Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change to BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, To List and Trade Winklevoss Bitcoin Shares Issued by the Winklevoss Bitcoin Trust, 71778-71782 [2016-25082]

Download as PDF 71778 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Notices Dated: October 11, 2016. Robert W. Errett, Deputy Secretary. [FR Doc. 2016–25088 Filed 10–17–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Proposed Collection; Comment Request Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 20549–2736. Lhorne on DSK30JT082PROD with NOTICES Extension: Rule 6a–4, Form 1–N; SEC File No. 270– 496, OMB Control No. 3235–0554. Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (‘‘Commission’’) is soliciting comments on the collection of information provided for in Rule 6a–4 and Form 1– N, summarized below. The Commission plans to submit this existing collection of information to the Office of Management and Budget for extension and approval. The Code of Federal Regulation citation to this collection of information is 17 CFR 240.6a–4 and 17 CFR 249.10 under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) (the ‘‘Act’’). Section 6 of the Act 1 sets out a framework for the registration and regulation of national securities exchanges. Under the Commodity Futures Modernization Act of 2000, a futures market may trade security futures products by registering as a national securities exchange. Rule 6a– 4 2 sets forth these registration procedures and directs futures markets to submit a notice registration on Form 1–N.3 Form 1–N calls for information regarding how the futures market operates, its rules and procedures, corporate governance, its criteria for membership, its subsidiaries and affiliates, and the security futures products it intends to trade. Rule 6a–4 also requires entities that have submitted an initial Form 1–N to file: (1) Amendments to Form 1–N in the event of material changes to the information provided in the initial Form 1–N; (2) periodic updates of certain information provided in the initial Form 1–N; (3) certain information that is provided to the futures market’s members; and (4) a 1 15 U.S.C. 78f. CFR 240.6a–4. 3 17 CFR 249.10. 2 17 VerDate Sep<11>2014 13:19 Oct 17, 2016 Jkt 241001 monthly report summarizing the futures market’s trading of security futures products. The information required to be filed with the Commission pursuant to Rule 6a–4 is designed to enable the Commission to carry out its statutorily mandated oversight functions and to ensure that registered and exempt exchanges continue to be in compliance with the Act. The respondents to the collection of information are futures markets. The Commission estimates that the total annual burden for all respondents to provide ad hoc amendments 4 to keep the Form 1–N accurate and up to date as required under Rule 6a–4 would be 60 hours (15 hours/respondent per year × 4 respondents 5) and $400 of miscellaneous clerical expenses. The Commission estimates that the total annual burden for all respondents to provide annual and three-year amendments 6 under Rule 6a–4 would be 88 hours (22 hours/respondent per year × 4 respondents) and $576 ($144 per year × 4 respondents 7). The Commission estimates that the total annual burden for the filing of the supplemental information 8 and the monthly reports required under Rule 6a–4 would be 24 hours (6 hours/ respondent per year × 4 respondents 9) and $240 of miscellaneous clerical expenses. Thus, the Commission estimates the total annual burden for complying with Rule 6a–4 is 172 hours and $1216 in miscellaneous clerical expenses. Compliance with Rule 6a–4 is mandatory. Information received in response to Rule 6a–4 shall not be kept confidential; the information collected is public information. Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency’s estimate of the burden of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or 4 17 CFR 240.6a–4(b)(1). Commission estimates that four exchanges will file amendments with the Commission in order to keep their Form 1–N current. 6 17 CFR 240.6a–4(b)(3) and (4). 7 The Commission notes that while there are currently five Security Futures Product Exchanges, one of those exchanges, NQLX, is dormant. 8 17 CFR 240.6a–4(c). 9 See supra footnote 7. 5 The PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information under the PRA unless it displays a currently valid OMB control number. Please direct your written comments to: Pamela Dyson, Director/Chief Information Officer, Securities and Exchange Commission, c/o Remi PavlikSimon, 100 F Street NE., Washington, DC 20549 or send an email to: PRA_ Mailbox@sec.gov. Dated: October 12, 2016. Robert W. Errett, Deputy Secretary. [FR Doc. 2016–25089 Filed 10–17–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79084; File No. SR– BatsBZX–2016–30] Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change to BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, To List and Trade Winklevoss Bitcoin Shares Issued by the Winklevoss Bitcoin Trust October 12, 2016. On June 30, 2016, Bats BZX Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade Winklevoss Bitcoin Shares (‘‘Shares’’) issued by the Winklevoss Bitcoin Trust (‘‘Trust’’) under BZX Rule 14.11(e)(4). The proposed rule change was published for comment in the Federal Register on July 14, 2016.3 The Commission has received six comment letters on the proposed rule change.4 On August 23, 2016, pursuant 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 78262 (Jul. 8, 2016), 81 FR 45554 (‘‘Notice’’). 4 See Letters from Robert D. Miller, VP Technical Services, RKL eSolutions (July 11, 2016) (‘‘Miller Letter’’); Jorge Stolfi, Full Professor, Institute of Computing UNICAMP (July 13, 2016) (‘‘Stolfi Letter’’); Guillaume Lethuillier (July 26, 2016) (‘‘Lethuillier Letter’’); Michael B. Casey (July 31, 2016) (‘‘Casey Letter’’); Erik A. Aronesty, Sr. Software Engineer, Bloomberg LP (Aug. 2, 2016) 2 17 E:\FR\FM\18OCN1.SGM 18OCN1 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Notices to Section 19(b)(2) of the Act,5 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.6 This order institutes proceedings under Section 19(b)(2)(B) of the Act 7 to determine whether to approve or disapprove the proposed rule change. Lhorne on DSK30JT082PROD with NOTICES I. Summary of the Proposal 8 The Exchange proposes to list and trade the Shares under BZX Rule 14.11(e)(4), which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.9 The Shares, which will be registered with the Commission by means of the Trust’s Registration Statement,10 represent units of fractional undivided beneficial interest in and ownership of the Trust. Digital Asset Services, LLC will be the sponsor of the Trust (‘‘Sponsor’’). Gemini Trust Company, LLC, the custodian of the Trust (‘‘Custodian’’), (‘‘Aronesty Letter’’); and Dan Anderson (Aug. 27, 2016) (‘‘Anderson Letter’’). All comments on the proposed rule change are available on the Commission’s Web site at: https://www.sec.gov/ comments/sr-batsbzx-2016-30/ batsbzx201630.shtml. 5 15 U.S.C. 78s(b)(2). 6 See Securities Exchange Act Release No. 78653, 81 FR 59256 (Aug. 29, 2016). The Commission designated October 12, 2016, as the date by which it should approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. 7 15 U.S.C. 78s(b)(2)(B). 8 The Commission notes that additional information regarding the Trust and the Shares, including investment objectives, risks, creation and redemption procedures, fees, portfolio holdings disclosure policies, calculation of NAV, distributions, and taxes, as well as additional background information about bitcoins and the Bitcoin network, including information relating to Bitcoin network operations, bitcoin transfers and transactions, cryptographic security used in the Bitcoin network, Bitcoin mining and creation of new bitcoins, the mathematically controlled supply of bitcoins, modifications to the Bitcoin protocol, among other things, can be found in the Notice (see supra note 3) and the registration statement filed with the Commission on Form S–1 (File No. 333– 189752) under the Securities Act of 1933 (‘‘Registration Statement’’), as applicable. 9 See BZX Rule 14.11(e)(4)(C) (permitting the listing and trading of ‘‘Commodity-Based Trust Shares,’’ defined as a security (a) that is issued by a trust that holds a specified commodity deposited with the trust; (b) that is issued by such Trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity; and (c) that, when aggregated in the same specified minimum number, may be redeemed at a holder’s request by such Trust which will deliver to the redeeming holder the quantity of the underlying commodity). 10 See Registration Statement, supra note 8. The Exchange states that the most recent amendment to the Registration Statement was filed on June 29, 2016, and that the Registration Statement will be effective as of the date of any offer and sale pursuant to the Registration Statement. VerDate Sep<11>2014 13:19 Oct 17, 2016 Jkt 241001 will hold the deposited bitcoins on behalf of the Trust in a segregated custody account. The Exchange has represented that the Custodian will use its proprietary and patent-pending offline (i.e., air-gapped) cold-storage system to store the Trust’s bitcoins.11 According to the Exchange, the Trust will hold only bitcoins as an asset.12 The investment objective of the Trust is for the Shares to track the price of bitcoins, as measured by the spot price at 4:00 p.m. Eastern time on the Gemini Exchange 13 each day the Exchange is open for trading, minus the Trust’s liabilities (which include accrued but unpaid fees and expenses). On each business day, the Trust’s administrator will use the Gemini Exchange spot price as measured at 4:00 p.m. Eastern time to calculate the Trust’s net asset value (‘‘NAV’’). The Trust will issue and redeem the Shares in ‘‘Baskets’’ only to certain Authorized Participants on an ongoing basis.14 Creation Baskets will be distributed to the Authorized Participants by the Trust in exchange for the delivery to the Trust of the appropriate number of bitcoins (i.e., bitcoins equal in value to the value of the Shares being purchased). On a redemption, the Trust will distribute bitcoins equal in value to the value of the Shares being redeemed to the redeeming Authorized Participant in exchange for the delivery to the Trust of one or more Baskets. On each business day, the value of a Basket for a creation transaction and the value of a Basket for a redemption transaction will be equal to one another (i.e., each Basket will consist of 50,000 Shares, and the value 11 According to the Exchange, the Custodian is an affiliate of the Sponsor and a New York Statechartered limited liability trust company that operates under the direct supervision and regulatory authority of the New York State Department of Financial Services. The Trust’s public Bitcoin addresses are established by the Custodian using its proprietary hardware and software security technology. The Trust will employ security procedures, described in greater detail in the Notice and the Registration Statement, to safeguard the bitcoin assets of the Trust. See Notice and Registation Statement, supra notes 3 and 8, respectively. 12 As described in greater detail in the Notice and the Registration Statement, a bitcoin (with a lower case ‘‘b’’) is a digital asset that is based on the decentralized, open-source protocol of the peer-topeer Bitcoin computer network. The Bitcoin network (with a capital ‘‘B’’) hosts the decentralized public transaction ledger, known as the ‘‘Blockchain,’’ on which all bitcoins are recorded. See Notice and Registation Statement, supra notes 3 and 8, respectively. 13 The Gemini Exchange is a digital-asset exchange owned and operated by the Custodian and is an affiliate of the Sponsor. 14 Each Basket will consist of 50,000 Shares, and the value of the Basket will be equal to the value of 50,000 Shares at their NAV per Share on that day. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 71779 of the Basket will be equal to the value of 50,000 Shares at the NAV per Share on that day). II. Summary of Comment Letters The Commission has received six comment letters on the proposed rule change.15 The following is a summary of those letters. A. Timing of the Proposal and Investor Access to Bitcoin One commenter states that the proposal is a timely opportunity for the Exchange and investors, and that the proposal will allow investors to invest in the technology without having to deal with the complexity of holding bitcoins directly.16 Another commenter states that it supports the goals of the Trust and finds the proposal to be appropriate and timely, noting that Bitcoin is in a pivotal year and is maturing, and noting that the average number of daily Bitcoin transactions is currently 200,000, that more than 350,000 unique addresses are being used to hold bitcoins,17 and that the Bitcoin miners (who validate transaction blocks through computational hashes) conduct more than a billion hashes per second.18 In addition, the commenter states that, in practice, while using Bitcoin may appear complex and forbidding, based on fear of theft and concerns about legal and tax issues, among other things, the Trust can help a whole category of people to gain access, albeit indirectly, to Bitcoin.19 B. Need for Additional Control and Security Measures With respect to security measures to be implemented by the Trust, one commenter recommends that additional steps mandating ‘‘proof of control’’ audits be employed to protect the consumers of this ETP.20 Specifically, the commenter recommends a monthly ‘‘proof of control’’ audit of all of the Trust’s bitcoins to be performed by the Custodian and provided to the Sponsor, who should display the signed messages on its Web site to publicly demonstrate proof of control over the bitcoins held by the Trust.21 According to this commenter, the message to be signed can be the mined hash of a 15 See supra note 4 and accompanying text. Miller Letter, supra note 4. 17 Additional information about Bitcoin addresses and storage, mining, bitcoin transfers, and the Blockchain, among other things, can be found in the Notice. See Notice, 81 FR at 45556–45561, supra note 3. 18 See Lethuillier Letter at 1–2, supra note 4. 19 See id. at 2. 20 See Casey Letter, supra note 4. 21 See id. at 2. 16 See E:\FR\FM\18OCN1.SGM 18OCN1 71780 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Notices predetermined block height, which is guaranteed to be both easily verifiable and unknown in advance,22 and the signatures can be created with the private keys still in cold storage and airgapped.23 This commenter notes that publicly identifying the addresses holding the bitcoins adds no risk to them being stolen due to the nature of Bitcoin.24 According to the commenter, the bitcoins remain secure from even quantum attack as the public key is never revealed, no additional risk is incurred by publishing the proof-ofcontrol audit, and opening control to public audit vastly increases confidence in possession and control of the underlying asset.25 In addition, the commenter notes that publishing the proof-of-control audit on a monthly basis would not place an undue burden on either the Sponsor or Custodian, as less-regular audits are scheduled in any event.26 Another commenter addressed proofof-control audits, adding that, unlike with non-digital assets, an ‘‘audit’’ of assets in bitcoins can be low cost, public, and automated, and that there is no legitimate reason to maintain secrecy of the holdings involved in a trust or exchange.27 This commenter notes that a well-managed trust should be able to trivially update its proof of assets at least once every day, if not more often (every time a bitcoin is moved or acquired).28 This commenter proposes that the Commission require that any trust holding bitcoins either (i) maintain insurance on its assets, or (ii) allow for public, daily audit of funds. Without one of those two measures, the commenter states, investors in a bitcoin trust cannot be reasonably assured that their investment is being soundly custodied.29 The commenter concludes by stating that, given the nature of bitcoins as electronic assets, a public and daily proof, rather than the stated provisions for private audits, should also be considered.30 Another commenter states that, according to the proposed rule change, the Custodian’s Cold Storage System utilizes multiple-signature (‘‘Multisig’’) technology with an ‘‘M-of-N’’ signing design that requires a signature from more than one (1) Signer (but fewer than the full complement of potential Signers) in order to move the Trust’s Lhorne on DSK30JT082PROD with NOTICES 22 See id. 23 See id. 24 See id. 25 See id. 26 See id. 27 See Aronesty Letter, supra note 4. 28 See id. 29 See id. 30 See id. VerDate Sep<11>2014 13:19 Oct 17, 2016 Jkt 241001 bitcoins.31 The commenter recommends amending the proposal in order to unambiguously specify the M-of-N signing design used to secure the Custodian’s Cold Storage System and to require the Trust to notify interested third parties, such as the Commission or, as the case may be, the Trust’s insurer, of any modification of the Multisig characteristics in the future.32 Specifically, this commenter notes that the proposed rule change fails to provide a meaningful description of the security level of the storage system Multisig.33 The proposal, the commenter asserts, ‘‘merely defines what a [M]ultisig is, in general, while only excluding the extreme cases M = 1, insecure, and M = N, unpractical.’’ 34 The commenter states that the present signing design is complicated by the fact that the Signers, which are hardware devices, are activated by Signatories, which are human beings.35 The commenter states that, as result, the given definition is overly abstract and incomplete. Because the signing design is critical to the safety of the funds, the commenter asserts, ‘‘the Trust should communicate the following elements to the interested third parties such as the Commission or, as the case should be, the Trust’s insurer: (i) Exact number of required Signers; (ii) Exact number of potential Signers; (iii) detailed explanation of why the chosen M-of-N configuration is adequate; (iv) complete list of the Signatories and what Signer(s) they can activate; and (v) useful information related to the Signatories’ keys. . . . ’’ 36 The commenter adds that the Trust should notify the relevant persons without delay of any modification of any of the above elements: (i) Through (iii) should be publicly announced, and, for security reasons, (iv) and (v) should be notified to the interested third parties only.37 C. Need for Insurance on the Fund’s Holdings A commenter notes that ‘‘[b]ecause safety measures cannot prevent thefts from the outside or the inside, [and] because human rationality is inherently bounded,’’ he does not support the fact that the Trust’s bitcoins are not insured.38 This commenter further asserts that the Gemini Exchange was 31 Additional information about the ‘‘M-of-N’’ signing design can be found in the Notice. See Notice, 81 FR at 45566–45567, supra note 3. 32 See Lethuillier Letter at 3, supra note 4. 33 See id. 34 See id. 35 See id. 36 See id. 37 See id. 38 See Lethuillier Letter at 2–3, supra note 4. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 able to discover on its own a failure to secure the secret keys that would maintain the safe custody of bitcoins.39 D. Need for Regulation of the Bitcoin ETP Industry One commenter states that, despite the advances in Bitcoin development, owning and controlling bitcoins remains a highly specialized task, which includes secure management of private keys and ‘‘fairly advanced technological know-how.’’ 40 Because of the difficulty and specialized knowledge required to manage bitcoins, many investors rely on exchanges to act as custodians of their value. As a result, the commenter believes that a Bitcoin ETP is a major milestone and improvement and that it is crucial that the Commission regulate this industry.41 The commenter concludes by noting that the concerns regarding bitcoin security would be greatly diminished were it possible to trade an ETP backed by bitcoins, rather than the bitcoins themselves.42 E. Speculative Nature of Bitcoin as an Underlying Digital Asset One commenter disagreed with the notion that bitcoins are commodities; rather, the commenter likened bitcoins to be more like ‘‘penny stock’’ or shares of a ponzi scheme.43 The commenter notes that the market price of a bitcoin, like that of a penny stock or ponzi fund, is ‘‘entirely speculative, based on expectations of traders about future prices, which will be based on expectations of future expectations.’’ 44 The commenter asserts that Bitcoin has the essential characteristics of a penny stock or a pyramid scheme: The profit of early investors comes entirely from the investment of later ones.45 In the commenter’s view, because bitcoins are primarily used for investment, bitcoins should be regulated like a security, in which case they should be regulated the same way a penny stock or ponzi fund would be.46 The commenter concludes that the proposed ETF does not add any productive mechanism to the underlying bitcoins, but rather makes bitcoins accessible to investments funds, such as retirement funds.47 39 See id. Anderson Letter, supra note 4. 41 See id. 42 See id. 43 See Stolfi Letter, supra note 4. 44 See id. 45 See id. 46 See id. 47 See id. 40 See E:\FR\FM\18OCN1.SGM 18OCN1 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Notices F. Concerns Regarding the Gemini Exchange and the Gemini Exchange Spot Price One commenter expresses concerns regarding the Gemini Exchange Spot Price.48 Specifically, the commenter states, the nominal price of the shares under the proposal is supposed to be tied to the market price of bitcoins at the Gemini Exchange, which is closely tied to the ETP proponents.49 In addition, the commenter states, the Gemini Exchange has relatively low liquidity and trade volume in bitcoins.50 The commenter asserts that there is a significant risk that the nominal ETP share price ‘‘will be manipulated, by relatively small trades that manipulate the bitcoin price at that exchange.’’ 51 III. Proceedings To Determine Whether To Approve or Disapprove SR– BatsBZX–2016–30 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 52 to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change. Pursuant to Section 19(b)(2)(B) of the Act,53 the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,’’ and ‘‘to protect investors and the public interest.’’ 54 Lhorne on DSK30JT082PROD with NOTICES IV. Procedure: Request for Written Comments The Commission requests that interested persons provide written 48 See id. id. 50 See id. 51 See id. 52 15 U.S.C. 78s(b)(2)(B). 53 Id. 54 15 U.S.C. 78f(b)(5). 49 See VerDate Sep<11>2014 13:19 Oct 17, 2016 Jkt 241001 submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposal is consistent with Section 6(b)(5) or any other provision of the Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4, any request for an opportunity to make an oral presentation.55 Interested persons are invited to submit written data, views, and arguments regarding whether the proposal should be approved or disapproved by November 8, 2016. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by November 22, 2016. The Commission asks that commenters address the sufficiency of the Exchange’s statements in support of the proposal, which are set forth in the Notice,56 in addition to any other comments they may wish to submit about the proposed rule change. In particular, the Commission seeks comment on the following: 1. The proposed fund, if approved, would be the first exchange-traded product available on U.S. markets to hold a digital asset such as bitcoins, which have neither a physical form (unlike commodities) nor an issuer that is currently registered with any regulatory body (unlike securities, futures, or derivatives), and whose fundamental properties and ownership can, by coordination among a majority of its network processing power, be changed (unlike any of the above). Moreover, as the Exchange acknowledges in its proposal, less than three years ago, the bitcoin exchange then responsible for nearly threequarters of worldwide bitcoin trading lost a substantial amount of its bitcoin holdings through computer hacking or fraud and failed.57 What are commenters’ views about the current 55 Section 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 94–29 (June 4, 1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). 56 See supra note 3. 57 See Notice, supra note 3, at 25 n.19. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 71781 stability, resilience, fairness, and efficiency of the markets on which bitcoina are traded? What are commenters’ views on whether an asset with the novel and unique properties of a bitcoin is an appropriate underlying asset for a product that will be traded on a national securities exchange? What are commenters’ views on the risk of loss via computer hacking posed by such an asset? What are commenters’ views on whether an ETP based on such an asset would be susceptible to manipulation? 2. According to the Exchange, the Gemini Exchange Spot Price is representative of the accurate price of a bitcoin because of the positive pricediscovery attributes of the Gemini Exchange marketplace. What are commenters’ views on the manner in which the Trust proposes to value its holdings? 3. According to the Exchange, the Gemini Exchange is a Digital Asset exchange owned and operated by the Custodian and is an affiliate of the Sponsor. What are commenters’ views regarding whether any potential conflict of interest or other issue might arise due to the relationship between entities such as the Sponsor, the Custodian, and the Gemini Exchange? 4. According to several commenters, there is a need for the Exchange to provide additional information regarding ‘‘proof of control’’ auditing, multisig protocols, and insurance with respect to the bitcoins held in custody on behalf of the Trust, in the interest of adequate security and investor confidence in bitcoin control. What are commenters’ views on these recommendations regarding additional security, control, and insurance measures? 5. A commenter notes that the Gemini Exchange has relatively low liquidity and trading volume in bitcoins and that there is a significant risk that the nominal ETP share price ‘‘will be manipulated, by relatively small trades that manipulate the bitcoin price at that exchange.’’ 58 What are commenters’ views on the concerns expressed by this commenter? What are commenters’ views regarding the susceptibility of the price of the Shares to manipulation, considering that the NAV would be based on the spot price of a single bitcoin exchange? What are commenters’ views generally with respect to the liquidity and transparency of the bitcoin market, and thus the suitability of bitcoins as an underlying asset for an ETP? 6. The Exchange asserts that the widespread availability of information 58 See E:\FR\FM\18OCN1.SGM Stolfi Letter, supra note 4. 18OCN1 71782 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Notices regarding Bitcoin, the Trust, and the Shares, combined with the ability of Authorized Participants to create and redeem Baskets each Business Day, thereby utilizing the arbitrage mechanism, will be sufficient for market participants to value and trade the Shares in a manner that will not lead to significant deviations between intraday Best Bid/Best Ask and the Intraday Indicative Value or between the Best Bid/Best Ask and the NAV. In addition, the Exchange asserts that the numerous options for buying and selling bitcoins will both provide Authorized Participants with many options for hedging their positions and provide market participants generally with potential arbitrage opportunities, further strengthening the arbitrage mechanism as it relates to the Shares. What are commenters’ views regarding these statements? Do commenters’ agree or disagree with the assertion that Authorized Participants and other market makers will be able to make efficient and liquid markets in the Shares at prices generally in line with the NAV? What are commenters’ views on whether the relationship between the Gemini Exchange and the Trust’s Sponsor and Custodian might affect the arbitrage mechanism? Comments may be submitted by any of the following methods: Lhorne on DSK30JT082PROD with NOTICES 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– BatsBZX–2016–30 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 Numbers SR–BatsBZX–2016–30. 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 VerDate Sep<11>2014 13:19 Oct 17, 2016 Jkt 241001 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 these filings 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– BatsBZX–2016–30 and should be submitted on or before November 8, 2016. Rebuttal comments should be submitted by November 22, 2016. invest in FBM Holdings, LLC. Therefore this transaction is considered financing an Associate, requiring prior SBA exemption. Notice is hereby given that any interested person may submit written comments on the transaction, within fifteen days of the date of this publication, to the Associate Administrator for Investment, U.S. Small Business Administration, 409 Third Street SW., Washington, DC 20416. Dated: September 28, 2016. Mark L. Walsh, Associate Administrator for Office of Investment and Innovation. [FR Doc. 2016–25078 Filed 10–17–16; 8:45 am] BILLING CODE 8025–01–P For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.59 Robert W. Errett, Deputy Secretary. SMALL BUSINESS ADMINISTRATION [FR Doc. 2016–25082 Filed 10–17–16; 8:45 am] AGENCY: BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION [License No. 05/05–0315] Northcreek Mezzanine Fund II, L.P.; Notice Seeking Exemption Under Section 312 of the Small Business Investment Act, Conflicts of Interest Notice is hereby given that Northcreek Mezzanine Fund II, L.P., 312 Walnut Street, Suite 2310 Cincinnati, OH 45202, a Federal Licensee under the Small Business Investment Act of 1958, as amended (‘‘the Act’’), in connection with the financing of a small concern, has sought an exemption under Section 312 of the Act and Section 107.730, Financings which Constitute Conflicts of Interest of the Small Business Administration (‘‘SBA’’) Rules and Regulations (13 CFR 107.730). Northcreek Mezzanine Fund I, L.P. and Northcreek Mezzanine Fund II, L.P. propose to provide debt and equity financing to FBM Holdings LLC, 100 Winners Circle, Brentwood, TN 37027. The financing is brought within the purview of § 107.730(a)(2) of the Regulations because Northcreek Mezzanine Fund I, L.P. is currently invested in FBM Holdings, LLC and because of its level of ownership, FBM Holdings LLC is an Associate. Northcreek Mezzanine Fund I, L.P. and Northcreek Mezzanine Fund II, L.P. are also Associates and are seeking to co59 17 PO 00000 CFR 200.30–3(a)(57). Frm 00094 Fmt 4703 Sfmt 4703 [Disaster Declaration #14907 and #14908] IOWA Disaster #IA–00067 U.S. Small Business Administration ACTION: Notice This is a notice of an Administrative declaration of a disaster for the State of IOWA dated 10/11/2016. Incident: Severe Weather and Flooding Incident Period: 09/21/2016 through 10/03/2016 EFFECTIVE DATE: 10/11/2016 Physical Loan Application Deadline Date: 12/12/2016. Economic Injury (EIDL) Loan Application Deadline Date: 07/11/2017. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the Administrator’s disaster declaration, applications for disaster loans may be filed at the address listed above or other locally announced locations. The following areas have been determined to be adversely affected by the disaster: Primary Counties: Butler. Contiguous Counties: Iowa. Black Hawk, Bremer, Cerro Gordo, Chickasaw, Floyd, Franklin, Grundy, Hardin. The Interest Rates are: SUMMARY: E:\FR\FM\18OCN1.SGM 18OCN1

Agencies

[Federal Register Volume 81, Number 201 (Tuesday, October 18, 2016)]
[Notices]
[Pages 71778-71782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25082]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79084; File No. SR-BatsBZX-2016-30]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change to BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, To List and Trade Winklevoss Bitcoin Shares Issued by the 
Winklevoss Bitcoin Trust

October 12, 2016.
    On June 30, 2016, Bats BZX Exchange, Inc. (``BZX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade Winklevoss Bitcoin Shares (``Shares'') issued by the 
Winklevoss Bitcoin Trust (``Trust'') under BZX Rule 14.11(e)(4). The 
proposed rule change was published for comment in the Federal Register 
on July 14, 2016.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78262 (Jul. 8, 
2016), 81 FR 45554 (``Notice'').
---------------------------------------------------------------------------

    The Commission has received six comment letters on the proposed 
rule change.\4\ On August 23, 2016, pursuant

[[Page 71779]]

to Section 19(b)(2) of the Act,\5\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\6\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \7\ to determine 
whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \4\ See Letters from Robert D. Miller, VP Technical Services, 
RKL eSolutions (July 11, 2016) (``Miller Letter''); Jorge Stolfi, 
Full Professor, Institute of Computing UNICAMP (July 13, 2016) 
(``Stolfi Letter''); Guillaume Lethuillier (July 26, 2016) 
(``Lethuillier Letter''); Michael B. Casey (July 31, 2016) (``Casey 
Letter''); Erik A. Aronesty, Sr. Software Engineer, Bloomberg LP 
(Aug. 2, 2016) (``Aronesty Letter''); and Dan Anderson (Aug. 27, 
2016) (``Anderson Letter''). All comments on the proposed rule 
change are available on the Commission's Web site at: https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630.shtml.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 78653, 81 FR 59256 
(Aug. 29, 2016). The Commission designated October 12, 2016, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

I. Summary of the Proposal \8\
---------------------------------------------------------------------------

    \8\ The Commission notes that additional information regarding 
the Trust and the Shares, including investment objectives, risks, 
creation and redemption procedures, fees, portfolio holdings 
disclosure policies, calculation of NAV, distributions, and taxes, 
as well as additional background information about bitcoins and the 
Bitcoin network, including information relating to Bitcoin network 
operations, bitcoin transfers and transactions, cryptographic 
security used in the Bitcoin network, Bitcoin mining and creation of 
new bitcoins, the mathematically controlled supply of bitcoins, 
modifications to the Bitcoin protocol, among other things, can be 
found in the Notice (see supra note 3) and the registration 
statement filed with the Commission on Form S-1 (File No. 333-
189752) under the Securities Act of 1933 (``Registration 
Statement''), as applicable.
---------------------------------------------------------------------------

    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4), which governs the listing and trading of Commodity-Based 
Trust Shares on the Exchange.\9\ The Shares, which will be registered 
with the Commission by means of the Trust's Registration Statement,\10\ 
represent units of fractional undivided beneficial interest in and 
ownership of the Trust. Digital Asset Services, LLC will be the sponsor 
of the Trust (``Sponsor''). Gemini Trust Company, LLC, the custodian of 
the Trust (``Custodian''), will hold the deposited bitcoins on behalf 
of the Trust in a segregated custody account. The Exchange has 
represented that the Custodian will use its proprietary and patent-
pending offline (i.e., air-gapped) cold-storage system to store the 
Trust's bitcoins.\11\
---------------------------------------------------------------------------

    \9\ See BZX Rule 14.11(e)(4)(C) (permitting the listing and 
trading of ``Commodity-Based Trust Shares,'' defined as a security 
(a) that is issued by a trust that holds a specified commodity 
deposited with the trust; (b) that is issued by such Trust in a 
specified aggregate minimum number in return for a deposit of a 
quantity of the underlying commodity; and (c) that, when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request by such Trust which will deliver to the redeeming holder the 
quantity of the underlying commodity).
    \10\ See Registration Statement, supra note 8. The Exchange 
states that the most recent amendment to the Registration Statement 
was filed on June 29, 2016, and that the Registration Statement will 
be effective as of the date of any offer and sale pursuant to the 
Registration Statement.
    \11\ According to the Exchange, the Custodian is an affiliate of 
the Sponsor and a New York State-chartered limited liability trust 
company that operates under the direct supervision and regulatory 
authority of the New York State Department of Financial Services. 
The Trust's public Bitcoin addresses are established by the 
Custodian using its proprietary hardware and software security 
technology. The Trust will employ security procedures, described in 
greater detail in the Notice and the Registration Statement, to 
safeguard the bitcoin assets of the Trust. See Notice and 
Registation Statement, supra notes 3 and 8, respectively.
---------------------------------------------------------------------------

    According to the Exchange, the Trust will hold only bitcoins as an 
asset.\12\ The investment objective of the Trust is for the Shares to 
track the price of bitcoins, as measured by the spot price at 4:00 p.m. 
Eastern time on the Gemini Exchange \13\ each day the Exchange is open 
for trading, minus the Trust's liabilities (which include accrued but 
unpaid fees and expenses). On each business day, the Trust's 
administrator will use the Gemini Exchange spot price as measured at 
4:00 p.m. Eastern time to calculate the Trust's net asset value 
(``NAV''). The Trust will issue and redeem the Shares in ``Baskets'' 
only to certain Authorized Participants on an ongoing basis.\14\ 
Creation Baskets will be distributed to the Authorized Participants by 
the Trust in exchange for the delivery to the Trust of the appropriate 
number of bitcoins (i.e., bitcoins equal in value to the value of the 
Shares being purchased). On a redemption, the Trust will distribute 
bitcoins equal in value to the value of the Shares being redeemed to 
the redeeming Authorized Participant in exchange for the delivery to 
the Trust of one or more Baskets. On each business day, the value of a 
Basket for a creation transaction and the value of a Basket for a 
redemption transaction will be equal to one another (i.e., each Basket 
will consist of 50,000 Shares, and the value of the Basket will be 
equal to the value of 50,000 Shares at the NAV per Share on that day).
---------------------------------------------------------------------------

    \12\ As described in greater detail in the Notice and the 
Registration Statement, a bitcoin (with a lower case ``b'') is a 
digital asset that is based on the decentralized, open-source 
protocol of the peer-to-peer Bitcoin computer network. The Bitcoin 
network (with a capital ``B'') hosts the decentralized public 
transaction ledger, known as the ``Blockchain,'' on which all 
bitcoins are recorded. See Notice and Registation Statement, supra 
notes 3 and 8, respectively.
    \13\ The Gemini Exchange is a digital-asset exchange owned and 
operated by the Custodian and is an affiliate of the Sponsor.
    \14\ Each Basket will consist of 50,000 Shares, and the value of 
the Basket will be equal to the value of 50,000 Shares at their NAV 
per Share on that day.
---------------------------------------------------------------------------

II. Summary of Comment Letters

    The Commission has received six comment letters on the proposed 
rule change.\15\ The following is a summary of those letters.
---------------------------------------------------------------------------

    \15\ See supra note 4 and accompanying text.
---------------------------------------------------------------------------

A. Timing of the Proposal and Investor Access to Bitcoin

    One commenter states that the proposal is a timely opportunity for 
the Exchange and investors, and that the proposal will allow investors 
to invest in the technology without having to deal with the complexity 
of holding bitcoins directly.\16\ Another commenter states that it 
supports the goals of the Trust and finds the proposal to be 
appropriate and timely, noting that Bitcoin is in a pivotal year and is 
maturing, and noting that the average number of daily Bitcoin 
transactions is currently 200,000, that more than 350,000 unique 
addresses are being used to hold bitcoins,\17\ and that the Bitcoin 
miners (who validate transaction blocks through computational hashes) 
conduct more than a billion hashes per second.\18\ In addition, the 
commenter states that, in practice, while using Bitcoin may appear 
complex and forbidding, based on fear of theft and concerns about legal 
and tax issues, among other things, the Trust can help a whole category 
of people to gain access, albeit indirectly, to Bitcoin.\19\
---------------------------------------------------------------------------

    \16\ See Miller Letter, supra note 4.
    \17\ Additional information about Bitcoin addresses and storage, 
mining, bitcoin transfers, and the Blockchain, among other things, 
can be found in the Notice. See Notice, 81 FR at 45556-45561, supra 
note 3.
    \18\ See Lethuillier Letter at 1-2, supra note 4.
    \19\ See id. at 2.
---------------------------------------------------------------------------

B. Need for Additional Control and Security Measures

    With respect to security measures to be implemented by the Trust, 
one commenter recommends that additional steps mandating ``proof of 
control'' audits be employed to protect the consumers of this ETP.\20\ 
Specifically, the commenter recommends a monthly ``proof of control'' 
audit of all of the Trust's bitcoins to be performed by the Custodian 
and provided to the Sponsor, who should display the signed messages on 
its Web site to publicly demonstrate proof of control over the bitcoins 
held by the Trust.\21\ According to this commenter, the message to be 
signed can be the mined hash of a

[[Page 71780]]

predetermined block height, which is guaranteed to be both easily 
verifiable and unknown in advance,\22\ and the signatures can be 
created with the private keys still in cold storage and air-gapped.\23\ 
This commenter notes that publicly identifying the addresses holding 
the bitcoins adds no risk to them being stolen due to the nature of 
Bitcoin.\24\ According to the commenter, the bitcoins remain secure 
from even quantum attack as the public key is never revealed, no 
additional risk is incurred by publishing the proof-of-control audit, 
and opening control to public audit vastly increases confidence in 
possession and control of the underlying asset.\25\ In addition, the 
commenter notes that publishing the proof-of-control audit on a monthly 
basis would not place an undue burden on either the Sponsor or 
Custodian, as less-regular audits are scheduled in any event.\26\
---------------------------------------------------------------------------

    \20\ See Casey Letter, supra note 4.
    \21\ See id. at 2.
    \22\ See id.
    \23\ See id.
    \24\ See id.
    \25\ See id.
    \26\ See id.
---------------------------------------------------------------------------

    Another commenter addressed proof-of-control audits, adding that, 
unlike with non[hyphen]digital assets, an ``audit'' of assets in 
bitcoins can be low cost, public, and automated, and that there is no 
legitimate reason to maintain secrecy of the holdings involved in a 
trust or exchange.\27\ This commenter notes that a well[hyphen]managed 
trust should be able to trivially update its proof of assets at least 
once every day, if not more often (every time a bitcoin is moved or 
acquired).\28\ This commenter proposes that the Commission require that 
any trust holding bitcoins either (i) maintain insurance on its assets, 
or (ii) allow for public, daily audit of funds. Without one of those 
two measures, the commenter states, investors in a bitcoin trust cannot 
be reasonably assured that their investment is being soundly 
custodied.\29\ The commenter concludes by stating that, given the 
nature of bitcoins as electronic assets, a public and daily proof, 
rather than the stated provisions for private audits, should also be 
considered.\30\
---------------------------------------------------------------------------

    \27\ See Aronesty Letter, supra note 4.
    \28\ See id.
    \29\ See id.
    \30\ See id.
---------------------------------------------------------------------------

    Another commenter states that, according to the proposed rule 
change, the Custodian's Cold Storage System utilizes multiple-signature 
(``Multisig'') technology with an ``M-of-N'' signing design that 
requires a signature from more than one (1) Signer (but fewer than the 
full complement of potential Signers) in order to move the Trust's 
bitcoins.\31\ The commenter recommends amending the proposal in order 
to unambiguously specify the M-of-N signing design used to secure the 
Custodian's Cold Storage System and to require the Trust to notify 
interested third parties, such as the Commission or, as the case may 
be, the Trust's insurer, of any modification of the Multisig 
characteristics in the future.\32\ Specifically, this commenter notes 
that the proposed rule change fails to provide a meaningful description 
of the security level of the storage system Multisig.\33\ The proposal, 
the commenter asserts, ``merely defines what a [M]ultisig is, in 
general, while only excluding the extreme cases M = 1, insecure, and M 
= N, unpractical.'' \34\ The commenter states that the present signing 
design is complicated by the fact that the Signers, which are hardware 
devices, are activated by Signatories, which are human beings.\35\ The 
commenter states that, as result, the given definition is overly 
abstract and incomplete. Because the signing design is critical to the 
safety of the funds, the commenter asserts, ``the Trust should 
communicate the following elements to the interested third parties such 
as the Commission or, as the case should be, the Trust's insurer: (i) 
Exact number of required Signers; (ii) Exact number of potential 
Signers; (iii) detailed explanation of why the chosen M-of-N 
configuration is adequate; (iv) complete list of the Signatories and 
what Signer(s) they can activate; and (v) useful information related to 
the Signatories' keys. . . . '' \36\ The commenter adds that the Trust 
should notify the relevant persons without delay of any modification of 
any of the above elements: (i) Through (iii) should be publicly 
announced, and, for security reasons, (iv) and (v) should be notified 
to the interested third parties only.\37\
---------------------------------------------------------------------------

    \31\ Additional information about the ``M-of-N'' signing design 
can be found in the Notice. See Notice, 81 FR at 45566-45567, supra 
note 3.
    \32\ See Lethuillier Letter at 3, supra note 4.
    \33\ See id.
    \34\ See id.
    \35\ See id.
    \36\ See id.
    \37\ See id.
---------------------------------------------------------------------------

C. Need for Insurance on the Fund's Holdings

    A commenter notes that ``[b]ecause safety measures cannot prevent 
thefts from the outside or the inside, [and] because human rationality 
is inherently bounded,'' he does not support the fact that the Trust's 
bitcoins are not insured.\38\ This commenter further asserts that the 
Gemini Exchange was able to discover on its own a failure to secure the 
secret keys that would maintain the safe custody of bitcoins.\39\
---------------------------------------------------------------------------

    \38\ See Lethuillier Letter at 2-3, supra note 4.
    \39\ See id.
---------------------------------------------------------------------------

D. Need for Regulation of the Bitcoin ETP Industry

    One commenter states that, despite the advances in Bitcoin 
development, owning and controlling bitcoins remains a highly 
specialized task, which includes secure management of private keys and 
``fairly advanced technological know-how.'' \40\ Because of the 
difficulty and specialized knowledge required to manage bitcoins, many 
investors rely on exchanges to act as custodians of their value. As a 
result, the commenter believes that a Bitcoin ETP is a major milestone 
and improvement and that it is crucial that the Commission regulate 
this industry.\41\ The commenter concludes by noting that the concerns 
regarding bitcoin security would be greatly diminished were it possible 
to trade an ETP backed by bitcoins, rather than the bitcoins 
themselves.\42\
---------------------------------------------------------------------------

    \40\ See Anderson Letter, supra note 4.
    \41\ See id.
    \42\ See id.
---------------------------------------------------------------------------

E. Speculative Nature of Bitcoin as an Underlying Digital Asset

    One commenter disagreed with the notion that bitcoins are 
commodities; rather, the commenter likened bitcoins to be more like 
``penny stock'' or shares of a ponzi scheme.\43\ The commenter notes 
that the market price of a bitcoin, like that of a penny stock or ponzi 
fund, is ``entirely speculative, based on expectations of traders about 
future prices, which will be based on expectations of future 
expectations.'' \44\ The commenter asserts that Bitcoin has the 
essential characteristics of a penny stock or a pyramid scheme: The 
profit of early investors comes entirely from the investment of later 
ones.\45\ In the commenter's view, because bitcoins are primarily used 
for investment, bitcoins should be regulated like a security, in which 
case they should be regulated the same way a penny stock or ponzi fund 
would be.\46\ The commenter concludes that the proposed ETF does not 
add any productive mechanism to the underlying bitcoins, but rather 
makes bitcoins accessible to investments funds, such as retirement 
funds.\47\
---------------------------------------------------------------------------

    \43\ See Stolfi Letter, supra note 4.
    \44\ See id.
    \45\ See id.
    \46\ See id.
    \47\ See id.

---------------------------------------------------------------------------

[[Page 71781]]

F. Concerns Regarding the Gemini Exchange and the Gemini Exchange Spot 
Price

    One commenter expresses concerns regarding the Gemini Exchange Spot 
Price.\48\ Specifically, the commenter states, the nominal price of the 
shares under the proposal is supposed to be tied to the market price of 
bitcoins at the Gemini Exchange, which is closely tied to the ETP 
proponents.\49\ In addition, the commenter states, the Gemini Exchange 
has relatively low liquidity and trade volume in bitcoins.\50\ The 
commenter asserts that there is a significant risk that the nominal ETP 
share price ``will be manipulated, by relatively small trades that 
manipulate the bitcoin price at that exchange.'' \51\
---------------------------------------------------------------------------

    \48\ See id.
    \49\ See id.
    \50\ See id.
    \51\ See id.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-
BatsBZX-2016-30 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \52\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\53\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \54\
---------------------------------------------------------------------------

    \53\ Id.
    \54\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\55\
---------------------------------------------------------------------------

    \55\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 8, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 22, 2016. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice,\56\ in addition to any other 
comments they may wish to submit about the proposed rule change. In 
particular, the Commission seeks comment on the following:
---------------------------------------------------------------------------

    \56\ See supra note 3.
---------------------------------------------------------------------------

    1. The proposed fund, if approved, would be the first exchange-
traded product available on U.S. markets to hold a digital asset such 
as bitcoins, which have neither a physical form (unlike commodities) 
nor an issuer that is currently registered with any regulatory body 
(unlike securities, futures, or derivatives), and whose fundamental 
properties and ownership can, by coordination among a majority of its 
network processing power, be changed (unlike any of the above). 
Moreover, as the Exchange acknowledges in its proposal, less than three 
years ago, the bitcoin exchange then responsible for nearly three-
quarters of worldwide bitcoin trading lost a substantial amount of its 
bitcoin holdings through computer hacking or fraud and failed.\57\ What 
are commenters' views about the current stability, resilience, 
fairness, and efficiency of the markets on which bitcoina are traded? 
What are commenters' views on whether an asset with the novel and 
unique properties of a bitcoin is an appropriate underlying asset for a 
product that will be traded on a national securities exchange? What are 
commenters' views on the risk of loss via computer hacking posed by 
such an asset? What are commenters' views on whether an ETP based on 
such an asset would be susceptible to manipulation?
---------------------------------------------------------------------------

    \57\ See Notice, supra note 3, at 25 n.19.
---------------------------------------------------------------------------

    2. According to the Exchange, the Gemini Exchange Spot Price is 
representative of the accurate price of a bitcoin because of the 
positive price-discovery attributes of the Gemini Exchange marketplace. 
What are commenters' views on the manner in which the Trust proposes to 
value its holdings?
    3. According to the Exchange, the Gemini Exchange is a Digital 
Asset exchange owned and operated by the Custodian and is an affiliate 
of the Sponsor. What are commenters' views regarding whether any 
potential conflict of interest or other issue might arise due to the 
relationship between entities such as the Sponsor, the Custodian, and 
the Gemini Exchange?
    4. According to several commenters, there is a need for the 
Exchange to provide additional information regarding ``proof of 
control'' auditing, multisig protocols, and insurance with respect to 
the bitcoins held in custody on behalf of the Trust, in the interest of 
adequate security and investor confidence in bitcoin control. What are 
commenters' views on these recommendations regarding additional 
security, control, and insurance measures?
    5. A commenter notes that the Gemini Exchange has relatively low 
liquidity and trading volume in bitcoins and that there is a 
significant risk that the nominal ETP share price ``will be 
manipulated, by relatively small trades that manipulate the bitcoin 
price at that exchange.'' \58\ What are commenters' views on the 
concerns expressed by this commenter? What are commenters' views 
regarding the susceptibility of the price of the Shares to 
manipulation, considering that the NAV would be based on the spot price 
of a single bitcoin exchange? What are commenters' views generally with 
respect to the liquidity and transparency of the bitcoin market, and 
thus the suitability of bitcoins as an underlying asset for an ETP?
---------------------------------------------------------------------------

    \58\ See Stolfi Letter, supra note 4.
---------------------------------------------------------------------------

    6. The Exchange asserts that the widespread availability of 
information

[[Page 71782]]

regarding Bitcoin, the Trust, and the Shares, combined with the ability 
of Authorized Participants to create and redeem Baskets each Business 
Day, thereby utilizing the arbitrage mechanism, will be sufficient for 
market participants to value and trade the Shares in a manner that will 
not lead to significant deviations between intraday Best Bid/Best Ask 
and the Intraday Indicative Value or between the Best Bid/Best Ask and 
the NAV. In addition, the Exchange asserts that the numerous options 
for buying and selling bitcoins will both provide Authorized 
Participants with many options for hedging their positions and provide 
market participants generally with potential arbitrage opportunities, 
further strengthening the arbitrage mechanism as it relates to the 
Shares. What are commenters' views regarding these statements? Do 
commenters' agree or disagree with the assertion that Authorized 
Participants and other market makers will be able to make efficient and 
liquid markets in the Shares at prices generally in line with the NAV? 
What are commenters' views on whether the relationship between the 
Gemini Exchange and the Trust's Sponsor and Custodian might affect the 
arbitrage mechanism?
    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-BatsBZX-2016-30 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 Numbers SR-BatsBZX-2016-30. 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 these filings 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-BatsBZX-2016-30 and should 
be submitted on or before November 8, 2016. Rebuttal comments should be 
submitted by November 22, 2016.
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    \59\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25082 Filed 10-17-16; 8:45 am]
 BILLING CODE 8011-01-P
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