SolidX NYSE Bitcoin Shares Disapproved by SEC

NYSE Arca Inc Request to the SEC for trading of SolidX Bitcoin Shares

SEC File No. SR-NYSEArca-2016-101

SolidX Bitcoin Trust Shares Disapproved

Note: No further filings or extensions of time for this proposal were found in the SEC database or the Federal Register within the time limits imposed by the SEC Rules of Practice. The proposal was therefore abandoned.

SolidX Bitcoin products next appear in SEC filings by Cboe BZX Exchange Inc., on June 26, 2018. See the post re file SR-CboeBZX-2018-040, VanEck SolidX Bitcoin Trust shares, SEC Release No. 34-83520.

April 3, 2017 – The notice of disapproval was published in the Federal Register. [82 FR 16247]

March 18, 2017 – SolidX Bitcoin Trust Shares Disapproved [SEC Release No. 34-80319] The NYSE Arca Inc., filed a proposed rule change with the Commission 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, to list and trade shares of the following exchange traded product:

careful consideration the Commission did not believe that the proposed rule change, as modified by Amendment No. 1, was consistent with the requirements of the Exchange Act. Specifically, Section 6(b)(5) of the Exchange Act, which required that the rules of a national securities exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.

The Commission had consistently, for commodity-trust ETPs, required that the listing exchange have surveillance-sharing agreements with significant, regulated markets related to the underlying asset. The Commission believed that the significant markets for bitcoin were unregulated and therefore, the Exchange had not entered into, and would be unable to enter into, the type of surveillance-sharing agreement that would help address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares. Accordingly, the Commission disapproved the proposed rule change.

The Commission noted that bitcoin was still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop. Should such markets develop, the Commission could consider whether a bitcoin ETP would be consistent with the requirements of the Exchange Act.

Therefore, the Commission ORDERED, pursuant to Section 19(b)(2) of the Exchange Act,183 that the proposed rule change (SR-NYSEArca-2016-101), as modified by Amendment No. 1, be disapproved.

February 15, 2017 – The Exchange filed Amendment No. 1 to the proposed rule change, amending and replacing the original filing in its entirety, and Amendment No. 1 was published for comment in the Federal Register on March 1, 2017, with a 15-day comment period that ended on March 16, 2017. See SEC Release No. 80099 (Feb. 24, 2017), 82 FR 12253 (Mar. 1, 2017) (“Amendment No. 1”).

January 3, 2017 – the Commission designated a longer period for Commission action on the proposed rule change. See SEC Release No. 79726 (Jan. 3, 2017), 82 FR 2426 (Jan. 9, 2017) (designating March 30, 2017, as the date by which the Commission must either approve or disapprove the proposed rule change).

October 27, 2016 – The Commission instituted proceedings under Section 19(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. 78s(b)(2)(B), to determine whether to approve or disapprove the proposed rule change. See SEC Release No. 79171 (Oct. 27, 2016), 81 FR 76400 (Nov. 2, 2016) (“Order Instituting Proceedings”).

September 6, 2016 – the Commission designated a longer period within which to act on the proposed rule change. See SEC Release No. 78770 (Sept. 6, 2016), 81 FR 62780 (Sept. 12, 2016).

July 13, 2016 – The Exchange filed the proposed rule change and the SEC filed the notice on July 27, 2016. It appeared in the Federal Register on August 2, 2016. See SEC Release No. 78426 (July 27, 2016), 81 FR 50763 (Aug. 2, 2016).

The Exchange proposed to list and trade shares (“Shares”) of the SolidX Bitcoin Trust (“Trust”) as Commodity-Based Trust Shares under NYSE Arca Equities Rule 8.201.8

Under NYSE Arca Equities Rule 8.201, the Exchange proposed to list trading and/or trades pursuant to unlisted privileges (‘‘UTP’’) ‘‘Commodity-Based Trust Shares’’. The Exchange proposes to list and trade
shares (‘‘Shares’’) of the Trust pursuant to NYSE Arca Equities Rule 8.201.5. The sponsor of the Trust was SolidX Management LLC (‘‘Sponsor’’), a Delaware limited liability company. The Sponsor is a wholly-owned subsidiary of SolidX Partners Inc.

According to the Registration Statement, the Trust would invest in bitcoin only. The Trust would use available offering proceeds to purchase bitcoin traded on various domestic and international exchanges and OTC markets, without being leveraged or exceeding relevant position limits.

The investment objective of the Trust would be for the Shares to track the price of bitcoins as measured by the TradeBlock XBX Index of eligible bitcoin exchanges, Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), itBit, and OKCoin International.

According to the Exchange, the underlying bitcoin marketplace operates 24 hours per day, 365 days per year. The Exchange cites the Trust’s registration statement for the proposition that the majority of bitcoin transactions are executed on public bitcoin exchanges where bitcoins are bought and sold daily for value in U.S. dollar (“USD”), euro, and other government-issued currencies, and the Exchange states that there are currently 30 bitcoin exchanges across the world. According to the Exchange, the various bitcoin exchanges are generally available to the public through online web portals, and trading information (including pricing, volume, and pending orders) is available on the exchanges’ websites, with most of this information publicly available to anyone who visits the websites.

The Exchange states that, according to the Registration Statement, there are currently several U.S.-based regulated entities that facilitate bitcoin trading and that comply with anti-money laundering (“AML”) and know your customer (“KYC”) regulatory requirements:

• GDAX, which is based in California, is a bitcoin exchange that maintains money transmitter licenses in over 30 states, the District of Columbia, and Puerto Rico. The NYSDFS granted a BitLicense to GDAX in January 2017.
• itBit is a bitcoin exchange that was granted a limited-purpose-trust-company charter by the NYSDFS in May 2015.
• Gemini is a bitcoin exchange that was granted limited-purpose trust company charter by the NYSDFS in October 2015
• SecondMarket, Inc., d/b/a Genesis Global Trading, is a member firm of the Financial Industry Regulatory Authority (“FINRA”) that makes a market in bitcoin by offering two-sided liquidity.

The Exchange noted that the CFTC has stated that bitcoins and other virtual currencies are encompassed in the definition of “commodity” under the Commodity Exchange Act and are thus within the regulatory jurisdiction of the CFTC.

The review of Bitcoin and the marketplace in the Release was extensive and recommended to the reader.

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.

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