Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 to 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, 76650-76670 [2016-26513]

Download as PDF 76650 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices 19(b)(3)(A)(iii) of the Act 22 and subparagraph (f)(6) of Rule 19b–4 thereunder.23 A proposed rule change filed under Rule 19b–4(f)(6) normally does not become operative prior to 30 days after the date of filing.24 Rule 19b– 4(f)(6)(iii), however, permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest.25 The Exchange has requested that the Commission waive the 30-day operative delay. The Commission believes that the proposed rule change is designed to ensure that there will always be a Clearing Member that will be financially responsible for a trade, which should promote greater operational certainty and facilitate cooperation and coordination with persons engaged in clearing transactions. In addition, the Commission believes that the proposal addresses the role of different parties involved in the give up process in a balanced manner and is designed to provide a fair and reasonable methodology for the give up process. The Commission notes that it has considered a substantially similar proposed rule change filed by the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’) and NYSE MKT LLC (‘‘NYSE MKT’’), which it approved after a notice and comment period.26 This proposed rule change does not raise any new or novel issues from those considered in the CBOE and NYSE MKT proposals. Based on the foregoing, the Commission believes that it is consistent with the protection of investors and the public interest to waive the 30-day operative date so that the proposal may take effect upon filing.27 At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the 22 15 U.S.C. 78s(b)(3)(a)(iii). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 24 17 CFR 240.19b–4(f)(6)(iii). 25 Id. 26 See supra note 5. 27 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). mstockstill on DSK3G9T082PROD with NOTICES 23 17 VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) of the Act 28 to determine whether the proposed rule change should be approved or 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– BatsEDGX–2016–58 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–BatsEDGX–2016–58. 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– BatsEDGX–2016–58, and should be 28 15 PO 00000 U.S.C. 78s(b)(2)(B). Frm 00098 Fmt 4703 Sfmt 4703 submitted on or before November 25, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Brent J. Fields, Secretary. [FR Doc. 2016–26512 Filed 11–2–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79183; File No. SR– BatsBZX–2016–30] Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 to 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 28, 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 issued by the Winklevoss Bitcoin 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 On August 23, 2016, pursuant to Section 19(b)(2) of the Act,4 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.5 On October 12, 2016, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act 6 to determine whether to approve or disapprove the proposed rule change.7 The Commission has 29 17 CFR 200.30–3(a)(12). 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. 4 15 U.S.C. 78s(b)(2). 5 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. 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 79084, 81 FR 71778 (Oct. 18, 2016) (‘‘Order Instituting Proceedings’’). Specifically, the Commission instituted proceedings to allow for additional analysis of the proposed rule change’s consistency 1 15 E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices received 17 comment letters on the proposed rule change.8 On October 20, 2016, the Exchange filed Amendment No. 1 to the proposed rule change, as described in Items I and II below, which Items have been prepared by the Exchange.9 The Commission is publishing this notice to solicit comments on Amendment No. 1 to the proposed rule change from interested persons.10 mstockstill on DSK3G9T082PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to list and trade Winklevoss Bitcoin Shares (the ‘‘Shares’’) issued by the Winklevoss Bitcoin Trust (the ‘‘Trust’’) under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. 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.’’ See id., 81 FR at 71781. 8 See Letters from Robert D. Miller, VP Technical Services, RKL eSolutions (July 11, 2016); Jorge Stolfi, Full Professor, Institute of Computing UNICAMP (July 13, 2016); Guillaume Lethuillier (July 26, 2016); Michael B. Casey (July 31, 2016); Erik A. Aronesty, Sr. Software Engineer, Bloomberg LP (Aug. 2, 2016); Dan Anderson (Aug. 27, 2016); Robert Miller (Oct. 12, 2016); Lysle Shaw-McMinn, O.D. (Oct. 13, 2016); Nils Neidhardt (Oct. 13, 2016); Dana K. Barish (2 letters; Oct. 13, 2016); Xin Lu (Oct. 13, 2016); Rodger Delehanty CFA (Oct. 14, 2016); Dylan (Oct. 14, 2016); Dana K. Barish (Oct. 14, 2016); and Dana K. Barish (2 letters; Oct. 15, 2016). 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. 9 Among other things, Amendment No. 1 (1) identifies State Street Bank and Trust Company as the Trust’s Administrator and Transfer Agent (see Section II.A.1, infra (discussion in subheading ‘‘Service Providers of the Trust’’)); (2) clarifies that the price of bitcoin is measured by the clearing price of a two-sided auction which occurs every day at 4:00 p.m. Eastern Time on the Gemini exchange (see Section II.A.1, infra (discussion in subheading ‘‘Service Providers of the Trust’’)) and notes various conflicts of interest that may arise among the Sponsor and its affiliates, including the Custodian and the Gemini Exchange, on one hand, and the Trust and its Shareholders, on the other hand (see Section II.A.1, infra (discussion in subheading ‘‘Overview of the Bitcoin Industry and Market’’ under ‘‘The Gemini Exchange’’)); (3) provides additional information on the Bitcoin exchange ‘‘lit’’ market (see Section II.A.1, infra (discussion in subheading ‘‘Bitcoin Market’’ under ‘‘Bitcoin Exchange Lit Market’’)); (4) provides additional information on security, the Custodian’s Cold Storage System, the Custodian’s insurance arrangements and proof of control auditing (see Section II.A.1, infra (discussion in subheading ‘‘Description of the Trust and Shares’’ under ‘‘Proprietary Cold Storage System’’)); and (5) changes the value of creation/redemption Baskets from 50,000 Shares to 10,000 Shares (see Section II.A.1, infra (discussion in subheading ‘‘Creation and Redemption of Shares’’)). 10 In formulating comments, commenters should consider whether this Amendment No. 1 addresses any of the questions posed in the Order to Institute Proceeding mentioned in footnote 5, supra. VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 The text of the proposed rule change is available at the Exchange’s Web site at www.batstrading.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 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 [sic] 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 This Amendment No. 1 to SR– BatsBZX–2016–30 amends and replaces in its entirety the proposal as originally submitted on June 30, 2016. The Exchange submits this Amendment No. 1 in order to clarify certain points and add additional details about the Trust. The Exchange proposes to list and trade the Shares under BZX Rule 14.11(e)(4),11 which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.12 The Shares will be offered by the Trust, which was established as a Delaware statutory trust on December 30, 2014. The Trust will not be registered as an investment company under the Investment Company Act of 1940 13 and is not required to register under such act. The Trust will not be a commodity pool for purposes of the Commodity Exchange Act (‘‘CEA’’).14 The Shares of the Trust will be registered with the Commission by means of the Trust’s registration statement on Form S–1 (the ‘‘Registration Statement’’) under the Securities Act of 1933 (the ‘‘Securities Act’’). The most recent amendment to 11 The Commission approved BZX Rule 14.11(e)(4) in Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR–BATS–2011–018). 12 All statements and representations made in this filing regarding (a) the description of the portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange rules and surveillance procedures shall constitute continued listing requirements for listing the Shares on the Exchange. 13 15 U.S.C. 80a–1. 14 17 U.S.C. 1. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 76651 the Registration Statement was filed on October 18, 2016 and the Registration Statement will be effective as of the date of any offer and sale pursuant to the Registration Statement.15 Service Providers of the Trust Digital Asset Services, LLC, formerly Math-Based Asset Services, LLC, will be the sponsor of the Trust (the ‘‘Sponsor’’).16 The Trust’s administrator (the ‘‘Administrator’’) 17 and transfer agent (the ‘‘Transfer Agent’’) will be State Street Bank and Trust Company (‘‘State Street’’).18 State Street is a trust company organized under the laws of the Commonwealth of Massachusetts. Gemini Trust Company, LLC will be the custodian of the Trust (the ‘‘Custodian’’).19 The Custodian is a New 15 See Registration Statement on Form S–1, dated October 18, 2016 (File No. 333–189752). The descriptions of the Trust and the Shares contained herein are based, in part, on information in the Registration Statement. 16 The Sponsor is a Delaware limited liability company formed on May 9, 2013, and is wholly owned by Winklevoss Capital Fund LLC. Under the Delaware Limited Liability Company Act and the governing documents of the Sponsor, Winklevoss Capital Fund LLC, the sole member of the Sponsor, is not responsible for the debts, obligations and liabilities of the Sponsor solely by reason of being the sole member of the Sponsor. The Sponsor will be the exclusive licensee, within the field of use of operation of an exchange-traded product (‘‘ETP’’), of certain patent-pending intellectual property regarding the operation of the Trust. Winklevoss IP LLC, an affiliate of the Sponsor, is the owner of and is licensing to the Sponsor such intellectual property for use by the Trust and the Custodian and other service providers in the operation of the Trust. The Sponsor arranged for the creation of the Trust and will arrange for the registration of the Shares for their public offering in the United States and their listing on the Exchange. 17 Pursuant to the Administration Agreement between the Administrator and the Trust, the Administrator provides fund administration and fund accounting services with regard to the Trust, including calculating the Trust’s net asset value and NAV, maintaining the Trust’s records, and providing such other administrative services as are specified in the Administration Agreement. 18 The Transfer Agent serves as the transfer agent in accordance with the provisions of the Transfer Agency and Services Agreement. The Transfer Agent, among other things, provides transfer agent services with respect to the creation and redemption of Baskets by Authorized Participants. 19 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 (‘‘NYSDFS’’). Although the Trust’s bitcoin is not stored in a physical sense, all transactions involving the Trust’s bitcoin are recorded on the Bitcoin Network’s Blockchain and associated with a public Bitcoin address. The Trust’s public Bitcoin addresses are established by the Custodian using its proprietary hardware and software security technology (‘‘Cold Storage System’’), which holds the Trust’s bitcoin and permits the Trust to move its bitcoin. Access and control of those Bitcoin addresses, and the bitcoin associated with them, is restricted through the public-private key pair relating to each Bitcoin address. The Custodian is E:\FR\FM\03NON1.SGM Continued 03NON1 76652 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES York State-chartered limited liability trust company that operates under the direct supervision and regulatory authority of the NYSDFS. The Custodian is a fiduciary and must meet the capitalization, compliance, antimoney laundering, consumer protection and cyber security requirements as set forth by the NYSDFS. The Custodian will hold the bitcoin deposited with the Custodian on behalf of the Trust in a segregated custody account (the ‘‘Trust Custody Account’’) in accordance with the Trust Custody Agreement. The Custodian will use its proprietary and patent-pending offline (i.e., air-gapped) Cold Storage System to store the Trust’s bitcoin, as further described herein. Delaware Trust Company acts as the trustee of the Trust (the ‘‘Trustee’’).20 The Trust will only hold bitcoin, which is a digital commodity 21 that is not issued by any government, bank or central organization. Bitcoin is a digital asset (‘‘Digital Asset’’) based on the decentralized, open source protocol of the peer-to-peer Bitcoin computer network (the ‘‘Bitcoin Network’’ or ‘‘Bitcoin’’) 22 that hosts the responsible for the safekeeping of the private keys used to access and transfer the Trust’s bitcoin. The Custodian also facilitates the transfer of bitcoin in accordance with the Administrator’s instructions pursuant to the terms of the Administration Agreement. Pursuant to the terms of the Trust Agreement and the trust custody agreement (‘‘Trust Custody Agreement’’), the Custodian will store all of the Trust’s bitcoin on a segregated basis in its unique Bitcoin addresses with balances that can be directly verified on the Blockchain. It will provide the Trust’s public Bitcoin addresses to the Administrator. Pursuant to the provisions of the Trust Custody Agreement, the Custodian will use the Cold Storage System to manage and safeguard a system utilizing numerous Bitcoin addresses that are kept offline either (i) in computers that are not directly connected to or accessible from the internet or (ii) through the storage of the public and private keys relating to such Bitcoin addresses only in ‘‘cold storage.’’ 20 The Trustee, a Delaware trust company, acts as the trustee of the Trust for the purpose of creating a Delaware statutory trust in accordance with the Delaware Statutory Trust Act (‘‘DSTA’’). The duties of the Trustee will be limited to (i) accepting legal process served on the Trust in the State of Delaware and (ii) the execution of any certificates required to be filed with the Delaware Secretary of State which the Delaware Trustee is required to execute under the DSTA. To the extent that, at law or in equity, the Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or the Sponsor, such duties and liabilities will be replaced by the duties and liabilities of the Trustee expressly set forth in the Trust Agreement. 21 Bitcoin is a commodity as defined in Section 1a(9) of the Commodity Exchange Act. 7 U.S.C. 1a(9). See In re Coinflip, Inc., No. 15–29 (CFTC Sept. 17, 2015), available at: https://www.cftc.gov/ ucm/groups/public/@lrenforcementactions/ documents/legalpleading/enfcoinfliprorder 09172015.pdf (‘‘Coinflip’’). 22 By common convention, Bitcoin with a capital ‘‘B’’ typically refers to the Bitcoin Network as a whole, whereas bitcoin with a lowercase ‘‘b’’ refers to the Digital Asset of the Bitcoin Network, VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 decentralized public transaction ledger, known as the ‘‘Blockchain,’’ on which all bitcoin is recorded. The Bitcoin Network software source code includes the protocols that govern the creation of bitcoin and the cryptographic system that secures and verifies Bitcoin transactions. The Trust is expected to issue and redeem Shares from time to time only in one or more whole Baskets. Certain Authorized Participants are the only persons that may place orders to create or redeem Baskets. Authorized Participants or their affiliated market makers are expected to have the facility to participate directly on one or more Bitcoin Exchanges (as defined below). The investment objective of the Trust is for the Shares to track the price of bitcoin, as measured by the clearing price of a two-sided auction which occurs every day at 4:00 p.m. Eastern Time on the Gemini exchange (‘‘Gemini Exchange’’) (the ‘‘Gemini Exchange Auction Price’’), each day the Exchange is open for trading (each a ‘‘Business Day’’), less the Trust’s liabilities (which include accrued but unpaid fees and expenses). The Gemini Exchange is a Digital Asset exchange owned and operated by the Custodian and is an affiliate of the Sponsor. The Gemini Exchange does not receive any compensation from the Trust or the Sponsor for providing the Gemini Exchange Auction Price. The Sponsor believes that, for many investors, the Shares will represent a cost-effective and convenient means of gaining investment exposure to bitcoin similar to a direct investment in bitcoin. The Shares represent units of fractional undivided beneficial interest in and ownership of the Trust and are expected to be traded under the ticker symbol ‘‘COIN.’’ Overview of the Bitcoin Industry and Market Bitcoin is a Digital Asset that is issued by, and transmitted through, the decentralized, open source protocol of the peer-to-peer Bitcoin Network. The Bitcoin Network hosts the decentralized public transaction ledger, known as the Blockchain, on which all bitcoin is recorded. No single entity owns or operates the Bitcoin Network, the infrastructure of which is collectively maintained by a decentralized user base. Bitcoin can be used to pay for goods and services or can be converted to fiat currencies, such as the U.S. Dollar, at rates determined on bitcoin exchanges including the Trust’s bitcoin. This naming convention is used throughout this document. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 (each a ‘‘Bitcoin Exchange’’) 23 or in individual end-user-to-end-user transactions under a barter system. See ‘‘Uses of Bitcoin—Bitcoin Exchange Market,’’ below. Bitcoin is ‘‘stored’’ or reflected on the Blockchain, which is a digital file stored in a decentralized manner on the computers of each Bitcoin Network user. The Bitcoin Network software source code includes the protocols that govern the creation of bitcoin and the cryptographic system that secures and verifies Bitcoin transactions. The Blockchain is a canonical record of every bitcoin, every Bitcoin transaction (including the creation or ‘‘mining’’ of new bitcoin) and every Bitcoin address associated with a quantity of bitcoin. The Bitcoin Network and Bitcoin Network software programs can interpret the Blockchain to determine the exact bitcoin balance, if any, of any public Bitcoin address listed in the Blockchain as having taken part in a transaction on the Bitcoin Network. The Bitcoin Network utilizes the Blockchain to evidence the existence of bitcoin in any public Bitcoin address. A Bitcoin private key controls the transfer or ‘‘spending’’ of bitcoin from its associated public Bitcoin address. A Bitcoin ‘‘wallet’’ is a collection of private keys and their associated public Bitcoin addresses. The Blockchain is comprised of a digital file, downloaded and stored, in whole or in part, on all Bitcoin Network users’ software programs. The file includes all blocks that have been solved by miners and is updated to include new blocks as they are solved. See ‘‘Bitcoin Mining & Creation of New Bitcoin.’’ As each newly solved block refers back to and ‘‘connects’’ with the immediately prior solved block, the addition of a new block adds to the Blockchain in a manner similar to a new link being added to a chain. Each new block records outstanding Bitcoin transactions, and outstanding transactions are settled and validated through such recording. The Blockchain represents a complete, transparent and unbroken history of all transactions of the Bitcoin Network. Each Bitcoin transaction is broadcast to the Bitcoin Network and recorded in the Blockchain. The Bitcoin Network is decentralized and does not rely on either governmental authorities or financial institutions to create, transmit or 23 The Gemini Exchange is a United States-based Bitcoin Exchange that began trading on October 8, 2015. It is currently operational in 35 states, Washington, DC, Canada, Hong Kong, Singapore, and the U.K., and allows trading between bitcoin, U.S. Dollars, and other Digital Assets. E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES determine the value of bitcoin. Rather, bitcoin is created and allocated by the Bitcoin Network protocol through a ‘‘mining’’ process subject to a strict, well-known issuance schedule. The value of bitcoin is determined by the supply of and demand for bitcoin in the ‘‘Bitcoin Exchange Market’’ 24 (and in private end-user-to-end-user transactions), as well as the number of merchants that accept them. As Bitcoin transactions can be broadcast to the Bitcoin Network by any user’s Bitcoin Network software and bitcoin can be transferred without the involvement of intermediaries or third parties, there are currently little or no transaction fees in direct peer-to-peer transactions on the Bitcoin Network. Third party service providers such as Bitcoin Exchanges and third-party Bitcoin payment processing services may charge fees for processing transactions and for converting, or facilitating the conversion of, bitcoin to or from fiat currency. The Bitcoin Network was initially contemplated in a white paper that also described bitcoin and the operating software to govern the Bitcoin Network. The white paper was purportedly authored by Satoshi Nakamoto; however, no individual with that name has been reliably identified as Bitcoin’s creator, and the general consensus is that the name is a pseudonym for the actual inventor or inventors. The first bitcoin was created in 2009 after Nakamoto released the Bitcoin Network source code (the software and protocol that created and launched the Bitcoin Network). Since its introduction, the Bitcoin Network has been under active development by a group of contributors currently headed by Wladimir J. van der Laan who was appointed project maintainer in April 2014 by Gavin Andresen (who was previously appointed maintainer by Satoshi Nakamoto in 2010). As an open source project, Bitcoin is not represented by an official organization or authority. Overview of the Bitcoin Network’s Operations In order to own, transfer or use bitcoin, a person generally must have internet access to connect to the Bitcoin Network. Bitcoin transactions may be made directly between end-users without the need for a third-party intermediary, although there are entities that provide third-party intermediary services. To prevent the possibility of double-spending bitcoin, a user must 24 For purposes of this filing, the term Bitcoin Exchange Market means the global Bitcoin Exchange Market for the trading of bitcoin, which consists of transactions on various electronic Bitcoin Exchanges. VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 notify the Bitcoin Network of the transaction by broadcasting the transaction data to its network peers. The Bitcoin Network provides confirmation against double-spending by memorializing every transaction in the Blockchain, which is publicly accessible and transparent. This memorialization and verification against double-spending is accomplished through the Bitcoin Network mining process, which adds ‘‘blocks’’ of data, including recent transaction information, to the Blockchain. See ‘‘Cryptographic Security Used in the Bitcoin Network—Double-Spending and the Bitcoin Network Confirmation System,’’ below. Brief Description of Bitcoin Transfers Prior to engaging in Bitcoin transactions, a user generally must first install on its computer or mobile device a Bitcoin Network software program that will allow the user to generate a private and public key pair associated with a Bitcoin address (analogous to a Bitcoin account). The Bitcoin Network software program and the Bitcoin address also enable the user to connect to the Bitcoin Network and engage in the transfer of bitcoin with other users. The computer of a user that downloads a version of the Bitcoin Network software program will become a ‘‘node’’ on the Bitcoin Network that assists in validating and relaying transactions from other users. See ‘‘Cryptographic Security Used in the Bitcoin Network—Double-Spending and the Bitcoin Network Confirmation System,’’ below. Alternatively, a user may retain a third party to create a Bitcoin address, or collection of Bitcoin addresses known as a digital wallet to be used for the same purpose. There is no limit on the number of Bitcoin addresses a user can have, and each such Bitcoin address consists of a ‘‘public key’’ and a ‘‘private key,’’ which are mathematically related. See ‘‘Cryptographic Security Used in the Bitcoin Network—Public and Private Keys,’’ below. In a Bitcoin transaction, the bitcoin recipient must provide its public Bitcoin address, which serves as a routing number for the recipient on the Blockchain, to the party initiating the transfer. This activity is analogous to a recipient providing a routing address in wire instructions to the payor so that cash may be wired to the recipient’s account. The recipient, however, does not make public or provide to the sender its related private key. The payor, or ‘‘spending’’ party, does reveal its public key in signing and verifying its spending transaction to the Blockchain. PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 76653 Neither the recipient nor the sender reveal their public Bitcoin addresses’ private key in a transaction, because the private key authorizes access to, and transfer of, the funds in that Bitcoin address to other users. Therefore, if a user loses his private key, the user permanently loses access to the bitcoin contained in the associated Bitcoin address. Likewise, bitcoin is irretrievably lost if the private key associated with them is deleted and no backup has been made. When sending bitcoin, a user’s Bitcoin Network software program must ‘‘sign’’ the transaction with the associated private key. The resulting digitally signed transaction is sent by the user’s Bitcoin Network software program to the Bitcoin Network to allow transaction confirmation. The digital signature serves as validation that the transaction has been authorized by the holder of the Bitcoin addresses’ private key. This signature process is typically automated by software that has access to the public and private keys. Summary of a Bitcoin Transaction In a Bitcoin transaction between two parties, the following circumstances must be in place: (i) The party seeking to send bitcoin must have a public Bitcoin address and the Bitcoin Network must recognize that public Bitcoin address as having sufficient bitcoin for the spending transaction; (ii) the receiving party must have a public Bitcoin address; and (iii) the spending party must have internet access with which to send its spending transaction. Next, the receiving party must provide the spending party with its public Bitcoin address, an identifying series of twenty-seven (27) to thirty-four (34) alphanumeric characters that represents the routing number on the Bitcoin Network and allow the Blockchain to record the sending of bitcoin to that public Bitcoin address. The receiving party can provide this address to the spending party in alphanumeric format or an encoded format such as a Quick Response Code (commonly known as a ‘‘QR Code’’), which may be scanned by a smartphone or other device to quickly transmit the information. After the provision of a recipient’s public Bitcoin address, the spending party must enter the address into its Bitcoin Network software program along with the number of bitcoin to be sent. The number of bitcoin to be sent will typically be agreed upon between the two parties based on a set number of bitcoin or an agreed upon conversion of the value of fiat currency to bitcoin. Most Bitcoin Network software E:\FR\FM\03NON1.SGM 03NON1 mstockstill on DSK3G9T082PROD with NOTICES 76654 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices programs also allow, and often suggest, the payment of a transaction fee (also known as a miner’s fee). Transaction fees are not required to be included by many Bitcoin Network software programs, but, when they are included, they are paid by the spending party on top of the specified quantity of bitcoin being sent in the transaction. Transaction fees, if any, are typically a fractional number of bitcoin (e.g., 0.005 or 0.0005 bitcoin) and are automatically transferred by the Bitcoin Network to the Bitcoin Network miner that solves and adds the block recording the spending transaction on the Blockchain. After the entry of the Bitcoin address, the number of bitcoin to be sent and the transaction fees, if any, to be paid, the spending party will transmit the spending transaction. The transmission of the spending transaction results in the creation of a data packet by the spending party’s Bitcoin Network software program, which data packet includes data showing (i) the destination public Bitcoin address, (ii) the number of bitcoin being sent, (iii) the transaction fees, if any, and (iv) the spending party’s digital signature, verifying the authenticity of the transaction. The data packet also includes references called ‘‘inputs’’ and ‘‘outputs,’’ which are used by the Blockchain to identify the source of the bitcoin being spent and record the flow of bitcoin from one transaction to the next transaction in which the bitcoin is spent. The digital signature exposes the spending party’s public Bitcoin address and public key to the Bitcoin Network, though, for the receiving party, only its public Bitcoin address is revealed. The spending party’s Bitcoin Network software will transmit the data packet onto the decentralized Bitcoin Network, resulting in the propagation of the information among the software programs of Bitcoin users across the Bitcoin Network for eventual inclusion in the Blockchain. Typically, the data will spread to a vast majority of Bitcoin Network miners within the course of less than a minute. As discussed in greater detail below in ‘‘Bitcoin Mining & Creation of New Bitcoin,’’ Bitcoin Network miners record transactions when they solve for and add blocks of information to the Blockchain. When a miner solves for a block, it creates that block, which includes data relating to (i) the solution to the block, (ii) a reference to the prior block in the Blockchain to which the new block is being added, and (iii) transactions that have occurred but have not yet been added to the Blockchain. The miner becomes aware of outstanding, unrecorded transactions VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 through the data packet transmission and propagation discussed above. Typically, Bitcoin transactions will be recorded in the next chronological block if the spending party has an internet connection and at least one (1) minute has passed between the transaction’s data packet transmission and the solution of the next block. If a transaction is not recorded in the next chronological block, it is usually recorded in the next block thereafter. Upon the addition of a block included in the Blockchain, the Bitcoin Network software program of both the spending party and the receiving party will show confirmation of the transaction on the Blockchain and reflect an adjustment to the bitcoin balance in each party’s public Bitcoin address, completing the bitcoin transaction. Typically, Bitcoin Network software programs will automatically check for and display additional confirmations of six or more blocks in the Blockchain. See ‘‘Cryptographic Security Used in the Bitcoin Network—Double-Spending and the Bitcoin Network Confirmation System.’’ Cryptographic Security Used in the Bitcoin Network Public and Private Keys The Bitcoin Network uses sophisticated cryptography to maintain the integrity of the Blockchain ledger. Transactions are digitally signed by their senders. Before adding a transaction to a block, miners will verify both that the sender has not already spent the bitcoin being sent and that the digital signature information in the transaction is valid. Besides the requirement of containing only valid transactions (as described in the preceding sentence), blocks are validated by means of properties of their cryptographic hashes. By extension, blocks in the Blockchain can be validated by verifying that each block contains the cryptographic hash of the prior block. The cryptographic algorithms and cryptographic parameters, including key sizes, used by the Bitcoin Network provide adequate security for the foreseeable future. Double-Spending and the Bitcoin Network Confirmation System To ensure the integrity of Bitcoin transactions from the recipient’s side (i.e., to prevent double-spending by a spending party), every Bitcoin transaction is broadcast to the Bitcoin Network and recorded in the Blockchain through the ‘‘mining’’ process, which timestamps the transaction and memorializes the change in the PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 ownership of bitcoin transferred. See ‘‘Bitcoin Mining & Creation of New Bitcoin,’’ below. Adding a block to the Blockchain requires Bitcoin Network miners to exert significant computational effort. Requiring this ‘‘proof of work’’ prevents a malicious actor from either adding fraudulent blocks to generate bitcoin (i.e., counterfeit bitcoin) or overwriting existing valid blocks to reverse prior transactions. A Bitcoin transaction between two parties is recorded in the Blockchain in a block only if that block is accepted as valid by a majority of the nodes on the Bitcoin Network. Validation of a block is achieved by confirming the cryptographic hash value included in the block’s solution and by the block’s addition to the longest confirmed Blockchain on the Bitcoin Network. For a transaction, inclusion in a block on the Blockchain constitutes a ‘‘confirmation’’ of a Bitcoin transaction. As each block contains a reference to the immediately preceding block, additional blocks appended to and incorporated into the Blockchain constitute additional confirmations of the transactions in such prior blocks, and a transaction included in a block for the first time is confirmed once against double-spending. The layered confirmation process makes changing historical blocks (and reversing transactions) exponentially more difficult the further back one goes in the Blockchain. Bitcoin Exchanges and users can set their own threshold as to how many confirmations they require until funds from the transferor are considered valid. To undo past transactions in a block recorded on the Blockchain, a malicious actor would have to exert tremendous hashrate in resolving each block in the Blockchain starting with and after the target block and broadcasting all such blocks to the Bitcoin Network. The Bitcoin Network is generally programmed to consider the longest Blockchain containing solved blocks to be the most accurate Blockchain. In order to undo multiple layers of confirmation and alter the Blockchain, a malicious actor must resolve all of the old blocks sought to be regenerated and be able to continuously add new blocks to the Blockchain at a speed that would have to outpace that of all of the other miners on the Bitcoin Network, who would be continuously solving for and adding new blocks to the Blockchain. Given the size and speed of the Bitcoin Network, it is generally agreed that the cost of amassing such computational power exceeds the profit to be obtained E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices by double-spending or attempting to fabricate prior blocks. If a malicious actor is able to amass ten (10) percent of the Bitcoin Network’s aggregate hashrate, there is estimated to be a 0.1 percent chance that it would be able to overcome six (6) confirmations. Therefore, given the difficulty in amassing such hashrate, six (6) confirmations is an often-cited standard for the validity of transactions. The Trust has adopted a policy whereby a transaction will be deemed confirmed upon this industry standard of six (6) confirmations (the ‘‘Confirmation Protocol’’). As one (1) block is added to the Blockchain approximately every six (6) to twelve (12) minutes, a Bitcoin transaction will be, on average, confirmed using the Confirmation Protocol beyond a reasonable doubt in approximately one (1) hour. Merchants selling high-value goods and services, as well as Bitcoin Exchanges and many experienced users, are believed to generally use the six (6) confirmations standard. This confirmation system, however, does not mean that merchants must always wait for multiple confirmations for transactions involving low-value goods and services. As discussed below, the value of a successful double-spending attack involving a low-value transaction may, and perhaps likely will, be significantly less than the cost involved in arranging and executing such double-spending attacks. Furthermore, merchants engaging in low-value transactions may then view the reward of quicker transaction settlements with limited or no Blockchain confirmation as greater than the related risk of not waiting for six (6) confirmations with respect to low-value transactions at points of sale. Conversely, for high-value transactions that are not time sensitive, additional settlement security can be provided by waiting for more than six (6) confirmations. mstockstill on DSK3G9T082PROD with NOTICES Bitcoin Mining & Creation of New Bitcoin Mining Process The process by which bitcoin is ‘‘mined’’ results in new blocks being added to the Blockchain and new bitcoin being issued to the miners. Bitcoin Network miners engage in a set of prescribed complex mathematical calculations in order to add a block to the Blockchain and thereby confirm Bitcoin transactions included in that block’s data. Miners that are successful in adding a block to the Blockchain are automatically awarded a fixed number of bitcoin for their effort. This reward system is the method by which new VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 bitcoin enter into circulation to the public and is accomplished in the added block through the notation of the new bitcoin creation and their allocation to the successful miner’s public Bitcoin address. To begin mining, a user can download and run Bitcoin Network mining software, which, like regular Bitcoin Network software programs, turns the user’s computer into a ‘‘node’’ on the Bitcoin Network that validates blocks. See ‘‘Overview of the Bitcoin Network’s Operations,’’ above. All Bitcoin transactions are recorded in blocks added to the Blockchain. Each block contains (i) the details of some or all of the most recent transactions that are not memorialized in prior blocks, (ii) a reference to the most recent prior block, and (iii) a record of the award of bitcoin to the miner who added the new block. In order to add blocks to the Blockchain, a miner must map an input data set (i.e., a reference to the immediately preceding block in the Blockchain, plus a block of the most recent Bitcoin Network transactions and an arbitrary number called a ‘‘nonce’’) to a desired output data set of predetermined length (‘‘hash value’’) using a cryptographic hash algorithm. To ‘‘solve’’ or ‘‘calculate’’ a block, a miner must repeat this computation with a different nonce until the miner generates a hash of a block’s header that has a value less than or equal to the current target set by the Bitcoin Network. Each unique block can only be solved and added to the Blockchain by one (1) miner; therefore, all individual miners and mining pools on the Bitcoin Network are engaged in a competitive process and are incentivized to increase their computing power to improve their likelihood of solving for new blocks. The cryptographic hash function that a miner uses is one-way only and is, in effect, irreversible: hash values are easy to generate from input data (i.e., valid recent network transactions, Blockchain and nonce), but neither a miner nor participant is able to determine the original input data solely from the hash value. As a result, generating a new valid block with a header value less than or equal to the target prescribed by the Bitcoin Network is initially difficult for a miner, yet other nodes can easily confirm a proposed block by running the hash function just once with the proposed nonce and other input data. A miner’s proposed block is added to the Blockchain once a majority of the nodes on the Bitcoin Network confirms the miner’s work, and the miner that solved such block receives the reward of a fixed number of bitcoin (plus any transaction fees paid by spenders of PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 76655 transactions that are recorded in the block). Therefore, ‘‘hashing’’ is akin to a mathematical lottery, and miners that have devices with greater processing power (i.e., the ability to make more hash calculations per second) are more likely to be successful miners because they can generate more hashes or ‘‘entries’’ into that lottery. As more miners join the Bitcoin Network and its aggregate hashrate increases, the Bitcoin Network automatically adjusts the complexity of the block-solving equation in an effort to set distribution such that newly-created blocks will be added to the Blockchain, on average, approximately every ten (10) minutes. Hashrate is added to the Bitcoin Network at irregular rates that have grown with increasing speed since early 2013, though the rate of additional mining power slowed steadily through 2014, until the computational speed of the network temporarily and marginally declined during December 2014. The rapid growth of the computational power of the Bitcoin Network means that blocks are typically solved faster than the Bitcoin protocol’s target of, on average, approximately every ten (10) minutes. Although the difficulty of the mining process is adjusted on a periodic basis, after 2,016 blocks have been added to the Blockchain since the last adjustment, the average solution time for a block has been approximately 8 minutes for the one hundred and eighty (180) days prior to and including October 1, 2016. Incentives for Mining Miners dedicate substantial resources to mining. Given the increasing difficulty of the target established by the Bitcoin Network, current miners must invest in expensive mining devices with adequate processing power to hash at a competitive rate. The first mining devices were standard home computers; however, mining computers are currently designed solely for mining purposes. Such devices include application specific integrated circuit (‘‘ASIC’’) machines built by specialized companies such as BitFury. Miners also incur substantial electricity costs in order to continuously power and cool their devices while solving for a new block. Although variables such as the rate and cost of electricity are estimated, as of September 1, 2013, Blockchain Luxembourg S.A. estimated that the average 24-hour electricity cost of all mining on the Bitcoin Network to be more than $1.5 million. In late 2013, Blockchain Luxembourg S.A. ceased publishing estimated electric consumption on the Bitcoin Network, in part due to uncertainty in estimating E:\FR\FM\03NON1.SGM 03NON1 mstockstill on DSK3G9T082PROD with NOTICES 76656 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices electrical usage as newer, more energy efficient mining hardware became prevalent. As of October 2016, over the past year, two (2) years, and three (3) years, the aggregate hashrate of the Bitcoin Network has increased approximately 4-fold, 8-fold and 1,500fold, respectively, due in part to the development of more energy efficient ASIC mining chips and, during the second half of 2013, the substantial increase in the price of bitcoin. Additionally, it can be estimated that the scale of total computing resources devoted to mining on the Bitcoin Network is commensurate with the total rewards, which was approximately $1.2 million U.S. dollars per day as of October 1, 2016. The Bitcoin Network is designed in such a way that the reward for adding new blocks to the Blockchain decreases over time and the production (and reward) of bitcoin will eventually cease. Once such reward ceases, it is expected that miners will demand compensation in the form of transaction fees to ensure that there is adequate incentive for them to continue mining. The amount of transaction fees will be based upon the need to provide sufficient revenue to incentivize miners, counterbalanced by the need to retain sufficient Bitcoin Network users (and transactions) to make mining profitable. Though not free from doubt, Bitcoin industry participants have expressed a belief that transaction fees would be enforced through (i) mining operators collectively refusing to record transactions that do not include a payment of a transaction fee or (ii) the updating of Bitcoin Network software to require a minimum transaction fee payment. Indeed, most miners already have a policy regarding transactions fees, albeit the minimum fees are currently low under such policies. Under a regime whereby large miners require fees to record transactions, a transaction where the spending party did not include a payment of transaction fees would not be recorded on the Blockchain until a miner who does not require transaction fees solves for a new block (thereby recording all outstanding transaction records for which it has received data). If popular Bitcoin Network software were to require a minimum transaction fee, users of such programs would be required to include such fees; however, VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 because of the open-source nature of the Bitcoin Network, there may be no way to require that all software instances include minimum transaction fees for spending transactions. Alternatively, a future Bitcoin Network software update could simply build a small transaction fee payment into all spending transactions (e.g., by deducting a fractional number of bitcoin from all transactions on the Bitcoin Network as transaction fees). The Bitcoin Network protocol already includes transaction fee rules and the mechanics for awarding transaction fees to the miners that solve for blocks in which the fees are recorded; however, users currently may opt not to pay transaction fees (depending on the Bitcoin Network software they use) and miners may choose not to enforce the transaction fee rules since, at present, the bitcoin rewards are far more substantial than transaction fees. As of October 2016, transaction fees accounted for an average of 3.55 percent of miners’ total revenue based upon publicly available information, though the percentage of revenue represented by transaction fees is not static and fluctuates based on the number of transactions for which sending users include transaction fees, the levels of those transaction fees and the number of transactions a miner includes in its solved blocks. Typically, transactions do not have difficulty being recorded if transaction fees are not included. Mining Pools A miner’s daily expected reward is proportional to their contribution to the Bitcoin Network’s aggregate hashrate. Given the limited number of blocks produced per day and the statistically uncertain nature of finding blocks, a small miner acting alone would experience very high variance in block rewards. Because of this fact most miners join mining pools wherein multiple miners act cohesively and share any rewards. According to Blockchain Luxembourg S.A., as of October 1, 2016, the largest three (3) known mining pools were AntPool, F2Pool and BTCC Pool, which, when aggregated, represented approximately forty-five (45) percent of the aggregate hashrate of the Bitcoin Network (as calculated by determining the percentage of blocks mined by each such pool over the prior four (4) days). PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 Also according to Blockchain Luxembourg S.A., on such date, the nine (9) largest pools (AntPool, F2Pool, ViaBTC, BitFury, BW.COM, SlushPool, BitFury, BTC.com, and HaoBTC) accounted for approximately eightyeight (88) percent of the aggregate hashrate of the Bitcoin Network. In late May and early June 2014, reports indicated that a single mining pool approached and, during a twenty-four (24)- to forty-eight (48)-hour period in early June, may have exceeded one-half of the aggregate hashrate of the Bitcoin Network, as measured by the selfreported hashrate of the pool and by measuring the percentage of blocks mined by the pool. As of October 1, 2016, that single mining pool has ceased to exist. As of October 1, 2016, Antpool was determined to be the largest mining pool, having solved for sixteen (16) percent of the blocks discovered during the prior four (4) days. Mathematically Controlled Supply The method for creating new bitcoin is mathematically controlled in a manner so that the supply of bitcoin grows at a limited rate pursuant to a preset schedule. The number of bitcoin awarded for solving a new block is automatically halved every two hundred and ten thousand (210,000) blocks. Thus, the current fixed reward for solving a new block is twelve and a half (12.5) bitcoin per block; the reward decreased from twenty-five (25) bitcoin per block in July 2016. It is estimated to halve again in about four years. This deliberately controlled rate of bitcoin creation means that the number of bitcoin in existence will never exceed twenty-one (21) million and that bitcoin cannot be devalued through excessive production unless the Bitcoin Network’s source code (and the underlying protocol for bitcoin issuance) is altered. See ‘‘Modifications to the Bitcoin Protocol,’’ below. As of October 1, 2016, approximately fifteen million, nine hundred and seven thousand (15,907,000) bitcoin have been mined. It is estimated that more than ninety (90) percent of the twenty-one (21) million bitcoin will have been produced by 2022. The following chart from Blockchain Luxembourg S.A. indicates the number of bitcoin that have been mined since the Bitcoin Network began operation in January 2009 through October 2016. E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices Bitcoin is an open source project (i.e., a product whose source code is freely available to the public and that utilizes crowdsourcing to identify possible issues, problems and defects) and there is no official developer or group of developers that controls the Bitcoin Network. The Bitcoin Network’s development is furthered by a collection of active contributors who can access and propose alterations to the Bitcoin Network source code hosted on GitHub, an online service and forum used to share and develop open source code. Other programmers have access to and can propose changes to the Bitcoin Network source code on GitHub, but some contributors have an elevated level of influence over the process. As a result, these contributors are responsible for quasi-official releases of updates and other changes to the Bitcoin Network’s source code. Users and miners can accept any changes made to the Bitcoin Network (including those proposed by contributors) by downloading the proposed modification of the source code. A modification of the source code is only effective with respect to the Bitcoin users and miners that download it. Consequently, as a practical matter, a modification to the source code (e.g., a proposal to increase the twenty-one (21) million total limit on bitcoin or to reduce the average confirmation time target from ten (10) minutes per block) only becomes part of the Bitcoin Network if accepted by participants collectively having an effective majority of the aggregate hashrate of the Bitcoin VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 Network. Additionally, an issue may arise in which a modification is overwhelmingly supported by users but miners do not support it, or vice versa. If a modification is accepted only by a percentage of users and miners, a division in the Bitcoin Network will occur such that one (1) network will run the pre-modification source code and the other network will run the modified source code; such a division is known as a ‘‘fork’’ in the Bitcoin Network. It should be noted that, although their power to amend the source code is effectively subject to the approval of users and miners, some contributors have substantial influence over the development of the Bitcoin Network and the direction of the Bitcoin community. Bitcoin Value Bitcoin Exchange Valuation The value of bitcoin is determined by the value that various market participants place on bitcoin through their transactions. The most common means of determining the value of a bitcoin is by surveying one or more Bitcoin Exchanges where bitcoin is traded publicly and transparently (i.e., the Bitcoin Exchange Market) or an index tracking prices on the Bitcoin Exchange Market (e.g., the CoinDesk Bitcoin Price Index). Bitcoin Exchange Public Market Data On each online Bitcoin Exchange, bitcoin is traded with publicly disclosed valuations for each executed trade, measured by one or more fiat currencies such as the U.S. Dollar, the Euro or the PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 Chinese Yuan. Bitcoin Exchanges typically publish trade data including last price, bid and ask information, and trade volume, among other data. 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). Arbitrage between the prices on various Bitcoin Exchanges is possible, but varying fees and fiat currency deposit/ withdrawal policies and other concerns appear to have, at times, prevented an active arbitrage mechanism among users on some Bitcoin Exchanges. For example, delayed fiat currency withdrawals imposed by Bitcoin Exchanges and the perceived risks associated with such delayed withdrawals have, at times, resulted in trading on such Bitcoin Exchange to be at a premium for certain periods. Bitcoin Exchange Price Convergence Price differentials across Bitcoin Exchanges remain; however, such differentials have been decreasing. For example, the daily opening price data for the one hundred and eighty (180) days prior to October 1, 2016 shows that the top three U.S.-based Bitcoin Exchanges (viz. GDAX, Gemini, and itBit) had an absolute price difference less than 1% percent according to publicly available data. Since 2015, prices on U.S.-based Bitcoin Exchanges have generally been converging. In January of 2015, the average range in E:\FR\FM\03NON1.SGM 03NON1 EN03NO16.000</GPH> mstockstill on DSK3G9T082PROD with NOTICES Modifications to the Bitcoin Protocol 76657 76658 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices prices across all Bitcoin Exchanges was approximately 3.8%; as of October 2016, that figure has dropped to less than 1.0%. This convergence serves to illustrate the fungibility of bitcoin across Bitcoin Exchanges and the ease with which market participants transfer their assets amongst them. mstockstill on DSK3G9T082PROD with NOTICES Bitcoin Exchange Market Manipulation As the Bitcoin Exchange Market has evolved and matured, licensed entrants have emerged, including two (2) New York limited purpose trust companies, markedly changing the once concentrated and non-regulated landscape of the Bitcoin Exchange Market. For example, in the first half of 2013, Mt.Gox accounted for nearly three-quarters of all Bitcoin Exchange Market trading.25 Any disruption to Mt.Gox trading, such as a distributed denial of service (‘‘DDOS’’) attack had a dramatic impact on the bitcoin price and subsequently the Bitcoin Exchange Market as a whole.26 Since then, the number of constituents in the Bitcoin Exchange Market has considerably increased and no single Bitcoin Exchange represents a systemically critical part or single point of failure of the Bitcoin ecosystem. In addition, the advent of market participants who are chiefly arbitrageurs results in Bitcoin Exchange prices generally converging after dislodgement. Arbitrageurs must have funds distributed across multiple Bitcoin Exchanges in order to take advantage of temporary price dislocations, thereby discouraging the strong concentration of funds on any particular Bitcoin Exchange. As a result, the potential for manipulation on a 25 For most of 2013, Mt. Gox (a Japanese exchange operated by Tibanne Co. Ltd.) was the largest online Bitcoin Exchange in the world. Supporting trading of bitcoin using sixteen (16) different fiat currencies, Mt. Gox accounted for nearly threequarters of all Bitcoin Exchange Market trading during the first half of 2013. On February 25, 2014, Mt. Gox suspended trading on its platform and, three (3) days later, filed for bankruptcy protection in Japanese courts, stating that it had lost approximately eight hundred and fifty thousand (850,000) bitcoin, including approximately seven hundred fifty thousand (750,000) bitcoin belonging to its customers. Mt. Gox subsequently recovered access to approximately two hundred thousand (200,000) of the lost bitcoin. As no full, reliable accounting has been publicly provided, it is difficult to assess whether Mt. Gox’s collapse was due to cyber-attacks (including denial of service and hacking incidents reported in 2011 and 2013), mismanagement or fraud, although many market participants believe Mt. Gox’s collapse was due to the latter. Following the cessation of trading activity on its platform, Mt. Gox has been in bankruptcy proceedings in Japan and the United States and is in the process of liquidation. 26 Bitcoin Exchanges may also be vulnerable to security breaches. For example, in August 2016, a security breach at Bitfinex, a large, Hong Kongbased Bitcoin Exchange, resulted in the loss of one hundred twenty thousand (120,000) bitcoin. VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 particular Bitcoin Exchange would require overcoming the liquidity supply of such arbitrageurs who are actively eliminating any cross-market pricing differences. The Gemini Exchange The Gemini Exchange, an affiliate of the Sponsor, is a Digital Asset exchange that has a U.S. dollar-denominated bitcoin order book. As a facility of a New York State-chartered limited liability trust company, the Gemini Exchange is one of only two (2) Bitcoin Exchanges in the world that have such a high level of regulatory oversight. The Bitcoin Exchange Market has experienced several significant incidents at unregulated Bitcoin Exchanges and it is widely-believed that much of the self-reported trade volume numbers of unregulated Bitcoin Exchanges are inaccurate (either intentionally or unintentionally). The Gemini Exchange was established in an effort to improve the Bitcoin ecosystem by having a regulated entity where participants could engage in trading bitcoin. In establishing the Gemini Exchange, Gemini Trust Company, LLC worked closely with the NYSDFS to obtain a limited purpose trust company license. The term ‘‘limited purpose trust company’’ refers to entities that are chartered under the bank and trust company provisions of the New York Banking Law. Under New York Banking Law, a ‘‘trust company’’ has general powers available to banks and trust companies, as well as powers generally associated with trustees and other fiduciaries. Apart from general fiduciary powers, the following activities are among those specifically identified in the statute as activities that New York Trust Companies may conduct with respect to their fiduciary accounts, including (i) the power to accept deposits exclusively in a fiduciary capacity, to receive and disburse money, to transfer, register and countersign evidences of indebtedness or other securities, and to act as attorney in fact or agent; 27 and (ii) the power to accept appointment as receiver, trustee, or committee of the property of an estate of any person in insolvency or bankruptcy proceedings. A ‘‘limited purpose’’ trust company must conduct its business and operations subject to the limitations or restrictions as the NYSDFS may prescribe in its sole discretion. In practice, most limited purpose trust companies typically engage in activities such as employee benefit trust, personal 27 N.Y. PO 00000 Banking Law § 100 (McKinney). Frm 00106 Fmt 4703 Sfmt 4703 trust, corporate trust, transfer agency, securities clearance, investment management, and custodial services. A trust company, including a limited purpose trust company like Gemini Trust Company, LLC, can serve as the custodian of customer funds itself. Under New York Banking Law, the same general procedures, requirements and criteria for the formation of a fullservice bank apply also to the formation of a limited purpose trust company with two (2) exceptions: (i) No requirement to carry FDIC insurance and (ii) a level of capitalization deemed satisfactory to the Superintendent of Financial Services. Once submitted in acceptable form, a limited purpose trust company application receives the same level of scrutiny as other bank and trust company proposals and ultimately requires the approval of the Superintendent of Financial Services. In addition, trust companies are subject to many of the same requirements that apply to a bank operating under a New York State banking charter, including: (i) Capital requirements, (ii) implementation of an anti-money laundering program,28 (iii) implementation of a cyber security program, and (iv) consumer protection disclosures.29 Furthermore, as a limited purpose trust company with fiduciary powers under the Banking Law, all activities of a trust company, including all exchange functions, are subject to examination and supervision by the NYSDFS. Gemini Trust Company, LLC complies with the capital requirements under New York State banking law, has implemented the required anti-money laundering program and cybersecurity program and makes the required consumer protection disclosures. As a facility of a regulated entity, the Gemini Exchange is obliged to put the interests of its customers before its own, to provide accurate public market data and 28 In particular, a prospective trust company must establish policies and procedures designed to ensure and monitor compliance with the Bank Secrecy Act (‘‘BSA’’) as amended by the USA PATRIOT Act and the anti-money laundering programs of Part 115 of the General Regulations of the Banking Board. A compliance program must include, at a minimum, a system of internal controls to assure ongoing compliance, independent testing for compliance to be conducted by bank personnel or by an outside party, the designation of an individual or individuals responsible for coordinating and monitoring day-to-day compliance, and training for appropriate personnel. 29 Limited purpose trust companies operating virtual currency exchanges are required to provide disclosures to current and prospective customers (in a form approved by NYSDFS) regarding the risks of its services and products and are also required to disclose to current and prospective customers the terms and conditions for using the trust company’s products and services prior to any customer using the product or service. E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES pricing information and to monitor for and prevent market manipulation. As part of its supervision under the NYSDFS and New York Banking Law, Gemini Trust Company, LLC must (i) undergo semiannual bank exams, (ii) submit quarterly financial updates to NYSDFS, (iii) submit independent third-party year-end audited financial statements to NYSDFS,30 (iv) submit semiannual Federal Financial Institutions Examination Council (‘‘FFIEC’’) Call Reports 31 to the NYSDFS, and (v) undergo an annual third-party review of its overall security program as implemented by its Chief Security Officer (‘‘CSO’’) that may take the form of a Service Organization Controls (‘‘SOC’’) Level 2 audit. The Gemini Exchange is not the only venue on which Authorized Participants can purchase bitcoin for delivery to the Trust, but it may provide a convenient and stable venue given its regulatory oversight and superior liquidity characteristics. While Authorized Participants are not obliged to use the Gemini Exchange to trade their bitcoin, it may prove to be an efficient way to do so. Conflicts of interest may arise among the Sponsor and its affiliates, including the Custodian and the Gemini Exchange, on the one hand, and the Trust and its Shareholders, on the other hand. As a result of these conflicts, the Sponsor may favor its own interests and the interests of its affiliates over the Trust and its Shareholders. These potential conflicts include, among others, the following: • The Sponsor has no fiduciary duties to, and is allowed to take into account the interests of parties other than, the Trust and its Shareholders in resolving conflicts of interest; • The Trust’s bitcoin is valued, and the Trust’s NAV is calculated, using the Gemini Exchange Auction Price, and the Gemini Exchange Auction Price as provided by the Sponsor will be used by the Administrator to calculate the amount of the Sponsor’s Fee due to the Sponsor; • The Sponsor’s relationship with the Gemini Exchange creates an incentive for the Sponsor to sell the bitcoin it collects as its Sponsor’s fee for U.S. dollars on the Gemini Exchange, which 30 Gemini Trust Company, LLC, successfully completed an independent third-party opening day Balance Sheet audit for October 2, 2015 as well as an independent third-party year-end Financial Statements audit for December 31, 2015. No material issues, weaknesses or concerns were raised. 31 Gemini Trust Company, LLC, successfully completed and filed its first FFIEC Call Report with the NYSDFS on February 1, 2016. VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 benefits the Sponsor’s affiliates through increased volume on the Gemini Exchange and which may negatively impact the value of the Trust’s remaining bitcoin; • The Sponsor, its affiliates and their officers and employees may own and trade bitcoin and are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with the Trust; and • The Sponsor decides whether to retain separate counsel, accountants or others to perform services for the Trust. Although the Trust has taken steps to mitigate these conflicts of interest, including having the Administrator calculate the Trust’s NAV and determine the amount of the Sponsor’s Fee (based on the publicly-available Gemini Exchange Auction Price, which will be provided to the Administrator by the Sponsor each business day), it may not be possible to entirely eliminate these conflicts of interest. Gemini Exchange Auction Price The Trust values its bitcoin using the Gemini Exchange Auction Price on each Business Day. At 4:00 p.m. Eastern Time every day, the Gemini Exchange conducts a two-sided auction which is open to all exchange customers. Similar to the closing auction on the Exchange and other U.S. equities exchanges, the auction process incorporates both auction-only and continuous trading book orders to find a single price at which the most interest is eligible to trade (sometimes called ‘‘Walrasian equilibrium’’). Because indicative auction pricing is published publicly throughout the ten (10) minutes prior to the auction, this mechanism allows participants to engage in thorough price discovery while concentrating liquidity and trading volume at a single moment each day. The Gemini Exchange Auction Price is the clearing price of this auction. The Gemini Exchange has been conducting these auctions since September 21, 2016. The Sponsor believes that the Gemini Exchange Auction Price is representative of the accurate price of bitcoin because of the positive price discovery attributes of the Gemini Exchange marketplace, and because the two-sided auction process was specifically designed to maximize price discovery and liquidity. According to publicly available market data for U.Sbased Bitcoin Exchanges as of October 1, 2016 for the prior six months: • The Gemini Exchange was the third biggest by volume. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 76659 • The Gemini Exchange had the second tightest bid/ask spread as a percentage of price. • The Gemini Exchange had the tightest spread ten (10) bitcoin deep and the second tightest spread one hundred (100) bitcoin deep. • The Gemini Exchange had the lowest volatility (i.e., smallest standard deviation of daily prices). In addition, since opening in October 2015 and as of October 1, 2016, pricing on the Gemini Exchange differed from the median price of all U.S.-based Bitcoin Exchanges on Business Days by 0.23% on average and 0.48% at most; that difference dropped to 0.15% on average in the third quarter of 2016.32 Since launching on September 21, 2016 and through October 14, 2016, on Business Days, the Gemini Exchange Auction Price has deviated from the Gemini Exchange midpoint price (the midrange of the highest bid and lowest offer prices) by 0.17% on average and 0.71% at most, and it has deviated from the median price of all U.S.-based Bitcoin Exchanges by 0.12% on average and 0.52% at most. On business days between September 21 and October 14, 2016, the volume has averaged more than 1,900 bitcoin (worth $1.2 million notional) representing more than 16% of all U.S.-based Bitcoin Exchange volume during that period. Additionally, the Gemini Exchange’s auction market bolstered its share of the U.S.-based Bitcoin Exchange market to almost $1.7 million of notional daily volume for the six-month period ending October 1, 2016, representing almost 32% of such market, since it was first instituted on September 21, 2016. In addition, transactions on the Gemini Exchange appear to be substantially larger than typical daily transaction sizes on other Bitcoin Exchanges. These facts, taken together, suggest that the Gemini Exchange Auction Price is representative and indicative of the larger Bitcoin marketplace, and that it can support the liquidity and volume necessary to maintain an efficient arbitrage mechanism. As discussed above, the Gemini Exchange is uniquely positioned because of its regulatory status and licensing as a venue on which traditional financial institutions may be comfortable transacting in bitcoin. These institutions provide a vital bridge to the equities markets and other capital markets, serving to enrich price discovery, liquidity, and transparency. The Trust has entered into preliminary conversations with a number of potential Authorized Participants as 32 Id. E:\FR\FM\03NON1.SGM 03NON1 76660 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices well as market makers, each of which is an experienced participant in the ETP 33 marketplace and is actively engaged in trading ETPs. A number of these potential Authorized Participants, currently trade bitcoin and are already registered participants that trade on the Gemini Exchange. Authorized Participants will not be required to use the Gemini Exchange to trade their bitcoin, and the Gemini Exchange is not the only venue on which Authorized Participants can purchase bitcoin for delivery to the Trust. However, the Gemini Exchange may provide a convenient and stable venue in which to purchase bitcoin, as well as an efficient way to trade bitcoin, given its regulatory oversight and superior liquidity characteristics. See ‘‘Bitcoin Value—The Gemini Exchange’’ above. Bitcoin Market mstockstill on DSK3G9T082PROD with NOTICES Global Bitcoin Market Global trade in bitcoin consists of individual end-user-to-end-user transactions, together with facilitated exchange-based bitcoin trading on ‘‘lit’’ markets as well as ‘‘dark pools’’. A limited market currently exists for bitcoin-based derivatives. The Trust represents the first Digital Asset ETP. Securitized instruments have been created for other marketplaces, but have encountered limited success due to their lack of transparency and thorough regulatory oversight. Three notable examples are the Grayscale Investment Trust, which trades under the ticker GBTC on OTC Markets (formerly the ‘‘Pink Sheets’’) and does not qualify as an exchange-listed product, Bitcoin Tracker One, which trades under the ticker COINXBT on the Stockholm Stock Exchange, and the eurodenominated BitcoinETI Exchange Traded Instrument, which has been approved for admission to the Gibraltar Stock Exchange and will be co-listed on Deutsche Boerse. None of these instruments are held to the same regulatory scrutiny and oversight as a security listed under the Securities Act. Because of the high standards pursued in the creation and listing of the Trust, it will finally provide investors with a reliable and transparent vehicle for access to bitcoin as an asset class. End-User-to-End-User The Bitcoin end-user-to-end-user ecosystem operates on a continuous, 24hour per day basis. This is accomplished through decentralized peer-to-peer transactions between 33 For purposes of this filing, the term ETP means any product that may be listed on the Exchange pursuant to Rule 14.11. VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 parties on a principal-to-principal basis. All risks and issues of credit are between the parties directly involved in the transaction. Liquidity can change from time to time during the course of a 24-hour trading day. The Bitcoin Network rules that require transaction fees are generally not enforced; therefore transaction costs, if any, are negotiable between the parties and may vary widely, although, where transaction fees are included, they are paid by the spending party in a Bitcoin transaction. These transactions occur remotely through the Internet or in-person through forums such as Satoshi Square (an open-air bitcoin trading market held in New York City) and bulletin boards such as LocalBitcoins. Marketplaces like LocalBitcoins and ICBIT are intended to bring together counterparties trading in bitcoin but do not provide any clearing or intermediary function and may or may not report transaction data such as price and volume. Bitcoin Exchange ‘‘Lit’’ Market U.S.-based Bitcoin Exchanges traded approximately $20 million of notional value daily throughout the six months ending October 1, 2016. Although it has been operating for only one year, the Gemini Exchange has traded approximately $1.2 million of notional daily volume over the same period, representing nearly 6 percent of the market. Moreover, on business days between September 21 and October 14, 2016, the volume has averaged more than 1,900 bitcoin (worth $1.2 million notional), representing more than 16% of all U.S.-based daily Bitcoin Exchange volume during that period. Additionally, the Gemini Exchange’s auction bolstered its share of the U.S.based Bitcoin Exchange market to almost $1.7 million of notional daily volume for the six-month period ending October 1, 2016, representing almost 32% of such market, since it was first instituted on September 21, 2016. These marketplaces provide significant data with respect to prevailing valuations of bitcoin. Most Bitcoin Exchanges operate through pooled account systems, whereby the users of the Bitcoin Exchange send bitcoin and/or fiat currency to an account of the Bitcoin Exchange, which records user subaccount balances in a ledger entry system. Trades on pooled account exchanges are typically conducted ‘‘offBlockchain,’’ meaning that they are settled by reallocating bitcoin and money to and from users on the balanced ledger of the Bitcoin Exchange. Therefore, a trade on a pooled account exchange will not result in a Bitcoin transaction being transmitted and PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 subsequently recorded on the Blockchain, or of a money transfer going from one bank account to another. For a pooled-account Bitcoin Exchange, Bitcoin transactions and money transfers typically only occur during the withdrawal or deposit of bitcoin or fiat currency by an exchange customer, or if the Bitcoin Exchange needs to shift bitcoin or fiat currency between its pooled accounts for internal purposes. Nevertheless, Bitcoin Exchanges typically publish trade data including last price, bid and ask information, and trade volume, among other data, on their respective Web sites and through application programming interfaces (‘‘APIs’’). As noted above, Gemini Exchange, an affiliate of the Sponsor and the source of the Gemini Exchange Auction Price used by the Trust to calculate its NAV, operates the Web site www.gemini.com. Gemini Exchange is owned and operated by Gemini Trust Company, LLC, the Trust’s Custodian. As a facility of a New York State-chartered limited liability trust company, Gemini Exchange operates under the direct supervision and regulatory authority of the NYSDFS. The Gemini Trust Company is a fiduciary and must meet the capitalization, compliance, antimoney laundering, consumer protection and cyber security requirements as set forth by the NYSDFS. Gemini Exchange’s principal business is to provide an electronic trading platform and associated online presence to allow customers to exchange fiat currency (e.g., U.S. Dollars) for Digital Assets (e.g., bitcoin or ether) and vice versa. Bitcoin Exchange Market ‘‘Dark Pools’’ and OTC Trading In addition to transparent or ‘‘lit’’ online Bitcoin Exchanges with a traditional central limit order book structure, some trading in bitcoin takes place on an on-demand or over-thecounter (‘‘OTC’’) basis. Similar to mature securities, there are also private request for quote (RFQ) venues and ‘‘dark pools,’’ which are bitcoin trading platforms that do not publicly report limit order book data. Market participants have the ability to execute large block trades in a dark pool without revealing those trades and the related price data to the public Bitcoin Exchange Market; however, any withdrawal from or deposit to a dark pool platform must ultimately be recorded on the Blockchain, as must OTC transactions. Genesis Trading also operates a form of dark pool through a trading desk that buys and sells blocks of bitcoin without publicly reporting trade data. In June 2015, Kraken, a E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices Bitcoin Exchange, launched a dark pool for bitcoin trades separate from its public central limit order book. Informal dark pools are currently believed to exist, particularly among wholesale buyers of bitcoin and Bitcoin Network mining groups that obtain bitcoin through mining. Such informal dark pools function as a result of the peer-topeer nature of the Bitcoin Network, which allows direct transactions between any seller and buyer. As the Bitcoin Exchange Market and bitcoin dark pools have a limited history and no publicly available limit order book data, it is difficult to estimate the impact of dark pools on the Bitcoin Exchange Market. mstockstill on DSK3G9T082PROD with NOTICES Global Bitcoin Derivatives Markets Nascent derivatives markets for bitcoin now exist. For example, certain types of options, futures contracts for differences and other derivative instruments are available in certain jurisdictions; however, many of these are not available in the United States and generally are not regulated to the degree that U.S. investors expect derivative instruments to be regulated. The U.S. Commodity Futures Trading Commission (‘‘CFTC’’) has approved TeraExchange, LLC as a swap execution facility (‘‘SEF’’), on which bitcoin swap contracts may be entered into. On October 9, 2014, TeraExchange announced that it had hosted the first executed bitcoin swap traded on a CFTC-regulated platform. Additionally, in September 2015, the CFTC issued an order temporarily registering LedgerX LLC as a SEF. LedgerX also previously applied for registration as a derivatives clearing organization (‘‘DCO’’) although its application is still in the process of CFTC approval. Other parties have acknowledged submitting applications for registration to the CFTC, though no other bitcoin-focused derivatives platform has been approved for registration by the CFTC. Various platforms and Bitcoin Exchanges also offer trading on margin. Currently, the open interest in these bitcoin derivative instruments is quite limited in comparison to the volume of actual bitcoin trades. CFTC commissioners have previously expressed publicly that derivatives based on Digital Assets such as bitcoin are subject to regulation by the CFTC, including oversight to prevent market manipulation of the price of bitcoin. As previously noted, in the September 2015 Coinflip case, the CFTC instituted and settled administrative proceedings that involved a bitcoin derivatives trading platform and its chief executive officer. VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 In Coinflip,34 the CFTC determined that bitcoin and other ‘‘virtual currencies’’ (aka Digital Assets) are properly defined as commodities under the CEA and CFTC regulations, and applied CEA provisions and CFTC regulations that apply to transactions in commodity options and swaps to the conduct of the bitcoin derivatives trading platform. The CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in ‘‘illegal, offexchange commodity transactions and failed to register as a futures commission merchant’’ when it facilitated borrowing transactions among its users to permit the trading of bitcoin on a ‘‘leveraged, margined or financed basis’’ without first registering with the CFTC.35 While the Commission has not opined on the legal characterization of bitcoin as a security, it has taken various actions against persons or entities misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi schemes), inaccurate and inadequate publicly disseminated information, and the offering of unregistered securities.36 Goods and Services Bitcoin can also be used to purchase goods and services, either online or at physical locations, although reliable data is not readily available about the retail and commercial market penetration of the Bitcoin Network. In 34 See supra note 13 [sic]. In re BFXNA Inc., No. 16–19 (CFTC June 2, 2016), available at: https://www.cftc.gov/idc/ groups/public/@lrenforcementactions/documents/ legalpleading/enfbfxnaorder060216.pdf. 36 See, e.g., SEC v. Homero Joshua Garza, GAW Miners, LLC and ZenMiner, LLC, Complaint and Demand for Jury Trial, Case 3:15–cv–01760 (D. Conn. Dec. 1, 2015) (The Commission brought charges in connection with a bitcoin-related Ponzi scheme); In re Erik T. Voorhees, Securities Act Release No. 9592 (June 3, 2014), available at: https://www.sec.gov/litigation/admin/2014/339592.pdf (The Commission brought an administrative action in connection with the offering of unregistered securities of two bitcoinrelated entities.); In re BTC Trading, Corp. and Ethan Burnside, Securities Act Release No. 9685 (Dec. 8, 2014), available at: https://www.sec.gov/ litigation/admin/2014/33-9685.pdf (The Commission brought an administrative action in connection with the operation and offering of securities of two online exchanges, neither of which were registered with the Commission, that accepted payment in bitcoin and primarily listed virtual currency-related companies.); In re Sand Hill Exchange, et al., Securities Act Release No. 9809 (June 17, 2015), available at: https://www.sec.gov/ litigation/admin/2015/33-9809.pdf (The Commission took legal action against an online exchange that accepted payment in bitcoin in connection with disseminating fraudulent information, among other matters.). 35 See PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 76661 January 2014, U.S. national online retailers Overstock.com and TigerDirect began accepting Bitcoin payments. Over the course of 2014, computer hardware and software company Microsoft began accepting bitcoin as online payment for certain digital content, online retailer NewEgg began accepting bitcoin, and computer hardware company Dell began accepting bitcoin. Additionally, Apple, Inc. approved the inclusion of certain approved bitcoin wallet applications on the Apple App Store. There are thousands of additional online merchants that accept bitcoin, and the variety of goods and services for which bitcoin can be exchanged is increasing. Currently, local, regional and national businesses, including Time Inc., Wikimedia, WordPress, Expedia and Foodler, accept bitcoin. Bitcoin service providers such as BitPay and Coinbase provide means to spend bitcoin for goods and services at additional retailers. There are also many real-world locations that accept bitcoin throughout the world. As of October 2016, it was estimated that as many as one hundred thousand (100,000) merchants or businesses accept, or have the technological infrastructure to choose to accept (e.g., Shopify merchants), bitcoin as payment. In September 2014, payments giant PayPal announced a partnership with merchant processors including BitPay and Coinbase and to expand their Bitcoin-related services to PayPal’s merchant customers, thereby significantly expanding the reach of bitcoin-accepting merchants. To date, the rate of consumer adoption and use of bitcoin in paying merchants has trailed the broad expansion of retail and commercial acceptance of bitcoin. Nevertheless, there will likely be a strong correlation between continued expansion of the Bitcoin Network and its retail and commercial market penetration. Market Participants Miners Miners range from Bitcoin enthusiasts to professional mining operations that design and build dedicated machines and data centers, but the vast majority of mining is now undertaken by participants in mining pools. See ‘‘Bitcoin Mining & Creation of New Bitcoin’’ above. Investment and Speculative Sector This sector includes the investment and trading activities of both private and professional investors and speculators. These participants range from exchange-traded products, such as E:\FR\FM\03NON1.SGM 03NON1 76662 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES ARK Web x.0 ETF, or hedge funds such as the Pantera Bitcoin Fund Ltd. to daytraders who invest in bitcoin by trading on Bitcoin Exchanges. See ‘‘Uses of Bitcoin—Bitcoin Exchange Market’’ below. Historically, larger financial services institutions are publicly reported to have limited involvement in investment and trading in bitcoin. In December 2013, Wedbush Securities and Bank of America Merrill Lynch released preliminary research reports on Bitcoin as both a payment tool and investment vehicle. Additionally in December, the Federal Reserve Bank of Chicago released a primer on Bitcoin prepared by a senior economist. In early 2014, Fitch Ratings, Goldman Sachs, JPMorgan Chase, PricewaterhouseCoopers, UBS Securities and Wedbush Securities, among others, released additional research reports analyzing the Bitcoin Network on the basis of bitcoin value, technological innovation or payment system mechanics. In December 2014, the Federal Reserve Board’s Divisions of Research & Statistics and Monetary Affairs released an analysis of the Bitcoin Network’s transaction system and the Bitcoin Exchange Market’s economics. Additionally, institutions including Fortress Investment Group and Pantera Capital made, or proposed to make, direct or indirect investments in bitcoin or the Bitcoin ecosystem. In addition, in October 2015, the Congressional Research Service, at the request of one (1) or more Members, released a report detailing the background and regulatory landscape of Bitcoin. Retail Sector The retail sector includes users transacting in direct peer-to-peer Bitcoin transactions through the direct sending of bitcoin over the Bitcoin Network. The retail sector also includes transactions between consumers paying for goods or services from commercial or service businesses through direct transactions or third-party service providers such as BitPay, Coinbase and GoCoin. BitPay, Coinbase and GoCoin each provide a merchant platform for instantaneous transactions whereby the consumer sends bitcoin to BitPay, Coinbase, or GoCoin, which then provides either the bitcoin or the cash value thereof to the commercial or service business utilizing the platform. PayPal, Square and Shopify are examples of traditional merchant payment processors or merchant platforms that have also added Bitcoin payment options for their merchant customers. Payment processing through the Bitcoin Network VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 typically reduces the transaction cost for merchants, relative to the costs paid for credit card transaction processing. Consumers can now purchase goods or services through retail companies such as Overstock.com, DISH, Dell, Expedia, Microsoft, and Time, Inc. Service Sector This sector includes companies that provide a variety of services including the buying, selling, payment processing and storing of bitcoin. Coinbase and Circle are each multi-service financial institutions that provide digital wallets that store bitcoin for users and also serve as a retail gateway whereby users can purchase bitcoin for fiat currency. Coinbase, BitPay, BitPagos, and GoCoin are examples of Bitcoin payment processors that allow merchants to accept bitcoin as payment. As the Bitcoin Network continues to grow in acceptance, it is anticipated that service providers will expand the currently available range of services and that additional parties will enter the service sector for the Bitcoin Network. Competition Bitcoin is not the only Digital Asset founded on math-based algorithms and cryptographic security, although it is considered the most prominent. Approximately seven hundred (700) other Digital Assets or ‘‘altcoins’’ have been developed since the Bitcoin Network’s inception, including Litecoin, Ether and Ripple. The Bitcoin Network, however, possesses the ‘‘first-to-market’’ advantage and thus far has the largest market capitalization and is secured by a mining network with significantly more aggregate hashrate than the networks of any other Digital Assets. Description of the Trust and the Shares According to the Registration Statement, the investment objective of the Trust is for the Shares to track the price of bitcoin using the Gemini Exchange Auction Price on each Business Day, less the Trust’s liabilities (which include accrued but unpaid fees and expenses).37 The Shares are 37 According to the Registration Statement, the activities of the Trust will be limited to (1) issuing Baskets in exchange for the actual bitcoin deposited by the Authorized Participants with the Custodian as consideration, (2) transferring actual bitcoin as necessary to cover the Sponsor’s Fee and as necessary to pay Trust expenses not assumed by the Sponsor and other liabilities, (3) transferring actual bitcoin in exchange for Baskets surrendered for redemption by the Authorized Participants, (4) causing the Trustee to sell bitcoin on the termination of the Trust, and (5) engaging in all administrative and custodial procedures necessary to accomplish such activities in accordance with the provisions of the Trust Agreement, the Administration Agreement, the Transfer Agency PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 designed for investors seeking a costeffective and convenient means of gaining investment exposure to bitcoin similar to a direct investment in bitcoin. A substantial direct investment in bitcoin may require expensive and sometimes complicated arrangements in connection with the acquisition, security, and safekeeping of the bitcoin and may involve the payment of substantial fees to acquire such bitcoin from third-party facilitators through cash payments of U.S. Dollars. Although the Shares will not be the exact equivalent of a direct investment in bitcoin, they provide investors with an alternative that allows them to gain investment exposure to bitcoin. In addition, the Trust will provide its investors with other advantages including easy accessibility, relative cost efficiencies and minimal credit risk as the Trust will wholly-own all of its bitcoin assets, as discussed below. The Shares offer an investment that is: • Easily Accessible and Relatively Cost Efficient. Investors in the Shares can also directly access bitcoin through the Bitcoin Exchange Market. The Sponsor believes that investors will be able to more effectively implement strategic and tactical asset allocation strategies that use bitcoin by using the Shares instead of directly purchasing and holding bitcoin, and for many investors, transaction costs related to the Shares will be lower than those associated with the direct purchase, storage and safekeeping of bitcoin. • Exchange-Traded and Transparent. The Shares will be listed on BZX, providing investors with an efficient means to implement various investment strategies. Upon effectiveness of the registration statement of which this prospectus is a part, the Shares will be eligible for margin accounts and will be backed by the assets of the Trust. The Trust will not hold or employ any derivative securities. The value of the Trust’s holdings will be reported each day on the Trust’s Web site, located at www.coin-etf.com. Furthermore, the fact that the Trust will be regulated by the Exchange and by the Commission under the Act provides a level of oversight not and Services Agreement, the Custody Agreement, the License Agreement, and Authorized Participant Agreements. The Trust will not be actively managed. It will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the market prices of bitcoin. The Trust seeks to achieve its investment objective by directly owning bitcoin and will not speculate with regard to short-term changes in bitcoin prices. The Trust will not invest in bitcoin derivatives, futures, swaps, or other financial instruments that represent bitcoin or that may be exchanged for bitcoin. The Trust does not expect to make any cash distributions to shareholders. E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES provided by any other current Bitcoin Exchanges or service providers. The Sponsor represents that the Trust will enter into an information sharing agreement with the Gemini Exchange enabling it to obtain and publish the Gemini Exchange Auction Price on the Trust’s Web site. In addition, the Sponsor will arrange for the Gemini Exchange to share data regarding the Gemini Exchange Spot Price and other trading data with the Exchange. See ‘‘Overview of the Bitcoin Industry and Market—Bitcoin Value—Gemini Exchange Spot Price’’ above. Lastly, the Exchange has the ability to halt trading and delist the Shares of the Trust under certain circumstances and, more generally, retains broad discretionary authority over the continued listing of securities on the Exchange, as further described below. • Proprietary Cold Storage System. The Custodian has been appointed to store and safekeep the Trust’s bitcoin using a state-of-the-art, proprietary Cold Storage System. Similar hardware, software, administration and continued technological development may not be available or cost-efficient for many investors. Winklevoss IP, LLC (‘‘WIP’’) is the owner of certain intellectual property and it has licensed such intellectual property to the Sponsor for use by the Custodian and its service providers in the safekeeping of the Trust’s bitcoin. Using the precious metals exchangetraded trusts currently trading on U.S. exchanges38 as design paradigms, the Sponsor has structured the Trust to be a similar passive investment vehicle holding a single asset. Like the precious metals exchange traded trusts cited above, the Trust will only own and store bitcoin and will not be permitted to hold cash or any other Digital Asset. The Custodian has been appointed to store and safekeep the Trust’s bitcoin 38 See, e.g., SPDR Gold Trust: See Securities Exchange Act Release No. 50603 (October 28, 2004), 69 FR 64614 (November 5, 2004) (SR–NYSE–2004– 22) (approving listing of the SPDR Gold Trust); iShares Gold Trust: See Securities Exchange Act Release No. 51058 (January 19, 2005), 70 FR 3749 (January 26, 2005) (SR–Amex–2004–38) (approving listing of the iShares Gold Trust); ETFS Gold Trust: See Securities Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993 (May 15, 2009) (SR– NYSEArca–2009–40) (approving listing of the ETFS Gold Trust); ETFS Silver Trust: See Securities Exchange Act Release No. 59781 (April 17, 2009), 74 FR 18771 (April 24, 2009) (SR–NYSEArca–2009– 95) (approving listing of the ETFS Silver Trust); ETFS Platinum Trust: See Securities Exchange Act Release No. 61219 (December 22, 2009), 74 FR 68886 (December 29, 2009) (SR–NYSEArca–2009– 94) (approving listing of the ETFS Platinum Trust); and ETFS Palladium Trust: See Securities Exchange Act Release No. 61220 (December 22, 2009), 74 FR 68895 (December 29, 2009) (SR–NYSEArca–2009– 94) (approving listing of the ETFS Palladium Trust). VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 using a state-of-the-art, proprietary Cold Storage System.39 Similar hardware, software, administration and continued technological development may not be available or cost-efficient for many investors. As such, the logistics of accepting, transferring and safekeeping of actual bitcoin are dealt with by the Custodian using the Cold Storage System, and the related expenses are built into the price of the Shares. Therefore, the investor does not have any additional tasks or costs over and above those associated with dealing in any other publicly traded security. The Shares are intended to provide investors with a cost-efficient and convenient means of gaining exposure to bitcoin similar to a direct investment in bitcoin. All bitcoin is recorded on the Blockchain, the decentralized transaction ledger of the Bitcoin Network. The Blockchain is a canonical record of every bitcoin, every Bitcoin transaction (including the mining of new bitcoin) and every Bitcoin address associated with a quantity of bitcoin. In order to transfer or ‘‘spend’’ bitcoin, one must control the private key that is mathematically associated with a given Bitcoin address. The private keys that control the Trust’s bitcoin are secured by the Custodian and stored completely offline (i.e., air-gapped) using the Custodian’s state-of-the-art, proprietary Cold Storage System. The Custodian’s Cold Storage System is founded on the principles of (i) building defense-indepth against external threats; (ii) protecting against human error; and (iii) guarding against misuse of insider access. In order to accomplish these principles, the Custodian’s Cold Storage System generates, stores and manages the private keys that control the Trust’s bitcoin onboard hardware security modules (‘‘HSMs’’) for the lifetime of each private key. HSMs (each, a ‘‘Signer’’) are tamper-resistant computers used by the Custodian to digitally sign (i.e., authenticate) any transfer of the Trust’s bitcoin. All Signers are stored, as well as backed up, in various geographically distributed, access-controlled facilities throughout the United States. In addition, the Custodian’s Cold Storage System 39 WIP is the owner of certain intellectual property and it has licensed such intellectual property to the Sponsor for use by the Custodian and its service providers in the safekeeping of the Trust’s bitcoin. The Sponsor believes that the use of this Cold Storage System and other security features described below, the technological experience of the Custodian’s employees and the Sponsor’s management team, as well as the use of independent auditors for periodic reviews, will provide a level of security not available through other Digital Asset custodians. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 76663 utilizes multiple-signature (‘‘Multisig’’) technology with a ‘‘2 of 3’’ signing design that requires a signature from at least two (2) of three (3) potential Signers in order to move the Trust’s bitcoin. This provides both security against attacks and tolerance to losing access to a minority of facilities or private keys, thereby eliminating single points of failure. In addition, the operation of a Signer requires the coordinated actions of multiple employees (each a ‘‘Signatory’’) to protect against insider malfeasance. All Signatories have undergone background checks by a third-party vendor and are subject to, with or without the Signatory’s knowledge, ongoing background checks at the discretion of the Custodian. All Signatories have been fingerprinted, and all fingerprint cards and accompanying information are retained by the Custodian for the duration of the Signatory’s tenure and for a minimum of three (3) years thereafter. Lastly, the Cold Storage System is comprised of hardware that is sourced from multiple, diverse manufacturers to guard against supplychain risks. The Custodian’s Cold Storage System was purpose-built to demonstrate ‘‘proof of control’’ of the private keys associated with its public Bitcoin addresses. More specifically, the Custodian can use Signers to sign a specific message that references a current event (i.e., to prove recency), thereby proving control of the private keys associated with the public Bitcoin addresses in which the Trust’s bitcoin are held. This allows the Custodian to periodically evidence control of the Trust’s assets without necessitating the transfer of any of the Trust’s bitcoin. In fact, such ‘‘proof of control’’ exercises will be conducted monthly and audited by the Trust’s Auditor; the results will be made publicly available on the Trust’s Web site along with an attestation from the Trust’s Auditor. The Trust does not currently intend to insure its bitcoin, but may elect to do so in the future if a viable insurance market for bitcoin is established. The Custodian does, however, maintain insurance in the form of a fidelity bond with regard to its custodial business on such terms and conditions as it considers appropriate in connection with its custodial obligations and is responsible for all costs, fees and expenses arising from the insurance policy or policies. The Custodian’s statutorily required fidelity bond coverage includes, among other things, insurance against employee theft, computer fraud, and funds transfer fraud; this coverage is subject to certain E:\FR\FM\03NON1.SGM 03NON1 mstockstill on DSK3G9T082PROD with NOTICES 76664 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices terms, conditions, and exclusions. This fidelity bond has been in effect since October 1, 2015. The Trust will not be a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage. Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the bitcoin held by the Custodian on behalf of the Trust. Furthermore, Shareholders’ recourse against the Trust, Custodian and Sponsor under New York law governing their custody operations is limited. Similarly, Shareholders’ recourse against the Administrator and Transfer Agent for the services they provide to the Trust is limited. Consequently, a loss may be suffered with respect to the Trust’s bitcoin which is not covered by insurance and for which no person is contractually liable in damages. The Custodian is the custodian of the Trust’s bitcoin in accordance with the terms and provisions of the Trust Custody Agreement and utilizes its Cold Storage System in the administration and operation of the Trust and the safekeeping of its bitcoin. The Custodian segregates the Trust’s bitcoin which are held in unique Bitcoin addresses with balances that can be directly verified on the Bitcoin Blockchain. Under the Trust Custody Agreement, the Custodian is also responsible for the maintenance of, and periodic updates to, the Cold Storage System. Acting on standing instructions specified in the Trust Custody Agreement, the Custodian will accept, on behalf of the Trust, delivery of bitcoin from Authorized Participants into the Trust Custody Account in the creation of a Basket. In order for an Authorized Participant to redeem a Basket and receive a distribution of bitcoin from the Trust, the Custodian, upon receiving instructions from the Transfer Agent, will sign transactions necessary to transfer bitcoin out of the Trust Custody Account and distribute to the Bitcoin address specified by the Authorized Participant. See ‘‘Net Asset Value—Creation and Redemption of Shares.’’ The Custodian will engage an independent audit firm to periodically audit the Custodian’s Cold Storage System protocols and internal controls (‘‘Internal Controls Audit’’), and report to the Custodian at least annually on such matters. Additionally, as noted above, the Sponsor and the Custodian have engaged an independent audit firm to verify that the Custodian can demonstrate ‘‘proof of control’’ of the VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 private keys that control the Trust’s bitcoin on a monthly basis. Other Digital Asset ETPs may not be able to or willing to provide ‘‘proof of control’’ of the private keys that control their bitcoin. Net Asset Value According to the Registration Statement, on each Business Day, the Administrator will use the Gemini Exchange Auction Price to calculate the Trust’s NAV at 4:00 p.m. Eastern Time (the ‘‘Evaluation Time’’). At the Evaluation Time, the Administrator will value the bitcoin held by the Trust using the Gemini Exchange Auction Price which is publicly available and will be provided to the Administrator by the Sponsor each Business Day. In the event that the Sponsor determines that the Gemini Exchange Auction Price is not an appropriate basis for evaluation of the Trust’s bitcoin on a given Business Day, the Sponsor will instruct the Administrator to use the 4:00 p.m. Eastern Time spot price on the Gemini Exchange or the itBit bitcoin exchange (the ‘‘itBit Exchange’’) 40 as an alternative basis for calculating the Trust’s NAV on that Business Day. The itBit Exchange is operated by the itBit Trust Company, LLC, a New York Statechartered limited liability trust company that, like the Gemini Exchange, operates under the direct supervision and regulatory oversight of the NYSDFS. Any determination that the Gemini Exchange Auction Price is unavailable or otherwise not an appropriate basis for calculating the Trust’s NAV on a given Business Day would be based upon extraordinary criteria in which the operation of the Gemini Exchange is disrupted or otherwise experiencing material calculation or reporting irregularities. If the Sponsor determines in good faith that none of the Gemini Exchange Auction Price, the spot price on the Gemini Exchange, or the spot price on the itBit Exchange are reliable for calculating the Trust’s NAV on a particular Business Day, including but not limited to situations where it does not reflect material information or events occurring between the time of calculation of such prices and the time the Trust’s Shares are valued, bitcoin will be valued by the Sponsor using fair market value pricing as determined in good faith by the Sponsor and calculated by the Administrator . Determining the fair market value of 40 The itBit Exchange is operated by the itBit Trust Company, LLC, a New York State-chartered limited liability trust company that, like the Gemini Exchange, operates under the direct supervision and regulatory oversight of the NYSDFS. PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 bitcoin involves the consideration of a number of subjective factors and thus the prices for bitcoin may differ from the Gemini Exchange Auction Price or the spot price on the Gemini Exchange or the itBit Exchange. Factors the Sponsor may consider include the market price for bitcoin on other Bitcoin Exchanges, or in other forums for which bitcoin prices are published publicly, recent significant transactions on the Blockchain where the USD-bitcoin exchange rate can be readily ascertained (e.g., sales of items with widely available USD prices where the cost in bitcoin can be readily determined), movements in the price of other Digital Assets or fiat currencies, movements in the price of other Digital Asset ETPs, global or regional political, economic or financial events, and other factors determined by the Sponsor in good faith. The Sponsor shall not be liable to any person for the determination that the Gemini Exchange Auction Price or an alternative basis for a fair market value of bitcoin is not appropriate as a basis for calculation of the Trust’s NAV provided that such determination is made in good faith. In order to calculate the Trust’s NAV, the Administrator will first determine the value of the Trust’s bitcoin and then subtract all of the Trust’s liabilities (including accrued but unpaid fees and expenses) to determine the Trust’s net assets. The Administrator will calculate the Trust’s NAV by dividing the net assets of the Trust by the number of the Shares outstanding as of the close of trading on the Exchange (which includes the net number of any of the Shares created or redeemed on such Business Day). The Sponsor will publish the Trust’s NAV on the Trust’s Web site as soon as practicable after determination by the Administrator. To the extent that the NAV has been calculated using a price per bitcoin other than the Gemini Exchange Auction Price for such Business Day, the publication on the Trust’s Web site will note the valuation methodology and the price per bitcoin resulting from such calculation. Creation and Redemption of Shares The Trust is expected to issue and redeem Shares from time to time only in one or more whole Baskets. The Trust will issue and redeem the Shares in Baskets only to certain Authorized Participants on an ongoing basis. On a 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 bitcoin (i.e., bitcoin equal in value to the value of the Shares being purchased). On a E:\FR\FM\03NON1.SGM 03NON1 mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices redemption, the Trust will distribute bitcoin 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 each Basket accepted by the Transfer Agent in a creation or redemption transaction will be the same (i.e., each Basket will consist of 10,000 Shares and the value of the Basket will be equal to the value of 10,000 Shares at their net asset value per Share on that day). The Trust will not issue or redeem fractions of a Basket. Only Authorized Participants will be able to place orders to create or redeem Baskets. Authorized Participants must be (i) registered broker-dealers or other securities market participants, such as banks and other financial institutions, which are not required to register as broker-dealers to engage in securities transactions, and (ii) DTC Participants. A Transaction Fee may be imposed to offset the transfer and other transaction costs associated with creation or redemption. Authorized Participants or their affiliated market makers are expected to have the facility to participate directly on one or more Bitcoin Exchanges. The Trust currently expects that prior to the commencement of trading on the Exchange, at least two Authorized Participants will have signed an Authorized Participant Agreement with the Trust and may create and redeem Baskets as described above. Persons interested in placing orders to create or redeem Baskets should contact the Sponsor or the Transfer Agent to obtain the contact information for the Authorized Participants. Shareholders who are not Authorized Participants will only be able to redeem their Shares through an Authorized Participant. Bitcoin will be (i) delivered to the Trust Custody Account from an Authorized Participant in connection with the creation of one or more Baskets and (ii) distributed by the Custodian from the Trust Custody Account to the Authorized Participant in connection with the redemption of one or more Baskets. Under the Authorized Participant Agreement, the Sponsor has agreed to indemnify the Authorized Participants against certain liabilities, including liabilities under the Securities Act. The following description of the procedures for the creation and redemption of Baskets is only a summary and an investor should refer to the relevant provisions of the Trust Agreement, the Trust Servicing Agreement and the form of Authorized Participant Agreement for more detail, VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 each of which is attached as an exhibit to the Registration Statement of which the prospectus is a part. Creation Procedures On any Business Day, an Authorized Participant may place an order with the Transfer Agent to create one or more Baskets (each a ‘‘Creation Basket’’). The settlement of Creation Basket orders, including the delivery of bitcoin by the Authorized Participant and distribution of Shares to the Authorized Participant, will occur only on days BZX is open for regular trading. Creation Basket Order Requirements The quantity of bitcoin required to be delivered to the Trust in exchange for a Creation Basket is determined by the Administrator, and all questions as to the quantity of bitcoin necessary to deliver to purchase a Creation Basket will be conclusively determined by the Administrator. The Administrator’s determination of the cost of a Creation Basket shall be final and binding on all persons interested in the Trust. Creation Basket Distribution An Authorized Participant who places a Creation Basket order with the Transfer Agent is responsible for delivering the bitcoin to the Trust required to purchase the Creation Basket on the order date. Bitcoin delivered by an Authorized Participant will be considered settled upon the completion of the Confirmation Protocol. Under the Confirmation Protocol, the Custodian must wait until the bitcoin delivery transaction has been confirmed by six (6) consecutive blocks on the Blockchain before it is considered settled. The confirmation process should take approximately one (1) hour depending upon the speed with which Bitcoin Network miners add new blocks to the Blockchain. See ‘‘Overview of the Bitcoin Industry and Market— Cryptographic Security Used in the Bitcoin Network—Double-Spending and the Bitcoin Network Confirmation System,’’ above. An Authorized Participant shall not be deemed to have fulfilled its bitcoin delivery requirement until the completion of the Confirmation Protocol. Following confirmation of the receipt of bitcoin into the Trust Custody Account by the Custodian, the Transfer Agent will direct DTC to credit the Authorized Participant’s DTC account with the Shares representing the number of Creation Baskets purchased. The expense and risk of delivery, ownership and safekeeping of a bitcoin delivery until it has been received by PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 76665 the Trust in the Trust Custody Account shall be borne by the Custodian. The Custodian may accept delivery of bitcoin by such other means as the Sponsor, from time to time, may determine to be acceptable for the Trust, provided that the same is disclosed in a prospectus relating to the Trust filed with the Commission pursuant to Rule 424 under the Securities Act. If bitcoin is to be delivered other than as described above, the Sponsor is authorized to establish such procedures and to appoint such custodians and establish such custody accounts in addition to those described in this prospectus, as the Sponsor determines to be desirable. Suspension or Rejection of Creation Basket Orders The Administrator or the Sponsor may suspend the right to place Creation Basket orders, or postpone the Creation Basket settlement date, (i) for any period during which BZX is closed other than customary weekend or holiday closings, or trading on BZX is suspended or restricted; or (ii) for any period during which an emergency exists as a result of which receipt or evaluation of bitcoin delivery is not reasonably practicable or presents, in the judgment of the Custodian or the Sponsor or their agents, a security risk to the Cold Storage System. The inability of the Custodian to operate the Cold Storage System because of a failure of hardware, software or personnel or an inability to access the Cold Storage System (e.g., because of power failure or acts of God) are examples of such emergencies. None of the Custodian, the Sponsor, or their agents will be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement. The Sponsor may also reject a Creation Basket order if (i) such order is not presented in proper form as described in the Authorized Participant Agreements, (ii) such order is incorrect, (iii) if the Creation Basket Order presents, in the opinion of the Custodian, the Sponsor, or their agents, a security risk to the Cold Storage System, (iv) the fulfillment of the Creation Basket order, in the opinion of counsel, might be unlawful, or (v) circumstances outside the control of the Sponsor, the Transfer Agent or the Custodian, as applicable, make it, for all practical purposes, not feasible to process the Creation Basket Order. None of the Custodian, Sponsor, or their agents will be liable for the rejection of any Creation Basket order. E:\FR\FM\03NON1.SGM 03NON1 76666 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices Redemption Procedures The procedures by which an Authorized Participant can redeem one or more Baskets (each a ‘‘Redemption Basket’’) will mirror the procedures for the creation of Baskets. On any Business Day, an Authorized Participant may place a Redemption Basket order with the Transfer Agent. The settlement of Redemption Baskets orders, including the delivery of Shares to the Trust and distribution of bitcoin to the Authorized Participant, will only occur when BZX is open for regular trading. Settlement of Redemption Baskets may be delayed only in the instance of administrative or custodial delays in the processing of a distribution of bitcoin from the Trust Custody Account, whether by reason of Bitcoin Network delays, mechanical or clerical error or by act of God. Settlement of a Redemption Basket will occur only on Business Days. Redemption Basket orders must be placed no later than 3:00 p.m. Eastern Time on a Business Day. A Redemption Basket order so received will be effective on the date it is received if the Sponsor finds it to be in satisfactory form. The redemption procedures allow only Authorized Participants to place Redemption Basket orders and do not entitle an Authorized Participant to receive a distribution of bitcoin in a quantity that is different than the value of a Redemption Basket. By placing a Redemption Basket order, an Authorized Participant agrees to deliver the number of Shares in the Redemption Basket through DTC’s bookentry system to the Transfer Agent’s DTC account not later than the next Business Day following the effective date of the Redemption Basket order. Redemption Basket Order Requirements The Redemption Basket distribution from the Trust will consist of a transfer to the redeeming Authorized Participant of the quantity of the bitcoin held by the Trust in the Trust Custody Account evidenced by the Shares being delivered. Redemption distributions will be subject to the deduction of any applicable taxes or other governmental charges that may be due. mstockstill on DSK3G9T082PROD with NOTICES Redemption Basket Distribution The distribution of bitcoin representing a Redemption Basket will be transferred to the Authorized Participant on the third Business Day following the Redemption Basket order date if, by 3:00 p.m. Eastern Time on the next Business Day, the Transfer Agent’s DTC account has been credited with the Redemption Baskets to be redeemed. Subsequently, the Transfer Agent will VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 instruct the Custodian to transfer bitcoin from the Trust Custody Account and distribute it to the redeeming Authorized Participant. If the Transfer Agent’s DTC account has not been credited with all of the Shares representative of the Redemption Baskets to be redeemed by such time, the delivery will be considered unfulfilled. In order to facilitate the distribution of the bitcoin representing a Redemption Basket order, the Administrator will calculate the number of bitcoin representing the value of the Redemption Basket order and instruct the Custodian to distribute that quantity of bitcoin to the redeeming Authorized Participant. Suspension or Rejection of Redemption Basket Orders The Administrator, the Transfer Agent, or the Sponsor may suspend the right to place Redemption Basket orders, or postpone the Redemption Basket order settlement date, (i) for any period during which BZX is closed other than customary weekend or holiday closings, or trading on BZX is suspended or restricted; or (ii) for any period during which an emergency exists as a result of which the distribution or evaluation of bitcoin is not reasonably practicable or presents, in the judgment of the Custodian, the Sponsor, or their agents a security risk to the Cold Storage System. The inability of the Custodian to operate the Cold Storage System because of a failure of hardware, software or personnel or an inability to access the Cold Storage System (e.g., because of power failure or acts of God) are examples of such emergencies. None of the Custodian, the Sponsor, or their agents will be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement. The Sponsor will also reject a Redemption Basket order if, among other things, the order is not in proper form as described in the Authorized Participant Agreement or if the fulfillment of the Redemption Basket order, in the opinion of its counsel, might be unlawful. Availability of Information The Trust’s Web site, which will be publicly available prior to the public offering of the Shares, will include a form of the prospectus for the Trust that may be downloaded. The Web site will feature additional quantitative information for the Shares updated every 15 seconds throughout the Exchange’s Regular Trading Session, including the prior Business Day’s PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 reported NAV, the Trust’s Intraday Indicative Value or IIV (as defined below), the national best bid for the Trust’s Shares (‘‘NBB’’), the national best offer for the Trust’s Shares (‘‘NBO’’), the midpoint of the NBB and the NBO, and the discount or premium of this midpoint from the IIV. Daily trading volume information for the Shares will also be available in the financial section of newspapers, through subscription services such as Bloomberg, Thomson Reuters and International Data Corporation, which can be accessed by Authorized Participants and other investors, as well as through other electronic services, including major public Web sites. In addition, the Sponsor will calculate an estimated fair value of the Shares based on the most recent Gemini Exchange Auction Price (the ‘‘Intraday Indicative Value’’ or ‘‘IIV’’), which will be updated and widely disseminated by one or more major market data vendors at least every fifteen (15) seconds during the Exchange’s regular trading hours.41 The dissemination of the Intraday Indicative Value will provide investors with an estimate of the fair value of the Shares throughout the trading day. Investors may obtain bitcoin pricing information twenty-four (24) hours a day or from various financial information service providers or Bitcoin Network information sites such as BitcoinCharts or bitcoinity. Bloomberg financial terminals include pricing data in USD and in Euro from several Bitcoin Exchanges. Recently, the CME and the ICE announced bitcoin pricing indices. Current Bitcoin market prices are also generally available with bid/ask spreads directly from Bitcoin Exchanges. In addition, on each Business Day, the Trust’s Web site will provide pricing information for the Gemini Exchange Auction Price, the 4:00 p.m. Eastern Time spot price on the Gemini Exchange and the Shares. The Gemini Exchange itself provides comprehensive last trade information as well as the aggregate quantity available at each price level within its limit order book, all through its public Web site (www.gemini.com) and public market data feeds. Additional information regarding the Trust and its Shares, including risks, creation and redemption procedures, fees, distributions and taxes, is included in the Registration Statement. 41 Currently, it is the Exchange’s understanding that several major market data vendors display and/ or make widely available Intraday Indicative Values published via the Consolidated Tape Association (‘‘CTA’’) or other data feeds. E:\FR\FM\03NON1.SGM 03NON1 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES Arbitrage Mechanism Similar to other ETPs listed and traded on the Exchange, the Trust will rely on the Basket creation and redemption process to reduce any premium or discount that may occur in the Share trading prices on the Exchange relative to the NAV. Baskets may be created or redeemed only by Authorized Participants who have entered into an Authorized Participant Agreement with the Trust and the Sponsor, subject to acceptance by the Transfer Agent. The Basket creation and redemption process is important for the Trust in providing Authorized Participants with an arbitrage mechanism through which they may keep Share trading prices in line with the NAV. See ‘‘Overview of the Bitcoin Industry and Market—Bitcoin Value— Gemini Exchange Spot Price’’ above. As the Shares trade intraday on the Exchange, their market prices will fluctuate due to supply and demand, which will be driven in large part by the price of bitcoin. The following examples generally describe the conditions surrounding Basket creation and redemption: • If the market price of the Shares is greater than the NAV, an Authorized Participant can purchase sufficient bitcoin to create a Basket, and then sell the new Shares on the secondary market at a profit. This process increases the selling interest of the Shares and is expected to decrease the market price of the Shares such that their market price will be closer to the NAV. • If the NAV is greater than the market price of the Shares, an Authorized Participant can purchase Shares on the secondary market in an amount equal to a Basket and redeem them for bitcoin, and then sell the bitcoin at a profit. This process increases the buying interest for the Shares and is expected to increase the market price of the Shares such that their market price will be closer to the NAV. This process is referred to as the arbitrage mechanism (‘‘Arbitrage Mechanism’’). The Arbitrage Mechanism helps to minimize the difference between the trading price of a Share and the NAV. Over time, these buying and selling pressures should balance, and a Share’s market trading price is expected to remain at a level that is at or close to the NAV. The Arbitrage Mechanism provided by the Basket creation and redemption process is designed, and required, in order to maintain the relationship between the market trading price of the Shares and the NAV. The Exchange expects that VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 arbitrageurs will take advantage of price variations between the Shares’ market price and the NAV and that the Arbitrage Mechanism will be facilitated by the transparency and simplicity of the Trust’s holdings, the availability of the Intraday Indicative Value, the liquidity of the bitcoin market, each Authorized Participant’s ability to access the bitcoin market, and each Authorized Participant’s ability to create workable hedges. Rule 14.11(e)(4)—Commodity-Based Trust Shares The Shares will be subject to BZX Rule 14.11(e)(4), which sets forth the initial and continued listing criteria applicable to Commodity-Based Trust Shares. The Exchange will obtain a representation that the Trust’s NAV will be calculated daily and that these values and information about the assets of the Trust will be made available to all market participants at the same time. The Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a trust that holds a specified commodity 42 deposited with the trust; (b) issued by such trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity; and (c) 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. The Trust currently expects that there will be at least 100,000 Shares outstanding at the time of commencement of trading on the Exchange. Upon termination of the Trust, the Shares will be removed from listing. The Trustee, Delaware Trust Company, is a trust company having substantial capital and surplus and the experience and facilities for handling corporate trust business, as required under Rule 14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee without prior notice to and approval of the Exchange. The Exchange also notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange shall have any liability for damages, claims, losses or expenses caused by any errors, omissions or delays in calculating or disseminating any underlying commodity value, the current value of the underlying commodity required to be deposited to 42 For purposes of Rule 14.11(e)(4), the term commodity takes on the definition of the term as provided in the Commodity Exchange Act. As noted above, the CFTC has opined that Bitcoin is a commodity as defined in Section 1a(9) of the Commodity Exchange Act. See Coinflip, supra note 13 [sic]. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 76667 the Trust in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by the Exchange, or any agent of the Exchange, or any act, condition or cause beyond the reasonable control of the Exchange, its agent, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission or delay in the reports of transactions in an underlying commodity. Finally, as required in Rule 14.11(e)(4)(G), the Exchange notes that any registered market maker (‘‘Market Maker’’) in the Shares must file with the Exchange in a manner prescribed by the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a registered Market Maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to the Exchange as required by this Rule. In addition to the existing obligations under Exchange rules regarding the production of books and records (see, e.g., Rule 4.2), the registered Market Maker in CommodityBased Trust Shares shall make available to the Exchange such books, records or other information pertaining to transactions by such entity or registered or non-registered employee affiliated with such entity for its or their own accounts for trading the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, as may be requested by the Exchange. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. The Exchange will halt trading in the Shares under the conditions specified in BZX Rule 11.18. Trading may be halted because of market 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 trading is not occurring E:\FR\FM\03NON1.SGM 03NON1 76668 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices in the bitcoin underlying the Shares; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. mstockstill on DSK3G9T082PROD with NOTICES Trading Rules 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. BZX will allow trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in BZX Rule 11.11(a) the minimum price variation for quoting and entry of orders in securities traded on the Exchange is $0.01 where the price is greater than $1.00 per share or $0.0001 where the price is less than $1.00 per share. Surveillance The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares via the Intermarket Surveillance Group (‘‘ISG’’), from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement.43 In addition, the Exchange may obtain information about bitcoin transactions, trades and market data from Bitcoin Exchanges with which the Exchange has entered into a 43 For a list of the current members and affiliate members of ISG, see www.isgportal.com. VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 comprehensive surveillance sharing agreement as well as certain additional information that is publicly available through the Blockchain. The Exchange notes that it has entered into a comprehensive surveillance sharing agreement with Gemini Exchange. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (i) The procedures for the creation and redemption of Baskets (and that the Shares are not individually redeemable); (ii) BZX Rule 3.7, which imposes suitability obligations on Exchange members with respect to recommending transactions in the Shares to customers; (iii) how information regarding the Intraday Indicative Value and the Trust’s NAV are disseminated; (iv) the risks involved in trading the Shares during the Pre-Opening 44 and After Hours Trading Sessions 45 when an updated Intraday Indicative Value will not be calculated or publicly disseminated; (v) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (vi) trading information. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Shares. Members purchasing the Shares for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, noaction and interpretive relief granted by the Commission from any rules under the Act. In addition, the Information Circular will reference that the Trust is subject to various fees and expenses described in the Registration Statement. The Information Circular will also reference the fact that, apart from the CFTC, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (‘‘FinCEN’’) and the U.S. Internal Revenue Service (‘‘IRS’’), most major U.S. regulators, including the Commission, have yet to make official pronouncements or adopt rules providing guidance with respect to the classification and treatment of bitcoin and other Digital Assets for purposes of commodities, tax and securities laws. The Information Circular will also contain information regarding the CFTC’s determination that bitcoin and other ‘‘virtual currencies’’ (aka Digital Assets) are properly defined as commodities under the CEA,46 and will reference the fact that the CFTC has applied CEA provisions and CFTC regulations that apply to transactions in commodity options and swaps to the conduct of the bitcoin derivatives trading platform. 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act 47 in general and Section 6(b)(5) of the Act 48 in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system 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 on the Exchange pursuant to the initial and continued listing criteria in Exchange Rule 14.11(e)(4), which as noted above includes all statements and representations made in this filing regarding the description of the portfolio and limitations on portfolio holdings or reference assets. The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. The Exchange may obtain information regarding trading in the Shares via the ISG from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement.49 In addition, the Exchange may obtain information about Bitcoin transactions, trades, and market data from Bitcoin Exchanges with which the Exchange has entered into a comprehensive surveillance sharing agreement, which includes the Gemini 46 See 44 The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. Eastern Time. 45 The After Hours Trading Session is from 4:00 p.m. to 5:00 p.m. Eastern Time. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 Coinflip, supra note 13 [sic]. U.S.C. 78f. 48 15 U.S.C. 78f(b)(5). 49 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 47 15 E:\FR\FM\03NON1.SGM 03NON1 mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices Exchange, as well as certain additional information that is publicly available through the Blockchain. According to the Registration Statement, the Trust will only own and store bitcoin and will not be permitted to hold cash or any other Digital Asset. The proposal also promotes market transparency in that large amount of information is publicly available regarding the Trust and the Shares, thereby promoting market transparency. The Exchange will obtain a representation from the Sponsor that the Trust’s NAV will be determined by the Administrator and published by the Sponsor at 4:00 p.m. Eastern Time each Business Day (using the Gemini Exchange Auction Price) on the Trust’s Web site and that such information will be made available to all market participants at the same time. Furthermore, the Trust’s Web site will provide an Intraday Indicative Value during regular trading hours on each Business Day. The Trust’s Web site will also provide its current prospectus, as well as the two (2) most recent reports to shareholders. The Web site will feature additional quantitative information for the Shares updated every 15 seconds throughout the Exchange’s Regular Trading Session, including the prior Business Day’s reported NAV, the Trust’s IIV, the NBB, the NBO, the midpoint of the NBB and the NBO, and the discount or premium of this midpoint from the IIV. This information will be retained by the Trust. In addition, the Exchange will publish (via the CTA) quotation information, trading volume, closing prices, and the prior Business Day’s NAV. The IIV, which is the pricing on the Gemini Exchange prior to the Gemini Exchange Auction Price, will be widely disseminated by one (1) or more major market data vendors, such as Reuters or Bloomberg, and broadly displayed on at least a 15-second basis during regular trading hours. In addition, information regarding market price and trading volume of the Shares will be continually available on a realtime basis throughout the Business Day on brokers’ computer screens and other electronic services, and quotation and last sale information will also be available via the Exchange’s data feeds. The proposed rule change is further designed to promote just and equitable principles of trade and to protect investors and the public interest and to promote market transparency in that there is a considerable amount of bitcoin price and market information available for free on public Web sites and through financial, professional and subscription services. Investors may VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 obtain bitcoin pricing information twenty-four (24) hours a day or from various financial information service providers or Bitcoin Network information sites such as www.BitcoinCharts.com or www.bitcoinity.org. Bloomberg financial terminals include pricing data in USD and in Euro from several Bitcoin Exchanges. Recently, the CME and the ICE announced bitcoin pricing indices. Current Bitcoin market prices are also generally available with bid/ask spreads directly from various Bitcoin Exchanges. The Exchange also believes that the widespread availability of information 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 the NBB/ NBO midpoint and the Intraday Indicative Value as well as between the NBB/NBO midpoint and the NAV. In addition, the numerous options for buying and selling bitcoin 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. Furthermore, the Trust has discussed with several prominent market participants the possibility of acting as an Authorized Participant and/or a Market Maker, each of which is an experienced participant in the ETP marketplace and is actively engaged in trading ETPs. A number of these potential Authorized Participants and Market Makers currently trade bitcoin and are already registered participants that trade on the Gemini Exchange. Based on their experience in ETPs and in the Bitcoin marketplace, these market participants have indicated that they believe that they will be able to make efficient and liquid markets in the Shares at prices generally in line with the NAV. Authorized Participants will be able to acquire bitcoin for delivery to the Trust by a variety of means. Authorized Participants will not be required to use the Gemini Exchange to trade their bitcoin and the Gemini Exchange is not the only venue on which Authorized Participants can purchase bitcoin for delivery to the Trust. However, as discussed above, the ability to transact in bitcoin on the Gemini Exchange may provide (i) a convenient and stable venue with superior liquidity characteristics in which to purchase or PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 76669 sell bitcoin, (ii) an efficient way to trade bitcoin, and (iii) a safe place to store purchased bitcoin for future use in the creation of Baskets given the regulatory oversight to which the Gemini Exchange is subject. The Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. The Exchange will halt trading in the Shares under the conditions specified in BZX Rule 11.18. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (i) The extent to which trading is not occurring in the financial instruments underlying the Shares; or (ii) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. 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 Commodity-Based Trust Shares 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 from other Bitcoin Exchanges with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, as noted above, investors will have ready access to information regarding bitcoin pricing and bitcoin information, as well as equitable access to the Trust’s Intraday Indicative Value, NAV, and quotation and last sale information for the Shares. For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. 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 purpose of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of an additional Commodity-Based Trust Share product that will enhance competition among market participants, to the benefit of investors and the marketplace. E:\FR\FM\03NON1.SGM 03NON1 76670 Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Section 6(b)(5) of the Act, the other provisions of the Act, and the rules and regulations thereunder. In particular, the Commission invites the written views of interested persons concerning the sufficiency of the Exchange’s statements in support of Amendment No. 1 to the proposed rule change, which are set forth above; the statements made in comment letters submitted to the Commission; 50 and the specific requests for comment set forth in the Order Instituting Proceedings.51 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. mstockstill on DSK3G9T082PROD with 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–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 50 See supra note 8. Order Instituting Proceedings, supra note 7. The Commission notes that, consistent with certain changes made in Amendment No. 1 to the proposed rule change, with respect to Question No. 2 in the Order Instituting Proceedings, commenters are asked to address the sufficiency of the Exchange’s statements as they pertain to the Gemini Exchange Auction Price. See id., 81 FR at 71781. 51 See VerDate Sep<11>2014 17:54 Nov 02, 2016 Jkt 241001 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 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– BatsBZX–2016–30 and should be submitted on or before November 25, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.52 Brent J. Fields, Secretary. [FR Doc. 2016–26513 Filed 11–2–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. IC–32342] Notice of Applications for Deregistration Under Section 8(f) of the Investment Company Act of 1940 October 28, 2016. The following is a notice of applications for deregistration under section 8(f) of the Investment Company Act of 1940 for the month of October 2016. A copy of each application may be obtained via the Commission’s Web site by searching for the file number, or for an applicant using the Company name box, at https://www.sec.gov/search/ search.htm or by calling (202) 551– 8090. An order granting each application will be issued unless the SEC orders a hearing. Interested persons may request a hearing on any application by writing to the SEC’s Secretary at the address below and serving the relevant applicant with a copy of the request, personally or by mail. Hearing requests should be received by the SEC by 5:30 p.m. on November 22, 2016, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to Rule 0–5 under the Act, 52 17 PO 00000 CFR 200.30–3(a)(12). Frm 00118 Fmt 4703 Sfmt 4703 hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. ADDRESSES: The Commission: Secretary, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. FOR FURTHER INFORMATION CONTACT: Jessica Shin, Attorney-Adviser, at (202) 551–5921 or Chief Counsel’s Office at (202) 551–6821; SEC, Division of Investment Management, Chief Counsel’s Office, 100 F Street NE., Washington, DC 20549–8010. Arden Investment Series Trust [File No. 811–22701] Summary: Applicant seeks an order declaring that it has ceased to be an investment company. On March 31, 2016 and September 20, 2016, applicant made liquidating distributions to its shareholders, based on net asset value. Applicant’s custodian is holding remaining assets of approximately $816,214 in cash and $105,662 in tax reclaims receivables to cover current and anticipated liabilities and expenses in connection with applicant’s liquidation and dissolution as well as to cover any unexpected liabilities. Expenses of approximately $611,038 incurred in connection with the liquidation were paid by the applicant and the applicant’s investment advisers. Filing Dates: The application was filed on April 20, 2016, and amended on September 21, 2016 and October 26, 2016. Applicant’s Address: 375 Park Avenue, 32nd Floor, New York, New York 10152. Roge Partners Fund [File No. 811– 21571] Summary: Applicant seeks an order declaring that it has ceased to be an investment company. The series of applicant has transferred its assets to a corresponding series of Northern Lights Fund Trust III, and, on April 24, 2014, made a final distribution to its shareholders based on net asset value. Expenses of approximately $9,084 incurred in connection with the reorganization were paid by the applicant’s investment adviser. Filing Dates: The application was filed on September 23, 2016 and amended on October 20, 2016. Applicant’s Address: 630 Johnson Avenue, Suite 103, Bohemia, New York 11716. E:\FR\FM\03NON1.SGM 03NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 213 (Thursday, November 3, 2016)]
[Notices]
[Pages 76650-76670]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26513]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79183; File No. SR-BatsBZX-2016-30]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of
Filing of Amendment No. 1 to 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 28, 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 issued by the Winklevoss
Bitcoin 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\
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\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.
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On August 23, 2016, pursuant to Section 19(b)(2) of the Act,\4\ 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.\5\ On October 12, 2016, the Commission instituted proceedings
under Section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposed rule change.\7\ The Commission has

[[Page 76651]]

received 17 comment letters on the proposed rule change.\8\
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\4\ 15 U.S.C. 78s(b)(2).
\5\ 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.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 79084, 81 FR 71778
(Oct. 18, 2016) (``Order Instituting Proceedings''). Specifically,
the Commission instituted 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.'' See id., 81 FR at 71781.
\8\ See Letters from Robert D. Miller, VP Technical Services,
RKL eSolutions (July 11, 2016); Jorge Stolfi, Full Professor,
Institute of Computing UNICAMP (July 13, 2016); Guillaume
Lethuillier (July 26, 2016); Michael B. Casey (July 31, 2016); Erik
A. Aronesty, Sr. Software Engineer, Bloomberg LP (Aug. 2, 2016); Dan
Anderson (Aug. 27, 2016); Robert Miller (Oct. 12, 2016); Lysle Shaw-
McMinn, O.D. (Oct. 13, 2016); Nils Neidhardt (Oct. 13, 2016); Dana
K. Barish (2 letters; Oct. 13, 2016); Xin Lu (Oct. 13, 2016); Rodger
Delehanty CFA (Oct. 14, 2016); Dylan (Oct. 14, 2016); Dana K. Barish
(Oct. 14, 2016); and Dana K. Barish (2 letters; Oct. 15, 2016). 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.
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On October 20, 2016, the Exchange filed Amendment No. 1 to the
proposed rule change, as described in Items I and II below, which Items
have been prepared by the Exchange.\9\ The Commission is publishing
this notice to solicit comments on Amendment No. 1 to the proposed rule
change from interested persons.\10\
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\9\ Among other things, Amendment No. 1 (1) identifies State
Street Bank and Trust Company as the Trust's Administrator and
Transfer Agent (see Section II.A.1, infra (discussion in subheading
``Service Providers of the Trust'')); (2) clarifies that the price
of bitcoin is measured by the clearing price of a two-sided auction
which occurs every day at 4:00 p.m. Eastern Time on the Gemini
exchange (see Section II.A.1, infra (discussion in subheading
``Service Providers of the Trust'')) and notes various conflicts of
interest that may arise among the Sponsor and its affiliates,
including the Custodian and the Gemini Exchange, on one hand, and
the Trust and its Shareholders, on the other hand (see Section
II.A.1, infra (discussion in subheading ``Overview of the Bitcoin
Industry and Market'' under ``The Gemini Exchange'')); (3) provides
additional information on the Bitcoin exchange ``lit'' market (see
Section II.A.1, infra (discussion in subheading ``Bitcoin Market''
under ``Bitcoin Exchange Lit Market'')); (4) provides additional
information on security, the Custodian's Cold Storage System, the
Custodian's insurance arrangements and proof of control auditing
(see Section II.A.1, infra (discussion in subheading ``Description
of the Trust and Shares'' under ``Proprietary Cold Storage
System'')); and (5) changes the value of creation/redemption Baskets
from 50,000 Shares to 10,000 Shares (see Section II.A.1, infra
(discussion in subheading ``Creation and Redemption of Shares'')).
\10\ In formulating comments, commenters should consider whether
this Amendment No. 1 addresses any of the questions posed in the
Order to Institute Proceeding mentioned in footnote 5, supra.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange filed a proposal to list and trade Winklevoss Bitcoin
Shares (the ``Shares'') issued by the Winklevoss Bitcoin Trust (the
``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares.
The text of the proposed rule change is available at the Exchange's
Web site at www.batstrading.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 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 [sic] 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
This Amendment No. 1 to SR-BatsBZX-2016-30 amends and replaces in
its entirety the proposal as originally submitted on June 30, 2016. The
Exchange submits this Amendment No. 1 in order to clarify certain
points and add additional details about the Trust.
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\11\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\12\ The Shares will be offered by
the Trust, which was established as a Delaware statutory trust on
December 30, 2014. The Trust will not be registered as an investment
company under the Investment Company Act of 1940 \13\ and is not
required to register under such act. The Trust will not be a commodity
pool for purposes of the Commodity Exchange Act (``CEA'').\14\ The
Shares of the Trust will be registered with the Commission by means of
the Trust's registration statement on Form S-1 (the ``Registration
Statement'') under the Securities Act of 1933 (the ``Securities Act'').
The most recent amendment to the Registration Statement was filed on
October 18, 2016 and the Registration Statement will be effective as of
the date of any offer and sale pursuant to the Registration
Statement.\15\
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\11\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\12\ All statements and representations made in this filing
regarding (a) the description of the portfolio, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange rules and surveillance procedures shall constitute
continued listing requirements for listing the Shares on the
Exchange.
\13\ 15 U.S.C. 80a-1.
\14\ 17 U.S.C. 1.
\15\ See Registration Statement on Form S-1, dated October 18,
2016 (File No. 333-189752). The descriptions of the Trust and the
Shares contained herein are based, in part, on information in the
Registration Statement.
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Service Providers of the Trust
Digital Asset Services, LLC, formerly Math-Based Asset Services,
LLC, will be the sponsor of the Trust (the ``Sponsor'').\16\ The
Trust's administrator (the ``Administrator'') \17\ and transfer agent
(the ``Transfer Agent'') will be State Street Bank and Trust Company
(``State Street'').\18\ State Street is a trust company organized under
the laws of the Commonwealth of Massachusetts. Gemini Trust Company,
LLC will be the custodian of the Trust (the ``Custodian'').\19\ The
Custodian is a New

[[Page 76652]]

York State-chartered limited liability trust company that operates
under the direct supervision and regulatory authority of the NYSDFS.
The Custodian is a fiduciary and must meet the capitalization,
compliance, anti-money laundering, consumer protection and cyber
security requirements as set forth by the NYSDFS. The Custodian will
hold the bitcoin deposited with the Custodian on behalf of the Trust in
a segregated custody account (the ``Trust Custody Account'') in
accordance with the Trust Custody Agreement. The Custodian will use its
proprietary and patent-pending offline (i.e., air-gapped) Cold Storage
System to store the Trust's bitcoin, as further described herein.
Delaware Trust Company acts as the trustee of the Trust (the
``Trustee'').\20\
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\16\ The Sponsor is a Delaware limited liability company formed
on May 9, 2013, and is wholly owned by Winklevoss Capital Fund LLC.
Under the Delaware Limited Liability Company Act and the governing
documents of the Sponsor, Winklevoss Capital Fund LLC, the sole
member of the Sponsor, is not responsible for the debts, obligations
and liabilities of the Sponsor solely by reason of being the sole
member of the Sponsor. The Sponsor will be the exclusive licensee,
within the field of use of operation of an exchange-traded product
(``ETP''), of certain patent-pending intellectual property regarding
the operation of the Trust. Winklevoss IP LLC, an affiliate of the
Sponsor, is the owner of and is licensing to the Sponsor such
intellectual property for use by the Trust and the Custodian and
other service providers in the operation of the Trust. The Sponsor
arranged for the creation of the Trust and will arrange for the
registration of the Shares for their public offering in the United
States and their listing on the Exchange.
\17\ Pursuant to the Administration Agreement between the
Administrator and the Trust, the Administrator provides fund
administration and fund accounting services with regard to the
Trust, including calculating the Trust's net asset value and NAV,
maintaining the Trust's records, and providing such other
administrative services as are specified in the Administration
Agreement.
\18\ The Transfer Agent serves as the transfer agent in
accordance with the provisions of the Transfer Agency and Services
Agreement. The Transfer Agent, among other things, provides transfer
agent services with respect to the creation and redemption of
Baskets by Authorized Participants.
\19\ 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 (``NYSDFS''). Although the
Trust's bitcoin is not stored in a physical sense, all transactions
involving the Trust's bitcoin are recorded on the Bitcoin Network's
Blockchain and associated with a public Bitcoin address. The Trust's
public Bitcoin addresses are established by the Custodian using its
proprietary hardware and software security technology (``Cold
Storage System''), which holds the Trust's bitcoin and permits the
Trust to move its bitcoin. Access and control of those Bitcoin
addresses, and the bitcoin associated with them, is restricted
through the public-private key pair relating to each Bitcoin
address. The Custodian is responsible for the safekeeping of the
private keys used to access and transfer the Trust's bitcoin. The
Custodian also facilitates the transfer of bitcoin in accordance
with the Administrator's instructions pursuant to the terms of the
Administration Agreement. Pursuant to the terms of the Trust
Agreement and the trust custody agreement (``Trust Custody
Agreement''), the Custodian will store all of the Trust's bitcoin on
a segregated basis in its unique Bitcoin addresses with balances
that can be directly verified on the Blockchain. It will provide the
Trust's public Bitcoin addresses to the Administrator. Pursuant to
the provisions of the Trust Custody Agreement, the Custodian will
use the Cold Storage System to manage and safeguard a system
utilizing numerous Bitcoin addresses that are kept offline either
(i) in computers that are not directly connected to or accessible
from the internet or (ii) through the storage of the public and
private keys relating to such Bitcoin addresses only in ``cold
storage.''
\20\ The Trustee, a Delaware trust company, acts as the trustee
of the Trust for the purpose of creating a Delaware statutory trust
in accordance with the Delaware Statutory Trust Act (``DSTA''). The
duties of the Trustee will be limited to (i) accepting legal process
served on the Trust in the State of Delaware and (ii) the execution
of any certificates required to be filed with the Delaware Secretary
of State which the Delaware Trustee is required to execute under the
DSTA. To the extent that, at law or in equity, the Trustee has
duties (including fiduciary duties) and liabilities relating thereto
to the Trust or the Sponsor, such duties and liabilities will be
replaced by the duties and liabilities of the Trustee expressly set
forth in the Trust Agreement.
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The Trust will only hold bitcoin, which is a digital commodity \21\
that is not issued by any government, bank or central organization.
Bitcoin is a digital asset (``Digital Asset'') based on the
decentralized, open source protocol of the peer-to-peer Bitcoin
computer network (the ``Bitcoin Network'' or ``Bitcoin'') \22\ that
hosts the decentralized public transaction ledger, known as the
``Blockchain,'' on which all bitcoin is recorded. The Bitcoin Network
software source code includes the protocols that govern the creation of
bitcoin and the cryptographic system that secures and verifies Bitcoin
transactions.
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\21\ Bitcoin is a commodity as defined in Section 1a(9) of the
Commodity Exchange Act. 7 U.S.C. 1a(9). See In re Coinflip, Inc.,
No. 15-29 (CFTC Sept. 17, 2015), available at: https://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf (``Coinflip'').
\22\ By common convention, Bitcoin with a capital ``B''
typically refers to the Bitcoin Network as a whole, whereas bitcoin
with a lowercase ``b'' refers to the Digital Asset of the Bitcoin
Network, including the Trust's bitcoin. This naming convention is
used throughout this document.
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The Trust is expected to issue and redeem Shares from time to time
only in one or more whole Baskets. Certain Authorized Participants are
the only persons that may place orders to create or redeem Baskets.
Authorized Participants or their affiliated market makers are expected
to have the facility to participate directly on one or more Bitcoin
Exchanges (as defined below).
The investment objective of the Trust is for the Shares to track
the price of bitcoin, as measured by the clearing price of a two-sided
auction which occurs every day at 4:00 p.m. Eastern Time on the Gemini
exchange (``Gemini Exchange'') (the ``Gemini Exchange Auction Price''),
each day the Exchange is open for trading (each a ``Business Day''),
less the Trust's liabilities (which include accrued but unpaid fees and
expenses). The Gemini Exchange is a Digital Asset exchange owned and
operated by the Custodian and is an affiliate of the Sponsor. The
Gemini Exchange does not receive any compensation from the Trust or the
Sponsor for providing the Gemini Exchange Auction Price. The Sponsor
believes that, for many investors, the Shares will represent a cost-
effective and convenient means of gaining investment exposure to
bitcoin similar to a direct investment in bitcoin. The Shares represent
units of fractional undivided beneficial interest in and ownership of
the Trust and are expected to be traded under the ticker symbol
``COIN.''
Overview of the Bitcoin Industry and Market
Bitcoin is a Digital Asset that is issued by, and transmitted
through, the decentralized, open source protocol of the peer-to-peer
Bitcoin Network. The Bitcoin Network hosts the decentralized public
transaction ledger, known as the Blockchain, on which all bitcoin is
recorded. No single entity owns or operates the Bitcoin Network, the
infrastructure of which is collectively maintained by a decentralized
user base. Bitcoin can be used to pay for goods and services or can be
converted to fiat currencies, such as the U.S. Dollar, at rates
determined on bitcoin exchanges (each a ``Bitcoin Exchange'') \23\ or
in individual end-user-to-end-user transactions under a barter system.
See ``Uses of Bitcoin--Bitcoin Exchange Market,'' below.
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\23\ The Gemini Exchange is a United States-based Bitcoin
Exchange that began trading on October 8, 2015. It is currently
operational in 35 states, Washington, DC, Canada, Hong Kong,
Singapore, and the U.K., and allows trading between bitcoin, U.S.
Dollars, and other Digital Assets.
---------------------------------------------------------------------------

Bitcoin is ``stored'' or reflected on the Blockchain, which is a
digital file stored in a decentralized manner on the computers of each
Bitcoin Network user. The Bitcoin Network software source code includes
the protocols that govern the creation of bitcoin and the cryptographic
system that secures and verifies Bitcoin transactions. The Blockchain
is a canonical record of every bitcoin, every Bitcoin transaction
(including the creation or ``mining'' of new bitcoin) and every Bitcoin
address associated with a quantity of bitcoin. The Bitcoin Network and
Bitcoin Network software programs can interpret the Blockchain to
determine the exact bitcoin balance, if any, of any public Bitcoin
address listed in the Blockchain as having taken part in a transaction
on the Bitcoin Network. The Bitcoin Network utilizes the Blockchain to
evidence the existence of bitcoin in any public Bitcoin address. A
Bitcoin private key controls the transfer or ``spending'' of bitcoin
from its associated public Bitcoin address. A Bitcoin ``wallet'' is a
collection of private keys and their associated public Bitcoin
addresses.
The Blockchain is comprised of a digital file, downloaded and
stored, in whole or in part, on all Bitcoin Network users' software
programs. The file includes all blocks that have been solved by miners
and is updated to include new blocks as they are solved. See ``Bitcoin
Mining & Creation of New Bitcoin.'' As each newly solved block refers
back to and ``connects'' with the immediately prior solved block, the
addition of a new block adds to the Blockchain in a manner similar to a
new link being added to a chain. Each new block records outstanding
Bitcoin transactions, and outstanding transactions are settled and
validated through such recording. The Blockchain represents a complete,
transparent and unbroken history of all transactions of the Bitcoin
Network. Each Bitcoin transaction is broadcast to the Bitcoin Network
and recorded in the Blockchain.
The Bitcoin Network is decentralized and does not rely on either
governmental authorities or financial institutions to create, transmit
or

[[Page 76653]]

determine the value of bitcoin. Rather, bitcoin is created and
allocated by the Bitcoin Network protocol through a ``mining'' process
subject to a strict, well-known issuance schedule. The value of bitcoin
is determined by the supply of and demand for bitcoin in the ``Bitcoin
Exchange Market'' \24\ (and in private end-user-to-end-user
transactions), as well as the number of merchants that accept them. As
Bitcoin transactions can be broadcast to the Bitcoin Network by any
user's Bitcoin Network software and bitcoin can be transferred without
the involvement of intermediaries or third parties, there are currently
little or no transaction fees in direct peer-to-peer transactions on
the Bitcoin Network. Third party service providers such as Bitcoin
Exchanges and third-party Bitcoin payment processing services may
charge fees for processing transactions and for converting, or
facilitating the conversion of, bitcoin to or from fiat currency.
---------------------------------------------------------------------------

\24\ For purposes of this filing, the term Bitcoin Exchange
Market means the global Bitcoin Exchange Market for the trading of
bitcoin, which consists of transactions on various electronic
Bitcoin Exchanges.
---------------------------------------------------------------------------

The Bitcoin Network was initially contemplated in a white paper
that also described bitcoin and the operating software to govern the
Bitcoin Network. The white paper was purportedly authored by Satoshi
Nakamoto; however, no individual with that name has been reliably
identified as Bitcoin's creator, and the general consensus is that the
name is a pseudonym for the actual inventor or inventors. The first
bitcoin was created in 2009 after Nakamoto released the Bitcoin Network
source code (the software and protocol that created and launched the
Bitcoin Network). Since its introduction, the Bitcoin Network has been
under active development by a group of contributors currently headed by
Wladimir J. van der Laan who was appointed project maintainer in April
2014 by Gavin Andresen (who was previously appointed maintainer by
Satoshi Nakamoto in 2010). As an open source project, Bitcoin is not
represented by an official organization or authority.
Overview of the Bitcoin Network's Operations
In order to own, transfer or use bitcoin, a person generally must
have internet access to connect to the Bitcoin Network. Bitcoin
transactions may be made directly between end-users without the need
for a third-party intermediary, although there are entities that
provide third-party intermediary services. To prevent the possibility
of double-spending bitcoin, a user must notify the Bitcoin Network of
the transaction by broadcasting the transaction data to its network
peers. The Bitcoin Network provides confirmation against double-
spending by memorializing every transaction in the Blockchain, which is
publicly accessible and transparent. This memorialization and
verification against double-spending is accomplished through the
Bitcoin Network mining process, which adds ``blocks'' of data,
including recent transaction information, to the Blockchain. See
``Cryptographic Security Used in the Bitcoin Network--Double-Spending
and the Bitcoin Network Confirmation System,'' below.
Brief Description of Bitcoin Transfers
Prior to engaging in Bitcoin transactions, a user generally must
first install on its computer or mobile device a Bitcoin Network
software program that will allow the user to generate a private and
public key pair associated with a Bitcoin address (analogous to a
Bitcoin account). The Bitcoin Network software program and the Bitcoin
address also enable the user to connect to the Bitcoin Network and
engage in the transfer of bitcoin with other users. The computer of a
user that downloads a version of the Bitcoin Network software program
will become a ``node'' on the Bitcoin Network that assists in
validating and relaying transactions from other users. See
``Cryptographic Security Used in the Bitcoin Network--Double-Spending
and the Bitcoin Network Confirmation System,'' below. Alternatively, a
user may retain a third party to create a Bitcoin address, or
collection of Bitcoin addresses known as a digital wallet to be used
for the same purpose. There is no limit on the number of Bitcoin
addresses a user can have, and each such Bitcoin address consists of a
``public key'' and a ``private key,'' which are mathematically related.
See ``Cryptographic Security Used in the Bitcoin Network--Public and
Private Keys,'' below.
In a Bitcoin transaction, the bitcoin recipient must provide its
public Bitcoin address, which serves as a routing number for the
recipient on the Blockchain, to the party initiating the transfer. This
activity is analogous to a recipient providing a routing address in
wire instructions to the payor so that cash may be wired to the
recipient's account. The recipient, however, does not make public or
provide to the sender its related private key. The payor, or
``spending'' party, does reveal its public key in signing and verifying
its spending transaction to the Blockchain.
Neither the recipient nor the sender reveal their public Bitcoin
addresses' private key in a transaction, because the private key
authorizes access to, and transfer of, the funds in that Bitcoin
address to other users. Therefore, if a user loses his private key, the
user permanently loses access to the bitcoin contained in the
associated Bitcoin address. Likewise, bitcoin is irretrievably lost if
the private key associated with them is deleted and no backup has been
made. When sending bitcoin, a user's Bitcoin Network software program
must ``sign'' the transaction with the associated private key. The
resulting digitally signed transaction is sent by the user's Bitcoin
Network software program to the Bitcoin Network to allow transaction
confirmation. The digital signature serves as validation that the
transaction has been authorized by the holder of the Bitcoin addresses'
private key. This signature process is typically automated by software
that has access to the public and private keys.
Summary of a Bitcoin Transaction
In a Bitcoin transaction between two parties, the following
circumstances must be in place: (i) The party seeking to send bitcoin
must have a public Bitcoin address and the Bitcoin Network must
recognize that public Bitcoin address as having sufficient bitcoin for
the spending transaction; (ii) the receiving party must have a public
Bitcoin address; and (iii) the spending party must have internet access
with which to send its spending transaction.
Next, the receiving party must provide the spending party with its
public Bitcoin address, an identifying series of twenty-seven (27) to
thirty-four (34) alphanumeric characters that represents the routing
number on the Bitcoin Network and allow the Blockchain to record the
sending of bitcoin to that public Bitcoin address. The receiving party
can provide this address to the spending party in alphanumeric format
or an encoded format such as a Quick Response Code (commonly known as a
``QR Code''), which may be scanned by a smartphone or other device to
quickly transmit the information.
After the provision of a recipient's public Bitcoin address, the
spending party must enter the address into its Bitcoin Network software
program along with the number of bitcoin to be sent. The number of
bitcoin to be sent will typically be agreed upon between the two
parties based on a set number of bitcoin or an agreed upon conversion
of the value of fiat currency to bitcoin. Most Bitcoin Network software

[[Page 76654]]

programs also allow, and often suggest, the payment of a transaction
fee (also known as a miner's fee). Transaction fees are not required to
be included by many Bitcoin Network software programs, but, when they
are included, they are paid by the spending party on top of the
specified quantity of bitcoin being sent in the transaction.
Transaction fees, if any, are typically a fractional number of bitcoin
(e.g., 0.005 or 0.0005 bitcoin) and are automatically transferred by
the Bitcoin Network to the Bitcoin Network miner that solves and adds
the block recording the spending transaction on the Blockchain.
After the entry of the Bitcoin address, the number of bitcoin to be
sent and the transaction fees, if any, to be paid, the spending party
will transmit the spending transaction. The transmission of the
spending transaction results in the creation of a data packet by the
spending party's Bitcoin Network software program, which data packet
includes data showing (i) the destination public Bitcoin address, (ii)
the number of bitcoin being sent, (iii) the transaction fees, if any,
and (iv) the spending party's digital signature, verifying the
authenticity of the transaction. The data packet also includes
references called ``inputs'' and ``outputs,'' which are used by the
Blockchain to identify the source of the bitcoin being spent and record
the flow of bitcoin from one transaction to the next transaction in
which the bitcoin is spent. The digital signature exposes the spending
party's public Bitcoin address and public key to the Bitcoin Network,
though, for the receiving party, only its public Bitcoin address is
revealed. The spending party's Bitcoin Network software will transmit
the data packet onto the decentralized Bitcoin Network, resulting in
the propagation of the information among the software programs of
Bitcoin users across the Bitcoin Network for eventual inclusion in the
Blockchain. Typically, the data will spread to a vast majority of
Bitcoin Network miners within the course of less than a minute.
As discussed in greater detail below in ``Bitcoin Mining & Creation
of New Bitcoin,'' Bitcoin Network miners record transactions when they
solve for and add blocks of information to the Blockchain. When a miner
solves for a block, it creates that block, which includes data relating
to (i) the solution to the block, (ii) a reference to the prior block
in the Blockchain to which the new block is being added, and (iii)
transactions that have occurred but have not yet been added to the
Blockchain. The miner becomes aware of outstanding, unrecorded
transactions through the data packet transmission and propagation
discussed above. Typically, Bitcoin transactions will be recorded in
the next chronological block if the spending party has an internet
connection and at least one (1) minute has passed between the
transaction's data packet transmission and the solution of the next
block. If a transaction is not recorded in the next chronological
block, it is usually recorded in the next block thereafter.
Upon the addition of a block included in the Blockchain, the
Bitcoin Network software program of both the spending party and the
receiving party will show confirmation of the transaction on the
Blockchain and reflect an adjustment to the bitcoin balance in each
party's public Bitcoin address, completing the bitcoin transaction.
Typically, Bitcoin Network software programs will automatically check
for and display additional confirmations of six or more blocks in the
Blockchain. See ``Cryptographic Security Used in the Bitcoin Network--
Double-Spending and the Bitcoin Network Confirmation System.''
Cryptographic Security Used in the Bitcoin Network
Public and Private Keys
The Bitcoin Network uses sophisticated cryptography to maintain the
integrity of the Blockchain ledger. Transactions are digitally signed
by their senders. Before adding a transaction to a block, miners will
verify both that the sender has not already spent the bitcoin being
sent and that the digital signature information in the transaction is
valid. Besides the requirement of containing only valid transactions
(as described in the preceding sentence), blocks are validated by means
of properties of their cryptographic hashes. By extension, blocks in
the Blockchain can be validated by verifying that each block contains
the cryptographic hash of the prior block. The cryptographic algorithms
and cryptographic parameters, including key sizes, used by the Bitcoin
Network provide adequate security for the foreseeable future.
Double-Spending and the Bitcoin Network Confirmation System
To ensure the integrity of Bitcoin transactions from the
recipient's side (i.e., to prevent double-spending by a spending
party), every Bitcoin transaction is broadcast to the Bitcoin Network
and recorded in the Blockchain through the ``mining'' process, which
timestamps the transaction and memorializes the change in the ownership
of bitcoin transferred. See ``Bitcoin Mining & Creation of New
Bitcoin,'' below. Adding a block to the Blockchain requires Bitcoin
Network miners to exert significant computational effort. Requiring
this ``proof of work'' prevents a malicious actor from either adding
fraudulent blocks to generate bitcoin (i.e., counterfeit bitcoin) or
overwriting existing valid blocks to reverse prior transactions.
A Bitcoin transaction between two parties is recorded in the
Blockchain in a block only if that block is accepted as valid by a
majority of the nodes on the Bitcoin Network. Validation of a block is
achieved by confirming the cryptographic hash value included in the
block's solution and by the block's addition to the longest confirmed
Blockchain on the Bitcoin Network. For a transaction, inclusion in a
block on the Blockchain constitutes a ``confirmation'' of a Bitcoin
transaction. As each block contains a reference to the immediately
preceding block, additional blocks appended to and incorporated into
the Blockchain constitute additional confirmations of the transactions
in such prior blocks, and a transaction included in a block for the
first time is confirmed once against double-spending. The layered
confirmation process makes changing historical blocks (and reversing
transactions) exponentially more difficult the further back one goes in
the Blockchain. Bitcoin Exchanges and users can set their own threshold
as to how many confirmations they require until funds from the
transferor are considered valid.
To undo past transactions in a block recorded on the Blockchain, a
malicious actor would have to exert tremendous hashrate in resolving
each block in the Blockchain starting with and after the target block
and broadcasting all such blocks to the Bitcoin Network. The Bitcoin
Network is generally programmed to consider the longest Blockchain
containing solved blocks to be the most accurate Blockchain. In order
to undo multiple layers of confirmation and alter the Blockchain, a
malicious actor must resolve all of the old blocks sought to be
regenerated and be able to continuously add new blocks to the
Blockchain at a speed that would have to outpace that of all of the
other miners on the Bitcoin Network, who would be continuously solving
for and adding new blocks to the Blockchain. Given the size and speed
of the Bitcoin Network, it is generally agreed that the cost of
amassing such computational power exceeds the profit to be obtained

[[Page 76655]]

by double-spending or attempting to fabricate prior blocks.
If a malicious actor is able to amass ten (10) percent of the
Bitcoin Network's aggregate hashrate, there is estimated to be a 0.1
percent chance that it would be able to overcome six (6) confirmations.
Therefore, given the difficulty in amassing such hashrate, six (6)
confirmations is an often-cited standard for the validity of
transactions. The Trust has adopted a policy whereby a transaction will
be deemed confirmed upon this industry standard of six (6)
confirmations (the ``Confirmation Protocol''). As one (1) block is
added to the Blockchain approximately every six (6) to twelve (12)
minutes, a Bitcoin transaction will be, on average, confirmed using the
Confirmation Protocol beyond a reasonable doubt in approximately one
(1) hour. Merchants selling high-value goods and services, as well as
Bitcoin Exchanges and many experienced users, are believed to generally
use the six (6) confirmations standard. This confirmation system,
however, does not mean that merchants must always wait for multiple
confirmations for transactions involving low-value goods and services.
As discussed below, the value of a successful double-spending attack
involving a low-value transaction may, and perhaps likely will, be
significantly less than the cost involved in arranging and executing
such double-spending attacks. Furthermore, merchants engaging in low-
value transactions may then view the reward of quicker transaction
settlements with limited or no Blockchain confirmation as greater than
the related risk of not waiting for six (6) confirmations with respect
to low-value transactions at points of sale. Conversely, for high-value
transactions that are not time sensitive, additional settlement
security can be provided by waiting for more than six (6)
confirmations.
Bitcoin Mining & Creation of New Bitcoin
Mining Process
The process by which bitcoin is ``mined'' results in new blocks
being added to the Blockchain and new bitcoin being issued to the
miners. Bitcoin Network miners engage in a set of prescribed complex
mathematical calculations in order to add a block to the Blockchain and
thereby confirm Bitcoin transactions included in that block's data.
Miners that are successful in adding a block to the Blockchain are
automatically awarded a fixed number of bitcoin for their effort. This
reward system is the method by which new bitcoin enter into circulation
to the public and is accomplished in the added block through the
notation of the new bitcoin creation and their allocation to the
successful miner's public Bitcoin address. To begin mining, a user can
download and run Bitcoin Network mining software, which, like regular
Bitcoin Network software programs, turns the user's computer into a
``node'' on the Bitcoin Network that validates blocks. See ``Overview
of the Bitcoin Network's Operations,'' above.
All Bitcoin transactions are recorded in blocks added to the
Blockchain. Each block contains (i) the details of some or all of the
most recent transactions that are not memorialized in prior blocks,
(ii) a reference to the most recent prior block, and (iii) a record of
the award of bitcoin to the miner who added the new block. In order to
add blocks to the Blockchain, a miner must map an input data set (i.e.,
a reference to the immediately preceding block in the Blockchain, plus
a block of the most recent Bitcoin Network transactions and an
arbitrary number called a ``nonce'') to a desired output data set of
predetermined length (``hash value'') using a cryptographic hash
algorithm. To ``solve'' or ``calculate'' a block, a miner must repeat
this computation with a different nonce until the miner generates a
hash of a block's header that has a value less than or equal to the
current target set by the Bitcoin Network. Each unique block can only
be solved and added to the Blockchain by one (1) miner; therefore, all
individual miners and mining pools on the Bitcoin Network are engaged
in a competitive process and are incentivized to increase their
computing power to improve their likelihood of solving for new blocks.
The cryptographic hash function that a miner uses is one-way only
and is, in effect, irreversible: hash values are easy to generate from
input data (i.e., valid recent network transactions, Blockchain and
nonce), but neither a miner nor participant is able to determine the
original input data solely from the hash value. As a result, generating
a new valid block with a header value less than or equal to the target
prescribed by the Bitcoin Network is initially difficult for a miner,
yet other nodes can easily confirm a proposed block by running the hash
function just once with the proposed nonce and other input data. A
miner's proposed block is added to the Blockchain once a majority of
the nodes on the Bitcoin Network confirms the miner's work, and the
miner that solved such block receives the reward of a fixed number of
bitcoin (plus any transaction fees paid by spenders of transactions
that are recorded in the block). Therefore, ``hashing'' is akin to a
mathematical lottery, and miners that have devices with greater
processing power (i.e., the ability to make more hash calculations per
second) are more likely to be successful miners because they can
generate more hashes or ``entries'' into that lottery.
As more miners join the Bitcoin Network and its aggregate hashrate
increases, the Bitcoin Network automatically adjusts the complexity of
the block-solving equation in an effort to set distribution such that
newly-created blocks will be added to the Blockchain, on average,
approximately every ten (10) minutes. Hashrate is added to the Bitcoin
Network at irregular rates that have grown with increasing speed since
early 2013, though the rate of additional mining power slowed steadily
through 2014, until the computational speed of the network temporarily
and marginally declined during December 2014.
The rapid growth of the computational power of the Bitcoin Network
means that blocks are typically solved faster than the Bitcoin
protocol's target of, on average, approximately every ten (10) minutes.
Although the difficulty of the mining process is adjusted on a periodic
basis, after 2,016 blocks have been added to the Blockchain since the
last adjustment, the average solution time for a block has been
approximately 8 minutes for the one hundred and eighty (180) days prior
to and including October 1, 2016.
Incentives for Mining
Miners dedicate substantial resources to mining. Given the
increasing difficulty of the target established by the Bitcoin Network,
current miners must invest in expensive mining devices with adequate
processing power to hash at a competitive rate. The first mining
devices were standard home computers; however, mining computers are
currently designed solely for mining purposes. Such devices include
application specific integrated circuit (``ASIC'') machines built by
specialized companies such as BitFury. Miners also incur substantial
electricity costs in order to continuously power and cool their devices
while solving for a new block. Although variables such as the rate and
cost of electricity are estimated, as of September 1, 2013, Blockchain
Luxembourg S.A. estimated that the average 24-hour electricity cost of
all mining on the Bitcoin Network to be more than $1.5 million. In late
2013, Blockchain Luxembourg S.A. ceased publishing estimated electric
consumption on the Bitcoin Network, in part due to uncertainty in
estimating

[[Page 76656]]

electrical usage as newer, more energy efficient mining hardware became
prevalent. As of October 2016, over the past year, two (2) years, and
three (3) years, the aggregate hashrate of the Bitcoin Network has
increased approximately 4-fold, 8-fold and 1,500-fold, respectively,
due in part to the development of more energy efficient ASIC mining
chips and, during the second half of 2013, the substantial increase in
the price of bitcoin. Additionally, it can be estimated that the scale
of total computing resources devoted to mining on the Bitcoin Network
is commensurate with the total rewards, which was approximately $1.2
million U.S. dollars per day as of October 1, 2016.
The Bitcoin Network is designed in such a way that the reward for
adding new blocks to the Blockchain decreases over time and the
production (and reward) of bitcoin will eventually cease. Once such
reward ceases, it is expected that miners will demand compensation in
the form of transaction fees to ensure that there is adequate incentive
for them to continue mining. The amount of transaction fees will be
based upon the need to provide sufficient revenue to incentivize
miners, counterbalanced by the need to retain sufficient Bitcoin
Network users (and transactions) to make mining profitable.
Though not free from doubt, Bitcoin industry participants have
expressed a belief that transaction fees would be enforced through (i)
mining operators collectively refusing to record transactions that do
not include a payment of a transaction fee or (ii) the updating of
Bitcoin Network software to require a minimum transaction fee payment.
Indeed, most miners already have a policy regarding transactions fees,
albeit the minimum fees are currently low under such policies. Under a
regime whereby large miners require fees to record transactions, a
transaction where the spending party did not include a payment of
transaction fees would not be recorded on the Blockchain until a miner
who does not require transaction fees solves for a new block (thereby
recording all outstanding transaction records for which it has received
data). If popular Bitcoin Network software were to require a minimum
transaction fee, users of such programs would be required to include
such fees; however, because of the open-source nature of the Bitcoin
Network, there may be no way to require that all software instances
include minimum transaction fees for spending transactions.
Alternatively, a future Bitcoin Network software update could simply
build a small transaction fee payment into all spending transactions
(e.g., by deducting a fractional number of bitcoin from all
transactions on the Bitcoin Network as transaction fees).
The Bitcoin Network protocol already includes transaction fee rules
and the mechanics for awarding transaction fees to the miners that
solve for blocks in which the fees are recorded; however, users
currently may opt not to pay transaction fees (depending on the Bitcoin
Network software they use) and miners may choose not to enforce the
transaction fee rules since, at present, the bitcoin rewards are far
more substantial than transaction fees. As of October 2016, transaction
fees accounted for an average of 3.55 percent of miners' total revenue
based upon publicly available information, though the percentage of
revenue represented by transaction fees is not static and fluctuates
based on the number of transactions for which sending users include
transaction fees, the levels of those transaction fees and the number
of transactions a miner includes in its solved blocks. Typically,
transactions do not have difficulty being recorded if transaction fees
are not included.
Mining Pools
A miner's daily expected reward is proportional to their
contribution to the Bitcoin Network's aggregate hashrate. Given the
limited number of blocks produced per day and the statistically
uncertain nature of finding blocks, a small miner acting alone would
experience very high variance in block rewards. Because of this fact
most miners join mining pools wherein multiple miners act cohesively
and share any rewards.
According to Blockchain Luxembourg S.A., as of October 1, 2016, the
largest three (3) known mining pools were AntPool, F2Pool and BTCC
Pool, which, when aggregated, represented approximately forty-five (45)
percent of the aggregate hashrate of the Bitcoin Network (as calculated
by determining the percentage of blocks mined by each such pool over
the prior four (4) days). Also according to Blockchain Luxembourg S.A.,
on such date, the nine (9) largest pools (AntPool, F2Pool, ViaBTC,
BitFury, BW.COM, SlushPool, BitFury, BTC.com, and HaoBTC) accounted for
approximately eighty-eight (88) percent of the aggregate hashrate of
the Bitcoin Network. In late May and early June 2014, reports indicated
that a single mining pool approached and, during a twenty-four (24)- to
forty-eight (48)-hour period in early June, may have exceeded one-half
of the aggregate hashrate of the Bitcoin Network, as measured by the
self-reported hashrate of the pool and by measuring the percentage of
blocks mined by the pool. As of October 1, 2016, that single mining
pool has ceased to exist. As of October 1, 2016, Antpool was determined
to be the largest mining pool, having solved for sixteen (16) percent
of the blocks discovered during the prior four (4) days.
Mathematically Controlled Supply
The method for creating new bitcoin is mathematically controlled in
a manner so that the supply of bitcoin grows at a limited rate pursuant
to a pre-set schedule. The number of bitcoin awarded for solving a new
block is automatically halved every two hundred and ten thousand
(210,000) blocks. Thus, the current fixed reward for solving a new
block is twelve and a half (12.5) bitcoin per block; the reward
decreased from twenty-five (25) bitcoin per block in July 2016. It is
estimated to halve again in about four years. This deliberately
controlled rate of bitcoin creation means that the number of bitcoin in
existence will never exceed twenty-one (21) million and that bitcoin
cannot be devalued through excessive production unless the Bitcoin
Network's source code (and the underlying protocol for bitcoin
issuance) is altered. See ``Modifications to the Bitcoin Protocol,''
below. As of October 1, 2016, approximately fifteen million, nine
hundred and seven thousand (15,907,000) bitcoin have been mined. It is
estimated that more than ninety (90) percent of the twenty-one (21)
million bitcoin will have been produced by 2022.
The following chart from Blockchain Luxembourg S.A. indicates the
number of bitcoin that have been mined since the Bitcoin Network began
operation in January 2009 through October 2016.

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Modifications to the Bitcoin Protocol
Bitcoin is an open source project (i.e., a product whose source
code is freely available to the public and that utilizes crowdsourcing
to identify possible issues, problems and defects) and there is no
official developer or group of developers that controls the Bitcoin
Network. The Bitcoin Network's development is furthered by a collection
of active contributors who can access and propose alterations to the
Bitcoin Network source code hosted on GitHub, an online service and
forum used to share and develop open source code. Other programmers
have access to and can propose changes to the Bitcoin Network source
code on GitHub, but some contributors have an elevated level of
influence over the process. As a result, these contributors are
responsible for quasi-official releases of updates and other changes to
the Bitcoin Network's source code. Users and miners can accept any
changes made to the Bitcoin Network (including those proposed by
contributors) by downloading the proposed modification of the source
code.
A modification of the source code is only effective with respect to
the Bitcoin users and miners that download it. Consequently, as a
practical matter, a modification to the source code (e.g., a proposal
to increase the twenty-one (21) million total limit on bitcoin or to
reduce the average confirmation time target from ten (10) minutes per
block) only becomes part of the Bitcoin Network if accepted by
participants collectively having an effective majority of the aggregate
hashrate of the Bitcoin Network. Additionally, an issue may arise in
which a modification is overwhelmingly supported by users but miners do
not support it, or vice versa. If a modification is accepted only by a
percentage of users and miners, a division in the Bitcoin Network will
occur such that one (1) network will run the pre-modification source
code and the other network will run the modified source code; such a
division is known as a ``fork'' in the Bitcoin Network. It should be
noted that, although their power to amend the source code is
effectively subject to the approval of users and miners, some
contributors have substantial influence over the development of the
Bitcoin Network and the direction of the Bitcoin community.
Bitcoin Value
Bitcoin Exchange Valuation
The value of bitcoin is determined by the value that various market
participants place on bitcoin through their transactions. The most
common means of determining the value of a bitcoin is by surveying one
or more Bitcoin Exchanges where bitcoin is traded publicly and
transparently (i.e., the Bitcoin Exchange Market) or an index tracking
prices on the Bitcoin Exchange Market (e.g., the CoinDesk Bitcoin Price
Index).
Bitcoin Exchange Public Market Data
On each online Bitcoin Exchange, bitcoin is traded with publicly
disclosed valuations for each executed trade, measured by one or more
fiat currencies such as the U.S. Dollar, the Euro or the Chinese Yuan.
Bitcoin Exchanges typically publish trade data including last price,
bid and ask information, and trade volume, among other data. 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). Arbitrage between the prices on various Bitcoin
Exchanges is possible, but varying fees and fiat currency deposit/
withdrawal policies and other concerns appear to have, at times,
prevented an active arbitrage mechanism among users on some Bitcoin
Exchanges. For example, delayed fiat currency withdrawals imposed by
Bitcoin Exchanges and the perceived risks associated with such delayed
withdrawals have, at times, resulted in trading on such Bitcoin
Exchange to be at a premium for certain periods.
Bitcoin Exchange Price Convergence
Price differentials across Bitcoin Exchanges remain; however, such
differentials have been decreasing. For example, the daily opening
price data for the one hundred and eighty (180) days prior to October
1, 2016 shows that the top three U.S.-based Bitcoin Exchanges (viz.
GDAX, Gemini, and itBit) had an absolute price difference less than 1%
percent according to publicly available data. Since 2015, prices on
U.S.-based Bitcoin Exchanges have generally been converging. In January
of 2015, the average range in

[[Page 76658]]

prices across all Bitcoin Exchanges was approximately 3.8%; as of
October 2016, that figure has dropped to less than 1.0%. This
convergence serves to illustrate the fungibility of bitcoin across
Bitcoin Exchanges and the ease with which market participants transfer
their assets amongst them.
Bitcoin Exchange Market Manipulation
As the Bitcoin Exchange Market has evolved and matured, licensed
entrants have emerged, including two (2) New York limited purpose trust
companies, markedly changing the once concentrated and non-regulated
landscape of the Bitcoin Exchange Market. For example, in the first
half of 2013, Mt.Gox accounted for nearly three-quarters of all Bitcoin
Exchange Market trading.\25\ Any disruption to Mt.Gox trading, such as
a distributed denial of service (``DDOS'') attack had a dramatic impact
on the bitcoin price and subsequently the Bitcoin Exchange Market as a
whole.\26\ Since then, the number of constituents in the Bitcoin
Exchange Market has considerably increased and no single Bitcoin
Exchange represents a systemically critical part or single point of
failure of the Bitcoin ecosystem. In addition, the advent of market
participants who are chiefly arbitrageurs results in Bitcoin Exchange
prices generally converging after dislodgement. Arbitrageurs must have
funds distributed across multiple Bitcoin Exchanges in order to take
advantage of temporary price dislocations, thereby discouraging the
strong concentration of funds on any particular Bitcoin Exchange. As a
result, the potential for manipulation on a particular Bitcoin Exchange
would require overcoming the liquidity supply of such arbitrageurs who
are actively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

\25\ For most of 2013, Mt. Gox (a Japanese exchange operated by
Tibanne Co. Ltd.) was the largest online Bitcoin Exchange in the
world. Supporting trading of bitcoin using sixteen (16) different
fiat currencies, Mt. Gox accounted for nearly three-quarters of all
Bitcoin Exchange Market trading during the first half of 2013. On
February 25, 2014, Mt. Gox suspended trading on its platform and,
three (3) days later, filed for bankruptcy protection in Japanese
courts, stating that it had lost approximately eight hundred and
fifty thousand (850,000) bitcoin, including approximately seven
hundred fifty thousand (750,000) bitcoin belonging to its customers.
Mt. Gox subsequently recovered access to approximately two hundred
thousand (200,000) of the lost bitcoin. As no full, reliable
accounting has been publicly provided, it is difficult to assess
whether Mt. Gox's collapse was due to cyber-attacks (including
denial of service and hacking incidents reported in 2011 and 2013),
mismanagement or fraud, although many market participants believe
Mt. Gox's collapse was due to the latter. Following the cessation of
trading activity on its platform, Mt. Gox has been in bankruptcy
proceedings in Japan and the United States and is in the process of
liquidation.
\26\ Bitcoin Exchanges may also be vulnerable to security
breaches. For example, in August 2016, a security breach at
Bitfinex, a large, Hong Kong-based Bitcoin Exchange, resulted in the
loss of one hundred twenty thousand (120,000) bitcoin.
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The Gemini Exchange
The Gemini Exchange, an affiliate of the Sponsor, is a Digital
Asset exchange that has a U.S. dollar-denominated bitcoin order book.
As a facility of a New York State-chartered limited liability trust
company, the Gemini Exchange is one of only two (2) Bitcoin Exchanges
in the world that have such a high level of regulatory oversight. The
Bitcoin Exchange Market has experienced several significant incidents
at unregulated Bitcoin Exchanges and it is widely-believed that much of
the self-reported trade volume numbers of unregulated Bitcoin Exchanges
are inaccurate (either intentionally or unintentionally). The Gemini
Exchange was established in an effort to improve the Bitcoin ecosystem
by having a regulated entity where participants could engage in trading
bitcoin.
In establishing the Gemini Exchange, Gemini Trust Company, LLC
worked closely with the NYSDFS to obtain a limited purpose trust
company license. The term ``limited purpose trust company'' refers to
entities that are chartered under the bank and trust company provisions
of the New York Banking Law. Under New York Banking Law, a ``trust
company'' has general powers available to banks and trust companies, as
well as powers generally associated with trustees and other
fiduciaries.
Apart from general fiduciary powers, the following activities are
among those specifically identified in the statute as activities that
New York Trust Companies may conduct with respect to their fiduciary
accounts, including (i) the power to accept deposits exclusively in a
fiduciary capacity, to receive and disburse money, to transfer,
register and countersign evidences of indebtedness or other securities,
and to act as attorney in fact or agent; \27\ and (ii) the power to
accept appointment as receiver, trustee, or committee of the property
of an estate of any person in insolvency or bankruptcy proceedings.
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\27\ N.Y. Banking Law Sec. 100 (McKinney).
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A ``limited purpose'' trust company must conduct its business and
operations subject to the limitations or restrictions as the NYSDFS may
prescribe in its sole discretion. In practice, most limited purpose
trust companies typically engage in activities such as employee benefit
trust, personal trust, corporate trust, transfer agency, securities
clearance, investment management, and custodial services. A trust
company, including a limited purpose trust company like Gemini Trust
Company, LLC, can serve as the custodian of customer funds itself.
Under New York Banking Law, the same general procedures,
requirements and criteria for the formation of a full-service bank
apply also to the formation of a limited purpose trust company with two
(2) exceptions: (i) No requirement to carry FDIC insurance and (ii) a
level of capitalization deemed satisfactory to the Superintendent of
Financial Services. Once submitted in acceptable form, a limited
purpose trust company application receives the same level of scrutiny
as other bank and trust company proposals and ultimately requires the
approval of the Superintendent of Financial Services. In addition,
trust companies are subject to many of the same requirements that apply
to a bank operating under a New York State banking charter, including:
(i) Capital requirements, (ii) implementation of an anti-money
laundering program,\28\ (iii) implementation of a cyber security
program, and (iv) consumer protection disclosures.\29\ Furthermore, as
a limited purpose trust company with fiduciary powers under the Banking
Law, all activities of a trust company, including all exchange
functions, are subject to examination and supervision by the NYSDFS.
Gemini Trust Company, LLC complies with the capital requirements under
New York State banking law, has implemented the required anti-money
laundering program and cybersecurity program and makes the required
consumer protection disclosures. As a facility of a regulated entity,
the Gemini Exchange is obliged to put the interests of its customers
before its own, to provide accurate public market data and

[[Page 76659]]

pricing information and to monitor for and prevent market manipulation.
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\28\ In particular, a prospective trust company must establish
policies and procedures designed to ensure and monitor compliance
with the Bank Secrecy Act (``BSA'') as amended by the USA PATRIOT
Act and the anti-money laundering programs of Part 115 of the
General Regulations of the Banking Board. A compliance program must
include, at a minimum, a system of internal controls to assure
ongoing compliance, independent testing for compliance to be
conducted by bank personnel or by an outside party, the designation
of an individual or individuals responsible for coordinating and
monitoring day-to-day compliance, and training for appropriate
personnel.
\29\ Limited purpose trust companies operating virtual currency
exchanges are required to provide disclosures to current and
prospective customers (in a form approved by NYSDFS) regarding the
risks of its services and products and are also required to disclose
to current and prospective customers the terms and conditions for
using the trust company's products and services prior to any
customer using the product or service.
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As part of its supervision under the NYSDFS and New York Banking
Law, Gemini Trust Company, LLC must (i) undergo semiannual bank exams,
(ii) submit quarterly financial updates to NYSDFS, (iii) submit
independent third-party year-end audited financial statements to
NYSDFS,\30\ (iv) submit semiannual Federal Financial Institutions
Examination Council (``FFIEC'') Call Reports \31\ to the NYSDFS, and
(v) undergo an annual third-party review of its overall security
program as implemented by its Chief Security Officer (``CSO'') that may
take the form of a Service Organization Controls (``SOC'') Level 2
audit.
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\30\ Gemini Trust Company, LLC, successfully completed an
independent third-party opening day Balance Sheet audit for October
2, 2015 as well as an independent third-party year-end Financial
Statements audit for December 31, 2015. No material issues,
weaknesses or concerns were raised.
\31\ Gemini Trust Company, LLC, successfully completed and filed
its first FFIEC Call Report with the NYSDFS on February 1, 2016.
---------------------------------------------------------------------------

The Gemini Exchange is not the only venue on which Authorized
Participants can purchase bitcoin for delivery to the Trust, but it may
provide a convenient and stable venue given its regulatory oversight
and superior liquidity characteristics. While Authorized Participants
are not obliged to use the Gemini Exchange to trade their bitcoin, it
may prove to be an efficient way to do so.
Conflicts of interest may arise among the Sponsor and its
affiliates, including the Custodian and the Gemini Exchange, on the one
hand, and the Trust and its Shareholders, on the other hand. As a
result of these conflicts, the Sponsor may favor its own interests and
the interests of its affiliates over the Trust and its Shareholders.
These potential conflicts include, among others, the following:
The Sponsor has no fiduciary duties to, and is allowed to
take into account the interests of parties other than, the Trust and
its Shareholders in resolving conflicts of interest;
The Trust's bitcoin is valued, and the Trust's NAV is
calculated, using the Gemini Exchange Auction Price, and the Gemini
Exchange Auction Price as provided by the Sponsor will be used by the
Administrator to calculate the amount of the Sponsor's Fee due to the
Sponsor;
The Sponsor's relationship with the Gemini Exchange
creates an incentive for the Sponsor to sell the bitcoin it collects as
its Sponsor's fee for U.S. dollars on the Gemini Exchange, which
benefits the Sponsor's affiliates through increased volume on the
Gemini Exchange and which may negatively impact the value of the
Trust's remaining bitcoin;
The Sponsor, its affiliates and their officers and
employees may own and trade bitcoin and are not prohibited from
engaging in other businesses or activities, including those that might
be in direct competition with the Trust; and
The Sponsor decides whether to retain separate counsel,
accountants or others to perform services for the Trust.
Although the Trust has taken steps to mitigate these conflicts of
interest, including having the Administrator calculate the Trust's NAV
and determine the amount of the Sponsor's Fee (based on the publicly-
available Gemini Exchange Auction Price, which will be provided to the
Administrator by the Sponsor each business day), it may not be possible
to entirely eliminate these conflicts of interest.
Gemini Exchange Auction Price
The Trust values its bitcoin using the Gemini Exchange Auction
Price on each Business Day. At 4:00 p.m. Eastern Time every day, the
Gemini Exchange conducts a two-sided auction which is open to all
exchange customers. Similar to the closing auction on the Exchange and
other U.S. equities exchanges, the auction process incorporates both
auction-only and continuous trading book orders to find a single price
at which the most interest is eligible to trade (sometimes called
``Walrasian equilibrium''). Because indicative auction pricing is
published publicly throughout the ten (10) minutes prior to the
auction, this mechanism allows participants to engage in thorough price
discovery while concentrating liquidity and trading volume at a single
moment each day. The Gemini Exchange Auction Price is the clearing
price of this auction. The Gemini Exchange has been conducting these
auctions since September 21, 2016.
The Sponsor believes that the Gemini Exchange Auction Price is
representative of the accurate price of bitcoin because of the positive
price discovery attributes of the Gemini Exchange marketplace, and
because the two-sided auction process was specifically designed to
maximize price discovery and liquidity. According to publicly available
market data for U.S-based Bitcoin Exchanges as of October 1, 2016 for
the prior six months:
The Gemini Exchange was the third biggest by volume.
The Gemini Exchange had the second tightest bid/ask spread
as a percentage of price.
The Gemini Exchange had the tightest spread ten (10)
bitcoin deep and the second tightest spread one hundred (100) bitcoin
deep.
The Gemini Exchange had the lowest volatility (i.e.,
smallest standard deviation of daily prices).
In addition, since opening in October 2015 and as of October 1,
2016, pricing on the Gemini Exchange differed from the median price of
all U.S.-based Bitcoin Exchanges on Business Days by 0.23% on average
and 0.48% at most; that difference dropped to 0.15% on average in the
third quarter of 2016.\32\
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\32\ Id.
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Since launching on September 21, 2016 and through October 14, 2016,
on Business Days, the Gemini Exchange Auction Price has deviated from
the Gemini Exchange midpoint price (the midrange of the highest bid and
lowest offer prices) by 0.17% on average and 0.71% at most, and it has
deviated from the median price of all U.S.-based Bitcoin Exchanges by
0.12% on average and 0.52% at most. On business days between September
21 and October 14, 2016, the volume has averaged more than 1,900
bitcoin (worth $1.2 million notional) representing more than 16% of all
U.S.-based Bitcoin Exchange volume during that period. Additionally,
the Gemini Exchange's auction market bolstered its share of the U.S.-
based Bitcoin Exchange market to almost $1.7 million of notional daily
volume for the six-month period ending October 1, 2016, representing
almost 32% of such market, since it was first instituted on September
21, 2016. In addition, transactions on the Gemini Exchange appear to be
substantially larger than typical daily transaction sizes on other
Bitcoin Exchanges. These facts, taken together, suggest that the Gemini
Exchange Auction Price is representative and indicative of the larger
Bitcoin marketplace, and that it can support the liquidity and volume
necessary to maintain an efficient arbitrage mechanism.
As discussed above, the Gemini Exchange is uniquely positioned
because of its regulatory status and licensing as a venue on which
traditional financial institutions may be comfortable transacting in
bitcoin. These institutions provide a vital bridge to the equities
markets and other capital markets, serving to enrich price discovery,
liquidity, and transparency. The Trust has entered into preliminary
conversations with a number of potential Authorized Participants as

[[Page 76660]]

well as market makers, each of which is an experienced participant in
the ETP \33\ marketplace and is actively engaged in trading ETPs. A
number of these potential Authorized Participants, currently trade
bitcoin and are already registered participants that trade on the
Gemini Exchange. Authorized Participants will not be required to use
the Gemini Exchange to trade their bitcoin, and the Gemini Exchange is
not the only venue on which Authorized Participants can purchase
bitcoin for delivery to the Trust. However, the Gemini Exchange may
provide a convenient and stable venue in which to purchase bitcoin, as
well as an efficient way to trade bitcoin, given its regulatory
oversight and superior liquidity characteristics. See ``Bitcoin Value--
The Gemini Exchange'' above.
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\33\ For purposes of this filing, the term ETP means any product
that may be listed on the Exchange pursuant to Rule 14.11.
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Bitcoin Market
Global Bitcoin Market
Global trade in bitcoin consists of individual end-user-to-end-user
transactions, together with facilitated exchange-based bitcoin trading
on ``lit'' markets as well as ``dark pools''. A limited market
currently exists for bitcoin-based derivatives. The Trust represents
the first Digital Asset ETP. Securitized instruments have been created
for other marketplaces, but have encountered limited success due to
their lack of transparency and thorough regulatory oversight. Three
notable examples are the Grayscale Investment Trust, which trades under
the ticker GBTC on OTC Markets (formerly the ``Pink Sheets'') and does
not qualify as an exchange-listed product, Bitcoin Tracker One, which
trades under the ticker COINXBT on the Stockholm Stock Exchange, and
the euro-denominated BitcoinETI Exchange Traded Instrument, which has
been approved for admission to the Gibraltar Stock Exchange and will be
co-listed on Deutsche Boerse. None of these instruments are held to the
same regulatory scrutiny and oversight as a security listed under the
Securities Act. Because of the high standards pursued in the creation
and listing of the Trust, it will finally provide investors with a
reliable and transparent vehicle for access to bitcoin as an asset
class.
End-User-to-End-User
The Bitcoin end-user-to-end-user ecosystem operates on a
continuous, 24-hour per day basis. This is accomplished through
decentralized peer-to-peer transactions between parties on a principal-
to-principal basis. All risks and issues of credit are between the
parties directly involved in the transaction. Liquidity can change from
time to time during the course of a 24-hour trading day. The Bitcoin
Network rules that require transaction fees are generally not enforced;
therefore transaction costs, if any, are negotiable between the parties
and may vary widely, although, where transaction fees are included,
they are paid by the spending party in a Bitcoin transaction. These
transactions occur remotely through the Internet or in-person through
forums such as Satoshi Square (an open-air bitcoin trading market held
in New York City) and bulletin boards such as LocalBitcoins.
Marketplaces like LocalBitcoins and ICBIT are intended to bring
together counterparties trading in bitcoin but do not provide any
clearing or intermediary function and may or may not report transaction
data such as price and volume.
Bitcoin Exchange ``Lit'' Market
U.S.-based Bitcoin Exchanges traded approximately $20 million of
notional value daily throughout the six months ending October 1, 2016.
Although it has been operating for only one year, the Gemini Exchange
has traded approximately $1.2 million of notional daily volume over the
same period, representing nearly 6 percent of the market. Moreover, on
business days between September 21 and October 14, 2016, the volume has
averaged more than 1,900 bitcoin (worth $1.2 million notional),
representing more than 16% of all U.S.-based daily Bitcoin Exchange
volume during that period. Additionally, the Gemini Exchange's auction
bolstered its share of the U.S.-based Bitcoin Exchange market to almost
$1.7 million of notional daily volume for the six-month period ending
October 1, 2016, representing almost 32% of such market, since it was
first instituted on September 21, 2016. These marketplaces provide
significant data with respect to prevailing valuations of bitcoin. Most
Bitcoin Exchanges operate through pooled account systems, whereby the
users of the Bitcoin Exchange send bitcoin and/or fiat currency to an
account of the Bitcoin Exchange, which records user sub-account
balances in a ledger entry system. Trades on pooled account exchanges
are typically conducted ``off-Blockchain,'' meaning that they are
settled by reallocating bitcoin and money to and from users on the
balanced ledger of the Bitcoin Exchange. Therefore, a trade on a pooled
account exchange will not result in a Bitcoin transaction being
transmitted and subsequently recorded on the Blockchain, or of a money
transfer going from one bank account to another. For a pooled-account
Bitcoin Exchange, Bitcoin transactions and money transfers typically
only occur during the withdrawal or deposit of bitcoin or fiat currency
by an exchange customer, or if the Bitcoin Exchange needs to shift
bitcoin or fiat currency between its pooled accounts for internal
purposes. Nevertheless, Bitcoin Exchanges typically publish trade data
including last price, bid and ask information, and trade volume, among
other data, on their respective Web sites and through application
programming interfaces (``APIs'').
As noted above, Gemini Exchange, an affiliate of the Sponsor and
the source of the Gemini Exchange Auction Price used by the Trust to
calculate its NAV, operates the Web site www.gemini.com. Gemini
Exchange is owned and operated by Gemini Trust Company, LLC, the
Trust's Custodian. As a facility of a New York State-chartered limited
liability trust company, Gemini Exchange operates under the direct
supervision and regulatory authority of the NYSDFS. The Gemini Trust
Company is a fiduciary and must meet the capitalization, compliance,
anti-money laundering, consumer protection and cyber security
requirements as set forth by the NYSDFS. Gemini Exchange's principal
business is to provide an electronic trading platform and associated
online presence to allow customers to exchange fiat currency (e.g.,
U.S. Dollars) for Digital Assets (e.g., bitcoin or ether) and vice
versa.
Bitcoin Exchange Market ``Dark Pools'' and OTC Trading
In addition to transparent or ``lit'' online Bitcoin Exchanges with
a traditional central limit order book structure, some trading in
bitcoin takes place on an on-demand or over-the-counter (``OTC'')
basis. Similar to mature securities, there are also private request for
quote (RFQ) venues and ``dark pools,'' which are bitcoin trading
platforms that do not publicly report limit order book data. Market
participants have the ability to execute large block trades in a dark
pool without revealing those trades and the related price data to the
public Bitcoin Exchange Market; however, any withdrawal from or deposit
to a dark pool platform must ultimately be recorded on the Blockchain,
as must OTC transactions. Genesis Trading also operates a form of dark
pool through a trading desk that buys and sells blocks of bitcoin
without publicly reporting trade data. In June 2015, Kraken, a

[[Page 76661]]

Bitcoin Exchange, launched a dark pool for bitcoin trades separate from
its public central limit order book. Informal dark pools are currently
believed to exist, particularly among wholesale buyers of bitcoin and
Bitcoin Network mining groups that obtain bitcoin through mining. Such
informal dark pools function as a result of the peer-to-peer nature of
the Bitcoin Network, which allows direct transactions between any
seller and buyer. As the Bitcoin Exchange Market and bitcoin dark pools
have a limited history and no publicly available limit order book data,
it is difficult to estimate the impact of dark pools on the Bitcoin
Exchange Market.
Global Bitcoin Derivatives Markets
Nascent derivatives markets for bitcoin now exist. For example,
certain types of options, futures contracts for differences and other
derivative instruments are available in certain jurisdictions; however,
many of these are not available in the United States and generally are
not regulated to the degree that U.S. investors expect derivative
instruments to be regulated. The U.S. Commodity Futures Trading
Commission (``CFTC'') has approved TeraExchange, LLC as a swap
execution facility (``SEF''), on which bitcoin swap contracts may be
entered into. On October 9, 2014, TeraExchange announced that it had
hosted the first executed bitcoin swap traded on a CFTC-regulated
platform. Additionally, in September 2015, the CFTC issued an order
temporarily registering LedgerX LLC as a SEF. LedgerX also previously
applied for registration as a derivatives clearing organization
(``DCO'') although its application is still in the process of CFTC
approval. Other parties have acknowledged submitting applications for
registration to the CFTC, though no other bitcoin-focused derivatives
platform has been approved for registration by the CFTC. Various
platforms and Bitcoin Exchanges also offer trading on margin.
Currently, the open interest in these bitcoin derivative instruments is
quite limited in comparison to the volume of actual bitcoin trades.
CFTC commissioners have previously expressed publicly that derivatives
based on Digital Assets such as bitcoin are subject to regulation by
the CFTC, including oversight to prevent market manipulation of the
price of bitcoin. As previously noted, in the September 2015 Coinflip
case, the CFTC instituted and settled administrative proceedings that
involved a bitcoin derivatives trading platform and its chief executive
officer. In Coinflip,\34\ the CFTC determined that bitcoin and other
``virtual currencies'' (aka Digital Assets) are properly defined as
commodities under the CEA and CFTC regulations, and applied CEA
provisions and CFTC regulations that apply to transactions in commodity
options and swaps to the conduct of the bitcoin derivatives trading
platform. The CFTC affirmed its approach to the regulation of bitcoin
and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its
Order, the CFTC found that Bitfinex engaged in ``illegal, off-exchange
commodity transactions and failed to register as a futures commission
merchant'' when it facilitated borrowing transactions among its users
to permit the trading of bitcoin on a ``leveraged, margined or financed
basis'' without first registering with the CFTC.\35\ While the
Commission has not opined on the legal characterization of bitcoin as a
security, it has taken various actions against persons or entities
misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi
schemes), inaccurate and inadequate publicly disseminated information,
and the offering of unregistered securities.\36\
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\34\ See supra note 13 [sic].
\35\ See In re BFXNA Inc., No. 16-19 (CFTC June 2, 2016),
available at: https://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf.
\36\ See, e.g., SEC v. Homero Joshua Garza, GAW Miners, LLC and
ZenMiner, LLC, Complaint and Demand for Jury Trial, Case 3:15-cv-
01760 (D. Conn. Dec. 1, 2015) (The Commission brought charges in
connection with a bitcoin-related Ponzi scheme); In re Erik T.
Voorhees, Securities Act Release No. 9592 (June 3, 2014), available
at: https://www.sec.gov/litigation/admin/2014/33-9592.pdf (The
Commission brought an administrative action in connection with the
offering of unregistered securities of two bitcoin-related
entities.); In re BTC Trading, Corp. and Ethan Burnside, Securities
Act Release No. 9685 (Dec. 8, 2014), available at: https://www.sec.gov/litigation/admin/2014/33-9685.pdf (The Commission
brought an administrative action in connection with the operation
and offering of securities of two online exchanges, neither of which
were registered with the Commission, that accepted payment in
bitcoin and primarily listed virtual currency-related companies.);
In re Sand Hill Exchange, et al., Securities Act Release No. 9809
(June 17, 2015), available at: https://www.sec.gov/litigation/admin/2015/33-9809.pdf (The Commission took legal action against an online
exchange that accepted payment in bitcoin in connection with
disseminating fraudulent information, among other matters.).
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Goods and Services
Bitcoin can also be used to purchase goods and services, either
online or at physical locations, although reliable data is not readily
available about the retail and commercial market penetration of the
Bitcoin Network. In January 2014, U.S. national online retailers
Overstock.com and TigerDirect began accepting Bitcoin payments. Over
the course of 2014, computer hardware and software company Microsoft
began accepting bitcoin as online payment for certain digital content,
online retailer NewEgg began accepting bitcoin, and computer hardware
company Dell began accepting bitcoin. Additionally, Apple, Inc.
approved the inclusion of certain approved bitcoin wallet applications
on the Apple App Store. There are thousands of additional online
merchants that accept bitcoin, and the variety of goods and services
for which bitcoin can be exchanged is increasing. Currently, local,
regional and national businesses, including Time Inc., Wikimedia,
WordPress, Expedia and Foodler, accept bitcoin. Bitcoin service
providers such as BitPay and Coinbase provide means to spend bitcoin
for goods and services at additional retailers. There are also many
real-world locations that accept bitcoin throughout the world.
As of October 2016, it was estimated that as many as one hundred
thousand (100,000) merchants or businesses accept, or have the
technological infrastructure to choose to accept (e.g., Shopify
merchants), bitcoin as payment. In September 2014, payments giant
PayPal announced a partnership with merchant processors including
BitPay and Coinbase and to expand their Bitcoin-related services to
PayPal's merchant customers, thereby significantly expanding the reach
of bitcoin-accepting merchants. To date, the rate of consumer adoption
and use of bitcoin in paying merchants has trailed the broad expansion
of retail and commercial acceptance of bitcoin. Nevertheless, there
will likely be a strong correlation between continued expansion of the
Bitcoin Network and its retail and commercial market penetration.
Market Participants
Miners
Miners range from Bitcoin enthusiasts to professional mining
operations that design and build dedicated machines and data centers,
but the vast majority of mining is now undertaken by participants in
mining pools. See ``Bitcoin Mining & Creation of New Bitcoin'' above.
Investment and Speculative Sector
This sector includes the investment and trading activities of both
private and professional investors and speculators. These participants
range from exchange-traded products, such as

[[Page 76662]]

ARK Web x.0 ETF, or hedge funds such as the Pantera Bitcoin Fund Ltd.
to day-traders who invest in bitcoin by trading on Bitcoin Exchanges.
See ``Uses of Bitcoin--Bitcoin Exchange Market'' below.
Historically, larger financial services institutions are publicly
reported to have limited involvement in investment and trading in
bitcoin. In December 2013, Wedbush Securities and Bank of America
Merrill Lynch released preliminary research reports on Bitcoin as both
a payment tool and investment vehicle. Additionally in December, the
Federal Reserve Bank of Chicago released a primer on Bitcoin prepared
by a senior economist. In early 2014, Fitch Ratings, Goldman Sachs,
JPMorgan Chase, PricewaterhouseCoopers, UBS Securities and Wedbush
Securities, among others, released additional research reports
analyzing the Bitcoin Network on the basis of bitcoin value,
technological innovation or payment system mechanics. In December 2014,
the Federal Reserve Board's Divisions of Research & Statistics and
Monetary Affairs released an analysis of the Bitcoin Network's
transaction system and the Bitcoin Exchange Market's economics.
Additionally, institutions including Fortress Investment Group and
Pantera Capital made, or proposed to make, direct or indirect
investments in bitcoin or the Bitcoin ecosystem. In addition, in
October 2015, the Congressional Research Service, at the request of one
(1) or more Members, released a report detailing the background and
regulatory landscape of Bitcoin.
Retail Sector
The retail sector includes users transacting in direct peer-to-peer
Bitcoin transactions through the direct sending of bitcoin over the
Bitcoin Network. The retail sector also includes transactions between
consumers paying for goods or services from commercial or service
businesses through direct transactions or third-party service providers
such as BitPay, Coinbase and GoCoin. BitPay, Coinbase and GoCoin each
provide a merchant platform for instantaneous transactions whereby the
consumer sends bitcoin to BitPay, Coinbase, or GoCoin, which then
provides either the bitcoin or the cash value thereof to the commercial
or service business utilizing the platform. PayPal, Square and Shopify
are examples of traditional merchant payment processors or merchant
platforms that have also added Bitcoin payment options for their
merchant customers. Payment processing through the Bitcoin Network
typically reduces the transaction cost for merchants, relative to the
costs paid for credit card transaction processing. Consumers can now
purchase goods or services through retail companies such as
Overstock.com, DISH, Dell, Expedia, Microsoft, and Time, Inc.
Service Sector
This sector includes companies that provide a variety of services
including the buying, selling, payment processing and storing of
bitcoin. Coinbase and Circle are each multi-service financial
institutions that provide digital wallets that store bitcoin for users
and also serve as a retail gateway whereby users can purchase bitcoin
for fiat currency. Coinbase, BitPay, BitPagos, and GoCoin are examples
of Bitcoin payment processors that allow merchants to accept bitcoin as
payment. As the Bitcoin Network continues to grow in acceptance, it is
anticipated that service providers will expand the currently available
range of services and that additional parties will enter the service
sector for the Bitcoin Network.
Competition
Bitcoin is not the only Digital Asset founded on math-based
algorithms and cryptographic security, although it is considered the
most prominent. Approximately seven hundred (700) other Digital Assets
or ``altcoins'' have been developed since the Bitcoin Network's
inception, including Litecoin, Ether and Ripple. The Bitcoin Network,
however, possesses the ``first-to-market'' advantage and thus far has
the largest market capitalization and is secured by a mining network
with significantly more aggregate hashrate than the networks of any
other Digital Assets.
Description of the Trust and the Shares
According to the Registration Statement, the investment objective
of the Trust is for the Shares to track the price of bitcoin using the
Gemini Exchange Auction Price on each Business Day, less the Trust's
liabilities (which include accrued but unpaid fees and expenses).\37\
The Shares are designed for investors seeking a cost-effective and
convenient means of gaining investment exposure to bitcoin similar to a
direct investment in bitcoin. A substantial direct investment in
bitcoin may require expensive and sometimes complicated arrangements in
connection with the acquisition, security, and safekeeping of the
bitcoin and may involve the payment of substantial fees to acquire such
bitcoin from third-party facilitators through cash payments of U.S.
Dollars. Although the Shares will not be the exact equivalent of a
direct investment in bitcoin, they provide investors with an
alternative that allows them to gain investment exposure to bitcoin. In
addition, the Trust will provide its investors with other advantages
including easy accessibility, relative cost efficiencies and minimal
credit risk as the Trust will wholly-own all of its bitcoin assets, as
discussed below. The Shares offer an investment that is:
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\37\ According to the Registration Statement, the activities of
the Trust will be limited to (1) issuing Baskets in exchange for the
actual bitcoin deposited by the Authorized Participants with the
Custodian as consideration, (2) transferring actual bitcoin as
necessary to cover the Sponsor's Fee and as necessary to pay Trust
expenses not assumed by the Sponsor and other liabilities, (3)
transferring actual bitcoin in exchange for Baskets surrendered for
redemption by the Authorized Participants, (4) causing the Trustee
to sell bitcoin on the termination of the Trust, and (5) engaging in
all administrative and custodial procedures necessary to accomplish
such activities in accordance with the provisions of the Trust
Agreement, the Administration Agreement, the Transfer Agency and
Services Agreement, the Custody Agreement, the License Agreement,
and Authorized Participant Agreements. The Trust will not be
actively managed. It will not engage in any activities designed to
obtain a profit from, or to ameliorate losses caused by, changes in
the market prices of bitcoin. The Trust seeks to achieve its
investment objective by directly owning bitcoin and will not
speculate with regard to short-term changes in bitcoin prices. The
Trust will not invest in bitcoin derivatives, futures, swaps, or
other financial instruments that represent bitcoin or that may be
exchanged for bitcoin. The Trust does not expect to make any cash
distributions to shareholders.
---------------------------------------------------------------------------

Easily Accessible and Relatively Cost Efficient. Investors
in the Shares can also directly access bitcoin through the Bitcoin
Exchange Market. The Sponsor believes that investors will be able to
more effectively implement strategic and tactical asset allocation
strategies that use bitcoin by using the Shares instead of directly
purchasing and holding bitcoin, and for many investors, transaction
costs related to the Shares will be lower than those associated with
the direct purchase, storage and safekeeping of bitcoin.
Exchange-Traded and Transparent. The Shares will be listed
on BZX, providing investors with an efficient means to implement
various investment strategies. Upon effectiveness of the registration
statement of which this prospectus is a part, the Shares will be
eligible for margin accounts and will be backed by the assets of the
Trust. The Trust will not hold or employ any derivative securities. The
value of the Trust's holdings will be reported each day on the Trust's
Web site, located at www.coin-etf.com. Furthermore, the fact that the
Trust will be regulated by the Exchange and by the Commission under the
Act provides a level of oversight not

[[Page 76663]]

provided by any other current Bitcoin Exchanges or service providers.
The Sponsor represents that the Trust will enter into an information
sharing agreement with the Gemini Exchange enabling it to obtain and
publish the Gemini Exchange Auction Price on the Trust's Web site. In
addition, the Sponsor will arrange for the Gemini Exchange to share
data regarding the Gemini Exchange Spot Price and other trading data
with the Exchange. See ``Overview of the Bitcoin Industry and Market--
Bitcoin Value--Gemini Exchange Spot Price'' above. Lastly, the Exchange
has the ability to halt trading and delist the Shares of the Trust
under certain circumstances and, more generally, retains broad
discretionary authority over the continued listing of securities on the
Exchange, as further described below.
Proprietary Cold Storage System. The Custodian has been
appointed to store and safekeep the Trust's bitcoin using a state-of-
the-art, proprietary Cold Storage System. Similar hardware, software,
administration and continued technological development may not be
available or cost-efficient for many investors. Winklevoss IP, LLC
(``WIP'') is the owner of certain intellectual property and it has
licensed such intellectual property to the Sponsor for use by the
Custodian and its service providers in the safekeeping of the Trust's
bitcoin.
Using the precious metals exchange-traded trusts currently trading
on U.S. exchanges\38\ as design paradigms, the Sponsor has structured
the Trust to be a similar passive investment vehicle holding a single
asset. Like the precious metals exchange traded trusts cited above, the
Trust will only own and store bitcoin and will not be permitted to hold
cash or any other Digital Asset.
---------------------------------------------------------------------------

\38\ See, e.g., SPDR Gold Trust: See Securities Exchange Act
Release No. 50603 (October 28, 2004), 69 FR 64614 (November 5, 2004)
(SR-NYSE-2004-22) (approving listing of the SPDR Gold Trust);
iShares Gold Trust: See Securities Exchange Act Release No. 51058
(January 19, 2005), 70 FR 3749 (January 26, 2005) (SR-Amex-2004-38)
(approving listing of the iShares Gold Trust); ETFS Gold Trust: See
Securities Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993
(May 15, 2009) (SR-NYSEArca-2009-40) (approving listing of the ETFS
Gold Trust); ETFS Silver Trust: See Securities Exchange Act Release
No. 59781 (April 17, 2009), 74 FR 18771 (April 24, 2009) (SR-
NYSEArca-2009-95) (approving listing of the ETFS Silver Trust); ETFS
Platinum Trust: See Securities Exchange Act Release No. 61219
(December 22, 2009), 74 FR 68886 (December 29, 2009) (SR-NYSEArca-
2009-94) (approving listing of the ETFS Platinum Trust); and ETFS
Palladium Trust: See Securities Exchange Act Release No. 61220
(December 22, 2009), 74 FR 68895 (December 29, 2009) (SR-NYSEArca-
2009-94) (approving listing of the ETFS Palladium Trust).
---------------------------------------------------------------------------

The Custodian has been appointed to store and safekeep the Trust's
bitcoin using a state-of-the-art, proprietary Cold Storage System.\39\
Similar hardware, software, administration and continued technological
development may not be available or cost-efficient for many investors.
As such, the logistics of accepting, transferring and safekeeping of
actual bitcoin are dealt with by the Custodian using the Cold Storage
System, and the related expenses are built into the price of the
Shares. Therefore, the investor does not have any additional tasks or
costs over and above those associated with dealing in any other
publicly traded security. The Shares are intended to provide investors
with a cost-efficient and convenient means of gaining exposure to
bitcoin similar to a direct investment in bitcoin.
---------------------------------------------------------------------------

\39\ WIP is the owner of certain intellectual property and it
has licensed such intellectual property to the Sponsor for use by
the Custodian and its service providers in the safekeeping of the
Trust's bitcoin. The Sponsor believes that the use of this Cold
Storage System and other security features described below, the
technological experience of the Custodian's employees and the
Sponsor's management team, as well as the use of independent
auditors for periodic reviews, will provide a level of security not
available through other Digital Asset custodians.
---------------------------------------------------------------------------

All bitcoin is recorded on the Blockchain, the decentralized
transaction ledger of the Bitcoin Network. The Blockchain is a
canonical record of every bitcoin, every Bitcoin transaction (including
the mining of new bitcoin) and every Bitcoin address associated with a
quantity of bitcoin. In order to transfer or ``spend'' bitcoin, one
must control the private key that is mathematically associated with a
given Bitcoin address. The private keys that control the Trust's
bitcoin are secured by the Custodian and stored completely offline
(i.e., air-gapped) using the Custodian's state-of-the-art, proprietary
Cold Storage System. The Custodian's Cold Storage System is founded on
the principles of (i) building defense-in-depth against external
threats; (ii) protecting against human error; and (iii) guarding
against misuse of insider access.
In order to accomplish these principles, the Custodian's Cold
Storage System generates, stores and manages the private keys that
control the Trust's bitcoin onboard hardware security modules
(``HSMs'') for the lifetime of each private key. HSMs (each, a
``Signer'') are tamper-resistant computers used by the Custodian to
digitally sign (i.e., authenticate) any transfer of the Trust's
bitcoin. All Signers are stored, as well as backed up, in various
geographically distributed, access-controlled facilities throughout the
United States. In addition, the Custodian's Cold Storage System
utilizes multiple-signature (``Multisig'') technology with a ``2 of 3''
signing design that requires a signature from at least two (2) of three
(3) potential Signers in order to move the Trust's bitcoin. This
provides both security against attacks and tolerance to losing access
to a minority of facilities or private keys, thereby eliminating single
points of failure. In addition, the operation of a Signer requires the
coordinated actions of multiple employees (each a ``Signatory'') to
protect against insider malfeasance. All Signatories have undergone
background checks by a third-party vendor and are subject to, with or
without the Signatory's knowledge, ongoing background checks at the
discretion of the Custodian. All Signatories have been fingerprinted,
and all fingerprint cards and accompanying information are retained by
the Custodian for the duration of the Signatory's tenure and for a
minimum of three (3) years thereafter. Lastly, the Cold Storage System
is comprised of hardware that is sourced from multiple, diverse
manufacturers to guard against supply-chain risks.
The Custodian's Cold Storage System was purpose-built to
demonstrate ``proof of control'' of the private keys associated with
its public Bitcoin addresses. More specifically, the Custodian can use
Signers to sign a specific message that references a current event
(i.e., to prove recency), thereby proving control of the private keys
associated with the public Bitcoin addresses in which the Trust's
bitcoin are held. This allows the Custodian to periodically evidence
control of the Trust's assets without necessitating the transfer of any
of the Trust's bitcoin. In fact, such ``proof of control'' exercises
will be conducted monthly and audited by the Trust's Auditor; the
results will be made publicly available on the Trust's Web site along
with an attestation from the Trust's Auditor.
The Trust does not currently intend to insure its bitcoin, but may
elect to do so in the future if a viable insurance market for bitcoin
is established. The Custodian does, however, maintain insurance in the
form of a fidelity bond with regard to its custodial business on such
terms and conditions as it considers appropriate in connection with its
custodial obligations and is responsible for all costs, fees and
expenses arising from the insurance policy or policies. The Custodian's
statutorily required fidelity bond coverage includes, among other
things, insurance against employee theft, computer fraud, and funds
transfer fraud; this coverage is subject to certain

[[Page 76664]]

terms, conditions, and exclusions. This fidelity bond has been in
effect since October 1, 2015. The Trust will not be a beneficiary of
any such insurance and does not have the ability to dictate the
existence, nature or amount of coverage. Therefore, Shareholders cannot
be assured that the Custodian will maintain adequate insurance or any
insurance with respect to the bitcoin held by the Custodian on behalf
of the Trust. Furthermore, Shareholders' recourse against the Trust,
Custodian and Sponsor under New York law governing their custody
operations is limited. Similarly, Shareholders' recourse against the
Administrator and Transfer Agent for the services they provide to the
Trust is limited. Consequently, a loss may be suffered with respect to
the Trust's bitcoin which is not covered by insurance and for which no
person is contractually liable in damages.
The Custodian is the custodian of the Trust's bitcoin in accordance
with the terms and provisions of the Trust Custody Agreement and
utilizes its Cold Storage System in the administration and operation of
the Trust and the safekeeping of its bitcoin. The Custodian segregates
the Trust's bitcoin which are held in unique Bitcoin addresses with
balances that can be directly verified on the Bitcoin Blockchain. Under
the Trust Custody Agreement, the Custodian is also responsible for the
maintenance of, and periodic updates to, the Cold Storage System.
Acting on standing instructions specified in the Trust Custody
Agreement, the Custodian will accept, on behalf of the Trust, delivery
of bitcoin from Authorized Participants into the Trust Custody Account
in the creation of a Basket. In order for an Authorized Participant to
redeem a Basket and receive a distribution of bitcoin from the Trust,
the Custodian, upon receiving instructions from the Transfer Agent,
will sign transactions necessary to transfer bitcoin out of the Trust
Custody Account and distribute to the Bitcoin address specified by the
Authorized Participant. See ``Net Asset Value--Creation and Redemption
of Shares.''
The Custodian will engage an independent audit firm to periodically
audit the Custodian's Cold Storage System protocols and internal
controls (``Internal Controls Audit''), and report to the Custodian at
least annually on such matters. Additionally, as noted above, the
Sponsor and the Custodian have engaged an independent audit firm to
verify that the Custodian can demonstrate ``proof of control'' of the
private keys that control the Trust's bitcoin on a monthly basis. Other
Digital Asset ETPs may not be able to or willing to provide ``proof of
control'' of the private keys that control their bitcoin.
Net Asset Value
According to the Registration Statement, on each Business Day, the
Administrator will use the Gemini Exchange Auction Price to calculate
the Trust's NAV at 4:00 p.m. Eastern Time (the ``Evaluation Time'').
At the Evaluation Time, the Administrator will value the bitcoin
held by the Trust using the Gemini Exchange Auction Price which is
publicly available and will be provided to the Administrator by the
Sponsor each Business Day. In the event that the Sponsor determines
that the Gemini Exchange Auction Price is not an appropriate basis for
evaluation of the Trust's bitcoin on a given Business Day, the Sponsor
will instruct the Administrator to use the 4:00 p.m. Eastern Time spot
price on the Gemini Exchange or the itBit bitcoin exchange (the ``itBit
Exchange'') \40\ as an alternative basis for calculating the Trust's
NAV on that Business Day. The itBit Exchange is operated by the itBit
Trust Company, LLC, a New York State-chartered limited liability trust
company that, like the Gemini Exchange, operates under the direct
supervision and regulatory oversight of the NYSDFS. Any determination
that the Gemini Exchange Auction Price is unavailable or otherwise not
an appropriate basis for calculating the Trust's NAV on a given
Business Day would be based upon extraordinary criteria in which the
operation of the Gemini Exchange is disrupted or otherwise experiencing
material calculation or reporting irregularities. If the Sponsor
determines in good faith that none of the Gemini Exchange Auction
Price, the spot price on the Gemini Exchange, or the spot price on the
itBit Exchange are reliable for calculating the Trust's NAV on a
particular Business Day, including but not limited to situations where
it does not reflect material information or events occurring between
the time of calculation of such prices and the time the Trust's Shares
are valued, bitcoin will be valued by the Sponsor using fair market
value pricing as determined in good faith by the Sponsor and calculated
by the Administrator . Determining the fair market value of bitcoin
involves the consideration of a number of subjective factors and thus
the prices for bitcoin may differ from the Gemini Exchange Auction
Price or the spot price on the Gemini Exchange or the itBit Exchange.
Factors the Sponsor may consider include the market price for bitcoin
on other Bitcoin Exchanges, or in other forums for which bitcoin prices
are published publicly, recent significant transactions on the
Blockchain where the USD-bitcoin exchange rate can be readily
ascertained (e.g., sales of items with widely available USD prices
where the cost in bitcoin can be readily determined), movements in the
price of other Digital Assets or fiat currencies, movements in the
price of other Digital Asset ETPs, global or regional political,
economic or financial events, and other factors determined by the
Sponsor in good faith. The Sponsor shall not be liable to any person
for the determination that the Gemini Exchange Auction Price or an
alternative basis for a fair market value of bitcoin is not appropriate
as a basis for calculation of the Trust's NAV provided that such
determination is made in good faith.
---------------------------------------------------------------------------

\40\ The itBit Exchange is operated by the itBit Trust Company,
LLC, a New York State-chartered limited liability trust company
that, like the Gemini Exchange, operates under the direct
supervision and regulatory oversight of the NYSDFS.
---------------------------------------------------------------------------

In order to calculate the Trust's NAV, the Administrator will first
determine the value of the Trust's bitcoin and then subtract all of the
Trust's liabilities (including accrued but unpaid fees and expenses) to
determine the Trust's net assets. The Administrator will calculate the
Trust's NAV by dividing the net assets of the Trust by the number of
the Shares outstanding as of the close of trading on the Exchange
(which includes the net number of any of the Shares created or redeemed
on such Business Day).
The Sponsor will publish the Trust's NAV on the Trust's Web site as
soon as practicable after determination by the Administrator. To the
extent that the NAV has been calculated using a price per bitcoin other
than the Gemini Exchange Auction Price for such Business Day, the
publication on the Trust's Web site will note the valuation methodology
and the price per bitcoin resulting from such calculation.
Creation and Redemption of Shares
The Trust is expected to issue and redeem Shares from time to time
only in one or more whole Baskets. The Trust will issue and redeem the
Shares in Baskets only to certain Authorized Participants on an ongoing
basis. On a 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 bitcoin (i.e., bitcoin equal in value to the
value of the Shares being purchased). On a

[[Page 76665]]

redemption, the Trust will distribute bitcoin 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 each Basket accepted by the
Transfer Agent in a creation or redemption transaction will be the same
(i.e., each Basket will consist of 10,000 Shares and the value of the
Basket will be equal to the value of 10,000 Shares at their net asset
value per Share on that day). The Trust will not issue or redeem
fractions of a Basket.
Only Authorized Participants will be able to place orders to create
or redeem Baskets. Authorized Participants must be (i) registered
broker-dealers or other securities market participants, such as banks
and other financial institutions, which are not required to register as
broker-dealers to engage in securities transactions, and (ii) DTC
Participants. A Transaction Fee may be imposed to offset the transfer
and other transaction costs associated with creation or redemption.
Authorized Participants or their affiliated market makers are expected
to have the facility to participate directly on one or more Bitcoin
Exchanges.
The Trust currently expects that prior to the commencement of
trading on the Exchange, at least two Authorized Participants will have
signed an Authorized Participant Agreement with the Trust and may
create and redeem Baskets as described above. Persons interested in
placing orders to create or redeem Baskets should contact the Sponsor
or the Transfer Agent to obtain the contact information for the
Authorized Participants. Shareholders who are not Authorized
Participants will only be able to redeem their Shares through an
Authorized Participant.
Bitcoin will be (i) delivered to the Trust Custody Account from an
Authorized Participant in connection with the creation of one or more
Baskets and (ii) distributed by the Custodian from the Trust Custody
Account to the Authorized Participant in connection with the redemption
of one or more Baskets.
Under the Authorized Participant Agreement, the Sponsor has agreed
to indemnify the Authorized Participants against certain liabilities,
including liabilities under the Securities Act.
The following description of the procedures for the creation and
redemption of Baskets is only a summary and an investor should refer to
the relevant provisions of the Trust Agreement, the Trust Servicing
Agreement and the form of Authorized Participant Agreement for more
detail, each of which is attached as an exhibit to the Registration
Statement of which the prospectus is a part.
Creation Procedures
On any Business Day, an Authorized Participant may place an order
with the Transfer Agent to create one or more Baskets (each a
``Creation Basket''). The settlement of Creation Basket orders,
including the delivery of bitcoin by the Authorized Participant and
distribution of Shares to the Authorized Participant, will occur only
on days BZX is open for regular trading.
Creation Basket Order Requirements
The quantity of bitcoin required to be delivered to the Trust in
exchange for a Creation Basket is determined by the Administrator, and
all questions as to the quantity of bitcoin necessary to deliver to
purchase a Creation Basket will be conclusively determined by the
Administrator. The Administrator's determination of the cost of a
Creation Basket shall be final and binding on all persons interested in
the Trust.
Creation Basket Distribution
An Authorized Participant who places a Creation Basket order with
the Transfer Agent is responsible for delivering the bitcoin to the
Trust required to purchase the Creation Basket on the order date.
Bitcoin delivered by an Authorized Participant will be considered
settled upon the completion of the Confirmation Protocol. Under the
Confirmation Protocol, the Custodian must wait until the bitcoin
delivery transaction has been confirmed by six (6) consecutive blocks
on the Blockchain before it is considered settled. The confirmation
process should take approximately one (1) hour depending upon the speed
with which Bitcoin Network miners add new blocks to the Blockchain. See
``Overview of the Bitcoin Industry and Market--Cryptographic Security
Used in the Bitcoin Network--Double-Spending and the Bitcoin Network
Confirmation System,'' above. An Authorized Participant shall not be
deemed to have fulfilled its bitcoin delivery requirement until the
completion of the Confirmation Protocol.
Following confirmation of the receipt of bitcoin into the Trust
Custody Account by the Custodian, the Transfer Agent will direct DTC to
credit the Authorized Participant's DTC account with the Shares
representing the number of Creation Baskets purchased. The expense and
risk of delivery, ownership and safekeeping of a bitcoin delivery until
it has been received by the Trust in the Trust Custody Account shall be
borne by the Custodian.
The Custodian may accept delivery of bitcoin by such other means as
the Sponsor, from time to time, may determine to be acceptable for the
Trust, provided that the same is disclosed in a prospectus relating to
the Trust filed with the Commission pursuant to Rule 424 under the
Securities Act. If bitcoin is to be delivered other than as described
above, the Sponsor is authorized to establish such procedures and to
appoint such custodians and establish such custody accounts in addition
to those described in this prospectus, as the Sponsor determines to be
desirable.
Suspension or Rejection of Creation Basket Orders
The Administrator or the Sponsor may suspend the right to place
Creation Basket orders, or postpone the Creation Basket settlement
date, (i) for any period during which BZX is closed other than
customary weekend or holiday closings, or trading on BZX is suspended
or restricted; or (ii) for any period during which an emergency exists
as a result of which receipt or evaluation of bitcoin delivery is not
reasonably practicable or presents, in the judgment of the Custodian or
the Sponsor or their agents, a security risk to the Cold Storage
System. The inability of the Custodian to operate the Cold Storage
System because of a failure of hardware, software or personnel or an
inability to access the Cold Storage System (e.g., because of power
failure or acts of God) are examples of such emergencies. None of the
Custodian, the Sponsor, or their agents will be liable to any person or
in any way for any loss or damages that may result from any such
suspension or postponement.
The Sponsor may also reject a Creation Basket order if (i) such
order is not presented in proper form as described in the Authorized
Participant Agreements, (ii) such order is incorrect, (iii) if the
Creation Basket Order presents, in the opinion of the Custodian, the
Sponsor, or their agents, a security risk to the Cold Storage System,
(iv) the fulfillment of the Creation Basket order, in the opinion of
counsel, might be unlawful, or (v) circumstances outside the control of
the Sponsor, the Transfer Agent or the Custodian, as applicable, make
it, for all practical purposes, not feasible to process the Creation
Basket Order. None of the Custodian, Sponsor, or their agents will be
liable for the rejection of any Creation Basket order.

[[Page 76666]]

Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets (each a ``Redemption Basket'') will mirror the procedures
for the creation of Baskets. On any Business Day, an Authorized
Participant may place a Redemption Basket order with the Transfer
Agent. The settlement of Redemption Baskets orders, including the
delivery of Shares to the Trust and distribution of bitcoin to the
Authorized Participant, will only occur when BZX is open for regular
trading. Settlement of Redemption Baskets may be delayed only in the
instance of administrative or custodial delays in the processing of a
distribution of bitcoin from the Trust Custody Account, whether by
reason of Bitcoin Network delays, mechanical or clerical error or by
act of God. Settlement of a Redemption Basket will occur only on
Business Days. Redemption Basket orders must be placed no later than
3:00 p.m. Eastern Time on a Business Day. A Redemption Basket order so
received will be effective on the date it is received if the Sponsor
finds it to be in satisfactory form. The redemption procedures allow
only Authorized Participants to place Redemption Basket orders and do
not entitle an Authorized Participant to receive a distribution of
bitcoin in a quantity that is different than the value of a Redemption
Basket.
By placing a Redemption Basket order, an Authorized Participant
agrees to deliver the number of Shares in the Redemption Basket through
DTC's book-entry system to the Transfer Agent's DTC account not later
than the next Business Day following the effective date of the
Redemption Basket order.
Redemption Basket Order Requirements
The Redemption Basket distribution from the Trust will consist of a
transfer to the redeeming Authorized Participant of the quantity of the
bitcoin held by the Trust in the Trust Custody Account evidenced by the
Shares being delivered. Redemption distributions will be subject to the
deduction of any applicable taxes or other governmental charges that
may be due.
Redemption Basket Distribution
The distribution of bitcoin representing a Redemption Basket will
be transferred to the Authorized Participant on the third Business Day
following the Redemption Basket order date if, by 3:00 p.m. Eastern
Time on the next Business Day, the Transfer Agent's DTC account has
been credited with the Redemption Baskets to be redeemed. Subsequently,
the Transfer Agent will instruct the Custodian to transfer bitcoin from
the Trust Custody Account and distribute it to the redeeming Authorized
Participant. If the Transfer Agent's DTC account has not been credited
with all of the Shares representative of the Redemption Baskets to be
redeemed by such time, the delivery will be considered unfulfilled.
In order to facilitate the distribution of the bitcoin representing
a Redemption Basket order, the Administrator will calculate the number
of bitcoin representing the value of the Redemption Basket order and
instruct the Custodian to distribute that quantity of bitcoin to the
redeeming Authorized Participant.
Suspension or Rejection of Redemption Basket Orders
The Administrator, the Transfer Agent, or the Sponsor may suspend
the right to place Redemption Basket orders, or postpone the Redemption
Basket order settlement date, (i) for any period during which BZX is
closed other than customary weekend or holiday closings, or trading on
BZX is suspended or restricted; or (ii) for any period during which an
emergency exists as a result of which the distribution or evaluation of
bitcoin is not reasonably practicable or presents, in the judgment of
the Custodian, the Sponsor, or their agents a security risk to the Cold
Storage System. The inability of the Custodian to operate the Cold
Storage System because of a failure of hardware, software or personnel
or an inability to access the Cold Storage System (e.g., because of
power failure or acts of God) are examples of such emergencies. None of
the Custodian, the Sponsor, or their agents will be liable to any
person or in any way for any loss or damages that may result from any
such suspension or postponement.
The Sponsor will also reject a Redemption Basket order if, among
other things, the order is not in proper form as described in the
Authorized Participant Agreement or if the fulfillment of the
Redemption Basket order, in the opinion of its counsel, might be
unlawful.
Availability of Information
The Trust's Web site, which will be publicly available prior to the
public offering of the Shares, will include a form of the prospectus
for the Trust that may be downloaded. The Web site will feature
additional quantitative information for the Shares updated every 15
seconds throughout the Exchange's Regular Trading Session, including
the prior Business Day's reported NAV, the Trust's Intraday Indicative
Value or IIV (as defined below), the national best bid for the Trust's
Shares (``NBB''), the national best offer for the Trust's Shares
(``NBO''), the midpoint of the NBB and the NBO, and the discount or
premium of this midpoint from the IIV. Daily trading volume information
for the Shares will also be available in the financial section of
newspapers, through subscription services such as Bloomberg, Thomson
Reuters and International Data Corporation, which can be accessed by
Authorized Participants and other investors, as well as through other
electronic services, including major public Web sites.
In addition, the Sponsor will calculate an estimated fair value of
the Shares based on the most recent Gemini Exchange Auction Price (the
``Intraday Indicative Value'' or ``IIV''), which will be updated and
widely disseminated by one or more major market data vendors at least
every fifteen (15) seconds during the Exchange's regular trading
hours.\41\ The dissemination of the Intraday Indicative Value will
provide investors with an estimate of the fair value of the Shares
throughout the trading day.
---------------------------------------------------------------------------

\41\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Intraday Indicative Values published via the Consolidated Tape
Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

Investors may obtain bitcoin pricing information twenty-four (24)
hours a day or from various financial information service providers or
Bitcoin Network information sites such as BitcoinCharts or bitcoinity.
Bloomberg financial terminals include pricing data in USD and in Euro
from several Bitcoin Exchanges. Recently, the CME and the ICE announced
bitcoin pricing indices. Current Bitcoin market prices are also
generally available with bid/ask spreads directly from Bitcoin
Exchanges. In addition, on each Business Day, the Trust's Web site will
provide pricing information for the Gemini Exchange Auction Price, the
4:00 p.m. Eastern Time spot price on the Gemini Exchange and the
Shares. The Gemini Exchange itself provides comprehensive last trade
information as well as the aggregate quantity available at each price
level within its limit order book, all through its public Web site
(www.gemini.com) and public market data feeds.
Additional information regarding the Trust and its Shares,
including risks, creation and redemption procedures, fees,
distributions and taxes, is included in the Registration Statement.

[[Page 76667]]

Arbitrage Mechanism
Similar to other ETPs listed and traded on the Exchange, the Trust
will rely on the Basket creation and redemption process to reduce any
premium or discount that may occur in the Share trading prices on the
Exchange relative to the NAV. Baskets may be created or redeemed only
by Authorized Participants who have entered into an Authorized
Participant Agreement with the Trust and the Sponsor, subject to
acceptance by the Transfer Agent. The Basket creation and redemption
process is important for the Trust in providing Authorized Participants
with an arbitrage mechanism through which they may keep Share trading
prices in line with the NAV. See ``Overview of the Bitcoin Industry and
Market--Bitcoin Value--Gemini Exchange Spot Price'' above.
As the Shares trade intraday on the Exchange, their market prices
will fluctuate due to supply and demand, which will be driven in large
part by the price of bitcoin. The following examples generally describe
the conditions surrounding Basket creation and redemption:
If the market price of the Shares is greater than the NAV,
an Authorized Participant can purchase sufficient bitcoin to create a
Basket, and then sell the new Shares on the secondary market at a
profit. This process increases the selling interest of the Shares and
is expected to decrease the market price of the Shares such that their
market price will be closer to the NAV.
If the NAV is greater than the market price of the Shares,
an Authorized Participant can purchase Shares on the secondary market
in an amount equal to a Basket and redeem them for bitcoin, and then
sell the bitcoin at a profit. This process increases the buying
interest for the Shares and is expected to increase the market price of
the Shares such that their market price will be closer to the NAV.
This process is referred to as the arbitrage mechanism (``Arbitrage
Mechanism''). The Arbitrage Mechanism helps to minimize the difference
between the trading price of a Share and the NAV. Over time, these
buying and selling pressures should balance, and a Share's market
trading price is expected to remain at a level that is at or close to
the NAV. The Arbitrage Mechanism provided by the Basket creation and
redemption process is designed, and required, in order to maintain the
relationship between the market trading price of the Shares and the
NAV. The Exchange expects that arbitrageurs will take advantage of
price variations between the Shares' market price and the NAV and that
the Arbitrage Mechanism will be facilitated by the transparency and
simplicity of the Trust's holdings, the availability of the Intraday
Indicative Value, the liquidity of the bitcoin market, each Authorized
Participant's ability to access the bitcoin market, and each Authorized
Participant's ability to create workable hedges.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
The Shares will be subject to BZX Rule 14.11(e)(4), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV will be calculated daily and that these values and
information about the assets of the Trust will be made available to all
market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a
trust that holds a specified commodity \42\ deposited with the trust;
(b) issued by such trust in a specified aggregate minimum number in
return for a deposit of a quantity of the underlying commodity; and (c)
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. The Trust currently
expects that there will be at least 100,000 Shares outstanding at the
time of commencement of trading on the Exchange. Upon termination of
the Trust, the Shares will be removed from listing. The Trustee,
Delaware Trust Company, is a trust company having substantial capital
and surplus and the experience and facilities for handling corporate
trust business, as required under Rule 14.11(e)(4)(E)(iv)(a) and that
no change will be made to the trustee without prior notice to and
approval of the Exchange. The Exchange also notes that, pursuant to
Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange
shall have any liability for damages, claims, losses or expenses caused
by any errors, omissions or delays in calculating or disseminating any
underlying commodity value, the current value of the underlying
commodity required to be deposited to the Trust in connection with
issuance of Commodity-Based Trust Shares; resulting from any negligent
act or omission by the Exchange, or any agent of the Exchange, or any
act, condition or cause beyond the reasonable control of the Exchange,
its agent, including, but not limited to, an act of God; fire; flood;
extraordinary weather conditions; war; insurrection; riot; strike;
accident; action of government; communications or power failure;
equipment or software malfunction; or any error, omission or delay in
the reports of transactions in an underlying commodity. Finally, as
required in Rule 14.11(e)(4)(G), the Exchange notes that any registered
market maker (``Market Maker'') in the Shares must file with the
Exchange in a manner prescribed by the Exchange and keep current a list
identifying all accounts for trading in an underlying commodity,
related commodity futures or options on commodity futures, or any other
related commodity derivatives, which the registered Market Maker may
have or over which it may exercise investment discretion. No registered
Market Maker shall trade in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, in an account in which a registered Market Maker, directly
or indirectly, controls trading activities, or has a direct interest in
the profits or losses thereof, which has not been reported to the
Exchange as required by this Rule. In addition to the existing
obligations under Exchange rules regarding the production of books and
records (see, e.g., Rule 4.2), the registered Market Maker in
Commodity-Based Trust Shares shall make available to the Exchange such
books, records or other information pertaining to transactions by such
entity or registered or non-registered employee affiliated with such
entity for its or their own accounts for trading the underlying
physical commodity, related commodity futures or options on commodity
futures, or any other related commodity derivatives, as may be
requested by the Exchange.
---------------------------------------------------------------------------

\42\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the Commodity Exchange
Act. As noted above, the CFTC has opined that Bitcoin is a commodity
as defined in Section 1a(9) of the Commodity Exchange Act. See
Coinflip, supra note 13 [sic].
---------------------------------------------------------------------------

Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in BZX Rule 11.18. Trading may be halted
because of market 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 trading is not occurring

[[Page 76668]]

in the bitcoin underlying the Shares; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present. Trading in the Shares also will be
subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances
under which trading in the Shares may be halted.
Trading Rules
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. BZX will allow
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a) the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01 where the price is greater than $1.00
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Commodity-Based Trust
Shares. The issuer has represented to the Exchange that it will advise
the Exchange of any failure by the Trust or the Shares to comply with
the continued listing requirements, and, pursuant to its obligations
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil
for compliance with the continued listing requirements. If the Trust or
the Shares are not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under
Exchange Rule 14.12. The Exchange may obtain information regarding
trading in the Shares via the Intermarket Surveillance Group (``ISG''),
from other exchanges who are members or affiliates of the ISG, or with
which the Exchange has entered into a comprehensive surveillance
sharing agreement.\43\ In addition, the Exchange may obtain information
about bitcoin transactions, trades and market data from Bitcoin
Exchanges with which the Exchange has entered into a comprehensive
surveillance sharing agreement as well as certain additional
information that is publicly available through the Blockchain. The
Exchange notes that it has entered into a comprehensive surveillance
sharing agreement with Gemini Exchange.
---------------------------------------------------------------------------

\43\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (i) The procedures for the
creation and redemption of Baskets (and that the Shares are not
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (iii) how information
regarding the Intraday Indicative Value and the Trust's NAV are
disseminated; (iv) the risks involved in trading the Shares during the
Pre-Opening \44\ and After Hours Trading Sessions \45\ when an updated
Intraday Indicative Value will not be calculated or publicly
disseminated; (v) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (vi) trading information.
---------------------------------------------------------------------------

\44\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
\45\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
---------------------------------------------------------------------------

In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
In addition, the Information Circular will reference that the Trust
is subject to various fees and expenses described in the Registration
Statement. The Information Circular will also reference the fact that,
apart from the CFTC, the Financial Crimes Enforcement Network of the
U.S. Department of the Treasury (``FinCEN'') and the U.S. Internal
Revenue Service (``IRS''), most major U.S. regulators, including the
Commission, have yet to make official pronouncements or adopt rules
providing guidance with respect to the classification and treatment of
bitcoin and other Digital Assets for purposes of commodities, tax and
securities laws. The Information Circular will also contain information
regarding the CFTC's determination that bitcoin and other ``virtual
currencies'' (aka Digital Assets) are properly defined as commodities
under the CEA,\46\ and will reference the fact that the CFTC has
applied CEA provisions and CFTC regulations that apply to transactions
in commodity options and swaps to the conduct of the bitcoin
derivatives trading platform.
---------------------------------------------------------------------------

\46\ See Coinflip, supra note 13 [sic].
---------------------------------------------------------------------------

2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \47\ in general and Section 6(b)(5) of the Act \48\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------

\47\ 15 U.S.C. 78f.
\48\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4), which as noted
above includes all statements and representations made in this filing
regarding the description of the portfolio and limitations on portfolio
holdings or reference assets. The Exchange believes that its
surveillance procedures are adequate to properly monitor the trading of
the Shares on the Exchange during all trading sessions and to deter and
detect violations of Exchange rules and the applicable federal
securities laws. The Exchange may obtain information regarding trading
in the Shares via the ISG from other exchanges who are members or
affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement.\49\ In addition, the
Exchange may obtain information about Bitcoin transactions, trades, and
market data from Bitcoin Exchanges with which the Exchange has entered
into a comprehensive surveillance sharing agreement, which includes the
Gemini

[[Page 76669]]

Exchange, as well as certain additional information that is publicly
available through the Blockchain.
---------------------------------------------------------------------------

\49\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

According to the Registration Statement, the Trust will only own
and store bitcoin and will not be permitted to hold cash or any other
Digital Asset. The proposal also promotes market transparency in that
large amount of information is publicly available regarding the Trust
and the Shares, thereby promoting market transparency. The Exchange
will obtain a representation from the Sponsor that the Trust's NAV will
be determined by the Administrator and published by the Sponsor at 4:00
p.m. Eastern Time each Business Day (using the Gemini Exchange Auction
Price) on the Trust's Web site and that such information will be made
available to all market participants at the same time. Furthermore, the
Trust's Web site will provide an Intraday Indicative Value during
regular trading hours on each Business Day. The Trust's Web site will
also provide its current prospectus, as well as the two (2) most recent
reports to shareholders. The Web site will feature additional
quantitative information for the Shares updated every 15 seconds
throughout the Exchange's Regular Trading Session, including the prior
Business Day's reported NAV, the Trust's IIV, the NBB, the NBO, the
midpoint of the NBB and the NBO, and the discount or premium of this
midpoint from the IIV. This information will be retained by the Trust.
In addition, the Exchange will publish (via the CTA) quotation
information, trading volume, closing prices, and the prior Business
Day's NAV. The IIV, which is the pricing on the Gemini Exchange prior
to the Gemini Exchange Auction Price, will be widely disseminated by
one (1) or more major market data vendors, such as Reuters or
Bloomberg, and broadly displayed on at least a 15-second basis during
regular trading hours. In addition, information regarding market price
and trading volume of the Shares will be continually available on a
real-time basis throughout the Business Day on brokers' computer
screens and other electronic services, and quotation and last sale
information will also be available via the Exchange's data feeds.
The proposed rule change is further designed to promote just and
equitable principles of trade and to protect investors and the public
interest and to promote market transparency in that there is a
considerable amount of bitcoin price and market information available
for free on public Web sites and through financial, professional and
subscription services. Investors may obtain bitcoin pricing information
twenty-four (24) hours a day or from various financial information
service providers or Bitcoin Network information sites such as
www.BitcoinCharts.com or www.bitcoinity.org. Bloomberg financial
terminals include pricing data in USD and in Euro from several Bitcoin
Exchanges. Recently, the CME and the ICE announced bitcoin pricing
indices. Current Bitcoin market prices are also generally available
with bid/ask spreads directly from various Bitcoin Exchanges.
The Exchange also believes that the widespread availability of
information 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 the NBB/NBO
midpoint and the Intraday Indicative Value as well as between the NBB/
NBO midpoint and the NAV. In addition, the numerous options for buying
and selling bitcoin 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. Furthermore, the
Trust has discussed with several prominent market participants the
possibility of acting as an Authorized Participant and/or a Market
Maker, each of which is an experienced participant in the ETP
marketplace and is actively engaged in trading ETPs. A number of these
potential Authorized Participants and Market Makers currently trade
bitcoin and are already registered participants that trade on the
Gemini Exchange. Based on their experience in ETPs and in the Bitcoin
marketplace, these market participants have indicated that they believe
that they will be able to make efficient and liquid markets in the
Shares at prices generally in line with the NAV.
Authorized Participants will be able to acquire bitcoin for
delivery to the Trust by a variety of means. Authorized Participants
will not be required to use the Gemini Exchange to trade their bitcoin
and the Gemini Exchange is not the only venue on which Authorized
Participants can purchase bitcoin for delivery to the Trust. However,
as discussed above, the ability to transact in bitcoin on the Gemini
Exchange may provide (i) a convenient and stable venue with superior
liquidity characteristics in which to purchase or sell bitcoin, (ii) an
efficient way to trade bitcoin, and (iii) a safe place to store
purchased bitcoin for future use in the creation of Baskets given the
regulatory oversight to which the Gemini Exchange is subject.
The Exchange may consider all relevant factors in exercising its
discretion to halt or suspend trading in the Shares. The Exchange will
halt trading in the Shares under the conditions specified in BZX Rule
11.18. Trading may be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (i) The extent to which trading is not
occurring in the financial instruments underlying the Shares; or (ii)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. Trading in the
Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets
forth circumstances under which trading in the Shares may be halted.
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
Commodity-Based Trust Shares 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 from other Bitcoin
Exchanges with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, as noted above, investors
will have ready access to information regarding bitcoin pricing and
bitcoin information, as well as equitable access to the Trust's
Intraday Indicative Value, NAV, and quotation and last sale information
for the Shares.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.

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 purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional Commodity-Based Trust Share product that will enhance
competition among market participants, to the benefit of investors and
the marketplace.

[[Page 76670]]

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

The Exchange has neither solicited nor received written comments on
the proposed rule change.

III. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Section 6(b)(5) of the Act,
the other provisions of the Act, and the rules and regulations
thereunder. In particular, the Commission invites the written views of
interested persons concerning the sufficiency of the Exchange's
statements in support of Amendment No. 1 to the proposed rule change,
which are set forth above; the statements made in comment letters
submitted to the Commission; \50\ and the specific requests for comment
set forth in the Order Instituting Proceedings.\51\
---------------------------------------------------------------------------

\50\ See supra note 8.
\51\ See Order Instituting Proceedings, supra note 7. The
Commission notes that, consistent with certain changes made in
Amendment No. 1 to the proposed rule change, with respect to
Question No. 2 in the Order Instituting Proceedings, commenters are
asked to address the sufficiency of the Exchange's statements as
they pertain to the Gemini Exchange Auction Price. See id., 81 FR at
71781.
---------------------------------------------------------------------------

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 Number 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 such 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-BatsBZX-2016-30 and should
be submitted on or before November 25, 2016.
---------------------------------------------------------------------------

\52\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
Brent J. Fields,
Secretary.
[FR Doc. 2016-26513 Filed 11-2-16; 8:45 am]
BILLING CODE 8011-01-P

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