entity that holds at least 25 contracts, which 
is the equivalent of 125 bitcoin. At a price of approximately 
$46,996 per bitcoin on 8/31/21, more than 80 firms had outstanding 
positions of greater than $5.8 million in Bitcoin Futures.'' Id. at 
8326 n.61.
    \129\ Id. at 8326.
---------------------------------------------------------------------------

    Moreover, acording to the Exchange, the Sponsor believes that 
``academic research corroborates this overall trend and supports the 
thesis that bitcoin futures, and more particularly CME [b]itcoin 
[f]utures[,] given the recent significant growth in that market, is a 
predominant influence in bitcoin price formation.'' \130\
---------------------------------------------------------------------------

    \130\ Id. at 8327 (citing to (a) representations made and 
comments submitted with respect to the proposed rule changes in 
connection with the ARK 21Shares Order and the Wise Origin Order, 
and (b) Hu, Y., Hou, Y. and Oxley, L. (2019), ``What role do futures 
markets play in Bitcoin pricing? Causality, cointegration and price 
discovery from a time-varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu, Hou & 
Oxley'')). The Exchange references the following conclusion from the 
``time-varying price discovery'' section of Hu, Hou & Oxley: ``There 
exist no episodes where the Bitcoin spot markets dominates the price 
discovery processes with regard to Bitcoin futures. This points to a 
conclusion that the price formation originates solely in the Bitcoin 
futures market. We can, therefore, conclude that the Bitcoin futures 
markets dominate the dynamic price discovery process based upon 
time-varying information share measures. Overall, price discovery 
seems to occur in the Bitcoin futures markets rather than the 
underlying spot market based upon a time-varying perspective.'' Id. 
at n.62
---------------------------------------------------------------------------

    BZX also contends that ``[w]here CME [b]itcoin [f]utures act as a 
predominant influence on the price in the spot market, such that a 
potential manipulator of the bitcoin spot market (beyond just the 
constituents of the Reference Rate) would have to participate in the 
CME [b]itcoin [f]utures market, it follows that a potential manipulator 
of the Shares would similarly have to transact in the CME [b]itcoin 
[f]utures market because the Reference Rate is based on spot prices.'' 
\131\ Further, BZX asserts that ``the Trust only allows for in-kind 
creation and redemption, which . . . reduces the potential for 
manipulation of the Shares through manipulation of the Reference Rate 
or any of its individual constituents, again emphasizing that a 
potential manipulator of the Shares would have to manipulate the 
entirety of the bitcoin spot market, of which the CME [b]itcoin 
[f]utures market appears to be a predominant influence.'' \132\ As 
such, the Exchange believes that the first prong of the significant 
market test is satisfied and that common membership in ISG between the 
Exchange and CME would assist the listing exchange in detecting and 
deterring misconduct in the Shares.\133\
---------------------------------------------------------------------------

    \131\ Id. at 8328, 8333.
    \132\ Id. at 8328.
    \133\ See id.
---------------------------------------------------------------------------

(b) Analysis
    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 the proposed ETP. Specifically, BZX's assertions about the 
general upward trends 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.\134\ While BZX provides data 
showing absolute growth in the size of the CME bitcoin futures market, 
it provides no data relative to the concomitant growth in either the 
spot bitcoin 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, including 
in the WisdomTree Order, 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.\135\ BZX's 
recitation of data reflecting the size of the CME bitcoin futures 
market, alone, either currently or in relation to previous years, is 
not sufficient to establish an interrelationship between the CME 
bitcoin futures market and the proposed ETP.\136\
---------------------------------------------------------------------------

    \134\ See WisdomTree Order, 86 FR at 69330.
    \135\ See USBT Order, 85 FR at 12611. See also WisdomTree Order, 
86 FR at 69330; Kryptoin Order, 86 FR at 74175; SkyBridge Order, 87 
FR at 3875; Wise Origin Order, 87 FR at 5534.
    \136\ See USBT Order, 85 FR at 12612. The Commission has 
previously considered and rejected similar arguments. See, e.g., 
VanEck Order, 86 FR at 64547; WisdomTree Order, 86 FR at 69330; 
Kryptoin Order, 86 FR at 74175-76; SkyBridge Order, 87 FR at 3875-
76; Wise Origin Order, 87 FR at 5534-35; Global X Order, 87 FR at 
14919; Grayscale Order, 87 FR at 40312.
---------------------------------------------------------------------------

    In addition, the econometric evidence in the record for the 
proposal does not support the conclusion that an interrelationship 
exists between the CME bitcoin futures market and the spot bitcoin 
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.\137\ The Exchange and the Sponsor, as they have done 
previously, rely on the findings of one section of the Hu, Hou & Oxley 
paper; \138\ however, they do not address issues that the Commission 
has previously raised, including in the WisdomTree Order, with respect 
to this paper.\139\ As the Commission explained in the WisdomTree 
Order, the findings of this paper's Granger causality analysis, which 
is widely used to formally test for lead-lag relationships, are 
concededly mixed.\140\
---------------------------------------------------------------------------

    \137\ See also USBT Order, 85 FR at 12611; WisdomTree Order, 86 
FR at 69330-31; Wise Origin Order, 87 FR at 5535; NYDIG Order, 87 FR 
at 14938; Global X Order, 87 FR at 14920; ARK 21Shares, 87 FR at 
20024; Bitwise Order, 87 FR at 40288-89; Grayscale Order, 87 FR at 
40312-13.
    \138\ See supra note 130.
    \139\ See, e.g., WisdomTree Order, 86 FR at 69331 (discussing 
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; and discussing that the paper found inconclusive 
evidence that futures prices lead spot bitcoin prices--in 
particular, that the months at the end of the paper's sample period 
showed, using Granger causality methodology, that the spot market 
was the leading market--and 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). See also USBT Order, 85 FR at 12613 n.244.
    \140\ 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. See also WisdomTree Order, 86 FR at 69331.

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

[[Page 62477]]

    Moreover, while the Exchange highlights data and analyses submitted 
to the Commission in connection with the Wise Origin Order and the ARK 
21Shares Order to support the premise that the CME bitcoin futures 
market leads the spot bitcoin market,\141\ the Commission disapproved 
the proposals related to these submissions, and the Commission raised 
issues with respect to these submissions--including with the data and 
analyses therein--that the Exchange does not address.\142\
---------------------------------------------------------------------------

    \141\ See supra note 130 and accompanying text.
    \142\ See, e.g., Wise Origin Order, 87 FR at 5534-36, 5539-40; 
ARK 21Shares Order, 87 FR at 20023-24.
---------------------------------------------------------------------------

    The Exchange does not provide results of its own lead-lag analysis 
or provide any additional evidence of an interrelationship between the 
CME bitcoin futures market, which is the regulated market, and spot 
bitcoin platforms, which are the markets on which the assets held by 
the proposed ETP would trade. As discussed in previous disapprovals, 
including the WisdomTree Order, analyses regarding whether the CME 
bitcoin futures market leads the spot market remain inconclusive.\143\ 
Thus, as in previous disapprovals, because the lead-lag analysis 
regarding whether the CME bitcoin futures market leads the spot market 
is ``central'' to understanding the first prong, the Commission 
determines that the evidence in the record is inadequate to conclude 
that an interrelationship exists between the CME bitcoin futures market 
and the spot bitcoin market such that it is reasonably likely that a 
person attempting to manipulate the proposed ETP would have to trade on 
the CME bitcoin futures market to successfully manipulate the proposed 
ETP.
---------------------------------------------------------------------------

    \143\ As the academic literature and listing exchanges' analyses 
pertaining to the pricing relationship between the CME bitcoin 
futures market and spot bitcoin market have developed, the 
Commission has critically reviewed those materials. See Grayscale 
Order, 87 FR at 40311-13; Bitwise Order, 87 FR at 40286-89; ARK 
21Shares Order, 87 FR at 20024; Global X Order, 87 FR at 14920; Wise 
Origin Order, 87 FR at 5535-36, 5539-40; Kryptoin Order, 86 FR at 
74176; WisdomTree Order, 86 FR at 69330-32; VanEck Order, 86 FR at 
64547-48; USBT Order, 85 FR at 12613.
---------------------------------------------------------------------------

    The Exchange also makes additional assertions \144\ that are 
conclusory and presuppose that the CME bitcoin futures market is a 
``predominant influence'' on the spot bitcoin market. For example, the 
Exchange's assertion that ``a potential manipulator of the Shares would 
. . . have to transact in the CME [b]itcoin [f]utures market because 
the Reference Rate is based on spot prices'' \145\ presupposes that 
``CME [b]itcoin [f]utures act as a predominant influence on the price 
in the spot market'' \146\ and assumes a link between the Reference 
Rate and the Shares that, as discussed above,\147\ the Exchange has not 
established. Likewise, the Exchange states that the Trust's in-kind 
create/redeem process supports the conclusion that a would-be 
manipulator would have to trade on the CME bitcoin futures market to 
successfully manipulate the proposed ETP because the ``CME [b]itcoin 
[f]utures market appears to be a predominant influence'' on the spot 
bitcoin market.\148\ However, as discussed already, the evidence in the 
record is inadequate to conclude that CME bitcoin futures prices lead 
spot bitcoin prices, let alone the premise that the CME bitcoin futures 
market has a ``predominant influence'' on the spot bitcoin market.
---------------------------------------------------------------------------

    \144\ See supra notes 131-132.
    \145\ Notice, 87 FR at 8328, 8333.
    \146\ Notice, 87 FR at 8333.
    \147\ See supra notes 106-109 and accompanying text.
    \148\ Notice, 87 FR at 8328 (``the Trust only allows for in-kind 
creation and redemption, which . . . reduces the potential for 
manipulation of the Shares through manipulation of the Reference 
Rate or any of its individual constituents, again emphasizing that a 
potential manipulator of the Shares would have to manipulate the 
entirety of the bitcoin spot market, of which the CME [b]itcoin 
[f]utures market appears to be a predominant influence'').
---------------------------------------------------------------------------

    The Commission thus concludes that the information that BZX 
provides is not sufficient 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 to successfully 
manipulate the proposed ETP. Therefore, the information in the record 
also does not establish that the CME bitcoin futures market is a 
``market of significant size'' related to the assets to be held by 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'' related to spot 
bitcoin 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.\149\
---------------------------------------------------------------------------

    \149\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

(a) BZX's Assertions
    BZX asserts that ``trading in the Shares would not be the 
predominant force on prices in the CME [b]itcoin [f]utures market (or 
spot market) for a number of reasons, including the significant volume 
in the CME [b]itcoin [f]utures market, the size of bitcoin's market 
cap, and the significant liquidity available in the spot market.'' 
\150\ Moreover, BZX asserts that ``the Shares should trade close to NAV 
given that market participants would arbitrage any significant price 
deviations between the price of the Shares and prices in the spot 
market.'' \151\
---------------------------------------------------------------------------

    \150\ Notice, 87 FR at 8328, 8333.
    \151\ Id.
---------------------------------------------------------------------------

    In addition to the CME bitcoin futures market data points cited 
above, BZX represents that ``the spot market for bitcoin is also very 
liquid.'' \152\ According to the Exchange, based on data from February 
2021, the cost to buy or sell $5 million worth of bitcoin averages 
roughly 10 basis points with a market impact of 30 basis points.\153\ 
According to the Exchange, based on the same data, the cost to buy or 
sell a $10 million market order of bitcoin ``is roughly 20 basis points 
with a market impact of 50 basis points.'' \154\ According to the 
Exchange ``[s]tated 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%.'' \155\ As such, BZX concludes that ``the combination of 
CME [b]itcoin [f]utures acting as a predominant influence on 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 CME [b]itcoin [f]utures markets.'' \156\
---------------------------------------------------------------------------

    \152\ Id.
    \153\ These statistics are sourced from CoinRoutes from February 
2021 and 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. See Notice, 87 FR at 8328-29 nn.74-
75.
    \154\ Notice, 87 FR at 8328.
    \155\ Id.
    \156\ Id. In addition, the Exchange states that the largest 
bitcoin futures ETF represents 3,803 contracts of the total 9,625 
contracts of open interest in December CME bitcoin futures as of 
December 2, 2021, (roughly 40% of open interest) and that this 
directly contradicts the previously articulated standards by the 
Commission in the disapproval orders issued for spot bitcoin ETPs 
related to whether the trading in the ETP would be the predominant 
influence on prices in that market. See id. at 8324. The Commission 
disagrees. The proposed rule change does not relate to the same 
underlying holdings as such ETFs, which provide exposure to bitcoin 
through CME bitcoin futures. The Commission considers the proposed 
rule change on its own merits and under the standards applicable to 
it. Namely, with respect to this proposed rule change, the 
Commission must apply the standards as provided by Section 6(b)(5) 
of the Exchange Act, which it has applied in connection with its 
orders considering previous proposals to list bitcoin-based 
commodity trusts and bitcoin-based trust issued receipts. See supra 
note 11 and accompanying text. See also infra Section III.B.3.

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

[[Page 62478]]

(b) Analysis
    The Commission does not agree with BZX's assertions, which are 
substantially the same assertions that BZX made, and the Commission 
discussed, in the WisdomTree Order. Now, as then, 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 lead price discovery 
\157\--the Commission will only address below the other two bases: the 
overall size of, and the impact of buys and sells on, the bitcoin 
market.
---------------------------------------------------------------------------

    \157\ See supra Section III.B.2.i.b.
---------------------------------------------------------------------------

    BZX's assertions about the potential effect of trading in the 
Shares on the CME bitcoin futures market and spot bitcoin market are 
general and conclusory, citing to the aforementioned trade volume of 
the CME bitcoin futures market and the size and liquidity of the spot 
bitcoin market, as well as the market impact of a single transaction in 
spot bitcoin, without any analysis or evidence to support these 
assertions. For example, there is no limit on the amount of mined 
bitcoin that the Trust may hold. Yet BZX does not provide any 
information on the expected growth in the size of the Trust and the 
resultant increase in the amount of bitcoin held by the Trust over 
time, or on the overall expected number, size, and frequency of 
creations and redemptions--or how any of the foregoing could (if at 
all) influence prices in the CME bitcoin futures market. Thus, the 
Commission cannot conclude, based on BZX's statements alone and absent 
any evidence or analysis in support of BZX's assertions, that it is 
unlikely that trading in the ETP would be the predominant influence on 
prices in the CME bitcoin futures market.\158\
---------------------------------------------------------------------------

    \158\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86 
FR at 69332-33; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87 
FR at 3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87 
FR at 20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    The Commission also is not persuaded by BZX's assertions about the 
minimal effect a market order to buy or sell bitcoin would have on the 
bitcoin market.\159\ While BZX concludes by way of an example of a $10 
million market order 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 or the CME 
bitcoin futures market's prices. Accordingly, such statistics, without 
more, are not relevant to the Commission's consideration of whether 
trading in the ETP would be the predominant influence on prices in the 
CME bitcoin futures market.
---------------------------------------------------------------------------

    \159\ See Notice, 87 FR at 8328 (``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%.'').
---------------------------------------------------------------------------

    To the extent 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, the Exchange has not adequately explained why a 
single market order in spot bitcoin is an appropriate proxy for trading 
in the Shares. As stated above, 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. While authorized participants 
of the Trust might transact in the spot bitcoin market as part of their 
creation or redemption of Shares, the Shares themselves would be traded 
in the secondary market on BZX. Furthermore, 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.\160\
---------------------------------------------------------------------------

    \160\ See VanEck Order, 86 FR at 64549; WisdomTree Order, 86 FR 
at 69333; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87 FR at 
3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87 FR at 
20025; Global X Order, 87 FR at 14921.
---------------------------------------------------------------------------

    Moreover, although BZX asserts that ``the Shares should trade close 
to NAV given that market participants would arbitrage any significant 
price deviations between the price of the Shares and prices in the spot 
market,'' \161\ the Exchange does not provide any additional data or 
analysis to support such an assertion; \162\ nor does the Exchange show 
that the arbitrage that may exist between the Shares and prices in the 
spot bitcoin markets demonstrates that the Shares would not be the 
predominant force on prices in the CME bitcoin futures market.
---------------------------------------------------------------------------

    \161\ Notice, 87 FR at 8328.
    \162\ See also supra notes 106-109 and accompanying text.
---------------------------------------------------------------------------

    Thus, the Commission cannot conclude, based on the assertions in 
the filing and absent sufficient evidence or analysis in support of 
these assertions, that it is unlikely that trading in the proposed ETP 
would be the predominant influence on prices in the CME bitcoin futures 
market.
    Therefore, 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'' related to spot 
bitcoin 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.
(3) Assertions That the Proposed Spot Bitcoin ETP Is Comparable to 
Bitcoin Futures-Based ETFs
(i) BZX's Assertions
    BZX asserts that, after allowing the listing and trading of bitcoin 
futures ETFs that hold primarily CME bitcoin futures, disapproving spot 
bitcoin ETPs ``seems . . . arbitrary and capricious.'' \163\ BZX 
asserts that, if the CME bitcoin futures market were not, in the 
opinion of the Commission, a regulated market of significant size, 
permitting bitcoin futures ETFs that trade on such market ``would seem 
to be inconsistent with the requirement under the [Exchange] Act of 
being designed to `prevent fraudulent and manipulative acts and 
practices.' '' \164\ BZX argues that this is particularly true for the 
Trust, which would use the Reference Rate as its price source to 
calculate its daily NAV, ``with inputs from the same bitcoin trading 
platforms. . . and materially the same methodology as is used to price 
CME [b]itcoin [f]utures.'' \165\ According to BZX, the Constituent 
Bitcoin Platforms' pricing inputs and methodology (except for the 
calculation time) are the same ``with respect to the Trust and CME 
bitcoin futures.'' \166\ BZX asserts that any

[[Page 62479]]

objective review of the proposals to list spot bitcoin ETPs compared to 
the already listed and traded bitcoin futures ETFs would lead to the 
conclusion that spot bitcoin ETPs should be available to U.S. investors 
\167\ because ``any concerns related to preventing fraudulent and 
manipulative acts and practices related to [s]pot [b]itcoin ETPs would 
apply equally to the spot markets underlying the futures contracts held 
by a [CME] [b]itcoin [f]utures ETF.'' \168\
---------------------------------------------------------------------------

    \163\ Notice, 87 FR at 8325.
    \164\ Id. at 8323; 15 U.S.C. 78f(b)(5).
    \165\ Notice, 87 FR at 8323 (emphasis in the original).
    \166\ Id.
    \167\ See Notice, 87 FR at 8324.
    \168\ Id. at 8325.
---------------------------------------------------------------------------

    Further, as discussed in more detail below,\169\ while the Trust is 
not an investment company registered under the 1940 Act,\170\ according 
to BZX, ``the Sponsor has taken 1940 Act considerations into account in 
structuring the Trust's operations in seeking `to protect investors and 
the public interest.' '' \171\ According to BZX, ``the Sponsor has 
structured the Trust's operations to operate as if certain 1940 Act 
provisions apply, providing transparency and investor protections such 
that a distinction between [bitcoin futures] ETFs and [spot bitcoin] 
ETPs is unwarranted.'' \172\
---------------------------------------------------------------------------

    \169\ See Section III.C, infra.
    \170\ See id. at 8329 (according to the Registration Statement, 
``the Trust is neither an investment company registered under the 
[1940 Act], as amended, nor a commodity pool for purposes of the 
Commodity Exchange Act . . . , and neither the Trust nor the Sponsor 
is subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.'').
    \171\ Id. at 8323. See also supra note 41 and accompanying text 
(summarizing the 1940 Act considerations taken into account by the 
Sponsor in structuring the Trust's operations).
    \172\ Id.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission disagrees with these assertions and conclusions. The 
proposed rule change does not relate to the same underlying holdings as 
ETFs regulated under the 1940 Act that provide exposure to bitcoin 
through CME bitcoin futures, or CME bitcoin futures-based ETPs that 
have registered their offerings under the Securities Act but are not 
regulated under the 1940 Act. The Commission considers the proposed 
rule change on its own merits and under the standards applicable to it. 
Namely, with respect to this proposed rule change, the Commission must 
apply the standards as provided by Section 6(b)(5) of the Exchange Act, 
which it has applied in connection with its orders considering previous 
proposals to list bitcoin-based commodity trusts and bitcoin-based 
trust issued receipts.\173\
---------------------------------------------------------------------------

    \173\ See supra note 11 and accompanying text.
---------------------------------------------------------------------------

    In focusing on whether ``concerns related to preventing fraudulent 
and manipulative acts and practices related to [s]pot [b]itcoin ETPs 
would apply equally to the spot markets underlying the futures 
contracts held by a [CME] [b]itcoin [f]utures ETF,'' \174\ the Exchange 
mischaracterizes the framework that the Commission has articulated in 
the Winklevoss Order. As stated in the Winklevoss Order, the Commission 
is not applying a ``cannot be manipulated''approach--either on the CME 
bitcoin futures market or the spot bitcoin markets. Rather, as the 
Commission has repeatedly emphasized, and also summarized above, the 
Commission is examining whether the proposal meets the requirements of 
the Exchange Act and, pursuant to its Rules of Practice, is placing the 
burden on BZX to demonstrate the validity of its contention that other 
means to prevent fraudulent and manipulative acts and practices are 
sufficient to justify dispensing with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to spot 
bitcoin,\175\ or to establish that it has entered into such a 
surveillance-sharing agreement.
---------------------------------------------------------------------------

    \174\ See Notice, 87 FR at 8325.
    \175\ See supra notes 42-45 and accompanying text.
---------------------------------------------------------------------------

    Consistent with this approach, the Commission's consideration (and 
thus far, disapproval) of proposals to list and trade spot bitcoin ETPs 
does not focus on an assessment of the overall risk of fraud and 
manipulation in the spot bitcoin or futures markets, or on the extent 
to which such risks are similar.\176\ Rather, the Commission's focus 
has been consistently on whether the listing exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying bitcoin assets of the ETP 
under consideration, so that it would have the necessary ability to 
detect and deter manipulative activity. For reasons articulated in the 
orders approving proposals to list and trade CME bitcoin futures-based 
ETPs (i.e., the Teucrium Order and the Valkyrie XBTO Order), the 
Commission found that in each such case the listing exchange has 
entered into such a surveillance-sharing agreement.\177\ Applying the 
same framework to this proposed spot bitcoin ETP, however, as discussed 
and explained above, the Commission finds that BZX has not.
---------------------------------------------------------------------------

    \176\ The Commission's past general discussion on the risk of 
fraud and manipulation in the spot bitcoin or futures markets is 
only in response to arguments raised by the proposing listing 
exchanges (or commenters) that mitigating factors against fraud and 
manipulation in the spot bitcoin or futures markets should compel 
the Commission to dispense with the detection and deterrence of 
fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size 
related to the underlying bitcoin assets. See, e.g., Winklevoss 
Order, 83 FR at 37580, 37582-91 (addressing assertions that 
``bitcoin and [spot] bitcoin 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, 12599-
12608. But even in such instance, the central issue is about the 
necessity of such a surveillance-sharing agreement, not the overall 
risk of fraud and manipulation in the spot bitcoin or futures 
markets, or the extent to which such risks are similar.
    \177\ See Teucrium Order, 87 FR at 21678-81; Valkyrie XBTO 
Order, 87 FR at 28850-53.
---------------------------------------------------------------------------

    Moreover, for the CME bitcoin futures ETPs under consideration in 
the Teucrium Order and the Valkyrie XBTO Order, the proposed 
``significant'' regulated market (i.e., the CME) with which the listing 
exchange has a surveillance-sharing agreement is the same market on 
which the underlying bitcoin assets (i.e., CME bitcoin futures 
contracts) trade. As explained in those Orders, the CME's surveillance 
can reasonably be relied upon to capture the effects on the CME bitcoin 
futures market caused by a person attempting to manipulate the CME 
bitcoin futures ETP by manipulating the price of CME bitcoin futures 
contracts, whether that attempt is made by directly trading on the CME 
bitcoin futures market or indirectly by trading outside of the CME 
bitcoin futures market.\178\ Regarding the approved Teucrium Bitcoin 
Futures Fund in the Teucrium Order (``Fund''), for example, when the 
CME shares its surveillance information with the listing exchange, the 
information would assist in detecting and deterring fraudulent or 
manipulative misconduct related to the non-cash assets held by the 
Fund.\179\ Accordingly, the Commission explains in the Teucrium Order 
and the Valkyrie XBTO Order that it is unnecessary for a listing 
exchange to establish a reasonable likelihood that a would-be 
manipulator would have to trade on the CME itself to manipulate a 
proposed ETP whose only non-cash holdings would be CME bitcoin futures 
contracts.\180\
---------------------------------------------------------------------------

    \178\ See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order, 
87 FR at 28851.
    \179\ See Teucrium Order, 87 FR at 21679.
    \180\ See id.
---------------------------------------------------------------------------

    However, as the Commission also states in those Orders, this 
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets 
are not currently ``regulated.'' \181\ If an exchange seeking

[[Page 62480]]

to list a spot bitcoin ETP relies on the CME as the regulated market 
with which it has a comprehensive surveillance-sharing agreement, the 
assets held by the spot bitcoin ETP would not be traded on the CME. 
Because of this significant difference, with respect to a spot bitcoin 
ETP, there would be reason to question whether a surveillance-sharing 
agreement with the CME would, in fact, assist in detecting and 
deterring fraudulent and manipulative misconduct affecting the price of 
the spot bitcoin held by that ETP. If, however, an exchange proposing 
to list and trade a spot bitcoin ETP identifies the CME as the 
regulated market with which it has a comprehensive surveillance-sharing 
agreement, the exchange could overcome the Commission's concern by 
demonstrating that there is a reasonable likelihood that a person 
attempting to manipulate the spot bitcoin ETP would have to trade on 
the CME in order to manipulate the ETP, because such demonstration 
would help establish that the exchange's surveillance-sharing agreement 
with the CME would have the intended effect of aiding in the detection 
and deterrence of fraudulent and manipulative misconduct related to the 
spot bitcoin held by the ETP.\182\
---------------------------------------------------------------------------

    \181\ See Teucrium Order, 87 FR at 21679 n.46 (citing USBT 
Order, 85 FR at 12604; NYDIG Order, 87 FR at 14936 nn.65-67). See 
also Valkyrie XBTO Order, 87 FR at 28851 n.42.
    \182\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
---------------------------------------------------------------------------

    Because, here, BZX is seeking to list a spot bitcoin ETP that 
relies on the CME as the purported ``significant'' regulated market 
with which it has a comprehensive surveillance-sharing agreement, the 
assets held by the proposed ETP would not be traded on the CME. Thus 
there is reason to question whether a surveillance-sharing agreement 
with the CME would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct affecting the price of the spot 
bitcoin held by the proposed ETP.\183\ An exchange can overcome this 
concern by demonstrating that there is a reasonable likelihood that a 
person attempting to manipulate the proposed ETP would have to trade on 
the CME in order to manipulate the ETP because such demonstration would 
help establish that an exchange's surveillance-sharing agreement with 
the CME would have the intended effect of aiding in the detection and 
deterrence of fraudulent and manipulative misconduct related to the 
spot bitcoin held by the proposed ETP.\184\ As discussed and explained 
above,\185\ the Commission finds that BZX has not made such 
demonstration.
---------------------------------------------------------------------------

    \183\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42. There is reason to question whether the 
CME's surveillance would capture manipulation of spot bitcoin that 
occurs off of the CME, if, for example, off-CME manipulation of spot 
bitcoin does not also similarly impact CME bitcoin futures 
contracts.
    \184\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
    \185\ See Section III.B.2.i, supra.
---------------------------------------------------------------------------

    To the extent that the Exchange is arguing that the CME's 
surveillance would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct that impacts spot bitcoin ETPs 
in the same way as it would for misconduct that impacts the CME bitcoin 
futures ETFs/ETPs, the information in the record for this filing does 
not support such a claim. First, while BZX emphasizes that the 
``pricing inputs and methodology (except for the calculation time)'' 
for the Reference Rate are ``the same'' as for the BRR,\186\ this does 
not--absent supporting data--establish any link between prices of 
shares of any CME bitcoin futures ETFs/ETPs and the prices of Shares of 
the proposed spot bitcoin ETP. There is no evidence in the record that 
shares of CME bitcoin futures ETFs/ETPs are priced according to the 
BRR. The BRR is a once-a-day reference rate of the U.S. dollar price of 
one bitcoin as of 4:00 p.m., London Time.\187\ The BRR aggregates the 
trade flow of its constituent spot bitcoin platforms--Coinbase, Gemini, 
LMAX Digital, itBit, Kraken, and Bitstamp \188\--during a specific one-
hour calculation window.\189\ While the BRR is used to value the final 
cash settlement of CME bitcoin futures contracts, it is not generally 
used for daily cash settlement of such contracts,\190\ nor is it 
claimed to be used for any intra-day trading of such contracts. In 
addition, CME bitcoin futures ETFs do not hold their CME bitcoin 
futures contracts to final cash settlement; rather, the contracts are 
rolled \191\ prior to their settlement dates. Moreover, the shares of 
CME bitcoin futures ETFs trade in secondary markets, and there is no 
evidence in the record for this filing that such intra-day, secondary 
market trading prices are determined by the BRR.
---------------------------------------------------------------------------

    \186\ See Notice, 87 FR at 8323. 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. See Notice, 87 FR at 8329 n.77.
    \187\ See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Reference+Rates+Methodology.pdf.
    \188\ See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges.pdf.
    \189\ See https://www.cmegroup.com/trading/files/bitcoin-reference-rate-methodology.pdf. This one-hour window is partitioned 
into 12, five-minute intervals, where the BRR is calculated as the 
equally-weighted average of the volume-weighted medians of all 12 
partitions. See id.
    \190\ Under normal procedures, daily cash settlements are 
generally based on the volume-weighted average price of trading 
activity on CME Globex between 2:59 p.m. and 3:00 p.m., Central 
Time). See https://www.cmegroup.com/confluence/display/EPICSANDBOX/Bitcoin for a description of CME bitcoin futures daily settlement 
procedures.
    \191\ Rolling a futures contract refers to extending the 
expiration of a position by closing out the futures contract that is 
nearing expiration and opening a new position in a futures contract 
with a later expiration.
---------------------------------------------------------------------------

    There is also no evidence in the record that the Shares' prices 
would be determined by the Reference Rate.\192\ The Reference Rate 
aggregates the trade flow of the Constituent Bitcoin Platforms--the 
current Constituent Bitcoin Platforms are Bitstamp, Coinbase, Gemini, 
itBit and Kraken--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. While the Reference Rate would be used daily to value the bitcoins 
held by the Trust, the Reference Rate would not be used for the 
creation or redemption of Shares, nor is it claimed that the Reference 
Rate would be used for any intra-day secondary market trading of the 
Shares.\193\ Rather, the Share price would be discovered through 
continuous intra-day, secondary market interactions of buy and sell 
interests.\194\
---------------------------------------------------------------------------

    \192\ As noted above, see supra note 33, the Commission 
understands that the Reference Rate was discontinued as of April 
2022. Because the Exchange has not amended its filing or its 
assertions with respect to the Reference Rate, the Commission's 
analysis herein responds to the Exchange's arguments as presented in 
its filing by assuming that the Reference Rate continues to be 
published.
    \193\ See supra notes 106-109 and accompanying text.
    \194\ As discussed above, the use of the Reference Rate by the 
Trust to determine the value of its bitcoin does not support the 
finding that the Exchange has established other means to prevent 
fraud and manipulation that are sufficient to justify dispensing 
with the detection and deterrence of fraud and manipulation provided 
by a comprehensive surveillance-sharing agreement with a regulated 
market of significant size related to spot bitcoin. See Section 
III.B.1.ii, supra. Likewise, the Commission has previously rejected 
arguments by listing exchanges that the use of a reference rate 
similar to the BRR to value bitcoin held by proposed spot bitcoin 
ETPs provides other means to prevent fraud and manipulation that are 
sufficient to justify dispensing with the detection and deterrence 
of fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size 
related to spot bitcoin. See Wise Origin Order, 87 FR at 5532-33; 
SkyBridge Order, 87 FR at 3877. Accordingly, the Reference Rate and 
the BRR, and the similarities between the BRR and the Reference 
Rate, are not informative in the Commission's determination of 
whether the Exchange has established other means to prevent fraud 
and manipulation.
---------------------------------------------------------------------------

    Thus, although the Exchange focuses on the similarities between the 
BRR and the Reference Rate,\195\ there is no

[[Page 62481]]

evidence in the record that the shares of any CME bitcoin futures ETF/
ETP, or the Shares of the proposed spot bitcoin ETP, would trade in the 
secondary market at a price related to (or informed by) the BRR or the 
Reference Rate.\196\
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    \195\ Despite the Exchange's claim that the Reference Rate uses 
``inputs from the same bitcoin trading platforms'' as the BRR, the 
BRR includes trade flow from LMAX Digital, which platform does not 
appear to be included as a Constituent Bitcoin Platform of the 
Reference Rate.
    \196\ In addition, the Commission's determination in the 
Teucrium Order and the Valkyrie XBTO Order to approve the listing 
and trading of the relevant CME bitcoin futures ETPs was not based 
on the ETPs' use--or lack of use--of the BRR (or any other similar 
pricing mechanism) for the calculation of NAV, or on the fact that 
the BRR is used for the final cash settlement of CME bitcoin futures 
contracts. Rather, as discussed above, the Commission approved the 
listing and trading of such CME bitcoin futures ETPs, not because of 
the BRR, but because the Commission found that the listing exchanges 
satisfy the requirement pertaining to a surveillance-sharing 
agreement with a regulated market of significant size related to the 
underlying bitcoin assets--which for such ETPs are CME bitcoin 
futures contracts, not spot bitcoin.
---------------------------------------------------------------------------

    Second, even if the Exchange had demonstrated a link between the 
BRR and/or the Reference Rate and the prices of bitcoin futures ETFs/
ETPs and/or the proposed spot bitcoin ETP, which it has not, it does 
not necessarily follow that the CME's surveillance would, in fact, 
assist in detecting and deterring fraudulent and manipulative 
misconduct that impacts spot bitcoin ETPs in the same way as it would 
for misconduct that impacts the CME bitcoin futures ETFs/ETPs--
particularly when such misconduct occurs off of the CME itself.\197\ 
For example, even assuming, for the sake of argument, that the BRR and/
or the Reference Rate is a potential link between prices on certain 
spot bitcoin platforms and CME bitcoin futures prices, it does not--
absent supporting data--necessarily follow that any manipulation that 
impacts spot bitcoin also similarly impacts CME bitcoin futures 
contracts. The Exchange has not provided analysis or data that assesses 
the reaction (if any) of CME bitcoin futures contracts to instances of 
fraud and manipulation in spot bitcoin markets.
---------------------------------------------------------------------------

    \197\ See also supra note 183.
---------------------------------------------------------------------------

    In addition, the disapproval of the proposal would not constitute 
an ``arbitrary and capricious'' administrative action in violation of 
the Administrative Procedure Act.\198\ Importantly, the issuers are not 
similarly situated. The issuers of CME bitcoin futures-based ETFs/ETPs 
propose to hold only CME bitcoin futures contracts (which are traded on 
the CME itself) as their only non-cash holdings, and the Trust proposes 
to hold only spot bitcoin (which is not traded on the CME). As 
explained in detail above, and in the Teucrium Order, Valkyrie XBTO 
Order, and the Grayscale Order, because of this important difference, 
for a spot bitcoin ETP, there is reason to question whether a 
surveillance-sharing agreement with the CME would, in fact, assist in 
detecting and deterring fraudulent and manipulative misconduct 
affecting the price of the spot bitcoin held by that ETP.\199\ And as 
discussed above, neither the Exchange nor any other evidence in the 
record for this filing, sufficiently demonstrates that the CME's 
surveillance can be reasonably relied upon to capture the effects of 
manipulation of the spot bitcoin assets underlying the proposed ETP 
when such manipulation is not attempted on the CME itself.
---------------------------------------------------------------------------

    \198\ The Commission is disapproving this proposed rule change 
because BZX has not met its burden to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5). 
The Commission's disapproval of this proposed rule change does not 
rest on an evaluation of the relative investment quality of a 
product holding spot bitcoin versus a product holding CME bitcoin 
futures, or an assessment of whether bitcoin, or blockchain 
technology more generally, has utility or value as an innovation or 
an investment. See, e.g., Winklevoss Order, 83 FR at 37580; USBT 
Order, 85 FR at 12597; One River Order, 87 FR at 33550; Grayscale 
Order, 87 FR at 40318 n.227.
    \199\ See supra note 183 and accompanying text.
---------------------------------------------------------------------------

    Moreover, the analytical framework for assessing compliance with 
the requirements of Exchange Act Section 6(b)(5) that the Commission 
applies here (i.e., comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to the underlying bitcoin 
assets) is the same one that the Commission has applied in each of its 
orders considering previous proposals to list bitcoin-based commodity 
trusts and trust issued receipts.\200\ The Commission has applied this 
framework to each proposal by analyzing the evidence presented by the 
listing exchange and statements made by commenters.\201\ Exchange Act 
Section 6(b)(5) can be satisfied by a proper showing; the Commission 
has in fact recently approved proposals by the Exchange and the Nasdaq 
Stock Market to list and trade shares of ETPs holding CME bitcoin 
futures as their only non-cash holdings.\202\ And in the orders 
approving the CME bitcoin futures-based ETPs, the Commission explicitly 
discussed how an exchange seeking to list and trade a spot bitcoin ETP 
could overcome the lack of a one-to-one relationship between the 
regulated market with which it has a surveillance-sharing agreement and 
the market(s) on which the assets held by a spot bitcoin ETP could be 
traded: by demonstrating that there is a reasonable likelihood that a 
person attempting to manipulate the spot bitcoin ETP would have to 
trade on the regulated market (i.e., on the CME) to manipulate the spot 
bitcoin ETP.\203\
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    \200\ See supra notes 11-24 and accompanying text.
    \201\ See supra note 11.
    \202\ See Teucrium Order and Valkyrie XBTO Order, supra note 11.
    \203\ See supra note 182 and accompanying text.
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    When considering past proposals for spot bitcoin ETPs, the 
Commission has, in particular, reviewed the econometric and/or 
statistical evidence in the record to determine whether the listing 
exchange's proposal has met the applicable standard.\204\ The 
Commission's assessment fundamentally presents quantitative, empirical 
questions, but, as discussed above, the Exchange has not provided 
evidence sufficient to support its arguments. Instead, the Exchange 
makes various assertions that are not supported by the limited data in 
the record regarding, among other things, CME bitcoin futures trading 
size, volume, and open interest, and spot bitcoin market 
capitalization, or the relationship between spot bitcoin prices and CME 
bitcoin futures prices (including the lead-lag relationship between the 
spot market and the CME bitcoin futures market), and the record 
contains insufficient empirical analysis or quantitative evidence of 
any such data to support the Exchange's conclusions.\205\
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    \204\ See, e.g., USBT Order, 85 FR at 12612-13; VanEck Order, 86 
FR at 64547-48; WisdomTree Order, 86 FR at 69330-32; Kryptoin Order, 
86 FR at 74175-76; NYDIG Order, 87 FR at 14938-39; Wise Origin 
Order, 87 FR at 5534-36; Global X Order, 87 FR at 14919-20; ARK 
21Shares Order, 87 FR at 20023-24; Bitwise Order, 87 FR at 40286-92; 
Grayscale Order, 87 FR at 40311-14.
    \205\ See Sections III.B.1 & III.B.2, supra.
---------------------------------------------------------------------------

    The Exchange also argues that ``a distinction between [bitcoin 
futures] ETFs and [spot bitcoin] ETPs is unwarranted'' because the 
Trust has agreed to voluntarily comply with some requirements of the 
1940 Act.\206\ While, as stated by the Exchange, an undertaking by the 
Trust to comply voluntarily with certain requirements of the 1940 Act 
may provide some level of transparency and promote certain types of 
investor protection, it does not alter the Commission's analysis under 
the Exchange Act relating to a spot bitcoin ETP.\207\ As discussed 
above, the

[[Page 62482]]

proposed rule change does not relate to the same underlying holdings as 
either ETFs regulated under the 1940 Act that provide exposure to 
bitcoin through CME bitcoin futures, or CME bitcoin futures-based ETPs 
that have registered their offerings under the Securities Act but are 
not regulated under the 1940 Act.\208\ And as discussed above, neither 
the Exchange nor any other evidence in the record for this filing, 
sufficiently demonstrates that the CME's surveillance can be reasonably 
relied upon to capture the effects of manipulation of the spot bitcoin 
assets underlying the proposed ETP when such manipulation is not 
attempted on the CME itself. The requirements of Section 6(b)(5) of the 
Exchange Act apply to the rules of national securities exchanges. 
Accordingly, the relevant obligation to have a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to spot bitcoin, or other means to prevent fraudulent and 
manipulative acts and practices that are sufficient to justify 
dispensing with such a 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.
---------------------------------------------------------------------------

    \206\ See supra note 172 and accompanying text.
    \207\ The 1940 Act provides for the regulation of investment 
companies. See 15 U.S.C. 80a. In general, the 1940 Act is designed 
to minimize conflicts of interest and is focused on disclosure to 
the investing public of information about the fund and its 
investment objectives, as well as on investment company structure 
and operations. See https://www.sec.gov/investment/laws-and-rules. 
The requirements of Section 6(b)(5) of the Exchange Act, on the 
other hand, apply to the rules of national securities exchanges and 
require, among other things, that such rules be designed to prevent 
fraudulent and manipulative acts and practices. 15 U.S.C. 78f(b)(5).
    \208\ Although counsel for the sponsor of the Teucrium Bitcoin 
Futures Fund submitted a letter to the Commission stating that the 
trust, which was not regulated under the 1940 Act, intended to 
comply with certain requirements of the 1940 Act, the Commission did 
not rely on this representation as a basis for its approval of the 
proposed rule change. See Teucrium Order, 87 FR at 21682. See also 
letter from W. Thomas Conner, Shareholder, VedderPrice, dated 
September 1, 2021, at 9.
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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.\209\ 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.
---------------------------------------------------------------------------

    \209\ 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; WisdomTree Order, 86 FR at 69333; 
Valkyrie Order, 86 FR at 74163; Kryptoin Order, 86 FR at 74178; 
SkyBridge Order, 87 FR at 3880; Wise Origin Order, 87 FR at 5537; 
ARK 21Shares Order, 87 FR at 20026; Global X Order, 87 FR at 14921; 
Bitwise Order, 87 FR at 40292; Grayscale Order, 87 FR at 40319.
---------------------------------------------------------------------------

(1) BZX's Assertions
    The Exchange states that the proposal is designed to protect 
investors and the public interest. BZX asserts that access for U.S. 
retail investors to gain exposure to bitcoin via a transparent and U.S. 
regulated, exchange-traded vehicle remains limited.\210\ According to 
the Exchange, current options include: (i) paying a potentially high 
premium (and high management fees) to buy over-the-counter (``OTC'') 
bitcoin funds, to the advantage of more sophisticated investors that 
are able to create shares at NAV directly with the issuing trust; (ii) 
facing the technical risk, complexity, and generally high fees 
associated with buying spot bitcoin; (iii) purchasing shares of 
operating companies that they believe will provide proxy exposure to 
bitcoin with limited disclosure about the associated risks; or (iv) 
through the purchase of bitcoin futures ETFs that represents a sub-
optimal investment for long-term investors.\211\ Meanwhile, the 
Exchange represents that investors in many other countries, including 
Canada \212\ and Brazil, are able to use more traditional exchange-
listed and traded products (including exchange-traded funds holding 
physical bitcoin) to gain exposure to bitcoin, disadvantaging U.S. 
investors and leaving them with more risky means of getting bitcoin 
exposure.\213\ Additionally, investors in other countries and regions, 
specifically Canada and Europe, generally pay lower fees than U.S. 
retail investors that invest in OTC bitcoin funds due to the fee 
pressure that results from increased competition among available 
bitcoin investment options.\214\ Without an approved and regulated spot 
bitcoin ETP in the U.S. as a viable alternative, BZX argues that U.S. 
investors could seek to purchase shares of non-U.S. bitcoin vehicles in 
order to get access to bitcoin exposure, and 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 an U.S. 
exchange listed ETP.\215\
---------------------------------------------------------------------------

    \210\ See Notice, 87 FR at 8322.
    \211\ See id.
    \212\ The Exchange notes that the Purpose Bitcoin ETF, a retail 
physical bitcoin ETP launched in Canada, reportedly reached $1.2 
billion in assets under management as of October 15, 2021, 
demonstrating the demand for a North American market listed bitcoin 
ETP. See id. at 8322 n.46.
    \213\ The Exchange notes that securities regulators in a number 
of other countries have either approved or otherwise allowed the 
listing and trading of bitcoin ETPs. Specifically, these funds 
include the Purpose Bitcoin ETF, Bitcoin ETF, VanEck Vectors Bitcoin 
ETN, WisdomTree Bitcoin ETP, Bitcoin Tracker One, BTCetc bitcoin 
ETP, Amun Bitcoin ETP, Amun Bitcoin Suisse ETP, 21Shares Short 
Bitcoin ETP, CoinShares Physical Bitcoin ETP. See id. at 8322 n.47.
    \214\ See id. at 8322.
    \215\ See id.
---------------------------------------------------------------------------

    BZX argues that over the past 1.5 years, U.S. investor exposure to 
bitcoin through OTC bitcoin funds has grown into the tens of billions 
of dollars and more than a billion dollars of exposure through bitcoin 
futures ETFs.\216\ With that growth, BZX asserts, so too has grown the 
quantifiable investor protection issues to U.S. investors through roll 
costs for bitcoin futures ETFs and premium/discount volatility and 
management fees for OTC bitcoin funds.\217\ The Exchange understands 
the Commission's previous focus on potential manipulation of a spot 
bitcoin ETP in prior disapproval orders, but now believes that such 
concerns have been sufficiently mitigated, and that the growing and 
quantifiable investor protection concerns should be a central 
consideration as the Commission reviews this proposal.\218\ The 
Exchange believes that approving this proposal (and comparable 
proposals) provides the Commission with the opportunity to allow U.S. 
investors with 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) reducing risks 
and costs associated with investing in bitcoin futures ETFs and 
operating companies that are imperfect proxies for bitcoin exposure; 
and (iv) providing an alternative for investors to self-custodying spot 
bitcoin.\219\
---------------------------------------------------------------------------

    \216\ See id. at 8329.
    \217\ See id.
    \218\ See id.
    \219\ See id.
---------------------------------------------------------------------------

    In addition, BZX represents that the Sponsor has taken 1940 Act 
considerations into account in structuring the Trust's operations in 
seeking ``to protect investors and the public interest.'' \220\ 
Although the Trust would not be an investment company registered under 
the 1940 Act, the Exchange represents that: (a) the Trust would qualify 
as an investment company under Accounting Standards Update 2013-08 and, 
as such, the Sponsor would ensure that the Trust's financial statements 
would be audited at least annually by an independent registered public 
accounting firm and,

[[Page 62483]]

as part of such audit, the auditor would be expected to perform 
procedures similar to those used for ETFs registered under the 1940 
Act; (b) the Sponsor would facilitate the Trust's compliance with the 
financial record keeping and reporting requirements under the Sarbanes-
Oxley Act of 2002; (c) the Trust's Custodian would qualify as a 
``custodian'' under the 1940 Act, and the Custodian would agree to 
exercise reasonable care, prudence, and diligence such as a person 
having responsibility for the safekeeping of property of the Trust 
would exercise; (d) the Trust would be subject to the transparency 
requirements of Rule 6c-11 under the 1940 Act; (e) the Sponsor would 
adopt procedures to ensure there are no transactions with affiliated 
persons that would be prohibited by Section 17 of the 1940 Act and the 
applicable rules and regulations thereunder; (f) the Trust would 
maintain a fidelity bond for the benefit of the Trust in the maximum 
amount required by Rule 17g-1 under the 1940 Act; and (g) the Sponsor 
or applicable service provider of the Trust would maintain the books 
and records of the Trust in satisfaction of the requirements of Section 
31 of the 1940 Act.\221\
---------------------------------------------------------------------------

    \220\ See id. at 8323.
    \221\ See id. at 8323-24.
---------------------------------------------------------------------------

(2) Analysis
    The Commission disagrees that the proposal should be approved 
because it is designed to protect investors and the public interest. 
Here, even if it were true that, compared to trading in unregulated 
spot bitcoin markets or OTC bitcoin funds, trading a spot bitcoin-based 
ETP on a national securities exchange could provide some additional 
protection to investors, or that the Shares would provide more 
efficient exposure to bitcoin than other products on the market such as 
bitcoin futures ETPs, or that approval of a spot bitcoin ETP could 
enhance competition, 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.\222\ Moreover, the 
same consideration applies despite the Exchange's representation that 
the Sponsor would voluntarily apply certain provisions of the 1940 Act, 
as described above, to the Trust. 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.\223\ Thus, even if a proposed rule 
change purports to protect investors from a particular type of 
investment risk--such as experiencing a potentially high premium/
discount by investing in an OTC bitcoin fund or roll costs by investing 
in bitcoin futures ETPs--or purports to provide benefits to investors 
and the public interest--such as enhancing competition--the proposed 
rule change may still fail to meet the requirements under the Exchange 
Act.\224\
---------------------------------------------------------------------------

    \222\ See supra note 209.
    \223\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C). See also Affiliated Ute Citizens of Utah v. United 
States, 406 U.S. 128, 151 (1972) (Congress enacted the Exchange Act 
largely ``for the purpose of avoiding frauds''); Gabelli v. SEC, 568 
U.S. 442, 451 (2013) (The ``SEC's very purpose'' is to detect and 
mitigate fraud.).
    \224\ See SolidX Order, 82 FR at 16259; VanEck Order, 86 FR at 
54550-51; WisdomTree Order, 86 FR at 69344; Kryptoin Order, 86 FR at 
74179; Valkyrie Order, 86 FR at 74163; SkyBridge Order, 87 FR at 
3881; Wise Origin Order, 87 FR at 5538; ARK 21Shares Order, 87 FR at 
20026-27.
---------------------------------------------------------------------------

    For the reasons discussed above, BZX has not met its burden of 
demonstrating an adequate basis in the record for the Commission to 
find that the proposal is consistent with Exchange Act Section 
6(b)(5),\225\ and, accordingly, the Commission must disapprove the 
proposal.\226\
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    \225\ 15 U.S.C. 78f(b)(5).
    \226\ 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).
---------------------------------------------------------------------------

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-2022-006 be, and it 
hereby is, disapproved.

    By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22345 Filed 10-13-22; 8:45 am]
BILLING CODE 8011-01-P