Document ID: SEC-2018-1500-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2018-09-26T04:00Z

[Federal Register Volume 83, Number 187 (Wednesday, September 26, 2018)]
[Notices]
[Pages 48665-48669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20884]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84231; File No. SR-CboeBZX-2018-040]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To List and Trade Shares of SolidX Bitcoin Shares 
Issued by the VanEck SolidX Bitcoin Trust Under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares

September 20, 2018.
    On June 20, 2018, 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 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares of SolidX Bitcoin Shares (``Shares'') issued by 
the VanEck SolidX 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 July 2, 2018.\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. 83520 (June 26, 
2018), 83 FR 31014 (July 2, 2018) (``Notice'').
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    On August 7, 2018, pursuant to Section 19(b)(2) of the 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\ As of September 19, 2018, the Commission has received more 
than 1,400 comment letters on the proposed rule change.\6\ This order 
institutes proceedings under Section 19(b)(2)(B) of the Act \7\ to 
determine whether to approve or disapprove the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 83792 (Aug. 7, 
2018), 83 FR 40112 (Aug. 13, 2018). The Commission designated 
September 30, 2018, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ All comments on the proposed rule change are available on 
the Commission's website at https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal \8\
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    \8\ The Commission notes that additional information regarding 
the Trust and the Shares, including investment strategies, 
calculation of net asset value (``NAV'') and intra-day indicative 
value (``IIV''), creation and redemption procedures, and additional 
background information about bitcoins and the Bitcoin network, among 
other things, can be found in the Notice (see supra note 3) and the 
registration statement filed with the Commission on Form S-1 (File 
No. 333-212479) under the Securities Act of 1933 (``Registration 
Statement''), as applicable.
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    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4), which governs the listing and trading of Commodity-Based 
Trust Shares on the Exchange.\9\ Each Share will represent a fractional 
undivided beneficial interest in the Trust's net assets. SolidX 
Management LLC will be the sponsor of the Trust (``Sponsor''). The 
Trust will be responsible for custody of the Trust's bitcoin. The Bank 
of New York Mellon will be the Administrator, transfer agent, and the 
custodian, with respect to cash, of the Trust. Foreside Fund Services, 
LLC will be the marketing agent in connection with the creation and 
redemption of baskets of Shares. Van Eck Securities Corporation will 
provide assistance in the marketing of the Shares.\10\
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    \9\ See BZX Rule 14.11(e)(4) (permitting the listing and trading 
of ``Commodity-Based Trust Shares,'' defined as a security (a) that 
is used by a trust which holds a specified commodity deposited with 
the trust; (b) that is issued by such trust in a specified aggregate 
minimum number in return for a deposit of a quantity of the 
underlying commodity; and (c) that, when aggregated in the same 
specified minimum number, may be redeemed at a holder's request by 
such trust which will deliver to the redeeming holder the quantity 
of the underlying commodity).
    \10\ See Notice, supra note 3, at 31015.
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    According to the Exchange, the investment objective of the Trust is 
for the Shares to reflect the performance of the price of bitcoin, less 
the expenses of the Trust's operations. The Trust is not actively 
managed and will not engage in activities designed to obtain a profit 
from, or to ameliorate losses caused by, changes in the price of 
bitcoin.\11\ The Administrator will generally use the closing price set 
for bitcoin by the MVIS Bitcoin OTC Index (``MVBTCO'') to calculate the 
Fund's NAV on each business day that the Exchange is open for regular 
trading, as promptly as practicable after 4:00 p.m. E.T.\12\
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    \11\ See id. at 31015.
    \12\ See id. at 31020. In the event that the Sponsor determines 
that this valuation method has failed, the Sponsor will determine 
the bitcoin market price on the valuation date according to a set of 
alternative methods to be used in the following order: (a) The mid-
point price of the bid/ask spread as of 4:00 p.m. E.T. obtained by 
the Sponsor from any bitcoin OTC platform that is part of the MVBTCO 
index; (b) the volume-weighted average price over the 24-hour period 
ending at 4:00 p.m. E.T. as published by a public data feed that is 
calculated based upon a volume-weighted average bitcoin price 
obtained from the major U.S. dollar-denominated bitcoin exchanges 
and that the Sponsor determines is reasonably reliable; and (c) the 
Sponsor's best judgment of a good faith estimate of the bitcoin 
market price. Greater detail concerning the alternative pricing 
procedures if the MVBTCO cannot be utilized as the basis for NAV 
calculations can be found in the Notice. See id. at 31019-20.
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    According to the Exchange, the MVBTCO represents the value of one 
bitcoin in U.S. dollars at any point in time. The Exchange represents 
that the MVBTCO calculates the intra-day price of bitcoin every 15 
seconds and a closing price as of 4:00 p.m. E.T., each weekday and that 
the intra-day levels of the MVBTCO incorporate the real-time price of 
bitcoin based on executable bids and asks derived from constituent 
bitcoin over-the-counter (``OTC'') platforms that have entered into an 
agreement with MV Index Solutions GmbH (``MVIS'') to provide such 
information. According to the Exchange, the intra-day price and closing 
level of the MVBTCO is calculated using a proprietary methodology 
collecting executable bid/ask spreads and calculating a mid-point price 
from several U.S.-based bitcoin OTC platforms. The Exchange represents 
that bitcoin OTC platforms included in the MVBTCO are U.S.-based 
entities that are well established institutions and include entities 
that are regulated by the Commission and the Financial Industry 
Regulatory Authority (``FINRA'') as registered broker-dealers and 
affiliates of broker-dealers. According to the Exchange, the logic 
utilized for the derivation of the intra-day and daily closing index 
level for the MVBTCO is intended to analyze actual executable bid/ask 
spread data, verify and refine the data set, and yield an objective, 
fair-market value of one bitcoin priced in U.S. dollars.\13\ The 
Trust's website will provide an 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.).\14\
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    \13\ See id. at 31017-18.
    \14\ See id. at 31023.
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    The Exchange states that the Trust intends to achieve its 
investment objective by investing substantially all of its assets in 
bitcoin traded primarily in the OTC markets, but that the Trust may 
also invest in bitcoin traded on domestic and international bitcoin 
exchanges, depending on liquidity and other factors at the Trust's 
discretion.\15\

[[Page 48666]]

According to the Exchange, while the Trust expects to conduct its 
trading primarily on the OTC platforms that comprise the MVBTCO, the 
Trust also maintains an internal proprietary database, which it does 
not share with anyone, of potential OTC bitcoin trading counterparties, 
including hedge funds, family offices, private wealth managers, and 
high-net-worth individuals. The Exchange represents that all such 
potential counterparties will be subject to the Trust's anti-money 
laundering (``AML'') and know your customer (``KYC'') compliance 
procedures. According to the Exchange, the Trust will begin trading 
with such potential OTC counterparties as their trading capabilities 
become viable; the Trust will also add additional potential 
counterparties to its internal proprietary database as it becomes aware 
of additional market participants; and the Trust will decide which OTC 
counterparties it will trade with based on its ability to fill orders 
at the best available price among OTC market participants.\16\ The 
Exchange represents that the Trust will provide information regarding 
the Trust's bitcoin holdings as well as additional data regarding the 
Trust. According to the Exchange, investors and market participants 
will be able throughout the trading day to compare the market price of 
the Shares to the Shares' IIV.\17\
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    \15\ See id. at 31015.
    \16\ See id. at 31017.
    \17\ See id. at 31021.
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    According to the Exchange, the Trust will issue and redeem 
``Baskets,'' each equal to a block of 5 Shares.\18\ The creation and 
redemption of a Basket will require the delivery to the Trust, or 
distribution by the Trust, of the number of whole and fractional 
bitcoins or the U.S. dollar equivalent represented by each Basket being 
created or redeemed. Only ``Authorized Participants'' may place orders 
to create and redeem Baskets.\19\ According to the Exchange, the Trust 
will not normally hold cash or any other assets, but may hold a very 
limited amount of cash in connection with the creation and redemption 
of Baskets and to pay the Trust's expenses.\20\
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    \18\ See id. According to the Exchange, as of the date of the 
Registration Statement, each Share represents approximately 25 
bitcoins. See id.
    \19\ See id.
    \20\ See id. at 31015.
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    The Exchange represents that, in addition to its security system, 
the Trust will maintain comprehensive insurance coverage underwritten 
by various insurance carriers. The purpose of the insurance is to 
protect investors against loss or theft of the Trust's bitcoin. The 
Exchange represents that the insurance will cover loss of bitcoin by, 
among other things, theft, destruction, bitcoin in transit, computer 
fraud, and other loss of the private keys that are necessary to access 
the bitcoin held by the Trust, subject to certain terms, conditions, 
and exclusions that are discussed in the Registration Statement. 
According to the Exchange, the insurance policy will carry initial 
limits of $25 million in primary coverage and $100 million in excess 
coverage, with the ability to increase coverage depending on the value 
of the bitcoin held by the Trust. According to the Exchange, to the 
extent the value of the Trust's bitcoin holdings exceeds the total 
$125,000,000 of insurance coverage, the Sponsor has made arrangements 
for additional insurance coverage with the goal of maintaining 
insurance coverage at a one-to-one ratio with the Trust's bitcoin 
holdings valued in U.S. dollars, such that for every dollar of bitcoin 
held by the Trust there is an equal amount of insurance coverage.\21\
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    \21\ See id. at 31019.
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    According to the Exchange, the Trust currently expects that there 
will be at least 100 Shares outstanding at the time of commencement of 
trading on the Exchange, which the Exchange asserts to be sufficient to 
provide adequate market liquidity. The Exchange states that BZX Rules 
14.11(e)(4)(E)(ii)(b) and (c) provide that the Exchange will commence 
delisting proceedings for a series of Commodity-Based Trust Shares 
where the applicable trust has fewer than 50,000 receipts or the market 
value of all receipts issued and outstanding is less than $1,000,000, 
respectively, following the initial 12 month period following 
commencement of trading on the Exchange. The Exchange is proposing that 
BZX Rule 14.11(e)(4)(E)(ii)(b) would not apply to the Shares because 
the Exchange believes that such policy concerns are otherwise 
mitigated. According to the Exchange, the lower number of Shares is 
merely a function of price that will have no impact on the creation and 
redemption process and the arbitrage mechanism, and the Exchange 
proposes that it would not commence delisting proceedings for the 
Shares if the Shares do not satisfy BZX Rule 14.11(e)(4)(E)(ii)(b).\22\
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    \22\ See id. at 31024.
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    According to the Exchange, the Sponsor expects that the 
dissemination of information on the Trust's website, along with 
quotations for and last-sale prices of transactions in the Shares and 
the IIV and NAV of the Trust, will help to reduce the ability of market 
participants to manipulate the bitcoin market or the price of the 
Shares, and that the Trust's arbitrage mechanism will facilitate the 
correction of price discrepancies between bitcoin and the Shares. The 
Exchange states that the Sponsor believes that demand from new, larger 
investors accessing bitcoin through investment in the Shares will 
broaden the investor base in bitcoin, which could further reduce the 
possibility of collusion among market participants to manipulate the 
bitcoin market, and that the Sponsor expects that the Shares will be 
purchased primarily by institutional and other substantial investors 
(such as hedge funds, family offices, private wealth managers, and 
high-net-worth individuals), which will provide additional liquidity 
and transparency to the bitcoin market in a regulated vehicle such as 
the Trust.\23\
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    \23\ See id. at 31018.
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    The Exchange also asserts that the policy concerns related to an 
underlying reference asset and its susceptibility to manipulation are 
mitigated as it relates to bitcoin because the very nature of the 
bitcoin ecosystem makes manipulation of bitcoin difficult. The Exchange 
argues that, particularly, in the OTC markets, the dual elements of 
principal-to-principal trading combined with the large size at which 
trades are effected should effectively eliminate the ability of market 
participants to manipulate the market with small trades as may be the 
case on any individual exchange. The Exchange further asserts that the 
OTC desks that comprise the MVBTCO with which the Trust intends to 
effect transactions are well established institutions that comply with 
AML and KYC regulatory requirements with respect to trading 
counterparties and include entities that are regulated by the 
Commission and FINRA as registered broker-dealers and affiliates of 
broker-dealers. According to the Exchange, it is the Sponsor's position 
that the OTC desks have a better measure of the market than any 
exchange-specific reference price, whether individually or indexed 
across multiple exchanges.\24\
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    \24\ See id. at 31025.
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    The Exchange argues that the geographically diverse and continuous 
nature of bitcoin trading makes it difficult and prohibitively costly 
to manipulate the price of bitcoin and that, in many instances, the 
bitcoin market is generally less susceptible to manipulation than the 
equity, fixed income, and commodity-futures markets. The Exchange 
submits a number of arguments for why this is the case, asserting that 
there is no inside

[[Page 48667]]

information about revenue, earnings, corporate activities, or sources 
of supply; that it is generally not possible to disseminate false or 
misleading information about bitcoin in order to manipulate; that 
manipulation of the price on any single venue would require 
manipulation of the global bitcoin price in order to be effective; that 
a substantial OTC market provides liquidity and shock-absorbing 
capacity; that bitcoin's 24/7/365 nature provides constant arbitrage 
opportunities across all trading venues; and that it is unlikely that 
any one actor could obtain a dominant market share.\25\
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    \25\ See id.
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    Further, the Exchange asserts that bitcoin is arguably less 
susceptible to manipulation than other commodities that underlie 
exchange-traded products (``ETPs'') because there may be inside 
information relating to the supply of the physical commodity (such as 
the discovery of new sources of supply or significant disruptions at 
mining facilities that supply the commodity) that simply are 
inapplicable to bitcoin. Further, the Exchange asserts that the 
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 unlikely. Moreover, according to 
the Exchange, 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. The Exchange argues that 
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 exchange or OTC platform. As a result, 
asserts the Exchange, the potential for manipulation on a trading 
platform would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market pricing 
differences.\26\
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    \26\ See id.
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    The Exchange asserts that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. According to the 
Exchange, trading of the Shares through the Exchange will be subject to 
the Exchange's surveillance procedures for derivative products, 
including Commodity-Based Trust Shares. The Exchange further represents 
that, pursuant to its obligations under Section 19(g)(1) of the Act, 
the Exchange will surveil for compliance with the continued listing 
requirements and that, if the Trust or the Shares are not in compliance 
with the applicable listing requirements, the Exchange will commence 
delisting procedures under BZX Rule 14.12.\27\
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    \27\ See id. at 31024-25.
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    The Exchange represents that it may obtain information regarding 
trading in the Shares and listed bitcoin derivatives via the 
Intermarket Surveillance Group (``ISG''), from other exchanges who are 
members or affiliates of the ISG, or with which the Exchange has 
entered into a comprehensive surveillance sharing agreement. In 
addition, the Exchange represents that it may obtain information about 
bitcoin transactions, trades, and market data from bitcoin exchanges 
with which the Exchange has entered into a comprehensive surveillance 
sharing agreement as well as certain additional information that is 
publicly available through the Bitcoin blockchain. The Exchange notes 
that it has entered into a comprehensive surveillance sharing agreement 
with the Gemini Exchange.\28\
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    \28\ See id. at 31025.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2018-040 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \29\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \29\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\30\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \31\
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    \30\ Id.
    \31\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\32\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following:
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    \32\ See Notice, supra note 3.
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    1. What are commenters' views of the Exchange's assertions that 
bitcoin is arguably less susceptible to manipulation than other 
commodities that underlie ETPs; that the geographically diverse and 
continuous nature of bitcoin trading makes it difficult and 
prohibitively costly to manipulate the price of bitcoin; that trading 
on inside information regarding bitcoin is unlikely; that the 
fragmentation across bitcoin markets, 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 unlikely; that manipulation of the 
price on any single venue would require manipulation of the global 
bitcoin price to be effective; that a substantial OTC bitcoin market 
provides liquidity and shock-absorbing capacity; that bitcoin's ``24/7/
365 nature'' provides constant arbitrage opportunities across all 
trading venues; and that it is unlikely that any one actor could obtain 
a dominant market share?
    2. What are commenters' views on the Sponsor's assertion, described 
by the Exchange in the Notice, that ``the OTC desks have a better 
measure of the market than any exchange-specific reference price, 
whether individually or indexed across multiple exchanges''? What are 
commenters' views on the Exchange's representation that, in the OTC 
markets, the dual elements of principal-to-principal trading combined 
with the large size at which trades are effected should effectively 
eliminate the ability of market participants to manipulate the market 
with small trades as may be the case on any individual exchange? What 
is the current typical number and volume of transactions on the OTC 
market? What are commenters' views on whether the liquidity of the OTC 
bitcoin market, which would be used as the reference market for pricing

[[Page 48668]]

the proposed ETP's holdings, is sufficient for efficient bitcoin price 
discovery? What are commenters' views on whether the liquidity of the 
OTC bitcoin market is sufficient to support efficient arbitrage between 
the price of the Shares and the spot price of bitcoin? What are the 
numbers of active traders, market makers, and other liquidity providers 
on the OTC bitcoin market? To what extent is trading in the OTC bitcoin 
market subject to regulation?
    3. The Exchange asserts that the dissemination of information on 
the Trust's website, along with quotations for and last-sale prices of 
transactions in the Shares and the IIV and NAV of the Trust, will help 
to reduce the ability of market participants to manipulate the bitcoin 
market or the price of the Shares and that the Trust's arbitrage 
mechanism will facilitate the correction of price discrepancies in 
bitcoin and the Shares. In addition, the Exchange asserts that demand 
from new, larger investors accessing bitcoin through investment in the 
Shares will broaden the investor base in bitcoin, which could further 
reduce the possibility of collusion among market participants to 
manipulate the bitcoin market. The Exchange further states that the 
exploitation of arbitrage opportunities by Authorized Participants and 
their clients and customers will tend to cause the public trading price 
to track NAV per Share closely over time. What are commenters' views 
regarding these statements? For example, do commenters agree or 
disagree with the assertion that Authorized Participants and other 
market makers will be able to engage in arbitrage and to make efficient 
and liquid markets in the Shares at prices generally in line with the 
NAV?
    4. What are commenters' views, generally, on whether the proposed 
ETP would be susceptible to manipulation?
    5. What are commenters' views on whether and to what extent bitcoin 
futures markets generally, and current volume on those markets 
specifically, affect the susceptibility of bitcoin to manipulation? 
What are commenters' views on whether and to what extent other listed 
bitcoin derivatives, and the current volume on the markets for those 
derivatives, affect the susceptibility of bitcoin to manipulation?
    6. What are commenters' views on the Trust's proposal to value its 
bitcoin holdings based on an index--the MVBTCO--that is calculated 
through a proprietary, non-public methodology that uses the privately 
reported bid/ask spreads of an unidentified set of U.S.-based market-
makers in the OTC marketplace, which, the Exchange says, has no formal 
structure and no open-outcry meeting place? Is the use of a non-public 
proprietary index to value holdings based on OTC activity an 
appropriate means to calculate the NAV of an ETP? What are commenters' 
views on whether determining NAV based on the index value at 4:00 p.m. 
E.T. might, or might not, create an opportunity for manipulation of the 
NAV or of the Shares?
    7. What are commenters' views on the statement in the Notice that, 
according to the Sponsor, the MVBTCO's methodology decreases the 
influence on the MVBTCO of any particular OTC platform that diverges 
from the rest of the data points used by the MVBTCO, which reduces the 
possibility of an attempt to manipulate the price of bitcoin as 
reflected by the MVBTCO?
    8. What are commenters' views on each of the set of alternative 
means by which the Trust proposes to value its holdings in the event 
that the Sponsor determines that the MVBTCO, or another alternate 
pricing mechanism, has failed or is unavailable?
    9. The Exchange represents that, while the Trust intends to conduct 
the majority of its trading in the OTC market on the OTC platforms that 
comprise the MVBTCO, the Trust also will maintain an internal 
proprietary database, which it will not share with anyone, of potential 
OTC bitcoin trading counterparties, including hedge funds, family 
offices, private wealth managers, and high-net-worth individuals. The 
Exchange further states that OTC bitcoin trading is typically private 
and not regularly reported, and that the Trust does not intend to 
report its OTC trading. What are commenters' views on how the Trust's 
unreported OTC trades may affect the calculation of the Trust's NAV and 
the ability of market makers to engage in arbitrage?
    10. What are commenters' views on the relationship between trading 
in the OTC bitcoin market and the wider global bitcoin market? What are 
commenters' views on the circumstances pursuant to which the OTC 
bitcoin market may trade at a premium or discount to the global bitcoin 
market? What are commenters' views on whether or not the OTC bitcoin 
market would provide a measure of insulation from erratic or dislocated 
trading in the global bitcoin market?
    11. What are commenters' views on the cost and the efficiency of 
arbitrage across the various global markets for bitcoin? What are 
commenters' views generally with respect to the liquidity and 
transparency of the bitcoin market, the bitcoin markets' susceptibility 
to manipulation, and thus the suitability of bitcoin as an underlying 
asset for an ETP?
    12. What are commenters' views on the Exchange's representation 
that the Sponsor estimates that the U.S. dollar OTC bitcoin trading 
volume globally represents on average approximately 50% of the trading 
volume of bitcoin traded globally in U.S. dollars on U.S.-dollar-
denominated bitcoin exchanges? Is the volume of U.S. dollar trading of 
bitcoin--which excludes bitcoin trading against other sovereign 
currencies or digital assets--a meaningful or appropriate measure of 
bitcoin market volume? Why or why not?
    13. What are commenters' views on whether the Exchange has entered 
into a surveillance-sharing agreement with a regulated market of 
significant size related to bitcoin? What are commenters' views on the 
current regulation of bitcoin-related markets? What are commenters' 
views on whether markets for listed bitcoin derivatives--such as 
bitcoin futures markets-- are markets of significant size? What are 
commenters' views on whether there is a reasonable likelihood that a 
person attempting to manipulate the proposed ETP would also have to 
trade on a regulated bitcoin-related market with which the Exchange has 
a surveillance sharing agreement? What are commenters' views on whether 
trading in the proposed ETP would be the predominant influence on 
prices in a regulated, bitcoin-related market with which the Exchange 
has a surveillance-sharing agreement?
    14. The Exchange represents that it has entered into a 
comprehensive surveillance-sharing agreement with the Gemini Exchange. 
What are commenters' views on whether the Gemini Exchange is a market 
of significant size? What are commenters' views on whether there is a 
reasonable likelihood that a person attempting to manipulate the 
proposed ETP would also have to trade on the Gemini Exchange? What are 
commenters' views on whether trading in the proposed ETP would be the 
predominant influence on prices in the Gemini Exchange?
    15. According to the Exchange, the Shares will be purchased 
primarily by institutional and other substantial investors (such as 
hedge funds, family offices, private wealth managers, and high-net-
worth individuals), which will provide additional liquidity and 
transparency to the bitcoin market in a regulated vehicle such as the 
Trust. The Exchange asserts that, with an estimated initial per-share 
price equivalent to 25 bitcoins, the Shares will be cost-prohibitive 
for smaller retail investors while allowing larger and generally

[[Page 48669]]

more sophisticated institutional investors to gain exposure to the 
price of bitcoin through a regulated product, eliminating the 
complications and reducing the risk associated with buying and holding 
bitcoin. What are commenters' views of the Exchange's assertions that 
transacting in the Shares will be geared toward more sophisticated 
institutional investors and will be cost-prohibitive for smaller retail 
investors? What are commenters' views regarding whether broker-dealers 
are likely to offer fractional shares in the Trust to retail investors, 
permitting retail investment with a smaller financial commitment? What 
are commenters' views of the Exchange's assertions that the Sponsor 
believes that demand from new, larger investors accessing bitcoin 
through investment in the Shares will broaden the investor base in 
bitcoin, which could further reduce the possibility of collusion among 
market participants to manipulate the bitcoin market, in light of the 
possibility that broker-dealers may offer fractional shares to their 
customers?
    16. The Exchange represents that there will be at least 100 Shares 
outstanding at the time of commencement of trading on the Exchange and 
that this amount of Shares outstanding at the commencement of trading 
will be sufficient to provide adequate market liquidity. What are 
commenters' views on the Exchange's assertion that a minimum of 100 
Shares outstanding at the time of commencement of trading will be 
sufficient to provide adequate market liquidity? What are commenters' 
views on whether the 100-share minimum would affect the arbitrage 
mechanism?
    17. What are commenters' views on the Exchange's assertion that, 
even though the Trust would not comply with the minimum number of 
shares outstanding required by Exchange rules, the policy concerns 
underlying that requirement would be otherwise mitigated in the case of 
the Trust, because the lower number of Shares is merely a function of 
the price of the Shares and will have no effect on the creation and 
redemption process or on arbitrage?
    18. The Exchange states that the Trust will maintain crime, excess 
crime, and excess vault risk insurance coverage underwritten by various 
insurance carriers that will cover the entirety of the Trust's bitcoin 
holdings. The Exchange further states that, while the Trust is 
confident in its system for securing its bitcoin, insurance coverage of 
all of the Trust's bitcoin holdings eliminates exposure to the risk of 
loss to investors through fraud or theft, which in turn eliminates most 
of the custodial issues associated with a series of Commodity-Based 
Trust Shares based on bitcoin. What are commenters' views of whether 
the proposed insurance coverage would affect trading in the Shares or 
in the underlying bitcoins? What are commenters' views regarding the 
Trust's proposed security, control, and insurance measures?

III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\33\
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    \33\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by October 17, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 31, 2018.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2018-040 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBZX-2018-040. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2018-040 and should be submitted 
by October 17, 2018. Rebuttal comments should be submitted by October 
31, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-20884 Filed 9-25-18; 8:45 am]
 BILLING CODE 8011-01-P