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Notice2021-15194

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 WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares

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Published
July 19, 2021

Issuing agencies

Securities and Exchange Commission

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<title>Federal Register, Volume 86 Issue 135 (Monday, July 19, 2021)</title>
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[Federal Register Volume 86, Number 135 (Monday, July 19, 2021)]
[Notices]
[Pages 38154-38156]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-15194]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92392; File No. SR-CboeBZX-2021-024]


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 WisdomTree Bitcoin 
Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares

July 13, 2021.
    On March 26, 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 
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 April 15, 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. 91521 (April 9, 
2021), 86 FR 19917 (April 15, 2021) (``Notice''). Comments on the 
proposed rule change can be found at: <a href="https://www.sec.gov/comments/sr-cboebzx-2021-024/srcboebzx2021024.htm">https://www.sec.gov/comments/sr-cboebzx-2021-024/srcboebzx2021024.htm</a>.
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    On May 26, 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. 92032, 86 FR 29611 
(June 2, 2021). The Commission designated July 14, 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 gain exposure to 
the price of bitcoin, less expenses and liabilities of the Trust's 
operation.\8\ The Trust

[[Page 38155]]

would hold bitcoin and it would calculate the Trust's net asset value 
(``NAV'') daily based on the value of bitcoin as reflected by the CF 
Bitcoin U.S. Settlement Price (``Reference Rate''). The Reference Rate 
was created, and is administered, by CF Benchmarks Ltd., an independent 
entity. The Reference Rate aggregates the trade flow of several bitcoin 
platforms. The current platform composition of the Reference Rate is 
Bitstamp, Coinbase, Gemini, itBit and Kraken. In calculating the 
Reference Rate, the methodology creates a joint list of the trade 
prices and sizes from the constituent platforms between 3:00 p.m. E.T. 
and 4:00 p.m. E.T. The methodology then divides this list into 12 
equally-sized time intervals of 5 minutes and it 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.\9\
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    \8\ WisdomTree Digital Commodity Services, LLC (``Sponsor'') is 
the sponsor of the Trust, and Delaware Trust Company is the trustee. 
A third-party regulated custodian (``Bitcoin Custodian'') will be 
responsible for custody of the Trust's bitcoin. The Sponsor is 
responsible for selecting the Bitcoin Custodian as well as an 
administrator, a transfer agent, a marketing agent, and an auditor 
for the Trust. See id. at 19925-26.
    \9\ See id. at 19926.
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    Each Share will represent a fractional undivided beneficial 
interest in the Trust's net assets. The Trust's assets will consist of 
bitcoin held by the Bitcoin 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.\10\
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    \10\ See id. at 19925.
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    The administrator will determine the NAV and NAV per Share of the 
Trust, on each day that the Exchange is open for regular trading, after 
4:00 p.m. E.T. (often by 5:30 p.m. E.T. and almost always by 8:00 p.m. 
E.T.). The NAV of the Trust is the aggregate value of the Trust's 
assets less total liabilities of the Trust. In determining the Trust's 
NAV, the administrator values the bitcoin held by the Trust based on 
the price set by the Reference Rate as of 4:00 p.m. E.T.\11\
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    \11\ See id. at 19927.
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    The Trust will provide information regarding the Trust's bitcoin 
holdings, as well as an Intraday Indicative Value (``IIV'') per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading 
Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during Regular Trading Hours to reflect changes in the value of 
the Trust's bitcoin holdings during the trading day.\12\
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    \12\ See id. at 19926.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in large blocks of aggregations of Shares. 
Authorized participants will deliver, or facilitate the delivery of, 
bitcoin to the Trust's account with the Bitcoin Custodian in exchange 
for Shares when they purchase Shares, and the Trust, through the 
Bitcoin Custodian, will deliver bitcoin to such authorized participants 
when they redeem Shares with the Trust.\13\
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    \13\ See id. at 19925-26.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2021-024 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \14\ 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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    \14\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\15\ 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.'' \16\
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    \15\ Id.
    \16\ 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,\17\ 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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    \17\ 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 
regulatory and financial landscapes relating to bitcoin and other 
digital assets have changed significantly since 2016? \18\ Are the 
changes that the Exchange identifies sufficient to support the 
determination that the proposed listing and trading of the Shares are 
consistent with the Act?
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    \18\ See id. at 19919.
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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.\19\ 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.'' \20\ What are 
commenters' views regarding such assertions?
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    \19\ See id. at 19920.
    \20\ See id. at 19924.
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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.'' \21\ Based on data provided and the academic research cited by 
the Exchange, do commenters agree that the Chicago Mercantile Exchange 
(``CME'') now represents a regulated market of significant size? \22\ 
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 of 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 helps to

[[Page 38156]]

prevent the Shares from becoming the predominant force on pricing in 
either the bitcoin spot or CME bitcoin futures markets? \23\
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    \21\ See id. at 19922.
    \22\ See id. at 19924.
    \23\ See id. at 19930.
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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? \24\ What of 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? \25\ What of 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''? \26\
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    \24\ See id. at 19924 n.58.
    \25\ See id. at 19925.
    \26\ 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.\27\
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    \27\ 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 August 9, 2021. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by August 23, 
2021.
    Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e694938a83cb85898b8b83889295a6958385c8818990"><span class="__cf_email__" data-cfemail="582a2d343d753b3735353d362c2b182b3d3b763f372e">[email&#160;protected]</span></a>. Please include 
File Number SR-CboeBZX-2021-024 on the subject line.

Paper Comments

    <bullet> 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-2021-024. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>). 
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-2021-024 and should be submitted 
by August 9, 2021. Rebuttal comments should be submitted by August 23, 
2021.
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    \28\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15194 Filed 7-16-21; 8:45 am]
BILLING CODE 8011-01-P


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