## Facts

- Bats BZX Exchange, Inc. (BZX), a registered national securities exchange, proposed a rule change to list and trade shares of the Winklevoss Bitcoin Trust as “Commodity-Based Trust Shares” under BZX Rule 14.11(e)(4).
- The Trust would hold bitcoin as its sole asset; its shares would be an exchange-traded product (ETP) offering exposure to bitcoin.
- Gemini Trust Company, LLC (Gemini), a New York-chartered trust company subject to New York State Department of Financial Services oversight, would custody the Trust’s bitcoin; Gemini also operated a bitcoin trading venue and an auction used in the Trust’s valuation approach.
- The Trust’s net asset value and related indicative values would be based on bitcoin prices, with the Gemini Bitcoin Auction playing a central role.
- BZX did not propose a comprehensive surveillance-sharing agreement with a regulated bitcoin or bitcoin-derivatives market of significant size.
- In 2017, SEC staff acting under delegated authority disapproved the proposal; BZX petitioned for Commission review.
- In 2018, the Commission conducted a de novo review, set aside the delegated-action disapproval, and issued a new order again disapproving the proposal.

## Issues

1. Whether BZX met its burden to show the proposed rule change was consistent with Exchange Act § 6(b)(5), including that exchange rules be designed to prevent fraudulent and manipulative acts and practices and protect investors and the public interest.
2. Whether, absent a surveillance-sharing agreement with a regulated market of significant size related to bitcoin, the record showed adequate alternative measures to detect and deter manipulation affecting the ETP.

## Decision

- The Commission set aside the prior delegated-authority disapproval order and decided the matter anew on the full record.
- The Commission disapproved the proposed rule change.
- The Commission found BZX failed to meet its burden to demonstrate that the proposal satisfied Exchange Act § 6(b)(5).
- The Commission relied principally on (1) the absence of a surveillance-sharing agreement with a regulated market of significant size and (2) the lack of record support that alternative means would adequately address fraud and manipulation risks in the underlying bitcoin market relevant to the ETP.

## Legal Principles

- Under Exchange Act § 6(b)(5), exchange listing rules must be designed to prevent fraudulent and manipulative acts and practices and protect investors and the public interest.
- The self-regulatory organization proposing a rule change bears the burden of demonstrating consistency with the Exchange Act and SEC rules.
- For commodity-based ETPs, a common method to satisfy § 6(b)(5) is showing a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference asset; absent such an agreement, the exchange must present evidence-based alternative means sufficient to detect and deter manipulation.
- Where an ETP’s valuation is materially influenced by a single venue or process (e.g., an auction), the exchange must address the resulting susceptibility to manipulation affecting the product’s pricing and investor protection.

## Conclusion

The SEC disapproved BZX’s proposal to list and trade shares of the Winklevoss Bitcoin Trust because BZX did not demonstrate that its rules, as applied to the listing, would satisfy Exchange Act § 6(b)(5)’s fraud-and-manipulation and investor-protection requirements, particularly given the lack of a surveillance-sharing agreement with a regulated market of significant size and insufficient evidence of effective alternative protections.


Bats BZX Exch., Inc., Exchange Act Release No. 34-83723, File No. SR-BatsBZX-2016-30 (S.E.C. July 26, 2018)