Document ID: SEC-2021-1574-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2021-11-08T05:00Z

[Federal Register Volume 86, Number 213 (Monday, November 8, 2021)]
[Notices]
[Pages 61820-61822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24326]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93510; File No. SR-CboeBZX-2021-051]

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 the ARK 21Shares 
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares

November 2, 2021.
    On July 20, 2021, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares (``Shares'') of the ARK 21Shares Bitcoin ETF 
(``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. 
The proposed rule change was published for comment in the Federal 
Register on August 6, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92543 (Aug. 2, 
2021), 86 FR 43289 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2021-051/srcboebzx2021051.htm.
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    On September 15, 2021, 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\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ 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. 92989, 86 FR 52530 
(Sept. 21, 2021). The Commission designated November 4, 2021, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in more detail in the Notice,\7\ 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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    \7\ See Notice, supra note 3.
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    The investment objective of the Trust would be to seek to track the 
performance of bitcoin, as measured by the performance of the S&P 
Bitcoin Index (``Index''), adjusted for the Trust's expenses and other 
liabilities.\8\ Each Share will represent a fractional undivided 
beneficial interest in the bitcoin held by the Trust. The Trust's 
assets will consist of bitcoin held by the Custodian on behalf of the 
Trust. The Trust generally does not intend to hold cash or cash 
equivalents. However, there may be situations where the Trust will 
unexpectedly hold cash on a temporary basis.\9\
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    \8\ See id. at 43298. 21SharesUS LLC (``Sponsor'') is the 
sponsor of the Trust, Delaware Trust Company is the trustee, The 
Bank of New York Mellon will be the administrator and transfer 
agent. Foreside Global Services, LLC will be the marketing agent in 
connection with the creation and redemption of Shares. ARK 
Investment Management LLC will provide assistance in the marketing 
of the Shares. Coinbase Custody Trust Company, LLC (``Custodian''), 
will be responsible for custody of the Trust's bitcoin. See id. at 
43290, 43297.
    \9\ See id. at 43297.
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    In seeking to achieve its investment objective, the Trust would 
hold bitcoin and would value the Shares daily based on the Index. The 
Index is a U.S. dollar-denominated composite reference rate for the 
price of bitcoin. The current platform composition of the Index is 
Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, Gemini, 
HitBTC, Huobi, Kraken, KuCoin, and Poloniex.\10\ The Index methodology 
is intended to determine the fair market value for bitcoin by 
determining the principal market for bitcoin as of 4:00 p.m. E.T. 
daily.\11\
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    \10\ The underlying platforms are sourced by Lukka Inc. (``Data 
Provider'') based on a combination of qualitative and quantitative 
metrics to analyze a comprehensive data set and evaluate factors 
including legal/regulation, Know-Your-Customer/transaction risk, 
data provision, security, team/exchange, asset quality/diversity, 
market quality and negative events. See id. at 43298.
    \11\ The Index methodology uses a ranking approach that 
considers several exchange characteristics including oversight and 
intra-day trading volume. Specifically, to rank the credibility and 
quality of each exchange, the Data Provider dynamically assigns a 
Base Exchange Score (``BES'') score to the key characteristics for 
each exchange. The BES reflects the fundamentals of an exchange and 
determines which exchange should be designated as the principal 
market at a given point of time. This score is determined by 
computing a weighted average of the values assigned to four 
different exchange characteristics: (i) oversight; (ii) 
microstructure efficiency; (iii) data transparency; and (iv) data 
integrity. The methodology then applies a five-step weighting 
process for identifying a principal exchange and the last price on 
that exchange. Following this weighting process, an executed 
exchange price is assigned for bitcoin as of 4:00 p.m. E.T. See id.
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    The Net Asset Value (``NAV'') of the Trust means the total assets 
of the Trust including, but not limited to, all bitcoin and cash, if 
any, less total liabilities of the Trust, each determined on the basis 
of generally accepted accounting principles. The NAV of the Trust is 
the aggregate value of the Trust's assets less its estimated accrued 
but unpaid liabilities (which include accrued expenses). In determining 
the Trust's NAV, the Administrator values the bitcoin held by the Trust 
based on the price set by the Index as of 4:00 p.m. E.T. The 
Administrator determines the NAV of the Trust on each day that the 
Exchange is open for regular trading, as promptly as practical after 
4:00 p.m. E.T.\12\
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    \12\ See id. at 43299.
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    The Trust will provide information regarding the Trust's bitcoin 
holdings, as well as an Intraday Indicative Value (``IIV'') per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading 
Hours (9:30 a.m. E.T. to 4:00 p.m. E.T.). The IIV will be calculated by 
using the prior day's closing NAV per Share as a

[[Page 61821]]

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.\13\
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    \13\ See id.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 Shares. Authorized participants 
will 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, will deliver bitcoin to 
such authorized participants when they redeem Shares with the 
Trust.\14\
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    \14\ See id. at 43297-98.
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II. Proceedings to Determine Whether to Approve or Disapprove SR-
CboeBZX-2021-051 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \15\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. 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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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\16\ 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'' and ``to protect investors and the 
public interest.'' \17\
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    \16\ Id.
    \17\ 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,\18\ 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 questions and asks commenters to submit 
data where appropriate to support their views:
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    \18\ See Notice, supra note 3.
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    1. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
bitcoin markets, the bitcoin markets' susceptibility to manipulation, 
and thus the suitability of bitcoin as an underlying asset for an 
exchange-traded product?
    2. What are commenters' views of the Exchange's assertion that the 
regulatory and financial landscapes relating to bitcoin and other 
digital assets have changed significantly since 2016? \19\ Are the 
changes that the Exchange identifies sufficient to support the 
determination that the proposal to list and trade the Shares is 
designed to protect investors and the public interest and is consistent 
with the other applicable requirements of Section 6(b)(5) of the Act?
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    \19\ See id. at 43291-92.
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    3. The Exchange states that ``approving this proposal . . . [would] 
allow U.S. investors with access to bitcoin in a regulated and 
transparent exchange-traded vehicle that would act to limit risk'' 
associated with exposure through other means.\20\ Further, the Exchange 
asserts that ``the manipulation concerns previously articulated by the 
Commission are sufficiently mitigated to the point that they are 
outweighed by quantifiable investor protection issues that would be 
resolved by approving this proposal.'' \21\ What are commenters' views 
regarding such assertions?
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    \20\ See id. at 43292.
    \21\ See id. at 43296.
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    4. According to the Exchange, ``[n]early every measurable metric 
related to [Chicago Mercantile Exchange's] Bitcoin Futures has trended 
consistently up since launch and/or accelerated upward in the past 
year.'' \22\ Based on data provided and the academic research cited by 
the Exchange, do commenters agree that the Chicago Mercantile Exchange 
(``CME'')'s bitcoin futures market now represents a regulated market of 
significant size? \23\ What are commenters' views on whether there is a 
reasonable likelihood that a person attempting to manipulate the Shares 
would also have to trade on CME to manipulate the Shares? What are 
commenters' views on the Exchange's assertion that the combination of 
(a) CME bitcoin futures leading price discovery; (b) the overall size 
of the bitcoin market; and (c) the ability for market participants to 
buy or sell large amounts of bitcoin without significant market impact 
would help to prevent the Shares from becoming the predominant force on 
pricing in either the bitcoin spot or CME bitcoin futures markets? \24\
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    \22\ See id. at 43294.
    \23\ See id. at 43291, 43294-96.
    \24\ See id. at 43297.
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    5. What are commenters' views on the Exchange's statement, 
generally, that bitcoin is resistant to price manipulation and that 
other means to prevent fraudulent and manipulative acts and practices 
exist to justify dispensing with the requisite surveillance sharing 
agreement with a regulated market of significant size related to 
bitcoin? \25\ What are commenters' views on the Exchange's assertion in 
support of such statement that significant liquidity in the spot market 
and the impact of market orders on the overall price of bitcoin mean 
that attempting to move the price of bitcoin is costly? \26\ What are 
commenters' views on the assertion that offering only in-kind creations 
and redemptions provides unique protections against potential attempts 
to manipulate the Shares and that the price the Sponsor uses to value 
the Trust's bitcoin ``is not particularly important''? \27\
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    \25\ See id. at 43296 n.54.
    \26\ See id. at 43297.
    \27\ See id.
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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.\28\
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    \28\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 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 November 29, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 13, 2021.
    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-2021-051 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-2021-051. 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-2021-051 and should be submitted 
by November 29, 2021. Rebuttal comments should be submitted by December 
13, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-24326 Filed 11-5-21; 8:45 am]
BILLING CODE 8011-01-P