On October 12, 2016 the Securities and Exchange Commission (“SEC”) issued an order instituting proceedings to determine whether or not to approve or disapprove a proposed rule change filed by Bats BZX Exchange, Inc. (“Exchange”) that would permit Winklevoss Bitcoin Shares (“Shares”) issued by the Winklevoss Bitcoin Trust (“Trust”) to be listed and traded on the Exchange. The SEC is instituting proceedings “in the view of the legal and policy issues raised by the proposed rule change” and stated that such proceedings “does not indicate that the Commission [SEC] has reached any conclusions with respect to any of the issues involved.” As further noted below the SEC is encouraging “interested persons to provide comments on the proposed rule change.”

Background on Proceedings:

Section 19(b) of the Securities Exchange Act of 1934, as amended (“SEA”), generally requires self-regulatory organizations (“SROs”) to file with the SEC proposed rule changes for approval. Each exchange seeking to list an ETF is an SRO. The SEC implemented Section 19(b) by adopting Rule 19b-4 and Form 19b-4. Therefore, in order for an exchange to list an ETF for trading, including the Winkelvoss Bitcoin Trust ETF, the exchange generally must file the ETF’s trading rules on Form 19b-4 with, and receive approval from, the SEC.

Under normal circumstances, a Rule 19b-4 order (either approving or disapproving the rule change) will be issued within 45 calendar days after the Form 19b-4 filing notice has been published (“Notice Period”) (See Section 19(b)(2)(A)(i) of the SEA). The SEC may extend the Notice Period for an additional 45 days, if: (1) the SEC determines that the “longer period is appropriate and publishes its reasons for such determination”; or (2) the SRO consents to such longer Notice Period (Section 19(b)(2)(A)(ii)). If the SEC has not been able (or does not want) to make a determination by the end of the extended Noticed Period, it may “institute proceedings” to further consider the filing (and further delay its determination). (Section 19(b)(2)(A)(i)(II)). The institution of proceedings provides the SEC with an additional 90 days to review the proposal, with the ability for an extension of another 60 days. (Section 19(b)(2)(B)(ii)). Accordingly, the SEC has a total of 240 calendar days (45+45+90+60) after the notice of a Form 19b-4 filing is published to determine whether to approve or disapprove the exchange’s proposed listing of an ETF.

The Exchange initially filed its rule proposal with the SEC on June 30, 2016. On August 23, 2016 the SEC extended the review period and designated October 12, 2016 at the date it would approve, disapprove or institute proceedings with respect to the proposed rule change.

Request for Comment:

The SEC indicated it had received six (6) comment letters on the Exchange’s initial filing with respect to the Trust. Therefore, the SEC is seeking further comments on the proposed listing and trading of Shares on the Exchange and is specifically seeking comment on the following topics:

  • The current stability, resilience, fairness and efficiency of the markets on which bitcoin is traded;
  • Whether or not bitcoin is an appropriate underlying asset for a product traded on a national securities exchange;
  • Views on whether bitcoin is susceptible to computer hacking or to manipulation;
  • Views on using the Gemini Exchange Spot Price as the basis for valuing the ETF including any conflicts of interests posed with the Gemini Exchange being affiliated with the sponsor of the ETF;
  • Views on the liquidity and transparency of the bitcoin market;
  • Whether Authorized Participants and other market makers will be able to make efficient and liquid markets in the Shares at prices that are generally in line with the NAV of the Trust (e.g. will the arbitrage mechanism described in the Exchange’s proposed rule change work).

The SEC also noted that while “there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views” the SEC would consider “any request for an opportunity to make an oral presentation.”

The order instituting proceedings can be found here. Comments are due November 8, 2016 while commenter’s who wish to file a rebuttal to any person’s submission must file the rebuttal by November 22, 2016.