Notice2021-28255
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Disapproving a Proposed Rule Change To List and Trade Shares of the Kryptoin Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 29, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 247 (Wednesday, December 29, 2021)</title>
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[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74166-74180]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-28255]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93860; File No. SR-CboeBZX-2021-029]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Kryptoin Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares
December 22, 2021.
I. Introduction
On April 9, 2021, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the Kryptoin Bitcoin
ETF Trust (``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares. The proposed rule change was published for comment in the
Federal Register on April 28, 2021.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 91646 (Apr. 22,
2021), 86 FR 22485 (``Notice''). Comments on the proposed rule
change can be found at: <a href="https://www.sec.gov/comments/sr-cboebzx-2021-029/srcboebzx2021029.htm">https://www.sec.gov/comments/sr-cboebzx-2021-029/srcboebzx2021029.htm</a>.
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On June 9, 2021, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On July 23, 2021, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On September 29, 2021, the Commission designated a longer period for
Commission action on the proposed rule change.\8\
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 92131, 86 FR 31772
(June 15, 2021).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 92476, 86 FR 40883
(July 29, 2021).
\8\ See Securities Exchange Act Release No. 93175, 86 FR 55092
(Oct. 5, 2021).
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This order disapproves the proposed rule change. The Commission
concludes that BZX has not met its burden under the Exchange Act and
the Commission's Rules of Practice to demonstrate that its proposal is
consistent with the requirements of Exchange Act Section 6(b)(5), and
in particular, the requirement that the rules of a national
[[Page 74167]]
securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices'' and ``to protect investors and the
public interest.'' \9\
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\9\ 15 U.S.C. 78f(b)(5).
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When considering whether BZX's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same standard used in its orders
considering previous proposals to list bitcoin \10\-based commodity
trusts and bitcoin-based trust issued receipts.\11\ As the Commission
has explained, an exchange that lists bitcoin-based exchange-traded
products (``ETPs'') can meet its obligations under Exchange Act Section
6(b)(5) by demonstrating that the exchange has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to the underlying or reference bitcoin assets.\12\
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\10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Notice, 86 FR at 22485.
\11\ See Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) and To List and Trade Shares of the United States Bitcoin
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E,
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1,
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024)
(``WisdomTree Order''). See also Order Disapproving a Proposed Rule
Change, as Modified by Amendment No. 1, Relating to the Listing and
Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca
Equities Rule 8.201, Securities Exchange Act Release No. 80319 (Mar.
28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101)
(``SolidX Order''). The Commission also notes that orders were
issued by delegated authority on the following matters: Order
Disapproving a Proposed Rule Change To List and Trade the Shares of
the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF,
Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83 FR
43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) (``ProShares Order'');
Order Disapproving a Proposed Rule Change To List and Trade the
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short
Bitcoin ETF, Securities Exchange Act Release No. 83913 (Aug. 22,
2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001)
(``GraniteShares Order''); Order Disapproving a Proposed Rule Change
To List and Trade Shares of the VanEck Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act
Release No. 93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-
CboeBZX-2021-019).
\12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order,
83 FR at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
83 FR at 43925-27 nn.35-39 and accompanying text (discussing
previous Commission approvals of commodity-futures ETPs).
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The standard requires such surveillance-sharing agreements since
they ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur.'' \13\ The Commission has
emphasized that it is essential for an exchange listing a derivative
securities product to enter into a surveillance-sharing agreement with
markets trading the underlying assets for the listing exchange to have
the ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of exchange
rules and applicable federal securities laws and rules.\14\ The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading activity,
clearing activity, and customer identity; that the parties to the
agreement have reasonable ability to obtain access to and produce
requested information; and that no existing rules, laws, or practices
would impede one party to the agreement from obtaining this information
from, or producing it to, the other party.\15\
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\13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at
12596.
\14\ See NDSP Adopting Release, 63 FR at 70959.
\15\ See Winklevoss Order, 83 FR at 37592-93; Letter from
Brandon Becker, Director, Division of Market Regulation, Commission,
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group
(June 3, 1994), available at <a href="https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm">https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm</a>.
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In the context of this standard, the terms ``significant market''
and ``market of significant size'' include a market (or group of
markets) as to which (a) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (b) it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\16\ A surveillance-sharing
agreement must be entered into with a ``significant market'' to assist
in detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to also engage in
trading activity on that ``significant market.'' \17\
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\16\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that will provide guidance to market
participants. See id.
\17\ See USBT Order, 85 FR at 12597.
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Consistent with this standard, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity--whether gold, silver, platinum, palladium, or
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group
(``ISG'') membership in common with, that market.\18\ Moreover, the
surveillance-sharing agreements have been consistently present whenever
the Commission has approved the listing and trading of derivative
securities, even where the underlying securities were also listed on
national securities exchanges--such as options based on an index of
stocks traded on a national securities exchange--and were thus subject
to the Commission's direct regulatory authority.\19\
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\18\ See Winklevoss Order, 83 FR at 37594.
\19\ See USBT Order, 85 FR at 12597; Securities Exchange Act
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994)
(SR-Amex-93-28) (order approving listing of options on American
Depository Receipts (``ADRs'')). The Commission has also required a
surveillance-sharing agreement in the context of index options even
when (i) all of the underlying index component stocks were either
registered with the Commission or exempt from registration under the
Exchange Act; (ii) all of the underlying index component stocks
traded in the U.S. either directly or as ADRs on a national
securities exchange; and (iii) effective international ADR arbitrage
alleviated concerns over the relatively smaller ADR trading volume,
helped to ensure that ADR prices reflected the pricing on the home
market, and helped to ensure more reliable price determinations for
settlement purposes, due to the unique composition of the index and
reliance on ADR prices. See Securities Exchange Act Release No.
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the
exchange on which the index option trades and the markets that trade
the underlying securities are necessary'' and that ``[t]he exchange
of surveillance data by the exchange trading a stock index option
and the markets for the securities comprising the index is important
to the detection and deterrence of intermarket manipulation.''). And
the Commission has required a surveillance-sharing agreement even
when approving options based on an index of stocks traded on a
national securities exchange. See Securities Exchange Act Release
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure
the availability of information necessary to detect and deter
potential manipulations and other trading abuses'').
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[[Page 74168]]
Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin market
is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\20\ In response, the Commission has agreed that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, it
would not necessarily need to enter into a surveillance-sharing
agreement with a regulated significant market.\21\ Such resistance to
fraud and manipulation, however, must be novel and beyond those
protections that exist in traditional commodity markets or equity
markets for which the Commission has long required surveillance-sharing
agreements in the context of listing derivative securities
products.\22\ No listing exchange has satisfied its burden to make such
demonstration.\23\
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\20\ See USBT Order, 85 FR at 12597.
\21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation); see also USBT Order, 85 FR at
12597.
\22\ See USBT Order, 85 FR at 12597.
\23\ See supra note 11.
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Here, BZX contends that approval of the proposal is consistent with
Section 6(b)(5) of the Exchange Act, in particular Section 6(b)(5)'s
requirement that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest.\24\ As discussed in more
detail below, BZX asserts that the proposal is consistent with Section
6(b)(5) of the Exchange Act because the Exchange has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size,\25\ and there exist other means to prevent fraudulent and
manipulative acts and practices that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement.\26\
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\24\ See Notice, 86 FR at 22495.
\25\ See id. at 22491-92.
\26\ See id. at 22492.
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Although BZX recognizes the Commission's focus on potential
manipulation of bitcoin ETPs in prior disapproval orders, BZX argues
that such manipulation concerns have been sufficiently mitigated, and
that the growing and quantifiable investor protection concerns should
be the central consideration of the Commission.\27\ Specifically, as
discussed in more detail below, the Exchange asserts that the
significant increase in trading volume in bitcoin futures on the
Chicago Mercantile Exchange (``CME''), the growth of liquidity in the
spot market for bitcoin, and certain features of the Shares and the
Reference Rate (as defined herein) mitigate potential manipulation
concerns to the point that the investor protection issues that have
arisen from the rapid growth of over-the-counter (``OTC'') bitcoin
funds, including premium/discount volatility and management fees,
should be the central consideration as the Commission determines
whether to approve this proposal.\28\
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\27\ See id. at 22487-88, 22491, 22495-96.
\28\ See id. at 22491, 22495.
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Further, BZX believes that the proposal would give U.S. investors
access to bitcoin in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors. According to
BZX, the proposed listing and trading of the Shares would mitigate risk
by: (i) Reducing premium and discount volatility; (ii) reducing
management fees through meaningful competition; (iii) reducing risks
associated with investing in operating companies that are imperfect
proxies for bitcoin exposure; and (iv) providing an alternative to
custodying spot bitcoin.\29\
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\29\ See id. at 22487.
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In the analysis that follows, the Commission examines whether the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act by addressing: In Section III.B.1 assertions that other means
besides surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices; in Section III.B.2
assertions that BZX has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to bitcoin; and in Section III.C assertions that the proposal is
consistent with the protection of investors and the public interest. As
discussed further below, BZX repeats various assertions made in prior
bitcoin-based ETP proposals that the Commission has previously
addressed and rejected--and more importantly, BZX does not respond to
the Commission's reasons for rejecting those assertions but merely
repeats them. The Commission concludes that BZX has not established
that other means to prevent fraudulent and manipulative acts and
practices are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The Commission further concludes that
BZX has not established that it has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to bitcoin. As a result, the Commission is unable to find that the
proposed rule change is consistent with the statutory requirements of
Exchange Act Section 6(b)(5).
The Commission again emphasizes that its disapproval of this
proposed rule change does not rest on an evaluation of whether bitcoin,
or blockchain technology more generally, has utility or value as an
innovation or an investment. Rather, the Commission is disapproving
this proposed rule change because, as discussed below, BZX has not met
its burden to demonstrate that its proposal is consistent with the
requirements of Exchange Act Section 6(b)(5).
II. Description of the Proposed Rule Change
As described in more detail in the Notice,\30\ the Exchange
proposes to list and trade the Shares of the Trust under BZX Rule
14.11(e)(4), which governs the listing and trading of Commodity-Based
Trust Shares on the Exchange.\31\
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\30\ See Notice, supra note 3. See also Amendment No. 2 to
Registration Statement on Form S-1, dated April 9, 2021, submitted
to the Commission by Kryptoin Investment Advisors, LLC (``Sponsor'')
on behalf of the Trust (``Registration Statement'').
\31\ Although the name of the Trust is the Kryptoin Bitcoin ETF
Trust, the Trust is a commodity-based ETP. The Trust is not an
exchange-traded fund, i.e., an ``ETF,'' registered under the
Investment Company Act of 1940, as amended (``1940 Act''), and is
not subject to regulation under the 1940 Act.
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The investment objective of the Trust is to provide exposure to
bitcoin at a price that is reflective of the actual bitcoin market
where investors purchase and sell bitcoin, less the expense of the
Trust's operations.\32\ The Trust would hold bitcoin, and it would
calculate the Trust's net asset value (``NAV'') daily based on the
value of bitcoin as reflected by the CF Bitcoin U.S. Settlement Price
(``Reference Rate''). The administrator of the Reference Rate is CF
Benchmarks Ltd. (``Benchmark Administrator''). The Reference Rate
aggregates the trade flow of several bitcoin spot platforms. The
current platform composition of the Reference
[[Page 74169]]
Rate is Bitstamp, Coinbase, Gemini, itBit, and Kraken. In calculating
the Reference Rate, the methodology creates a joint list of certain
trade prices and sizes from the constituent platforms between 3:00 p.m.
E.T. and 4:00 p.m. E.T. The methodology then divides this list into 12
equally-sized time intervals of five minutes, and it calculates the
volume-weighted median trade price for each of those time
intervals.\33\ The Reference Rate is the arithmetic mean of these 12
volume-weighted median trade prices.\34\
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\32\ Delaware Trust Company is the trustee, and The Bank of New
York Mellon will be the administrator (``Administrator'') and
transfer agent. Foreside Fund Services, LLC will be the marketing
agent in connection with the creation and redemption of ``baskets''
of Shares, and the Sponsor will provide assistance in the marketing
of the Shares. Gemini Trust Company, LLC, a third-party custodian
(``Custodian''), will be responsible for custody of the Trust's
bitcoin. See Notice, 86 FR at 22485, 22492-93.
\33\ According to BZX, the Reference Rate is based on materially
the same methodology (except calculation time, as described herein)
as the Benchmark Administrator's CME CF Bitcoin Reference Rate
(``BRR''), which was first introduced on November 14, 2016, and is
the rate on which bitcoin futures contracts are cash-settled in U.S.
dollars on CME. The Reference Rate is calculated as of 4:00 p.m.
E.T., whereas the BRR is calculated as of 4:00 p.m. London Time. The
Reference Rate aggregates the trade flow of several bitcoin
platforms, during an observation window between 3:00 p.m. and 4:00
p.m. E.T. into the U.S. dollar price of one bitcoin at 4:00 p.m.
E.T. The current constituent bitcoin platforms of the Reference Rate
are Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent
Bitcoin Platforms''). See id. at 22493.
\34\ See id.
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Each Share represents a fractional undivided beneficial interest in
the bitcoin held by the Trust. The Trust's assets will consist of
bitcoin held by the Custodian on behalf of the Trust. The Trust
generally does not intend to hold cash or cash equivalents. However,
there may be situations where the Trust will unexpectedly hold cash on
a temporary basis.\35\
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\35\ See id. at 22492.
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The Administrator will determine the NAV and NAV per Share of the
Trust on each day that the Exchange is open for regular trading, after
4:00 p.m. E.T. The NAV of the Trust is the aggregate value of the
Trust's assets less its liabilities (which include estimated accrued
but unpaid fees and expenses). In determining the Trust's NAV, the
Administrator will value the bitcoin held by the Trust on the basis of
the price of bitcoin as determined by the Reference Rate.\36\
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\36\ See id. at 22494.
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The Trust will provide information regarding the Trust's bitcoin
holdings, as well as an Intraday Indicative Value (``IIV'') per Share
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading
Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated by
using the prior day's closing NAV per Share as a base and updating that
value during Regular Trading Hours to reflect changes in the value of
the Trust's bitcoin holdings during the trading day.\37\
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\37\ See id. at 22493.
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When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 50,000 Shares. When creating the
Shares, authorized participants will deliver, or facilitate the
delivery of, bitcoin to the Trust's account with the Custodian in
exchange for the Shares, and, when redeeming the Shares, the Trust,
through the Custodian, will deliver bitcoin to such authorized
participants.\38\
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\38\ See id.
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III. Discussion
A. The Applicable Standard for Review
The Commission must consider whether BZX's proposal is consistent
with the Exchange Act. Section 6(b)(5) of the Exchange Act requires, in
relevant part, that the rules of a national securities exchange be
designed ``to prevent fraudulent and manipulative acts and practices''
and ``to protect investors and the public interest.'' \39\ Under the
Commission's Rules of Practice, the ``burden to demonstrate that a
proposed rule change is consistent with the Exchange Act and the rules
and regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \40\
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\39\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
\40\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\41\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\42\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\43\
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\41\ See id.
\42\ See id.
\43\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is
Designed To Prevent Fraudulent and Manipulative Acts and Practices
(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and
Practices
As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with a comprehensive surveillance-sharing agreement with a regulated
market of significant size, including by demonstrating that the bitcoin
market as a whole or the relevant underlying bitcoin market is uniquely
and inherently resistant to fraud and manipulation.\44\ Such resistance
to fraud and manipulation must be novel and beyond those protections
that exist in traditional commodities or securities markets.\45\
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\44\ See USBT Order, 85 FR at 12597 n.23. The Commission is not
applying a ``cannot be manipulated'' standard. Instead, the
Commission is examining whether the proposal meets the requirements
of the Exchange Act and, pursuant to its Rules of Practice, places
the burden on the listing exchange to demonstrate the validity of
its contentions and to establish that the requirements of the
Exchange Act have been met. See id.
\45\ See id. at 12597.
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BZX asserts that bitcoin is resistant to price manipulation.
According to BZX, the geographically diverse and continuous nature of
bitcoin trading render it difficult and prohibitively costly to
manipulate the price of bitcoin.\46\ Fragmentation across bitcoin
platforms, the relatively slow speed of transactions, and the capital
necessary to maintain a significant presence on each trading platform
make manipulation of bitcoin prices through continuous trading activity
challenging.\47\ To the extent that there are bitcoin platforms engaged
in or allowing wash trading or other activity intended to manipulate
the price of bitcoin on other markets, such pricing does not normally
impact prices on other platforms because participants will generally
ignore markets with
[[Page 74170]]
quotes that they deem non-executable.\48\ BZX further argues that the
linkage between the bitcoin markets and the presence of arbitrageurs in
those markets means that the manipulation of the price of bitcoin on
any single venue would require manipulation of the global bitcoin price
in order to be effective.\49\ Arbitrageurs must have funds distributed
across multiple trading platforms in order to take advantage of
temporary price dislocations, thereby making it unlikely that there
will be strong concentration of funds on any particular bitcoin trading
venue.\50\ As a result, BZX concludes that the potential for
manipulation on a bitcoin trading platform would require overcoming the
liquidity supply of such arbitrageurs who are effectively eliminating
any cross-market pricing differences.\51\
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\46\ See Notice, 86 FR at 22491 n.55.
\47\ See id.
\48\ See id.
\49\ See id.
\50\ See id.
\51\ See id.
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The Sponsor, in a comment letter, states that it agrees with the
Exchange's assertion that the bitcoin spot market is resistant to price
manipulation. The Sponsor asserts that the trading of bitcoin on
hundreds of spot platforms in geographically diverse locations, the
dispersed nature of market liquidity, and the level of capital
necessarily deployed across these platforms render an attempted
manipulation of the global bitcoin spot market ``challenging and highly
unlikely, if not impossible.'' \52\ The Sponsor further states that
there exists a large presence of arbitrageurs in the form of automated
market makers and high-frequency and algorithmic trading firms
established to specifically seek profits by actively trading any
temporary dislocations in the bitcoin price between trading venues, and
that any attempt to manipulate the price of bitcoin where these firms
are active would require exceeding the liquidity supply of these
arbitrageurs that are effectively eliminating any cross-market pricing
deviations.\53\
---------------------------------------------------------------------------
\52\ See letter from Jason Toussaint, Chief Executive Officer,
Kryptoin Investment Advisors, LLC, dated August 19, 2021 (``Kryptoin
Letter''), at 3.
\53\ See id. The Custodian, in a comment letter, states that it
believes that certain of the Commission's historical concerns about
the bitcoin markets are ameliorated by the growth of the overall
bitcoin market and related growth of regulated bitcoin derivatives.
See letter from Gemini Trust Company, LLC, dated August 19, 2021
(``Gemini Letter''), at 2. Another commenter, however, asserts that
the bitcoin network is the preferred network for global criminals
and is a pyramid scheme in which the top holders encourage existing
holders to keep holding and entice new retail investors to invest.
See letter from Maulik Patel, dated July 4, 2021 (``Patel Letter'').
---------------------------------------------------------------------------
As with the previous proposals, the Commission here concludes that
the record does not support a finding that the bitcoin market is
inherently and uniquely resistant to fraud and manipulation. BZX and
the Sponsor assert that, because of how bitcoin trades occur, including
through continuous means and through fragmented platforms, arbitrage
across the bitcoin platforms essentially helps to keep global bitcoin
prices aligned with one another, thus hindering manipulation. Neither
the Exchange nor the Sponsor, however, provides any data or analysis to
support its assertions, either in terms of how closely bitcoin prices
are aligned across different bitcoin trading venues or how quickly
price disparities may be arbitraged away.\54\ As stated above,
``unquestioning reliance'' on an SRO's representations in a proposed
rule change is not sufficient to justify Commission approval of a
proposed rule change.\55\
---------------------------------------------------------------------------
\54\ In addition, the Registration Statement states that bitcoin
spot platforms are not subject to the same regulatory oversight as
traditional equity exchanges, which could negatively impact the
ability of authorized participants to implement arbitrage
mechanisms. See Registration Statement at 22. See also infra note 69
and accompanying text (referencing statements made in the
Registration Statement that contradict assertions made by BZX).
\55\ See supra note 43.
---------------------------------------------------------------------------
Efficient price arbitrage, moreover, is not sufficient to support
the finding that a market is uniquely and inherently resistant to
manipulation such that the Commission can dispense with surveillance-
sharing agreements.\56\ The Commission has stated, for example, that
even for equity options based on securities listed on national
securities exchanges, the Commission relies on surveillance-sharing
agreements to detect and deter fraud and manipulation.\57\ Here,
neither the Exchange nor the Sponsor provides evidence to support its
assertion of efficient price arbitrage across bitcoin platforms, let
alone any evidence that price arbitrage in the bitcoin market is novel
or unique so as to warrant the Commission dispensing with the
requirement of a surveillance-sharing agreement. Moreover, neither the
Exchange nor the Sponsor takes into account that a market participant
with a dominant ownership position would not find it prohibitively
expensive to overcome the liquidity supplied by arbitrageurs and could
use dominant market share to engage in manipulation.\58\
---------------------------------------------------------------------------
\56\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR
at 16256-57; USBT Order, 85 FR at 12601.
\57\ See, e.g., USBT Order, 85 FR at 12601.
\58\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85
FR at 12600-01. See also Registration Statement at 10 (stating that,
as of the date of the Registration Statement, ``the largest 100
bitcoin wallets held a substantial amount of the outstanding supply
of bitcoin and it is possible that some of these wallets are
controlled by the same person or entity''; that ``it is possible
that other persons or entities control multiple wallets that
collectively hold a significant number of bitcoin, even if each
wallet individually only holds a small amount''; and that ``[a]s a
result of this concentration of ownership, large sales by such
holders could have an adverse effect on the market price of
bitcoin.'').
---------------------------------------------------------------------------
In addition, the Exchange makes the unsupported claim that bitcoin
prices on platforms with wash trades or other activity intended to
manipulate the price of bitcoin do not influence the ``real'' price of
bitcoin. The Exchange also asserts that, to the extent that there are
bitcoin platforms engaged in or allowing wash trading or other
manipulative activities, market participants will generally ignore
those platforms.\59\ However, without the necessary data or other
evidence, the Commission has no basis on which to conclude that bitcoin
platforms are insulated from prices of others that engage in or permit
fraud or manipulation.\60\
---------------------------------------------------------------------------
\59\ See Notice, 86 FR at 22491 n.55.
\60\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------
Additionally, the continuous nature of bitcoin trading does not
eliminate manipulation risk, and neither do linkages among markets, as
BZX asserts.\61\ Even in the presence of continuous trading or linkages
among markets, formal (such as those with consolidated quotations or
routing requirements) or otherwise (such as in the context of the
fragmented, global bitcoin markets), manipulation of asset prices, as a
general matter, can occur simply through trading activity that creates
a false impression of supply or demand.\62\
---------------------------------------------------------------------------
\61\ See Winklevoss Order, 83 FR at 37585 n.92 and accompanying
text.
\62\ See id. at 37585.
---------------------------------------------------------------------------
BZX also argues that the significant liquidity in the bitcoin spot
market and the impact of market orders on the overall price of bitcoin
mean that attempting to move the price of bitcoin is costly and has
grown more expensive over the past year.\63\ According to BZX, in
January 2020, for example, the cost to buy or sell $5 million worth of
bitcoin averaged roughly 30 basis points (compared to 10 basis points
in February 2021) with a market impact of 50 basis points (compared to
30 basis points in February 2021). For a $10 million market order, the
cost to buy or
[[Page 74171]]
sell was roughly 50 basis points (compared to 20 basis points in
February 2021) with a market impact of 80 basis points (compared to 50
basis points in February 2021). BZX contends that as the liquidity in
the bitcoin spot market increases, it follows that the impact of $5
million and $10 million orders will continue to decrease.\64\
---------------------------------------------------------------------------
\63\ See Notice, 86 FR at 22492, 22496.
\64\ See id.
---------------------------------------------------------------------------
However, the data furnished by BZX regarding the cost to move the
price of bitcoin, and the market impact of such attempts, are
incomplete. BZX does not provide meaningful analysis pertaining to how
these figures compare to other markets or why one must conclude, based
on the numbers provided, that the bitcoin market is costly to
manipulate. Further, BZX's analysis of the market impact of a mere two
sample transactions is not sufficient evidence to conclude that the
bitcoin market is resistant to manipulation.\65\ Even assuming that the
Commission agreed with BZX's premise, that it is costly to manipulate
the bitcoin market and it is becoming increasingly so, any such
evidence speaks only to establish that there is some resistance to
manipulation, not that it establishes unique resistance to manipulation
to warrant dispensing with the standard surveillance-sharing
agreement.\66\ The Commission thus concludes that the record does not
demonstrate that the nature of bitcoin trading renders the bitcoin
market inherently and uniquely resistant to fraud and manipulation.
---------------------------------------------------------------------------
\65\ Aside from stating that the ``statistics are based on
samples of bitcoin liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase Pro, Gemini,
Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during
February 2021,'' the Exchange provides no other information
pertaining to the methodology used to enable the Commission to
evaluate these findings or their significance. See id. at 22492
n.61.
\66\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------
Moreover, BZX does not sufficiently contest the presence of
possible sources of fraud and manipulation in the bitcoin spot market
generally that the Commission has raised in previous orders, which have
included (1) ``wash'' trading,\67\ (2) persons with a dominant position
in bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin
network and trading platforms, (4) malicious control of the bitcoin
network, (5) trading based on material, non-public information,
including the dissemination of false and misleading information, (6)
manipulative activity involving the purported ``stablecoin'' Tether
(USDT), and (7) fraud and manipulation at bitcoin trading
platforms.\68\
---------------------------------------------------------------------------
\67\ See supra notes 59-60 and accompanying text.
\68\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28,
2019), available at <a href="https://ssrn.com/abstract=3195066">https://ssrn.com/abstract=3195066</a> and published
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
---------------------------------------------------------------------------
In addition, BZX does not address risk factors specific to the
bitcoin blockchain and bitcoin platforms, described in the Trust's
Registration Statement, that undermine the argument that the bitcoin
market is inherently resistant to fraud and manipulation. For example,
the Registration Statement acknowledges that the ``price of bitcoin as
determined by the bitcoin market has experienced periods of extreme
volatility and may be influenced by, among other things, trading
activity and the closing of bitcoin trading platforms due to fraud,
failure, security breaches or otherwise''; that the bitcoin blockchain
could be vulnerable to a ``51% attack,'' in which a bad actor or actors
that control a majority of the processing power dedicated to mining on
the bitcoin network may be able to alter the bitcoin blockchain on
which the bitcoin network and bitcoin transactions rely; that the
nature of the assets held at bitcoin platforms makes them appealing
targets for hackers, that some bitcoin platforms have been the victim
of cybercrimes, subject to cybersecurity breaches, or ``hacked,''
resulting in losses, and that ``[n]o bitcoin [platform] is immune from
these risks''; that bitcoin platforms on which bitcoin trade are
relatively new and, in some cases, largely unregulated, and, therefore,
may be more exposed to fraud and security breaches than established,
regulated exchanges for other financial assets or instruments; and that
``[o]ver the past several years, a number of bitcoin [platforms] have
been closed or faced issues due to fraud, failure, security breaches or
governmental regulations.'' \69\
---------------------------------------------------------------------------
\69\ See Registration Statement at 1, 11, 13. See also
Winklevoss Order, 83 FR at 37585.
---------------------------------------------------------------------------
BZX also asserts that other means to prevent fraud and manipulation
are sufficient to justify dispensing with the requisite surveillance-
sharing agreement. The Exchange mentions that the Reference Rate, which
is used to value the Trust's bitcoin, is itself resistant to
manipulation based on the Reference Rate's methodology.\70\ The
Exchange states that the Reference Rate is calculated based on the
``Relevant Transactions'' \71\ of all of its Constituent Bitcoin
Platforms. All Relevant Transactions are added to a joint list,
recording the time of execution, trade price, and size for each
transaction, and the list is partitioned by timestamp into 12 equally-
sized time intervals of five minute length.\72\ For each partition
separately, the volume-weighted median trade price is calculated from
the trade prices and sizes of all Relevant Transactions.\73\ The
Reference Rate is then determined by the arithmetic mean of the volume-
weighted medians of all partitions.\74\ According to BZX, ``[b]y
employing the foregoing steps, the Reference Rate thereby seeks to
ensure that transactions in bitcoin conducted at outlying prices do not
have an undue effect on the value of a specific partition, large trades
or clusters of trades transacted over a short period of time will not
have an undue influence on the index level, and the effect of large
trades at prices that deviate from the prevailing price are mitigated
from having an undue influence on the benchmark level.'' \75\ BZX
concludes its analysis of the Reference Rate by noting that ``an
oversight function is implemented by the Benchmark Administrator in
seeking to ensure that the Reference Rate is administered through
codified policies for Reference Rate integrity.'' \76\
---------------------------------------------------------------------------
\70\ See Notice, 86 FR at 22492, 22497.
\71\ According to the Exchange, a ``Relevant Transaction'' is
any cryptocurrency versus U.S. dollar spot trade that occurs during
the observation window between 3:00 p.m. and 4:00 p.m. E.T. on a
Constituent Bitcoin Platform in the BTC/USD pair that is reported
and disseminated by a Constituent Bitcoin Platform and observed by
the Benchmark Administrator. See id. at 22493 n.66.
\72\ See id. at 22493.
\73\ See id. According to the Exchange, a volume-weighted median
differs from a standard median in that a weighting factor, in this
case trade size, is factored into the calculation. See id.
\74\ See id.
\75\ See id.
\76\ See id.
---------------------------------------------------------------------------
The Custodian, in a comment letter, agrees that BZX's choice of the
Reference Rate, which includes a composite of bitcoin prices from
underlying spot bitcoin platforms, including the Custodian's platform,
is a further factor in support of the proposed ETP.\77\ The Custodian
asserts that it and other ``regulated digital asset exchanges'' and
custodians have a history of operations in compliance with a regulatory
framework developed specifically to address activities in digital
assets, including guidance by the New York State Department of
Financial Services (``NYSDFS'') regarding the implementation of anti-
fraud measures. The Custodian states that it meets this obligation
through automated systems and robust internal controls and
surveillance, and that the growing sophistication of market
surveillance tools and strategies in the bitcoin market
[[Page 74172]]
as well as the growing proportion of bitcoin activity occurring on
``regulated exchanges'' is a key development to mollify concerns about
price manipulation or other manipulative practices in the bitcoin
market.\78\ The Sponsor, in a comment letter, states that global
bitcoin and cryptocurrency markets are subject to increasing levels of
regulation, oversight, and enforcement actions by global governments
and regulatory bodies.\79\
---------------------------------------------------------------------------
\77\ See Gemini Letter at 2.
\78\ See id. The Custodian also states that it is registered
with the Financial Crimes Enforcement Network (``FinCEN'') as a
money service business and maintains money transmitter licenses (or
the statutory equivalent) in all states where this is required. See
Gemini Letter at 3 and infra note 98.
\79\ See Kryptoin Letter at 7. The Sponsor states that in
January 2019, the Singapore Government enacted the Payment Services
Act, bringing cryptocurrency dealing or exchange services under the
supervision of the Monetary Authority of Singapore, Singapore's
central bank and financial regulator. See id. The Sponsor, however,
provides no data, information, or analysis as to how such ``global
governments and regulatory bodies'' oversee bitcoin markets in
general, or the Constituent Bitcoin Platforms in particular; or how
any such regulation makes the listing and trading of the Shares
inherently resistant to fraud and manipulation.
---------------------------------------------------------------------------
Simultaneously with these assertions regarding the Reference Rate,
the Exchange also states that, because the Trust will engage in in-kind
creations and redemptions only, the ``manipulability of the Reference
Rate [is] significantly less important.'' \80\ The Exchange elaborates
further that, ``because the Trust will not accept cash to buy bitcoin
in order to create new shares or . . . be forced to sell bitcoin to pay
cash for redeemed shares, the price that the Sponsor uses to value the
Trust's bitcoin is not particularly important.'' \81\ According to BZX,
when authorized participants create Shares with the Trust, they would
need to deliver a certain number of bitcoin per share (regardless of
the valuation used), and when they redeem with the Trust, they would
similarly expect to receive a certain number of bitcoin per share.\82\
As such, BZX argues that even if the price used to value the Trust's
bitcoin is manipulated, the ratio of bitcoin per Share does not change,
and the Trust will either accept (for creations) or distribute (for
redemptions) the same number of bitcoin regardless of the value.\83\
This, according to BZX, not only mitigates the risk associated with
potential manipulation, but also discourages and disincentivizes
manipulation of the Reference Rate because there is little financial
incentive to do so.\84\
---------------------------------------------------------------------------
\80\ See Notice, 86 FR at 22492.
\81\ See id.
\82\ See id.
\83\ See id.
\84\ See id.
---------------------------------------------------------------------------
The Sponsor, in a comment letter, agrees that the in-kind process
by which the Shares will be created and redeemed makes the Shares
inherently resistant to manipulation. The Sponsor states that the
``creation and redemption of Trust Shares through the in-kind exchange
mechanism is solely dependent on the amount of bitcoin to be received
or delivered by the Trust and is completely independent of the value of
bitcoin at that point in time.'' \85\ The Sponsor also states that, in
contrast to other OTC bitcoin funds that receive cash from investors
and then purchase bitcoin in the spot market, the size and timing of
which can contribute to the value of these funds' quoted prices
deviating from NAV, the Trust and its Shares will not be subjected to
this potential source of NAV deviation.\86\ The Sponsor further states
that the fact that the Trust's expenses are paid in bitcoin, not cash,
makes these expense payments ``completely independent of the value of
bitcoin or the Reference Rate,'' which mitigates the risk associated
with potential manipulation and discourages manipulation of the
Reference Rate because there is little financial incentive to do
so.\87\
---------------------------------------------------------------------------
\85\ See Kryptoin Letter at 1-2.
\86\ See id. at 2.
\87\ See id. at 14.
---------------------------------------------------------------------------
Based on assertions made and the information provided, the
Commission can find no basis to conclude that BZX has articulated other
means to prevent fraud and manipulation that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement.
First, the record does not demonstrate that the proposed
methodology for calculating the Reference Rate would make the proposed
ETP resistant to fraud or manipulation such that a surveillance-sharing
agreement with a regulated market of significant size is
unnecessary.\88\ Specifically, the Exchange has not assessed the
possible influence that spot platforms not included among the
Constituent Bitcoin Platforms would have on bitcoin prices used to
calculate the Reference Rate.\89\ And as discussed above, the record
does not establish that the broader bitcoin market is inherently and
uniquely resistant to fraud and manipulation. Accordingly, to the
extent that trading on platforms not directly used to calculate the
Reference Rate affects prices on the Constituent Bitcoin Platforms, the
characteristics of those other platforms--where various kinds of fraud
and manipulation from a variety of sources may be present and persist--
affect whether the Reference Rate is resistant to manipulation.
---------------------------------------------------------------------------
\88\ The Commission has previously considered and rejected
similar arguments about the valuation of bitcoin according to a
benchmark or reference price. See, e.g., SolidX Order, 82 FR at
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at
12599-601.
\89\ As discussed above, while the Exchange asserts that bitcoin
prices on platforms with wash trades or other activity intended to
manipulate the price of bitcoin do not influence the ``real'' price
of bitcoin or Reference Rate, the Commission has no basis on which
to conclude that bitcoin platforms are insulated from prices of
others that engage in or permit fraud or manipulation. See supra
notes 59-60 and accompanying text.
---------------------------------------------------------------------------
Moreover, the Exchange's assertions that the Reference Rate's
methodology helps make the Reference Rate resistant to manipulation are
contradicted by the Registration Statement's own statements.
Specifically, the Registration Statement states that ``[b]itcoin
[platforms] on which bitcoin trades . . . may be more exposed to fraud
and security breaches than established, regulated exchanges for other
financial assets or instruments, which could have a negative impact on
the performance of the Trust.'' \90\ Constituent Bitcoin Platforms are
a subset of the bitcoin platforms currently in existence. Although the
Sponsor raises concerns regarding fraud and security of bitcoin
platforms in the Registration Statement, the Exchange does not explain
how or why such concerns are consistent with its assertion that the
Reference Rate is resistant to fraud and manipulation.
---------------------------------------------------------------------------
\90\ See Registration Statement at 11.
---------------------------------------------------------------------------
BZX also has not shown that its proposed use of 12 equally-sized
time intervals of five minute length over the observation window
between 3:00 p.m. and 4:00 p.m. E.T. to calculate the Reference Rate
would effectively be able to eliminate fraudulent or manipulative
activity that is not transient. Fraud and manipulation in the bitcoin
spot market could persist for a ``significant duration.'' \91\ The
Exchange does not connect the use of such partitions to the duration of
the effects of the wash and fictitious trading that may exist in the
bitcoin spot market.\92\
---------------------------------------------------------------------------
\91\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
\92\ See WisdomTree Order, 86 FR at 69327.
---------------------------------------------------------------------------
The Commission thus concludes that the Exchange has not
demonstrated that its Reference Rate methodology makes the proposed ETP
resistant to manipulation. While the proposed procedures for
calculating the Reference Rate using only prices from the Constituent
Bitcoin Platforms are intended to provide some degree of protection
against attempts to
[[Page 74173]]
manipulate the Reference Rate, these procedures are not sufficient for
the Commission to dispense with the requisite surveillance-sharing
agreement with a regulated market of significant size.
Second, the Custodian asserts that the growing sophistication of
market surveillance tools and strategies used by the Constituent
Bitcoin Platforms, as well as the growing proportion of bitcoin
activity occurring on ``regulated exchanges,'' ``mollify concerns about
price manipulation or other manipulative practices.'' \93\ However, the
level of regulation on the Constituent Bitcoin Platforms is not
equivalent to the obligations, authority, and oversight of national
securities exchanges or futures exchanges and therefore is not an
appropriate substitute.\94\ National securities exchanges are required
to have rules that are ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.'' \95\ Moreover, national
securities exchanges must file proposed rules with the Commission
regarding certain material aspects of their operations,\96\ and the
Commission has the authority to disapprove any such rule that is not
consistent with the requirements of the Exchange Act.\97\ Thus,
national securities exchanges are subject to Commission oversight of,
among other things, their governance, membership qualifications,
trading rules, disciplinary procedures, recordkeeping, and fees.\98\
---------------------------------------------------------------------------
\93\ See Gemini Letter at 2.
\94\ See also USBT Order, 85 FR at 12603-05.
\95\ See 15 U.S.C. 78f(b)(5).
\96\ 17 CFR 240.19b-4(a)(6)(i).
\97\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rules
changes with the Commission and provides the Commission with the
authority to disapprove proposed rule changes that are not
consistent with the Exchange Act. Designated contract markets
(``DCMs'') (commonly called ``futures markets'') registered with and
regulated by the Commodity Futures Trading Commission (``CFTC'')
must comply with, among other things, a similarly comprehensive
range of regulatory principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available
at <a href="https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm">https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm</a>.
\98\ See Winklevoss Order, 83 FR at 37597. The Commission notes
that the NYSDFS has issued ``guidance'' to supervised virtual
currency business entities, stating that these entities must
``implement measures designed to effectively detect, prevent, and
respond to fraud, attempted fraud, and similar wrongdoing.'' See
Maria T. Vullo, Superintendent of Financial Services, NYSDFS,
Guidance on Prevention of Market Manipulation and Other Wrongful
Activity (Feb. 7, 2018), available at <a href="https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf">https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf</a>. The NYSDFS recognizes that its
``guidance is not intended to limit the scope or applicability of
any law or regulation'' (id.), which would include the Exchange Act.
Nothing in the record evidences whether the Reference Rate's
Constituent Bitcoin Platforms have complied with this NYSDFS
guidance. Further, as stated previously, there are substantial
differences between the NYSDFS and FinCEN versus the Commission's
regulation. Anti-Money Laundering (``AML'') and Know-Your-Customer
(``KYC'') policies and procedures, for example, have been referenced
in other bitcoin-based ETP proposals as a purportedly alternative
means by which such ETPs would be uniquely resistant to
manipulation. The Commission has previously concluded that such AML
and KYC policies and procedures do not serve as a substitute for,
and are not otherwise dispositive in the analysis regarding the
importance of, having a surveillance-sharing agreement with a
regulated market of significant size relating to bitcoin. For
example, AML and KYC policies and procedures do not substitute for
the sharing of information about market trading activity or clearing
activity and do not substitute for regulation of a national
securities exchange. See USBT Order, 85 FR at 12603 n.101.
---------------------------------------------------------------------------
The Constituent Bitcoin Platforms, on the other hand, have none of
these requirements (none are registered as a national securities
exchange).\99\ Further, although the Custodian claims that the
Constituent Bitcoin Platforms have market surveillance tools and
strategies that are growing in sophistication, the Custodian provides
no supporting evidence to substantiate its claims. Moreover, even
assuming that the Constituent Bitcoin Platforms are as vigilant towards
fraud and manipulation as the Custodian describes, neither the Exchange
nor the Custodian attempts to establish that only the Constituent
Bitcoin Platforms'' ability to detect and deter fraud and manipulation
would matter, exclusive of other bitcoin spot markets. In other words,
neither addresses how fraud and manipulation on other bitcoin spot
markets may influence the price of bitcoin.
---------------------------------------------------------------------------
\99\ See 15 U.S.C. 78e, 78f.
---------------------------------------------------------------------------
Third, the Exchange does not explain the significance of the
Reference Rate's purported resistance to manipulation to the overall
analysis of whether the proposal to list and trade the Shares is
designed to prevent fraud and manipulation. Even assuming that the
Exchange's argument is that, if the Reference Rate is resistant to
manipulation, the Trust's NAV, and thereby the Shares as well, would be
resistant to manipulation, the Exchange has not established in the
record a basis for such conclusion. That assumption aside, the
Commission notes that the Shares would trade at market-based prices in
the secondary market, not at NAV, which then raises the question of the
significance of the NAV calculation to the manipulation of the Shares.
Fourth, the Exchange's arguments are contradictory. While arguing
that the Reference Rate is resistant to manipulation, the Exchange
simultaneously downplays the importance of the Reference Rate in light
of the Trust's in-kind creation and redemption mechanism.\100\ The
Exchange points out that the Trust will create and redeem Shares in-
kind, not in cash, which renders the NAV calculation, and thereby the
ability to manipulate NAV, ``significantly less important.'' \101\ In
BZX's own words, the Trust will not accept cash to buy bitcoin in order
to create shares or sell bitcoin to pay cash for redeemed shares, so
the price that the Sponsor uses to value the Trust's bitcoin ``is not
particularly important.'' \102\ If the Reference Rate that the Trust
uses to value the Trust's bitcoin ``is not particularly important,'' it
follows that the Reference Rate's resistance to manipulation is not
material to the Shares' susceptibility to fraud and manipulation.\103\
As neither the Exchange nor the Sponsor addresses or provides any
analysis with respect to these issues, the Commission cannot conclude
that the Reference Rate aids in the determination that the proposal to
list and trade the Shares is designed to prevent fraudulent and
manipulative acts and practices.
---------------------------------------------------------------------------
\100\ See supra notes 80-84 and accompanying text.
\101\ See Notice, 86 FR at 22492 (``While the Sponsor believes
that the Reference Rate which it uses to value the Trust's bitcoin
is itself resistant to manipulation based on the methodology further
described below, the fact that creations and redemptions are only
available in-kind makes the manipulability of the Reference Rate
significantly less important.'').
\102\ See id. (concluding that ``because the Trust will not
accept cash to buy bitcoin in order to create new shares or, barring
a forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses to value the Trust's bitcoin
is not particularly important.'').
\103\ Similarly, the Sponsor asserts that the Trust and the
Shares are inherently resistant to manipulation due to the in-kind
create/redeem process. See Kryptoin Letter at 1. Yet in the
Sponsor's own words, the creation and redemption of Shares is
``completely independent'' of the value of bitcoin at that point in
time, i.e., completely independent of the Reference Rate and the
Trust's NAV. See id. at 2. As such, going by the Sponsor's own
assertion, it again follows that the Reference Rate's resistance to
manipulation is not material to the Shares'' susceptibility to fraud
and manipulation.
---------------------------------------------------------------------------
[[Page 74174]]
Fifth, the Commission finds that neither BZX nor the Sponsor has
demonstrated that in-kind creations and redemptions provide the Shares
with a unique resistance to manipulation.\104\ The Commission has
previously addressed similar assertions.\105\ As the Commission stated
before, in-kind creations and redemptions are a common feature of ETPs,
and the Commission has not previously relied on the in-kind creation
and redemption mechanism as a basis for excusing exchanges that list
ETPs from entering into surveillance-sharing agreements with
significant, regulated markets related to the portfolio's assets.\106\
Accordingly, the Commission is not persuaded here that the Trust's in-
kind creations and redemptions afford it a unique resistance to
manipulation.\107\
---------------------------------------------------------------------------
\104\ The Sponsor asserts that the in-kind create/redeem process
provides for an arbitrage pricing mechanism whereby authorized
participants trade the price deviations ``between the Trust's
secondary market prices and NAV,'' keeping the Shares'' price ``at
or near NAV'' (emphasis added). See Kryptoin Letter at 2. However,
this assertion is also contradicted by the Sponsor's statement that
the in-kind create/redeem process means that the amount of bitcoin
that an authorized participant delivers to or receives from the
Trust is ``completely independent'' of the value of bitcoin, i.e.,
completely independent of NAV and the Reference Rate used to compute
it. See id. Moreover, the prerequisite of an efficient arbitrage
mechanism is not unique to the proposal here, as it is a fundamental
premise of any ETP or exchange-traded fund, and the Commission has
not previously dispensed with the requirement of a surveillance-
sharing agreement based on an efficient arbitrage mechanism.
\105\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR
at 12607-08.
\106\ See, e.g., iShares COMEX Gold Trust, Securities Exchange
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26,
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24,
2006) (SR-Amex-2005-072).
\107\ Putting aside the Exchange's various assertions about the
nature of bitcoin and the bitcoin market, the Reference Rate, and
the Shares, the Exchange also does not address concerns the
Commission has previously identified, including the susceptibility
of bitcoin markets to potential trading on material, non-public
information (such as plans of market participants to significantly
increase or decrease their holdings in bitcoin; new sources of
demand for bitcoin; the decision of a bitcoin-based investment
vehicle on how to respond to a ``fork'' in the bitcoin blockchain,
which would create two different, non-interchangeable types of
bitcoin), or to the dissemination of false or misleading
information. See Winklevoss Order, 83 FR at 37585. See also USBT
Order, 85 FR at 12600-01.
---------------------------------------------------------------------------
Finally, the Sponsor, in a comment letter, cites to the
Commission's 2004 approval of the SPDR Gold Trust as evidence that a
combination of (1) a deep and liquid spot market, (2) an information-
sharing agreement with a commodity futures exchange, and (3) exchange
trading rules to govern the trading of ETP shares by liquidity
providers, justify dispensing with the requisite surveillance-sharing
agreement.\108\ The Sponsor states that the spot bitcoin market is deep
and liquid; \109\ that the Exchange is a member of ISG, as is the CME
that lists bitcoin futures; and that the Exchange has rules in place to
govern the trading of the Trust's Shares.\110\ The Sponsor concludes
that, therefore, there is a solid base of evidence to support the
Commission's approval of the proposed ETP.\111\
---------------------------------------------------------------------------
\108\ See Kryptoin Letter at 13, citing Securities Exchange Act
Release No. 50604 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004)
(``Gold Order'').
\109\ The Sponsor states that, for the six-month period ending
August 13, 2021, average daily spot bitcoin trading volume across
approximately 40 spot exchanges was $9.88 billion. The Sponsor
compares this to estimates in the Gold Order of the 2003 high
average daily gold trading volume of $7.9 billion (19 million troy
ounces) and low average of $5.67 billion (13.6 million troy ounces).
The Sponsor believes that the bitcoin spot market therefore meets,
and exceeds, the Commission's ``definition'' of an extremely deep
and liquid market. See id. at 4.
\110\ The Sponsor cites BZX Rule 14.11(e)(4)(G) regarding the
types of records and information that registered market makers in
Commodity-Based Trust Shares must provide to the Exchange. See id.
at 13-14.
\111\ See id. at 13.
---------------------------------------------------------------------------
The Commission disagrees. The Commission considered and discussed
the Gold Order at length in the Winklevoss Order. While the Gold Order
observes that it is ``not possible . . . to enter into an information
sharing agreement with the OTC gold market,'' the order continues:
``Nevertheless, the Commission believes that the unique liquidity and
depth of the gold market, together with the MOU [Memorandum of
Understanding] with NYMEX (of which COMEX is a Division) and NYSE Rules
1300(b) and 1301, create the basis for the [ETP listing exchange] to
monitor for fraudulent and manipulative practices in the trading of the
Shares.'' \112\ Thus, even though the Commission found that the OTC
market for gold was ``extremely deep and liquid,'' \113\ the
Commission's approval of the first precious metal ETP expressly relied
on an agreement to share surveillance information between the ETP
listing exchange and a significant, regulated market for gold
futures.\114\ The Commission continues to maintain that the Gold Order
demonstrates the importance of establishing an agreement to share
surveillance information between the ETP listing exchange and a
significant, regulated market.\115\ Accordingly, having a surveillance-
sharing agreement with CME is not sufficient--the Exchange must
demonstrate that CME is ``a significant, regulated market.''
---------------------------------------------------------------------------
\112\ See Gold Order, 69 FR at 64619.
\113\ See id.
\114\ See Winklevoss Order, 83 FR at 37592-94.
\115\ See id. at 37594. The Commission further stated that
``[c]onsistent with the discussion of `significant market' . . . ,
the Commission has not previously, and does not now, require that an
ETP listing exchange be able to enter into a surveillance-sharing
agreement with each regulated spot or derivatives market relating to
an underlying asset, provided that the market or markets with which
there is such an agreement constitute a `significant market'.'' See
id. at 37595.
---------------------------------------------------------------------------
(2) Assertions That BZX Has Entered Into a Comprehensive Surveillance-
Sharing Agreement With a Regulated Market of Significant Size
As BZX has not demonstrated that other means besides surveillance-
sharing agreements will be sufficient to prevent fraudulent and
manipulative acts and practices, the Commission next examines whether
the record supports the conclusion that BZX has entered into a
comprehensive surveillance-sharing agreement with a regulated market of
significant size relating to the underlying assets. In this context,
the term ``market of significant size'' includes a market (or group of
markets) as to which (i) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (ii) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\116\
---------------------------------------------------------------------------
\116\ See id. at 37594. This definition is illustrative and not
exclusive. There could be other types of ``significant markets'' and
``markets of significant size,'' but this definition is an example
that provides guidance to market participants. See id.
---------------------------------------------------------------------------
As the Commission has stated in the past, it considers two markets
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate
bilateral surveillance-sharing agreement.\117\ Accordingly, based on
the common membership of BZX and CME in the ISG,\118\ BZX has the
equivalent of a comprehensive surveillance-sharing agreement with CME.
However, while the Commission recognizes that the CFTC regulates the
CME futures market,\119\ including the CME bitcoin futures market, and
thus such market is ``regulated,'' in the context of the
[[Page 74175]]
proposed ETP, the record does not, as explained further below,
establish that the CME bitcoin futures market is a ``market of
significant size'' as that term is used in the context of the
applicable standard here.\120\
---------------------------------------------------------------------------
\117\ See id. at 37580 n.19.
\118\ See Notice, 86 FR at 22491 nn.56-57 and accompanying text.
\119\ While the Commission recognizes that the CFTC regulates
the CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying bitcoin spot market. See Winklevoss
Order, 83 FR at 37587, 37599.
\120\ As described above (see supra notes 93-99 and accompanying
text), in the context of the proposed ETP, the Reference Rate's
Constituent Bitcoin Platforms are not ``regulated.'' They are not
registered as ``exchanges'' and lack the obligations, authority, and
oversight of national securities exchanges. Thus the Commission
limits the scope of its analysis to the CME.
---------------------------------------------------------------------------
(i) Whether There is a Reasonable Likelihood That a Person Attempting
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin
Futures Market To Successfully Manipulate the ETP
The first prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that there is a reasonable likelihood that a person
attempting to manipulate the ETP would have to trade on the CME bitcoin
futures market to successfully manipulate the ETP.
BZX notes that the CME began to offer trading in bitcoin futures in
2017.\121\ According to BZX, nearly every measurable metric related to
CME bitcoin futures contracts, which trade and settle like other cash-
settled commodity futures contracts, has ``trended consistently up
since launch and/or accelerated upward in the past year.'' \122\ For
example, according to BZX, there was approximately $28 billion in
trading in CME bitcoin futures in December 2020 compared to $737
million, $1.4 billion, and $3.9 billion in total trading in December
2017, December 2018, and December 2019, respectively.\123\
Additionally, CME bitcoin futures traded over $1.2 billion per day in
December 2020 and represented $1.6 billion in open interest compared to
$115 million in December 2019.\124\ Similarly, BZX contends that the
number of large open interest holders \125\ has continued to increase,
even as the price of bitcoin has risen, as have the number of unique
accounts trading CME bitcoin futures.\126\
---------------------------------------------------------------------------
\121\ According to BZX, each contract represents five bitcoin
and is based on the CME CF Bitcoin Reference Rate. See Notice, 86 FR
at 22489.
\122\ See id.
\123\ See id.
\124\ See id.
\125\ BZX represents that a large open interest holder in CME
bitcoin futures is an entity that holds at least 25 contracts, which
is the equivalent of 125 bitcoin. According to BZX, at a price of
approximately $30,000 per bitcoin on December 31, 2020, more than 80
firms had outstanding positions of greater than $3.8 million in CME
bitcoin futures. See id. at 22490 n.51.
\126\ See id. at 22490.
---------------------------------------------------------------------------
The Sponsor, in a comment letter, adds that CME trading volume has
continued to increase substantially: Increasing by approximately 220
percent in July 2021 versus July 2020; increasing by approximately 156
percent year-to-date July 2021 versus year-to-date July 2020; reaching
a record daily notional traded value of $7.33 billion on February 23,
2021, and a record open interest value of $3.17 billion on February 19,
2021; and in the six-month period ending August 13, 2021, reaching an
average daily trading volume of $2.20 billion and average open interest
of $1.98 billion.\127\ The Sponsor states that this exceeds the 2003
average daily COMEX gold futures trading volume of approximately $2.04
billion.\128\
---------------------------------------------------------------------------
\127\ See Kryptoin Letter at 5.
\128\ See id. at 4.
---------------------------------------------------------------------------
BZX argues that the significant growth in CME bitcoin futures
across each of trading volumes, open interest, large open interest
holders, and total market participants since the USBT Order was issued
is reflective of that market's growing influence on the spot price. BZX
asserts that where CME bitcoin futures lead the price in the spot
market such that a potential manipulator of the bitcoin spot market
(beyond just the Constituent Bitcoin Platforms) would have to
participate in the CME bitcoin futures market, it follows that a
potential manipulator of the Shares would similarly have to transact in
the CME bitcoin futures market.\129\
---------------------------------------------------------------------------
\129\ See Notice, 86 FR at 22491.
---------------------------------------------------------------------------
BZX further states that academic research corroborates the overall
trend outlined above and supports the thesis that CME bitcoin futures
pricing leads the spot market. BZX asserts that academic research
demonstrates that the CME bitcoin futures market was already leading
the spot price in 2018 and 2019.\130\ BZX concludes that a person
attempting to manipulate the Shares would also have to trade on that
market to manipulate the ETP.\131\
---------------------------------------------------------------------------
\130\ See id. at 22491, 22496 & n.52 (citing Y. Hu, Y. Hou & L.
Oxley, What role do futures markets play in Bitcoin pricing?
Causality, cointegration and price discovery from a time-varying
perspective, 72 Int'l Rev. of Fin. Analysis 101569 (2020) (available
at: <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/">https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/</a>) (``Hu,
Hou & Oxley'')).
\131\ See id. at 22491-92, 22496.
---------------------------------------------------------------------------
The Sponsor, in a comment letter, also argues that there is a
reasonable likelihood that a person attempting to manipulate the Shares
would also have to trade on the CME to manipulate the Shares.\132\
Citing Hu, Hou & Oxley as evidence that CME bitcoin futures lead the
price in the bitcoin spot markets,\133\ the Sponsor states that an
attempt to manipulate the spot market would require participation in
the CME bitcoin futures market.\134\ The Sponsor asserts that it
follows, then, that an attempted manipulation of the Shares would
similarly require participation in the CME bitcoin futures market,
because both the CME CF Bitcoin Real-Time Index (``BRTI'') and the BRR,
upon which CME bitcoin futures are settled, are calculated by observing
prices in the underlying spot bitcoin markets.\135\ The Sponsor asserts
that an interrelationship between the CME bitcoin futures market and
the Trust exists because the Trust's Reference Rate is based materially
on the same methodology as the BRTI and BRR,\136\ and therefore it is
reasonable to assume that any effort to manipulate the Trust's NAV or
Share price would also require an attempted manipulation of the CME
bitcoin futures prices.\137\ The Sponsor concludes that, because both
the Exchange and the CME are members of the ISG, such attempted
misconduct would be effectively detected and deterred.\138\
---------------------------------------------------------------------------
\132\ See Kryptoin Letter at 12.
\133\ See id. at 11 n.22.
\134\ See id. at 12.
\135\ See id.
\136\ See id. at 2.
\137\ See id. at 2-3, 12.
\138\ See id. at 3, 12.
---------------------------------------------------------------------------
The Commission disagrees. The record does not demonstrate that
there is a reasonable likelihood that a person attempting to manipulate
the proposed ETP would have to trade on the CME bitcoin futures market
to successfully manipulate it. Specifically, BZX's and the Sponsor's
assertions about the general upward trends from 2018 to August 2021 in
trading volume and open interest of, and in the number of large open
interest holders and number of unique accounts trading in, CME bitcoin
futures do not establish that the CME bitcoin futures market is of
significant size. While BZX and the Sponsor provide data showing
absolute growth in the size of the CME bitcoin futures market, they
provide no data relative to the concomitant growth in either the
bitcoin spot markets or other bitcoin futures markets (including
unregulated futures markets). Moreover, even if the CME has grown in
relative size, as the Commission has previously articulated, the
interpretation of the term ``market of significant size'' or
``significant market'' depends on the interrelationship between the
market with which the listing exchange has a surveillance-sharing
agreement and the proposed ETP.\139\ BZX's recitation of data
reflecting the size of the CME bitcoin futures market, alone, either
[[Page 74176]]
currently or in relation to previous years, is not sufficient to
establish an interrelationship between the CME bitcoin futures market
and the proposed ETP.\140\
---------------------------------------------------------------------------
\139\ See USBT Order, 85 FR at 12611.
\140\ See id. at 12612.
---------------------------------------------------------------------------
Moreover, while the Sponsor asserts that an interrelationship
exists between the CME bitcoin futures market and the Trust, on account
of the Trust's Reference Rate being based materially on the same
methodology as the BRTI and BRR,\141\ and asserts that it is therefore
reasonable to assume that any effort to manipulate the Trust's NAV or
Share price would also require an attempted manipulation of the CME
bitcoin futures prices,\142\ the Sponsor provides no mechanism or
example that would demonstrate the accuracy of the assumption.
Moreover, as addressed above, the Sponsor itself undermines such an
assumption by its own recognition that the Trust's in-kind create/
redeem process is ``completely independent'' of the value of
bitcoin,\143\ and thereby completely independent of the Reference Rate
used to compute such a value.
---------------------------------------------------------------------------
\141\ See Kryptoin Letter at 2.
\142\ See id. at 2-3, 12.
\143\ See id. at 2 and supra notes 100-104 and accompanying
text.
---------------------------------------------------------------------------
Further, the econometric evidence in the record for this proposal
also does not support a conclusion that an interrelationship exists
between the CME bitcoin futures market and the bitcoin spot market such
that it is reasonably likely that a person attempting to manipulate the
proposed ETP would also have to trade on the CME bitcoin futures market
to successfully manipulate the proposed ETP.\144\ While BZX and the
Sponsor state that CME bitcoin futures pricing leads the spot
market,\145\ they rely on the findings of a price discovery analysis in
one section of a single academic paper to support the overall
thesis.\146\ However, the findings of that paper's Granger causality
analysis, which is widely used to formally test for lead-lag
relationships, are concededly mixed.\147\ In addition, the Commission
considered an unpublished version of the paper in the USBT Order, as
well as a comment letter submitted by the authors on that record.\148\
In the USBT Order, as part of the Commission's conclusion that ``mixed
results'' in academic studies failed to demonstrate that the CME
bitcoin futures market constitutes a market of significant size, the
Commission noted the paper's inconclusive evidence that CME bitcoin
futures prices lead spot prices--in particular that the months at the
end of the paper's sample period showed that the spot market was the
leading market--and stated that the record did not include evidence to
explain why this would not indicate a shift towards prices in the spot
market leading the futures market that would be expected to persist
into the future.\149\ The Commission also stated that the paper's use
of daily price data, as opposed to intraday prices, may not be able to
distinguish which market incorporates new information faster.\150\ BZX
has not addressed either issue.
---------------------------------------------------------------------------
\144\ See USBT Order, 85 FR at 12611. Listing exchanges have
attempted to demonstrate such an ``interrelationship'' by presenting
the results of various econometric ``lead-lag'' analyses. The
Commission considers such analyses to be central to understanding
whether it is reasonably likely that a would-be manipulator of the
ETP would need to trade on the CME bitcoin futures market. See id.
at 12612.
\145\ See Notice, 86 FR at 22491; Kryptoin Letter at 12.
\146\ See supra note 130 and accompanying text. BZX and the
Sponsor reference the following conclusion from the ``time-varying
price discovery'' section of Hu, Hou & Oxley: ``There exist no
episodes where the Bitcoin spot markets dominates the price
discovery processes with regard to Bitcoin futures. This points to a
conclusion that the price formation originates solely in the Bitcoin
futures market. We can, therefore, conclude that the Bitcoin futures
markets dominate the dynamic price discovery process based upon
time-varying information share measures. Overall, price discovery
seems to occur in the Bitcoin futures markets rather than the
underlying spot market based upon a time-varying perspective . . .''
See Notice, 86 FR at 22491 n.52; Kryptoin Letter at 11 n.22.
\147\ The paper finds that the CME bitcoin futures market
dominates the spot markets in terms of Granger causality, but that
the causal relationship is bi-directional, and a Granger causality
episode from March 2019 to June/July 2019 runs from bitcoin spot
prices to CME bitcoin futures prices. The paper concludes: ``[T]he
Granger causality episodes are not constant throughout the whole
sample period. Via our causality detection methods, market
participants can identify when markets are being led by futures
prices and when they might not be.'' See Hu, Hou & Oxley, supra note
130.
\148\ See USBT Order, 85 FR at 12609.
\149\ See id. at 12613 n.244.
\150\ See id.
---------------------------------------------------------------------------
Moreover, BZX does not provide results of its own analysis and does
not present any other data supporting its conclusion. BZX's unsupported
representations constitute an insufficient basis for approving a
proposed rule change in circumstances where, as here, the Exchange's
assertion would form such an integral role in the Commission's analysis
and the assertion is subject to several challenges.\151\ In this
context, BZX's reliance on a single paper, whose own lead-lag results
are inconclusive, is especially lacking because the academic literature
on the lead-lag relationship and price discovery between bitcoin spot
and futures markets is unsettled.\152\ In the USBT Order, the
Commission responded to multiple academic papers that were cited and
concluded that, in light of the mixed results found, the exchange there
had not demonstrated that it is reasonably likely that a would-be
manipulator of the proposed ETP would transact on the CME bitcoin
futures market.\153\ Likewise, here, given the body of academic
literature to indicate to the contrary, the Commission concludes that
the information that BZX provides is not a sufficient basis to support
a determination that it is reasonably likely that a would-be
manipulator of the proposed ETP would have to trade on the CME bitcoin
futures market.\154\
---------------------------------------------------------------------------
\151\ See Susquehanna, 866 F.3d at 447.
\152\ See, e.g., D. Baur & T. Dimpfl, Price discovery in bitcoin
spot or futures?, 39 J. Futures Mkts. 803 (2019) (finding that the
bitcoin spot market leads price discovery); O. Entrop, B. Frijns &
M. Seruset, The determinants of price discovery on bitcoin markets,
40 J. Futures Mkts. 816 (2020) (finding that price discovery
measures vary significantly over time without one market being
clearly dominant over the other); J. Hung, H. Liu & J. Yang, Trading
activity and price discovery in Bitcoin futures markets, 62 J.
Empirical Finance 107 (2021) (finding that the bitcoin spot market
dominates price discovery); B. Kapar & J. Olmo, An analysis of price
discovery between Bitcoin futures and spot markets, 174 Econ.
Letters 62 (2019) (finding that bitcoin futures dominate price
discovery); E. Akyildirim, S. Corbet, P. Katsiampa, N. Kellard & A.
Sensoy, The development of Bitcoin futures: Exploring the
interactions between cryptocurrency derivatives, 34 Fin. Res.
Letters 101234 (2020) (finding that bitcoin futures dominate price
discovery); A. Fassas, S. Papadamou, & A. Koulis, Price discovery in
bitcoin futures, 52 Res. Int'l Bus. Fin. 101116 (2020) (finding that
bitcoin futures play a more important role in price discovery); S.
Aleti & B. Mizrach, Bitcoin spot and futures market microstructure,
41 J. Futures Mkts. 194 (2021) (finding that relatively more price
discovery occurs on CME as compared to four spot exchanges); J. Wu,
K. Xu, X. Zheng & J. Chen, Fractional cointegration in bitcoin spot
and futures markets, 41 J. Futures Mkts. 1478 (2021) (finding that
CME bitcoin futures dominate price discovery). See also C. Alexander
& D. Heck, Price discovery in Bitcoin: The impact of unregulated
markets, 50 J. Financial Stability 100776 (2020) (finding that, in a
multi-dimensional setting, including the main price leaders within
futures, perpetuals, and spot markets, CME bitcoin futures have a
very minor effect on price discovery; and that faster speed of
adjustment and information absorption occurs on the unregulated spot
and derivatives platforms than on CME bitcoin futures).
\153\ See USBT Order, 85 FR at 12613 nn.239-244 and accompanying
text.
\154\ In addition, the Exchange fails to address the
relationship (if any) between prices on other bitcoin futures
markets and the CME bitcoin futures market, the bitcoin spot market,
and/or the particular Constituent Bitcoin Platforms, or where price
formation occurs when the entirety of bitcoin futures markets, not
just CME, is considered.
---------------------------------------------------------------------------
The Commission accordingly concludes that the information provided
in the record does not establish a reasonable likelihood that a would-
be manipulator of the proposed ETP would have to trade on the CME
bitcoin futures market to successfully manipulate the proposed ETP.
Therefore, the
[[Page 74177]]
information in the record also does not establish that the CME bitcoin
futures market is a ``market of significant size'' with respect to the
proposed ETP.
(ii) Whether It is Unlikely That Trading in the Proposed ETP Would Be
the Predominant Influence on Prices in the CME Bitcoin Futures Market
The second prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that it is unlikely that trading in the proposed ETP
would be the predominant influence on prices in the CME bitcoin futures
market.\155\
---------------------------------------------------------------------------
\155\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at
12596-97.
---------------------------------------------------------------------------
BZX asserts that trading in the Shares would not be the predominant
force on prices in the CME bitcoin futures market (or spot market)
because of the significant volume in the CME bitcoin futures market,
the size of bitcoin's market capitalization, which is approximately $1
trillion, and the significant liquidity available in the spot
market.\156\ BZX provides that, according to February 2021 data, the
cost to buy or sell $5 million worth of bitcoin averages roughly 10
basis points with a market impact of 30 basis points.\157\ For a $10
million market order, the cost to buy or sell is roughly 20 basis
points with a market impact of 50 basis points. Stated another way, BZX
states that a market participant could enter a market buy or sell order
for $10 million of bitcoin and only move the market 0.5 percent.\158\
BZX further asserts that more strategic purchases or sales (such as
using limit orders and executing through OTC bitcoin trade desks) would
likely have less obvious impact on the market, which is consistent with
MicroStrategy, Tesla, and Square being able to collectively purchase
billions of dollars in bitcoin.\159\ Thus, BZX concludes that the
combination of CME bitcoin futures leading price discovery, the overall
size of the bitcoin market, and the ability for market participants
(including authorized participants creating and redeeming in-kind with
the Trust) to buy or sell large amounts of bitcoin without significant
market impact, will help prevent the Shares from becoming the
predominant force on pricing in either the bitcoin spot or the CME
bitcoin futures market.\160\ The Sponsor agrees.\161\
---------------------------------------------------------------------------
\156\ See Notice, 86 FR at 22492, 22496.
\157\ See id. According to BZX, these statistics are based on
samples of bitcoin liquidity in U.S. dollars (excluding stablecoins
or Euro liquidity) based on executable quotes on Coinbase Pro,
Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin
during February 2021. See id. at 22492 n.61.
\158\ See id. at 22492, 22496.
\159\ See id.
\160\ See id.
\161\ See Kryptoin Letter at 12.
---------------------------------------------------------------------------
The Commission does not agree. The record does not demonstrate that
it is unlikely that trading in the proposed ETP would be the
predominant influence on prices in the CME bitcoin futures market. As
the Commission has already addressed and rejected one of the bases of
BZX's assertion--that CME bitcoin futures leads price discovery \162\
--it will only address below the other two bases--the overall size of,
and the impact of buys and sells on, the bitcoin market.
---------------------------------------------------------------------------
\162\ See supra notes 144-154 and accompanying text.
---------------------------------------------------------------------------
BZX's assertions about the potential effect of trading in the
Shares on the CME bitcoin futures market and bitcoin spot market are
general and conclusory, repeating the aforementioned trade volume of
the CME bitcoin futures market and the size and liquidity of the
bitcoin spot market, as well as the market impact of a large
transaction, without any analysis or evidence to support these
assertions. For example, there is no limit on the amount of mined
bitcoin that the Trust may hold. Yet BZX does not provide any
information on the expected growth in the size of the Trust and the
resultant increase in the amount of bitcoin held by the Trust over
time, or on the overall expected number, size, and frequency of
creations and redemptions--or how any of the foregoing could (if at
all) influence prices in the CME bitcoin futures market. Moreover, in
the Trust's Registration Statement, the Sponsor acknowledges that the
Trust may acquire large size positions in bitcoin, which would increase
the risk of illiquidity in the underlying bitcoin. Specifically, the
Sponsor, in the Registration Statement, states that the Trust may
acquire large size positions in bitcoin, which will increase the risk
of illiquidity by both making the positions more difficult to liquidate
and increasing the losses incurred while trying to do so, or by making
it more difficult for authorized participants to acquire or liquidate
bitcoin as part of the creation and/or redemption of Shares of the
Trust.\163\ Although the Trust's Registration Statement concedes that
the Trust could negatively affect the liquidity of bitcoin, BZX does
not address this in the proposal or discuss how impacting the liquidity
of bitcoin can be consistent with the assertion that the Shares are
unlikely to be the predominant influence on the prices of the CME
bitcoin futures market. Thus, the Commission cannot conclude, based on
BZX's statements alone and absent any evidence or analysis in support
of BZX's assertions, that it is unlikely that trading in the ETP would
be the predominant influence on prices in the CME bitcoin futures
market.
---------------------------------------------------------------------------
\163\ See Registration Statement at 18.
---------------------------------------------------------------------------
The Commission also is not persuaded by BZX's assertions about the
minimal effect a large market order to buy or sell bitcoin would have
on the bitcoin market.\164\ While BZX concludes by way of a $10 million
market order example that buying or selling large amounts of bitcoin
would have insignificant market impact, the conclusion does not analyze
the extent of any impact on the CME bitcoin futures market. Even
assuming that BZX is suggesting that a single $10 million order in
bitcoin would have immaterial impact on the prices in the CME bitcoin
futures market, this prong of the ``market of significant size''
determination concerns the influence on prices from trading in the
proposed ETP, which is broader than just trading by the proposed ETP.
While authorized participants of the Trust might only transact in the
bitcoin spot market as part of their creation or redemption of Shares,
the Shares themselves would be traded in the secondary market on BZX.
The record does not discuss the expected number or trading volume of
the Shares, or establish the potential effect of the Shares'' trade
prices on CME bitcoin futures prices. For example, BZX does not provide
any data or analysis about the potential effect the quotations or trade
prices of the Shares might have on market-maker quotations in CME
bitcoin futures contracts and whether those effects would constitute a
predominant influence on the prices of those futures contracts.
---------------------------------------------------------------------------
\164\ See Notice, 86 FR at 22492, 22496 (``For a $10 million
market order, the cost to buy or sell is roughly 20 basis points
with a market impact of 50 basis points. Stated another way, a
market participant could enter a market buy or sell order for $10
million of bitcoin and only move the market 0.5%.'').
---------------------------------------------------------------------------
Thus, because BZX has not provided sufficient information to
establish both prongs of the ``market of significant size''
determination, the Commission cannot conclude that the CME bitcoin
futures market is a ``market of significant size'' such that BZX would
be able to rely on a surveillance-sharing agreement with the CME to
provide sufficient protection against fraudulent and manipulative acts
and practices.
The requirements of Section 6(b)(5) of the Exchange Act apply to
the rules of national securities exchanges. Accordingly, the relevant
obligation for
[[Page 74178]]
a comprehensive surveillance-sharing agreement with a regulated market
of significant size, or other means to prevent fraudulent and
manipulative acts and practices that are sufficient to justify
dispensing with the requisite surveillance-sharing agreement, resides
with the listing exchange. Because there is insufficient evidence in
the record demonstrating that BZX has satisfied this obligation, the
Commission cannot approve the proposed ETP for listing and trading on
BZX.
C. Whether BZX Has Met Its Burden To Demonstrate That the Proposal Is
Designed To Protect Investors and the Public Interest
BZX contends that, if approved, the proposed ETP would protect
investors and the public interest. However, the Commission must
consider these potential benefits in the broader context of whether the
proposal meets each of the applicable requirements of the Exchange
Act.\165\ Because BZX has not demonstrated that its proposed rule
change is designed to prevent fraudulent and manipulative acts and
practices, the Commission must disapprove the proposal.
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\165\ See Winklevoss Order, 83 FR at 37602. See also
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at
43941; USBT Order, 85 FR at 12615.
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BZX asserts that, with the growth of U.S. investor exposure to
bitcoin through OTC bitcoin funds, so too has grown the potential risk
to U.S. investors.\166\ Specifically, BZX argues that premium and
discount volatility, high fees, insufficient disclosures, and technical
hurdles are putting U.S. investor money at risk on a daily basis and
that such risk could potentially be eliminated through access to a
bitcoin ETP.\167\ As such, the Exchange believes that approving this
proposal (and comparable proposals submitted hereafter) would give U.S.
investors access to bitcoin in a regulated and transparent exchange-
traded vehicle that would act to limit risk to U.S. investors by: (i)
Reducing premium and discount volatility; (ii) reducing management fees
through meaningful competition; (iii) providing an alternative to
custodying spot bitcoin; and (iv) reducing risks associated with
investing in operating companies that are imperfect proxies for bitcoin
exposure.\168\
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\166\ See Notice, 86 FR at 22487.
\167\ See id. BZX states that while it understands the
Commission's previous focus on potential manipulation of a bitcoin
ETP in prior disapproval orders, it now believes that ``such
concerns have been sufficiently mitigated and that the growing and
quantifiable investor protection concerns should be the central
consideration as the Commission reviews this proposal.'' See id.
\168\ See id.
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According to BZX, OTC bitcoin funds are generally designed to
provide exposure to bitcoin in a manner similar to the Shares. However,
unlike the Shares, BZX states that ``OTC bitcoin funds are unable to
freely offer creation and redemption in a way that incentivizes market
participants to keep their shares trading in line with their NAV and,
as such, frequently trade at a price that is out-of-line with the value
of their assets held.'' \169\ BZX represents that, historically, OTC
bitcoin funds have traded at a significant premium to NAV.\170\
Although the Exchange concedes that trading at a premium or a discount
is not unique to OTC bitcoin funds and not inherently problematic, BZX
believes that it raises certain investor protections issues. First,
according to BZX, investors are buying shares of a fund for a price
that is not reflective of the per share value of the fund's underlying
assets.\171\ Second, according to BZX, because only accredited
investors, generally, are able to create or redeem shares with the
issuing trust and can buy or sell shares directly with the trust at NAV
(in exchange for either cash or bitcoin) without having to pay the
premium or sell into the discount, these investors that are allowed to
interact directly with the trust are able to hedge their bitcoin
exposure as needed to satisfy holding requirements and collect on the
premium or discount opportunity. BZX argues, therefore, that the
premium in OTC bitcoin funds essentially creates a direct payment from
retail investors to more sophisticated investors.\172\
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\169\ See id. BZX also states that, unlike the Shares, because
OTC bitcoin funds are not listed on an exchange, they are not
subject to the same transparency and regulatory oversight by a
listing exchange. BZX further asserts that the existence of a
surveillance-sharing agreement between BZX and the CME bitcoin
futures market would result in increased investor protections for
the Shares compared to OTC bitcoin funds. See id. at 22487 n.38.
\170\ See id. at 22487. BZX further represents that the
inability to trade in line with NAV may at some point result in OTC
bitcoin funds trading at a discount to their NAV. According to BZX,
while that has not historically been the case, trading at a discount
would give rise to nearly identical potential issues related to
trading at a premium. See id. at 22487 n.39.
\171\ See id. at 22488.
\172\ See id. The Sponsor, in a comment letter, states that
sophisticated market participants have referred to this potential
source of profit at the expense of retail investors as a ``free put
option'' embedded in the OTC bitcoin funds. See Kryptoin Letter at
9.
---------------------------------------------------------------------------
One commenter expresses support for the approval of bitcoin ETPs
because they believe such ETPs would have lower premium/discount
volatility and lower management fees than an OTC bitcoin fund.\173\ The
Sponsor, in a comment letter, states that on a year-to-date basis
through August 13, 2021, the OTC bitcoin fund's total return was 19.91
percent versus its NAV of 56.56 percent; and on a one-year basis
through August 13, 2021, the fund's total return was 192.7 percent
versus its NAV return of 288.6 percent.\174\ The Sponsor also states
that, because OTC bitcoin funds are not listed on an exchange, they are
therefore not subject to the same transparency and regulatory oversight
by a listing exchange as the Trust's Shares would be.\175\
---------------------------------------------------------------------------
\173\ See letter from Anonymous, dated June 17, 2021.
\174\ See Kryptoin Letter at 8. In addition to the premium/
discount volatility's direct investment risk to retail investors,
the Sponsor also points to two additional risks of the OTC bitcoin
fund: (1) The inability to redeem or sell back shares to the fund in
exchange for bitcoin or cash means that sophisticated investors who
previously created shares directly with the fund at NAV before its
shares began trading at a discount are now facing potentially
substantial and widespread capital losses; and (2) because the fund
periodically closes and does not accept any further investment
through private placement, accredited and institutional investors
could be unable to deploy capital in compliance with their
investment mandates. See id. at 9.
\175\ See id.
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BZX also asserts that exposure to bitcoin through an ETP also
presents advantages for retail investors compared to buying spot
bitcoin directly.\176\ BZX asserts that, without the advantages of an
ETP, an individual retail investor holding bitcoin through a
cryptocurrency trading platform lacks protections.\177\ BZX explains
that, typically, retail platforms hold most, if not all, retail
investors'' bitcoin in ``hot'' (internet-connected) storage and do not
make any commitments to indemnify retail investors or to observe any
particular cybersecurity standard.\178\ Meanwhile, a retail investor
holding spot bitcoin directly in a self-hosted wallet may suffer from
inexperience in private key management (e.g., insufficient password
protection, lost key, etc.), which could cause them to lose some or all
of their bitcoin holdings.\179\ BZX represents that the Custodian
would, by contrast, use ``cold'' (offline) storage to hold private
keys, employ a certain degree of cybersecurity measures and operational
best practices, be highly experienced in bitcoin custody, and be
accountable for failures.\180\ Thus, with respect to custody of the
Trust's bitcoin assets,
[[Page 74179]]
BZX concludes that, compared to owning spot bitcoin directly, the Trust
presents advantages from an investment protection standpoint for retail
investors.\181\
---------------------------------------------------------------------------
\176\ See Notice, 86 FR at 22488.
\177\ See id.
\178\ See id.
\179\ See id.
\180\ See id.
\181\ See id.
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The Custodian, in a comment letter, echoes some of the descriptions
of the custodial arrangement.\182\ The Custodian also specifies that
its offline ``cold'' storage solution will hold the Trust's bitcoin in
Hardware Security Modules that have achieved the highest security level
of U.S. federal government standards and that are physically protected
at the Custodian's network of secure facilities and that to carry out a
transfer from the Trust's account, a quorum of these secure facilities
must be involved to sign the transaction.\183\ Also, according to the
Custodian, it maintains digital asset insurance, is regularly audited
by major financial and audit firms, and is subject to independent
third-party verification that the Custodian's operations and security
compliance structures meet the most robust of industry standards.\184\
The Sponsor, in a comment letter, adds that the Custodian will perform
its duties in a manner that meets the definition of a qualified
custodian under the Investment Advisers Act of 1940, as amended.\185\
---------------------------------------------------------------------------
\182\ See Gemini Letter at 2-3.
\183\ See id.
\184\ See id.
\185\ See Kryptoin Letter at 10.
---------------------------------------------------------------------------
BZX further asserts that a number of operating companies engaged in
unrelated businesses have announced investments as large as $1.5
billion in bitcoin.\186\ Without access to bitcoin ETPs, BZX argues
that retail investors seeking investment exposure to bitcoin may
purchase shares in these companies in order to gain the exposure to
bitcoin that they seek.\187\ BZX contends that such operating
companies, however, are imperfect bitcoin proxies and provide investors
with partial bitcoin exposure paired with additional risks associated
with whichever operating company they decide to purchase. BZX concludes
that investors seeking bitcoin exposure through publicly traded
companies are gaining only partial exposure to bitcoin and are not
fully benefitting from the risk disclosures and associated investor
protections that come from the securities registration process.\188\
---------------------------------------------------------------------------
\186\ See Notice, 86 FR at 22487.
\187\ See id. at 22488-89. The Custodian, in its comment letter,
agrees that the proposed ETP would offer greater investor protection
and transparency than existing alternatives for retail customers to
gain proxy exposure to bitcoin. See Gemini Letter at 2.
\188\ See Notice, 86 FR at 22489.
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BZX also states that investors in many other countries, including
Canada, are able to use more traditional exchange-listed and traded
products to gain exposure to bitcoin, disadvantaging U.S. investors and
leaving them with more risky means of getting bitcoin exposure.\189\
The Sponsor, in a comment letter, states that obtaining bitcoin
exposure through CME bitcoin futures ``generally remain[s] beyond the
scope of comfort level of retail investors'' because of, among other
reasons, the risk of margin calls. The Sponsor states that this risk is
eliminated entirely in the case of investors holding non-margin bitcoin
investment alternatives, such as a bitcoin ETP.\190\
---------------------------------------------------------------------------
\189\ See id. at 22487. BZX represents that the Purpose Bitcoin
ETF, a retail bitcoin-based ETP launched in Canada, reportedly
reached $421.8 million in assets under management in two days,
demonstrating the demand for a North American market listed bitcoin
ETP. BZX contends that the Purpose Bitcoin ETF also offers a class
of units that is U.S. dollar denominated, which could appeal to U.S.
investors. BZX also argues that without an approved bitcoin ETP in
the U.S. as a viable alternative, U.S. investors could seek to
purchase these shares in order to get access to bitcoin exposure.
BZX believes that, given the separate regulatory regime and the
potential difficulties associated with any international litigation,
such an arrangement would create more risk exposure for U.S.
investors than they would otherwise have with a U.S. exchange-listed
ETP. See id. at 22487 n.36. BZX also notes that regulators in other
countries have either approved or otherwise allowed the listing and
trading of bitcoin-based ETPs. See id. at 22487 n.37.
\190\ See Kryptoin Letter at 10.
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In essence, BZX asserts that the risky nature of direct investment
in the underlying bitcoin and the unregulated markets on which bitcoin
and OTC bitcoin funds trade compel approval of the proposed rule
change. The Commission disagrees. Pursuant to Section 19(b)(2) of the
Exchange Act, the Commission must approve a proposed rule change filed
by a national securities exchange if it finds that the proposed rule
change is consistent with the applicable requirements of the Exchange
Act--including the requirement under Section 6(b)(5) that the rules of
a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices--and it must disapprove the filing if
it does not make such a finding.\191\ Thus, even if a proposed rule
change purports to protect investors from a particular type of
investment risk--such as the susceptibility of an asset to loss or
theft--the proposed rule change may still fail to meet the requirements
under the Exchange Act.\192\
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\191\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
\192\ See SolidX Order, 82 FR at 16259; WisdomTree Order, 86 FR
at 69334.
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Here, even if it were true that, compared to trading in unregulated
bitcoin spot markets, trading a bitcoin-based ETP on a national
securities exchange provides some additional protection to investors,
the Commission must consider this potential benefit in the broader
context of whether the proposal meets each of the applicable
requirements of the Exchange Act.\193\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing
exchange have a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to bitcoin, or demonstrate
that other means to prevent fraudulent and manipulative acts and
practices are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The listing exchange has not met that
requirement here. Therefore the Commission is unable to find that the
proposed rule change is consistent with the statutory standard.
---------------------------------------------------------------------------
\193\ See supra note 165.
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2) of the Exchange Act, the Commission
must disapprove a proposed rule change filed by a national securities
exchange if it does not find that the proposed rule change is
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices.\194\
---------------------------------------------------------------------------
\194\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------
For the reasons discussed above, BZX has not met its burden of
demonstrating that the proposal is consistent with Exchange Act Section
6(b)(5),\195\ and, accordingly, the Commission must disapprove the
proposal.\196\
---------------------------------------------------------------------------
\195\ 15 U.S.C. 78f(b)(5).
\196\ In disapproving the proposed rule change, the Commission
has considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
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D. Other Comments
Comment letters also address the general nature and uses of
bitcoin; \197\ the state of development of bitcoin as a digital asset;
\198\ the inherent value of, and risks of investing in, bitcoin; \199\
the desire of investors to gain access to bitcoin through an ETP; \200\
the retirement investment benefits of a
[[Page 74180]]
bitcoin ETP; \201\ and the bitcoin network's effect on the
environment.\202\ Ultimately, however, additional discussion of these
topics is unnecessary, as they do not bear on the basis for the
Commission's decision to disapprove the proposal.
---------------------------------------------------------------------------
\197\ See, e.g., Patel Letter; letter from Sam Ahn, dated April
28, 2021 (``Ahn Letter'').
\198\ See, e.g., Ahn Letter; Gemini Letter at 2.
\199\ See, e.g., Ahn Letter; Patel Letter; letter from Bradley
M. Kuhn, dated April 25, 2021 (``Kuhn Letter'').
\200\ See, e.g., Kuhn Letter; Gemini Letter at 2; Kryptoin
Letter at 7.
\201\ See, e.g., Kuhn Letter.
\202\ See, e.g., Patel Letter.
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IV. Conclusion
For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and in particular, with Section 6(b)(5) of the
Exchange Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that proposed rule change SR-CboeBZX-2021-029 be, and
hereby is, disapproved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-28255 Filed 12-28-21; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on December 29, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.