Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of Shares of SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201, 50763-50777 [2016-18204]

Download as PDF Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BOX–2016–36. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BOX– 2016–36, and should be submitted on or before August 23, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–18206 Filed 8–1–16; 8:45 am] mstockstill on DSK3G9T082PROD with NOTICES BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–78426; File No. SR– NYSEArca–2016–101] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of Shares of SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201 July 27, 2016. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on July 13, 2016, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares of the following under NYSE Arca Equities Rule 8.201: SolidX Bitcoin Trust (‘‘Trust’’). The proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose Under NYSE Arca Equities Rule 8.201, the Exchange may propose to list 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 10 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 50763 and/or trade pursuant to unlisted trading privileges (‘‘UTP’’) ‘‘Commodity-Based Trust Shares’’.4 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 is SolidX Management LLC (‘‘Sponsor’’), a Delaware limited liability company. The Sponsor is a wholly-owned subsidiary of SolidX Partners Inc. The trustee for the Trust (‘‘Trustee’’) serves pursuant to a trust agreement. The Bank of New York Mellon will be the administrator (‘‘Administrator’’) and the custodian, with respect to cash, of the Trust (‘‘Custodian’’). The Trust is a grantor trust formed under the laws of the State of New York. The Trust has no fixed termination date. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in the Trust’s net assets. The Trust’s assets will consist of bitcoin 6 held on the Trust’s behalf by the Sponsor utilizing a secure process as described below in ‘‘bitcoin Security and Storage for the Trust’’. The Trust will not normally hold cash or any other assets, but may hold a very limited amount of cash in connection with the creation and redemption of ‘‘Baskets’’ 7 and to pay Trust expenses, as described below. According to the Registration Statement, the Trust will invest in bitcoin only. The activities of the Trust are limited to: (i) Issuing Baskets in exchange for bitcoin or the cash deposited with the Custodian as consideration; (ii) purchasing bitcoin from various exchanges and in over-thecounter (‘‘OTC’’) transactions; (iii) selling bitcoin (or transferring bitcoin, at the Sponsor’s discretion) as necessary to cover the Sponsor’s management fee, 4 Commodity-Based Trust Shares are securities issued by a trust that represent investors’ discrete identifiable and undivided beneficial ownership interest in the commodities deposited into the Trust. 5 On July 11, 2016, the Trust filed a registration statement (‘‘Registration Statement’’) on Form S–1 under the Securities Act of 1933 (15 U.S.C. 77a). The descriptions of the Trust, the Shares and bitcoin contained herein are based, in part, on the Registration Statement. 6 A ‘‘bitcoin’’ is an asset that can be transferred among parties via the Internet, but without the use of a central administrator or clearing agency (‘‘bitcoin’’). The asset, bitcoin, is generally written with a lower case ‘‘b’’. The asset, bitcoin, is differentiated from the computers and software (or the protocol) involved in the transfer of bitcoin among users, which constitute the ‘‘Bitcoin Network’’. The asset, bitcoin, is the intrinsically linked unit of account that exists within the Bitcoin Network. See ‘‘bitcoin and the Bitcoin Industry’’ below. 7 The Trust will issue and redeem ‘‘Baskets’’, each equal to a block of 10,000 Shares, only to ‘‘Authorized Participants’’. See ‘‘Creation and Redemption of Shares’’ below. E:\FR\FM\02AUN1.SGM 02AUN1 50764 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices Trust expenses not assumed by the Sponsor and other liabilities; (iv) selling bitcoin as necessary in connection with redemptions; (v) delivering bitcoin or cash in exchange for Baskets surrendered for redemption; and (vi) maintaining insurance coverage for the bitcoin held by the Trust. According to the Registration Statement, the Trust is neither an investment company registered under the Investment Company Act of 1940, as amended,8 nor a commodity pool for purposes of the Commodity Exchange Act (‘‘CEA’’),9 and neither the Sponsor nor the Trustee is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares. Investment Objective According to the Registration Statement and as further described below, the Trust will seek to provide investors with exposure to the daily change in the U.S. dollar price of bitcoin, before expenses and liabilities of the Trust, as measured by the TradeBlock XBX Index (‘‘XBX’’). The Trust intends to achieve this objective by investing substantially all of its assets in bitcoin traded on various domestic and international bitcoin exchanges and OTC markets depending on liquidity and otherwise at the Sponsor’s discretion. The Trust is not actively managed. It does not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the price of bitcoin. Investment in Bitcoin Subject to certain requirements and conditions described below and in the Registration Statement, the Trust, under normal market conditions,10 will use available offering proceeds to purchase bitcoin that are traded on various domestic and international exchanges and OTC markets, without being leveraged or exceeding relevant position limits. Generally, the Sponsor will directly place purchase or sale orders for bitcoin on behalf of the Trust on domestic and international exchanges and with OTC participants using delivery-versus-payment (‘‘DVP’’) and 8 15 U.S.C. 80a–1. U.S.C. 1. 10 The term ‘‘under normal circumstances’’ includes, but is not limited to, the absence of extreme volatility or trading halts in the price of bitcoin or the financial markets generally; operational issues causing dissemination of inaccurate market information; or force majeure type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance. mstockstill on DSK3G9T082PROD with NOTICES 9 17 VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 receive-versus-payment (‘‘RVP’’) arrangements. Bitcoin and the Bitcoin Industry General The following is a brief introduction to the global bitcoin market. The data presented below are derived from information released by various thirdparty sources, including white papers, other published materials, research reports and regulatory guidance. The Bitcoin Network A bitcoin is an asset that can be transferred among parties via the Internet, but without the use of a central administrator or clearing agency. The term ‘‘decentralized’’ is often used in descriptions of bitcoin, in reference to bitcoin’s lack of necessity for administration by a central party. The Bitcoin Network (i.e., the network of computers running the software protocol underlying bitcoin involved in maintaining the database of bitcoin ownership and facilitating the transfer of bitcoin among parties) and the asset, bitcoin, are intrinsically linked and inseparable. Bitcoin was first described in a white paper released in 2008 and published under the name ‘‘Satoshi Nakamoto’’, and the protocol underlying bitcoin was subsequently released in 2009 as open source software. Bitcoin Ownership and the Blockchain To begin using bitcoin, a user may download specialized software referred to as a ‘‘bitcoin wallet’’. A user’s bitcoin wallet can run on a computer or smartphone. A bitcoin wallet can be used both to send and to receive bitcoin. Within a bitcoin wallet, a user will be able to generate one or more ‘‘bitcoin addresses’’, which are similar in concept to bank account numbers, and each address is unique. Upon generating a bitcoin address, a user can begin to transact in bitcoin by receiving bitcoin at his or her bitcoin address and sending it from his or her address to another user’s address. Sending bitcoin from one bitcoin address to another is similar in concept to sending a bank wire from one person’s bank account to another person’s bank account. Balances of the quantity of bitcoin associated with each bitcoin address are listed in a database, referred to as the ‘‘blockchain’’. Copies of the blockchain exist on thousands of computers on the Bitcoin Network throughout the Internet. A user’s bitcoin wallet will either contain a copy of the blockchain or be able to connect with another computer that holds a copy of the blockchain. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 When a bitcoin user wishes to transfer bitcoin to another user, the sender must first request a bitcoin address from the recipient. The sender then uses his or her bitcoin wallet software, to create a proposed addition to the blockchain. The proposal would decrement the sender’s address and increment the recipient’s address by the amount of bitcoin desired to be transferred. The proposal is entirely digital in nature, similar to a file on a computer, and it can be sent to other computers participating in the Bitcoin Network. Such digital proposals are referred to as ‘‘bitcoin transactions’’. Bitcoin transactions and the process of one user sending bitcoin to another should not be confused with buying and selling bitcoin, which is a separate process (as discussed below in ‘‘bitcoin Trading On Exchanges’’ and ‘‘bitcoin Trading Overthe-Counter’’). A bitcoin transaction is similar in concept to an irreversible digital check. The transaction contains the sender’s bitcoin address, the recipient’s bitcoin address, the amount of bitcoin to be sent, a confirmation fee and the sender’s digital signature. The sender’s use of his or her digital signature enables participants on the Bitcoin Network to verify the authenticity of the bitcoin transaction. A user’s digital signature is generated via usage of the user’s so-called ‘‘private key’’, one of two numbers in a so-called cryptographic ‘‘key pair’’. A key pair consists of a ‘‘public key’’ and its corresponding private key, both of which are lengthy numerical codes, derived together and possessing a unique relationship. Public keys are used to create bitcoin addresses. Private keys are used to sign transactions that initiate the transfer of bitcoin from a sender’s bitcoin address to a recipient’s bitcoin address. Only the holder of the private key associated with a particular bitcoin address can digitally sign a transaction proposing a transfer of bitcoin from that particular bitcoin address. A user’s bitcoin address (which is derived from a public key) may be safely distributed, but a user’s private key must remain known solely by its rightful owner. The utilization of a private key is the only mechanism by which a bitcoin user can create a digital signature to transfer bitcoin from him or herself to another user. Additionally, if a malicious third party learns of a user’s private key, that third party could forge the user’s digital signature and send the user’s bitcoin to any arbitrary bitcoin address (i.e., the third party could steal the user’s bitcoin). E:\FR\FM\02AUN1.SGM 02AUN1 mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices When a bitcoin holder sends bitcoin to a destination bitcoin address, the transaction is initially considered unconfirmed. Confirmation of the validity of the transaction involves verifying the signature of the sender, as created by the sender’s private key. Confirmation also involves verifying that the sender has not ‘‘double spent’’ the bitcoin (e.g., confirming Party A has not attempted to send the same bitcoin both to Party B and to Party C). The confirmation process occurs via a process known as ‘‘bitcoin mining’’. Bitcoin mining utilizes a combination of computer hardware and software to accomplish a dual purpose: (i) To verify the authenticity and validity of bitcoin transactions (i.e., the movement of bitcoin between addresses) and (ii) the creation of new bitcoin. Neither the Sponsor nor the Trust intends to engage in bitcoin mining. Bitcoin miners do not need permission to participate in verifying transactions. Rather, miners compete to solve a prescribed and complicated mathematical calculation using computers dedicated to the task. Rounds of the competition repeat approximately every ten minutes. In any particular round of the competition, the first miner to find the solution to the mathematical calculation is the miner who gains the privilege of announcing the next block to be added to the blockchain. A new block that is added to the blockchain serves to take all of the recent-yet-unconfirmed transactions and verify that none are fraudulent. The recent-yet-unconfirmed transactions also generally contain transaction fees that are awarded to the miner who produces the block in which the transactions are inserted, and thereby confirmed. The successful miner also earns the so-called ‘‘block reward’’, an amount of newly created bitcoin. Thus, bitcoin miners are financially incentivized to conduct their work. The financial incentives received by bitcoin miners are a vital part of the process by which the Bitcoin Network functions. Upon successfully winning a round of the competition (winning a round is referred to as mining a new block), the miner then transmits a copy of the newly-formed block to peers on the Bitcoin Network, all of which then update their respective copies of the blockchain by appending the new block, thereby acknowledging the confirmation of the transactions that had previously existed in an unconfirmed state. A recipient of bitcoin must wait until a new block is formed in order to see the transaction convert from an unconfirmed state to a confirmed state. According to the Registration Statement, VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 with new rounds won approximately every ten minutes, the average wait time for a confirmation is five minutes. The protocol underlying bitcoin provides the rules by which all users and miners on the Bitcoin Network must operate. A user or miner attempting to operate under a different set of rules will be ignored by other network participants, thus rendering that user’s or miner’s behavior moot. The protocol also lays out the block reward, the amount of bitcoin that a miner earns upon creating a new block. The initial block reward when Bitcoin was introduced in 2009 was 50 bitcoin per block. That number has and will continue to halve approximately every four years until approximately 2140, when it is estimated that block rewards will go to zero. The next halving is projected for July 2016, which will reduce the block reward to 12.5 bitcoin from its current level of 25.11 The halving thereafter will occur in another four years and will reduce the block reward to 6.25 bitcoin, and so on. Currently, there are approximately 15 million bitcoin that have been created, a number that will grow with certainty to a maximum of 21 million, estimated to occur by the year 2140. Bitcoin mining should not be confused with buying and selling bitcoin, which, as discussed below, is a separate process. Use of Bitcoin and the Blockchain Beyond using bitcoin as a value transfer mechanism, applications related to the blockchain technology underlying bitcoin have become increasingly prominent.12 Blockchainfocused applications take advantage of certain unique characteristics of the blockchain such as secure time stamping (secure time stamps are on newly created blocks), highly redundant storage (copies of the blockchain are distributed throughout the Internet) and tamper-resistant data secured by secure digital signatures. According to the Registration Statement, blockchain-focused applications in usage and under development include, but are not limited to, supply chain management, secure cloud storage, identity management, counterfeit and fraud detection systems, database security enhancement, evidence capture, secure document and contract signing, asset title transfer and financial asset 50765 settlement. Whether used for value transfer or other blockchain-focused applications, each transaction or use of the blockchain requires a fee, priced and paid in bitcoin. Therefore, the usage of bitcoin, the asset, is inherently involved in blockchain-focused applications, thus linking the growth and adoption of blockchain-focused applications to the growth and adoption of bitcoin. According to the Registration Statement, as a value transfer mechanism, over 100,000 merchants worldwide currently accept bitcoin as payment for goods and services. Notable merchants accepting bitcoin for certain types of purchases include Microsoft, Dell, Expedia, Overstock.com and Dish Network. Common bitcoin purchases include Web site hosting, home furnishings, gift cards and consumer electronics. Bitcoin is also accepted by a number of non-profit organizations worldwide, including United Way Worldwide, the American Red Cross, Wikipedia and Fidelity Charitable.13 Bitcoin Exchanges Bitcoin exchanges operate Web sites that facilitate the purchase and sale of bitcoin for various government-issued currencies, including the U.S. dollar, the euro or the Chinese yuan. Activity on bitcoin exchanges should not be confused with the process of users sending bitcoin from one bitcoin address to another bitcoin address, the latter being an activity that is wholly within the confines of the Bitcoin Network and the former being an activity that occurs entirely on private Web sites. Bitcoin exchanges operate in a manner that is unlike the traditional capital markets infrastructure in the U.S. and in other developed nations. Bitcoin exchanges combine the process of order matching, trade clearing, trade settlement and custody into a single entity. For example, a user can send U.S. dollars via wire to a bitcoin exchange and then visit the exchange’s Web site to purchase bitcoin. The entirety of the transaction—from trade to clearing to settlement to custody (at least temporary custody)—is accomplished by the bitcoin exchange in a matter of seconds. The user can then withdraw the purchased bitcoin into a wallet to take custody of the bitcoin directly. According to the Registration Statement, there are currently several 11 https://www.bitcoinblockhalf.com/. 12 Additional applications based on blockchain technology—both the blockchain underlying bitcoin as well as separate public blockchains incorporating similar characteristics of the blockchain underlying bitcoin—are currently in development by numerous entities, including financial institutions like banks. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 13 Attached as Exhibit 3, Item 1 is a chart setting forth a summary of bitcoin transaction volume (i.e., transfers of bitcoin between parties on the Bitcoin Network, which is different than and should not be confused with bitcoin exchange-traded volume) from January 2009 through January 2016. E:\FR\FM\02AUN1.SGM 02AUN1 mstockstill on DSK3G9T082PROD with NOTICES 50766 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices U.S.-based regulated entities that facilitate bitcoin trading and that comply with U.S. anti-money laundering (‘‘AML’’) and know your customer (‘‘KYC’’) regulatory requirements: • Coinbase, which is based in California, is a bitcoin exchange that maintains money transmitter licenses in over thirty states, the District of Columbia and Puerto Rico (‘‘Coinbase’’). Coinbase is subject to the regulations enforced by the various state agencies that issued their respective money transmitter licenses to Coinbase. In New York, Coinbase applied for a BitLicense, a regulatory framework created by the New York Department of Financial Services (‘‘DFS’’) that sets forth consumer protection, AML compliance, and cyber security rules tailored for digital currency companies operating and transacting business in New York. • itBit is a bitcoin exchange that was granted a limited purpose trust company charter by the DFS in May 2015 (‘‘itBit’’). Limited purpose trusts, according to the DFS, are permitted to undertake certain activities, such as transfer agency, securities clearance, investment management, and custodial services, but without the power to take deposits or make loans. • Gemini is a bitcoin exchange that is also regulated by the DFS. In October 2015, the DFS granted Gemini authorization to operate as a limited purpose trust company (‘‘Gemini’’). • SecondMarket, Inc. d/b/a Genesis Global Trading is a FINRA member firm that makes a market in bitcoin by offering two-sided liquidity (‘‘Genesis Global Trading’’). According to the Registration Statement, the majority of bitcoin transactions are executed on public bitcoin exchanges where bitcoin are bought and sold daily for value in U.S. dollar, euro and other government currencies. These bitcoin exchanges provide the most data with respect to prevailing valuations of bitcoin. The exchanges typically publish real-time trade data including last price, bid and ask spread, and trade volume on their respective Web sites and through application programming interfaces. As a result, the prices on bitcoin exchanges are the most accurate expression of the value of bitcoin. The XBX, which the Trust will use to calculate the net asset value of the Shares, accordingly tracks the price of bitcoin across multiple exchanges (see ‘‘bitcoin Price Indexes’’ below). The bitcoin marketplace is a 24-hour, 365-day per year market. There currently exist globally over 30 bitcoin exchanges. The Sponsor represents that VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 the exchanges with the most significant bitcoin trading by volume (i.e., Bitfinex,14 Bitstamp,15 BTCC,16 BTC-e,17 Coinbase, Huobi,18 itBit, OKCoin Exchange China 19 and OKCoin International 20) traded approximately 422 million bitcoin at U.S. dollar converted prices ranging between $199 and $706 for a total trade volume of over $154 billion during the period February 2014 through January 2016. The Sponsor represents that average global daily trade volume during this period was approximately $212 million. The various bitcoin exchanges are generally available to the public through online web portals. Trading information, including pricing, volumes, and order book is available on the exchanges’ Web sites, and most such information is publicly available to anyone who visits the site. According to the Sponsor, for those exchanges that comply with applicable KYC requirements, prior to trading bitcoin, users are required to provide the exchange with KYC verifiable identification and other such documentation. Once a user establishes an account with the exchange, the user deposits government currency with the exchange by completing a wire of government currency to the exchange’s bank. Bitcoin are traded with publicly disclosed valuations for each transaction, measured by one or more government currencies such as the U.S. dollar, the euro or the Chinese yuan. Bitcoin exchanges typically report publicly on their site the valuation of each transaction and bid and ask prices for the purchase or sale of bitcoin. Although each bitcoin exchange has its own market price, it is expected that 14 Bitfinex is a bitcoin exchange that facilitates U.S. dollar-denominated bitcoin trading (‘‘Bitfinex’’). It is based in Hong Kong and holds a Money Services Operator license issued by the Customs and Excise Department, Money Services Supervision Bureau. 15 Bitstamp is a bitcoin exchange that facilitates U.S. dollar-denominated bitcoin trading (‘‘Bitstamp’’). It is based in the United Kingdom with offices in London, Luxembourg and New York. The government of Luxembourg granted Bitstamp a license to operate as a regulated bitcoin exchange in the European Union. 16 BTCC is a bitcoin exchange that is headquartered in Shanghai and facilitates yuandenominated bitcoin trading (‘‘BTCC’’). 17 BTC-e is a U.S. dollar-denominated bitcoin exchange (‘‘BTC-e’’). 18 Huobi is a bitcoin exchange that is based in Beijing and facilitates yuan-denominated bitcoin trading. 19 OKCoin Exchange China is located in Beijing and facilitates Chinese yuan-denominated bitcoin trading (‘‘OKCoin Exchange China’’). 20 OKCoin International is located in Singapore and facilitates U.S. dollar-denominated bitcoin trading (‘‘OKCoin International’’). PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 most bitcoin exchanges’ market prices should be relatively consistent with the bitcoin exchange market average since market participants can choose the bitcoin exchange on which to buy or sell bitcoin (i.e., exchange shopping). According to the Registration Statement, price differentials across bitcoin exchanges enable arbitrage between bitcoin prices on the various exchanges. Bitcoin Price Indexes XBX Index. Launched in July 2014, the XBX represents the value of one bitcoin in U.S. dollars at any point in time and closes as of 4:00 p.m., Eastern time (‘‘E.T.’’), each weekday. The intraday levels of the XBX incorporate the real-time price of bitcoin based on trading activity derived from constituent exchanges throughout each trading day. The closing level of the XBX is calculated using a proprietary methodology utilizing bitcoin trading data from constituent exchanges and is published at or after 4:00 p.m., E.T., each weekday. The XBX is published to two decimal places rounded on the last digit. Schvey, Inc. d/b/a TradeBlock (‘‘TradeBlock’’) is the index sponsor and calculation agent for the XBX. The Sponsor has entered into a licensing agreement with TradeBlock to use the XBX. The Trust is entitled to use the XBX pursuant to a sub-licensing arrangement with the Sponsor. The XBX is a real-time U.S. dollardenominated composite reference rate for the price of bitcoin. The XBX calculates the intra-day price of bitcoin every second, including the closing price as of 4:00 p.m., E.T. The intra-day price and closing price are based on a methodology that consists of collecting and cleansing actual trade data from several bitcoin exchanges included within the XBX. According to the Registration Statement, to ensure that TradeBlock’s exchange selection process is impartial, TradeBlock implements a standardized eligibility criteria framework based on periodically-reviewed governance principles that includes elements such as depth of liquidity, compliance with applicable legal and regulatory requirements, data availability and acceptance of U.S. dollar deposits. As of June 30, 2016, the eligible bitcoin exchanges selected by TradeBlock for inclusion in the XBX are Bitfinex, Bitstamp, Coinbase, itBit and OKCoin International. The XBX currently does not include any other bitcoin exchanges, derivative exchanges, dark pools, OTC or other trading venues. The logic utilized for the derivation of the daily closing index level for the XBX E:\FR\FM\02AUN1.SGM 02AUN1 mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices is intended to analyze actual bitcoin transactional data, verify and refine the data set and yield an objective, fairmarket value of one bitcoin as of 4:00 p.m., E.T., each weekday, priced in U.S. dollars. As discussed herein, the XBX intra-day price and the XBX closing price are collectively referred to as the XBX price, unless otherwise noted. The key elements of the algorithm underlying the XBX include: • Volume/Liquidity Weighting: Exchanges with greater liquidity receive a higher weighting in the XBX, increasing the ability to execute against the XBX in the underlying spot markets. Liquidity weighting also mitigates the impact of volume spikes during off-peak trading hours. • Price Variance Weighting: The XBX price reflects data points that are discretely weighted in proportion to their variance from contemporaneous pricing reflected on the XBX’s constituent exchanges. As the price at a particular exchange diverges from the rest of the data points, its influence on the XBX consequently decreases. • Inactivity Adjustment: The algorithm penalizes stale ticks on any given exchange. If an exchange does not have recent trading data, its weighting is gradually reduced, until it is deweighted entirely. Similarly, once activity resumes, the corresponding weighting for that constituent is gradually increased until it reaches the appropriate level. • Thin Order Books: The XBX minimizes the impact of thin order books and fluctuating prices, which provides a more stable and reliable benchmark for the price of bitcoin. The XBX index calculation methodology and governance protocol are based on principles established by the International Organization of Securities Commissions for financial benchmarks. TradeBlock conducts a quarterly review of the constituent exchanges and the algorithm used to calculate XBX prices and maintains a history of all updates. In the event of market stress or unresponsive input data from the constituent exchanges, the XBX algorithm will incorporate a minimum of one input to calculate a benchmark value. In the unlikely event of no input data from all constituent values, the XBX will default to the most recent value for which one or more inputs were present. The Sponsor is not aware of any bitcoin derivatives currently trading based on the XBX. NYXBT Index. Launched in May 2015, the NYSE Bitcoin Index (‘‘NYXBT’’) represents the value of one bitcoin in U.S. dollars at any point in VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 time and closes as of 4:00 p.m., E.T., each weekday. CoinDesk Bitcoin Price Index. CoinDesk, a digital currency content provider (‘‘Coindesk’’), launched a proprietary bitcoin price index, the CoinDesk Bitcoin Price Index (‘‘XBP’’) in September 2013. The XBP takes the average of U.S. dollar bitcoin prices from leading exchanges. Bitcoin Trading on Exchanges According to the Registration Statement, an individual who wishes to purchase bitcoin on a bitcoin exchange would create an account on the exchange Web site. After creating an account, the buyer would send government issued money to the Web site via traditional payment methods such as ACH and wire transfer. The buyer’s account at the bitcoin exchange would be credited with the money sent, and the buyer would then be able to visit the Web site and make a purchase of bitcoin. Directly after the purchase is made, the bitcoin acquired still remains in the custody of the bitcoin exchange (i.e., it remains at a bitcoin address controlled by the exchange). To take custody of the bitcoin, the purchaser would direct the exchange Web site to transfer the bitcoin to a bitcoin address controlled by the purchaser, thereby completing the process of acquiring bitcoin. A sale of bitcoin using a bitcoin exchange involves the same process but in reverse. The seller would transfer bitcoin from an address under his or her control to an address under the bitcoin exchange’s control. The seller’s account at the bitcoin exchange would be credited with the bitcoin sent, and the seller would be able to commence the sale of the bitcoin via the Web site. Upon completion of the sale, the seller’s account would reflect the seller’s balance, in government currency, which the seller could then receive by directing the exchange to send the funds via traditional payment methods to the seller’s bank account. Bitcoin exchange Web sites generally show users a central limit order book (i.e., a list of all bids and offers for purchases and sales of bitcoin on the exchange). The Sponsor has trading experience with several U.S. and foreign bitcoin exchanges that generally represent the highest daily U.S. dollar bitcoin trading volume. The Sponsor may conduct some of its bitcoin trading on behalf of the Trust through a wholly-owned subsidiary, SolidX Management Ltd., an exempted limited company established in the Cayman Islands (‘‘Subsidiary’’), to buy and sell bitcoin on behalf of the Trust on certain bitcoin exchanges which are PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 50767 only open to non-U.S. persons or which do not conduct business in New York or with New York residents. The officers of the Sponsor also serve as officers of the Subsidiary. When conducting trading through the Subsidiary, the Sponsor is responsible for the security of the bitcoin to the same extent as if trading bitcoin directly. Bitcoin traded through the Subsidiary will be stored in the same way as bitcoin that is traded directly by the Sponsor, and the Trust’s bitcoin insurance on bitcoin traded through the Subsidiary will apply to the same extent as otherwise applicable. Furthermore, the Subsidiary will have the same trading arrangements with the applicable bitcoin exchanges as does the Sponsor itself. Accordingly, references herein to the Sponsor’s trading arrangements with bitcoin exchanges on behalf of the Trust include trading conducted by the Sponsor through the Subsidiary, unless otherwise noted. The Sponsor intends to conduct its bitcoin exchange trading on the following U.S. dollar-denominated bitcoin exchanges: Bitfinex, Bitstamp, Coinbase, Gemini, itBit, Kraken 21 and OKCoin International.22 The Sponsor represents that all of these exchanges follow AML and KYC regulatory requirements. Because Bitfinex and Kraken do not conduct business in New York or with New York residents, and OKCoin International is only open to non-U.S. persons, the Sponsor intends to conduct its bitcoin trading on these three exchanges through the Subsidiary. As discussed above, the Sponsor does not expect the Trust to experience any differences between bitcoin exchange trades on the Trust’s behalf conducted through the Subsidiary versus those conducted by the Sponsor directly. According to the Registration Statement, during the preceding twelvemonth period (June 2015 through May 2016), the aggregate trading volume on the five constituent exchanges comprising the XBX (i.e., Bitfinex, Bitstamp, Coinbase, itBit and OKCoin International) represented approximately 80% of the entire global U.S. dollar-denominated bitcoin exchange market.23According to the 21 Kraken is located in San Francisco (‘‘Kraken’’). Although Kraken conducts U.S. dollar bitcoin trading, it is primarily a euro-denominated bitcoin exchange. 22 The Sponsor intends to trade with OKCoin International, the Singaporean entity, and not with the yuan-denominated OKCoin Exchange China. 23 In addition to the five constituent exchanges comprising the XBX, the global U.S. dollardenominated bitcoin exchange market also includes BTC-e, Gemini, LakeBTC (located in Shanghai, China) and Kraken. The Sponsor represents that although BTC-e is a U.S. dollar-denominated E:\FR\FM\02AUN1.SGM Continued 02AUN1 50768 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES Registration Statement, during the period April 2015 through April 2016 (including weekends and holidays), average daily bitcoin trading on Bitfinex, Bitstamp, Coinbase, Gemini, itBit and OKCoin International totaled approximately 64,000 bitcoin across all of those exchanges at prices that ranged between $217 and $469. Of that trading, Bitfinex accounted for 38%, Bitstamp accounted for 19%, Coinbase accounted for 13%, Gemini accounted for 1%, itBit accounted for 7% and OKCoin International accounted for 23%. With a Basket (as defined below) size of 1,000 bitcoin, the creation or redemption of one Basket would represent approximately 1.5% of the aggregate daily U.S. dollar-denominated bitcoin trading volume across these exchanges and approximately 1% of the aggregate daily (i) U.S. dollar-denominated bitcoin trading volume on these exchanges plus (ii) global U.S. dollardenominated OTC bitcoin trading volume. The Sponsor has established, on behalf of the Trust, DVP and RVP trading arrangements with several of the U.S. dollar-denominated bitcoin exchanges pursuant to which the Trust will be able to minimize exchange counterparty risk. These arrangements are on a trade-by-trade basis and do not bind the Sponsor or the Trust to continue to trade with any exchange. Under these arrangements, the Sponsor, on behalf of the Trust, will receive bitcoin from an exchange that has entered into a DVP/RVP arrangement with the Sponsor without having to deposit U.S. dollars with the exchange prior to trade execution. Once the Sponsor receives the bitcoin it purchased, the Sponsor will within 24 hours wire U.S. dollars to the exchange to settle the trade. When selling bitcoin on behalf of the Trust, an exchange that has entered into a DVP/RVP arrangement with the Sponsor will permit the Sponsor to sell bitcoin on the exchange without the need to deposit bitcoin with the exchange beforehand. The Sponsor will transmit bitcoin to the exchange only after the exchange has wired the U.S. dollar sales proceeds to the Sponsor. These DVP and RVP settlement terms reduce exchange counterparty risks for the Trust. bitcoin exchange with significant trading volume, BTC-e does not comply with certain of the Sponsor’s internal criteria regarding the exchanges on which the Sponsor will trade and, therefore, the Sponsor will not transact with BTC-e. The Sponsor represents that it is also aware of other smaller U.S. dollar-denominated bitcoin exchanges, but the trading volume on these exchanges is insignificant and the Sponsor does not intend to conduct business with these smaller exchanges. VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 Bitcoin Price Transparency According to the Registration Statement, bitcoin trading currently occurs globally across over 30 bitcoin exchanges and trades against over 20 government currencies 24-hours per day, 365 days per year. Individual bitcoin exchanges continually publish publicly available price and volume data that is utilized by service providers to create various bitcoin indexes. Bitcoin prices are also available via major market data vendors such as Bloomberg and Thomson Reuters. Realtime and historical price data is available through numerous public web platforms including: https:// tradeblock.com/; https:// www.coindesk.com/; https:// bitcoinaverage.com; and others. Although the trading volumes on BTCC, Huobi and OKCoin Exchange China are significant, trading on these exchanges is limited to Chinese yuan, and the Sponsor therefore does not intend to transact with these exchanges. The Sponsor intends to transact with U.S. dollar-denominated exchanges only. However, the Sponsor represents that the price of bitcoin on BTCC, Huobi and OKCoin Exchange China generally has been consistent with the price of bitcoin on U.S. dollar-denominated bitcoin exchanges, including Bitfinex, Bitstamp, Coinbase, itBit and OKCoin International. The Sponsor represents that because bitcoin trades on more than 30 exchanges globally on a 24-hour basis, it is difficult for attempted market manipulation on any one exchange to affect the global market price of bitcoin. Any such attempt to manipulate the price would result in an arbitrage opportunity among exchanges, which typically would be acted upon by market participants. In addition to the price transparency of the bitcoin exchange market itself, the Trust will provide information regarding the Trust’s bitcoin holdings as well as additional data regarding the Trust. The Sponsor expects that the dissemination of information on the Trust’s Web site, along with quotations for and last-sale prices of transactions in the Shares and the intra-day indicative value (‘‘IIV’’) and net asset value (‘‘NAV’’) of the Trust will help to reduce the ability of market participants to manipulate the bitcoin market or the price of the Shares and that the Trust’s arbitrage mechanism will facilitate the correction of price discrepancies in bitcoin and the Shares. The Sponsor believes that demand from new investors accessing bitcoin through investment in the Shares will broaden PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 the investor base in bitcoin, which could further reduce the possibility of collusion among market participants to manipulate the bitcoin market. According to the Sponsor, the XBX’s price variance weighting, which decreases the influence on the XBX of any particular exchange that diverges from the rest of the data points used by the XBX, reduces the possibility of an attempt to manipulate the price of bitcoin as reflected by the XBX. Bitcoin Trading Over-the-Counter OTC trading of bitcoin is generally accomplished via bilateral agreements on a principal-to-principal basis. All risks and issues of credit are between the parties directly involved in the transaction. The OTC market provides a relatively flexible market in terms of quotes, price, size and other factors. The OTC market has no formal structure and no open-outcry meeting place. Parties engaging in OTC transactions will agree upon a price—often via phone or email—and one of the two parties would then initiate the transaction. For example, a seller of bitcoin could initiate the transaction by sending the bitcoin to the buyer’s bitcoin address. The buyer would then wire U.S. dollars to the seller’s bank account. Based on its observations and experience in the market, the Sponsor estimates that the U.S. dollar OTC bitcoin trading volume globally represents on average approximately fifty percent of the trading volume of bitcoin traded globally in U.S. dollars on U.S. dollar-denominated bitcoin exchanges. According to the Registration Statement, transaction costs in the OTC market are negotiable between the parties and therefore vary with some participants willing to offer competitive prices for larger volumes, although this will vary according to market conditions. Cost indicators can be obtained from various information service providers, such as the bitcoin price indexes and bitcoin exchanges. OTC trading tends to be in large blocks of bitcoin and between institutions. In addition to using Bitfinex, Bitstamp, Coinbase, Gemini, itBit, Kraken and OKCoin International to buy and sell bitcoin, the Trust intends to participate in the OTC bitcoin market when such market opportunities are deemed by the Sponsor to be advantageous for the Trust. The Sponsor currently expects that often it will be more cost efficient to effect large trades (e.g., $500,000 or greater) on behalf of the Trust in the OTC market rather than on a bitcoin exchange. The Sponsor E:\FR\FM\02AUN1.SGM 02AUN1 mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices therefore expects to conduct most of its trading in the OTC bitcoin market. When deciding whether to buy and sell bitcoin in the OTC market, the Sponsor will consider various market factors, including the total U.S. dollar size of the trade, the volume of bitcoin traded across the various U.S. dollardenominated bitcoin exchanges during the preceding 24-hour period, available liquidity offered by OTC market participants and the bid and ask quotes offered by OTC market participants. The Sponsor’s experience is that the prices at which trades in the OTC market are executed closely correspond to the XBX. The Sponsor expects the price at which it will trade bitcoin in the OTC market will generally track the XBX, and, therefore, should not affect the Trust’s ability to track the XBX. The Sponsor also maintains an internal proprietary database, which it does not share with anyone, of potential OTC bitcoin trading counterparties, including hedge funds, family offices, private wealth managers and high-net-worth individuals. All such potential counterparties will be subject to the Sponsor’s AML and KYC compliance procedures. The Sponsor will add additional potential counterparties to its internal proprietary database as it becomes aware of additional market participants. The Sponsor will decide whether or not to trade with OTC counterparties based on its ability to fill orders at the best available price amongst OTC market participants and bitcoin exchanges. Generally, the Sponsor will directly place purchase or sale orders for bitcoin on behalf of the Trust with participants in the OTC markets using DVP and RVP style arrangements. While the Sponsor expects that most of its bitcoin trading with exchanges and OTC counterparties on behalf of the Trust will occur pursuant to DVP and RVP arrangements, the Sponsor may also enter into collateral arrangements with certain bitcoin exchanges and OTC counterparties where DVP and RVP arrangements are not practicable. Such collateral arrangements require the Sponsor, out of its own assets, and the bitcoin exchange or OTC counterparty to open and maintain collateral deposit accounts with a bank or similar financial intermediary for the purpose of collateralizing pending bitcoin transactions effected by the Sponsor on behalf of the Trust and the bitcoin exchange or OTC counterparty. The Trust would not pledge (or receive) collateral pursuant to these arrangements and the Sponsor would bear any exchange counterparty risk. The Sponsor represents that a default of an exchange or OTC counterparty under VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 such arrangement would have no greater impact on the Trust than a default under the DVP and RVP arrangements. To the extent a Basket creation or redemption order necessitates the buying or selling of a large block of bitcoin (e.g., an amount that if an order were placed on an exchange would potentially move the price of bitcoin), the Sponsor represents that placing such a trade in the OTC market may be advantageous to the Trust. OTC trades help avoid factors such as potential price slippage (causing the price of bitcoin to move as the order is filled on the exchange), while offering speed in trade execution and settlement (an OTC trade can be executed immediately upon agreement of terms between counterparties) and privacy (to avoid other market participants entering trades in advance of a large block order). OTC bitcoin trading is typically private and not regularly reported. For example, Genesis Global Trading and itBit release periodic reports that discuss their respective OTC trading volumes. The Trust does not intend to report its OTC trading. Regardless of whether the Sponsor buys bitcoin on an exchange or in the OTC market, the Sponsor expects the Trust to take custody of bitcoin within one business day of receiving an order from an Authorized Participant to create a Basket (as defined in ‘‘Creation and Redemption of Shares’’ below). Historical Chart of the Price of Bitcoin The price of bitcoin is volatile and fluctuations are expected to have a direct impact on the value of the Shares. However, movements in the price of bitcoin in the past are not a reliable indicator of future movements. Movements may be influenced by various factors, including supply and demand, geo-political uncertainties, economic concerns such as inflation and real or speculative investor interest.24 Additional Bitcoin Trading Products Certain non-U.S. based bitcoin exchanges offer derivative products on 24 Attached as Exhibit 3, Item 2 is a chart illustrating the changes in the price of bitcoin during the period July 2010 through March 2016. Attached as Exhibit 3, Item 3 is a chart comparing the trailing calendar month volatility in the price of bitcoin compared to the trailing calendar month volatility in the prices of gold, platinum, copper and oil during the period May 1, 2014 through May 31, 2016 (excluding holidays and weekends). Attached as Exhibit 3, Item 4 is a chart comparing the trailing calendar month volatility in the price of bitcoin compared to the trailing calendar month volatility in the prices of gold, platinum, copper and oil during the period March 1, 2016 through May 31, 2016 (excluding holidays and weekends). PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 50769 bitcoin such as options, swaps and futures. According to the Registration Statement, BitMex (based in the Republic of Seychelles), CryptoFacilites (based in the United Kingdom), 796 Exchange (based in China) and OKCoin Exchange China all offer futures contracts settled in bitcoin. Coinut, based in Singapore, offers bitcoin binary options and vanilla options based on the Coinut index. Nadex, based in Chicago, offers bitcoin binary options denominated in U.S. dollars using the TeraBit Bitcoin Price Index.25 IGMarkets (based in the United Kingdom), Avatrade (based in Ireland) and Plus500 (based in Israel) also offer bitcoin derivative products. The Commodity Futures Trading Commission (‘‘CFTC’’) has approved TeraExchange, LLC as a swap execution facility (‘‘TeraExchange’’) and LedgerX provisionally as a swap execution facility, where bitcoin swap and nondeliverable forward contracts may be entered into. The CFTC commissioners have expressed publicly that derivatives based on bitcoin are subject to regulation by the CFTC, including oversight to prevent market manipulation of the price of bitcoin. In addition, the CFTC has stated that bitcoin and other virtual currencies are encompassed in the definition of commodities under the CEA.26 In May 2015, the Swedish FSA approved the prospectus for ‘‘Bitcoin Tracker One’’, an open-ended exchangetraded note that tracks the price of bitcoin in U.S. dollars. The Bitcoin Tracker One initially traded in Swedish krona on the Nasdaq Nordic in Stockholm, but is now also available to trade in euro. The Bitcoin Tracker One is available to retail investors in the European Union and to those investors in the U.S. who maintain brokerage accounts with Interactive Brokers. Founded in 2013, Bitcoin Investment Trust, a private, open-ended trust available to accredited investors, is another investment vehicle that derives 25 The TeraBit Bitcoin Price Index is disseminated by TeraExchange. 26 See ‘‘In the Matter of Coinflip, Inc.’’ (CFTC Docket 15–29 (September 17, 2015)) (order instituting proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making findings and imposing remedial sanctions), in which the CFTC stated the following: ‘‘Section 1a(9) of the CEA defines ‘commodity’ to include, among other things, ‘all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.’ 7 U.S.C. 1a(9). The definition of a ‘commodity’ is broad. See, e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.’’ E:\FR\FM\02AUN1.SGM 02AUN1 50770 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES its value from the price of bitcoin. Eligible shares of the Bitcoin Investment Trust are quoted on the OTCQX marketplace under the symbol ‘‘GBTC’’. Bitcoin Security and Storage for the Trust According to the Sponsor, given the novelty and unique digital characteristics (as set forth above) of bitcoin as an innovative asset class, traditional custodians who normally custody assets do not currently offer custodial services for bitcoin. Accordingly, the Sponsor will secure the bitcoin held by the Trust using multi-signature ‘‘cold storage wallets’’, an industry best practice. A cold storage wallet is created and stored on a computer with no access to a network, i.e., an ‘‘air-gapped’’ computer with no ability to access the Internet. Such a computer is isolated from any network, including local or Internet connections. A multi-signature address is an address associated with more than one private key. For example, a ‘‘2 of 3’’ address requires two signatures (out of three) from two separate private keys (out of three) to move bitcoin from a sender address to a receiver address. The Sponsor will utilize bitcoin private keys that are generated and stored on air-gapped computers. The movement of bitcoin will require physical access to the air-gapped computers and use of multiple authorized signers. For backup and disaster recovery purposes, the Sponsor will maintain cold wallet backups in locations geographically distributed throughout the United States, including in the Northeast and Midwest. In addition to the Sponsor’s security system, the Sponsor has arranged for the Trust to maintain comprehensive insurance coverage underwritten by various insurance carriers. The purpose of the insurance is to protect investors against loss or theft of the Trust’s bitcoin. The insurance will cover loss of bitcoin by, among other things, theft, destruction, bitcoin in transit, computer fraud (i.e., hacking attack) and other loss of the private keys that are necessary to access the bitcoin held by the Trust. The coverage is subject to certain terms, conditions and exclusions, as discussed in the Registration Statement. The insurance policy will carry initial limits of $25 million in primary coverage and $100 million in excess coverage, with the ability to increase coverage depending on the value of the bitcoin held by the Trust. The Sponsor expects that the Trust’s auditor will verify the existence of bitcoin held in custody by the Trust. In addition, the Trust’s insurance carriers VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 will have inspection rights associated with the bitcoin held in custody by the Trust. Bitcoin Market Price In the ordinary course of business, the Administrator will value the bitcoin held by the Trust based on the price set by the XBX as of 4:00 p.m., E.T., on the valuation date on any day that the NYSE Arca is open for regular trading. For further detail, see (i) below. If the procedures described in (i) fail and the Administrator is unable to value the Trust’s bitcoin using the procedures described in (i), the Administrator will value the Trust’s bitcoin using the cascading set of rules set forth in (ii) through (iv) below; the methodology used to established the value of the bitcoin held by the Trust will be the ‘‘bitcoin Market Price’’. For the avoidance of doubt, the Administrator will employ the below rules sequentially and in the order as presented, should the Sponsor determine that one or more specific rule(s) fails. The Sponsor may determine that a rule has failed if the pricing source is unavailable or, in the judgment of the Sponsor, is deemed unreliable. To the extent the Administrator uses any of the cascading set of rules, the Sponsor will make public on the Trust’s Web site the rule being used. (i) bitcoin Market Price = The price set by the XBX as of 4:00 p.m., E.T., on the valuation date. The XBX is a realtime U.S. dollar-denominated composite reference rate for the price of bitcoin. The XBX calculates the intra-day price of bitcoin every second, including the closing price as of 4:00 p.m., E.T. The intra-day price and closing price are based on a methodology that consists of collecting and cleansing actual trade data from several bitcoin exchanges included within the XBX. TradeBlock uses standardized eligibility criteria based on periodically-reviewed governance principles to select trading venues for inclusion in the XBX. As of June 30, 2016, the eligible bitcoin exchanges selected by TradeBlock for inclusion in the XBX are Bitfinex, Bitstamp, Coinbase, itBit and OKCoin International. The logic utilized for the derivation of the daily closing index level is intended to analyze actual bitcoin transactional data, verify and refine the data set and yield an objective, fair-market value of one bitcoin as of 4:00 p.m., E.T., each weekday, priced in U.S. dollars. (ii) bitcoin Market Price = The price set by the CoinDesk Bitcoin Price Index XBP as of 4:00 p.m., E.T., on the valuation date. The XBP is a U.S. dollar- PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 denominated composite reference rate for the price of bitcoin based on the volume-weighted price at trading venues selected by CoinDesk. Trading venues used to calculate the XBP may include bitcoin exchanges, OTC markets or derivative platforms. CoinDesk uses its discretion to select trading venues that will be included in the XBP based on guidelines, including depth of liquidity, compliance with applicable legal and regulatory requirements, data availability, domicile in the United States and acceptance of U.S. dollar deposits. To calculate the reference rate, trade data is cleansed and compiled in such a manner as to algorithmically reduce the impact of anomalistic or manipulative trading. This is accomplished by adjusting the weight of each data input based on price deviation relative to the observable set of data for the relevant trading venue, as well as recent and long-term trading volume at each venue relative to the observable set for the relevant trading venues. To calculate volume-weighted price, the weighting algorithm is applied to the price and volume of all inputs for the immediately preceding 24-hour period at 4:00 p.m., E.T., on the valuation date. (iii) bitcoin Market Price = The volume-weighted average bitcoin price for the immediately preceding 24-hour period at 4:00 p.m., E.T., on the valuation date as published by an alternative third party’s public data feed that the Sponsor determines is reasonably reliable, subject to the requirement that such data is calculated based upon a volume-weighted average bitcoin price obtained from the major U.S. dollar-denominated bitcoin exchanges (‘‘Second Source’’). Subject to the next sentence, if the Second Source becomes unavailable (e.g., data sources from the Second Source for bitcoin prices become unavailable, unwieldy or otherwise impractical for use), or if the Sponsor determines in good faith that the Second Source does not reflect an accurate bitcoin price, then the Sponsor will, on a best efforts basis, contact the Second Source in an attempt to obtain the relevant data. If after such contact the Second Source remains unavailable or the Sponsor continues to believe in good faith that the Second Source does not reflect an accurate bitcoin price, then the Administrator will employ the next rule to determine the bitcoin Market Price. (iv) bitcoin Market Price = The Sponsor will use its best judgment to determine a good faith estimate of the bitcoin Market Price. E:\FR\FM\02AUN1.SGM 02AUN1 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices The Trust According to the Registration Statement, the Trust will invest in bitcoin only. The Trust will cause the Sponsor to either (i) receive bitcoin from the Trust in such quantity as may be necessary to pay the Sponsor’s management fee and other Trust expenses and liabilities not assumed by the Sponsor or (ii) sell bitcoin in such quantity as may be necessary to permit payment in cash of the Sponsor’s management fee and other Trust expenses and liabilities not assumed by the Sponsor. As a result, the amount of bitcoin sold will vary from time to time depending on the level of the Trust’s expenses and the market price of bitcoin. The Trust will pay the Sponsor a management fee as compensation for services performed on behalf of the Trust and for services performed in connection with maintaining the Trust. The Sponsor’s fee will be payable monthly in arrears and will be accrued daily. The Sponsor will be responsible for paying all of the routine operational, administrative and other ordinary expenses of the Trust, including, but not limited to, the fees and expenses of the Trustee and Administrator, custody fees, transfer agency fees, distribution and marketing fees, up to $100,000 per annum in legal fees, audit and accounting fees and expenses, filing fees, exchange listing fees and printing, mailing and duplication costs. The Sponsor will also be responsible for paying the premiums associated with the insurance coverage of the bitcoin held by the Trust. The Trust will be responsible for paying, or for reimbursing the Sponsor or its affiliates for paying, all the extraordinary fees and expenses, if any, of the Trust. The management fee to be paid to the Sponsor is expected to be the only ordinary recurring operating expense of the Trust. mstockstill on DSK3G9T082PROD with NOTICES Net Asset Value The NAV for the Trust will equal the market value of the Trust’s total assets, including bitcoin and cash, less liabilities of the Trust, which include estimated accrued but unpaid fees, expenses and other liabilities. Under the Trust’s proposed operational procedures, the Administrator will calculate the NAV on each business day that the NYSE Arca is open for regular trading, as promptly as practicable after 4:00 p.m., E.T. To calculate the NAV, the Administrator will use the bitcoin Market Price. The Administrator will also determine the NAV per Share by VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 dividing the NAV of the Trust by the number of the Shares outstanding as of the close of trading on the NYSE Arca Core Trading Session, i.e., 9:30 a.m. to 4:00 p.m., E.T. (which includes the net number of any Shares deemed created or redeemed on such day). According to the Registration Statement, Authorized Participants (as defined in ‘‘Creation and Redemption of Shares’’ below), or their clients or customers, may have an opportunity to realize a riskless profit if they can create a Basket (as defined in ‘‘Creation and Redemption of Shares’’ below) at a discount to the public trading price of the Shares or can redeem a Basket at a premium over the public trading price of the Shares. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price to track NAV per Share closely over time. Such arbitrage opportunities will not be available to holders of Shares who are not Authorized Participants. The Sponsor represents that bitcoin is a bearer asset, so unlike most financial assets within the modern financial system, Authorized Participants seeking to acquire quantities of bitcoin will require specialized knowledge to source and secure the bitcoin. Such potential holders of bitcoin without sufficient technological knowledge will encounter both counterparty and custodial issues that will effectively lock them out of accessing the bitcoin market. Therefore, although there is nothing preventing Authorized Participants from participating directly in the bitcoin market, the Sponsor believes, based on the current state of the bitcoin market and its participants, many probably will not until such time as the bitcoin market matures so that the technological, counterparty and custodial issues evolve to become similar to those of traditional financial instruments. Notwithstanding the foregoing, the Sponsor believes, based on conversations with market participants, that one or more Authorized Participants and/or market makers may be interested in participating directly in the bitcoin market and creating or redeeming Baskets in-kind. According to the Sponsor, whether creating and redeeming baskets in-kind or for cash, Authorized Participants and market makers can hedge their exposure to bitcoin using non-deliverable forward contracts (‘‘NDFs’’) and swap contracts that will create synthetic long and short exposure to bitcoin. NDFs will be offered by several participants in the bitcoin marketplace, including bitcoin PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 50771 exchanges, bitcoin OTC market participants and the Sponsor itself, operating on a principal basis. Such arrangements make it possible for Authorized Participants that lack the trading infrastructure to transact in bitcoin to be able to hedge their exposure by entering into an NDF or swap contract. Accordingly, an Authorized Participant may hedge its exposure to bitcoin without the need to custody bitcoin, or to engage a third party to custody bitcoin. In addition, to the extent requested by Authorized Participants and market makers, the Sponsor will act as agent by buying and selling bitcoin on behalf of the Authorized Participants and market makers, including short sale orders for hedging purposes. The NDF and swap contracts that the Sponsor will enter into as agent on behalf of the Authorized Participants and market makers will be bespoke, OTC and cash settled. The terms of the NDF and swap contracts will be negotiated between the counterparties to the NDF and swap contracts. The NDF and swap contracts may be traded electronically on at least one swap execution facility. Generally, the NDF and swap contract strike prices will be based on the bitcoin spot price, as determined by the XBX, or other pricing source as agreed to between the NDF and swap contract counterparties, when the contract is entered into. The NDF termination price will be based on the NAV of the Trust determined as of 4:00 p.m., E.T. The terms of the NDF and swap contracts will be governed by International Swaps and Derivatives Associations, Inc. (‘‘ISDA’’) agreements. The ISDA terms, including to the extent necessary any collateral arrangements, will be negotiated between the counterparties to the NDF and swap contracts. While the Trust’s investment objective is to seek to provide shareholders with exposure to the daily change in the U.S. dollar price of bitcoin, before expenses and liabilities of the Trust, as measured by the XBX, the Shares may trade in the secondary market at prices that are lower or higher relative to their NAV per Share. The NAV per Share may fluctuate with changes in the market value of the bitcoin held by the Trust. The value of the Shares may be influenced by nonconcurrent trading hours between NYSE Arca and the various bitcoin exchanges comprising the XBX, all of which constituent bitcoin exchanges operate 24 hours per day, 365 days per year. As a result, there will be periods when the NYSE Arca is closed and such bitcoin exchanges continue to trade. Significant E:\FR\FM\02AUN1.SGM 02AUN1 50772 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES changes in the price of bitcoin on such exchanges could result in a difference in performance between the value of bitcoin as measured by the XBX and the most recent NAV per Share or closing trading price. The non-concurrent trading hours also may result in trading spreads and the resulting premium or discount on the Shares widening, increasing the difference between the price of the Shares and the NAV of such Shares. The price difference may also be due to the fact that supply and demand forces at work in the secondary trading market for Shares are closely related, but not identical, to the same forces influencing the XBX spot price. Consequently, an Authorized Participant may be able to create or redeem a Basket of Shares at a discount or a premium to the public trading price per Share. Impact on Arbitrage Investors and market participants are able throughout the trading day to compare the market price of the Shares and the Share’s IIV. According to the Sponsor, if the market price of the Shares diverges significantly from the IIV, Authorized Participants will have an incentive to execute arbitrage trades. Because of the potential for arbitrage inherent in the structure of the Trust, the Sponsor believes that the Shares will not trade at a material discount or premium to the underlying bitcoin held by the Trust. The arbitrage process, which in general provides investors the opportunity to profit from differences in prices of assets, increases the efficiency of the markets, serves to prevent potentially manipulative efforts, and can be expected to operate efficiently in the case of the Shares and bitcoin. For example, if the Shares appear to be trading at a discount compared to the IIV, an Authorized Participant could buy the Shares on the NYSE Arca and simultaneously hedge their exposure to the price of the Shares by entering into an NDF or swap contract—in a dollar amount equal to the aggregate price of the Shares bought—that would provide the Authorized Participant with synthetic short exposure to bitcoin. The Authorized Participant then could redeem a Basket at NAV and realize a profit. Conversely, if the Shares appear to be trading at a premium compared to the IIV, an Authorized Participant could sell short the Shares on the NYSE Arca and simultaneously hedge their exposure to the short sale by entering into an NDF or swap contract—in a dollar amount equal to the aggregate price of the Shares sold—that would provide the Authorized Participant with VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 synthetic long exposure to bitcoin. The Authorized Participant then could create a Basket at NAV, use those newly created Shares to cover the short sale and realize a profit. Such arbitrage trades can tighten the tracking between the market price of the Shares and the IIV and thus can be beneficial to all market participants. Creation and Redemption of Shares According to the Registration Statement, the Trust will issue and redeem ‘‘Baskets’’, each equal to a block of 10,000 Shares, only to ‘‘Authorized Participants’’ (as described below). The size of a Basket is subject to change. The creation and redemption of Baskets will principally be made in exchange for the delivery to the Trust or the distribution by the Trust of the amount of cash or bitcoin represented by the combined NAV of the Baskets being created or redeemed, the amount of which will be based on the combined bitcoin represented by the number of Shares included in the Baskets being created or redeemed determined on the day the order to create or redeem Baskets is properly received. Orders to create and redeem Baskets may be placed only by Authorized Participants.27 A transaction fee will be assessed on all creation and redemption transactions effected in-kind. In addition, a variable transaction fee will be charged to the Authorized Participants for creations and redemptions effected in cash to cover the Trust’s expenses related to purchasing and selling bitcoin on bitcoin exchanges or in OTC transactions. Such expenses may vary, but the Trust currently expects such expenses to constitute 1% or less of the value of a Basket. Creation Procedures On any business day, an Authorized Participant may place an order with the Administrator to create one or more Baskets. For purposes of processing both purchase and redemption orders, a ‘‘business day’’ means any day other than a day when the NYSE Arca is closed for regular trading. Purchase 27 An Authorized Participant must: (1) Be a registered broker-dealer or other securities market participant, such as a bank or other financial institution, which, but for an exclusion from registration, would be required to register as a broker-dealer to engage in securities transactions and (2) be a participant in Depository Trust Company (‘‘DTC’’). To become an Authorized Participant, a person must enter into an ‘‘Authorized Participant Agreement’’ with the Sponsor and the Administrator. The Authorized Participant Agreement provides the procedures for the creation and redemption of Baskets and for the delivery of the cash (and, potentially, bitcoin inkind) required for such creations and redemptions. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 orders must be placed by 1:00 p.m., E.T. The day on which the Administrator receives a valid purchase order is the ‘‘purchase order date’’. Purchase orders are irrevocable. By placing a purchase order, and prior to delivery of such Baskets, an Authorized Participant’s DTC account will be charged the nonrefundable transaction fee due for the purchase order. Determination of Required Payment The total payment required to create each Basket is determined by calculating the NAV of 10,000 Shares of the Trust as of the closing time of the NYSE Arca Core Trading Session on the purchase order date. Baskets are issued as of 9:30 a.m., E.T., on the business day immediately following the purchase order date at the applicable NAV as of the closing time of the NYSE Arca Core Trading Session on the purchase order date, but only if the required payment has been timely received. Orders to purchase Baskets must be placed no later than 1:00 p.m., E.T., but the total payment required to create a Basket will not be determined until 4:00 p.m., E.T., on the date the purchase order is received. Authorized Participants therefore will not know the total amount of the payment required to create a Basket at the time they submit an irrevocable purchase order for the Basket. Valid orders to purchase Baskets received after 1:00 p.m., E.T., are considered received on the following business day. The NAV of the Trust and the total amount of the payment required to create a Basket could rise or fall substantially between the time an irrevocable purchase order is submitted and the time the amount of the purchase price in respect thereof is determined. The payment required to create a Basket typically will be made in cash, but it may also be made partially or wholly in-kind at the discretion of the Sponsor if the Authorized Participant requests to convey bitcoin directly to the Trust. To the extent the Authorized Participant places an in-kind order to create, the Authorized Participant must deliver bitcoin directly to the Sponsor (i.e., to the security system that holds the Trust’s bitcoin) and an amount of cash referred to as the ‘‘Cash Component’’, computed as described below, each no later than 1:00 p.m., E.T., on the date the purchase order is received. The amount of bitcoin delivered by the Authorized Participant must be in an amount equal to the number of bitcoin necessary to create a Basket as of 4:00 p.m., E.T., on the date the purchase order is received. Upon delivery of the bitcoin to the Sponsor’s security system and the Cash E:\FR\FM\02AUN1.SGM 02AUN1 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices Component to the Custodian, the Administrator will cause the Trust to issue a Basket to the Authorized Participant. Expenses relating to purchasing bitcoin in assembling an inkind creation Basket, such as bitcoin exchange-related fees and transaction fees, will be borne by Authorized Participants. With respect to creations in cash, Authorized Participants will be charged a variable transaction fee to cover expenses as set forth above. The Cash Component is an amount equal to the difference between the NAV of the Shares (per Basket) and the ‘‘Deposit Amount’’, which is an amount equal to the market value of bitcoin (per Basket) which, for this purpose, is calculated in the same manner as the Trust values its bitcoin as set forth in ‘‘bitcoin Market Price’’ above. The Cash Component serves to compensate for any difference between the NAV per Basket and the Deposit Amount. Payment of any tax or other fees and expenses payable upon transfer of bitcoin shall be the sole responsibility of the Authorized Participant purchasing a Basket. The Sponsor makes available through the National Securities Clearing Corporation (‘‘NSCC’’) on each business day, prior to the opening of business on the NYSE Arca, the amount of bitcoin required for an in-kind creation of a Basket. This amount is applicable in order to effect in-kind purchases of Baskets until such time as the nextannounced amount is made available. mstockstill on DSK3G9T082PROD with NOTICES Rejection of Purchase Orders The Administrator may reject a purchase order if: (i) It determines that the purchase order is not in proper form; (ii) the Administrator or the Sponsor believes the purchase order would have adverse tax consequences to the Trust or the shareholders; or (iii) circumstances outside the control of the Sponsor make it, for all practical purposes, not feasible to process creations of Baskets. The Administrator may reject a purchase order if the Sponsor thinks it is necessary or advisable for any reason, which the Sponsor determines is in the best interests of the Trust or shareholders. Redemption Procedures The procedures by which an Authorized Participant can redeem one or more Baskets mirror the procedures for the creation of Baskets. On any business day, an Authorized Participant may place an order with the Administrator to redeem one or more Baskets. Redemption orders must be placed no later than 1:00 p.m., E.T. The day on which the Administrator VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 receives a valid redemption order is the ‘‘redemption order date’’. Redemption orders are irrevocable. The redemption procedures allow only Authorized Participants to redeem Baskets. By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTC’s book-entry system to the Trust not later than 1:00 p.m., E.T., on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant’s DTC account will be charged the non-refundable transaction fee due for the redemption order. Determination of Redemption Proceeds The redemption proceeds from the Trust consist of the ‘‘cash redemption amount’’ and, if making an in-kind redemption, bitcoin. The cash redemption amount is equal to the combined NAV of the number of Baskets of the Trust requested in the Authorized Participant’s redemption order as of the closing time of the NYSE Arca Core Trading Session on the redemption order date. The Administrator will distribute the cash redemption amount at 4:00 p.m., E.T., on the business day immediately following the redemption order date through DTC to the account of the Authorized Participant as recorded on DTC’s book-entry system. At the discretion of the Sponsor and if the Authorized Participant requests to receive bitcoin directly, some or all of the redemption proceeds may be distributed to the Authorized Participant in-kind. Orders to redeem Baskets must be placed no later than 1:00 p.m., E.T., but the total amount of redemption proceeds typically will not be determined until after 4:00 p.m., E.T., on the date the redemption order is received. Authorized Participants therefore will not know the total amount of the redemption proceeds at the time they submit an irrevocable redemption order. Delivery of Redemption Proceeds The redemption proceeds due from the Trust are delivered to the Authorized Participant at 4:00 p.m., E.T., on the business day immediately following the redemption order date if, by such time on such business day immediately following the redemption order date, the Trust’s DTC account has been credited with the Baskets to be redeemed. If the Trust’s DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption distribution is delivered PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 50773 to the extent of whole Baskets received. Any remainder of the redemption distribution is delivered on the next business day to the extent of remaining whole Baskets received if the Sponsor receives the fee applicable to the extension of the redemption distribution date which the Sponsor may, from time to time, determine and the remaining Baskets to be redeemed are credited to the Trust’s DTC account by 4:00 p.m., E.T., on such next business day. Any further outstanding amount of the redemption order shall be cancelled. The Sponsor will also be authorized to deliver the redemption distribution notwithstanding that the Baskets to be redeemed are not credited to the Trust’s DTC account by 4:00 p.m., E.T., on the business day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Baskets through DTC’s book-entry system on such terms as the Sponsor may determine from time to time. In the case of in-kind redemptions, the Sponsor makes available through the NSCC, prior to the opening of business on the NYSE Arca on each business day, the amount of bitcoin per Basket that will be applicable to redemption requests received in proper form. To the extent the Authorized Participant places an in-kind order to redeem a Basket, the Sponsor will deliver, on the business day immediately following the day the redemption order is received, bitcoin to the Authorized Participant in an amount equal to the number of bitcoin necessary to redeem a Basket as of 4:00 p.m., E.T. Expenses relating to transferring bitcoin to an Authorized Participant in a redemption Basket will be borne by Authorized Participants via the redemption transaction fee. With respect to redemptions in cash, Authorized Participants will be charged a variable transaction fee to cover expenses as set forth above. Suspension or Rejection of Redemption Orders The Administrator may, in its discretion, suspend the right of redemption or postpone the redemption settlement date (1) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable or (2) for such other period as the Sponsor determines to be necessary for the protection of the shareholders. None of the Sponsor, the Administrator or the Custodian will be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement. E:\FR\FM\02AUN1.SGM 02AUN1 50774 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices The Administrator will reject a redemption order if the order is not in proper form as described in the Authorized Participant Agreement or if the fulfillment of the order, in the opinion of its counsel, might be unlawful. mstockstill on DSK3G9T082PROD with NOTICES Availability of Information The Trust’s Web site will provide an intra-day indicative value (‘‘IIV’’) per Share updated every 15 seconds, as calculated by the Exchange or a third party financial data provider during the Exchange’s Core Trading Session. The IIV will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during the NYSE Arca Core Trading Session to reflect changes in the value of the Trust’s bitcoin holdings during the trading day. The IIV disseminated during the NYSE Arca Core Trading Session should not be viewed as an actual real-time update of the NAV, which will be calculated only once at the end of each trading day. The IIV will be widely disseminated on a per Share basis every 15 seconds during the NYSE Arca Core Trading Session by one or more major market data vendors. In addition, the IIV will be published on the NYSE Global Index Feed and will be available through on-line information services such as Bloomberg and Reuters. The Web site for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) The current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the mid-point of the bid-ask price 28 in relation to the NAV as of the time the NAV is calculated (‘‘Bid-Ask Price’’) and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The Trust will also disseminate the Trust’s holdings on a daily basis on the Trust’s Web site. The price of bitcoin will be made available by one or more major market data vendors, updated at least every 15 seconds during the Exchange’s Core Trading Session. Information about the XBX, including key elements of how the XBX algorithm is calculated, is publicly 28 The bid-ask price of the Trust is determined using the highest bid and lowest offer on the Consolidated Tape as of the time of calculation of the closing day NAV. VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 available at https://tradeblock.com/ markets/index/. The NAV for the Trust will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. The Exchange will also make available on its Web site daily trading volume of the Shares, closing prices of the Shares and the corresponding NAV for the Trust. In addition, bitcoin prices are available from automated quotation systems, published or other public sources or on-line information services such as Bloomberg or Reuters. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). Quotation and last sale information for bitcoin will be widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. In addition, the complete realtime price (and volume) data for bitcoin is available by subscription from Reuters and Bloomberg. The spot price of bitcoin is available on a 24-hour basis from major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in bitcoin will be available from major market data vendors and from the exchanges on which bitcoin are traded. The normal trading hours for bitcoin exchanges are 24-hours per day, 365-days per year. The Trust will provide Web site disclosure of its bitcoin holdings daily. The Web site disclosure of the Trust’s portfolio composition will occur at the same time as the disclosure by the Sponsor of the portfolio composition to Authorized Participants so that all market participants are provided portfolio composition information at the same time. Therefore, the same portfolio information will be provided on the public Web site as well as in electronic files provided to Authorized Participants. Accordingly, each investor will have access to the current portfolio composition of the Trust through the Trust’s Web site. Trading Rules The Trust will be subject to the criteria in NYSE Arca Equities Rule 8.201, including 8.201(e), for initial and continued listing of the Shares. A minimum of 100,000 Shares will be required to be outstanding at the start of trading. With respect to application of Rule 10A–3 under the Act, the Trust will rely on the exception contained in Rule 10A–3(c)(7). The Exchange believes that the anticipated minimum PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 number of Shares outstanding at the start of trading is sufficient to provide adequate market liquidity. The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. Trading in the Shares on the Exchange will occur in accordance with NYSE Arca Equities Rule 7.34(a). The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Equities Rule 7.6, the minimum price variation (‘‘MPV’’) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for order entry is $0.0001. Further, NYSE Arca Equities Rule 8.201 sets forth certain restrictions on Equity Trading Permit Holders (‘‘ETP Holders’’) acting as registered Market Makers in the Shares to facilitate surveillance. Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP Holder acting as a registered Market Maker in the Shares is required to provide the Exchange with information relating to its trading in the underlying bitcoin, related futures or options on futures or any other related derivatives. Commentary .04 of NYSE Arca Equities Rule 6.3 requires an ETP Holder acting as a registered Market Maker, and its affiliates, in the Shares to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of any material nonpublic information with respect to such products, any components of the related products, any physical asset or commodity underlying the product, applicable currencies, underlying indexes, related futures or options on futures and any related derivative instruments (including the Shares). As a general matter, the Exchange has regulatory jurisdiction over its ETP Holders and their associated persons, which include any person or entity controlling an ETP Holder. A subsidiary or affiliate of an ETP Holder that does business only in commodities or futures contracts would not be subject to Exchange jurisdiction, but the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member. With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. Trading on the Exchange in the Shares may be halted because of market E:\FR\FM\02AUN1.SGM 02AUN1 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which conditions in the underlying bitcoin markets have caused disruptions and/or lack of trading or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. In addition, trading in Shares will be subject to trading halts caused by extraordinary market volatility pursuant to the Exchange’s ‘‘circuit breaker’’ rule.29 The Exchange will halt trading in the Shares if the NAV of the Trust is not calculated or disseminated daily. The Exchange may halt trading during the day in which an interruption occurs to the dissemination of the IIV or to the dissemination of bitcoin pricing data by one or more bitcoin Market Price sources. If the interruption to the dissemination of the IIV or the value of bitcoin persists past the trading day in which it occurs, the Exchange will halt trading no later than the beginning of the trading day following the interruption.30 In addition, if the Exchange becomes aware that the NAV with respect to the Shares is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. Surveillance mstockstill on DSK3G9T082PROD with NOTICES The Exchange represents that trading in the Shares will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by the Financial Industry Regulatory Authority (‘‘FINRA’’) on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.31 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, 29 See NYSE Arca Equities Rule 7.12. Exchange notes that the Exchange may halt trading during the day in which an interruption to the dissemination of the IIV or the value of bitcoin occurs. 31 FINRA conducts cross market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. 30 The VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares with other markets and other entities that are members of the Intermarket Surveillance Group (‘‘ISG’’), and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement (‘‘CSSA’’).32 Also, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is able to obtain information regarding trading in the Shares and the underlying bitcoin or any bitcoin derivative through ETP Holders acting as registered Market Makers, in connection with such ETP Holders’ proprietary or customer trades through ETP Holders which they effect on any relevant market. The Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. All statements and representations made in this filing regarding (i) the description of the portfolio, (ii) limitations on portfolio holdings or reference assets or (iii) the applicability of Exchange rules and surveillance procedures shall constitute continued listing requirements for listing the Shares on the Exchange. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under NYSE Arca Equities Rule 5.5(m). Information Bulletin Prior to the commencement of trading, the Exchange will inform its 32 For the list of current members of ISG, see https://www.isgportal.org/home.html. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 50775 ETP Holders in an ‘‘Information Bulletin’’ of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares in Baskets (including noting that the Shares are not individually redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (3) how information regarding how the Index and the IIV are disseminated; (4) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; (5) the possibility that trading spreads and the resulting premium or discount on the Shares may widen during the Opening and Late Trading Sessions, when an updated IIV will not be calculated or publicly disseminated; and (6) trading information. For example, the Information Bulletin will advise ETP Holders, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Trust. The Exchange notes that investors purchasing Shares directly from the Trust will receive a prospectus. ETP Holders purchasing Shares from the Trust for resale to investors will deliver a prospectus to such investors. In addition, the Information Bulletin will reference that the Trust is subject to various fees and expenses as described in the Registration Statement. The Information Bulletin will disclose that information about the Shares of the Trust is publicly available on the Trust’s Web site. The Information Bulletin will also discuss any relief, if granted, by the Commission or the staff from any rules under the Act. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 33 that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange 33 15 E:\FR\FM\02AUN1.SGM U.S.C. 78f(b)(5). 02AUN1 mstockstill on DSK3G9T082PROD with NOTICES 50776 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices pursuant to the initial and continued listing criteria in NYSE Arca Equities Rule 8.201. The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares with other markets that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets. In addition, the Exchange may obtain information regarding trading in the Shares from markets that are members of ISG or with which the Exchange has in place a CSSA. Also, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is able to obtain information regarding trading in the Shares and the underlying bitcoin or any bitcoin derivative through ETP Holders acting as registered Market Makers, in connection with such ETP Holders’ proprietary or customer trades through ETP Holders which they effect on any relevant market. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that there is a considerable amount of bitcoin price and bitcoin market information available on public Web sites and through professional and subscription services. Investors may obtain on a 24hour basis bitcoin pricing information based on the spot price for bitcoin from various financial information service providers. The closing price and settlement prices of bitcoin are readily available from the bitcoin exchanges and other publicly available Web sites. In addition, such prices are published in public sources or on-line information services such as Bloomberg and Reuters. The Trust will provide Web site disclosure of its bitcoin holdings daily. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. The IIV will be widely disseminated on a per Share basis every 15 seconds during the NYSE Arca Core Trading Session by one or more major market data vendors. In addition, the IIV will be published on the NYSE Global Index Feed and will be available through on-line information services such as Bloomberg and Reuters. The Exchange represents that the Exchange may halt trading during the day in which an interruption to the dissemination of the IIV or the value of VerDate Sep<11>2014 18:35 Aug 01, 2016 Jkt 238001 bitcoin occurs. If the interruption to the dissemination of the IIV or the value of bitcoin persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. In addition, if the Exchange becomes aware that the NAV with respect to the Shares is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. The NAV per Share will be calculated daily and made available to all market participants at the same time. One or more major market data vendors will disseminate for the Trust on a daily basis information with respect to the recent NAV per Share and Shares outstanding. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a CSSA. In addition, as noted above, investors will have ready access to information regarding the Trust’s bitcoin holdings, IIV and quotation and last sale information for the Shares. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of an additional type of exchange-traded product, and the first such product based on bitcoin, which will enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this 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 such proposed rule change; or (b) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–NYSEArca–2016–101 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2016–101. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the E:\FR\FM\02AUN1.SGM 02AUN1 50777 Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Notices filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEArca–2016–101 and should be submitted on or before August 23, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–18204 Filed 8–1–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–78427; File No. SR–BOX– 2016–34] Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule on the BOX Market LLC (‘‘BOX’’) Options Facility July 27, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 18, 2016, BOX Options Exchange LLC (the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange filed the proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange is filing with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change to amend the Fee Schedule to on the BOX Market LLC (‘‘BOX’’) options facility. While changes to the fee schedule pursuant to this proposal will be effective upon filing, the changes will become operative on August 1, 2016. The text of the proposed rule change is available from the principal office of the Exchange, at the Commission’s Public Reference Room and also on the Exchange’s Internet Web site at https:// boxexchange.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to make a number of changes to the BOX Fee Schedule. Exchange Fees PIP and COPIP Transactions The Exchange proposes to remodel the current fee structure for PIP and COPIP Transactions. Currently, PIP and COPIP transactions are assessed fees based upon the account type of the Participant and whether the order is a: (i) PIP or COPIP Order; (ii) Improvement Order in PIP or COPIP; or (iii) Primary Improvement Order. The current PIP and COPIP Transactions fee structure is as follows: Account type Public customer PIP Order or COPIP Order 5 .................... Improvement Order in PIP or COPIP 6 ..... Primary Improvement Order 7 ................... Professional customer Broker dealer $0.00 ........................... $0.15 ........................... See Section I. B.1 ....... $0.15 ........................... $0.37 ........................... See Section I. B.1 ....... $0.15 ........................... $0.37 ........................... See Section I. B.1 ....... mstockstill on DSK3G9T082PROD with NOTICES First, the Exchange proposes to restructure the PIP and COPIP Transactions fee schedule to differentiate between fees assessed in Penny and Non-Penny Pilot Classes. Next, the Exchange proposes to adjust the Improvement Order fees assessed for Broker Dealers, Professional Customers 34 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). PIP Order or COPIP Order is a Customer Order (an agency order for the account of either a customer or a broker-dealer) designated for the PIP or COPIP, respectively. 5A 1 15 VerDate Sep<11>2014 18:35 Aug 01, 2016 and Market Makers. Specifically, the Exchange proposes to establish a fee of $0.12 for Broker Dealers, Professional Customer and Market Maker Improvement Orders in Penny Pilot Classes. For Improvement Orders in Non-Penny Pilot Classes, the Exchange proposes to establish a fee of $0.38 for Jkt 238001 PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 Market maker $0.15. $0.30. See Section I. B.1. Market Makers, Broker Dealers and Professional Customers. Public Customer Improvement Order fees will remain the same, as well as the PIP and COPIP Order fees for all Participants. The proposed PIP and COPIP fee structure will be as follows: 6 An Improvement Order is a response to a PIP or COPIP auction. 7 A Primary Improvement Order is the matching contra order submitted to the PIP or COPIP on the opposite side of the PIP or COPIP order. E:\FR\FM\02AUN1.SGM 02AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 148 (Tuesday, August 2, 2016)]
[Notices]
[Pages 50763-50777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18204]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78426; File No. SR-NYSEArca-2016-101]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to the Listing and Trading of Shares
of SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201

July 27, 2016.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on July 13, 2016, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to list and trade shares of the following
under NYSE Arca Equities Rule 8.201: SolidX Bitcoin Trust (``Trust'').
The proposed rule change is available on the Exchange's Web site at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
Under NYSE Arca Equities Rule 8.201, the Exchange may propose to
list and/or trade pursuant to unlisted trading privileges (``UTP'')
``Commodity-Based Trust Shares''.\4\ The Exchange proposes to list and
trade shares (``Shares'') of the Trust pursuant to NYSE Arca Equities
Rule 8.201.\5\
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\4\ Commodity-Based Trust Shares are securities issued by a
trust that represent investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
Trust.
\5\ On July 11, 2016, the Trust filed a registration statement
(``Registration Statement'') on Form S-1 under the Securities Act of
1933 (15 U.S.C. 77a). The descriptions of the Trust, the Shares and
bitcoin contained herein are based, in part, on the Registration
Statement.
---------------------------------------------------------------------------

The sponsor of the Trust is SolidX Management LLC (``Sponsor''), a
Delaware limited liability company. The Sponsor is a wholly-owned
subsidiary of SolidX Partners Inc. The trustee for the Trust
(``Trustee'') serves pursuant to a trust agreement. The Bank of New
York Mellon will be the administrator (``Administrator'') and the
custodian, with respect to cash, of the Trust (``Custodian'').
The Trust is a grantor trust formed under the laws of the State of
New York. The Trust has no fixed termination date.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Trust's net assets.
The Trust's assets will consist of bitcoin \6\ held on the Trust's
behalf by the Sponsor utilizing a secure process as described below in
``bitcoin Security and Storage for the Trust''. The Trust will not
normally hold cash or any other assets, but may hold a very limited
amount of cash in connection with the creation and redemption of
``Baskets'' \7\ and to pay Trust expenses, as described below.
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\6\ A ``bitcoin'' is an asset that can be transferred among
parties via the Internet, but without the use of a central
administrator or clearing agency (``bitcoin''). The asset, bitcoin,
is generally written with a lower case ``b''. The asset, bitcoin, is
differentiated from the computers and software (or the protocol)
involved in the transfer of bitcoin among users, which constitute
the ``Bitcoin Network''. The asset, bitcoin, is the intrinsically
linked unit of account that exists within the Bitcoin Network. See
``bitcoin and the Bitcoin Industry'' below.
\7\ The Trust will issue and redeem ``Baskets'', each equal to a
block of 10,000 Shares, only to ``Authorized Participants''. See
``Creation and Redemption of Shares'' below.
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According to the Registration Statement, the Trust will invest in
bitcoin only. The activities of the Trust are limited to: (i) Issuing
Baskets in exchange for bitcoin or the cash deposited with the
Custodian as consideration; (ii) purchasing bitcoin from various
exchanges and in over-the-counter (``OTC'') transactions; (iii) selling
bitcoin (or transferring bitcoin, at the Sponsor's discretion) as
necessary to cover the Sponsor's management fee,

[[Page 50764]]

Trust expenses not assumed by the Sponsor and other liabilities; (iv)
selling bitcoin as necessary in connection with redemptions; (v)
delivering bitcoin or cash in exchange for Baskets surrendered for
redemption; and (vi) maintaining insurance coverage for the bitcoin
held by the Trust.
According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended,\8\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''),\9\ and neither the Sponsor nor the Trustee is
subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

\8\ 15 U.S.C. 80a-1.
\9\ 17 U.S.C. 1.
---------------------------------------------------------------------------

Investment Objective
According to the Registration Statement and as further described
below, the Trust will seek to provide investors with exposure to the
daily change in the U.S. dollar price of bitcoin, before expenses and
liabilities of the Trust, as measured by the TradeBlock XBX Index
(``XBX''). The Trust intends to achieve this objective by investing
substantially all of its assets in bitcoin traded on various domestic
and international bitcoin exchanges and OTC markets depending on
liquidity and otherwise at the Sponsor's discretion. The Trust is not
actively managed. It does not engage in any activities designed to
obtain a profit from, or to ameliorate losses caused by, changes in the
price of bitcoin.
Investment in Bitcoin
Subject to certain requirements and conditions described below and
in the Registration Statement, the Trust, under normal market
conditions,\10\ will use available offering proceeds to purchase
bitcoin that are traded on various domestic and international exchanges
and OTC markets, without being leveraged or exceeding relevant position
limits. Generally, the Sponsor will directly place purchase or sale
orders for bitcoin on behalf of the Trust on domestic and international
exchanges and with OTC participants using delivery-versus-payment
(``DVP'') and receive-versus-payment (``RVP'') arrangements.
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\10\ The term ``under normal circumstances'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the price of bitcoin or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar intervening
circumstance.
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Bitcoin and the Bitcoin Industry
General
The following is a brief introduction to the global bitcoin market.
The data presented below are derived from information released by
various third-party sources, including white papers, other published
materials, research reports and regulatory guidance.
The Bitcoin Network
A bitcoin is an asset that can be transferred among parties via the
Internet, but without the use of a central administrator or clearing
agency. The term ``decentralized'' is often used in descriptions of
bitcoin, in reference to bitcoin's lack of necessity for administration
by a central party. The Bitcoin Network (i.e., the network of computers
running the software protocol underlying bitcoin involved in
maintaining the database of bitcoin ownership and facilitating the
transfer of bitcoin among parties) and the asset, bitcoin, are
intrinsically linked and inseparable. Bitcoin was first described in a
white paper released in 2008 and published under the name ``Satoshi
Nakamoto'', and the protocol underlying bitcoin was subsequently
released in 2009 as open source software.
Bitcoin Ownership and the Blockchain
To begin using bitcoin, a user may download specialized software
referred to as a ``bitcoin wallet''. A user's bitcoin wallet can run on
a computer or smartphone. A bitcoin wallet can be used both to send and
to receive bitcoin. Within a bitcoin wallet, a user will be able to
generate one or more ``bitcoin addresses'', which are similar in
concept to bank account numbers, and each address is unique. Upon
generating a bitcoin address, a user can begin to transact in bitcoin
by receiving bitcoin at his or her bitcoin address and sending it from
his or her address to another user's address. Sending bitcoin from one
bitcoin address to another is similar in concept to sending a bank wire
from one person's bank account to another person's bank account.
Balances of the quantity of bitcoin associated with each bitcoin
address are listed in a database, referred to as the ``blockchain''.
Copies of the blockchain exist on thousands of computers on the Bitcoin
Network throughout the Internet. A user's bitcoin wallet will either
contain a copy of the blockchain or be able to connect with another
computer that holds a copy of the blockchain.
When a bitcoin user wishes to transfer bitcoin to another user, the
sender must first request a bitcoin address from the recipient. The
sender then uses his or her bitcoin wallet software, to create a
proposed addition to the blockchain. The proposal would decrement the
sender's address and increment the recipient's address by the amount of
bitcoin desired to be transferred. The proposal is entirely digital in
nature, similar to a file on a computer, and it can be sent to other
computers participating in the Bitcoin Network. Such digital proposals
are referred to as ``bitcoin transactions''. Bitcoin transactions and
the process of one user sending bitcoin to another should not be
confused with buying and selling bitcoin, which is a separate process
(as discussed below in ``bitcoin Trading On Exchanges'' and ``bitcoin
Trading Over-the-Counter'').
A bitcoin transaction is similar in concept to an irreversible
digital check. The transaction contains the sender's bitcoin address,
the recipient's bitcoin address, the amount of bitcoin to be sent, a
confirmation fee and the sender's digital signature. The sender's use
of his or her digital signature enables participants on the Bitcoin
Network to verify the authenticity of the bitcoin transaction.
A user's digital signature is generated via usage of the user's so-
called ``private key'', one of two numbers in a so-called cryptographic
``key pair''. A key pair consists of a ``public key'' and its
corresponding private key, both of which are lengthy numerical codes,
derived together and possessing a unique relationship.
Public keys are used to create bitcoin addresses. Private keys are
used to sign transactions that initiate the transfer of bitcoin from a
sender's bitcoin address to a recipient's bitcoin address. Only the
holder of the private key associated with a particular bitcoin address
can digitally sign a transaction proposing a transfer of bitcoin from
that particular bitcoin address.
A user's bitcoin address (which is derived from a public key) may
be safely distributed, but a user's private key must remain known
solely by its rightful owner. The utilization of a private key is the
only mechanism by which a bitcoin user can create a digital signature
to transfer bitcoin from him or herself to another user. Additionally,
if a malicious third party learns of a user's private key, that third
party could forge the user's digital signature and send the user's
bitcoin to any arbitrary bitcoin address (i.e., the third party could
steal the user's bitcoin).

[[Page 50765]]

When a bitcoin holder sends bitcoin to a destination bitcoin
address, the transaction is initially considered unconfirmed.
Confirmation of the validity of the transaction involves verifying the
signature of the sender, as created by the sender's private key.
Confirmation also involves verifying that the sender has not ``double
spent'' the bitcoin (e.g., confirming Party A has not attempted to send
the same bitcoin both to Party B and to Party C). The confirmation
process occurs via a process known as ``bitcoin mining''.
Bitcoin mining utilizes a combination of computer hardware and
software to accomplish a dual purpose: (i) To verify the authenticity
and validity of bitcoin transactions (i.e., the movement of bitcoin
between addresses) and (ii) the creation of new bitcoin. Neither the
Sponsor nor the Trust intends to engage in bitcoin mining.
Bitcoin miners do not need permission to participate in verifying
transactions. Rather, miners compete to solve a prescribed and
complicated mathematical calculation using computers dedicated to the
task. Rounds of the competition repeat approximately every ten minutes.
In any particular round of the competition, the first miner to find the
solution to the mathematical calculation is the miner who gains the
privilege of announcing the next block to be added to the blockchain.
A new block that is added to the blockchain serves to take all of
the recent-yet-unconfirmed transactions and verify that none are
fraudulent. The recent-yet-unconfirmed transactions also generally
contain transaction fees that are awarded to the miner who produces the
block in which the transactions are inserted, and thereby confirmed.
The successful miner also earns the so-called ``block reward'', an
amount of newly created bitcoin. Thus, bitcoin miners are financially
incentivized to conduct their work. The financial incentives received
by bitcoin miners are a vital part of the process by which the Bitcoin
Network functions.
Upon successfully winning a round of the competition (winning a
round is referred to as mining a new block), the miner then transmits a
copy of the newly-formed block to peers on the Bitcoin Network, all of
which then update their respective copies of the blockchain by
appending the new block, thereby acknowledging the confirmation of the
transactions that had previously existed in an unconfirmed state.
A recipient of bitcoin must wait until a new block is formed in
order to see the transaction convert from an unconfirmed state to a
confirmed state. According to the Registration Statement, with new
rounds won approximately every ten minutes, the average wait time for a
confirmation is five minutes.
The protocol underlying bitcoin provides the rules by which all
users and miners on the Bitcoin Network must operate. A user or miner
attempting to operate under a different set of rules will be ignored by
other network participants, thus rendering that user's or miner's
behavior moot. The protocol also lays out the block reward, the amount
of bitcoin that a miner earns upon creating a new block. The initial
block reward when Bitcoin was introduced in 2009 was 50 bitcoin per
block. That number has and will continue to halve approximately every
four years until approximately 2140, when it is estimated that block
rewards will go to zero. The next halving is projected for July 2016,
which will reduce the block reward to 12.5 bitcoin from its current
level of 25.\11\ The halving thereafter will occur in another four
years and will reduce the block reward to 6.25 bitcoin, and so on.
Currently, there are approximately 15 million bitcoin that have been
created, a number that will grow with certainty to a maximum of 21
million, estimated to occur by the year 2140. Bitcoin mining should not
be confused with buying and selling bitcoin, which, as discussed below,
is a separate process.
---------------------------------------------------------------------------

\11\ https://www.bitcoinblockhalf.com/.
---------------------------------------------------------------------------

Use of Bitcoin and the Blockchain
Beyond using bitcoin as a value transfer mechanism, applications
related to the blockchain technology underlying bitcoin have become
increasingly prominent.\12\ Blockchain-focused applications take
advantage of certain unique characteristics of the blockchain such as
secure time stamping (secure time stamps are on newly created blocks),
highly redundant storage (copies of the blockchain are distributed
throughout the Internet) and tamper-resistant data secured by secure
digital signatures.
---------------------------------------------------------------------------

\12\ Additional applications based on blockchain technology--
both the blockchain underlying bitcoin as well as separate public
blockchains incorporating similar characteristics of the blockchain
underlying bitcoin--are currently in development by numerous
entities, including financial institutions like banks.
---------------------------------------------------------------------------

According to the Registration Statement, blockchain-focused
applications in usage and under development include, but are not
limited to, supply chain management, secure cloud storage, identity
management, counterfeit and fraud detection systems, database security
enhancement, evidence capture, secure document and contract signing,
asset title transfer and financial asset settlement. Whether used for
value transfer or other blockchain-focused applications, each
transaction or use of the blockchain requires a fee, priced and paid in
bitcoin. Therefore, the usage of bitcoin, the asset, is inherently
involved in blockchain-focused applications, thus linking the growth
and adoption of blockchain-focused applications to the growth and
adoption of bitcoin.
According to the Registration Statement, as a value transfer
mechanism, over 100,000 merchants worldwide currently accept bitcoin as
payment for goods and services. Notable merchants accepting bitcoin for
certain types of purchases include Microsoft, Dell, Expedia,
Overstock.com and Dish Network. Common bitcoin purchases include Web
site hosting, home furnishings, gift cards and consumer electronics.
Bitcoin is also accepted by a number of non-profit organizations
worldwide, including United Way Worldwide, the American Red Cross,
Wikipedia and Fidelity Charitable.\13\
---------------------------------------------------------------------------

\13\ Attached as Exhibit 3, Item 1 is a chart setting forth a
summary of bitcoin transaction volume (i.e., transfers of bitcoin
between parties on the Bitcoin Network, which is different than and
should not be confused with bitcoin exchange-traded volume) from
January 2009 through January 2016.
---------------------------------------------------------------------------

Bitcoin Exchanges
Bitcoin exchanges operate Web sites that facilitate the purchase
and sale of bitcoin for various government-issued currencies, including
the U.S. dollar, the euro or the Chinese yuan. Activity on bitcoin
exchanges should not be confused with the process of users sending
bitcoin from one bitcoin address to another bitcoin address, the latter
being an activity that is wholly within the confines of the Bitcoin
Network and the former being an activity that occurs entirely on
private Web sites.
Bitcoin exchanges operate in a manner that is unlike the
traditional capital markets infrastructure in the U.S. and in other
developed nations. Bitcoin exchanges combine the process of order
matching, trade clearing, trade settlement and custody into a single
entity. For example, a user can send U.S. dollars via wire to a bitcoin
exchange and then visit the exchange's Web site to purchase bitcoin.
The entirety of the transaction--from trade to clearing to settlement
to custody (at least temporary custody)--is accomplished by the bitcoin
exchange in a matter of seconds. The user can then withdraw the
purchased bitcoin into a wallet to take custody of the bitcoin
directly.
According to the Registration Statement, there are currently
several

[[Page 50766]]

U.S.-based regulated entities that facilitate bitcoin trading and that
comply with U.S. anti-money laundering (``AML'') and know your customer
(``KYC'') regulatory requirements:
Coinbase, which is based in California, is a bitcoin
exchange that maintains money transmitter licenses in over thirty
states, the District of Columbia and Puerto Rico (``Coinbase'').
Coinbase is subject to the regulations enforced by the various state
agencies that issued their respective money transmitter licenses to
Coinbase. In New York, Coinbase applied for a BitLicense, a regulatory
framework created by the New York Department of Financial Services
(``DFS'') that sets forth consumer protection, AML compliance, and
cyber security rules tailored for digital currency companies operating
and transacting business in New York.
itBit is a bitcoin exchange that was granted a limited
purpose trust company charter by the DFS in May 2015 (``itBit'').
Limited purpose trusts, according to the DFS, are permitted to
undertake certain activities, such as transfer agency, securities
clearance, investment management, and custodial services, but without
the power to take deposits or make loans.
Gemini is a bitcoin exchange that is also regulated by the
DFS. In October 2015, the DFS granted Gemini authorization to operate
as a limited purpose trust company (``Gemini'').
SecondMarket, Inc. d/b/a Genesis Global Trading is a FINRA
member firm that makes a market in bitcoin by offering two-sided
liquidity (``Genesis Global Trading'').
According to the Registration Statement, the majority of bitcoin
transactions are executed on public bitcoin exchanges where bitcoin are
bought and sold daily for value in U.S. dollar, euro and other
government currencies. These bitcoin exchanges provide the most data
with respect to prevailing valuations of bitcoin. The exchanges
typically publish real-time trade data including last price, bid and
ask spread, and trade volume on their respective Web sites and through
application programming interfaces. As a result, the prices on bitcoin
exchanges are the most accurate expression of the value of bitcoin. The
XBX, which the Trust will use to calculate the net asset value of the
Shares, accordingly tracks the price of bitcoin across multiple
exchanges (see ``bitcoin Price Indexes'' below).
The bitcoin marketplace is a 24-hour, 365-day per year market.
There currently exist globally over 30 bitcoin exchanges. The Sponsor
represents that the exchanges with the most significant bitcoin trading
by volume (i.e., Bitfinex,\14\ Bitstamp,\15\ BTCC,\16\ BTC-e,\17\
Coinbase, Huobi,\18\ itBit, OKCoin Exchange China \19\ and OKCoin
International \20\) traded approximately 422 million bitcoin at U.S.
dollar converted prices ranging between $199 and $706 for a total trade
volume of over $154 billion during the period February 2014 through
January 2016. The Sponsor represents that average global daily trade
volume during this period was approximately $212 million.
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\14\ Bitfinex is a bitcoin exchange that facilitates U.S.
dollar-denominated bitcoin trading (``Bitfinex''). It is based in
Hong Kong and holds a Money Services Operator license issued by the
Customs and Excise Department, Money Services Supervision Bureau.
\15\ Bitstamp is a bitcoin exchange that facilitates U.S.
dollar-denominated bitcoin trading (``Bitstamp''). It is based in
the United Kingdom with offices in London, Luxembourg and New York.
The government of Luxembourg granted Bitstamp a license to operate
as a regulated bitcoin exchange in the European Union.
\16\ BTCC is a bitcoin exchange that is headquartered in
Shanghai and facilitates yuan-denominated bitcoin trading
(``BTCC'').
\17\ BTC-e is a U.S. dollar-denominated bitcoin exchange (``BTC-
e'').
\18\ Huobi is a bitcoin exchange that is based in Beijing and
facilitates yuan-denominated bitcoin trading.
\19\ OKCoin Exchange China is located in Beijing and facilitates
Chinese yuan-denominated bitcoin trading (``OKCoin Exchange
China'').
\20\ OKCoin International is located in Singapore and
facilitates U.S. dollar-denominated bitcoin trading (``OKCoin
International'').
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The various bitcoin exchanges are generally available to the public
through online web portals. Trading information, including pricing,
volumes, and order book is available on the exchanges' Web sites, and
most such information is publicly available to anyone who visits the
site. According to the Sponsor, for those exchanges that comply with
applicable KYC requirements, prior to trading bitcoin, users are
required to provide the exchange with KYC verifiable identification and
other such documentation. Once a user establishes an account with the
exchange, the user deposits government currency with the exchange by
completing a wire of government currency to the exchange's bank.
Bitcoin are traded with publicly disclosed valuations for each
transaction, measured by one or more government currencies such as the
U.S. dollar, the euro or the Chinese yuan. Bitcoin exchanges typically
report publicly on their site the valuation of each transaction and bid
and ask prices for the purchase or sale of bitcoin. Although each
bitcoin exchange has its own market price, it is expected that most
bitcoin exchanges' market prices should be relatively consistent with
the bitcoin exchange market average since market participants can
choose the bitcoin exchange on which to buy or sell bitcoin (i.e.,
exchange shopping). According to the Registration Statement, price
differentials across bitcoin exchanges enable arbitrage between bitcoin
prices on the various exchanges.
Bitcoin Price Indexes
XBX Index. Launched in July 2014, the XBX represents the value of
one bitcoin in U.S. dollars at any point in time and closes as of 4:00
p.m., Eastern time (``E.T.''), each weekday. The intra-day levels of
the XBX incorporate the real-time price of bitcoin based on trading
activity derived from constituent exchanges throughout each trading
day. The closing level of the XBX is calculated using a proprietary
methodology utilizing bitcoin trading data from constituent exchanges
and is published at or after 4:00 p.m., E.T., each weekday. The XBX is
published to two decimal places rounded on the last digit.
Schvey, Inc. d/b/a TradeBlock (``TradeBlock'') is the index sponsor
and calculation agent for the XBX. The Sponsor has entered into a
licensing agreement with TradeBlock to use the XBX. The Trust is
entitled to use the XBX pursuant to a sub-licensing arrangement with
the Sponsor.
The XBX is a real-time U.S. dollar-denominated composite reference
rate for the price of bitcoin. The XBX calculates the intra-day price
of bitcoin every second, including the closing price as of 4:00 p.m.,
E.T. The intra-day price and closing price are based on a methodology
that consists of collecting and cleansing actual trade data from
several bitcoin exchanges included within the XBX.
According to the Registration Statement, to ensure that
TradeBlock's exchange selection process is impartial, TradeBlock
implements a standardized eligibility criteria framework based on
periodically-reviewed governance principles that includes elements such
as depth of liquidity, compliance with applicable legal and regulatory
requirements, data availability and acceptance of U.S. dollar deposits.
As of June 30, 2016, the eligible bitcoin exchanges selected by
TradeBlock for inclusion in the XBX are Bitfinex, Bitstamp, Coinbase,
itBit and OKCoin International. The XBX currently does not include any
other bitcoin exchanges, derivative exchanges, dark pools, OTC or other
trading venues.
The logic utilized for the derivation of the daily closing index
level for the XBX

[[Page 50767]]

is intended to analyze actual bitcoin transactional data, verify and
refine the data set and yield an objective, fair-market value of one
bitcoin as of 4:00 p.m., E.T., each weekday, priced in U.S. dollars. As
discussed herein, the XBX intra-day price and the XBX closing price are
collectively referred to as the XBX price, unless otherwise noted.
The key elements of the algorithm underlying the XBX include:
Volume/Liquidity Weighting: Exchanges with greater
liquidity receive a higher weighting in the XBX, increasing the ability
to execute against the XBX in the underlying spot markets. Liquidity
weighting also mitigates the impact of volume spikes during off-peak
trading hours.
Price Variance Weighting: The XBX price reflects data
points that are discretely weighted in proportion to their variance
from contemporaneous pricing reflected on the XBX's constituent
exchanges. As the price at a particular exchange diverges from the rest
of the data points, its influence on the XBX consequently decreases.
Inactivity Adjustment: The algorithm penalizes stale ticks
on any given exchange. If an exchange does not have recent trading
data, its weighting is gradually reduced, until it is de-weighted
entirely. Similarly, once activity resumes, the corresponding weighting
for that constituent is gradually increased until it reaches the
appropriate level.
Thin Order Books: The XBX minimizes the impact of thin
order books and fluctuating prices, which provides a more stable and
reliable benchmark for the price of bitcoin.
The XBX index calculation methodology and governance protocol are
based on principles established by the International Organization of
Securities Commissions for financial benchmarks. TradeBlock conducts a
quarterly review of the constituent exchanges and the algorithm used to
calculate XBX prices and maintains a history of all updates. In the
event of market stress or unresponsive input data from the constituent
exchanges, the XBX algorithm will incorporate a minimum of one input to
calculate a benchmark value. In the unlikely event of no input data
from all constituent values, the XBX will default to the most recent
value for which one or more inputs were present.
The Sponsor is not aware of any bitcoin derivatives currently
trading based on the XBX.
NYXBT Index. Launched in May 2015, the NYSE Bitcoin Index
(``NYXBT'') represents the value of one bitcoin in U.S. dollars at any
point in time and closes as of 4:00 p.m., E.T., each weekday.
CoinDesk Bitcoin Price Index. CoinDesk, a digital currency content
provider (``Coindesk''), launched a proprietary bitcoin price index,
the CoinDesk Bitcoin Price Index (``XBP'') in September 2013. The XBP
takes the average of U.S. dollar bitcoin prices from leading exchanges.
Bitcoin Trading on Exchanges
According to the Registration Statement, an individual who wishes
to purchase bitcoin on a bitcoin exchange would create an account on
the exchange Web site. After creating an account, the buyer would send
government issued money to the Web site via traditional payment methods
such as ACH and wire transfer. The buyer's account at the bitcoin
exchange would be credited with the money sent, and the buyer would
then be able to visit the Web site and make a purchase of bitcoin.
Directly after the purchase is made, the bitcoin acquired still remains
in the custody of the bitcoin exchange (i.e., it remains at a bitcoin
address controlled by the exchange). To take custody of the bitcoin,
the purchaser would direct the exchange Web site to transfer the
bitcoin to a bitcoin address controlled by the purchaser, thereby
completing the process of acquiring bitcoin. A sale of bitcoin using a
bitcoin exchange involves the same process but in reverse. The seller
would transfer bitcoin from an address under his or her control to an
address under the bitcoin exchange's control. The seller's account at
the bitcoin exchange would be credited with the bitcoin sent, and the
seller would be able to commence the sale of the bitcoin via the Web
site. Upon completion of the sale, the seller's account would reflect
the seller's balance, in government currency, which the seller could
then receive by directing the exchange to send the funds via
traditional payment methods to the seller's bank account. Bitcoin
exchange Web sites generally show users a central limit order book
(i.e., a list of all bids and offers for purchases and sales of bitcoin
on the exchange).
The Sponsor has trading experience with several U.S. and foreign
bitcoin exchanges that generally represent the highest daily U.S.
dollar bitcoin trading volume.
The Sponsor may conduct some of its bitcoin trading on behalf of
the Trust through a wholly-owned subsidiary, SolidX Management Ltd., an
exempted limited company established in the Cayman Islands
(``Subsidiary''), to buy and sell bitcoin on behalf of the Trust on
certain bitcoin exchanges which are only open to non-U.S. persons or
which do not conduct business in New York or with New York residents.
The officers of the Sponsor also serve as officers of the Subsidiary.
When conducting trading through the Subsidiary, the Sponsor is
responsible for the security of the bitcoin to the same extent as if
trading bitcoin directly. Bitcoin traded through the Subsidiary will be
stored in the same way as bitcoin that is traded directly by the
Sponsor, and the Trust's bitcoin insurance on bitcoin traded through
the Subsidiary will apply to the same extent as otherwise applicable.
Furthermore, the Subsidiary will have the same trading arrangements
with the applicable bitcoin exchanges as does the Sponsor itself.
Accordingly, references herein to the Sponsor's trading arrangements
with bitcoin exchanges on behalf of the Trust include trading conducted
by the Sponsor through the Subsidiary, unless otherwise noted.
The Sponsor intends to conduct its bitcoin exchange trading on the
following U.S. dollar-denominated bitcoin exchanges: Bitfinex,
Bitstamp, Coinbase, Gemini, itBit, Kraken \21\ and OKCoin
International.\22\ The Sponsor represents that all of these exchanges
follow AML and KYC regulatory requirements. Because Bitfinex and Kraken
do not conduct business in New York or with New York residents, and
OKCoin International is only open to non-U.S. persons, the Sponsor
intends to conduct its bitcoin trading on these three exchanges through
the Subsidiary. As discussed above, the Sponsor does not expect the
Trust to experience any differences between bitcoin exchange trades on
the Trust's behalf conducted through the Subsidiary versus those
conducted by the Sponsor directly.
---------------------------------------------------------------------------

\21\ Kraken is located in San Francisco (``Kraken''). Although
Kraken conducts U.S. dollar bitcoin trading, it is primarily a euro-
denominated bitcoin exchange.
\22\ The Sponsor intends to trade with OKCoin International, the
Singaporean entity, and not with the yuan-denominated OKCoin
Exchange China.
---------------------------------------------------------------------------

According to the Registration Statement, during the preceding
twelve-month period (June 2015 through May 2016), the aggregate trading
volume on the five constituent exchanges comprising the XBX (i.e.,
Bitfinex, Bitstamp, Coinbase, itBit and OKCoin International)
represented approximately 80% of the entire global U.S. dollar-
denominated bitcoin exchange market.\23\According to the

[[Page 50768]]

Registration Statement, during the period April 2015 through April 2016
(including weekends and holidays), average daily bitcoin trading on
Bitfinex, Bitstamp, Coinbase, Gemini, itBit and OKCoin International
totaled approximately 64,000 bitcoin across all of those exchanges at
prices that ranged between $217 and $469. Of that trading, Bitfinex
accounted for 38%, Bitstamp accounted for 19%, Coinbase accounted for
13%, Gemini accounted for 1%, itBit accounted for 7% and OKCoin
International accounted for 23%. With a Basket (as defined below) size
of 1,000 bitcoin, the creation or redemption of one Basket would
represent approximately 1.5% of the aggregate daily U.S. dollar-
denominated bitcoin trading volume across these exchanges and
approximately 1% of the aggregate daily (i) U.S. dollar-denominated
bitcoin trading volume on these exchanges plus (ii) global U.S. dollar-
denominated OTC bitcoin trading volume.
---------------------------------------------------------------------------

\23\ In addition to the five constituent exchanges comprising
the XBX, the global U.S. dollar-denominated bitcoin exchange market
also includes BTC-e, Gemini, LakeBTC (located in Shanghai, China)
and Kraken. The Sponsor represents that although BTC-e is a U.S.
dollar-denominated bitcoin exchange with significant trading volume,
BTC-e does not comply with certain of the Sponsor's internal
criteria regarding the exchanges on which the Sponsor will trade
and, therefore, the Sponsor will not transact with BTC-e. The
Sponsor represents that it is also aware of other smaller U.S.
dollar-denominated bitcoin exchanges, but the trading volume on
these exchanges is insignificant and the Sponsor does not intend to
conduct business with these smaller exchanges.
---------------------------------------------------------------------------

The Sponsor has established, on behalf of the Trust, DVP and RVP
trading arrangements with several of the U.S. dollar-denominated
bitcoin exchanges pursuant to which the Trust will be able to minimize
exchange counterparty risk. These arrangements are on a trade-by-trade
basis and do not bind the Sponsor or the Trust to continue to trade
with any exchange. Under these arrangements, the Sponsor, on behalf of
the Trust, will receive bitcoin from an exchange that has entered into
a DVP/RVP arrangement with the Sponsor without having to deposit U.S.
dollars with the exchange prior to trade execution. Once the Sponsor
receives the bitcoin it purchased, the Sponsor will within 24 hours
wire U.S. dollars to the exchange to settle the trade. When selling
bitcoin on behalf of the Trust, an exchange that has entered into a
DVP/RVP arrangement with the Sponsor will permit the Sponsor to sell
bitcoin on the exchange without the need to deposit bitcoin with the
exchange beforehand. The Sponsor will transmit bitcoin to the exchange
only after the exchange has wired the U.S. dollar sales proceeds to the
Sponsor. These DVP and RVP settlement terms reduce exchange
counterparty risks for the Trust.
Bitcoin Price Transparency
According to the Registration Statement, bitcoin trading currently
occurs globally across over 30 bitcoin exchanges and trades against
over 20 government currencies 24-hours per day, 365 days per year.
Individual bitcoin exchanges continually publish publicly available
price and volume data that is utilized by service providers to create
various bitcoin indexes. Bitcoin prices are also available via major
market data vendors such as Bloomberg and Thomson Reuters. Real-time
and historical price data is available through numerous public web
platforms including: https://tradeblock.com/; https://www.coindesk.com/;
https://bitcoinaverage.com; and others.
Although the trading volumes on BTCC, Huobi and OKCoin Exchange
China are significant, trading on these exchanges is limited to Chinese
yuan, and the Sponsor therefore does not intend to transact with these
exchanges. The Sponsor intends to transact with U.S. dollar-denominated
exchanges only. However, the Sponsor represents that the price of
bitcoin on BTCC, Huobi and OKCoin Exchange China generally has been
consistent with the price of bitcoin on U.S. dollar-denominated bitcoin
exchanges, including Bitfinex, Bitstamp, Coinbase, itBit and OKCoin
International.
The Sponsor represents that because bitcoin trades on more than 30
exchanges globally on a 24-hour basis, it is difficult for attempted
market manipulation on any one exchange to affect the global market
price of bitcoin. Any such attempt to manipulate the price would result
in an arbitrage opportunity among exchanges, which typically would be
acted upon by market participants.
In addition to the price transparency of the bitcoin exchange
market itself, the Trust will provide information regarding the Trust's
bitcoin holdings as well as additional data regarding the Trust. The
Sponsor expects that the dissemination of information on the Trust's
Web site, along with quotations for and last-sale prices of
transactions in the Shares and the intra-day indicative value (``IIV'')
and net asset value (``NAV'') of the Trust will help to reduce the
ability of market participants to manipulate the bitcoin market or the
price of the Shares and that the Trust's arbitrage mechanism will
facilitate the correction of price discrepancies in bitcoin and the
Shares. The Sponsor believes that demand from new investors accessing
bitcoin through investment in the Shares will broaden the investor base
in bitcoin, which could further reduce the possibility of collusion
among market participants to manipulate the bitcoin market.
According to the Sponsor, the XBX's price variance weighting, which
decreases the influence on the XBX of any particular exchange that
diverges from the rest of the data points used by the XBX, reduces the
possibility of an attempt to manipulate the price of bitcoin as
reflected by the XBX.
Bitcoin Trading Over-the-Counter
OTC trading of bitcoin is generally accomplished via bilateral
agreements on a principal-to-principal basis. All risks and issues of
credit are between the parties directly involved in the transaction.
The OTC market provides a relatively flexible market in terms of
quotes, price, size and other factors. The OTC market has no formal
structure and no open-outcry meeting place. Parties engaging in OTC
transactions will agree upon a price--often via phone or email--and one
of the two parties would then initiate the transaction. For example, a
seller of bitcoin could initiate the transaction by sending the bitcoin
to the buyer's bitcoin address. The buyer would then wire U.S. dollars
to the seller's bank account.
Based on its observations and experience in the market, the Sponsor
estimates that the U.S. dollar OTC bitcoin trading volume globally
represents on average approximately fifty percent of the trading volume
of bitcoin traded globally in U.S. dollars on U.S. dollar-denominated
bitcoin exchanges.
According to the Registration Statement, transaction costs in the
OTC market are negotiable between the parties and therefore vary with
some participants willing to offer competitive prices for larger
volumes, although this will vary according to market conditions. Cost
indicators can be obtained from various information service providers,
such as the bitcoin price indexes and bitcoin exchanges. OTC trading
tends to be in large blocks of bitcoin and between institutions.
In addition to using Bitfinex, Bitstamp, Coinbase, Gemini, itBit,
Kraken and OKCoin International to buy and sell bitcoin, the Trust
intends to participate in the OTC bitcoin market when such market
opportunities are deemed by the Sponsor to be advantageous for the
Trust. The Sponsor currently expects that often it will be more cost
efficient to effect large trades (e.g., $500,000 or greater) on behalf
of the Trust in the OTC market rather than on a bitcoin exchange. The
Sponsor

[[Page 50769]]

therefore expects to conduct most of its trading in the OTC bitcoin
market.
When deciding whether to buy and sell bitcoin in the OTC market,
the Sponsor will consider various market factors, including the total
U.S. dollar size of the trade, the volume of bitcoin traded across the
various U.S. dollar-denominated bitcoin exchanges during the preceding
24-hour period, available liquidity offered by OTC market participants
and the bid and ask quotes offered by OTC market participants. The
Sponsor's experience is that the prices at which trades in the OTC
market are executed closely correspond to the XBX. The Sponsor expects
the price at which it will trade bitcoin in the OTC market will
generally track the XBX, and, therefore, should not affect the Trust's
ability to track the XBX. The Sponsor also maintains an internal
proprietary database, which it does not share with anyone, of potential
OTC bitcoin trading counterparties, including hedge funds, family
offices, private wealth managers and high-net-worth individuals. All
such potential counterparties will be subject to the Sponsor's AML and
KYC compliance procedures. The Sponsor will add additional potential
counterparties to its internal proprietary database as it becomes aware
of additional market participants. The Sponsor will decide whether or
not to trade with OTC counterparties based on its ability to fill
orders at the best available price amongst OTC market participants and
bitcoin exchanges. Generally, the Sponsor will directly place purchase
or sale orders for bitcoin on behalf of the Trust with participants in
the OTC markets using DVP and RVP style arrangements.
While the Sponsor expects that most of its bitcoin trading with
exchanges and OTC counterparties on behalf of the Trust will occur
pursuant to DVP and RVP arrangements, the Sponsor may also enter into
collateral arrangements with certain bitcoin exchanges and OTC
counterparties where DVP and RVP arrangements are not practicable. Such
collateral arrangements require the Sponsor, out of its own assets, and
the bitcoin exchange or OTC counterparty to open and maintain
collateral deposit accounts with a bank or similar financial
intermediary for the purpose of collateralizing pending bitcoin
transactions effected by the Sponsor on behalf of the Trust and the
bitcoin exchange or OTC counterparty. The Trust would not pledge (or
receive) collateral pursuant to these arrangements and the Sponsor
would bear any exchange counterparty risk. The Sponsor represents that
a default of an exchange or OTC counterparty under such arrangement
would have no greater impact on the Trust than a default under the DVP
and RVP arrangements.
To the extent a Basket creation or redemption order necessitates
the buying or selling of a large block of bitcoin (e.g., an amount that
if an order were placed on an exchange would potentially move the price
of bitcoin), the Sponsor represents that placing such a trade in the
OTC market may be advantageous to the Trust. OTC trades help avoid
factors such as potential price slippage (causing the price of bitcoin
to move as the order is filled on the exchange), while offering speed
in trade execution and settlement (an OTC trade can be executed
immediately upon agreement of terms between counterparties) and privacy
(to avoid other market participants entering trades in advance of a
large block order).
OTC bitcoin trading is typically private and not regularly
reported. For example, Genesis Global Trading and itBit release
periodic reports that discuss their respective OTC trading volumes. The
Trust does not intend to report its OTC trading.
Regardless of whether the Sponsor buys bitcoin on an exchange or in
the OTC market, the Sponsor expects the Trust to take custody of
bitcoin within one business day of receiving an order from an
Authorized Participant to create a Basket (as defined in ``Creation and
Redemption of Shares'' below).
Historical Chart of the Price of Bitcoin
The price of bitcoin is volatile and fluctuations are expected to
have a direct impact on the value of the Shares. However, movements in
the price of bitcoin in the past are not a reliable indicator of future
movements. Movements may be influenced by various factors, including
supply and demand, geo-political uncertainties, economic concerns such
as inflation and real or speculative investor interest.\24\
---------------------------------------------------------------------------

\24\ Attached as Exhibit 3, Item 2 is a chart illustrating the
changes in the price of bitcoin during the period July 2010 through
March 2016. Attached as Exhibit 3, Item 3 is a chart comparing the
trailing calendar month volatility in the price of bitcoin compared
to the trailing calendar month volatility in the prices of gold,
platinum, copper and oil during the period May 1, 2014 through May
31, 2016 (excluding holidays and weekends). Attached as Exhibit 3,
Item 4 is a chart comparing the trailing calendar month volatility
in the price of bitcoin compared to the trailing calendar month
volatility in the prices of gold, platinum, copper and oil during
the period March 1, 2016 through May 31, 2016 (excluding holidays
and weekends).
---------------------------------------------------------------------------

Additional Bitcoin Trading Products
Certain non-U.S. based bitcoin exchanges offer derivative products
on bitcoin such as options, swaps and futures.
According to the Registration Statement, BitMex (based in the
Republic of Seychelles), CryptoFacilites (based in the United Kingdom),
796 Exchange (based in China) and OKCoin Exchange China all offer
futures contracts settled in bitcoin. Coinut, based in Singapore,
offers bitcoin binary options and vanilla options based on the Coinut
index. Nadex, based in Chicago, offers bitcoin binary options
denominated in U.S. dollars using the TeraBit Bitcoin Price Index.\25\
IGMarkets (based in the United Kingdom), Avatrade (based in Ireland)
and Plus500 (based in Israel) also offer bitcoin derivative products.
---------------------------------------------------------------------------

\25\ The TeraBit Bitcoin Price Index is disseminated by
TeraExchange.
---------------------------------------------------------------------------

The Commodity Futures Trading Commission (``CFTC'') has approved
TeraExchange, LLC as a swap execution facility (``TeraExchange'') and
LedgerX provisionally as a swap execution facility, where bitcoin swap
and non-deliverable forward contracts may be entered into.
The CFTC commissioners have expressed publicly that derivatives
based on bitcoin are subject to regulation by the CFTC, including
oversight to prevent market manipulation of the price of bitcoin. In
addition, the CFTC has stated that bitcoin and other virtual currencies
are encompassed in the definition of commodities under the CEA.\26\
---------------------------------------------------------------------------

\26\ See ``In the Matter of Coinflip, Inc.'' (CFTC Docket 15-29
(September 17, 2015)) (order instituting proceedings pursuant to
Sections 6(c) and 6(d) of the CEA, making findings and imposing
remedial sanctions), in which the CFTC stated the following:
``Section 1a(9) of the CEA defines `commodity' to include, among
other things, `all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See,
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142
(7th Cir. 1982). Bitcoin and other virtual currencies are
encompassed in the definition and properly defined as commodities.''
---------------------------------------------------------------------------

In May 2015, the Swedish FSA approved the prospectus for ``Bitcoin
Tracker One'', an open-ended exchange-traded note that tracks the price
of bitcoin in U.S. dollars. The Bitcoin Tracker One initially traded in
Swedish krona on the Nasdaq Nordic in Stockholm, but is now also
available to trade in euro. The Bitcoin Tracker One is available to
retail investors in the European Union and to those investors in the
U.S. who maintain brokerage accounts with Interactive Brokers. Founded
in 2013, Bitcoin Investment Trust, a private, open-ended trust
available to accredited investors, is another investment vehicle that
derives

[[Page 50770]]

its value from the price of bitcoin. Eligible shares of the Bitcoin
Investment Trust are quoted on the OTCQX marketplace under the symbol
``GBTC''.
Bitcoin Security and Storage for the Trust
According to the Sponsor, given the novelty and unique digital
characteristics (as set forth above) of bitcoin as an innovative asset
class, traditional custodians who normally custody assets do not
currently offer custodial services for bitcoin. Accordingly, the
Sponsor will secure the bitcoin held by the Trust using multi-signature
``cold storage wallets'', an industry best practice. A cold storage
wallet is created and stored on a computer with no access to a network,
i.e., an ``air-gapped'' computer with no ability to access the
Internet. Such a computer is isolated from any network, including local
or Internet connections. A multi-signature address is an address
associated with more than one private key. For example, a ``2 of 3''
address requires two signatures (out of three) from two separate
private keys (out of three) to move bitcoin from a sender address to a
receiver address.
The Sponsor will utilize bitcoin private keys that are generated
and stored on air-gapped computers. The movement of bitcoin will
require physical access to the air-gapped computers and use of multiple
authorized signers. For backup and disaster recovery purposes, the
Sponsor will maintain cold wallet backups in locations geographically
distributed throughout the United States, including in the Northeast
and Midwest.
In addition to the Sponsor's security system, the Sponsor has
arranged for the Trust to maintain comprehensive insurance coverage
underwritten by various insurance carriers. The purpose of the
insurance is to protect investors against loss or theft of the Trust's
bitcoin. The insurance will cover loss of bitcoin by, among other
things, theft, destruction, bitcoin in transit, computer fraud (i.e.,
hacking attack) and other loss of the private keys that are necessary
to access the bitcoin held by the Trust. The coverage is subject to
certain terms, conditions and exclusions, as discussed in the
Registration Statement. The insurance policy will carry initial limits
of $25 million in primary coverage and $100 million in excess coverage,
with the ability to increase coverage depending on the value of the
bitcoin held by the Trust.
The Sponsor expects that the Trust's auditor will verify the
existence of bitcoin held in custody by the Trust. In addition, the
Trust's insurance carriers will have inspection rights associated with
the bitcoin held in custody by the Trust.
Bitcoin Market Price
In the ordinary course of business, the Administrator will value
the bitcoin held by the Trust based on the price set by the XBX as of
4:00 p.m., E.T., on the valuation date on any day that the NYSE Arca is
open for regular trading. For further detail, see (i) below. If the
procedures described in (i) fail and the Administrator is unable to
value the Trust's bitcoin using the procedures described in (i), the
Administrator will value the Trust's bitcoin using the cascading set of
rules set forth in (ii) through (iv) below; the methodology used to
established the value of the bitcoin held by the Trust will be the
``bitcoin Market Price''. For the avoidance of doubt, the Administrator
will employ the below rules sequentially and in the order as presented,
should the Sponsor determine that one or more specific rule(s) fails.
The Sponsor may determine that a rule has failed if the pricing source
is unavailable or, in the judgment of the Sponsor, is deemed
unreliable. To the extent the Administrator uses any of the cascading
set of rules, the Sponsor will make public on the Trust's Web site the
rule being used.
(i) bitcoin Market Price = The price set by the XBX as of 4:00
p.m., E.T., on the valuation date. The XBX is a real-time U.S. dollar-
denominated composite reference rate for the price of bitcoin. The XBX
calculates the intra-day price of bitcoin every second, including the
closing price as of 4:00 p.m., E.T. The intra-day price and closing
price are based on a methodology that consists of collecting and
cleansing actual trade data from several bitcoin exchanges included
within the XBX. TradeBlock uses standardized eligibility criteria based
on periodically-reviewed governance principles to select trading venues
for inclusion in the XBX. As of June 30, 2016, the eligible bitcoin
exchanges selected by TradeBlock for inclusion in the XBX are Bitfinex,
Bitstamp, Coinbase, itBit and OKCoin International. The logic utilized
for the derivation of the daily closing index level is intended to
analyze actual bitcoin transactional data, verify and refine the data
set and yield an objective, fair-market value of one bitcoin as of 4:00
p.m., E.T., each weekday, priced in U.S. dollars.
(ii) bitcoin Market Price = The price set by the CoinDesk Bitcoin
Price Index XBP as of 4:00 p.m., E.T., on the valuation date. The XBP
is a U.S. dollar-denominated composite reference rate for the price of
bitcoin based on the volume-weighted price at trading venues selected
by CoinDesk. Trading venues used to calculate the XBP may include
bitcoin exchanges, OTC markets or derivative platforms. CoinDesk uses
its discretion to select trading venues that will be included in the
XBP based on guidelines, including depth of liquidity, compliance with
applicable legal and regulatory requirements, data availability,
domicile in the United States and acceptance of U.S. dollar deposits.
To calculate the reference rate, trade data is cleansed and compiled in
such a manner as to algorithmically reduce the impact of anomalistic or
manipulative trading. This is accomplished by adjusting the weight of
each data input based on price deviation relative to the observable set
of data for the relevant trading venue, as well as recent and long-term
trading volume at each venue relative to the observable set for the
relevant trading venues. To calculate volume-weighted price, the
weighting algorithm is applied to the price and volume of all inputs
for the immediately preceding 24-hour period at 4:00 p.m., E.T., on the
valuation date.
(iii) bitcoin Market Price = The volume-weighted average bitcoin
price for the immediately preceding 24-hour period at 4:00 p.m., E.T.,
on the valuation date as published by an alternative third party's
public data feed that the Sponsor determines is reasonably reliable,
subject to the requirement that such data is calculated based upon a
volume-weighted average bitcoin price obtained from the major U.S.
dollar-denominated bitcoin exchanges (``Second Source''). Subject to
the next sentence, if the Second Source becomes unavailable (e.g., data
sources from the Second Source for bitcoin prices become unavailable,
unwieldy or otherwise impractical for use), or if the Sponsor
determines in good faith that the Second Source does not reflect an
accurate bitcoin price, then the Sponsor will, on a best efforts basis,
contact the Second Source in an attempt to obtain the relevant data. If
after such contact the Second Source remains unavailable or the Sponsor
continues to believe in good faith that the Second Source does not
reflect an accurate bitcoin price, then the Administrator will employ
the next rule to determine the bitcoin Market Price.
(iv) bitcoin Market Price = The Sponsor will use its best judgment
to determine a good faith estimate of the bitcoin Market Price.

[[Page 50771]]

The Trust
According to the Registration Statement, the Trust will invest in
bitcoin only. The Trust will cause the Sponsor to either (i) receive
bitcoin from the Trust in such quantity as may be necessary to pay the
Sponsor's management fee and other Trust expenses and liabilities not
assumed by the Sponsor or (ii) sell bitcoin in such quantity as may be
necessary to permit payment in cash of the Sponsor's management fee and
other Trust expenses and liabilities not assumed by the Sponsor. As a
result, the amount of bitcoin sold will vary from time to time
depending on the level of the Trust's expenses and the market price of
bitcoin.
The Trust will pay the Sponsor a management fee as compensation for
services performed on behalf of the Trust and for services performed in
connection with maintaining the Trust. The Sponsor's fee will be
payable monthly in arrears and will be accrued daily.
The Sponsor will be responsible for paying all of the routine
operational, administrative and other ordinary expenses of the Trust,
including, but not limited to, the fees and expenses of the Trustee and
Administrator, custody fees, transfer agency fees, distribution and
marketing fees, up to $100,000 per annum in legal fees, audit and
accounting fees and expenses, filing fees, exchange listing fees and
printing, mailing and duplication costs. The Sponsor will also be
responsible for paying the premiums associated with the insurance
coverage of the bitcoin held by the Trust. The Trust will be
responsible for paying, or for reimbursing the Sponsor or its
affiliates for paying, all the extraordinary fees and expenses, if any,
of the Trust. The management fee to be paid to the Sponsor is expected
to be the only ordinary recurring operating expense of the Trust.
Net Asset Value
The NAV for the Trust will equal the market value of the Trust's
total assets, including bitcoin and cash, less liabilities of the
Trust, which include estimated accrued but unpaid fees, expenses and
other liabilities. Under the Trust's proposed operational procedures,
the Administrator will calculate the NAV on each business day that the
NYSE Arca is open for regular trading, as promptly as practicable after
4:00 p.m., E.T. To calculate the NAV, the Administrator will use the
bitcoin Market Price. The Administrator will also determine the NAV per
Share by dividing the NAV of the Trust by the number of the Shares
outstanding as of the close of trading on the NYSE Arca Core Trading
Session, i.e., 9:30 a.m. to 4:00 p.m., E.T. (which includes the net
number of any Shares deemed created or redeemed on such day).
According to the Registration Statement, Authorized Participants
(as defined in ``Creation and Redemption of Shares'' below), or their
clients or customers, may have an opportunity to realize a riskless
profit if they can create a Basket (as defined in ``Creation and
Redemption of Shares'' below) at a discount to the public trading price
of the Shares or can redeem a Basket at a premium over the public
trading price of the Shares. The Sponsor expects that the exploitation
of such arbitrage opportunities by Authorized Participants and their
clients and customers will tend to cause the public trading price to
track NAV per Share closely over time. Such arbitrage opportunities
will not be available to holders of Shares who are not Authorized
Participants.
The Sponsor represents that bitcoin is a bearer asset, so unlike
most financial assets within the modern financial system, Authorized
Participants seeking to acquire quantities of bitcoin will require
specialized knowledge to source and secure the bitcoin. Such potential
holders of bitcoin without sufficient technological knowledge will
encounter both counterparty and custodial issues that will effectively
lock them out of accessing the bitcoin market. Therefore, although
there is nothing preventing Authorized Participants from participating
directly in the bitcoin market, the Sponsor believes, based on the
current state of the bitcoin market and its participants, many probably
will not until such time as the bitcoin market matures so that the
technological, counterparty and custodial issues evolve to become
similar to those of traditional financial instruments. Notwithstanding
the foregoing, the Sponsor believes, based on conversations with market
participants, that one or more Authorized Participants and/or market
makers may be interested in participating directly in the bitcoin
market and creating or redeeming Baskets in-kind.
According to the Sponsor, whether creating and redeeming baskets
in-kind or for cash, Authorized Participants and market makers can
hedge their exposure to bitcoin using non-deliverable forward contracts
(``NDFs'') and swap contracts that will create synthetic long and short
exposure to bitcoin. NDFs will be offered by several participants in
the bitcoin marketplace, including bitcoin exchanges, bitcoin OTC
market participants and the Sponsor itself, operating on a principal
basis. Such arrangements make it possible for Authorized Participants
that lack the trading infrastructure to transact in bitcoin to be able
to hedge their exposure by entering into an NDF or swap contract.
Accordingly, an Authorized Participant may hedge its exposure to
bitcoin without the need to custody bitcoin, or to engage a third party
to custody bitcoin. In addition, to the extent requested by Authorized
Participants and market makers, the Sponsor will act as agent by buying
and selling bitcoin on behalf of the Authorized Participants and market
makers, including short sale orders for hedging purposes.
The NDF and swap contracts that the Sponsor will enter into as
agent on behalf of the Authorized Participants and market makers will
be bespoke, OTC and cash settled. The terms of the NDF and swap
contracts will be negotiated between the counterparties to the NDF and
swap contracts. The NDF and swap contracts may be traded electronically
on at least one swap execution facility. Generally, the NDF and swap
contract strike prices will be based on the bitcoin spot price, as
determined by the XBX, or other pricing source as agreed to between the
NDF and swap contract counterparties, when the contract is entered
into. The NDF termination price will be based on the NAV of the Trust
determined as of 4:00 p.m., E.T. The terms of the NDF and swap
contracts will be governed by International Swaps and Derivatives
Associations, Inc. (``ISDA'') agreements. The ISDA terms, including to
the extent necessary any collateral arrangements, will be negotiated
between the counterparties to the NDF and swap contracts.
While the Trust's investment objective is to seek to provide
shareholders with exposure to the daily change in the U.S. dollar price
of bitcoin, before expenses and liabilities of the Trust, as measured
by the XBX, the Shares may trade in the secondary market at prices that
are lower or higher relative to their NAV per Share.
The NAV per Share may fluctuate with changes in the market value of
the bitcoin held by the Trust. The value of the Shares may be
influenced by non-concurrent trading hours between NYSE Arca and the
various bitcoin exchanges comprising the XBX, all of which constituent
bitcoin exchanges operate 24 hours per day, 365 days per year. As a
result, there will be periods when the NYSE Arca is closed and such
bitcoin exchanges continue to trade. Significant

[[Page 50772]]

changes in the price of bitcoin on such exchanges could result in a
difference in performance between the value of bitcoin as measured by
the XBX and the most recent NAV per Share or closing trading price. The
non-concurrent trading hours also may result in trading spreads and the
resulting premium or discount on the Shares widening, increasing the
difference between the price of the Shares and the NAV of such Shares.
The price difference may also be due to the fact that supply and
demand forces at work in the secondary trading market for Shares are
closely related, but not identical, to the same forces influencing the
XBX spot price. Consequently, an Authorized Participant may be able to
create or redeem a Basket of Shares at a discount or a premium to the
public trading price per Share.
Impact on Arbitrage
Investors and market participants are able throughout the trading
day to compare the market price of the Shares and the Share's IIV.
According to the Sponsor, if the market price of the Shares diverges
significantly from the IIV, Authorized Participants will have an
incentive to execute arbitrage trades. Because of the potential for
arbitrage inherent in the structure of the Trust, the Sponsor believes
that the Shares will not trade at a material discount or premium to the
underlying bitcoin held by the Trust. The arbitrage process, which in
general provides investors the opportunity to profit from differences
in prices of assets, increases the efficiency of the markets, serves to
prevent potentially manipulative efforts, and can be expected to
operate efficiently in the case of the Shares and bitcoin.
For example, if the Shares appear to be trading at a discount
compared to the IIV, an Authorized Participant could buy the Shares on
the NYSE Arca and simultaneously hedge their exposure to the price of
the Shares by entering into an NDF or swap contract--in a dollar amount
equal to the aggregate price of the Shares bought--that would provide
the Authorized Participant with synthetic short exposure to bitcoin.
The Authorized Participant then could redeem a Basket at NAV and
realize a profit. Conversely, if the Shares appear to be trading at a
premium compared to the IIV, an Authorized Participant could sell short
the Shares on the NYSE Arca and simultaneously hedge their exposure to
the short sale by entering into an NDF or swap contract--in a dollar
amount equal to the aggregate price of the Shares sold--that would
provide the Authorized Participant with synthetic long exposure to
bitcoin. The Authorized Participant then could create a Basket at NAV,
use those newly created Shares to cover the short sale and realize a
profit. Such arbitrage trades can tighten the tracking between the
market price of the Shares and the IIV and thus can be beneficial to
all market participants.
Creation and Redemption of Shares
According to the Registration Statement, the Trust will issue and
redeem ``Baskets'', each equal to a block of 10,000 Shares, only to
``Authorized Participants'' (as described below). The size of a Basket
is subject to change. The creation and redemption of Baskets will
principally be made in exchange for the delivery to the Trust or the
distribution by the Trust of the amount of cash or bitcoin represented
by the combined NAV of the Baskets being created or redeemed, the
amount of which will be based on the combined bitcoin represented by
the number of Shares included in the Baskets being created or redeemed
determined on the day the order to create or redeem Baskets is properly
received.
Orders to create and redeem Baskets may be placed only by
Authorized Participants.\27\ A transaction fee will be assessed on all
creation and redemption transactions effected in-kind. In addition, a
variable transaction fee will be charged to the Authorized Participants
for creations and redemptions effected in cash to cover the Trust's
expenses related to purchasing and selling bitcoin on bitcoin exchanges
or in OTC transactions. Such expenses may vary, but the Trust currently
expects such expenses to constitute 1% or less of the value of a
Basket.
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\27\ An Authorized Participant must: (1) Be a registered broker-
dealer or other securities market participant, such as a bank or
other financial institution, which, but for an exclusion from
registration, would be required to register as a broker-dealer to
engage in securities transactions and (2) be a participant in
Depository Trust Company (``DTC''). To become an Authorized
Participant, a person must enter into an ``Authorized Participant
Agreement'' with the Sponsor and the Administrator. The Authorized
Participant Agreement provides the procedures for the creation and
redemption of Baskets and for the delivery of the cash (and,
potentially, bitcoin in-kind) required for such creations and
redemptions.
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Creation Procedures
On any business day, an Authorized Participant may place an order
with the Administrator to create one or more Baskets. For purposes of
processing both purchase and redemption orders, a ``business day''
means any day other than a day when the NYSE Arca is closed for regular
trading. Purchase orders must be placed by 1:00 p.m., E.T. The day on
which the Administrator receives a valid purchase order is the
``purchase order date''. Purchase orders are irrevocable. By placing a
purchase order, and prior to delivery of such Baskets, an Authorized
Participant's DTC account will be charged the non-refundable
transaction fee due for the purchase order.
Determination of Required Payment
The total payment required to create each Basket is determined by
calculating the NAV of 10,000 Shares of the Trust as of the closing
time of the NYSE Arca Core Trading Session on the purchase order date.
Baskets are issued as of 9:30 a.m., E.T., on the business day
immediately following the purchase order date at the applicable NAV as
of the closing time of the NYSE Arca Core Trading Session on the
purchase order date, but only if the required payment has been timely
received.
Orders to purchase Baskets must be placed no later than 1:00 p.m.,
E.T., but the total payment required to create a Basket will not be
determined until 4:00 p.m., E.T., on the date the purchase order is
received. Authorized Participants therefore will not know the total
amount of the payment required to create a Basket at the time they
submit an irrevocable purchase order for the Basket. Valid orders to
purchase Baskets received after 1:00 p.m., E.T., are considered
received on the following business day. The NAV of the Trust and the
total amount of the payment required to create a Basket could rise or
fall substantially between the time an irrevocable purchase order is
submitted and the time the amount of the purchase price in respect
thereof is determined.
The payment required to create a Basket typically will be made in
cash, but it may also be made partially or wholly in-kind at the
discretion of the Sponsor if the Authorized Participant requests to
convey bitcoin directly to the Trust. To the extent the Authorized
Participant places an in-kind order to create, the Authorized
Participant must deliver bitcoin directly to the Sponsor (i.e., to the
security system that holds the Trust's bitcoin) and an amount of cash
referred to as the ``Cash Component'', computed as described below,
each no later than 1:00 p.m., E.T., on the date the purchase order is
received. The amount of bitcoin delivered by the Authorized Participant
must be in an amount equal to the number of bitcoin necessary to create
a Basket as of 4:00 p.m., E.T., on the date the purchase order is
received. Upon delivery of the bitcoin to the Sponsor's security system
and the Cash

[[Page 50773]]

Component to the Custodian, the Administrator will cause the Trust to
issue a Basket to the Authorized Participant. Expenses relating to
purchasing bitcoin in assembling an in-kind creation Basket, such as
bitcoin exchange-related fees and transaction fees, will be borne by
Authorized Participants. With respect to creations in cash, Authorized
Participants will be charged a variable transaction fee to cover
expenses as set forth above.
The Cash Component is an amount equal to the difference between the
NAV of the Shares (per Basket) and the ``Deposit Amount'', which is an
amount equal to the market value of bitcoin (per Basket) which, for
this purpose, is calculated in the same manner as the Trust values its
bitcoin as set forth in ``bitcoin Market Price'' above. The Cash
Component serves to compensate for any difference between the NAV per
Basket and the Deposit Amount. Payment of any tax or other fees and
expenses payable upon transfer of bitcoin shall be the sole
responsibility of the Authorized Participant purchasing a Basket.
The Sponsor makes available through the National Securities
Clearing Corporation (``NSCC'') on each business day, prior to the
opening of business on the NYSE Arca, the amount of bitcoin required
for an in-kind creation of a Basket. This amount is applicable in order
to effect in-kind purchases of Baskets until such time as the next-
announced amount is made available.
Rejection of Purchase Orders
The Administrator may reject a purchase order if: (i) It determines
that the purchase order is not in proper form; (ii) the Administrator
or the Sponsor believes the purchase order would have adverse tax
consequences to the Trust or the shareholders; or (iii) circumstances
outside the control of the Sponsor make it, for all practical purposes,
not feasible to process creations of Baskets. The Administrator may
reject a purchase order if the Sponsor thinks it is necessary or
advisable for any reason, which the Sponsor determines is in the best
interests of the Trust or shareholders.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place an order with the
Administrator to redeem one or more Baskets. Redemption orders must be
placed no later than 1:00 p.m., E.T. The day on which the Administrator
receives a valid redemption order is the ``redemption order date''.
Redemption orders are irrevocable. The redemption procedures allow only
Authorized Participants to redeem Baskets.
By placing a redemption order, an Authorized Participant agrees to
deliver the Baskets to be redeemed through DTC's book-entry system to
the Trust not later than 1:00 p.m., E.T., on the business day
immediately following the redemption order date. By placing a
redemption order, and prior to receipt of the redemption proceeds, an
Authorized Participant's DTC account will be charged the non-refundable
transaction fee due for the redemption order.
Determination of Redemption Proceeds
The redemption proceeds from the Trust consist of the ``cash
redemption amount'' and, if making an in-kind redemption, bitcoin. The
cash redemption amount is equal to the combined NAV of the number of
Baskets of the Trust requested in the Authorized Participant's
redemption order as of the closing time of the NYSE Arca Core Trading
Session on the redemption order date. The Administrator will distribute
the cash redemption amount at 4:00 p.m., E.T., on the business day
immediately following the redemption order date through DTC to the
account of the Authorized Participant as recorded on DTC's book-entry
system. At the discretion of the Sponsor and if the Authorized
Participant requests to receive bitcoin directly, some or all of the
redemption proceeds may be distributed to the Authorized Participant
in-kind.
Orders to redeem Baskets must be placed no later than 1:00 p.m.,
E.T., but the total amount of redemption proceeds typically will not be
determined until after 4:00 p.m., E.T., on the date the redemption
order is received. Authorized Participants therefore will not know the
total amount of the redemption proceeds at the time they submit an
irrevocable redemption order.
Delivery of Redemption Proceeds
The redemption proceeds due from the Trust are delivered to the
Authorized Participant at 4:00 p.m., E.T., on the business day
immediately following the redemption order date if, by such time on
such business day immediately following the redemption order date, the
Trust's DTC account has been credited with the Baskets to be redeemed.
If the Trust's DTC account has not been credited with all of the
Baskets to be redeemed by such time, the redemption distribution is
delivered to the extent of whole Baskets received. Any remainder of the
redemption distribution is delivered on the next business day to the
extent of remaining whole Baskets received if the Sponsor receives the
fee applicable to the extension of the redemption distribution date
which the Sponsor may, from time to time, determine and the remaining
Baskets to be redeemed are credited to the Trust's DTC account by 4:00
p.m., E.T., on such next business day. Any further outstanding amount
of the redemption order shall be cancelled. The Sponsor will also be
authorized to deliver the redemption distribution notwithstanding that
the Baskets to be redeemed are not credited to the Trust's DTC account
by 4:00 p.m., E.T., on the business day immediately following the
redemption order date if the Authorized Participant has collateralized
its obligation to deliver the Baskets through DTC's book-entry system
on such terms as the Sponsor may determine from time to time.
In the case of in-kind redemptions, the Sponsor makes available
through the NSCC, prior to the opening of business on the NYSE Arca on
each business day, the amount of bitcoin per Basket that will be
applicable to redemption requests received in proper form.
To the extent the Authorized Participant places an in-kind order to
redeem a Basket, the Sponsor will deliver, on the business day
immediately following the day the redemption order is received, bitcoin
to the Authorized Participant in an amount equal to the number of
bitcoin necessary to redeem a Basket as of 4:00 p.m., E.T. Expenses
relating to transferring bitcoin to an Authorized Participant in a
redemption Basket will be borne by Authorized Participants via the
redemption transaction fee. With respect to redemptions in cash,
Authorized Participants will be charged a variable transaction fee to
cover expenses as set forth above.
Suspension or Rejection of Redemption Orders
The Administrator may, in its discretion, suspend the right of
redemption or postpone the redemption settlement date (1) for any
period during which an emergency exists as a result of which the
redemption distribution is not reasonably practicable or (2) for such
other period as the Sponsor determines to be necessary for the
protection of the shareholders. None of the Sponsor, the Administrator
or the Custodian will be liable to any person or in any way for any
loss or damages that may result from any such suspension or
postponement.

[[Page 50774]]

The Administrator will reject a redemption order if the order is
not in proper form as described in the Authorized Participant Agreement
or if the fulfillment of the order, in the opinion of its counsel,
might be unlawful.
Availability of Information
The Trust's Web site will provide an intra-day indicative value
(``IIV'') per Share updated every 15 seconds, as calculated by the
Exchange or a third party financial data provider during the Exchange's
Core Trading Session. The IIV will be calculated by using the prior
day's closing NAV per Share as a base and updating that value during
the NYSE Arca Core Trading Session to reflect changes in the value of
the Trust's bitcoin holdings during the trading day.
The IIV disseminated during the NYSE Arca Core Trading Session
should not be viewed as an actual real-time update of the NAV, which
will be calculated only once at the end of each trading day. The IIV
will be widely disseminated on a per Share basis every 15 seconds
during the NYSE Arca Core Trading Session by one or more major market
data vendors. In addition, the IIV will be published on the NYSE Global
Index Feed and will be available through on-line information services
such as Bloomberg and Reuters.
The Web site for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) The current NAV per
Share daily and the prior business day's NAV and the reported closing
price; (b) the mid-point of the bid-ask price \28\ in relation to the
NAV as of the time the NAV is calculated (``Bid-Ask Price'') and a
calculation of the premium or discount of such price against such NAV;
(c) data in chart form displaying the frequency distribution of
discounts and premiums of the Bid-Ask Price against the NAV, within
appropriate ranges for each of the four previous calendar quarters (or
for the life of the Trust, if shorter); (d) the prospectus; and (e)
other applicable quantitative information. The Trust will also
disseminate the Trust's holdings on a daily basis on the Trust's Web
site. The price of bitcoin will be made available by one or more major
market data vendors, updated at least every 15 seconds during the
Exchange's Core Trading Session. Information about the XBX, including
key elements of how the XBX algorithm is calculated, is publicly
available at https://tradeblock.com/markets/index/.
---------------------------------------------------------------------------

\28\ The bid-ask price of the Trust is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day NAV.
---------------------------------------------------------------------------

The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. The Exchange will also make available on its Web site daily
trading volume of the Shares, closing prices of the Shares and the
corresponding NAV for the Trust. In addition, bitcoin prices are
available from automated quotation systems, published or other public
sources or on-line information services such as Bloomberg or Reuters.
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Quotation and last sale information for bitcoin will be widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. In addition, the complete real-time price (and
volume) data for bitcoin is available by subscription from Reuters and
Bloomberg. The spot price of bitcoin is available on a 24-hour basis
from major market data vendors, including Bloomberg and Reuters.
Information relating to trading, including price and volume
information, in bitcoin will be available from major market data
vendors and from the exchanges on which bitcoin are traded. The normal
trading hours for bitcoin exchanges are 24-hours per day, 365-days per
year.
The Trust will provide Web site disclosure of its bitcoin holdings
daily. The Web site disclosure of the Trust's portfolio composition
will occur at the same time as the disclosure by the Sponsor of the
portfolio composition to Authorized Participants so that all market
participants are provided portfolio composition information at the same
time. Therefore, the same portfolio information will be provided on the
public Web site as well as in electronic files provided to Authorized
Participants. Accordingly, each investor will have access to the
current portfolio composition of the Trust through the Trust's Web
site.
Trading Rules
The Trust will be subject to the criteria in NYSE Arca Equities
Rule 8.201, including 8.201(e), for initial and continued listing of
the Shares. A minimum of 100,000 Shares will be required to be
outstanding at the start of trading. With respect to application of
Rule 10A-3 under the Act, the Trust will rely on the exception
contained in Rule 10A-3(c)(7). The Exchange believes that the
anticipated minimum number of Shares outstanding at the start of
trading is sufficient to provide adequate market liquidity.
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Trading in the Shares
on the Exchange will occur in accordance with NYSE Arca Equities Rule
7.34(a). The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions. As provided in NYSE Arca
Equities Rule 7.6, the minimum price variation (``MPV'') for quoting
and entry of orders in equity securities traded on the NYSE Arca
Marketplace is $0.01, with the exception of securities that are priced
less than $1.00 for which the MPV for order entry is $0.0001.
Further, NYSE Arca Equities Rule 8.201 sets forth certain
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting
as registered Market Makers in the Shares to facilitate surveillance.
Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP Holder acting as a
registered Market Maker in the Shares is required to provide the
Exchange with information relating to its trading in the underlying
bitcoin, related futures or options on futures or any other related
derivatives. Commentary .04 of NYSE Arca Equities Rule 6.3 requires an
ETP Holder acting as a registered Market Maker, and its affiliates, in
the Shares to establish, maintain and enforce written policies and
procedures reasonably designed to prevent the misuse of any material
nonpublic information with respect to such products, any components of
the related products, any physical asset or commodity underlying the
product, applicable currencies, underlying indexes, related futures or
options on futures and any related derivative instruments (including
the Shares).
As a general matter, the Exchange has regulatory jurisdiction over
its ETP Holders and their associated persons, which include any person
or entity controlling an ETP Holder. A subsidiary or affiliate of an
ETP Holder that does business only in commodities or futures contracts
would not be subject to Exchange jurisdiction, but the Exchange could
obtain information regarding the activities of such subsidiary or
affiliate through surveillance sharing agreements with regulatory
organizations of which such subsidiary or affiliate is a member.
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading on the Exchange in the Shares may be
halted because of market

[[Page 50775]]

conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. These may include: (1) The extent to
which conditions in the underlying bitcoin markets have caused
disruptions and/or lack of trading or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present. In addition, trading in Shares will be
subject to trading halts caused by extraordinary market volatility
pursuant to the Exchange's ``circuit breaker'' rule.\29\
---------------------------------------------------------------------------

\29\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

The Exchange will halt trading in the Shares if the NAV of the
Trust is not calculated or disseminated daily. The Exchange may halt
trading during the day in which an interruption occurs to the
dissemination of the IIV or to the dissemination of bitcoin pricing
data by one or more bitcoin Market Price sources. If the interruption
to the dissemination of the IIV or the value of bitcoin persists past
the trading day in which it occurs, the Exchange will halt trading no
later than the beginning of the trading day following the
interruption.\30\ In addition, if the Exchange becomes aware that the
NAV with respect to the Shares is not disseminated to all market
participants at the same time, it will halt trading in the Shares until
such time as the NAV is available to all market participants.
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\30\ The Exchange notes that the Exchange may halt trading
during the day in which an interruption to the dissemination of the
IIV or the value of bitcoin occurs.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances administered by the Exchange, as
well as cross-market surveillances administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\31\ The Exchange represents that
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and federal securities laws applicable to trading on
the Exchange.
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\31\ FINRA conducts cross market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
---------------------------------------------------------------------------

The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), and the Exchange or FINRA, on behalf of
the Exchange, or both, may obtain trading information regarding trading
in the Shares from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares from
markets and other entities that are members of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement
(``CSSA'').\32\
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\32\ For the list of current members of ISG, see https://www.isgportal.org/home.html.
---------------------------------------------------------------------------

Also, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is
able to obtain information regarding trading in the Shares and the
underlying bitcoin or any bitcoin derivative through ETP Holders acting
as registered Market Makers, in connection with such ETP Holders'
proprietary or customer trades through ETP Holders which they effect on
any relevant market.
The Exchange also has a general policy prohibiting the distribution
of material, non-public information by its employees.
All statements and representations made in this filing regarding
(i) the description of the portfolio, (ii) limitations on portfolio
holdings or reference assets or (iii) the applicability of Exchange
rules and surveillance procedures shall constitute continued listing
requirements for listing the Shares on the Exchange.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Fund to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Fund is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Equities Rule 5.5(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an ``Information Bulletin'' of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
The procedures for purchases and redemptions of Shares in Baskets
(including noting that the Shares are not individually redeemable); (2)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its ETP Holders to learn the essential facts relating to every
customer prior to trading the Shares; (3) how information regarding how
the Index and the IIV are disseminated; (4) the requirement that ETP
Holders deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
(5) the possibility that trading spreads and the resulting premium or
discount on the Shares may widen during the Opening and Late Trading
Sessions, when an updated IIV will not be calculated or publicly
disseminated; and (6) trading information. For example, the Information
Bulletin will advise ETP Holders, prior to the commencement of trading,
of the prospectus delivery requirements applicable to the Trust. The
Exchange notes that investors purchasing Shares directly from the Trust
will receive a prospectus. ETP Holders purchasing Shares from the Trust
for resale to investors will deliver a prospectus to such investors.
In addition, the Information Bulletin will reference that the Trust
is subject to various fees and expenses as described in the
Registration Statement. The Information Bulletin will disclose that
information about the Shares of the Trust is publicly available on the
Trust's Web site.
The Information Bulletin will also discuss any relief, if granted,
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \33\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

\33\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange

[[Page 50776]]

pursuant to the initial and continued listing criteria in NYSE Arca
Equities Rule 8.201. The Exchange has in place surveillance procedures
that are adequate to properly monitor trading in the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and applicable federal securities laws. The Exchange or FINRA, on
behalf of the Exchange, or both, will communicate as needed regarding
trading in the Shares with other markets that are members of the ISG,
and the Exchange or FINRA, on behalf of the Exchange, or both, may
obtain trading information regarding trading in the Shares from such
markets. In addition, the Exchange may obtain information regarding
trading in the Shares from markets that are members of ISG or with
which the Exchange has in place a CSSA. Also, pursuant to NYSE Arca
Equities Rule 8.201(g), the Exchange is able to obtain information
regarding trading in the Shares and the underlying bitcoin or any
bitcoin derivative through ETP Holders acting as registered Market
Makers, in connection with such ETP Holders' proprietary or customer
trades through ETP Holders which they effect on any relevant market.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that there is a considerable amount of bitcoin price and bitcoin market
information available on public Web sites and through professional and
subscription services. Investors may obtain on a 24-hour basis bitcoin
pricing information based on the spot price for bitcoin from various
financial information service providers. The closing price and
settlement prices of bitcoin are readily available from the bitcoin
exchanges and other publicly available Web sites. In addition, such
prices are published in public sources or on-line information services
such as Bloomberg and Reuters. The Trust will provide Web site
disclosure of its bitcoin holdings daily. Quotation and last-sale
information regarding the Shares will be disseminated through the
facilities of the CTA. The IIV will be widely disseminated on a per
Share basis every 15 seconds during the NYSE Arca Core Trading Session
by one or more major market data vendors. In addition, the IIV will be
published on the NYSE Global Index Feed and will be available through
on-line information services such as Bloomberg and Reuters. The
Exchange represents that the Exchange may halt trading during the day
in which an interruption to the dissemination of the IIV or the value
of bitcoin occurs. If the interruption to the dissemination of the IIV
or the value of bitcoin persists past the trading day in which it
occurred, the Exchange will halt trading no later than the beginning of
the trading day following the interruption. In addition, if the
Exchange becomes aware that the NAV with respect to the Shares is not
disseminated to all market participants at the same time, it will halt
trading in the Shares until such time as the NAV is available to all
market participants. The NAV per Share will be calculated daily and
made available to all market participants at the same time. One or more
major market data vendors will disseminate for the Trust on a daily
basis information with respect to the recent NAV per Share and Shares
outstanding.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a CSSA. In addition, as noted above,
investors will have ready access to information regarding the Trust's
bitcoin holdings, IIV and quotation and last sale information for the
Shares.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product, and the first such product
based on bitcoin, which will enhance competition among market
participants, to the benefit of investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

No written comments were solicited or received with respect to the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this 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 such proposed rule change; or (b)
institute proceedings to determine whether the proposed rule change
should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2016-101 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2016-101. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the

[[Page 50777]]

filing will also be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEArca-2016-101 and should be submitted on or before
August 23, 2016.
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\34\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18204 Filed 8-1-16; 8:45 am]
BILLING CODE 8011-01-P

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