Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading Shares of the Bitcoin Investment Trust under NYSE Arca Equities Rule 8.201, 10086-10099 [2017-02651]
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Industry Members, FINRA believes that
this proposal furthers the objectives of
the Plan, as identified by the SEC, and
is therefore consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. FINRA notes
that the proposed rule change
implements provisions of the CAT NMS
Plan, and is designed to assist FINRA in
meeting its regulatory obligations
pursuant to the Plan. FINRA also notes
that the proposed rule series
implementing provisions of the CAT
NMS Plan will apply equally to all firms
that trade NMS Securities and OTC
Equity Securities. In addition, the
national securities exchanges are
proposing similar rules to require
compliance by their members with the
CAT NMS Plan. Therefore, this is not a
competitive rule filing, and, therefore, it
does not impose a burden on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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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:
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2017–003 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
[Release No. 34–79955; File No. SR–
NYSEArca–2017–06]
• 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–FINRA–2017–003. 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 FINRA. 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–FINRA–
2017–003 and should be submitted on
or before March 2, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.61
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–02642 Filed 2–8–17; 8:45 am]
BILLING CODE 8011–01–P
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change Relating to the Listing
and Trading Shares of the Bitcoin
Investment Trust under NYSE Arca
Equities Rule 8.201
February 3, 2017.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on January
25, 2017, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade shares of the following under
NYSE Arca Equities Rule 8.201: Bitcoin
Investment Trust (‘‘Trust’’). The
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
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1 15
U.S.C.78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
61 17
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CFR 200.30–3(a)(12).
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
Under NYSE Arca Equities Rule
8.201, the Exchange may propose to list
and/or trade pursuant to unlisted
trading privileges (‘‘UTP’’)
‘‘Commodity-Based Trust Shares.’’ 4 The
Exchange proposes to list and trade
shares (‘‘Shares’’) of the Trust pursuant
to NYSE Arca Equities Rule 8.201.5
The sponsor of the Trust is Grayscale
Investments, LLC (‘‘Sponsor’’), a
Delaware limited liability company. The
Sponsor is a wholly-owned subsidiary
of Digital Currency Group, Inc. (‘‘Digital
Currency Group’’). The trustee for the
Trust is Delaware Trust Company
(‘‘Trustee’’). The Bank of New York
Mellon will be the Trust’s transfer agent
(in such capacity, ‘‘Transfer Agent’’) and
the administrator of the Trust (in such
capacity, ‘‘Administrator’’). Xapo Inc. is
the custodian for the Trust
(‘‘Custodian’’).6 ALPS Portfolio
Solutions Distributor, Inc. will be the
marketing agent for the Trust
(‘‘Marketing Agent’’).
The Trust is a Delaware statutory
trust, organized on September 13, 2013,
4 Commodity-Based Trust Shares are securities
issued by a trust that represent investors’ discrete
identifiable and undivided beneficial ownership
interest in the commodities deposited into the
Trust.
5 On January 20, 2017, the Trust filed a
registration statement (‘‘Registration Statement’’) on
Form S–1 under the Securities Act of 1933 (15
U.S.C. 77a) (File No. 333–215627). The descriptions
of the Trust, the Shares and bitcoin contained
herein are based, in part, on the Registration
Statement.
On March 4, 2016, the Trust submitted to the
Commission an amended Form D as a business
trust. Shares of the Trust have been quoted on OTC
Market’s OTCQX Best Marketplace under the
symbol ‘‘GBTC’’ since March 26, 2015. On
November 11, 2016, the Trust also published a
quarterly report for GBTC for the period ended
September 30, 2016, which can be found on OTC
Market’s Web site: https://www.otcmarkets.com/
stock/GBTC/filings. The Shares will be of the same
class and will have the same rights as shares of
GBTC. Effective October 28, 2014, the Trust
suspended its redemption program for shares of
GBTC, in which shareholders were permitted to
request the redemption of their shares through
Genesis Global Trading, Inc. (formerly known as
SecondMarket, Inc.), an affiliate of the Sponsor and
the Trust (‘‘Genesis’’). According to the Sponsor,
freely tradeable shares of GBTC will remain
unregistered freely tradeable Shares on the date of
the listing of the Shares unless, if authorized by the
Trust, holders of GBTC sell the shares in the initial
public offering. Restricted shares of GBTC will
remain subject to private placement restrictions and
the holders of such restricted shares may either (i)
continue to hold those shares subject to those
restrictions or (ii) if authorized by the Trust, sell the
restricted shares in the initial public offering.
6 According to the Registration Statement, Digital
Currency Group owns a minority interest in the
Custodian that represents less than 1.0% of the
Custodian’s equity.
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that operates pursuant to a trust
agreement between the Sponsor and the
Trustee. The Trust has no fixed
termination date.
According to the Registration
Statement, each Share will represent a
proportional interest, based on the total
number of Shares outstanding, in the
bitcoins held by the Trust, less the
Trust’s liabilities, which include
accrued but unpaid fees and expenses.
The Trust’s assets will consist solely of
bitcoins held on the Trust’s behalf by
the Custodian. The Trust has not had a
cash balance at any time since
inception. When selling bitcoins to pay
expenses, the Sponsor will endeavor to
sell the exact number of bitcoins needed
to pay expenses in order to minimize
the Trust’s holdings of assets other than
bitcoin. As a consequence, the Trust
expects that it will not record any cash
flow from its operations and that its
cash balance will be zero at the end of
each reporting period.
The activities of the Trust will be
limited to (i) issuing ‘‘Baskets’’ (as
defined below) in exchange for bitcoins
deposited by the ‘‘Authorized
Participants’’ (as defined below) or
‘‘Liquidity Providers’’ (as defined
below), as applicable, with the
Custodian as consideration, (ii)
transferring actual bitcoins as necessary
to cover the Sponsor’s management fee
and selling bitcoins as necessary to pay
certain other fees that are not
contractually assumed by the Sponsor,
(iii) transferring actual bitcoins in
exchange for Baskets surrendered for
redemption by the Authorized
Participants, (iv) causing the Sponsor to
sell bitcoins on the termination of the
Trust and (v) engaging in all
administrative and custodial procedures
necessary to accomplish such activities
in accordance with the provisions of
applicable agreements. The Trust is not
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 price of bitcoins.
According to the Registration
Statement, the Trust is neither an
investment company registered under
the Investment Company Act of 1940, as
amended, (‘‘1940 Act’’) 7 nor a
commodity pool for purposes of the
Commodity Exchange Act,8 and neither
the Sponsor nor the Trustee is subject to
regulation as a commodity pool operator
or a commodity trading adviser in
connection with the Shares.
7 15
8 17
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U.S.C. 80a–1.
U.S.C. 1.
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Investment Objective
According to the Registration
Statement, and as further described
below, the investment objective of the
Trust will be for the Shares to reflect the
performance of the value of a bitcoin as
represented by the TradeBlock XBX
Index (‘‘Index’’),9 less the Trust’s
liabilities and expenses.
The Shares are designed to provide
investors with a cost-effective and
convenient way to invest in bitcoin. A
substantial direct investment in bitcoins
may require expensive and sometimes
complicated arrangements in
connection with the acquisition,
security and safekeeping of the bitcoins
and may involve the payment of
substantial fees to acquire such bitcoins
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
bitcoins, they will provide investors
with an alternative that constitutes a
relatively cost-effective way to
participate in bitcoin markets through
the securities market.
Overview of the Bitcoin Industry and
Market
The following is a brief introduction
to the bitcoin industry and the bitcoin
market based on information provided
in the Registration Statement.
The Bitcoin Network
A bitcoin is a decentralized digital
currency that is issued by, and
transmitted through, an open-source
digital protocol platform using
cryptographic security that is known as
the ‘‘Bitcoin Network.’’ The Bitcoin
Network is an online, peer-to-peer user
network that hosts a public transaction
ledger, known as the ‘‘Blockchain,’’ and
the source code that comprises the basis
for the cryptography and digital
protocols governing the Bitcoin
Network. No single entity owns or
operates the Bitcoin Network, the
infrastructure of which is collectively
maintained by a decentralized user base.
Bitcoins 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 electronic
marketplaces where exchange
participants may first use fiat currency
9 The Index is a U.S. dollar-denominated
composite reference rate for the price of bitcoin
based on the volume-weighted price at trading
venues selected by TradeBlock, Inc. (‘‘Index
Provider’’). According to the Registration Statement,
Digital Currency Group, Inc. owns approximately
2.4% of the Index Provider’s voting equity and
warrants representing approximately 1.4% of the
Index Provider’s voting equity. See ‘‘Bitcoin Index
Price’’ below.
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to trade, buy and sell bitcoins based on
bid-ask trading (‘‘Bitcoin Exchanges’’) or
in individual end-user-to-end-user
transactions in the over-the-counter
(‘‘OTC’’) markets.
The Blockchain is comprised of a
digital file, downloaded and stored in a
decentralized manner on the computer
of each Bitcoin Network user. The file
includes all ‘‘blocks’’ that have been
solved by miners and is updated to
include new blocks as they are solved.
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. Because 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 on
the Bitcoin Network.
Bitcoins are ‘‘stored’’ or reflected on
the Blockchain. The Blockchain records
the transaction history of all bitcoins in
existence and, through the transparent
reporting of transactions, allows the
Bitcoin Network to verify the
association of each bitcoin with the
digital wallet that owns them. The
Bitcoin Network and bitcoin software
programs can interpret the Blockchain
to determine the exact bitcoin balance of
any digital wallet listed in the
Blockchain as having taken part in a
transaction on the Bitcoin Network.
In order to own, transfer or use
bitcoins, a person generally must have
internet access to connect to the Bitcoin
Network. Bitcoin transactions between
parties occur very rapidly (typically less
than one minute) and 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 doublespending a single bitcoin, each
transaction is recorded, time stamped
and publicly displayed in a block in the
publicly available Blockchain. Thus, the
Bitcoin Network provides confirmation
against double-spending by
memorializing every transaction in the
Blockchain, which is publicly accessible
and downloaded in part or in whole by
all users’ Bitcoin Network software
programs as described above.
The Bitcoin Network is decentralized
and does not rely on either
governmental authorities or financial
institutions to create, transmit or
determine the value of bitcoins. Rather,
bitcoins are created and allocated by the
Bitcoin Network protocol through a
‘‘mining’’ process subject to a strict,
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well-known issuance schedule. The
value of bitcoins is determined by the
supply of and demand for bitcoins in
the bitcoin exchange market (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
software and bitcoins can be transferred
without the involvement of
intermediaries or third parties, there are
little or no transaction costs in direct
peer-to-peer transactions on the Bitcoin
Network. Third-party service providers
such as Bitcoin Exchanges and bitcoin
third-party payment processing services
may charge significant fees for
processing transactions and for
converting, or facilitating the conversion
of, bitcoins to or from fiat currency.
‘‘Off-Blockchain transactions’’ involve
the transfer of control over or ownership
of a specific digital wallet holding
bitcoins or of the reallocation of
ownership of certain bitcoins in a
pooled-ownership digital wallet, such as
a digital wallet owned by a Bitcoin
Exchange. Off-Blockchain transactions
are not truly bitcoin transactions in that
they do not involve the transfer of
transaction data on the Bitcoin Network
and do not reflect a movement of
bitcoins between addresses recorded in
the Blockchain. Information and data
regarding Off-Blockchain transactions
are generally not publicly available in
contrast to ‘‘true’’ bitcoin transactions,
which are publicly recorded on the
Blockchain. Off-Blockchain transactions
are subject to risks as any such transfer
of bitcoin ownership is not protected by
the protocol behind the Bitcoin Network
or recorded in and validated through the
Blockchain mechanism.
Overview of Bitcoin Transactions
Prior to engaging in bitcoin
transactions, a user must first obtain a
digital bitcoin ‘‘wallet’’ (analogous to a
bitcoin account) in which to store
bitcoins. A wallet can be obtained,
among other ways, through an opensource software program that generates
bitcoin addresses and enables users to
engage in the transfer of bitcoins with
other users. A user may install a bitcoin
software program on a computer or
mobile device that will generate a
bitcoin wallet or, alternatively, a user
may retain a third party to create a
digital wallet to be used for the same
purpose. There is no limit on the
number of digital wallets a user can
have, and each such wallet includes one
or more unique addresses and a
verification system for each address
consisting of a ‘‘public key’’ and a
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‘‘private key,’’ which are
mathematically related.
In a typical bitcoin transaction, the
bitcoin recipient must provide the
spending party with the recipient’s
digital wallet address, an identifying
series of 27 to 34 alphanumeric
characters that represents the wallet’s
routing number on the Bitcoin Network
and allows the Blockchain to record the
sending of bitcoins to the recipient’s
wallet. 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. This activity is analogous
to a recipient providing an address in
wire instructions to the payor so that
cash may be wired to the recipient’s
account.
After the provision of the receiving
wallet’s digital address, the spending
party must enter the address into its
bitcoin software program along with the
number of bitcoins to be sent. The
number of bitcoins to be sent will
typically be agreed upon between the
two parties based on a set number of
bitcoins or an agreed upon conversion
of the value of fiat currency to bitcoins.
Most bitcoin software 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
software programs, but, when they are
included, they are paid by the spending
party on top of the specified amount of
bitcoins being sent in the transaction.
Transaction fees, if any, are typically a
fractional number of bitcoins (for
example, 0.005 or 0.0005 bitcoins) and
are automatically transferred by the
Bitcoin Network to the bitcoin miner
that solves and adds the block recording
the spending transaction on the
Blockchain.
After the entry of the receiving
wallet’s address, the number of bitcoins
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 software
program. The data packet includes data
showing (i) the receiving wallet’s
address, (ii) the number of bitcoins
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
bitcoins being spent and record the flow
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of bitcoins from one transaction to the
next transaction in which the bitcoins
are spent. The digital signature exposes
the spending party’s digital wallet
address and public key to the Bitcoin
Network, though, for the receiving
party, only its digital wallet address is
revealed. The spending party’s bitcoin
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
miners within the course of less than
one minute.
Bitcoin 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) all 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 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.
Bitcoin transactions that are
micropayments (typically, less than 0.01
bitcoins) and that do not include
transaction fees to miners are currently
deprioritized for recording, meaning
that, depending on bitcoin miner
policies, these transactions may take
longer to record than typical
transactions if the transactions do not
include a transaction fee. Additionally,
transactions initiated by spending
wallets with poor connections to the
Bitcoin Network (i.e., few or poor
quality connections to nodes or
‘‘supernodes’’ that relay transaction
data) may be delayed in the propagation
of their transaction data and, therefore,
transaction recording on the Blockchain.
Finally, to the extent that a miner
chooses to limit the transactions it
includes in a solved block (whether by
the payment of transaction fees or
otherwise), a transaction not meeting
that miner’s criteria will not be
included.
To the extent that a transaction has
not yet been recorded, there is a greater
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chance that the spending wallet can
double-spend the bitcoins sent in the
original transaction. If the next block
solved is by an honest miner not
involved in the attempt to double-spend
bitcoin and if the transaction data for
both the original and double-spend
transactions have been propagated onto
the Bitcoin Network, the transaction
that is received with the earlier time
stamp will be recorded by the solving
miner, regardless of whether the doublespending transaction includes a larger
transaction fee. If the double-spend
transaction propagates to the solving
miner and the original transaction has
not, then the double-spending has a
greater chance of success. As a result of
the high difficulty in successfully
initiating a double-spend without the
assistance of a coordinated attack, the
probability of success for a doublespend transaction attempt is limited.
Upon the addition of a block included
in the Blockchain, the bitcoin 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
digital wallet, completing the bitcoin
transaction. Typically, bitcoin software
programs will automatically check for
and display additional confirmations of
six or more blocks in the Blockchain.
To ensure the integrity of bitcoin
transactions from the recipient’s side
(i.e., to prevent double-spending by a
payor), every bitcoin transaction is
broadcast to the Bitcoin Network and
recorded in the Blockchain through the
mining process, which time-stamps the
transaction and memorializes the
change in the ownership of the
bitcoin(s) transferred. Adding a block to
the Blockchain requires bitcoin miners
to exert significant computational effort
to verify it is a valid transaction.
According to the Registration Statement,
requiring this computational effort, or
‘‘proof of work,’’ prevents a malicious
actor from either adding fraudulent
blocks to generate bitcoins (i.e.,
counterfeit bitcoins) or overwriting
existing valid blocks to reverse its prior
transactions.
A transaction in bitcoins 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 the bitcoin
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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 are required
until funds from the transferor are
considered valid. However, statistically
speaking, a transaction is virtually final
after six confirmations as it would be
extremely difficult to challenge the
validity of the transaction at that point.
According to the Registration
Statement, at this point in the evolution
of the Bitcoin Network, bitcoin
transactions are considered irreversible.
Once a transaction appears in the
Blockchain, no one has the authority to
reverse it. If someone were to attempt to
undo a past transaction in a block
recorded on the Blockchain, such
individual would have to exert
tremendous processing power in a series
of complicated transactions that may
not be achieved at this point in the
Bitcoin Network’s development.
Bitcoin Security and Storage
According to the Registration
Statement, all transactions on the
Bitcoin Network are secured using
public-key cryptography, a technique
which underpins many online
transactions. Public-key cryptography
works by generating two mathematically
related keys (one a public key and the
other a private key). One of these, the
private key, is retained in the
individual’s digital wallet and the other
key is made public and serves as the
address to which bitcoin(s) can be
transferred and from which money can
be transferred by the owner of the
bitcoin wallet. In the case of bitcoin
transactions, the public key is an
address (a string of letters and numbers)
that is used to encode payments, which
can then only be retrieved with its
associated private key, which is used to
authorize the transaction. In other
words, the payor uses his private key to
approve any transfers to a recipient’s
account. Users on the Bitcoin Network
can confirm that the user signed the
transaction with the appropriate private
key, but cannot reverse engineer the
private key from the signature.
According to the Registration
Statement, the Custodian is responsible
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for keeping the private key or keys that
provide access to the Trust’s digital
wallets and vaults secure. Pursuant to a
request from the Sponsor or the Trust,
the Custodian will establish and
maintain an account with one or more
wallets (‘‘Wallet Account’’) and one or
more cold-storage vault accounts
(‘‘Vault Account’’ and, together with the
Wallet Account and any subaccounts
associated therewith, the ‘‘Bitcoin
Account’’) in the name of the Sponsor
and the Trust. The Custodian deposits
and withdraws bitcoins to and from the
Bitcoin Account at the instruction of the
Sponsor. The Custodian is responsible
for administering the Bitcoin Account.
The Bitcoin Account is maintained by
the Custodian and cold storage
mechanisms are used for the Vault
Account by the Custodian. Each digital
wallet of the Trust may be accessed
using its corresponding private key. The
Custodian’s custodial operations
maintain custody of the private keys
that have been deposited in cold storage
at its various vaulting premises across
the United States, Europe (including
Switzerland) and South America.
According to the Registration Statement,
the locations of the vaulting premises
change regularly and are kept
confidential by the Custodian for
security purposes.
The term ‘‘cold storage’’ refers to a
safeguarding method by which the
private keys corresponding to bitcoins
stored on a digital wallet are removed
from any computers actively connected
to the internet. Cold storage of private
keys may involve keeping such wallet
on a non-networked computer or
electronic device or storing the public
key and private keys relating to the
digital wallet on a storage device (for
example, a USB thumb drive) or printed
medium (for example, papyrus or paper)
and deleting the digital wallet from all
computers. According to the
Registration Statement, most of the
private keys in the Wallet Account and
all of the private keys in the Vault
Account are kept in cold storage. A
digital wallet may receive deposits of
bitcoins but may not send bitcoins
without use of the bitcoins’
corresponding private keys. In order to
send bitcoin from a digital wallet in
which the private keys are kept in cold
storage, either the private keys must be
retrieved from cold storage and entered
into a bitcoin software program to sign
the transaction, or the unsigned
transaction must be sent to the ‘‘cold’’
server in which the private keys are
held for signature by the private keys.
At that point, the user of the digital
wallet can transfer its bitcoins.
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According to the Registration
Statement, the Custodian is the
custodian of the Trust’s private keys and
will utilize certain security procedures
such as algorithms, codes, passwords,
encryption or telephone call-backs in
the administration and operation of the
Trust and the safekeeping of its bitcoins
and private keys. The Custodian has
created a Vault Account for the Trust
assets in which private keys are placed
in cold storage. According to the
Registration Statement, the Custodian
segregates the private keys stored with
it from any other assets it holds or holds
for others.
The Custodian is authorized to accept,
on behalf of the Trust, deposits of
bitcoins from ‘‘Authorized Participant
Self-Administered Accounts’’ (as
defined below) or ‘‘Liquidity Provider
Accounts’’ (as defined below), as
applicable, held with the Custodian and
transfer such bitcoins into the Bitcoin
Account. Deposits of bitcoins will be
immediately available to the Trust to the
extent such bitcoins have not already
been transferred to the Vault Account.
Bitcoins transferred to the Bitcoin
Account will be directly deposited into
digital wallets for which the keys are
already in cold storage.
According to the Registration
Statement, if bitcoins need to be
withdrawn from the Trust in connection
with a redemption, the Custodian will
ensure that the private keys to those
bitcoins sign the withdrawal
transaction.
Bitcoin Mining and Creation of New
Bitcoins
According to the Registration
Statement, the process by which
bitcoins are created and bitcoin
transactions are verified is called
mining.10 To begin mining, a miner can
download and run a mining client,
which, like regular Bitcoin Network
software programs, turns the user’s
computer into a ‘‘node’’ on the Bitcoin
Network that validates blocks. Bitcoin
transactions are recorded in new blocks
that are added to the Blockchain and
new bitcoins being issued to the miners.
Miners, through the use of the bitcoin
software program, 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.
In order to add blocks to the
Blockchain, a miner must map an input
data set (i.e., the Blockchain, plus a
10 None of the Trust, Sponsor or Genesis currently
participates in mining or has plans to engage in
mining in the future.
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block of the most recent Bitcoin
Network transactions and an arbitrary
number called a ‘‘nonce’’) to a desired
output data set of a predetermined
length, i.e., a hash value, using the
SHA–256 cryptographic hash algorithm.
Each unique block can only be solved
and added to the Blockchain by one
miner; therefore, all individual miners
and mining pools on the Bitcoin
Network are engaged in a competitive
process of constantly increasing their
computing power to improve their
likelihood of solving for new blocks.
According to the Registration Statement,
as more miners join the Bitcoin Network
and its processing power increases, the
Bitcoin Network adjusts the complexity
of the block-solving equation to
maintain a predetermined pace of
adding a new block to the Blockchain
approximately every ten minutes.
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. Miners that are
successful in adding a block to the
Blockchain are automatically awarded
bitcoins for their effort plus any
transaction fees paid by transferors
whose transactions are recorded in the
block. This reward system is the method
by which new bitcoins enter into
circulation to the public.
The supply of new bitcoins is
mathematically controlled in a manner
so that the number of bitcoins grows at
a limited rate pursuant to a pre-set
schedule. The number of bitcoins
awarded for solving a new block is
automatically halved after every 210,000
blocks are added to the Blockchain.
Recently, in July 2016, the fixed reward
for solving a new block decreased from
25 bitcoins to 12.5 bitcoins per block
and this is expected to decrease by half
to become 6.25 bitcoins after the next
210,000 blocks have entered the Bitcoin
Network, which is expected to be July
2020. This deliberately controlled rate
of bitcoin creation means that the
number of bitcoins in existence will
increase at a controlled rate until the
number of bitcoins in existence reaches
the pre-determined 21 million bitcoins.
According to the Registration Statement,
as of December 30, 2016, approximately
16.08 million bitcoins have been mined,
and estimates of when the 21 million
bitcoin limitation will be reached range
up to the year 2140.
Bitcoin Exchanges
According to the Registration
Statement, due to the peer-to-peer
framework of the Bitcoin Network and
the protocols thereunder, transferors
and recipients of bitcoins are able to
determine the value of the bitcoins
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transferred by mutual agreement or
barter with respect to their transactions.
As a result, the most common means of
determining the value of a bitcoin is by
surveying one or more Bitcoin
Exchanges where bitcoins are bought,
sold and traded. On each Bitcoin
Exchange, bitcoins are traded with
publicly disclosed valuations for each
transaction, measured by one or more
fiat currencies such as the U.S. dollar or
the Chinese yuan. According to the
Registration Statement, while a
significant volume of bitcoin-to-fiatcurrency exchange is denominated in
currency other than U.S. dollars,
movements in pricing on these
exchanges are generally in line with
U.S. dollar-denominated exchanges.
According to the Registration Statement,
for example, volume on the selfreported, unregulated exchanges located
in China makes up approximately 95%
of the global trade volume in bitcoins.
According to the Registration Statement,
similar to other currency pairs, such as
euro to bitcoin, movements in pricing
on the Chinese exchanges are generally
in line with U.S. dollar-denominated
exchanges. For example, according to
the Registration Statement, based on
data from the Index Provider, from May
10, 2015 to December 30, 2016, the 4:00
p.m., Eastern Time (‘‘E.T.’’), spot price
on the three primary Chinese yuandenominated exchanges (BTC China,
Huobi and OKCoin) differed from the
‘‘Bitcoin Index Price’’ (as defined below)
by only 1.5% on average.
According to the Registration
Statement, bitcoin price indexes have
also been developed by a number of
service providers in the bitcoin space.
For example, Coindesk, a digital
currency content provider and whollyowned subsidiary of Digital Currency
Group, launched a proprietary bitcoin
price index in September 2013, and
bitcoinaverage.com provides an average
of all bitcoin prices on several Bitcoin
Exchanges. The Sponsor uses the Index
calculated by the Index Provider to
determine the ‘‘Bitcoin Index Price,’’ as
described below under ‘‘Bitcoin Index
Price.’’
Currently, there are numerous Bitcoin
Exchanges operating worldwide in a
number of currency pairs including,
among others, bitcoin to U.S. dollar,
bitcoin to euro, bitcoin to Chinese yuan
and bitcoin to Indian rupee. According
to the Registration Statement, most of
the data with respect to prevailing
valuations of bitcoin come from such
Bitcoin Exchanges. These exchanges
include established exchanges such as
Bitstamp, GDAX and Bitfinex, which
provide a number of options for buying
and selling bitcoins. Among the Bitcoin
Exchanges eligible for inclusion in the
Index, domicile, regulation and legal
compliance varies.
The table below sets forth (1) the
aggregate number of bitcoin trades made
on the nine largest U.S. dollardenominated Bitcoin Exchanges by
trade volume from May 10, 2015 to
December 30, 2016 and (2) the market
share of trade volume of each such
Bitcoin Exchange.
Volume
(BTC) 12,13
Nine Largest U.S. Dollar-Denominated Bitcoin Exchanges by Trade Volume 11
Bitcoin Exchanges included in the Index as of December 30, 2016
Bitfinex .....................................................................................................................................................................
OKCoin International ...............................................................................................................................................
BitStamp ..................................................................................................................................................................
GDAX (formerly known as Coinbase Exchange) ....................................................................................................
ItBit ...........................................................................................................................................................................
Total U.S. dollar-denominated trade volume included in the Index as of December 30, 2016 ......................
Bitcoin Exchanges not included in the Index as of December 30, 2016
BTC–E .....................................................................................................................................................................
LakeBTC ..................................................................................................................................................................
LocalBitcoins ............................................................................................................................................................
Gemini ......................................................................................................................................................................
Total U.S. dollar-denominated trade volume not included in the Index as of December 30, 2016 .......................
Total U.S. Dollar-BTC trade volume ........................................................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
Information regarding each Bitcoin
Exchange may be found, where
available, on the Web sites for such
Bitcoin Exchanges, among other places.
11 Based on amounts reported by the exchanges,
the Sponsor estimates that the U.S. dollardenominated Bitcoin Exchanges listed in this table
account for approximately 3% of the aggregate
global trade volume in bitcoins for all currency
pairs traded on Bitcoin Exchanges. From May 10,
2015 to December 30, 2016, the three primary
Chinese Bitcoin Exchanges, BTCC, Huobi and
OKCoin Exchange China, reported a trade volume
of over 1.26 billion bitcoins.
12 Reflects the aggregate number of trades of U.S.
dollars for bitcoin on each named Bitcoin Exchange
from May 10, 2015 to December 30, 2016.
13 As of May 10, 2015, Kraken EUR (U.S. dollar
equivalent) was a component of the Index but was
removed from the Index on May 11, 2015. The
transactions on Kraken EUR were not a material
component to the Index.
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Off-Exchange Bitcoin Trading
According to the Registration
Statement, in addition to open online
Bitcoin Exchanges, there are ‘‘dark
pools,’’ which are bitcoin trading
platforms that do not publicly report
bitcoin trade data. Market participants
have the ability to execute large block
trades on a dark pool without revealing
those trades and the related price data
to the public bitcoin exchange market,
although any withdrawal from or
deposit to a dark pool platform may be
recorded on the Blockchain.14
14 According to the Registration Statement,
Genesis operates an OTC trading desk that buys and
sells large blocks of bitcoins without publicly
reporting trade data. Informal dark pools are
currently believed to exist, particularly among
wholesale buyers of bitcoin and bitcoin mining
groups that obtain large supplies of bitcoin through
mining. Such informal dark pools function as a
result of the peer-to-peer nature of the Bitcoin
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10091
Market share
(%)
12,333,460
6,200,571
5,768,897
4,325,755
3,026,029
31,654,711
30.89%
15.53
14.45
10.83
7.58
79.28
4,157,855
2,709,627
806,194
597,983
8,271,689
39,926,401
10.41
6.79
2.02
1.50
20.72
100.00
Bitcoin may also be traded OTC. OTC
trades are not required to be reported
through any facilities. However,
according to the Sponsor, based on
publicly available information, OTC
trading may not represent a material
volume of overall bitcoin trading. The
OTC markets operate in a similar
manner to dark pools. However,
typically, OTC trades are institutional
size block transactions (though on a
much lower scale relative to the size of
block transactions for other
commodities or industries) or
transactions made on behalf of high-net
worth individuals.
According to the Sponsor, some OTC
intermediaries that facilitate OTC
trading, such as Genesis and itBit,
provide summary statistics on an ad hoc
Network, which allows direct transactions between
any seller and buyer.
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basis. For instance, in April 2016, itBit
reported that it had traded
approximately 25,500 bitcoins, valued
at approximately $10.3 million U.S.
dollars, which would account for
roughly 1.81% of the bitcoin trading
volume across the nine highest volume
U.S. dollar-denominated exchanges. For
the fourth quarter of 2015, Genesis
reported trading approximately 125,000
bitcoins, valued at approximately $50
million U.S. dollars. According to the
Sponsor, the reported Genesis volume
would comprise roughly 1.17% of the
trading volume across the nine highest
volume U.S. dollar-denominated
exchanges during that time period.
Bitcoin Price Volatility 15
sradovich on DSK3GMQ082PROD with NOTICES
According to the Sponsor, volatility in
bitcoin was pronounced in its earliest
days through late 2013. According to the
Sponsor, during that time period, almost
all bitcoin trading activity centered on
two exchanges, which centralized the
global order book and led to large price
movements. Since then, the bitcoin
trading environment has matured with
the development of dozens of exchanges
around the world, resulting in more
transparency with respect to bitcoin
pricing, in increased trading volume
and in greater liquidity. Additionally,
the globalization of bitcoin exchanges,
ranging from those domiciled in the
United States to other areas of the globe,
such as China, has led to development
of many bitcoin currency pairs,
garnering more market participants.
Today, the largest trading pairs are
bitcoin to Chinese yuan, bitcoin to U.S.
dollars and bitcoin to euro.
Bitcoin price volatility has declined
since the inception of bitcoin.
According to the Sponsor and as
detailed in Exhibit 3, recent figures,
such as the three and six month
volatility charts, show that the volatility
of bitcoin is now at levels lower than
those seen for crude oil and natural gas
and comparable to those seen for metals
like silver, platinum and copper.
Moreover, the trailing one-year volatility
of bitcoin is approximately in line with
that of crude oil and natural gas and
continues to trend downward.
According to the Sponsor, while
bitcoin price volatility has declined and
its volatility approximately corresponds
to that of certain commodities over a
15 Attached as Exhibit 3 hereto are tables relating
to: (i) rolling 3-month volatility of bitcoin and other
commodities; (ii) average 3-month correlation of
bitcoin to other commodities; (iii) rolling 6-month
volatility of bitcoin and other commodities; (iv)
average 6-month correlation of bitcoin to other
commodities; (v) rolling 12-month volatility of
bitcoin and other commodities; and (vi) average 12month correlation of bitcoin to other commodities.
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one-year timeframe, the volatility of
bitcoin is not correlated with the
volatility of other commodities over
shorter- (i.e., three to six months) and
longer-term (i.e., longer than one year)
investment horizons, reinforcing the
important role bitcoin can play as a
diversifying asset in an investor’s
portfolio.
Demand for Bitcoin
According to the Sponsor, demand for
bitcoins is based on several factors.
Demand may be based on speculation
regarding the future appreciation of the
value of bitcoins. Continuing
development of various applications
utilizing the Bitcoin Network for uses
such as remittance, payment for goods
and services, recording transfer of
ownership of certain assets and
settlement of both financial and nonfinancial assets have led many investors
to speculate that the price of bitcoins
will appreciate as use of these
applications increases. As additional
applications are developed, demand
may increase. Additionally, some
investors have developed analogs
between bitcoin and other scarce assets
such as gold. Bitcoin shares many of the
same characteristics as gold, e.g.,
scarcity, but has superior utility,
portability and divisibility. If investors
shift a portion of their asset allocations
from gold to bitcoin, the demand for
bitcoins could increase. Furthermore,
bitcoins are used in day-to-day
transactions for the purchase of goods
and services. As additional merchants
continue to accept bitcoins for the
purchase of goods and services, demand
for bitcoins may increase. Relatedly, as
merchants accept bitcoins for sales of
goods and services, supply of bitcoins
could increase on the exchange markets
as these merchants look to liquidate
their bitcoin for fiat currencies.
Bitcoin Index Price
The ‘‘Bitcoin Index Price’’ is the U.S.
dollar value of a bitcoin as represented
by the Index, calculated at 4:00 p.m.,
E.T., on each business day. If the Index
becomes unavailable, or if the Sponsor
determines in good faith that the Index
does not reflect an accurate bitcoin
value, then the Sponsor will, on a best
efforts basis, contact the Index Provider
in order to obtain the Bitcoin Index
Price. If after such contact the Index
remains unavailable or the Sponsor
continues to believe in good faith that
the Index does not reflect an accurate
bitcoin value, then the Administrator
will utilize the following cascading set
of rules to calculate the Bitcoin Index
Price. For the avoidance of doubt, the
Sponsor will employ the below rules
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sequentially and in the order presented
below, should one or more specific
rule(s) fail:
(i) Bitcoin Index Price = The price set
by the Index as of 4:00 p.m., E.T., on the
valuation date. According to the
Registration Statement, the Index is a
U.S. dollar-denominated composite
reference rate for the price of bitcoin
based on the volume-weighted price at
trading venues selected by the Index
Provider. Trading venues used to
calculate the Index may include Bitcoin
Exchanges, OTC markets or derivative
platforms. According to the Registration
Statement, to ensure that the Index
Provider’s trading venue selection
process is impartial, the Index Provider
considers depth of liquidity, compliance
with applicable legal and regulatory
requirements, data availability, U.S.
domicile and acceptance of U.S. dollar
deposits. The Index Provider conducts a
quarterly review of these criteria.
According to the Registration
Statement, as of the date of the
Registration Statement, the eligible
Bitcoin Exchanges selected by the Index
Provider include Bitfinex, Bitstamp,
GDAX (formerly known as Coinbase
Exchange), itBit and OKCoin
International. Bitfinex is a trading
platform based in Hong Kong for digital
currencies, including bitcoin, that offers
many advanced features such as margin
and exchange trading and margin
funding. Bitstamp is a European Unionbased bitcoin marketplace that enables
people from all around the world to
safely buy and sell bitcoins. GDAX,
based in San Francisco, California, is a
digital currency exchange. itBit is a New
York City-based, regulated global
exchange that offers retail and
institutional investors a powerful
platform to buy and sell bitcoin.
OKCoin International is a worldwide
digital currency trading platform that is
based in Singapore.
According to the Registration
Statement, in the calculation of the
Bitcoin Index Price, the Index Provider
cleanses the trade data and compiles it
in such a manner as to algorithmically
reduce the impact of anomalistic or
manipulative trading. This is
accomplished by adjusting the weight of
each input based on price deviation
relative to the observable set of data for
the relevant trading venue, as well as
recent and long-term trading volume at
each venue relative to the observable set
for the relevant trading venues. The
Index Provider reduces the weighting of
data inputs as they get further from the
mean price across the trading venues
and ultimately excludes any trades with
a price that deviates beyond a certain
predetermined threshold level from the
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mean. In addition, the Index groups
‘‘trade bursts’’ (i.e., a group of small-size
trades in a short period of time,
typically under one second) and
movements during off-peak trading
hours on any given venue into single
data inputs, which reduces the
potentially erratic price movements
caused by small, individual orders. The
Index Provider formally reevaluates the
weighting algorithm quarterly, but
maintains discretion to change the way
in which the Index is calculated based
on its periodic review or in extreme
circumstances. The precise formula
underlying the Index is proprietary.
According to the Registration
Statement, the Index Provider does not
currently include data from OTC
markets or derivative platforms. OTC
data is not currently included because
of the potential for trades to include a
significant premium or discount paid
for larger liquidity, which creates an
uneven comparison relative to more
active markets. There is also a higher
potential for OTC transactions to not be
arms-length and thus not be
representative of a true market price.
Bitcoin derivative markets are also not
currently included as the markets
remain relatively thin. According to the
Registration Statement, the Index
Provider will consider International
Organization of Securities Commissions
(‘‘IOSCO’’) principles for financial
benchmarks and the management of
trading venues of bitcoin derivatives
when considering inclusion of OTC or
derivative platform data in the future.
According to the Registration Statement,
the Index Provider and Genesis, a
Liquidity Provider and affiliate of the
Trust, have entered into a platform
license agreement under which the
Index Provider licenses its OTC market
platform software to Genesis. Genesis
uses the software to operate its bitcoin
trading desk, which Genesis relies upon
as a Liquidity Provider. Under the
agreement, Genesis has agreed to
provide its bitcoin trade data to the
Index Provider. Consequently, it is
possible that the Index Provider may
decide in the future to include Genesis’s
OTC trading desk as a trading venue
that is included in the Index. However,
currently, the Index Provider does not
include data from the Genesis OTC
trading desk (or any other OTC
markets).
According to the Registration
Statement, to calculate the Bitcoin Index
Price, the weighting algorithm is
applied to the price and volume of all
inputs for the immediately preceding
24-hour period as of 4:00 p.m., E.T., on
the valuation date. According to the
Registration Statement, to measure
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volume data and trading halts, the Index
Provider monitors trading activity and
regards as eligible those Bitcoin
Exchanges that it determines represent a
substantial portion of U.S. dollardenominated trading over a sustained
period on a platform without a
significant history of trading
disruptions. The Index Provider
maintains a monitoring system that tests
for these criteria on an ongoing basis.
The description of the Index is based
on information publicly available at the
Index Provider’s Web site at https://
tradeblock.com/markets/index/. The
Index spot price will be available on the
Index Provider’s Web site and/or from
one or more major market data vendors.
If the Index becomes unavailable, or
if the Sponsor determines in good faith
that the Index does not reflect an
accurate bitcoin value, then the Sponsor
will, on a best efforts basis, contact the
Index Provider to obtain the Bitcoin
Index Price directly from the Index
Provider. If after such contact the Index
remains unavailable or the Sponsor
continues to believe in good faith that
the Index does not reflect an accurate
bitcoin value, then the Sponsor will
employ the next rule to determine the
Bitcoin Index Price.
(ii) Bitcoin Index Price = The volumeweighted average bitcoin price for the
immediately preceding 24-hour period
as of 4:00 p.m., E.T., on the valuation
date as calculated based upon the
volume-weighted average bitcoin prices
of the Major Bitcoin Exchanges as
published by an alternative third party’s
public data feed that the Sponsor
believes is accurately and reliably
providing market data (i.e., is receiving
up-to-date and timely market data from
constituent exchanges) (‘‘Second
Source’’). ‘‘Major Bitcoin Exchanges’’
are those Bitcoin Exchanges that are
online, trade on a 24-hour basis and
make transaction price and volume data
publicly available. Subject to the next
sentence, if the Second Source becomes
unavailable (for example, data sources
from the Second Source for bitcoin
prices become unavailable, unwieldy or
otherwise impractical for use), or if the
Sponsor determines in good faith that
the Second Source does not reflect an
accurate bitcoin value, then the Sponsor
will, on a best efforts basis, contact the
Second Source in an attempt to obtain
the relevant data. If after such contact
the Second Source remains unavailable
or the Sponsor continues to believe in
good faith that the Second Source does
not reflect an accurate bitcoin price,
then the Sponsor will employ the next
rule to determine the Bitcoin Index
Price.
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10093
(iii) Bitcoin Index Price = The
volume-weighted average bitcoin price
as calculated by dividing (a) the U.S.
dollar value of the bitcoin transactions
on the Major Bitcoin Exchanges by (b)
the total number of bitcoins traded on
the Major Bitcoin Exchanges, in each
case for the 24-hour period from 4:00
p.m., E.T. (or as soon as practicable
thereafter), on the business day prior to
the valuation date to 4:00 p.m., E.T. (or
as soon as practicable thereafter), on the
valuation date as published by a third
party’s public data feed that the Sponsor
believes is accurately and reliably
providing market data (i.e., is receiving
up-to-date and timely market data from
eligible exchanges), subject to the
requirement that such data is calculated
based upon a volume-weighted average
bitcoin price obtained from the Major
Bitcoin Exchanges (‘‘Third Source’’).
Subject to the next sentence, if the Third
Source becomes unavailable (for
example, data sources from the Third
Source become unavailable, unwieldy
or otherwise impractical for use), or if
the Sponsor determines in good faith
that the Third Source does not reflect an
accurate bitcoin price, then the Sponsor
will, on a best efforts basis, contact the
Third Source in an attempt to obtain the
relevant data. If after such contact the
Third Source remains unavailable or the
Sponsor continues to believe in good
faith that the Third Source does not
reflect an accurate bitcoin value then
the Sponsor will employ the next rule
to determine the Bitcoin Index Price.
(iv) Bitcoin Index Price = The volumeweighted average bitcoin price as
calculated by dividing (a) the U.S. dollar
value of the bitcoin transactions on the
Bitcoin Benchmark Exchanges by (b) the
total number of bitcoins traded on the
Bitcoin Benchmark Exchanges, in each
case for the 24-hour period from 4:00
p.m., E.T. (or as soon as practicable
thereafter), on the business day prior to
the valuation date to 4:00 p.m., E.T. (or
as soon as practicable thereafter), on the
valuation date. A ‘‘Bitcoin Benchmark
Exchange’’ is a Bitcoin Exchange that
represents at least 25% of the aggregate
U.S. dollar-denominated trading volume
of the bitcoin market during the last 30
consecutive calendar days and that to
the knowledge of the Sponsor is in
substantial compliance with the laws,
rules and regulations, including any
anti-money laundering (‘‘AML’’) and
know-your-customer (‘‘KYC’’)
procedures, of such Bitcoin Exchange’s
applicable jurisdiction; provided that if
there are fewer than three such Bitcoin
Exchanges, then the Bitcoin Benchmark
Exchanges will include such Bitcoin
Exchange or Bitcoin Exchanges that
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meet the above-described requirements
as well as one or more additional
Bitcoin Exchanges, selected by the
Sponsor, that have had monthly trading
volume of at least 50,000 bitcoins
during the last 30 consecutive calendar
days and that to the knowledge of the
Sponsor is in substantial compliance
with the laws, rules and regulations,
including any AML and KYC
procedures, of such Bitcoin Exchange’s
applicable jurisdiction.
The Sponsor will review the
composition of the exchanges that
comprise the Bitcoin Benchmark
Exchanges at the beginning of each
month, or more frequently if necessary,
in order to ensure the accuracy of its
composition. Subject to the next
sentence, if one or more of the Bitcoin
Benchmark Exchanges become
unavailable (for example, data sources
from the Bitcoin Benchmark Exchanges
of bitcoin prices become unavailable,
unwieldy or otherwise impractical for
use), or if the Sponsor determines in
good faith that the Bitcoin Benchmark
Exchange does not reflect an accurate
bitcoin value, then the Sponsor will, on
a best efforts basis, contact the Bitcoin
Benchmark Exchange that is
experiencing the service outages in an
attempt to obtain the relevant data. If
after such contact one or more of the
Bitcoin Benchmark Exchanges remain
unavailable or the Sponsor continues to
believe in good faith that the Bitcoin
Benchmark Exchange does not reflect an
accurate bitcoin price, then the Sponsor
will employ the next rule to determine
the Bitcoin Index Price.
(v) Bitcoin Index Price = The Sponsor
will use its best judgment to determine
a good faith estimate of the Bitcoin
Index Price.
Data used for the above calculation of
the Bitcoin Index Price is gathered by
the Administrator or its delegate who
calculates the Bitcoin Index Price each
business day as of 4:00 p.m., E.T., or as
soon thereafter as practicable. The
Administrator will disseminate the
Bitcoin Index Price each business day.
The Index Provider may change the
trading venues that are used to calculate
the Index, or otherwise change the way
in which the Index is calculated at any
time. The Index Provider does not have
any obligation to consider the interests
of the Sponsor, the Administrator, the
Trust, the shareholders or anyone else
in connection with such changes. The
Index Provider is not required to
publicize or explain the changes, or to
alert the Sponsor or the Administrator
to such changes. The Index Provider
will consider IOSCO principles for
financial benchmarks and the
management of trading venues of
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bitcoin derivatives when considering
inclusion of OTC or derivative platform
data in the future.
Bitcoin Holdings
According to the Registration
Statement, the Trust’s assets will consist
solely of bitcoin. The Administrator will
determine the value of the Trust for
operational purposes (herein referred to
as ‘‘Bitcoin Holdings’’), which is the
aggregate U.S. dollar value, based on the
Bitcoin Index Price, of the Trust’s
bitcoins less its liabilities, on each day
the Shares trade on the Exchange as of
4:00 p.m. E.T., or as soon thereafter as
practicable.16 The Administrator will
also determine the Bitcoin Holdings per
Share, which equals the Trust’s Bitcoin
Holdings divided by the number of
outstanding Shares. The Sponsor will
publish the Bitcoin Holdings and the
Bitcoin Holdings per Share each
business day at 4:00 p.m., E.T., or as
soon thereafter as practicable at the
Trust’s Web site at https://grayscale.co/
bitcoin-investment-trust/#marketperformance.
To calculate the Bitcoin Holdings, the
Administrator will determine the
Bitcoin Index Price and multiply the
Bitcoin Index Price by the Trust’s
aggregate number of bitcoins owned by
the Trust as of 4:00 p.m., E.T., on the
immediately preceding day. The
Administrator will add the U.S. dollar
value of any bitcoins receivable under
pending creation ‘‘Baskets’’ (as defined
below), if any, determined by
multiplying the number of such creation
Baskets by the Bitcoin Basket Amount
and then multiplying such product by
the Bitcoin Index Price. The
Administrator will subtract (i) the U.S.
dollar value of the bitcoins constituting
any accrued but unpaid fees, (ii) the
U.S. dollar value of the bitcoins to be
distributed under pending redemption
Baskets, determined by multiplying the
number of such redemption Baskets by
the Bitcoin Basket Amount and then
multiplying such product by the Bitcoin
Index Price and (iii) extraordinary legal
fees and certain expenses of the Trust.
The Sponsor will publish the Bitcoin
Index Price, the Bitcoin Holdings and
the Bitcoin Holdings per Share on the
Trust’s Web site as soon as practicable
after its determination. If the Bitcoin
Holdings and Bitcoin Holdings per
Share have been calculated using a price
per bitcoin other than the Bitcoin Index
Price, the publication on the Trust’s
Web site will note the valuation
methodology used and the price per
bitcoin resulting from such calculation.
16 Bitcoin Holdings is different than the GAAP net
asset value referenced in the Registration Statement.
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While the Trust’s investment
objective is for the Shares to reflect the
performance of the value of a bitcoin as
represented by the Index, less the
Trust’s liabilities and expenses, the
Shares may trade in the secondary
market at prices that are lower or higher
than the Bitcoin Holdings per Share.
The amount of the discount or premium
in the trading price relative to the
Bitcoin Holdings per Share may be
influenced by non-concurrent trading
hours and liquidity between the
secondary market and larger Bitcoin
Exchanges in the bitcoin exchange
market. While the Shares will be listed
and trade on the Exchange from 9:30
a.m. until 4:00 p.m., E.T., liquidity in
the global bitcoin markets may fluctuate
depending upon the volume and
availability of larger Bitcoin Exchanges.
As a result, during periods in which
bitcoin exchange market liquidity is
limited or a major Bitcoin Exchange is
off-line, trading spreads, and the
resulting premium or discount, on the
Shares may widen.
Impact on Arbitrage
Because of the potential for arbitrage
inherent in the structure of the Trust,
the Sponsor believes that the Shares
will not trade at a material discount or
premium to the underlying bitcoin held
by the Trust. The arbitrage process,
which in general provides investors the
opportunity to profit from differences in
prices of assets, increases the efficiency
of the markets, serves to prevent
potentially manipulative efforts, and
can be expected to operate efficiently in
the case of the Shares and bitcoin. If the
price of the Shares deviates enough
from the price of bitcoin to create a
material discount or premium, an
arbitrage opportunity is created. If the
Shares are inexpensive compared to the
bitcoin that underlies them, an
arbitrageur may buy the Shares at a
discount, immediately redeem them in
exchange for bitcoin, and sell the
bitcoin in the cash market at a profit. If
the Shares are expensive compared to
the bitcoin that underlies them, an
arbitrageur may sell the Shares short,
buy enough bitcoin to acquire the
number of Shares sold short, acquire the
Shares through the creation process, and
deliver the Shares to close out the short
position.17 In both instances, the
17 The Exchange states that the Trust, which will
only hold bitcoin, differs from index-based
exchange-traded funds, which may involve a trust
holding hundreds or even thousands of underlying
component securities, necessarily involving in the
arbitrage process movements in a large number of
security positions. See, e.g., Securities Exchange
Act Release No. 46306 (August 2, 2002) (approving
the UTP trading of Vanguard Total Market VIPERs
based on the Wilshire 5000 Total Market Index).
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arbitrageur serves to efficiently correct
price discrepancies between the Shares
and the underlying bitcoin.
Creation and Redemption of Shares
According to the Registration
Statement, the Trust will issue and
redeem ‘‘Baskets,’’ each equal to a block
of 100 Shares, only to Authorized
Participants. The size of a Basket is
subject to change. The creation and
redemption of a Basket require the
delivery to the Trust, or the distribution
by the Trust, of the number of whole
and fractional bitcoins represented by
each Basket being created or redeemed,
the number of which is determined by
dividing the number of bitcoins owned
by the Trust at such time by the number
of Shares outstanding at such time
(calculated to one one-hundredmillionth of one bitcoin), as adjusted for
the number of whole and fractional
bitcoins constituting accrued but unpaid
fees and expenses of the Trust and
multiplying the quotient obtained by
100 (‘‘Basket Bitcoin Amount’’). The
Basket Bitcoin Amount will gradually
decrease over time as the Trust’s
bitcoins are used to pay the Trust’s
expenses. According to the Registration
Statement, as of the date of the
Registration Statement, each Share
currently represents approximately
0.094 of a bitcoin.
Authorized Participants are the only
persons that may place orders to create
and redeem Baskets. Each Authorized
Participant must (i) be a registered
broker-dealer, (ii) enter into a
participant agreement with the Sponsor,
the Trust and the Liquidity Providers
(‘‘Participant Agreement’’) and (iii) in
the case of the creation or redemption
of Baskets that do not use the
‘‘Conversion Procedures’’ (as defined
below), own a bitcoin wallet address
that is recognized by the Custodian as
belonging to the Authorized Participant
(‘‘Authorized Participant SelfAdministered Account’’). Authorized
Participants may act for their own
accounts or as agents for broker-dealers,
custodians and other securities market
participants that wish to create or
redeem Baskets. Shareholders who are
not Authorized Participants will only be
able to redeem their Shares through an
Authorized Participant.
The creation and redemption of a
Basket requires the delivery to the Trust,
or the distribution by the Trust, of the
Basket Bitcoin Amount (that is, the
number of bitcoins represented by each
Basket), for each Basket to be created or
redeemed. The Basket Bitcoin Amount
multiplied by the number of Baskets
being created or redeemed is the ‘‘Total
Basket Bitcoin Amount.’’
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Although the Trust will only create
Baskets upon the receipt of bitcoins, and
will only redeem Baskets by distributing
bitcoins, an Authorized Participant may
deposit cash with the Administrator,
which will facilitate the purchase or
sale of bitcoins through a Liquidity
Provider on behalf of an Authorized
Participant (the ‘‘Conversion
Procedures’’). ‘‘Liquidity Providers’’
must (i) enter into a Participant
Agreement with the Sponsor, the Trust
and the Authorized Participants and (ii)
own a bitcoin wallet address that is
recognized by the Custodian as
belonging to the Liquidity Provider
(‘‘Liquidity Provider Account’’).
To create Baskets in-kind, Authorized
Participants will send the Administrator
a creation order on the trade date. The
Administrator and the Marketing Agent
will accept or reject the creation order
on that same date, and the Total Basket
Bitcoin Amount will be determined as
soon as practicable after 4:00 p.m., E.T.,
on that date. On the business day
following the trade date, the Authorized
Participant will transfer the Total Basket
Bitcoin Amount to the Custodian. Once
the Total Basket Bitcoin Amount is
received by the Custodian, the
Administrator will instruct the Transfer
Agent to deliver the creation Baskets to
the Authorized Participant.
To create Baskets using the
Conversion Procedures, Authorized
Participants will send the Administrator
a creation order on the business day
preceding the trade date. The
Administrator and the Marketing Agent
will accept or reject the creation order
on that same date. Upon receiving
instruction from the Administrator that
a creation order has been accepted, the
Authorized Participant will send 110%
of the U.S. dollar value of the Total
Basket Bitcoin Amount, determined
using the Bitcoin Index Price as of 4:00
p.m., E.T., on the business day that the
Authorized Participant places the
creation order (‘‘Cash Collateral
Amount’’). The Total Basket Bitcoin
Amount will be determined as soon as
practicable after 4:00 p.m., E.T. the
following day. Upon receiving
instruction from the Sponsor that a
creation order has been placed, a
Liquidity Provider will buy bitcoins at
the lowest price that it is able to procure
using its commercially reasonable
efforts and deliver to the Custodian the
Total Basket Bitcoin Amount on the
business day following the trade date.
Once the Total Basket Bitcoin Amount
is received by the Custodian, the
Administrator will instruct the Transfer
Agent to deliver the creation Baskets to
the Authorized Participant. The
Administrator will then send the
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10095
Liquidity Providers the amount of cash
equal to the Bitcoin Index Price as of
4:00 p.m., E.T., on the business day
immediately following the date on
which the creation order was placed
multiplied by the Total Basket Bitcoin
Amount and return any remaining
amount of the Cash Collateral Amount
to the Authorized Participant. If the
Cash Collateral Amount does not
sufficiently cover the Total Basket
Bitcoin Amount, the Authorized
Participant will be responsible for
paying the balance before they receive
the creation Baskets.
To redeem Baskets in-kind,
Authorized Participants will send the
Administrator a redemption order on
the trade date. The Administrator and
the Marketing Agent will accept or
reject the redemption order on that same
date. On the third business day
following the trade date, the Authorized
Participant will deliver to the Transfer
Agent redemption Baskets from its
account. Once the redemption Baskets
are received by the Transfer Agent, the
Custodian will send the Total Basket
Bitcoin Amount to the Authorized
Participant.
To redeem Baskets using the
Conversion Procedures, Authorized
Participants will send the Administrator
a redemption order. The Administrator
and the Marketing Agent will accept or
reject the redemption order on that same
date. Upon receiving instruction from
the Sponsor that a redemption order has
been placed, a Liquidity Provider will
sell bitcoins at the highest price that it
is able to procure using its commercially
reasonable efforts and deliver to the
Administrator the cash proceeds equal
to the Total Basket Bitcoin Amount.
Once the Transfer Agent receives the
redemption Baskets from the
Authorized Participant, the
Administrator will send the cash
proceeds equal to the Total Basket
Bitcoin Amount to the Authorized
Participant. At the instruction of the
Administrator, the Custodian will then
send the Liquidity Provider the number
of bitcoins that comprise the Total
Basket Bitcoin Amount.
The Sponsor represents that Liquidity
Providers will only transact with
exchanges and OTC trading partners
that have met AML and KYC regulatory
requirements. Authorized Participants
that create and redeem Baskets using the
Conversion Procedures will be
responsible for reimbursing the relevant
Liquidity Provider for any expenses
incurred in connection with the
Conversion Procedures. The Authorized
Participants will also pay a variable fee
to the Administrator for its facilitation
of the Conversion Procedures. There are
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no other fees related to the Conversion
Procedures that will be charged by the
Sponsor or the Custodian.
Other than the fees mentioned above,
Authorized Participants do not pay a
transaction fee to the Trust in
connection with the creation or
redemption of Baskets, but there may be
transaction fees associated with the
validation of the transfer of bitcoins by
the Bitcoin Network or fees payable to
the Administrator. Authorized
Participants who deposit bitcoins with
the Trust in exchange for Baskets will
receive no fees, commissions or other
form of compensation or inducement of
any kind from either the Sponsor or the
Trust, and no such person has any
obligation or responsibility to the
Sponsor or the Trust to effect any sale
or resale of Shares.
sradovich on DSK3GMQ082PROD with NOTICES
Creation Procedures
On any business day, an Authorized
Participant may order one or more
creation Baskets from the Trust by
placing a creation order with the
Administrator. According to the
Registration Statement, creation orders
may be placed either ‘‘in-kind’’ or ‘‘incash.’’ Creation orders must be placed
no later than 5:00 p.m., E.T., on each
business day.
Determination of Required Deposits
The Basket Bitcoin Amount required
for a creation Basket will be determined
by dividing the number of bitcoins
owned by the Trust at such time by the
number of Shares outstanding at such
time (calculated to one one-hundredmillionth of one bitcoin), as adjusted for
the number of whole and fractional
bitcoins constituting accrued but unpaid
fees and expenses of the Trust, and
multiplying the quotient obtained by
100. All questions as to the composition
of a Basket Bitcoin Amount will be
conclusively determined by the Sponsor
and will be final and binding on all
persons interested in the Trust.
Deposits other than those received
from an Authorized Participant SelfAdministered Account or a Liquidity
Provider Account will be rejected. The
expense and risk of delivery, ownership
and safekeeping of bitcoins, until such
bitcoins have been received by the
Trust, shall be borne solely by the
Authorized Participant. The Custodian
may accept delivery of bitcoins by such
other means as the Sponsor, from time
to time, may determine to be acceptable
for the Trust.
Redemption Procedures
On any business day, an Authorized
Participant may place a redemption
order specifying the number of
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redemption Baskets to be redeemed.
According to the Registration Statement,
redemption orders may be placed either
‘‘in-kind’’ or ‘‘in-cash.’’ Redemption
orders must be placed no later than 5:00
p.m., E.T., on each business day. The
Authorized Participants may only
redeem Baskets and cannot redeem any
Shares in an amount less than a Basket.
Availability of Information
The Trust’s Web site (https://
grayscale.co/bitcoin-investment-trust/)
will include quantitative information on
a per-Share basis updated on a daily
basis, including, for the Trust (i) the
current Bitcoin Holdings per Share daily
and the prior business day’s Bitcoin
Holdings and the reported closing price,
(ii) the mid-point of the bid-ask price 18
in relation to the Bitcoin Holdings as of
the time the Bitcoin Holdings is
calculated (‘‘Bid-Ask Price’’) and a
calculation of the premium or discount
of such price against such Bitcoin
Holdings and (iii) data in chart format
displaying the frequency distribution of
discounts and premiums of the daily
Bid-Ask Price against the Bitcoin
Holdings, within appropriate ranges, for
each of the four previous calendar
quarters (or for the life of the Trust, if
shorter). In addition, on each business
day the Trust’s Web site will provide
pricing information for the Shares.
The Trust’s Web site will provide an
intra-day indicative value (‘‘IIV’’) per
Share updated every 15 seconds, as
calculated by the Exchange or a third
party financial data provider during the
Exchange’s Core Trading Session (9:30
a.m. to 4:00 p.m., E.T.).19 The IIV will
be calculated by using the prior day’s
closing Bitcoin Holdings per Share as a
base and updating that value during the
NYSE Arca Core Trading Session to
reflect changes in the value of the
Trust’s bitcoin holdings during the
trading day.
The IIV disseminated during the
NYSE Arca Core Trading Session should
not be viewed as an actual real time
update of the Bitcoin Holdings, which
will be calculated only once at the end
of each trading day. The IIV will be
widely disseminated on a per Share
basis every 15 seconds during the NYSE
Arca Core Trading Session by one or
more major market data vendors. In
addition, the IIV will be available
through on-line information services.
The Bitcoin Holdings for the Trust
will be calculated by the Administrator
once a day and will be disseminated
daily to all market participants at the
same time. To the extent that the
Administrator has utilized the cascading
set of rules described in ‘‘Bitcoin Index
Price’’ above, the Trust’s Web site will
note the valuation methodology used
and the price per bitcoin resulting from
such calculation. Quotation and lastsale information regarding the Shares
will be disseminated through the
facilities of the Consolidated Tape
Association (‘‘CTA’’).
Quotation and last sale information
for bitcoin will be widely disseminated
through a variety of major market data
vendors, including Bloomberg and
Reuters. In addition, the complete realtime price (and volume) data for bitcoin
is available by subscription from
Reuters and Bloomberg. The spot price
of bitcoin is available on a 24-hour basis
from major market data vendors,
including Bloomberg and Reuters.
Information relating to trading,
18 The bid-ask price of the Trust is determined
using the highest bid and lowest offer on the
Consolidated Tape as of the time of calculation of
the closing day Bitcoin Holdings.
19 The IIV on a per Share basis disseminated
during the Core Trading Session should not be
viewed as a real-time update of the Bitcoin
Holdings, which is calculated once a day.
Determination of Redemption
Distribution
The Basket Bitcoin Amount required
for a redemption Basket will be
determined by dividing the number of
bitcoins owned by the Trust at such
time by the number of Shares
outstanding at such time (calculated to
one one-hundred-millionth of one
bitcoin), as adjusted for the number of
whole and fractional bitcoins
constituting accrued but unpaid fees
and expenses of the Trust, and
multiplying the quotient obtained by
100. Redemption distributions will be
subject to the deduction of any
applicable tax or other governmental
charges that may be due. The Sponsor
has final determination of all questions
as to the composition of the number of
bitcoins required for a redemption
Basket.
Suspension or Rejection of Orders
The creation or redemption of Shares
may be suspended generally, or refused
with respect to particular requested
creations or redemptions, during any
period when the transfer books of the
Transfer Agent are closed or if
circumstances outside the control of the
Sponsor or its delegates make it for all
practical purposes not feasible to
process creation orders or redemption
orders. The Administrator may reject an
order if such order is not presented in
proper form as described in the
Participant Agreement or if the
fulfillment of the order, in the opinion
of counsel, might be unlawful.
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including price and volume
information, in bitcoin will be available
from major market data vendors and
from the exchanges on which bitcoin are
traded. The normal trading hours for
bitcoin exchanges are 24-hours per day,
365-days per year.
The Trust will provide Web site
disclosure of its Bitcoin Holdings daily.
The Web site disclosure of the Trust’s
Bitcoin Holdings will occur at the same
time as the disclosure by the Sponsor of
the Bitcoin Holdings to Authorized
Participants so that all market
participants are provided such portfolio
information at the same time. Therefore,
the same portfolio information will be
provided on the public Web site as well
as in electronic files provided to
Authorized Participants. Accordingly,
each investor will have access to the
current Bitcoin Holdings of the Trust
through the Trust’s Web site.
Additional information regarding the
Index may be found at https://
tradeblock.com/markets/index/.
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Trading Rules
The Trust will be subject to the
criteria in NYSE Arca Equities Rule
8.201, including 8.201(e), for initial and
continued listing of the Shares. A
minimum of 100,000 Shares will be
required to be outstanding at the start of
trading. With respect to application of
Rule 10A–3 under the Act, the Trust
will rely on the exception contained in
Rule 10A–3(c)(7). The Exchange
believes that the anticipated minimum
number of Shares outstanding at the
start of trading is sufficient to provide
adequate market liquidity.
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Trading in the Shares
on the Exchange will occur in
accordance with NYSE Arca Equities
Rule 7.34(a).20 The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Equities Rule 7.6, the minimum
price variation (‘‘MPV’’) for quoting and
entry of orders in equity securities
traded on the NYSE Arca Marketplace is
20 The Exchange has three trading sessions for
Commodity-Based Trust Shares each day the
Corporation is open for business unless otherwise
determined by the Corporation: (i) The Opening
Session begins at 1:00 a.m., Pacific Time (‘‘P.T.’’),
and concludes at the commencement of the Core
Trading Session; (ii) the Core Trading Session
begins for each security at 6:30 a.m., P.T., or at the
conclusion of the Market Order Auction, whichever
comes later, and concludes at 1:15 p.m., P.T.; and
(iii) the Late Trading Session begins following the
conclusion of the Core Trading Session and
concludes at 5:00 p.m., P.T.
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$0.01, with the exception of securities
that are priced less than $1.00 for which
the MPV for order entry is $0.0001.
Further, NYSE Arca Equities Rule
8.201 sets forth certain restrictions on
Equity Trading Permit Holders (‘‘ETP
Holders’’) acting as registered Market
Makers in the Shares to facilitate
surveillance. Pursuant to NYSE Arca
Equities Rule 8.201(g), an ETP Holder
acting as a registered Market Maker in
the Shares is required to provide the
Exchange with information relating to
its trading in the underlying bitcoin,
related futures or options on futures, or
any other related derivatives.
Commentary .04 of NYSE Arca Equities
Rule 6.3 requires an ETP Holder acting
as a registered Market Maker, and its
affiliates, in the Shares to establish,
maintain and enforce written policies
and procedures reasonably designed to
prevent the misuse of any material
nonpublic information with respect to
such products, any components of the
related products, any physical asset or
commodity underlying the product,
applicable currencies, underlying
indexes, related futures or options on
futures and any related derivative
instruments (including the Shares).
As a general matter, the Exchange has
regulatory jurisdiction over its ETP
Holders and their associated persons,
which include any person or entity
controlling an ETP Holder. A subsidiary
or affiliate of an ETP Holder that does
business only in commodities or futures
contracts would not be subject to
Exchange jurisdiction, but the Exchange
could obtain information regarding the
activities of such subsidiary or affiliate
through surveillance sharing agreements
with regulatory organizations of which
such subsidiary or affiliate is a member.
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares.
Trading on the Exchange in the Shares
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. These may
include: (1) The extent to which
conditions in the underlying bitcoin
markets have caused disruptions and/or
lack of trading or (2) whether other
unusual conditions or circumstances
detrimental to the maintenance of a fair
and orderly market are present. In
addition, trading in Shares will be
subject to trading halts caused by
extraordinary market volatility pursuant
to the Exchange’s ‘‘circuit breaker’’
rule.21
21 See
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The Exchange will halt trading in the
Shares if the Bitcoin Holdings of the
Trust is not calculated or disseminated
daily. The Exchange may halt trading
during the day in which an interruption
occurs to the dissemination of the IIV or
the Index spot price, as discussed above.
If the interruption to the dissemination
of the IIV or the Index spot price
persists past the trading day in which it
occurs, the Exchange will halt trading
no later than the beginning of the
trading day following the interruption.22
In addition, if the Exchange becomes
aware that the Bitcoin Holdings with
respect to the Shares is not
disseminated to all market participants
at the same time, it will halt trading in
the Shares until such time as the Bitcoin
Holdings is available to all market
participants.
Surveillance
The Exchange represents that trading
in the Shares will be subject to the
existing trading surveillances
administered by the Exchange, as well
as cross-market surveillances
administered by the Financial Industry
Regulatory Authority (‘‘FINRA’’) on
behalf of the Exchange, which are
designed to detect violations of
Exchange rules and applicable federal
securities laws.23 The Exchange
represents that these procedures are
adequate to properly monitor Exchange
trading of the Shares in all trading
sessions and to deter and detect
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange.
The surveillances referred to above
generally focus on detecting securities
trading outside their normal patterns,
which could be indicative of
manipulative or other violative activity.
When such situations are detected,
surveillance analysis follows and
investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations.
The Exchange or FINRA, on behalf of
the Exchange, or both, will
communicate as needed regarding
trading in the Shares with other markets
and other entities that are members of
the Intermarket Surveillance Group
(‘‘ISG’’), and the Exchange or FINRA, on
behalf of the Exchange, or both, may
22 The Exchange notes that the Exchange may halt
trading during the day in which an interruption to
the dissemination of the IIV or the Index spot price
occurs.
23 FINRA conducts cross market surveillances on
behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for
FINRA’s performance under this regulatory services
agreement.
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sradovich on DSK3GMQ082PROD with NOTICES
obtain trading information regarding
trading in the Shares from such markets
and other entities. In addition, the
Exchange may obtain information
regarding trading in the Shares from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement
(‘‘CSSA’’).24
Also, pursuant to NYSE Arca Equities
Rule 8.201(g), the Exchange is able to
obtain information regarding trading in
the Shares and the underlying bitcoin or
any bitcoin derivative through ETP
Holders acting as registered Market
Makers, in connection with such ETP
Holders’ proprietary or customer trades
through ETP Holders which they effect
on any relevant market.
The Exchange also has a general
policy prohibiting the distribution of
material, non-public information by its
employees.
All statements and representations
made in this filing regarding (i) the
description of the portfolio, (ii)
limitations on portfolio holdings or
reference assets or (iii) the applicability
of Exchange rules and surveillance
procedures shall constitute continued
listing requirements for listing the
Shares on the Exchange.
The issuer has represented to the
Exchange that it will advise the
Exchange of any failure by the Trust to
comply with the continued listing
requirements, and, pursuant to its
obligations under Section 19(g)(1) of the
Act, the Exchange will monitor for
compliance with the continued listing
requirements. If the Trust is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
NYSE Arca Equities Rule 5.5(m).
Information Bulletin
Prior to the commencement of
trading, the Exchange will inform its
ETP Holders in an ‘‘Information
Bulletin’’ of the special characteristics
and risks associated with trading the
Shares. Specifically, the Information
Bulletin will discuss the following: (1)
The procedures for purchases and
redemptions of Shares in Baskets
(including noting that the Shares are not
individually redeemable); (2) NYSE
Arca Equities Rule 9.2(a), which
imposes a duty of due diligence on its
ETP Holders to learn the essential facts
relating to every customer prior to
trading the Shares; (3) how information
regarding how the Index and the IIV are
disseminated; (4) the requirement that
24 For the list of current members of ISG, see
https://www.isgportal.org/home.html.
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18:11 Feb 08, 2017
Jkt 241001
ETP Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; (5) the
possibility that trading spreads and the
resulting premium or discount on the
Shares may widen during the Opening
and Late Trading Sessions, when an
updated IIV will not be calculated or
publicly disseminated; and (6) trading
information. For example, the
Information Bulletin will advise ETP
Holders, prior to the commencement of
trading, of the prospectus delivery
requirements applicable to the Trust.
The Exchange notes that investors
purchasing Shares directly from the
Trust will receive a prospectus. ETP
Holders purchasing Shares from the
Trust for resale to investors will deliver
a prospectus to such investors.
In addition, the Information Bulletin
will reference that the Trust is subject
to various fees and expenses as
described in the Registration Statement.
The Information Bulletin will disclose
that information about the Shares of the
Trust is publicly available on the Trust’s
Web site.
The Information Bulletin will also
discuss any relief, if granted, by the
Commission or the staff from any rules
under the Act.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 25 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of a free and open market
and, in general, to protect investors and
the public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Equities
Rule 8.201. The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws. The Exchange or FINRA, on behalf
of the Exchange, or both, will
communicate as needed regarding
trading in the Shares with other markets
that are members of the ISG, and the
Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading
information regarding trading in the
25 15
PO 00000
U.S.C. 78f(b)(5).
Frm 00116
Fmt 4703
Sfmt 4703
Shares from such markets. In addition,
the Exchange may obtain information
regarding trading in the Shares from
markets that are members of ISG or with
which the Exchange has in place a
CSSA. Also, pursuant to NYSE Arca
Equities Rule 8.201(g), the Exchange is
able to obtain information regarding
trading in the Shares and the underlying
bitcoin or any bitcoin derivative through
ETP Holders acting as registered Market
Makers, in connection with such ETP
Holders’ proprietary or customer trades
through ETP Holders which they effect
on any relevant market.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that there is a
considerable amount of bitcoin price
and bitcoin market information
available on public Web sites and
through professional and subscription
services. Investors may obtain on a 24hour basis bitcoin pricing information
based on the spot price for bitcoin from
various financial information service
providers. The closing price and
settlement prices of bitcoin are readily
available from the bitcoin exchanges
and other publicly available Web sites.
In addition, such prices are published in
public sources, or on-line information
services such as Bloomberg and Reuters.
The Trust will provide Web site
disclosure of its bitcoin holdings daily.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA. The IIV will be widely
disseminated on a per Share basis every
15 seconds during the NYSE Arca Core
Trading Session (normally 9:30 a.m.,
E.T., to 4:00 p.m., E.T.) by one or more
major market data vendors. In addition,
the IIV will be available through on-line
information services. The Exchange
represents that the Exchange may halt
trading during the day in which an
interruption to the dissemination of the
IIV or the Index spot price occurs. If the
interruption to the dissemination of the
IIV or the Index spot price persists past
the trading day in which it occurred, the
Exchange will halt trading no later than
the beginning of the trading day
following the interruption. In addition,
if the Exchange becomes aware that the
Bitcoin Holdings with respect to the
Shares is not disseminated to all market
participants at the same time, it will halt
trading in the Shares until such time as
the Bitcoin Holdings is available to all
market participants. The Bitcoin
Holdings per Share will be calculated
daily and made available to all market
participants at the same time. One or
more major market data vendors will
E:\FR\FM\09FEN1.SGM
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Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices
disseminate for the Trust on a daily
basis information with respect to the
most recent Bitcoin Holdings per Share
and Shares outstanding.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of exchange-traded
product that will enhance competition
among market participants, to the
benefit of investors and the marketplace.
As noted above, the Exchange has in
place surveillance procedures relating to
trading in the Shares and may obtain
information via ISG from other
exchanges that are members of ISG or
with which the Exchange has entered
into a CSSA. In addition, as noted
above, investors will have ready access
to information regarding the Trust’s
bitcoin holdings, IIV and quotation and
last sale information for the Shares.
IV. Solicitation of Comments
B. Self-Regulatory Organization’s
Statement on Burden on Competition
All submissions should refer to File
Number SR–NYSEArca–2017–06. This
file number should be included in the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2017–06 and should be
submitted on or before March 2, 2017.
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change will facilitate the listing and
trading of an additional type of
exchange-traded product, and the first
such product based on bitcoin, which
will enhance competition among market
participants, to the benefit of investors
and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
sradovich on DSK3GMQ082PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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18:11 Feb 08, 2017
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Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2017–06 in the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–02651 Filed 2–8–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79979; File No. SR–OC–
2017–01]
Self-Regulatory Organizations;
OneChicago, LLC; Notice of Filing of
Proposed Rule Change Regarding
Fraudulent Acts
February 6, 2017.
Pursuant to Section 19(b)(7) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 notice is hereby given that on
January 25, 2017, OneChicago, LLC
(‘‘OneChicago,’’ ‘‘OCX,’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
OneChicago has also filed this rule
change with the Commodity Futures
Trading Commission (‘‘CFTC’’).
OneChicago filed a written certification
with the CFTC under Section 5c(c) of
the Commodity Exchange Act on
January 17, 2017.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
OneChicago is proposing to make two
amendments to OCX Rule 601
(Fraudulent Acts). First, OneChicago is
proposing to amend OCX Rule 601 to
clarify that in addition to prohibiting
fraudulent acts, the rule also prohibits
any attempt to engage in any fraudulent
act. Further, the rule is also being
amended to track the language in CFTC
Regulation 180.1 that expressly
prohibits the use or employment of any
manipulative device, scheme, or artifice
to defraud.2 The text of the proposed
rule change is attached as Exhibit 4 to
the filing submitted by the Exchange but
is not attached to the published notice
of the filing.
1 15
26 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00117
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2 17
E:\FR\FM\09FEN1.SGM
U.S.C. 78s(b)(7).
CFR 180.1.
09FEN1
]]>Agencies
[Federal Register Volume 82, Number 26 (Thursday, February 9, 2017)]
[Notices]
[Pages 10086-10099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02651]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79955; File No. SR-NYSEArca-2017-06]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to the Listing and Trading Shares of
the Bitcoin Investment Trust under NYSE Arca Equities Rule 8.201
February 3, 2017.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on January 25, 2017, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Equities Rule 8.201: Bitcoin Investment Trust
(``Trust''). The proposed rule change is available on the Exchange's
Web site at www.nyse.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
[[Page 10087]]
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under NYSE Arca Equities Rule 8.201, the Exchange may propose to
list and/or trade pursuant to unlisted trading privileges (``UTP'')
``Commodity-Based Trust Shares.'' \4\ The Exchange proposes to list and
trade shares (``Shares'') of the Trust pursuant to NYSE Arca Equities
Rule 8.201.\5\
---------------------------------------------------------------------------
\4\ Commodity-Based Trust Shares are securities issued by a
trust that represent investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
Trust.
\5\ On January 20, 2017, the Trust filed a registration
statement (``Registration Statement'') on Form S-1 under the
Securities Act of 1933 (15 U.S.C. 77a) (File No. 333-215627). The
descriptions of the Trust, the Shares and bitcoin contained herein
are based, in part, on the Registration Statement.
On March 4, 2016, the Trust submitted to the Commission an
amended Form D as a business trust. Shares of the Trust have been
quoted on OTC Market's OTCQX Best Marketplace under the symbol
``GBTC'' since March 26, 2015. On November 11, 2016, the Trust also
published a quarterly report for GBTC for the period ended September
30, 2016, which can be found on OTC Market's Web site: https://www.otcmarkets.com/stock/GBTC/filings. The Shares will be of the
same class and will have the same rights as shares of GBTC.
Effective October 28, 2014, the Trust suspended its redemption
program for shares of GBTC, in which shareholders were permitted to
request the redemption of their shares through Genesis Global
Trading, Inc. (formerly known as SecondMarket, Inc.), an affiliate
of the Sponsor and the Trust (``Genesis''). According to the
Sponsor, freely tradeable shares of GBTC will remain unregistered
freely tradeable Shares on the date of the listing of the Shares
unless, if authorized by the Trust, holders of GBTC sell the shares
in the initial public offering. Restricted shares of GBTC will
remain subject to private placement restrictions and the holders of
such restricted shares may either (i) continue to hold those shares
subject to those restrictions or (ii) if authorized by the Trust,
sell the restricted shares in the initial public offering.
---------------------------------------------------------------------------
The sponsor of the Trust is Grayscale Investments, LLC
(``Sponsor''), a Delaware limited liability company. The Sponsor is a
wholly-owned subsidiary of Digital Currency Group, Inc. (``Digital
Currency Group''). The trustee for the Trust is Delaware Trust Company
(``Trustee''). The Bank of New York Mellon will be the Trust's transfer
agent (in such capacity, ``Transfer Agent'') and the administrator of
the Trust (in such capacity, ``Administrator''). Xapo Inc. is the
custodian for the Trust (``Custodian'').\6\ ALPS Portfolio Solutions
Distributor, Inc. will be the marketing agent for the Trust
(``Marketing Agent'').
---------------------------------------------------------------------------
\6\ According to the Registration Statement, Digital Currency
Group owns a minority interest in the Custodian that represents less
than 1.0% of the Custodian's equity.
---------------------------------------------------------------------------
The Trust is a Delaware statutory trust, organized on September 13,
2013, that operates pursuant to a trust agreement between the Sponsor
and the Trustee. The Trust has no fixed termination date.
According to the Registration Statement, each Share will represent
a proportional interest, based on the total number of Shares
outstanding, in the bitcoins held by the Trust, less the Trust's
liabilities, which include accrued but unpaid fees and expenses. The
Trust's assets will consist solely of bitcoins held on the Trust's
behalf by the Custodian. The Trust has not had a cash balance at any
time since inception. When selling bitcoins to pay expenses, the
Sponsor will endeavor to sell the exact number of bitcoins needed to
pay expenses in order to minimize the Trust's holdings of assets other
than bitcoin. As a consequence, the Trust expects that it will not
record any cash flow from its operations and that its cash balance will
be zero at the end of each reporting period.
The activities of the Trust will be limited to (i) issuing
``Baskets'' (as defined below) in exchange for bitcoins deposited by
the ``Authorized Participants'' (as defined below) or ``Liquidity
Providers'' (as defined below), as applicable, with the Custodian as
consideration, (ii) transferring actual bitcoins as necessary to cover
the Sponsor's management fee and selling bitcoins as necessary to pay
certain other fees that are not contractually assumed by the Sponsor,
(iii) transferring actual bitcoins in exchange for Baskets surrendered
for redemption by the Authorized Participants, (iv) causing the Sponsor
to sell bitcoins on the termination of the Trust and (v) engaging in
all administrative and custodial procedures necessary to accomplish
such activities in accordance with the provisions of applicable
agreements. The Trust is not 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 price of bitcoins.
According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended, (``1940 Act'') \7\ nor a commodity pool for purposes of the
Commodity Exchange Act,\8\ and neither the Sponsor nor the Trustee is
subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 80a-1.
\8\ 17 U.S.C. 1.
---------------------------------------------------------------------------
Investment Objective
According to the Registration Statement, and as further described
below, the investment objective of the Trust will be for the Shares to
reflect the performance of the value of a bitcoin as represented by the
TradeBlock XBX Index (``Index''),\9\ less the Trust's liabilities and
expenses.
---------------------------------------------------------------------------
\9\ The Index is a U.S. dollar-denominated composite reference
rate for the price of bitcoin based on the volume-weighted price at
trading venues selected by TradeBlock, Inc. (``Index Provider'').
According to the Registration Statement, Digital Currency Group,
Inc. owns approximately 2.4% of the Index Provider's voting equity
and warrants representing approximately 1.4% of the Index Provider's
voting equity. See ``Bitcoin Index Price'' below.
---------------------------------------------------------------------------
The Shares are designed to provide investors with a cost-effective
and convenient way to invest in bitcoin. A substantial direct
investment in bitcoins may require expensive and sometimes complicated
arrangements in connection with the acquisition, security and
safekeeping of the bitcoins and may involve the payment of substantial
fees to acquire such bitcoins 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 bitcoins, they will provide
investors with an alternative that constitutes a relatively cost-
effective way to participate in bitcoin markets through the securities
market.
Overview of the Bitcoin Industry and Market
The following is a brief introduction to the bitcoin industry and
the bitcoin market based on information provided in the Registration
Statement.
The Bitcoin Network
A bitcoin is a decentralized digital currency that is issued by,
and transmitted through, an open-source digital protocol platform using
cryptographic security that is known as the ``Bitcoin Network.'' The
Bitcoin Network is an online, peer-to-peer user network that hosts a
public transaction ledger, known as the ``Blockchain,'' and the source
code that comprises the basis for the cryptography and digital
protocols governing the Bitcoin Network. No single entity owns or
operates the Bitcoin Network, the infrastructure of which is
collectively maintained by a decentralized user base. Bitcoins 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 electronic
marketplaces where exchange participants may first use fiat currency
[[Page 10088]]
to trade, buy and sell bitcoins based on bid-ask trading (``Bitcoin
Exchanges'') or in individual end-user-to-end-user transactions in the
over-the-counter (``OTC'') markets.
The Blockchain is comprised of a digital file, downloaded and
stored in a decentralized manner on the computer of each Bitcoin
Network user. The file includes all ``blocks'' that have been solved by
miners and is updated to include new blocks as they are solved. 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. Because 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 on the Bitcoin Network.
Bitcoins are ``stored'' or reflected on the Blockchain. The
Blockchain records the transaction history of all bitcoins in existence
and, through the transparent reporting of transactions, allows the
Bitcoin Network to verify the association of each bitcoin with the
digital wallet that owns them. The Bitcoin Network and bitcoin software
programs can interpret the Blockchain to determine the exact bitcoin
balance of any digital wallet listed in the Blockchain as having taken
part in a transaction on the Bitcoin Network.
In order to own, transfer or use bitcoins, a person generally must
have internet access to connect to the Bitcoin Network. Bitcoin
transactions between parties occur very rapidly (typically less than
one minute) and 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 a single bitcoin, each transaction is recorded, time
stamped and publicly displayed in a block in the publicly available
Blockchain. Thus, the Bitcoin Network provides confirmation against
double-spending by memorializing every transaction in the Blockchain,
which is publicly accessible and downloaded in part or in whole by all
users' Bitcoin Network software programs as described above.
The Bitcoin Network is decentralized and does not rely on either
governmental authorities or financial institutions to create, transmit
or determine the value of bitcoins. Rather, bitcoins are created and
allocated by the Bitcoin Network protocol through a ``mining'' process
subject to a strict, well-known issuance schedule. The value of
bitcoins is determined by the supply of and demand for bitcoins in the
bitcoin exchange market (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 software and bitcoins can be transferred without the
involvement of intermediaries or third parties, there are little or no
transaction costs in direct peer-to-peer transactions on the Bitcoin
Network. Third-party service providers such as Bitcoin Exchanges and
bitcoin third-party payment processing services may charge significant
fees for processing transactions and for converting, or facilitating
the conversion of, bitcoins to or from fiat currency.
``Off-Blockchain transactions'' involve the transfer of control
over or ownership of a specific digital wallet holding bitcoins or of
the reallocation of ownership of certain bitcoins in a pooled-ownership
digital wallet, such as a digital wallet owned by a Bitcoin Exchange.
Off-Blockchain transactions are not truly bitcoin transactions in that
they do not involve the transfer of transaction data on the Bitcoin
Network and do not reflect a movement of bitcoins between addresses
recorded in the Blockchain. Information and data regarding Off-
Blockchain transactions are generally not publicly available in
contrast to ``true'' bitcoin transactions, which are publicly recorded
on the Blockchain. Off-Blockchain transactions are subject to risks as
any such transfer of bitcoin ownership is not protected by the protocol
behind the Bitcoin Network or recorded in and validated through the
Blockchain mechanism.
Overview of Bitcoin Transactions
Prior to engaging in bitcoin transactions, a user must first obtain
a digital bitcoin ``wallet'' (analogous to a bitcoin account) in which
to store bitcoins. A wallet can be obtained, among other ways, through
an open-source software program that generates bitcoin addresses and
enables users to engage in the transfer of bitcoins with other users. A
user may install a bitcoin software program on a computer or mobile
device that will generate a bitcoin wallet or, alternatively, a user
may retain a third party to create a digital wallet to be used for the
same purpose. There is no limit on the number of digital wallets a user
can have, and each such wallet includes one or more unique addresses
and a verification system for each address consisting of a ``public
key'' and a ``private key,'' which are mathematically related.
In a typical bitcoin transaction, the bitcoin recipient must
provide the spending party with the recipient's digital wallet address,
an identifying series of 27 to 34 alphanumeric characters that
represents the wallet's routing number on the Bitcoin Network and
allows the Blockchain to record the sending of bitcoins to the
recipient's wallet. 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.
This activity is analogous to a recipient providing an address in wire
instructions to the payor so that cash may be wired to the recipient's
account.
After the provision of the receiving wallet's digital address, the
spending party must enter the address into its bitcoin software program
along with the number of bitcoins to be sent. The number of bitcoins to
be sent will typically be agreed upon between the two parties based on
a set number of bitcoins or an agreed upon conversion of the value of
fiat currency to bitcoins. Most bitcoin software 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 software programs, but, when they are included, they are paid
by the spending party on top of the specified amount of bitcoins being
sent in the transaction. Transaction fees, if any, are typically a
fractional number of bitcoins (for example, 0.005 or 0.0005 bitcoins)
and are automatically transferred by the Bitcoin Network to the bitcoin
miner that solves and adds the block recording the spending transaction
on the Blockchain.
After the entry of the receiving wallet's address, the number of
bitcoins 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 software program. The data packet includes
data showing (i) the receiving wallet's address, (ii) the number of
bitcoins 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 bitcoins being spent and record the flow
[[Page 10089]]
of bitcoins from one transaction to the next transaction in which the
bitcoins are spent. The digital signature exposes the spending party's
digital wallet address and public key to the Bitcoin Network, though,
for the receiving party, only its digital wallet address is revealed.
The spending party's bitcoin 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 miners within the
course of less than one minute.
Bitcoin 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) all
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 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.
Bitcoin transactions that are micropayments (typically, less than
0.01 bitcoins) and that do not include transaction fees to miners are
currently deprioritized for recording, meaning that, depending on
bitcoin miner policies, these transactions may take longer to record
than typical transactions if the transactions do not include a
transaction fee. Additionally, transactions initiated by spending
wallets with poor connections to the Bitcoin Network (i.e., few or poor
quality connections to nodes or ``supernodes'' that relay transaction
data) may be delayed in the propagation of their transaction data and,
therefore, transaction recording on the Blockchain. Finally, to the
extent that a miner chooses to limit the transactions it includes in a
solved block (whether by the payment of transaction fees or otherwise),
a transaction not meeting that miner's criteria will not be included.
To the extent that a transaction has not yet been recorded, there
is a greater chance that the spending wallet can double-spend the
bitcoins sent in the original transaction. If the next block solved is
by an honest miner not involved in the attempt to double-spend bitcoin
and if the transaction data for both the original and double-spend
transactions have been propagated onto the Bitcoin Network, the
transaction that is received with the earlier time stamp will be
recorded by the solving miner, regardless of whether the double-
spending transaction includes a larger transaction fee. If the double-
spend transaction propagates to the solving miner and the original
transaction has not, then the double-spending has a greater chance of
success. As a result of the high difficulty in successfully initiating
a double-spend without the assistance of a coordinated attack, the
probability of success for a double-spend transaction attempt is
limited.
Upon the addition of a block included in the Blockchain, the
bitcoin 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 digital
wallet, completing the bitcoin transaction. Typically, bitcoin software
programs will automatically check for and display additional
confirmations of six or more blocks in the Blockchain.
To ensure the integrity of bitcoin transactions from the
recipient's side (i.e., to prevent double-spending by a payor), every
bitcoin transaction is broadcast to the Bitcoin Network and recorded in
the Blockchain through the mining process, which time-stamps the
transaction and memorializes the change in the ownership of the
bitcoin(s) transferred. Adding a block to the Blockchain requires
bitcoin miners to exert significant computational effort to verify it
is a valid transaction. According to the Registration Statement,
requiring this computational effort, or ``proof of work,'' prevents a
malicious actor from either adding fraudulent blocks to generate
bitcoins (i.e., counterfeit bitcoins) or overwriting existing valid
blocks to reverse its prior transactions.
A transaction in bitcoins 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 the 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 are required until funds from the
transferor are considered valid. However, statistically speaking, a
transaction is virtually final after six confirmations as it would be
extremely difficult to challenge the validity of the transaction at
that point.
According to the Registration Statement, at this point in the
evolution of the Bitcoin Network, bitcoin transactions are considered
irreversible. Once a transaction appears in the Blockchain, no one has
the authority to reverse it. If someone were to attempt to undo a past
transaction in a block recorded on the Blockchain, such individual
would have to exert tremendous processing power in a series of
complicated transactions that may not be achieved at this point in the
Bitcoin Network's development.
Bitcoin Security and Storage
According to the Registration Statement, all transactions on the
Bitcoin Network are secured using public-key cryptography, a technique
which underpins many online transactions. Public-key cryptography works
by generating two mathematically related keys (one a public key and the
other a private key). One of these, the private key, is retained in the
individual's digital wallet and the other key is made public and serves
as the address to which bitcoin(s) can be transferred and from which
money can be transferred by the owner of the bitcoin wallet. In the
case of bitcoin transactions, the public key is an address (a string of
letters and numbers) that is used to encode payments, which can then
only be retrieved with its associated private key, which is used to
authorize the transaction. In other words, the payor uses his private
key to approve any transfers to a recipient's account. Users on the
Bitcoin Network can confirm that the user signed the transaction with
the appropriate private key, but cannot reverse engineer the private
key from the signature.
According to the Registration Statement, the Custodian is
responsible
[[Page 10090]]
for keeping the private key or keys that provide access to the Trust's
digital wallets and vaults secure. Pursuant to a request from the
Sponsor or the Trust, the Custodian will establish and maintain an
account with one or more wallets (``Wallet Account'') and one or more
cold-storage vault accounts (``Vault Account'' and, together with the
Wallet Account and any subaccounts associated therewith, the ``Bitcoin
Account'') in the name of the Sponsor and the Trust. The Custodian
deposits and withdraws bitcoins to and from the Bitcoin Account at the
instruction of the Sponsor. The Custodian is responsible for
administering the Bitcoin Account.
The Bitcoin Account is maintained by the Custodian and cold storage
mechanisms are used for the Vault Account by the Custodian. Each
digital wallet of the Trust may be accessed using its corresponding
private key. The Custodian's custodial operations maintain custody of
the private keys that have been deposited in cold storage at its
various vaulting premises across the United States, Europe (including
Switzerland) and South America. According to the Registration
Statement, the locations of the vaulting premises change regularly and
are kept confidential by the Custodian for security purposes.
The term ``cold storage'' refers to a safeguarding method by which
the private keys corresponding to bitcoins stored on a digital wallet
are removed from any computers actively connected to the internet. Cold
storage of private keys may involve keeping such wallet on a non-
networked computer or electronic device or storing the public key and
private keys relating to the digital wallet on a storage device (for
example, a USB thumb drive) or printed medium (for example, papyrus or
paper) and deleting the digital wallet from all computers. According to
the Registration Statement, most of the private keys in the Wallet
Account and all of the private keys in the Vault Account are kept in
cold storage. A digital wallet may receive deposits of bitcoins but may
not send bitcoins without use of the bitcoins' corresponding private
keys. In order to send bitcoin from a digital wallet in which the
private keys are kept in cold storage, either the private keys must be
retrieved from cold storage and entered into a bitcoin software program
to sign the transaction, or the unsigned transaction must be sent to
the ``cold'' server in which the private keys are held for signature by
the private keys. At that point, the user of the digital wallet can
transfer its bitcoins.
According to the Registration Statement, the Custodian is the
custodian of the Trust's private keys and will utilize certain security
procedures such as algorithms, codes, passwords, encryption or
telephone call-backs in the administration and operation of the Trust
and the safekeeping of its bitcoins and private keys. The Custodian has
created a Vault Account for the Trust assets in which private keys are
placed in cold storage. According to the Registration Statement, the
Custodian segregates the private keys stored with it from any other
assets it holds or holds for others.
The Custodian is authorized to accept, on behalf of the Trust,
deposits of bitcoins from ``Authorized Participant Self-Administered
Accounts'' (as defined below) or ``Liquidity Provider Accounts'' (as
defined below), as applicable, held with the Custodian and transfer
such bitcoins into the Bitcoin Account. Deposits of bitcoins will be
immediately available to the Trust to the extent such bitcoins have not
already been transferred to the Vault Account. Bitcoins transferred to
the Bitcoin Account will be directly deposited into digital wallets for
which the keys are already in cold storage.
According to the Registration Statement, if bitcoins need to be
withdrawn from the Trust in connection with a redemption, the Custodian
will ensure that the private keys to those bitcoins sign the withdrawal
transaction.
Bitcoin Mining and Creation of New Bitcoins
According to the Registration Statement, the process by which
bitcoins are created and bitcoin transactions are verified is called
mining.\10\ To begin mining, a miner can download and run a mining
client, which, like regular Bitcoin Network software programs, turns
the user's computer into a ``node'' on the Bitcoin Network that
validates blocks. Bitcoin transactions are recorded in new blocks that
are added to the Blockchain and new bitcoins being issued to the
miners. Miners, through the use of the bitcoin software program, 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.
---------------------------------------------------------------------------
\10\ None of the Trust, Sponsor or Genesis currently
participates in mining or has plans to engage in mining in the
future.
---------------------------------------------------------------------------
In order to add blocks to the Blockchain, a miner must map an input
data set (i.e., 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 a predetermined length, i.e., a hash value,
using the SHA-256 cryptographic hash algorithm. Each unique block can
only be solved and added to the Blockchain by one miner; therefore, all
individual miners and mining pools on the Bitcoin Network are engaged
in a competitive process of constantly increasing their computing power
to improve their likelihood of solving for new blocks. According to the
Registration Statement, as more miners join the Bitcoin Network and its
processing power increases, the Bitcoin Network adjusts the complexity
of the block-solving equation to maintain a predetermined pace of
adding a new block to the Blockchain approximately every ten minutes.
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. Miners
that are successful in adding a block to the Blockchain are
automatically awarded bitcoins for their effort plus any transaction
fees paid by transferors whose transactions are recorded in the block.
This reward system is the method by which new bitcoins enter into
circulation to the public.
The supply of new bitcoins is mathematically controlled in a manner
so that the number of bitcoins grows at a limited rate pursuant to a
pre-set schedule. The number of bitcoins awarded for solving a new
block is automatically halved after every 210,000 blocks are added to
the Blockchain. Recently, in July 2016, the fixed reward for solving a
new block decreased from 25 bitcoins to 12.5 bitcoins per block and
this is expected to decrease by half to become 6.25 bitcoins after the
next 210,000 blocks have entered the Bitcoin Network, which is expected
to be July 2020. This deliberately controlled rate of bitcoin creation
means that the number of bitcoins in existence will increase at a
controlled rate until the number of bitcoins in existence reaches the
pre-determined 21 million bitcoins. According to the Registration
Statement, as of December 30, 2016, approximately 16.08 million
bitcoins have been mined, and estimates of when the 21 million bitcoin
limitation will be reached range up to the year 2140.
Bitcoin Exchanges
According to the Registration Statement, due to the peer-to-peer
framework of the Bitcoin Network and the protocols thereunder,
transferors and recipients of bitcoins are able to determine the value
of the bitcoins
[[Page 10091]]
transferred by mutual agreement or barter with respect to their
transactions. As a result, the most common means of determining the
value of a bitcoin is by surveying one or more Bitcoin Exchanges where
bitcoins are bought, sold and traded. On each Bitcoin Exchange,
bitcoins are traded with publicly disclosed valuations for each
transaction, measured by one or more fiat currencies such as the U.S.
dollar or the Chinese yuan. According to the Registration Statement,
while a significant volume of bitcoin-to-fiat-currency exchange is
denominated in currency other than U.S. dollars, movements in pricing
on these exchanges are generally in line with U.S. dollar-denominated
exchanges. According to the Registration Statement, for example, volume
on the self-reported, unregulated exchanges located in China makes up
approximately 95% of the global trade volume in bitcoins. According to
the Registration Statement, similar to other currency pairs, such as
euro to bitcoin, movements in pricing on the Chinese exchanges are
generally in line with U.S. dollar-denominated exchanges. For example,
according to the Registration Statement, based on data from the Index
Provider, from May 10, 2015 to December 30, 2016, the 4:00 p.m.,
Eastern Time (``E.T.''), spot price on the three primary Chinese yuan-
denominated exchanges (BTC China, Huobi and OKCoin) differed from the
``Bitcoin Index Price'' (as defined below) by only 1.5% on average.
According to the Registration Statement, bitcoin price indexes have
also been developed by a number of service providers in the bitcoin
space. For example, Coindesk, a digital currency content provider and
wholly-owned subsidiary of Digital Currency Group, launched a
proprietary bitcoin price index in September 2013, and
bitcoinaverage.com provides an average of all bitcoin prices on several
Bitcoin Exchanges. The Sponsor uses the Index calculated by the Index
Provider to determine the ``Bitcoin Index Price,'' as described below
under ``Bitcoin Index Price.''
Currently, there are numerous Bitcoin Exchanges operating worldwide
in a number of currency pairs including, among others, bitcoin to U.S.
dollar, bitcoin to euro, bitcoin to Chinese yuan and bitcoin to Indian
rupee. According to the Registration Statement, most of the data with
respect to prevailing valuations of bitcoin come from such Bitcoin
Exchanges. These exchanges include established exchanges such as
Bitstamp, GDAX and Bitfinex, which provide a number of options for
buying and selling bitcoins. Among the Bitcoin Exchanges eligible for
inclusion in the Index, domicile, regulation and legal compliance
varies.
The table below sets forth (1) the aggregate number of bitcoin
trades made on the nine largest U.S. dollar-denominated Bitcoin
Exchanges by trade volume from May 10, 2015 to December 30, 2016 and
(2) the market share of trade volume of each such Bitcoin Exchange.
------------------------------------------------------------------------
Nine Largest U.S. Dollar-Denominated Volume (BTC) Market share
Bitcoin Exchanges by Trade Volume \11\ \12,13\ (%)
------------------------------------------------------------------------
Bitcoin Exchanges included in the Index
as of December 30, 2016
Bitfinex................................ 12,333,460 30.89%
OKCoin International.................... 6,200,571 15.53
BitStamp................................ 5,768,897 14.45
GDAX (formerly known as Coinbase 4,325,755 10.83
Exchange)..............................
ItBit................................... 3,026,029 7.58
Total U.S. dollar-denominated trade 31,654,711 79.28
volume included in the Index as of
December 30, 2016..................
Bitcoin Exchanges not included in the
Index as of December 30, 2016
BTC-E................................... 4,157,855 10.41
LakeBTC................................. 2,709,627 6.79
LocalBitcoins........................... 806,194 2.02
Gemini.................................. 597,983 1.50
Total U.S. dollar-denominated trade 8,271,689 20.72
volume not included in the Index as of
December 30, 2016......................
Total U.S. Dollar-BTC trade volume...... 39,926,401 100.00
------------------------------------------------------------------------
Information regarding each Bitcoin Exchange may be found, where
available, on the Web sites for such Bitcoin Exchanges, among other
places.
---------------------------------------------------------------------------
\11\ Based on amounts reported by the exchanges, the Sponsor
estimates that the U.S. dollar-denominated Bitcoin Exchanges listed
in this table account for approximately 3% of the aggregate global
trade volume in bitcoins for all currency pairs traded on Bitcoin
Exchanges. From May 10, 2015 to December 30, 2016, the three primary
Chinese Bitcoin Exchanges, BTCC, Huobi and OKCoin Exchange China,
reported a trade volume of over 1.26 billion bitcoins.
\12\ Reflects the aggregate number of trades of U.S. dollars for
bitcoin on each named Bitcoin Exchange from May 10, 2015 to December
30, 2016.
\13\ As of May 10, 2015, Kraken EUR (U.S. dollar equivalent) was
a component of the Index but was removed from the Index on May 11,
2015. The transactions on Kraken EUR were not a material component
to the Index.
---------------------------------------------------------------------------
Off-Exchange Bitcoin Trading
According to the Registration Statement, in addition to open online
Bitcoin Exchanges, there are ``dark pools,'' which are bitcoin trading
platforms that do not publicly report bitcoin trade data. Market
participants have the ability to execute large block trades on a dark
pool without revealing those trades and the related price data to the
public bitcoin exchange market, although any withdrawal from or deposit
to a dark pool platform may be recorded on the Blockchain.\14\
---------------------------------------------------------------------------
\14\ According to the Registration Statement, Genesis operates
an OTC trading desk that buys and sells large blocks of bitcoins
without publicly reporting trade data. Informal dark pools are
currently believed to exist, particularly among wholesale buyers of
bitcoin and bitcoin mining groups that obtain large supplies of
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.
---------------------------------------------------------------------------
Bitcoin may also be traded OTC. OTC trades are not required to be
reported through any facilities. However, according to the Sponsor,
based on publicly available information, OTC trading may not represent
a material volume of overall bitcoin trading. The OTC markets operate
in a similar manner to dark pools. However, typically, OTC trades are
institutional size block transactions (though on a much lower scale
relative to the size of block transactions for other commodities or
industries) or transactions made on behalf of high-net worth
individuals.
According to the Sponsor, some OTC intermediaries that facilitate
OTC trading, such as Genesis and itBit, provide summary statistics on
an ad hoc
[[Page 10092]]
basis. For instance, in April 2016, itBit reported that it had traded
approximately 25,500 bitcoins, valued at approximately $10.3 million
U.S. dollars, which would account for roughly 1.81% of the bitcoin
trading volume across the nine highest volume U.S. dollar-denominated
exchanges. For the fourth quarter of 2015, Genesis reported trading
approximately 125,000 bitcoins, valued at approximately $50 million
U.S. dollars. According to the Sponsor, the reported Genesis volume
would comprise roughly 1.17% of the trading volume across the nine
highest volume U.S. dollar-denominated exchanges during that time
period.
Bitcoin Price Volatility \15\
---------------------------------------------------------------------------
\15\ Attached as Exhibit 3 hereto are tables relating to: (i)
rolling 3-month volatility of bitcoin and other commodities; (ii)
average 3-month correlation of bitcoin to other commodities; (iii)
rolling 6-month volatility of bitcoin and other commodities; (iv)
average 6-month correlation of bitcoin to other commodities; (v)
rolling 12-month volatility of bitcoin and other commodities; and
(vi) average 12-month correlation of bitcoin to other commodities.
---------------------------------------------------------------------------
According to the Sponsor, volatility in bitcoin was pronounced in
its earliest days through late 2013. According to the Sponsor, during
that time period, almost all bitcoin trading activity centered on two
exchanges, which centralized the global order book and led to large
price movements. Since then, the bitcoin trading environment has
matured with the development of dozens of exchanges around the world,
resulting in more transparency with respect to bitcoin pricing, in
increased trading volume and in greater liquidity. Additionally, the
globalization of bitcoin exchanges, ranging from those domiciled in the
United States to other areas of the globe, such as China, has led to
development of many bitcoin currency pairs, garnering more market
participants. Today, the largest trading pairs are bitcoin to Chinese
yuan, bitcoin to U.S. dollars and bitcoin to euro.
Bitcoin price volatility has declined since the inception of
bitcoin. According to the Sponsor and as detailed in Exhibit 3, recent
figures, such as the three and six month volatility charts, show that
the volatility of bitcoin is now at levels lower than those seen for
crude oil and natural gas and comparable to those seen for metals like
silver, platinum and copper. Moreover, the trailing one-year volatility
of bitcoin is approximately in line with that of crude oil and natural
gas and continues to trend downward.
According to the Sponsor, while bitcoin price volatility has
declined and its volatility approximately corresponds to that of
certain commodities over a one-year timeframe, the volatility of
bitcoin is not correlated with the volatility of other commodities over
shorter- (i.e., three to six months) and longer-term (i.e., longer than
one year) investment horizons, reinforcing the important role bitcoin
can play as a diversifying asset in an investor's portfolio.
Demand for Bitcoin
According to the Sponsor, demand for bitcoins is based on several
factors. Demand may be based on speculation regarding the future
appreciation of the value of bitcoins. Continuing development of
various applications utilizing the Bitcoin Network for uses such as
remittance, payment for goods and services, recording transfer of
ownership of certain assets and settlement of both financial and non-
financial assets have led many investors to speculate that the price of
bitcoins will appreciate as use of these applications increases. As
additional applications are developed, demand may increase.
Additionally, some investors have developed analogs between bitcoin and
other scarce assets such as gold. Bitcoin shares many of the same
characteristics as gold, e.g., scarcity, but has superior utility,
portability and divisibility. If investors shift a portion of their
asset allocations from gold to bitcoin, the demand for bitcoins could
increase. Furthermore, bitcoins are used in day-to-day transactions for
the purchase of goods and services. As additional merchants continue to
accept bitcoins for the purchase of goods and services, demand for
bitcoins may increase. Relatedly, as merchants accept bitcoins for
sales of goods and services, supply of bitcoins could increase on the
exchange markets as these merchants look to liquidate their bitcoin for
fiat currencies.
Bitcoin Index Price
The ``Bitcoin Index Price'' is the U.S. dollar value of a bitcoin
as represented by the Index, calculated at 4:00 p.m., E.T., on each
business day. If the Index becomes unavailable, or if the Sponsor
determines in good faith that the Index does not reflect an accurate
bitcoin value, then the Sponsor will, on a best efforts basis, contact
the Index Provider in order to obtain the Bitcoin Index Price. If after
such contact the Index remains unavailable or the Sponsor continues to
believe in good faith that the Index does not reflect an accurate
bitcoin value, then the Administrator will utilize the following
cascading set of rules to calculate the Bitcoin Index Price. For the
avoidance of doubt, the Sponsor will employ the below rules
sequentially and in the order presented below, should one or more
specific rule(s) fail:
(i) Bitcoin Index Price = The price set by the Index as of 4:00
p.m., E.T., on the valuation date. According to the Registration
Statement, the Index is a U.S. dollar-denominated composite reference
rate for the price of bitcoin based on the volume-weighted price at
trading venues selected by the Index Provider. Trading venues used to
calculate the Index may include Bitcoin Exchanges, OTC markets or
derivative platforms. According to the Registration Statement, to
ensure that the Index Provider's trading venue selection process is
impartial, the Index Provider considers depth of liquidity, compliance
with applicable legal and regulatory requirements, data availability,
U.S. domicile and acceptance of U.S. dollar deposits. The Index
Provider conducts a quarterly review of these criteria.
According to the Registration Statement, as of the date of the
Registration Statement, the eligible Bitcoin Exchanges selected by the
Index Provider include Bitfinex, Bitstamp, GDAX (formerly known as
Coinbase Exchange), itBit and OKCoin International. Bitfinex is a
trading platform based in Hong Kong for digital currencies, including
bitcoin, that offers many advanced features such as margin and exchange
trading and margin funding. Bitstamp is a European Union-based bitcoin
marketplace that enables people from all around the world to safely buy
and sell bitcoins. GDAX, based in San Francisco, California, is a
digital currency exchange. itBit is a New York City-based, regulated
global exchange that offers retail and institutional investors a
powerful platform to buy and sell bitcoin. OKCoin International is a
worldwide digital currency trading platform that is based in Singapore.
According to the Registration Statement, in the calculation of the
Bitcoin Index Price, the Index Provider cleanses the trade data and
compiles it in such a manner as to algorithmically reduce the impact of
anomalistic or manipulative trading. This is accomplished by adjusting
the weight of each input based on price deviation relative to the
observable set of data for the relevant trading venue, as well as
recent and long-term trading volume at each venue relative to the
observable set for the relevant trading venues. The Index Provider
reduces the weighting of data inputs as they get further from the mean
price across the trading venues and ultimately excludes any trades with
a price that deviates beyond a certain predetermined threshold level
from the
[[Page 10093]]
mean. In addition, the Index groups ``trade bursts'' (i.e., a group of
small-size trades in a short period of time, typically under one
second) and movements during off-peak trading hours on any given venue
into single data inputs, which reduces the potentially erratic price
movements caused by small, individual orders. The Index Provider
formally reevaluates the weighting algorithm quarterly, but maintains
discretion to change the way in which the Index is calculated based on
its periodic review or in extreme circumstances. The precise formula
underlying the Index is proprietary.
According to the Registration Statement, the Index Provider does
not currently include data from OTC markets or derivative platforms.
OTC data is not currently included because of the potential for trades
to include a significant premium or discount paid for larger liquidity,
which creates an uneven comparison relative to more active markets.
There is also a higher potential for OTC transactions to not be arms-
length and thus not be representative of a true market price. Bitcoin
derivative markets are also not currently included as the markets
remain relatively thin. According to the Registration Statement, the
Index Provider will consider International Organization of Securities
Commissions (``IOSCO'') principles for financial benchmarks and the
management of trading venues of bitcoin derivatives when considering
inclusion of OTC or derivative platform data in the future. According
to the Registration Statement, the Index Provider and Genesis, a
Liquidity Provider and affiliate of the Trust, have entered into a
platform license agreement under which the Index Provider licenses its
OTC market platform software to Genesis. Genesis uses the software to
operate its bitcoin trading desk, which Genesis relies upon as a
Liquidity Provider. Under the agreement, Genesis has agreed to provide
its bitcoin trade data to the Index Provider. Consequently, it is
possible that the Index Provider may decide in the future to include
Genesis's OTC trading desk as a trading venue that is included in the
Index. However, currently, the Index Provider does not include data
from the Genesis OTC trading desk (or any other OTC markets).
According to the Registration Statement, to calculate the Bitcoin
Index Price, the weighting algorithm is applied to the price and volume
of all inputs for the immediately preceding 24-hour period as of 4:00
p.m., E.T., on the valuation date. According to the Registration
Statement, to measure volume data and trading halts, the Index Provider
monitors trading activity and regards as eligible those Bitcoin
Exchanges that it determines represent a substantial portion of U.S.
dollar-denominated trading over a sustained period on a platform
without a significant history of trading disruptions. The Index
Provider maintains a monitoring system that tests for these criteria on
an ongoing basis.
The description of the Index is based on information publicly
available at the Index Provider's Web site at https://tradeblock.com/markets/index/. The Index spot price will be available on the Index
Provider's Web site and/or from one or more major market data vendors.
If the Index becomes unavailable, or if the Sponsor determines in
good faith that the Index does not reflect an accurate bitcoin value,
then the Sponsor will, on a best efforts basis, contact the Index
Provider to obtain the Bitcoin Index Price directly from the Index
Provider. If after such contact the Index remains unavailable or the
Sponsor continues to believe in good faith that the Index does not
reflect an accurate bitcoin value, then the Sponsor will employ the
next rule to determine the Bitcoin Index Price.
(ii) Bitcoin Index Price = The volume-weighted average bitcoin
price for the immediately preceding 24-hour period as of 4:00 p.m.,
E.T., on the valuation date as calculated based upon the volume-
weighted average bitcoin prices of the Major Bitcoin Exchanges as
published by an alternative third party's public data feed that the
Sponsor believes is accurately and reliably providing market data
(i.e., is receiving up-to-date and timely market data from constituent
exchanges) (``Second Source''). ``Major Bitcoin Exchanges'' are those
Bitcoin Exchanges that are online, trade on a 24-hour basis and make
transaction price and volume data publicly available. Subject to the
next sentence, if the Second Source becomes unavailable (for example,
data sources from the Second Source for bitcoin prices become
unavailable, unwieldy or otherwise impractical for use), or if the
Sponsor determines in good faith that the Second Source does not
reflect an accurate bitcoin value, then the Sponsor will, on a best
efforts basis, contact the Second Source in an attempt to obtain the
relevant data. If after such contact the Second Source remains
unavailable or the Sponsor continues to believe in good faith that the
Second Source does not reflect an accurate bitcoin price, then the
Sponsor will employ the next rule to determine the Bitcoin Index Price.
(iii) Bitcoin Index Price = The volume-weighted average bitcoin
price as calculated by dividing (a) the U.S. dollar value of the
bitcoin transactions on the Major Bitcoin Exchanges by (b) the total
number of bitcoins traded on the Major Bitcoin Exchanges, in each case
for the 24-hour period from 4:00 p.m., E.T. (or as soon as practicable
thereafter), on the business day prior to the valuation date to 4:00
p.m., E.T. (or as soon as practicable thereafter), on the valuation
date as published by a third party's public data feed that the Sponsor
believes is accurately and reliably providing market data (i.e., is
receiving up-to-date and timely market data from eligible exchanges),
subject to the requirement that such data is calculated based upon a
volume-weighted average bitcoin price obtained from the Major Bitcoin
Exchanges (``Third Source''). Subject to the next sentence, if the
Third Source becomes unavailable (for example, data sources from the
Third Source become unavailable, unwieldy or otherwise impractical for
use), or if the Sponsor determines in good faith that the Third Source
does not reflect an accurate bitcoin price, then the Sponsor will, on a
best efforts basis, contact the Third Source in an attempt to obtain
the relevant data. If after such contact the Third Source remains
unavailable or the Sponsor continues to believe in good faith that the
Third Source does not reflect an accurate bitcoin value then the
Sponsor will employ the next rule to determine the Bitcoin Index Price.
(iv) Bitcoin Index Price = The volume-weighted average bitcoin
price as calculated by dividing (a) the U.S. dollar value of the
bitcoin transactions on the Bitcoin Benchmark Exchanges by (b) the
total number of bitcoins traded on the Bitcoin Benchmark Exchanges, in
each case for the 24-hour period from 4:00 p.m., E.T. (or as soon as
practicable thereafter), on the business day prior to the valuation
date to 4:00 p.m., E.T. (or as soon as practicable thereafter), on the
valuation date. A ``Bitcoin Benchmark Exchange'' is a Bitcoin Exchange
that represents at least 25% of the aggregate U.S. dollar-denominated
trading volume of the bitcoin market during the last 30 consecutive
calendar days and that to the knowledge of the Sponsor is in
substantial compliance with the laws, rules and regulations, including
any anti-money laundering (``AML'') and know-your-customer (``KYC'')
procedures, of such Bitcoin Exchange's applicable jurisdiction;
provided that if there are fewer than three such Bitcoin Exchanges,
then the Bitcoin Benchmark Exchanges will include such Bitcoin Exchange
or Bitcoin Exchanges that
[[Page 10094]]
meet the above-described requirements as well as one or more additional
Bitcoin Exchanges, selected by the Sponsor, that have had monthly
trading volume of at least 50,000 bitcoins during the last 30
consecutive calendar days and that to the knowledge of the Sponsor is
in substantial compliance with the laws, rules and regulations,
including any AML and KYC procedures, of such Bitcoin Exchange's
applicable jurisdiction.
The Sponsor will review the composition of the exchanges that
comprise the Bitcoin Benchmark Exchanges at the beginning of each
month, or more frequently if necessary, in order to ensure the accuracy
of its composition. Subject to the next sentence, if one or more of the
Bitcoin Benchmark Exchanges become unavailable (for example, data
sources from the Bitcoin Benchmark Exchanges of bitcoin prices become
unavailable, unwieldy or otherwise impractical for use), or if the
Sponsor determines in good faith that the Bitcoin Benchmark Exchange
does not reflect an accurate bitcoin value, then the Sponsor will, on a
best efforts basis, contact the Bitcoin Benchmark Exchange that is
experiencing the service outages in an attempt to obtain the relevant
data. If after such contact one or more of the Bitcoin Benchmark
Exchanges remain unavailable or the Sponsor continues to believe in
good faith that the Bitcoin Benchmark Exchange does not reflect an
accurate bitcoin price, then the Sponsor will employ the next rule to
determine the Bitcoin Index Price.
(v) Bitcoin Index Price = The Sponsor will use its best judgment to
determine a good faith estimate of the Bitcoin Index Price.
Data used for the above calculation of the Bitcoin Index Price is
gathered by the Administrator or its delegate who calculates the
Bitcoin Index Price each business day as of 4:00 p.m., E.T., or as soon
thereafter as practicable. The Administrator will disseminate the
Bitcoin Index Price each business day.
The Index Provider may change the trading venues that are used to
calculate the Index, or otherwise change the way in which the Index is
calculated at any time. The Index Provider does not have any obligation
to consider the interests of the Sponsor, the Administrator, the Trust,
the shareholders or anyone else in connection with such changes. The
Index Provider is not required to publicize or explain the changes, or
to alert the Sponsor or the Administrator to such changes. The Index
Provider will consider IOSCO principles for financial benchmarks and
the management of trading venues of bitcoin derivatives when
considering inclusion of OTC or derivative platform data in the future.
Bitcoin Holdings
According to the Registration Statement, the Trust's assets will
consist solely of bitcoin. The Administrator will determine the value
of the Trust for operational purposes (herein referred to as ``Bitcoin
Holdings''), which is the aggregate U.S. dollar value, based on the
Bitcoin Index Price, of the Trust's bitcoins less its liabilities, on
each day the Shares trade on the Exchange as of 4:00 p.m. E.T., or as
soon thereafter as practicable.\16\ The Administrator will also
determine the Bitcoin Holdings per Share, which equals the Trust's
Bitcoin Holdings divided by the number of outstanding Shares. The
Sponsor will publish the Bitcoin Holdings and the Bitcoin Holdings per
Share each business day at 4:00 p.m., E.T., or as soon thereafter as
practicable at the Trust's Web site at https://grayscale.co/bitcoin-investment-trust/#market-performance.
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\16\ Bitcoin Holdings is different than the GAAP net asset value
referenced in the Registration Statement.
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To calculate the Bitcoin Holdings, the Administrator will determine
the Bitcoin Index Price and multiply the Bitcoin Index Price by the
Trust's aggregate number of bitcoins owned by the Trust as of 4:00
p.m., E.T., on the immediately preceding day. The Administrator will
add the U.S. dollar value of any bitcoins receivable under pending
creation ``Baskets'' (as defined below), if any, determined by
multiplying the number of such creation Baskets by the Bitcoin Basket
Amount and then multiplying such product by the Bitcoin Index Price.
The Administrator will subtract (i) the U.S. dollar value of the
bitcoins constituting any accrued but unpaid fees, (ii) the U.S. dollar
value of the bitcoins to be distributed under pending redemption
Baskets, determined by multiplying the number of such redemption
Baskets by the Bitcoin Basket Amount and then multiplying such product
by the Bitcoin Index Price and (iii) extraordinary legal fees and
certain expenses of the Trust.
The Sponsor will publish the Bitcoin Index Price, the Bitcoin
Holdings and the Bitcoin Holdings per Share on the Trust's Web site as
soon as practicable after its determination. If the Bitcoin Holdings
and Bitcoin Holdings per Share have been calculated using a price per
bitcoin other than the Bitcoin Index Price, the publication on the
Trust's Web site will note the valuation methodology used and the price
per bitcoin resulting from such calculation.
While the Trust's investment objective is for the Shares to reflect
the performance of the value of a bitcoin as represented by the Index,
less the Trust's liabilities and expenses, the Shares may trade in the
secondary market at prices that are lower or higher than the Bitcoin
Holdings per Share. The amount of the discount or premium in the
trading price relative to the Bitcoin Holdings per Share may be
influenced by non-concurrent trading hours and liquidity between the
secondary market and larger Bitcoin Exchanges in the bitcoin exchange
market. While the Shares will be listed and trade on the Exchange from
9:30 a.m. until 4:00 p.m., E.T., liquidity in the global bitcoin
markets may fluctuate depending upon the volume and availability of
larger Bitcoin Exchanges. As a result, during periods in which bitcoin
exchange market liquidity is limited or a major Bitcoin Exchange is
off-line, trading spreads, and the resulting premium or discount, on
the Shares may widen.
Impact on Arbitrage
Because of the potential for arbitrage inherent in the structure of
the Trust, the Sponsor believes that the Shares will not trade at a
material discount or premium to the underlying bitcoin held by the
Trust. The arbitrage process, which in general provides investors the
opportunity to profit from differences in prices of assets, increases
the efficiency of the markets, serves to prevent potentially
manipulative efforts, and can be expected to operate efficiently in the
case of the Shares and bitcoin. If the price of the Shares deviates
enough from the price of bitcoin to create a material discount or
premium, an arbitrage opportunity is created. If the Shares are
inexpensive compared to the bitcoin that underlies them, an arbitrageur
may buy the Shares at a discount, immediately redeem them in exchange
for bitcoin, and sell the bitcoin in the cash market at a profit. If
the Shares are expensive compared to the bitcoin that underlies them,
an arbitrageur may sell the Shares short, buy enough bitcoin to acquire
the number of Shares sold short, acquire the Shares through the
creation process, and deliver the Shares to close out the short
position.\17\ In both instances, the
[[Page 10095]]
arbitrageur serves to efficiently correct price discrepancies between
the Shares and the underlying bitcoin.
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\17\ The Exchange states that the Trust, which will only hold
bitcoin, differs from index-based exchange-traded funds, which may
involve a trust holding hundreds or even thousands of underlying
component securities, necessarily involving in the arbitrage process
movements in a large number of security positions. See, e.g.,
Securities Exchange Act Release No. 46306 (August 2, 2002)
(approving the UTP trading of Vanguard Total Market VIPERs based on
the Wilshire 5000 Total Market Index).
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Creation and Redemption of Shares
According to the Registration Statement, the Trust will issue and
redeem ``Baskets,'' each equal to a block of 100 Shares, only to
Authorized Participants. The size of a Basket is subject to change. The
creation and redemption of a Basket require the delivery to the Trust,
or the distribution by the Trust, of the number of whole and fractional
bitcoins represented by each Basket being created or redeemed, the
number of which is determined by dividing the number of bitcoins owned
by the Trust at such time by the number of Shares outstanding at such
time (calculated to one one-hundred-millionth of one bitcoin), as
adjusted for the number of whole and fractional bitcoins constituting
accrued but unpaid fees and expenses of the Trust and multiplying the
quotient obtained by 100 (``Basket Bitcoin Amount''). The Basket
Bitcoin Amount will gradually decrease over time as the Trust's
bitcoins are used to pay the Trust's expenses. According to the
Registration Statement, as of the date of the Registration Statement,
each Share currently represents approximately 0.094 of a bitcoin.
Authorized Participants are the only persons that may place orders
to create and redeem Baskets. Each Authorized Participant must (i) be a
registered broker-dealer, (ii) enter into a participant agreement with
the Sponsor, the Trust and the Liquidity Providers (``Participant
Agreement'') and (iii) in the case of the creation or redemption of
Baskets that do not use the ``Conversion Procedures'' (as defined
below), own a bitcoin wallet address that is recognized by the
Custodian as belonging to the Authorized Participant (``Authorized
Participant Self-Administered Account''). Authorized Participants may
act for their own accounts or as agents for broker-dealers, custodians
and other securities market participants that wish to create or redeem
Baskets. Shareholders who are not Authorized Participants will only be
able to redeem their Shares through an Authorized Participant.
The creation and redemption of a Basket requires the delivery to
the Trust, or the distribution by the Trust, of the Basket Bitcoin
Amount (that is, the number of bitcoins represented by each Basket),
for each Basket to be created or redeemed. The Basket Bitcoin Amount
multiplied by the number of Baskets being created or redeemed is the
``Total Basket Bitcoin Amount.''
Although the Trust will only create Baskets upon the receipt of
bitcoins, and will only redeem Baskets by distributing bitcoins, an
Authorized Participant may deposit cash with the Administrator, which
will facilitate the purchase or sale of bitcoins through a Liquidity
Provider on behalf of an Authorized Participant (the ``Conversion
Procedures''). ``Liquidity Providers'' must (i) enter into a
Participant Agreement with the Sponsor, the Trust and the Authorized
Participants and (ii) own a bitcoin wallet address that is recognized
by the Custodian as belonging to the Liquidity Provider (``Liquidity
Provider Account'').
To create Baskets in-kind, Authorized Participants will send the
Administrator a creation order on the trade date. The Administrator and
the Marketing Agent will accept or reject the creation order on that
same date, and the Total Basket Bitcoin Amount will be determined as
soon as practicable after 4:00 p.m., E.T., on that date. On the
business day following the trade date, the Authorized Participant will
transfer the Total Basket Bitcoin Amount to the Custodian. Once the
Total Basket Bitcoin Amount is received by the Custodian, the
Administrator will instruct the Transfer Agent to deliver the creation
Baskets to the Authorized Participant.
To create Baskets using the Conversion Procedures, Authorized
Participants will send the Administrator a creation order on the
business day preceding the trade date. The Administrator and the
Marketing Agent will accept or reject the creation order on that same
date. Upon receiving instruction from the Administrator that a creation
order has been accepted, the Authorized Participant will send 110% of
the U.S. dollar value of the Total Basket Bitcoin Amount, determined
using the Bitcoin Index Price as of 4:00 p.m., E.T., on the business
day that the Authorized Participant places the creation order (``Cash
Collateral Amount''). The Total Basket Bitcoin Amount will be
determined as soon as practicable after 4:00 p.m., E.T. the following
day. Upon receiving instruction from the Sponsor that a creation order
has been placed, a Liquidity Provider will buy bitcoins at the lowest
price that it is able to procure using its commercially reasonable
efforts and deliver to the Custodian the Total Basket Bitcoin Amount on
the business day following the trade date. Once the Total Basket
Bitcoin Amount is received by the Custodian, the Administrator will
instruct the Transfer Agent to deliver the creation Baskets to the
Authorized Participant. The Administrator will then send the Liquidity
Providers the amount of cash equal to the Bitcoin Index Price as of
4:00 p.m., E.T., on the business day immediately following the date on
which the creation order was placed multiplied by the Total Basket
Bitcoin Amount and return any remaining amount of the Cash Collateral
Amount to the Authorized Participant. If the Cash Collateral Amount
does not sufficiently cover the Total Basket Bitcoin Amount, the
Authorized Participant will be responsible for paying the balance
before they receive the creation Baskets.
To redeem Baskets in-kind, Authorized Participants will send the
Administrator a redemption order on the trade date. The Administrator
and the Marketing Agent will accept or reject the redemption order on
that same date. On the third business day following the trade date, the
Authorized Participant will deliver to the Transfer Agent redemption
Baskets from its account. Once the redemption Baskets are received by
the Transfer Agent, the Custodian will send the Total Basket Bitcoin
Amount to the Authorized Participant.
To redeem Baskets using the Conversion Procedures, Authorized
Participants will send the Administrator a redemption order. The
Administrator and the Marketing Agent will accept or reject the
redemption order on that same date. Upon receiving instruction from the
Sponsor that a redemption order has been placed, a Liquidity Provider
will sell bitcoins at the highest price that it is able to procure
using its commercially reasonable efforts and deliver to the
Administrator the cash proceeds equal to the Total Basket Bitcoin
Amount. Once the Transfer Agent receives the redemption Baskets from
the Authorized Participant, the Administrator will send the cash
proceeds equal to the Total Basket Bitcoin Amount to the Authorized
Participant. At the instruction of the Administrator, the Custodian
will then send the Liquidity Provider the number of bitcoins that
comprise the Total Basket Bitcoin Amount.
The Sponsor represents that Liquidity Providers will only transact
with exchanges and OTC trading partners that have met AML and KYC
regulatory requirements. Authorized Participants that create and redeem
Baskets using the Conversion Procedures will be responsible for
reimbursing the relevant Liquidity Provider for any expenses incurred
in connection with the Conversion Procedures. The Authorized
Participants will also pay a variable fee to the Administrator for its
facilitation of the Conversion Procedures. There are
[[Page 10096]]
no other fees related to the Conversion Procedures that will be charged
by the Sponsor or the Custodian.
Other than the fees mentioned above, Authorized Participants do not
pay a transaction fee to the Trust in connection with the creation or
redemption of Baskets, but there may be transaction fees associated
with the validation of the transfer of bitcoins by the Bitcoin Network
or fees payable to the Administrator. Authorized Participants who
deposit bitcoins with the Trust in exchange for Baskets will receive no
fees, commissions or other form of compensation or inducement of any
kind from either the Sponsor or the Trust, and no such person has any
obligation or responsibility to the Sponsor or the Trust to effect any
sale or resale of Shares.
Creation Procedures
On any business day, an Authorized Participant may order one or
more creation Baskets from the Trust by placing a creation order with
the Administrator. According to the Registration Statement, creation
orders may be placed either ``in-kind'' or ``in-cash.'' Creation orders
must be placed no later than 5:00 p.m., E.T., on each business day.
Determination of Required Deposits
The Basket Bitcoin Amount required for a creation Basket will be
determined by dividing the number of bitcoins owned by the Trust at
such time by the number of Shares outstanding at such time (calculated
to one one-hundred-millionth of one bitcoin), as adjusted for the
number of whole and fractional bitcoins constituting accrued but unpaid
fees and expenses of the Trust, and multiplying the quotient obtained
by 100. All questions as to the composition of a Basket Bitcoin Amount
will be conclusively determined by the Sponsor and will be final and
binding on all persons interested in the Trust.
Deposits other than those received from an Authorized Participant
Self-Administered Account or a Liquidity Provider Account will be
rejected. The expense and risk of delivery, ownership and safekeeping
of bitcoins, until such bitcoins have been received by the Trust, shall
be borne solely by the Authorized Participant. The Custodian may accept
delivery of bitcoins by such other means as the Sponsor, from time to
time, may determine to be acceptable for the Trust.
Redemption Procedures
On any business day, an Authorized Participant may place a
redemption order specifying the number of redemption Baskets to be
redeemed. According to the Registration Statement, redemption orders
may be placed either ``in-kind'' or ``in-cash.'' Redemption orders must
be placed no later than 5:00 p.m., E.T., on each business day. The
Authorized Participants may only redeem Baskets and cannot redeem any
Shares in an amount less than a Basket.
Determination of Redemption Distribution
The Basket Bitcoin Amount required for a redemption Basket will be
determined by dividing the number of bitcoins owned by the Trust at
such time by the number of Shares outstanding at such time (calculated
to one one-hundred-millionth of one bitcoin), as adjusted for the
number of whole and fractional bitcoins constituting accrued but unpaid
fees and expenses of the Trust, and multiplying the quotient obtained
by 100. Redemption distributions will be subject to the deduction of
any applicable tax or other governmental charges that may be due. The
Sponsor has final determination of all questions as to the composition
of the number of bitcoins required for a redemption Basket.
Suspension or Rejection of Orders
The creation or redemption of Shares may be suspended generally, or
refused with respect to particular requested creations or redemptions,
during any period when the transfer books of the Transfer Agent are
closed or if circumstances outside the control of the Sponsor or its
delegates make it for all practical purposes not feasible to process
creation orders or redemption orders. The Administrator may reject an
order if such order is not presented in proper form as described in the
Participant Agreement or if the fulfillment of the order, in the
opinion of counsel, might be unlawful.
Availability of Information
The Trust's Web site (https://grayscale.co/bitcoin-investment-trust/) will include quantitative information on a per-Share basis
updated on a daily basis, including, for the Trust (i) the current
Bitcoin Holdings per Share daily and the prior business day's Bitcoin
Holdings and the reported closing price, (ii) the mid-point of the bid-
ask price \18\ in relation to the Bitcoin Holdings as of the time the
Bitcoin Holdings is calculated (``Bid-Ask Price'') and a calculation of
the premium or discount of such price against such Bitcoin Holdings and
(iii) data in chart format displaying the frequency distribution of
discounts and premiums of the daily Bid-Ask Price against the Bitcoin
Holdings, within appropriate ranges, for each of the four previous
calendar quarters (or for the life of the Trust, if shorter). In
addition, on each business day the Trust's Web site will provide
pricing information for the Shares.
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\18\ The bid-ask price of the Trust is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day Bitcoin Holdings.
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The Trust's Web site will provide an intra-day indicative value
(``IIV'') per Share updated every 15 seconds, as calculated by the
Exchange or a third party financial data provider during the Exchange's
Core Trading Session (9:30 a.m. to 4:00 p.m., E.T.).\19\ The IIV will
be calculated by using the prior day's closing Bitcoin Holdings per
Share as a base and updating that value during the NYSE Arca Core
Trading Session to reflect changes in the value of the Trust's bitcoin
holdings during the trading day.
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\19\ The IIV on a per Share basis disseminated during the Core
Trading Session should not be viewed as a real-time update of the
Bitcoin Holdings, which is calculated once a day.
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The IIV disseminated during the NYSE Arca Core Trading Session
should not be viewed as an actual real time update of the Bitcoin
Holdings, which will be calculated only once at the end of each trading
day. The IIV will be widely disseminated on a per Share basis every 15
seconds during the NYSE Arca Core Trading Session by one or more major
market data vendors. In addition, the IIV will be available through on-
line information services.
The Bitcoin Holdings for the Trust will be calculated by the
Administrator once a day and will be disseminated daily to all market
participants at the same time. To the extent that the Administrator has
utilized the cascading set of rules described in ``Bitcoin Index
Price'' above, the Trust's Web site will note the valuation methodology
used and the price per bitcoin resulting from such calculation.
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Quotation and last sale information for bitcoin will be widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. In addition, the complete real-time price (and
volume) data for bitcoin is available by subscription from Reuters and
Bloomberg. The spot price of bitcoin is available on a 24-hour basis
from major market data vendors, including Bloomberg and Reuters.
Information relating to trading,
[[Page 10097]]
including price and volume information, in bitcoin will be available
from major market data vendors and from the exchanges on which bitcoin
are traded. The normal trading hours for bitcoin exchanges are 24-hours
per day, 365-days per year.
The Trust will provide Web site disclosure of its Bitcoin Holdings
daily. The Web site disclosure of the Trust's Bitcoin Holdings will
occur at the same time as the disclosure by the Sponsor of the Bitcoin
Holdings to Authorized Participants so that all market participants are
provided such portfolio information at the same time. Therefore, the
same portfolio information will be provided on the public Web site as
well as in electronic files provided to Authorized Participants.
Accordingly, each investor will have access to the current Bitcoin
Holdings of the Trust through the Trust's Web site.
Additional information regarding the Index may be found at https://tradeblock.com/markets/index/.
Trading Rules
The Trust will be subject to the criteria in NYSE Arca Equities
Rule 8.201, including 8.201(e), for initial and continued listing of
the Shares. A minimum of 100,000 Shares will be required to be
outstanding at the start of trading. With respect to application of
Rule 10A-3 under the Act, the Trust will rely on the exception
contained in Rule 10A-3(c)(7). The Exchange believes that the
anticipated minimum number of Shares outstanding at the start of
trading is sufficient to provide adequate market liquidity.
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Trading in the Shares
on the Exchange will occur in accordance with NYSE Arca Equities Rule
7.34(a).\20\ The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, the minimum price variation (``MPV'') for
quoting and entry of orders in equity securities traded on the NYSE
Arca Marketplace is $0.01, with the exception of securities that are
priced less than $1.00 for which the MPV for order entry is $0.0001.
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\20\ The Exchange has three trading sessions for Commodity-Based
Trust Shares each day the Corporation is open for business unless
otherwise determined by the Corporation: (i) The Opening Session
begins at 1:00 a.m., Pacific Time (``P.T.''), and concludes at the
commencement of the Core Trading Session; (ii) the Core Trading
Session begins for each security at 6:30 a.m., P.T., or at the
conclusion of the Market Order Auction, whichever comes later, and
concludes at 1:15 p.m., P.T.; and (iii) the Late Trading Session
begins following the conclusion of the Core Trading Session and
concludes at 5:00 p.m., P.T.
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Further, NYSE Arca Equities Rule 8.201 sets forth certain
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting
as registered Market Makers in the Shares to facilitate surveillance.
Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP Holder acting as a
registered Market Maker in the Shares is required to provide the
Exchange with information relating to its trading in the underlying
bitcoin, related futures or options on futures, or any other related
derivatives. Commentary .04 of NYSE Arca Equities Rule 6.3 requires an
ETP Holder acting as a registered Market Maker, and its affiliates, in
the Shares to establish, maintain and enforce written policies and
procedures reasonably designed to prevent the misuse of any material
nonpublic information with respect to such products, any components of
the related products, any physical asset or commodity underlying the
product, applicable currencies, underlying indexes, related futures or
options on futures and any related derivative instruments (including
the Shares).
As a general matter, the Exchange has regulatory jurisdiction over
its ETP Holders and their associated persons, which include any person
or entity controlling an ETP Holder. A subsidiary or affiliate of an
ETP Holder that does business only in commodities or futures contracts
would not be subject to Exchange jurisdiction, but the Exchange could
obtain information regarding the activities of such subsidiary or
affiliate through surveillance sharing agreements with regulatory
organizations of which such subsidiary or affiliate is a member.
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading on the Exchange in the Shares may be
halted because of market conditions or for reasons that, in the view of
the Exchange, make trading in the Shares inadvisable. These may
include: (1) The extent to which conditions in the underlying bitcoin
markets have caused disruptions and/or lack of trading or (2) whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Shares will be subject to trading halts caused by
extraordinary market volatility pursuant to the Exchange's ``circuit
breaker'' rule.\21\
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\21\ See NYSE Arca Equities Rule 7.12.
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The Exchange will halt trading in the Shares if the Bitcoin
Holdings of the Trust is not calculated or disseminated daily. The
Exchange may halt trading during the day in which an interruption
occurs to the dissemination of the IIV or the Index spot price, as
discussed above. If the interruption to the dissemination of the IIV or
the Index spot price persists past the trading day in which it occurs,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.\22\ In addition, if the
Exchange becomes aware that the Bitcoin Holdings with respect to the
Shares is not disseminated to all market participants at the same time,
it will halt trading in the Shares until such time as the Bitcoin
Holdings is available to all market participants.
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\22\ The Exchange notes that the Exchange may halt trading
during the day in which an interruption to the dissemination of the
IIV or the Index spot price occurs.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances administered by the Exchange, as
well as cross-market surveillances administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\23\ The Exchange represents that
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and federal securities laws applicable to trading on
the Exchange.
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\23\ FINRA conducts cross market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), and the Exchange or FINRA, on behalf of
the Exchange, or both, may
[[Page 10098]]
obtain trading information regarding trading in the Shares from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares from markets and other
entities that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement (``CSSA'').\24\
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\24\ For the list of current members of ISG, see https://www.isgportal.org/home.html.
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Also, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is
able to obtain information regarding trading in the Shares and the
underlying bitcoin or any bitcoin derivative through ETP Holders acting
as registered Market Makers, in connection with such ETP Holders'
proprietary or customer trades through ETP Holders which they effect on
any relevant market.
The Exchange also has a general policy prohibiting the distribution
of material, non-public information by its employees.
All statements and representations made in this filing regarding
(i) the description of the portfolio, (ii) limitations on portfolio
holdings or reference assets or (iii) the applicability of Exchange
rules and surveillance procedures shall constitute continued listing
requirements for listing the Shares on the Exchange.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Trust to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Trust is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Equities Rule 5.5(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an ``Information Bulletin'' of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
The procedures for purchases and redemptions of Shares in Baskets
(including noting that the Shares are not individually redeemable); (2)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its ETP Holders to learn the essential facts relating to every
customer prior to trading the Shares; (3) how information regarding how
the Index and the IIV are disseminated; (4) the requirement that ETP
Holders deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
(5) the possibility that trading spreads and the resulting premium or
discount on the Shares may widen during the Opening and Late Trading
Sessions, when an updated IIV will not be calculated or publicly
disseminated; and (6) trading information. For example, the Information
Bulletin will advise ETP Holders, prior to the commencement of trading,
of the prospectus delivery requirements applicable to the Trust. The
Exchange notes that investors purchasing Shares directly from the Trust
will receive a prospectus. ETP Holders purchasing Shares from the Trust
for resale to investors will deliver a prospectus to such investors.
In addition, the Information Bulletin will reference that the Trust
is subject to various fees and expenses as described in the
Registration Statement. The Information Bulletin will disclose that
information about the Shares of the Trust is publicly available on the
Trust's Web site.
The Information Bulletin will also discuss any relief, if granted,
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \25\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\25\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.201. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares in all trading
sessions and to deter and detect violations of Exchange rules and
applicable federal securities laws. The Exchange or FINRA, on behalf of
the Exchange, or both, will communicate as needed regarding trading in
the Shares with other markets that are members of the ISG, and the
Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in the Shares from such markets.
In addition, the Exchange may obtain information regarding trading in
the Shares from markets that are members of ISG or with which the
Exchange has in place a CSSA. Also, pursuant to NYSE Arca Equities Rule
8.201(g), the Exchange is able to obtain information regarding trading
in the Shares and the underlying bitcoin or any bitcoin derivative
through ETP Holders acting as registered Market Makers, in connection
with such ETP Holders' proprietary or customer trades through ETP
Holders which they effect on any relevant market.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that there is a considerable amount of bitcoin price and bitcoin market
information available on public Web sites and through professional and
subscription services. Investors may obtain on a 24-hour basis bitcoin
pricing information based on the spot price for bitcoin from various
financial information service providers. The closing price and
settlement prices of bitcoin are readily available from the bitcoin
exchanges and other publicly available Web sites. In addition, such
prices are published in public sources, or on-line information services
such as Bloomberg and Reuters. The Trust will provide Web site
disclosure of its bitcoin holdings daily. Quotation and last-sale
information regarding the Shares will be disseminated through the
facilities of the CTA. The IIV will be widely disseminated on a per
Share basis every 15 seconds during the NYSE Arca Core Trading Session
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major
market data vendors. In addition, the IIV will be available through on-
line information services. The Exchange represents that the Exchange
may halt trading during the day in which an interruption to the
dissemination of the IIV or the Index spot price occurs. If the
interruption to the dissemination of the IIV or the Index spot price
persists past the trading day in which it occurred, the Exchange will
halt trading no later than the beginning of the trading day following
the interruption. In addition, if the Exchange becomes aware that the
Bitcoin Holdings with respect to the Shares is not disseminated to all
market participants at the same time, it will halt trading in the
Shares until such time as the Bitcoin Holdings is available to all
market participants. The Bitcoin Holdings per Share will be calculated
daily and made available to all market participants at the same time.
One or more major market data vendors will
[[Page 10099]]
disseminate for the Trust on a daily basis information with respect to
the most recent Bitcoin Holdings per Share and Shares outstanding.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a CSSA. In addition, as noted above,
investors will have ready access to information regarding the Trust's
bitcoin holdings, IIV and quotation and last sale information for the
Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product, and the first such product
based on bitcoin, which will enhance competition among market
participants, to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2017-06 in the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2017-06. This
file number should be included in the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2017-06 and should
be submitted on or before March 2, 2017.
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\26\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02651 Filed 2-8-17; 8:45 am]
BILLING CODE 8011-01-P
