Granite Shares Bitcoin ETF Disallowed by the SEC

Cboe BZX Exchange, Inc., Proposal to the SEC for Granite Shares Bitcoin ETFs

SEC File No. SR-CboeBZX-2018-001

October 4, 2018 ORDER > Division of Trading and Markets Disapproval Order of August 22, 2018, to Remain in Effect and Schedule for Filing Statements on Review – See SEC Release No. 34-84367 (1) The Commissioner set the time limit for comments to November 5, 2018, and (2) ORDERED that the order August 22, 2018, ORDER disapproving proposed rule change SR-CboeBZX-2018-001 would remain in effect pending review by the Commission. [83 FR 51521 October 11, 2018]

Time of Next Action by the Commission: Pursuant to Section 19(b)(2) of the Securities Exchange Act (15 U.S.C. 78s(b)(2)), within 45 days of the date of publication of the notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: A. by order approve or disapprove the proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. All comments were to be submitted within 21 days from the date of publication in the Federal Register.

Commentary by Attorney Timothy F. Mills, Editor / Action Cyber Times™ © 2018 All Rights Reserved.

Action Cyber Times™ provides resources for cybersecurity, data privacy, compliance, breach reporting and risk management, intellectual property theft, and the utilization of emerging technologies such as artificial intelligence, machine learning, blockchain DLT, advances in cryptographic applications, and more.

Disclaimer: The content available on the web site and in the blog posts is for informational purposes only and is not intended to, and does not, provide legal advice. Contact and retain an appropriate professional for legal advice. Use of this content or any of the links contained within the site do not create an attorney-client relationship. The opinions expressed are the opinions of the author.

GraniteShares Bitcoin Disapproved

 SEC Disapproves 2 Bitcoin Funds from the GraniteShares ETP Trust

August 22, 2018 – SEC Disapproval Order – See SEC Release No. 34-83913 for File No. SR-CboeBZX-2018-001, by the Division of Trading and Markets. [83 FR 43923 August 28, 2018]

After review of the Cboe BZX Exchange proposed rule change, the SEC Disapproved the proposal, concluding as follows:

Analysis – Preventing Fraudulent and Manipulative Practices – As stated in the Winklevoss Order, although surveillance-sharing agreements were not the exclusive means by which an exchange could meet its obligations under Exchange Act Section 6(b)(5), such agreements were widely used as a means for exchanges that list ETPs to meet their obligations in deterring manipulation.  Even though the Winklevoss Order was based on a commodity-trust ETP it was also appropriate for an ETP based on bitcoin futures. Thus, a surveillance-sharing agreement with a regulated market of significant size was required to prevent fraudulent and manipulative acts and practices. That the bitcoin markets of the CME and CBOE regulated by the CFTC were not of sufficient size.

In reaching its conclusion, the Commission stated it had to consider whether the potential benefits of the proposal met the applicable requirements of the Exchange Act. In accord with Section 19(b)(2) of the Exchange Act, the Commission had to disapprove a proposed rule change filed by a national securities exchange if it did not find that the proposed rule change was 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. Thus, even if a proposed rule change would provide certain benefits to investors and the markets, the proposed rule change would still fail to meet other requirements under the Exchange Act. Thus the Commission concluded that exchange had not met its burden of demonstrating an adequate basis on the record for the Commission to find that the proposal was consistent with Exchange Act Section 6(b)(5), and therefor disapproved the proposal.

Although the Commission disapproved this proposed rule change, the Commission emphasized that its disapproval did not evaluate whether bitcoin, or blockchain technology more generally, had utility or value as an innovation or an investment. Rather, the Commission disapproved the proposed rule change because the Exchange had not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal was consistent with the requirements, in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.

Untimely Amendments – As noted above, the deadline for rebuttal comments in response to the Order Instituting Proceedings was May 15, 2018. On August 21, 2018, the Exchange filed Amendment No. 1 with the Commission, stating that the amendment “amends and replaces in its entirety the proposal as originally submitted on January 5, 2018.” Then, on August 22, 2018, the Exchange filed Amendment No. 2 with the Commission, stating that the amendment “amends and replaces in its entirety Amendment No. 1 as submitted on August 21, 2018, which amended and replaced in its entirety the proposal as originally submitted on January 5, 2018.” Because these amendments were filed months after the deadline for comments on the proposed rule change, the Commission deems Amendment No. 1 and Amendment No. 2 to have been untimely filed.

In conclusion, the Commission stated that pursuant to Section 19(b)(2) of the Exchange Act, the proposed rule change was not 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. Therefore, it ORDERED that the proposed rule change SR-CboeBZX-2018-001 was disapproved.

July 18, 2018 – The Commission extended the period for consideration of the proposed rule change to September 21, 2018, in that it had only received a few comments. [83 FR 35040]

June 28, 2018 – Time Extended – [SEC Release No. 34-83548][83 FR 31246] – Section 19(b)(2) of the Act provides that, after initiating disapproval proceedings, the Commission shall issue an order approving or disapproving the proposed rule change not later than 180 days after the date of publication of notice of filing of the proposed rule change. The Commission may extend the period for issuing an order approving or disapproving the proposed rule change, however, by not more than 60 days if the Commission determines that a longer period is appropriate and publishes the reasons for such determination.

The proposed rule change was published for notice and comment in the Federal Register on January 18, 2018. July 17, 2018, is 180 days from that date, and September 15, 2018, is 240 days from that date.
The Commission finds it appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider this proposed rule change. Accordingly, the Commission designates September 15, 2018, as the date by which the Commission shall either approve or disapprove the proposed rule change.

April 5, 2018 – Questions for Commentators –  [SEC Release No. 34-82995][83-15425 April 11, 2018] Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change to List and Trade the Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF Under BZX Rule 14.11(f)(4), Trust Issued Receipts pursuant to Section 19(b)(2)(B) of the Act6 to determine whether to approve or disapprove the proposed rule change.

The Commission stated it was providing notice of the grounds for disapproval. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,” and “to protect investors and the public interest.

However, the Commission included twelve specific questions and requested that they be addressed by commentators. extended the time to receive comments to 21 days after the publication in the Federal Register, and 35 days post publication for rebuttal comments:

1. In its proposal, the Exchange states that each Fund, in the event that position, price, or accountability limits are reached with respect to Bitcoin Futures Contracts, may also invest in Listed Bitcoin Swaps. What are commenters’ views on the current availability of Listed Bitcoin Swaps for trading? What are commenters’ views on the ability of the Funds to invest in Listed Bitcoin Swaps in the event that position, price, or accountability limits are reached with respect to Bitcoin Futures Contracts?
2. In its proposal, the Exchange states that each Fund, in the event that position, price, or accountability limits are reached with respect to Listed Bitcoin Swaps, may also invest in OTC Bitcoin Swaps. What are commenters’ views on the current availability of OTC Bitcoin Swaps for trading? What are commenters’ views on the ability of the Funds to invest in OTC Bitcoin Swaps in the event that position, price, or accountability limits are reached with respect to Listed Bitcoin Swaps?
3. What are commenters’ views on whether the Funds would have the information necessary to adequately value, including fair value, the Bitcoin Futures Contracts and the Bitcoin Swaps when determining an appropriate end-of-day NAV for the Funds, taking into account any volatility, fragmentation, or general lack of regulation of the underlying bitcoin markets?
4. What are commenters’ views on the potential impact of manipulation in the underlying bitcoin markets on the Funds’ NAV? What are commenters’ views on the potential effect of such manipulation on the valuation of a Fund’s Bitcoin Futures Contracts? What are commenters’ views on the potential effect of such manipulation on the pricing of a Fund’s Bitcoin Swaps?
5. What are commenters’ views on how the Funds’ valuation policies would address the potential for the bitcoin blockchain to diverge into different paths (i.e., a “fork”)?
6. What are commenters’ views on the price differentials and trading volumes across bitcoin trading platforms (including during periods of market stress) and on the extent to which these differing prices may affect the trading of the Bitcoin Futures Contracts and, accordingly, trading in the Shares of the Funds?
7. What are commenters’ views on how the substantial margin requirements for Bitcoin Futures Contracts, and the nature of liquidity and volatility in the market for Bitcoin Futures Contracts, might affect the Trust’s ability to meet redemption orders? What are commenters’ views on whether and how the margin requirements for Bitcoin Futures Contracts, and the nature of liquidity and volatility in the market for Bitcoin Futures Contracts, might affect a Fund’s use of available cash to achieve its investment strategy?
8. What are commenters’ views on the possibility that the Funds—along with other exchange-traded products with similar investment objectives—could acquire a substantial portion of the market for Bitcoin Futures Contracts or the Bitcoin Swaps? What are commenters’ views on whether such a concentration of holdings could affect the Funds’ portfolio management, the liquidity of the Funds’ respective portfolios, or the pricing of the Bitcoin Futures Contracts or the Bitcoin Swaps? What are commenters’ views on the Exchange’s representation that it expects significant liquidity to exist in the market for Bitcoin Futures Contracts?
9. What are commenters’ views on possible factors that might impair the ability of the arbitrage mechanism to keep the trading price of the Shares tied to the NAV of each Fund? With respect to the market for Bitcoin Futures Contracts, what are commenters’ views on the potential impact on the arbitrage mechanism of the price volatility and the potential for trading halts? What are commenters’ views on whether or how these potential impairments of the arbitrage mechanism may affect the Funds’ ability to ensure adequate participation by Authorized Participants? What are commenters’ views on the potential effects on investors if the arbitrage mechanism is impaired?
10. What are commenters’ views on the risks of price manipulation and fraud in the underlying bitcoin trading platforms and how these risks might affect the Bitcoin Futures Contracts market or the Bitcoin Swaps? What are commenters’ views on how these risks might affect trading in the Shares of the Funds?
11. What are commenters’ views on how an investor may evaluate the price of the Shares in light of the risk of potential price manipulation and fraud in the underlying bitcoin trading platforms and in light of the potentially significant spread between the price of the Bitcoin Futures Contracts or the Bitcoin Swaps and the spot price of bitcoin?
12. What are commenters’ views on whether the two bitcoin futures exchanges represent a significant market, i.e., a market of significant size?

February 22, 2018 – Time Extended – The Commission decided to extend the 45-day time period to designate a longer period within which to take action on the proposed rule change so that it had sufficient time to consider the proposed rule change. [SEC Release No. 34-82759] [83 FR 8719]

January 18, 2018 – The notice of filing was published in the Federal Register at 83 FR 2704.

January 11, 2018 – Notice of Filing – The Commission posted the Notice of Filing of a Proposed Rule Change to List and Trade Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF, a Series of the GraniteShares ETP Trust, Under Rule 14.11(f)(4), Trust Issued Receipts. [SEC Release No. 34-82484] [83 FR 2704 January 18, 2018]

January 5, 2018  – Cboe BZX Inc Proposed Rule Change – The Cboe BZX Exchange, Inc. (“BZX”) filed with the Commission a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 USC 78s(b)(1)] and Rule 19b-4 [17 CFR 240.19b-4] thereunder.

The Exchange filed a proposal to list and trade shares of:

• GraniteShares Bitcoin ETF (the “Long Fund”)
• GraniteShares Short Bitcoin ETF (the “Short Fund”)

(each a “Fund” and, collectively, the “Funds”), a series of the GraniteShares ETP Trust (the “Trust”), under Rule 14.11(f)(4) (“Trust Issued Receipts”). The shares of the Funds were referred to as the “Shares.”

The Long Fund sought as its investment objective that for a single day and over time, it would match the performance of lead month Benchmark Futures Contracts. By being long Bitcoin Futures Contracts, it should benefit from daily increases in the price of the Bitcoin Futures Contracts but would lose value when the price of the Bitcoin Futures Contracts declined.

The Short Fund seeks to provide investment results that, on a daily basis correspond to the inverse (-1x) of the daily performance of the Benchmark Futures Contracts for a single day. By being short Bitcoin Futures Contracts, the Short Fund will benefit from daily decreases in the price of the Bitcoin Futures Contracts and will lose value when the price of the Bitcoin Futures Contracts increase.

The proposal stated that each Fund would hold substantially all of its assets in Benchmark Futures Contracts, and cash and Cash Equivalents (used to collateralize the Benchmark Futures Contracts) in order to achieve the investment objective. The Funds may also invest in other U.S. exchange-listed bitcoin futures contracts, as available, in addition to the Benchmark Futures Contracts. In the event that position price, or accountability limits are reached with respect to Bitcoin Futures Contracts, each Fund may invest in U.S. listed swaps on bitcoin or the Benchmark Futures Contracts. In the event that position price or accountability limits are reached with respect to Listed Bitcoin Swaps, each Fund may invest in OTC swaps on bitcoin or the Benchmark Futures Contracts.

Time of Next Action by the Commission: Pursuant to Section 19(b)(2) of the Securities Exchange Act (15 U.S.C. 78s(b)(2)), within 45 days of the date of publication of the notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: A. by order approve or disapprove the proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. All comments were to be submitted within 21 days from the date of publication in the Federal Register.

Commentary by Attorney Timothy F. Mills, Editor / Action Cyber Times™ © 2018 All Rights Reserved.

Action Cyber Times™ provides resources for cybersecurity, data privacy, compliance, breach reporting and risk management, intellectual property theft, and the utilization of emerging technologies such as artificial intelligence, machine learning, blockchain DLT, advances in cryptographic applications, and more.

Disclaimer: The content available on the web site and in the blog posts is for informational purposes only and is not intended to, and does not, provide legal advice. Contact and retain an appropriate professional for legal advice. Use of this content or any of the links contained within the site do not create an attorney-client relationship. The opinions expressed are the opinions of the author.