Denial of Bats BZX Exchange, Inc. Bitcoin ETP Proposal

The Bats BZX Exchange, Inc. (BZX) (petitioner) was a national stock exchange registered with the Securities and Exchange Commission (SEC). BZX asked the SEC for permission to change BZX’s rules to allow BZX to list and trade shares of the Winklevoss Bitcoin Trust (trust) as commodity-based trust shares. If the SEC approved the rule change, the trust would have been an exchange-traded product (ETP). Under BZX’s proposal, the trust’s sole asset would be Bitcoin, which would be held and secured by Gemini Trust Company LLC (Gemini), a New York-chartered entity that was supervised by the New York State Department of Financial Services. Gemini was also affiliated with Digital Asset Services LLC, the trust’s sponsor. BZX did not intend to share surveillance information or join a surveillance group regarding Bitcoin trading. Nevertheless, BZX contended that its proposed rule change satisfied § 6(b)(5) of the Securities Exchange Act of 1934, which required that national stock exchange rules be designed to prevent fraud and manipulation and protect investors and the public interest. Per BZX, this was because Bitcoin was uniquely resistant to manipulation due to the absence of material inside information regarding Bitcoin revenue or earnings. The SEC considered, however, whether the market for Bitcoin or Bitcoin derivatives could be manipulated through the misuse of material, nonpublic information regarding (1) order flow (e.g., potential significant buy-or-sell orders); (2) new demand sources (e.g., new Bitcoin-holding ETPs); or (3) responses by Bitcoin-based ETPs, Bitcoin-trading venues, or Bitcoin wallet-service providers to a potential fork in the Bitcoin blockchain that would create noninterchangeable Bitcoin forms. The SEC also considered an academic paper citing empirical evidence of Bitcoin trading based on material, nonpublic information and the possibility that the Bitcoin market could be manipulated by hacking or by someone gaining malicious control of the Bitcoin network.