Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust, Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 5140-5157 [2019-02732]

Download as PDF 5140 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices maintained. Thus, the Commission believes that the proposed rule change would enable ICE Clear Europe to maintain a sound risk management framework for comprehensively managing its model risk. Therefore, the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(e)(3).35 D. Consistency With Rules 17Ad– 22(e)(4)(vii), (e)(6)(vii), and (e)(7)(vii) Rule 17Ad–22(e)(4)(vii) requires that ICE Clear Europe establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes, including by performing a model validation for its credit risk models not less than annually or more frequently as may be required by its risk management framework.36 Rule 17Ad– 22(e)(6)(vii) requires that ICE Clear Europe establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, among other things, requires a model validation for its margin system and related models to be performed not less than annually, or more frequently as may be contemplated by its risk management framework.37 Rule 17Ad– 22(e)(7)(vii) requires that ICE Clear Europe establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by ICE Clear Europe, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by, among other things, performing a model validation of its liquidity risk models not less than annually or more frequently as may be contemplated by its risk management framework.38 As discussed above, the MRGF would specify the frequency of model validations. Specifically, the MRGF would provide that model validations shall comply with applicable regulatory requirements, in particular in regards to annual validation cycles, and that model performance assessments shall also be conducted on a periodic basis, with cycles no greater than one year. 35 17 CFR 240.17Ad–22(e)(3). CFR 240.17Ad–22(e)(4)(vii). 37 17 CFR 240.17Ad–22(e)(6)(vii). 38 17 CFR 240.17Ad–22(e)(7)(vii). 36 17 VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 The Commission believes that these aspects of the MRGF would help ensure that ICE Clear Europe complies with the aspects of Rules 17Ad–22(e)(4)(vii), (e)(6)(vii), and (e)(7)(vii) 39 that require annual model validations by providing that the frequency of model validations shall comply with applicable regulatory requirements, in particular in regards to annual validation cycles, and that model performance assessments shall also be conducted on cycles no greater than one year. Therefore, the Commission finds that the proposed rule change is consistent with Rules 17Ad–22(e)(4)(vii), (e)(6)(vii), and (e)(7)(vii).40 IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act, and in particular, with the requirements of Section 17A(b)(3)(F) of the Act 41 and Rules 17Ad–22(e)(2)(i) and (v), (e)(3), (e)(4)(vii), (e)(6)(vii), and (e)(7)(vii) thereunder.42 It is therefore ordered pursuant to Section 19(b)(2) of the Act 43 that the proposed rule change, as modified by Amendment No. 1 (SR–ICEEU–2018– 024), be, and hereby is, approved.44 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.45 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2019–02733 Filed 2–19–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–85119; File No. SR– CboeBZX–2019–004] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust, Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares February 13, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 30, 2019, Cboe BZX Exchange, Inc. (‘‘BZX’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The 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 a rule change to list and trade shares of SolidX Bitcoin Shares (the ‘‘Fund’’) issued by the VanEck SolidX Bitcoin Trust (the ‘‘Trust’’), under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The shares of the Trust are referred to herein as the ‘‘Shares.’’ The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 39 17 CFR 240.17Ad–22(e)(4)(vii), (e)(6)(vii), and (e)(7)(vii). 40 17 CFR 240.17Ad–22(e)(4)(vii), (e)(6)(vii), and (e)(7)(vii). 41 15 U.S.C. 78q–1(b)(3)(F). 42 17 CFR 240.17Ad–22(e)(2)(i) and (v), (e)(3), (e)(4)(vii), (e)(6)(vii), and (e)(7)(vii). 43 15 U.S.C. 78s(b)(2). 44 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 45 17 CFR 200.30–3(a)(12). PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1 15 2 17 E:\FR\FM\20FEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade the Shares under BZX Rule 14.11(e)(4),3 which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.4 SolidX Management LLC is the sponsor of the Trust (‘‘Sponsor’’). The Trust will be responsible for custody of the Trust’s bitcoin. SolidX Management LLC is a wholly-owned subsidiary of SolidX Partners Inc. Delaware Trust Company is the trustee (‘‘Trustee’’). The Bank of New York Mellon will be the administrator (‘‘Administrator’’), transfer agent (‘‘Transfer Agent’’) and the custodian, with respect to cash, (‘‘Cash Custodian’’) of the Trust. Foreside Fund Services, LLC will be the marketing agent (‘‘Marketing Agent’’) in connection with the creation and redemption of ‘‘Baskets’’ 5 of Shares. Van Eck Securities Corporation (‘‘VanEck’’) provides assistance in the marketing of the Shares. The Trust was formed as a Delaware statutory trust on September 15, 2016 and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in the Trust’s net assets. The Trust’s assets will consist of bitcoin 6 held by the Trust utilizing a secure process as described below in ‘‘bitcoin Security and Storage for the Trust’’. The Trust will not normally hold cash or any other assets, but may hold a very limited amount of cash in connection with the 3 The Commission approved BZX Rule 14.11(e)(4) in Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR–BATS–2011–018). 4 All statements and representations made in this filing regarding (a) the description of the portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange rules and surveillance procedures shall constitute continued listing requirements for listing the Shares on the Exchange. 5 The Trust will issue and redeem ‘‘Baskets’’, each equal to a block of 5 Shares, only to ‘‘Authorized Participants’’. See ‘‘Creation and Redemption of Shares’’ below. 6 A ‘‘bitcoin’’ is an asset that can be transferred among parties via the internet, but without the use of a central administrator or clearing agency (‘‘bitcoin’’). The asset, bitcoin, is generally written with a lower case ‘‘b’’. The asset, bitcoin, is differentiated from the computers and software (or the protocol) involved in the transfer of bitcoin among users, which constitute the ‘‘Bitcoin Network’’. The asset, bitcoin, is the intrinsically linked unit of account that exists within the Bitcoin Network. See ‘‘bitcoin and the Bitcoin Industry’’ below. VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 creation and redemption of Baskets and to pay Trust expenses, as described below. According to the Registration Statement, the Trust will invest in bitcoin only. The activities of the Trust are limited to: (1) Issuing Baskets in exchange for the cash and/or bitcoin deposited with the Cash Custodian or Trust, respectively, as consideration; (2) purchasing bitcoin from various exchanges and in OTC transactions; (3) selling bitcoin (or transferring bitcoin, at the Sponsor’s discretion, to pay the Management Fee) as necessary to cover the Sponsor’s Management Fee, bitcoin Insurance Fee, Trust principals’ and employees’ salaries, expenses associated with securing the Trust’s bitcoin and Trust expenses not assumed by the Sponsor and other liabilities; (4) selling bitcoin as necessary in connection with redemptions; (5) delivering cash and/or bitcoin in exchange for Baskets surrendered for redemption; (6) maintaining insurance coverage for the bitcoin held by the Trust; and (7) securing the bitcoin held by the Trust. According to the Registration Statement, the Trust is neither an investment company registered under the Investment Company Act of 1940, as amended,7 nor a commodity pool for purposes of the Commodity Exchange Act (‘‘CEA’’),8 and neither the Trust nor the Sponsor is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares. Investment Objective According to the Registration Statement and as further described below, the investment objective of the Trust is for the Shares to reflect the performance of the price of bitcoin, less the expenses of the Trust’s operations. The Trust intends to achieve this objective by investing substantially all of its assets in bitcoin traded primarily in the over-the-counter (‘‘OTC’’) markets, though the Trust may also invest in bitcoin traded on domestic and international bitcoin exchanges, depending on liquidity and otherwise at the Trust’s discretion. The Trust is not actively managed. It does not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the price of bitcoin. Subject to certain requirements and conditions described below and in the Registration Statement, the Trust, under normal market conditions,9 will use 7 15 U.S.C. 80a–1. U.S.C. 1. 9 Consistent with the definition in Rule 14.11(i)(3)(E), the term ‘‘Normal Market 8 17 PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 5141 available offering proceeds to purchase bitcoin primarily in the OTC markets, without being leveraged or exceeding relevant position limits. Trust Issued Receipts—Standard of Review Section 6(b)(5) and the Applicable Standards Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt as laid out under Rule 14.11(f). The Commission has approved numerous series of Trust Issued Receipts, including Commodity-Based Trust Shares, to be listed on U.S. national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of Section 6(b)(5) of the Act and, as is applicable here, the requirement that a national securities exchange’s rules are designed to prevent fraudulent and manipulative acts and practices. In its recent analysis of commodity-based exchange-traded products (‘‘Commodity ETPs’’), the Commission has focused on this particular language of Section 6(b)(5) of the Act and states that a proposed rule change must offer record evidence to demonstrate that underlying markets are ‘‘regulated markets’’ ‘‘of significant size.’’ The Commission has interpreted the terms ‘‘significant market’’ and ‘‘market of significant size’’ to include a market (or group of markets) as to which: (a) There is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct; and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market. Cboe believes that, based on previous application of the standard, the market for Bitcoin Futures 10 is a regulated Conditions’’ includes, but is not limited to, the absence of trading halts in the applicable financial markets generally; operational issues causing dissemination of inaccurate market information or system failures; or force majeure type events such as natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance. 10 Both Cboe Futures Exchange, Inc. (‘‘CFE’’) and Chicago Mercantile Exchange, Inc. (‘‘CME’’), both members of the Intermarket Surveillance Group, have offered contracts for bitcoin futures products since 2017. While the CFE bitcoin futures contracts and the CME bitcoin futures contracts (collectively, the ‘‘Bitcoin Futures’’) differ in certain of their E:\FR\FM\20FEN1.SGM Continued 20FEN1 5142 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices market of significant size with which the Exchange has in place comprehensive surveillance sharing agreements and, thus, the Commission should approve this proposal.11 In addition, the Exchange also believes that there are sufficient other means to prevent fraudulent and manipulative acts and practices in the Shares, as was presented as an alternate means to demonstrate that a proposal is consistent with Section 6(b)(5) of the Act in the in the order disapproving SR– CboeBZX–2018–001 (the ‘‘GraniteShares Disapproval Order’’).12 Specifically, the Exchange believes that the collective effect of the following factors are sufficient to prevent fraudulent and manipulative acts and practices in the Shares: 13 (i) The regulated nature of implementation details, Bitcoin Futures generally trade and settle like any other cash-settled commodity futures contracts. 11 As the Exchange has stated in a number of other public documents, it continues to believe that bitcoin itself is particularly resistant to price manipulation. The geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin and, in many instances, the bitcoin market is generally less susceptible to manipulation than the equity, fixed income, and commodity futures markets. There are a number of reasons this is the case, including that there is not inside information about revenue, earnings, corporate activities, or sources of supply, making it particularly difficult to disseminate false or misleading information about bitcoin in order to manipulate; manipulation of the price on any single venue would require manipulation of the global bitcoin price in order to be effective; a substantial over-the-counter market provides liquidity and shock-absorbing capacity; bitcoin’s 24/7/365 nature provides constant arbitrage opportunities across all trading venues; and it is unlikely that any one actor could obtain a dominant market share. Further, bitcoin is arguably less susceptible to manipulation than other commodities that underlie ETPs; there may be inside information relating to the supply of the physical commodity such as the discovery of new sources of supply or significant disruptions at mining facilities that supply the commodity that simply are inapplicable as it relates to bitcoin. Further, the Exchange believes that the fragmentation across bitcoin platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of bitcoin prices through continuous trading activity unlikely. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of bitcoin price on any single venue would require manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular bitcoin exchange or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. 12 See Securities Exchange Act Release No. 83913 (August 22, 2018), 83 FR 43923 (August 28, 2018) at 3. 13 While not directly related to the issue of manipulation, the Exchange also notes that the VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 each of the firms that make up the MVIS® Bitcoin OTC Index (the index that is used to price the Shares, as further described below) (the ‘‘MVBTCO’’); 14 (ii) the notional volume of trading 15 and liquidity 16 available on the OTC Trading Desks; (iii) the principal to principal nature of the OTC Trading Desks; and (iv) in addition to its standard surveillance procedures, the Exchange will have in place a comprehensive surveillance sharing agreement with each of the OTC Trading Desks prior to the Shares listing on the Exchange.17 Each of these points is further discussed below. Precedent—Dry Bulk Shipping Futures Looking at the limited instances in which the Commission has included in the record for an approval order an affirmative statement about a ‘‘significant regulated market’’ provides some insight, but very little specificity as to how the standard is applied to proposals that are approved. Of particular interest is the approval order for the Breakwave Dry Bulk Shipping ETF (the ‘‘Shipping Futures ETF’’) which is designed to provide exposure to the daily change in the price of dry bulk freight futures: An ETP that provides exposure to a unique Sponsor expects that the Shares will be purchased primarily by institutional and other substantial investors (such as hedge funds, family offices, private wealth managers and high-net-worth individuals), which will provide additional liquidity and transparency to the bitcoin market in a regulated vehicle such as the Trust. With an estimated initial per-share price equivalent to 25 bitcoin, the Shares will be cost-prohibitive for smaller retail investors while allowing larger and generally more sophisticated institutional investors to gain exposure to the price of bitcoin through a regulated product while eliminating the complications and reducing the risk associated with buying and holding bitcoin. 14 As further described below, Genesis Global Trading, Inc. (‘‘Genesis’’) is a FINRA registered broker-dealer, Cumberland DRW LLC (‘‘Cumberland’’) is an affiliate of DRW Execution Services, LLC, a FINRA registred broker-dealer, and Circle Financial (‘‘Circle’’) is awaiting FINRA approval of its purchase of SI Securities, LLC, a FINRA registered broker-dealer. For purposes of this filing, Genesis, Cumberland, and Circle are collectively referred to as the ‘‘OTC Trading Desks.’’ 15 The Sponsor has indicated that there are tens of millions to hundereds of millions of dollars of bitcoin traded on the OTC Trading Desks on a daily basis. 16 Each constituent firm offers and will continue to offer firm, executable quotes of at least $250,000 depth on both the bid and ask at all times. 17 The Trust maintains crime, excess crime and excess vault risk insurance coverage underwritten by various insurance carriers that will cover the entirety of the Trust’s bitcoin holdings. While the Trust remains fully confident in its system for securing its bitcoin, insurance coverage of all of the Trust’s bitcoin holdings eliminates exposure to the risk of loss to investors through fraud or theft, which in turn eliminates most of the custodial issues associated with a series of Commodity-Based Trust Shares based on bitcoin. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 underlying instrument with no direct precedent for approval. Looking to the language in the approval order for the Shipping Futures ETF, the order states: ‘‘[t]he Commission notes that the Exchange has represented that the Freight Futures trade on wellestablished, regulated markets that are members of the ISG. The Commission finds that the Exchange will be able to share surveillance information with a significant regulated market for trading futures on dry bulk freight.’’ 18 The Approval Order includes no additional analysis that specifically discusses whether the markets with which the listing exchange will be able to share surveillance information related to freight futures, which the Shipping Futures ETF will invest substantially all of its assets in,19 are significant regulated markets. Importantly, the Approval Order included no mention of the listing exchange establishing the existence of other means to sufficiently prevent fraudulent and manipulative acts and practices. Looking deeper, the Approval Order also states that: Freight Futures are financial instruments that trade off-exchange but then are cleared through an exchange. Market participants communicate their buy or sell orders through a network of execution brokers mainly through phone or instant messaging platforms with specific trading instructions related to price, size, and type of order. The execution broker receives such order and then attempts to match it with a counterparty. Once there is a match and both parties confirm the transaction, the execution broker submits the transaction details including trade specifics, counterparty details and accounts to the relevant exchange for clearing, thus completing a cleared block futures transaction. The exchange will then require the relevant member or FCM to submit the necessary margin to support the position similar to other futures clearing and margin requirements.20 That is to say, freight futures trades occur off-exchange and are coordinated through a broker network, mostly through phone and instant messaging, and it is only post-trade that any information is shared with a clearing exchange for the contracts to be cleared and for margin requirements to be communicated. The Approval Order also notes that the liquidity in freight futures has generally been constant over the last five years and open interest represents more than $3 billion.21 The Approval 18 See Securities Exchange Act Release No. 82390 (December 22, 2017), 82 FR 61625 (December 28, 2017) (the ‘‘Approval Order’’) at 30. 19 Id at 5. 20 See Approval Order at 12. 21 Id at 14. E:\FR\FM\20FEN1.SGM 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices Order didn’t include any statistics about the daily market-wide trading volume, but the sponsor of the Shipping Futures ETF estimates a daily volume of $50– 100 million in freight futures.22 While the Approval Order did include some background about the dry bulk freight industry, dry bulk freight charter rates, and the indexes designed to track those rates, there is no discussion or additional facts included that can be used to infer that the market for freight futures is a significant market. There was also no discussion about whether the capacity in which exchanges participate in the freight futures market constituted a regulated market. Because the Approval Order includes no specific mention of the factors used to determine that the freight futures market is significant and regulated, the best reference is to look to the most obvious factors and where the Commission retroactively provided guidance as to the basis for determining that the market was a significant, regulated market.23 First, it’s arguable based on the description in the Approval Order that the exchanges’ role in the freight futures ecosystem is not even that of a ‘‘market,’’ but rather as a trade reporting facility and clearing venue. The Commission obviously determined that even the limited capacity in which the exchanges are involved in freight futures constituted a ‘‘market,’’ but comparing that capacity where message and phone based trades are reported after the fact to an exchange to the fully transparent order books in Bitcoin Futures, the regulatory role and the information available to surveil for manipulative activity are both significantly greater in the Bitcoin Futures markets at CFE and CME. As such, the Exchange represents that Bitcoin Futures trade on regulated markets that are members of the ISG. Second, the statistics related to Bitcoin Futures compare favorably to freight futures.24 For instance, the 22 See page 3 of the slide show available at: https:// www.drybulketf.com/assets/ETFMG-BDRY-ETFInvestment-Strategy.pdf. 23 The GraniteShares Disproval Order provided some additional insight into the basis for determining that the dry bulk shipping futures market was a significant, regulated market than was originally included in the Approval Order, as further described below. 24 As noted above, the GraniteShares Disapproval Order provided more detail about the analysis than the Approval Order itself, pointing out that the length of time that the futures had been trading (‘‘at least a dozen years’’) and that the proposal included more than just daily volume figures, but also VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 notional average daily volume for Bitcoin Futures in the third quarter and fourth quarter of 2018 were more than $150 million and $121 million, respectively,25 as compared to the estimate of $50–100 million per day for freight futures. Moreover, approximately $44.1 billion in Bitcoin Futures traded in 2018 26 and more than $7.7 billion in Bitcoin Futures traded in the fourth quarter of 2018, even as the price of bitcoin declined.27 Further, open interest in Bitcoin Futures was approximately $86 million as of December 31, 2018.28 Stated another way, approximately 5.8 million bitcoin worth of Bitcoin Futures traded in 2018 (more than 30% of the current total bitcoin supply), more than 1.5 million bitcoin worth traded in the fourth quarter alone (more than 4% of the current total bitcoin supply), and more than 22,600 bitcoin worth of open interest exists in Bitcoin Futures. Looking at these numbers, the liquidity in Bitcoin Futures was relatively consistent over 2018. Given the favorable comparison to freight futures, the Exchange believes that the significant trading volume in Bitcoin Futures, especially as it relates to the total bitcoin supply, makes the market for Bitcoin Futures a significant market.29 included statistics related to open interest, yearly volume, and distribution of open interest across contract types and had represented that liquidity had remained relatively constant over a five-year period. The GraniteShares Disapproval Order also noted that the listing exchange had represented that ‘‘the Freight Futures trade on well-established, regulated markets that are members of the ISG.’’ See GraniteShares Disapproval Order at 24. 25 All statistics herein are based on publicly available statistics from CFE and CME and a bitcoin price of $7107, $6691, $6593, $6478, $5452, and $3720, for July through December, respectively, and $7558 for 2018, which was the approximate average daily price of bitcoin in 2018. 26 Based on publicly available statistics from CFE and CME and a bitcoin price of $7558, which was the approximate average daily price of bitcoin in 2018. 27 Based on publicly available statistics from CFE and CME and a bitcoin price of $6478, $5452, and $3720, for October, November, and December, respectively, which were each the approximate average daily price of bitcoin during those months. 28 Based on publicly available statistics from CFE and CME and a bitcoin price of $3791, which was the approximate price of bitcoin on December 31, 2018. 29 The Exchange also notes that there has been a strong correlation between the price of Bitcoin Futures and the bitcoin spot price over the more than year-long trading history of Bitcoin Futures, which is indicative of the easily arbitrageable bitcoin spot and Bitcoin Futures prices. See Memorandum to File No. SR–CboeBZX–2018–040, PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 5143 Volatility and Manipulation The Exchange also takes issue with the implication that the price volatility in bitcoin implies that the price of bitcoin is being manipulated and, thus, the underlying markets cannot be significant and regulated. Looking at the history of the Baltic Dry Index (the ‘‘BDI’’), which is a composite index designed to reflect the broader dry bulk shipping industry and which the Approval Order states ‘‘is a common industry measure of dry bulk rates’’ that ‘‘has reflected the volatility of charter rates over the last 15 years,’’ the dry bulk shipping industry often experiences even greater periods of volatility than the price of bitcoin. For instance, the BDI hit a record high of 11,793 on May 20, 2008 and proceeded to fall to 663 by December 5, 2008, a decline of nearly 95% over approximately six and a half months. While that was the largest decline, it is one of numerous significant price declines in the recent history of the BDI. For instance, from August 3, 2015 to February 8, 2016, the BDI went from 1200 to 291 (¥74.6% over six months). From December 9, 2013 to July 14, 2014 the BDI went from 2330 to 732 (¥68.6% over seven months) and further fell to 513 on February 7, 2015 (total decline of 78% over 14 months).30 Even since the Approval Order was issued, the BDI dropped from 1702 in December 2017 to 948 in April (¥44.4% in five months), bounced back to 1773 in July and dropped to 1008 in November (¥43.2% in five months). The price of the fund (and investors’ returns) reflects this volatility. Just like the price of bitcoin, the price of dry bulk shipping (and thus the BDI) is dependent on the complex interaction of natural market forces, which can result in significant price movement over short periods of time as supply or demand adjust. November 28, 2018, available at: https:// www.sec.gov/comments/sr-cboebzx-2018-040/ srcboebzx2018040-4691015-176590.pdf. 30 The BDI is a composite index made up of subindices that track the Capesize, Panamax, Supramax, and Handysize charter rates. According to the Approval Order, the reference indexes for the dry bulk shipping fund track the charter rate for only Capesize, Panamax, and Supramax, meaning that, the fund in the Approval Order excludes Handysize rates. Publicly available information indicates that Capesize, Panamax, and Supramax rates have experienced similar, if not more pronounced, volatility as the BDI index over the same period of review. For example, the Baltic Capesize Index fell from 18,749 in May 2008 to 838 in November 2008 (96.6%). E:\FR\FM\20FEN1.SGM 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices Further to this point, the Exchange emphasizes that the standard applicable under Section 6(b)(5) of the Act is not that there must be a complete absence of manipulation in the underlying market. In fact, the Commodity Futures Trading Commission (the ‘‘CFTC’’) 31 Chart sourced from United Nations Conference on Trade and Development, Review of Maritime Transport 2018. 32 Chart sourced from cnbc.com. VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 significantly increased the number of enforcement cases it brought in fiscal year 2018 related to manipulative conduct and spoofing,33 including bringing cases involving futures related to gold, silver, and S&P 500 futures 33 See 2018 Annual Report on the Division of Enforcement at the Commodity Futures Trading Commission, available: https://www.cftc.gov/sites/ default/files/2018-11/ENFAnnualReport111418_ 0.pdf. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 contracts, among others,34 each of which are also the underlying reference asset for numerous ETPs. As noted in the GraniteShares Disapproval Order, such manipulation on regulated markets provides regulators, including the listing self-regulatory organization, with 34 See James M. McDonald, Statement in Connection with Manipulation and Spoofing Filings (Jan. 29, 2018). https://www.cftc.gov/PressRoom/ SpeechesTestimony/mcdonaldstatement012918. E:\FR\FM\20FEN1.SGM 20FEN1 EN20FE19.000</GPH> EN20FE19.001</GPH> 5144 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices a window into such manipulative trading activity, leaving them better able to detect, understand, and deter potential manipulation in the ETP and the underlying reference asset. Based on the favorable comparison laid out above between the Bitcoin Futures market and the dry bulk shipping futures market combined with the Commission’s determination that the dry bulk shipping market is a significant, regulated market, the Exchange believes that the Bitcoin Futures market is similarly significant and regulated and would provide the window described above into potential manipulation in the Shares. As further described below, the Exchange will also be able to obtain information about bitcoin transactions, trades and market data from each of the OTC platforms that are included in the MVBTCO and from bitcoin exchanges with which the Exchange has entered into a comprehensive surveillance sharing agreement, as well as certain additional information that is publicly available through the Bitcoin blockchain. Basis for Approval This analysis of the Approval Order is not to say that the Approval Order should not have been issued—to the contrary, Cboe is only asking that this proposal be reviewed through the same lens as similar precedent and believes that such an analysis would result in this proposal being approved. The Commission’s approval of this or any proposal to list and trade an ETP is not an endorsement of the underlying asset and especially is not a guarantee against the ETP being an extremely risky and/ or volatile investment. Rather, it signifies that the benefits to end investors that want exposure to a particular asset class from having a regulated and transparent U.S. exchange traded vehicle outweigh the applicable risk of manipulation. With this in mind, Cboe believes that the Bitcoin Futures market is a significant, regulated market, especially when compared to the dry bulk shipping futures market described in the Approval Order, and therefore the Commission should approve this proposal. Further, even if the Commission were to determine that the Bitcoin Futures market is not a significant, regulated market, the Exchange believes that the regulated nature of each of the firms that make up the MVIS® Bitcoin OTC, the nature of trading and liquidity available on each of its constituents, and the comprehensive surveillance sharing agreements that the Exchange will have in place with each of the OTC Trading Desks, constitutes sufficient record VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 evidence to demonstrate that there are other means to prevent fraudulent and manipulative acts and practices in the Shares. Bitcoin Price Index The Fund will use the MVBTCO to calculate the Trust’s net asset value (‘‘NAV’’). The MVBTCO represents the value of one bitcoin in U.S. dollars at any point in time based on executable bids and asks derived from constituent bitcoin OTC platforms.35 The index also generates a closing price as of 4:00 p.m., Eastern Time (‘‘E.T.’’), each weekday, which is the value used to calculate the Trust’s NAV. The index price and the closing price are calculated using the same methodology. The intra-day levels of the MVBTCO incorporate the realtime price of bitcoin based on executable bids and asks derived from constituent bitcoin OTC platforms that have entered into an agreement with MV Index Solutions GmbH (‘‘MVIS’’) to provide such information. The intra-day price and closing level of the MVBTCO are calculated using a proprietary methodology collecting executable bid/ask spreads and calculating a mid-point price from several U.S.-based bitcoin OTC platforms and is published at or after 4:00 p.m., E.T., each weekday. The MVBTCO is published to two decimal places rounded on the last digit. The MVBTCO has been live since November 20, 2018 and additional information about the index can be found on the MVBTCO’s website (https://www.mvisindices.com/indices/digital-assets/mvisbitcoin-us-otc-spot). MVIS is the index sponsor and calculation agent for the MVBTCO. The Sponsor has entered into a licensing agreement with MVIS to use the MVBTCO. The Trust is entitled to use the MVBTCO pursuant to a sublicensing arrangement with the Sponsor. The MVBTCO calculates the intra-day price of bitcoin every 15 seconds, including the closing price as of 4:00 p.m. E.T. The bitcoin OTC platforms included in the MVBTCO are U.S.-based entities. These platforms are well established institutions that comply with anti-money laundering (‘‘AML’’) and know your customer (‘‘KYC’’) regulatory requirements with respect to trading counterparties and include entities that are regulated by the SEC 35 As noted above, each OTC Trade Desk offers constant, executable bids and offers of at least $250,000 worth of bitcoin. The index value is based on these bids and offers, the logic for which is further described below. The OTC Trading Desks are the three largest participants in the U.S. dollar OTC bitcoin trading market. The Exchange will have in place a comprehensive surveillance sharing agreement with each of the OTC Trading Desks prior to the Shares listing on the Exchange. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 5145 and FINRA as registered broker-dealers and affiliates of broker-dealers. The logic utilized for the derivation of the intra-day and daily closing index level for the MVBTCO is intended to analyze actual executable bid/ask spread data, verify and refine the data set and yield an objective, fair-market value of one bitcoin throughout the day and as of 4:00 p.m. E.T. each weekday, priced in U.S. dollars. As discussed herein, the MVBTCO intra-day price and the MVBTCO closing price are collectively referred to as the MVBTCO price, unless otherwise noted. The key elements of the algorithm underlying the MVBTCO include: • Equal Weighting of OTC Platforms: This mitigates the impact of spikes at single platforms. • Using executable bid/ask spreads and the respective mid-point prices, which are consistently available. The Sponsor is not aware of any bitcoin derivatives currently trading based on the MVBTCO. OTC Trading OTC trading of bitcoin is generally accomplished via bilateral agreements on a principal-to-principal basis. All risks and issues of credit are between the parties directly involved in the transaction. The OTC market provides a relatively flexible market in terms of quotes, price, size and other factors. The OTC market has no formal structure and no open-outcry meeting place. Parties engaging in OTC transactions will agree upon a price—often via phone or email—and one of the two parties would then initiate the transaction. For example, a seller of bitcoin could initiate the transaction by sending the bitcoin to the buyer’s bitcoin address. The buyer would then wire U.S. dollars to the seller’s bank account. The OTC Trading Desks are the three largest participants in the U.S. dollar OTC bitcoin trading market. Based on its observations and experience in the market, the Sponsor estimates that the U.S. dollar OTC bitcoin trading volume globally represents on average approximately 25–50% of the trading volume of bitcoin traded globally in U.S. dollars on U.S. dollar-denominated bitcoin exchanges. According to the Registration Statement, transaction costs in the OTC market are negotiable between the parties and therefore vary with some participants willing to offer competitive prices for larger volumes, although this will vary according to market conditions. Cost indicators can be obtained from OTC trading platforms as well as various information service providers, such as the bitcoin price E:\FR\FM\20FEN1.SGM 20FEN1 5146 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices indexes and bitcoin exchanges. OTC trading tends to be in large blocks of bitcoin and between institutions. The Trust intends to buy and sell bitcoin in the OTC bitcoin market. The Sponsor currently expects that often it will be more cost efficient for the Trust to effect large trades (e.g., $500,000 or greater) in the OTC market rather than on a bitcoin exchange. The Trust therefore expects to conduct most of its trading in the OTC bitcoin market, primarily on the OTC platforms that comprise the MVBTCO. As noted above, each OTC Trade Desk offers constant, executable bids and offers of at least $250,000 worth of bitcoin and offers near real-time quotes for tens of millions of dollars of bitcoin and, in most circumstances, minimal slippage. When buying and selling bitcoin in the OTC market, the Trust will consider various market factors, including the total U.S. dollar size of the trade, the volume of bitcoin traded across the various U.S. dollar-denominated bitcoin exchanges during the preceding 24-hour period, available liquidity offered by OTC market participants, and the bid and ask quotes offered by OTC market participants. The Trust’s goal is to fill an order at the best possible price. To the extent a Basket creation or redemption order necessitates the buying or selling of a large block of bitcoin (e.g., an amount that if an order were placed on an exchange would potentially move the price of bitcoin), the Sponsor represents that placing such a trade in the OTC market may be advantageous to the Trust. OTC trades help avoid factors such as potential price slippage (causing the price of bitcoin to move as the order is filled on the exchange), while offering speed in trade execution and settlement (an OTC trade can be executed immediately upon agreement of terms between counterparties) and privacy (to avoid other market participants entering trades in advance of a large block order). OTC bitcoin trading is typically private and not regularly reported. The Trust does not intend to report its OTC trading. The Trust has established delivery-versus-payment like (‘‘DVP’’) and receive-versus-payment like (‘‘RVP’’) trading arrangements with its trading counterparties pursuant to which the Trust will be able to minimize counterparty risk. These arrangements are on a trade-by-trade basis and do not bind the Trust to continue to trade with any counterparty. The Trust expects to take custody of bitcoin within one business day of receiving an order from an Authorized Participant to create a Basket (as defined VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 in ‘‘Creation and Redemption of Shares’’ below). The dual elements of principal to principal trading combined with the large size at which trades are effected should effectively eliminate the ability of market participants to manipulate the market with small trades as may be the case on any individual exchange. As noted above, the OTC desks that comprise the MVBTCO with which the Trust intends to effect transactions are well established institutions that comply with AML and KYC regulatory requirements with respect to trading counterparties and include entities that are regulated by the SEC and FINRA as registered broker-dealers and affiliates of broker-dealers. It is the Sponsor’s position that the OTC desks have a better measure of the market than any exchange-specific reference price, whether individually or indexed across multiple exchanges. Bitcoin Trading on Exchanges According to the Registration Statement, to the extent the Trust conducts bitcoin trading on an exchange, it expects to do so on the following U.S. dollar-denominated bitcoin exchanges: Bitstamp (located in Slovenia and with an office in the U.K.), Coinbase (located in California), Gemini (located in New York), itBit (located in New York), bitFlyer (located in New York) and Kraken (located in San Francisco). All of these exchanges follow AML and KYC regulatory requirements. Bitcoin Price Transparency In addition to the price transparency of the MVBTCO, with respect to the OTC market, and the bitcoin exchange market itself, the Trust will provide information regarding the Trust’s bitcoin holdings as well as additional data regarding the Trust. The Sponsor expects that the dissemination of information on the Trust’s website, along with quotations for and last-sale prices of transactions in the Shares and the intra-day indicative value (‘‘IIV’’) and NAV of the Trust will help to reduce the ability of market participants to manipulate the bitcoin market or the price of the Shares and that the Trust’s arbitrage mechanism will facilitate the correction of price discrepancies in bitcoin and the Shares. The Sponsor believes that demand from new, larger investors accessing bitcoin through investment in the Shares will broaden the investor base in bitcoin, which could further reduce the possibility of collusion among market participants to manipulate the bitcoin market. The Sponsor expects that the Shares will be PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 purchased primarily by institutional and other substantial investors (such as hedge funds, family offices, private wealth managers and high-net-worth individuals), which will provide additional liquidity and transparency to the bitcoin market in a regulated vehicle such as the Trust. According to the Sponsor, the MVBTCO’s methodology decreases the influence on the MVBTCO of any particular OTC platform that diverges from the rest of the data points used by the MVBTCO, which reduces the possibility of an attempt to manipulate the price of bitcoin as reflected by the MVBTCO. Bitcoin Security and Storage for the Trust According to the Sponsor, given the novelty and unique digital characteristics (as set forth above) of bitcoin as an innovative asset class, traditional custodians who normally custody assets do not currently offer custodial services for bitcoin. Accordingly, the Trust will secure bitcoin using multi-signature ‘‘cold storage wallets’’, an industry best practice. A cold storage wallet is created and stored on a computer with no access to a network, i.e., an ‘‘airgapped’’ computer with no ability to access the internet. Such a computer is isolated from any network, including local or internet connections. A multisignature address is an address associated with more than one private key. For example, a ‘‘2 of 3’’ address requires two signatures (out of three) from two separate private keys (out of three) to move bitcoin from a sender address to a receiver address. The Trust will utilize bitcoin private keys that are generated and stored on air-gapped computers. The movement of bitcoin will require physical access to the air-gapped computers and use of multiple authorized signers. For backup and disaster recovery purposes, the Trust will maintain cold storage wallet backups in locations geographically distributed throughout the United States, including in the Northeast and Midwest. In addition to its security system, the Trust will maintain comprehensive insurance coverage underwritten by various insurance carriers. The purpose of the insurance is to protect investors against loss or theft of the Trust’s bitcoin. The insurance will cover loss of bitcoin by, among other things, theft, destruction, bitcoin in transit, computer fraud and other loss of the private keys that are necessary to access the bitcoin held by the Trust. The coverage is subject to certain terms, conditions and E:\FR\FM\20FEN1.SGM 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices exclusions, as discussed in the Registration Statement. The insurance policy will carry initial limits of $25 million in primary coverage and $100 million in excess coverage, with the ability to increase coverage depending on the value of the bitcoin held by the Trust. To the extent the value of the Trust’s bitcoin holdings exceeds the total $125,000,000 of insurance coverage, the Sponsor has made arrangements for additional insurance coverage with the goal of maintaining insurance coverage at a one-to-one ratio with the Trust’s bitcoin holdings valued in U.S. dollars such that for every dollar of bitcoin held by the Trust there is an equal amount of insurance coverage. The Sponsor expects that the Trust’s auditor will verify the existence of bitcoin held in custody by the Trust. In addition, the Trust’s insurance carriers will have inspection rights associated with the bitcoin held in custody by the Trust. Bitcoin Market Price In the ordinary course of business, the Administrator will value the bitcoin held by the Trust based on the closing price set by the MVBTCO or one of the other pricing sources set forth below (each, a ‘‘bitcoin Market Price’’) as of 4:00 p.m. E.T., on the valuation date on any day that the Exchange is open for regular trading. For further detail, see (i) below. If for any reason, and as determined by the Sponsor, the Administrator is unable to value the Trust’s bitcoin using the procedures described in (i), the Administrator will value the Trust’s bitcoin using the cascading set of rules set forth in (ii) through (iv) below. For the avoidance of doubt, the Administrator will employ the below rules sequentially and in the order as presented, should the Sponsor determine that one or more specific rule(s) fails. The Sponsor may determine that a rule has failed if a pricing source is unavailable or, in the judgment of the Sponsor, is deemed unreliable. To the extent the Administrator uses any of the cascading set of rules, the Sponsor will make public on the Trust’s website the rule being used. (i) Except as further described below, the bitcoin Market Price will be: The price set by the MVBTCO as of 4:00 p.m. E.T., on the valuation date. The MVBTCO is a real-time U.S. dollardenominated composite reference rate for the price of bitcoin. The MVBTCO calculates the intra-day price of bitcoin every 15 seconds, including the closing price as of 4:00 p.m. E.T. The intra-day price and closing price are based on a methodology that consists of collecting VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 actual executable bid/ask spreads and calculating a mid-point price from constituent bitcoin OTC platforms that have entered into an agreement with MVIS. The logic utilized for the derivation of the daily closing index level for the MVBTCO is intended to analyze actual executable bid/ask spread data, verify and refine the data set, and yield an objective, fair-market value of one bitcoin throughout the day and as of 4:00 p.m. E.T. each weekday, priced in U.S. dollars. (ii) In the event that rule (i) above fails, the bitcoin Market Price will be: the mid-point price between the bid/ask obtained by the Sponsor from any one of the bitcoin OTC platforms included within the MVBTCO index as of 4:00 p.m. E.T., on the valuation date. (iii) In the event that rules (i) and (ii) above fail, the bitcoin Market Price will be: the volume weighted average bitcoin price for the immediately preceding 24hour period at 4:00 p.m. E.T. on the valuation date as published by an alternative third party’s public data feed that the Sponsor determines is reasonably reliable, subject to the requirement that such data is calculated based upon a volume weighted average bitcoin price obtained from the major U.S. dollar-denominated bitcoin exchanges (‘‘Second Source’’). Subject to the next sentence, if the Second Source becomes unavailable (e.g., data sources from the Second Source for bitcoin prices become unavailable, unwieldy or otherwise impractical for use), or if the Sponsor determines in good faith that the Second Source does not reflect an accurate bitcoin price, then the Sponsor will, on a best efforts basis, contact the Second Source in an attempt to obtain the relevant data. If after such contact the Second Source remains unavailable or the Sponsor continues to believe in good faith that the Second Source does not reflect an accurate bitcoin price, then the Administrator will employ the next rule to determine the bitcoin Market Price. (iv) In the event that rules (i), (ii), and (iii) above fail, the bitcoin Market Price will be: The Sponsor will use its best judgment to determine a good faith estimate of the bitcoin Market Price. The Trust According to the Registration Statement, the Trust will invest in bitcoin only. The Trust will either (i) cause the Sponsor to receive bitcoin from the Trust in such quantity as may be necessary to pay the Management Fee or (ii) sell bitcoin in such quantity as may be necessary to permit payment in cash of the Management Fee and other Trust expenses and liabilities not PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 5147 assumed by the Sponsor, such as the bitcoin Insurance Fee, bitcoin storage fees and salaries of Trust principals and employees. As a result, the amount of bitcoin sold will vary from time to time depending on the level of the Trust’s expenses and the market price of bitcoin. The Trust will pay the Sponsor a management fee as compensation for services performed on behalf of the Trust and for services performed in connection with maintaining the Trust. The Sponsor’s fee will be payable monthly in arrears and will be accrued daily. The bitcoin Insurance Fee will be payable by the Trust monthly in advance, as described in the Registration Statement. Bitcoin storage fees and salaries of Trust principals and employees will be payable monthly in arrears and will be accrued daily. In exchange for the Management Fee, the Sponsor has agreed to assume the following administrative and marketing expenses incurred by the Trust: Each of the Trustee’s, Administrator’s, Cash Custodian’s, Transfer Agent’s and Marketing Agent’s monthly fee and outof-pocket expenses and expenses reimbursable in connection with such service provider’s respective agreement; the marketing support fees and expenses; exchange listing fees; SEC registration fees; index license fees; printing and mailing costs; maintenance expenses for the Trust’s website; audit fees and expenses; and up to $100,000 per annum in legal expenses. The Trust will be responsible for paying, or for reimbursing the Sponsor or its affiliates for paying, all the extraordinary fees and expenses, if any, of the Trust. The management fee to be paid to the Sponsor, the bitcoin Insurance Fee, the salaries of the Trust’s principals and employees and the expenses associated with custody of the Trust’s bitcoin are expected to be the only ordinary recurring operating expense of the Trust. Net Asset Value The NAV for the Trust will equal the market value of the Trust’s total assets, including bitcoin and cash, less liabilities of the Trust, which include estimated accrued but unpaid fees, expenses and other liabilities. Under the Trust’s proposed operational procedures, the Administrator will calculate the NAV on each business day that the Exchange is open for regular trading, as promptly as practicable after 4:00 p.m. E.T. To calculate the NAV, the Administrator will use the closing price set for bitcoin by the MVBTCO or one of the other bitcoin Market Prices set forth above. The Administrator will also E:\FR\FM\20FEN1.SGM 20FEN1 5148 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices determine the NAV per Share by dividing the NAV of the Trust by the number of the Shares outstanding as of the close of trading on Regular Trading Hours, i.e., 9:30 a.m. to 4:00 p.m. E.T. (which includes the net number of any Shares deemed created or redeemed on such day). According to the Registration Statement, Authorized Participants (as defined in ‘‘Creation and Redemption of Shares’’ below), or their clients or customers, may have an opportunity to realize a riskless profit if they can create a Basket (as defined in ‘‘Creation and Redemption of Shares’’ below) at a discount to the public trading price of the Shares or can redeem a Basket at a premium over the public trading price of the Shares. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price to track NAV per Share closely over time. Such arbitrage opportunities will not be available to holders of Shares who are not Authorized Participants. While the Trust’s investment objective is for the Shares to reflect the performance of the price of bitcoin, less expenses of the Trust’s operations, the Shares may trade in the secondary market at prices that are lower or higher relative to their NAV per Share for a number of reasons, including price volatility, trading volume, and closing of bitcoin trading platforms due to fraud, failure, security breaches or otherwise. The NAV per Share may fluctuate with changes in the market value of the bitcoin held by the Trust. The value of the Shares may be influenced by nonconcurrent trading hours between the Exchange and the various bitcoin OTC platforms comprising the MVBTCO. As a result, there will be periods when the Exchange is closed and the bitcoin OTC platforms continue to trade. Significant changes in the price of bitcoin during such time periods could result in a difference between the value of bitcoin as measured by the MVBTCO and the most recent NAV per Share or closing trading price. The Exchange, however, expects that any meaningful divergence in the intraday price of the Shares and the MVTCO will be quickly arbitraged away when trading is available on the Exchange because when such a discount or premium exists, Authorized Participants will generally be able to create or redeem a Basket of Shares at a discount or a premium to the public trading price per Share. VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 Impact on Arbitrage Investors and market participants are able throughout the trading day to compare the market price of the Shares and the Share’s IIV. If the market price of the Shares diverges significantly from the IIV, Authorized Participants will have strong economic incentive to execute arbitrage trades. Because of the potential for arbitrage inherent in the structure of the Trust, the Sponsor believes that the Shares will not trade at a material discount or premium to the underlying bitcoin held by the Trust. 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. To facilitate the arbitrage process, Authorized Participants may source bitcoin through the OTC market or on exchanges; alternatively, Authorized Participants may create or redeem for cash and the Trust will source buyers and sellers of bitcoin in the OTC market. 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. Creation and Redemption of Shares According to the Registration Statement, the Trust will issue and redeem ‘‘Baskets’’, each equal to a block of 5 Shares, only to ‘‘Authorized Participants’’ (as described below). 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 or the U.S. dollar equivalent 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 PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 fees and expenses of the Trust and multiplying the quotient obtained by 5 (‘‘bitcoin Basket Amount’’). The bitcoin Basket Amount will gradually decrease over time as the Trust’s bitcoin 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 25 bitcoin. Orders to create and redeem Baskets may be placed only by Authorized Participants.36 A transaction fee will be assessed on all creation and redemption transactions effected in-kind. In addition, the Trust reserves the right to charge a variable transaction fee to the Authorized Participants for creations and redemptions effected in cash to cover the Trust’s expenses related to purchasing and selling bitcoin in the OTC market or on bitcoin exchanges if such expenses should exceed the fixed $1,000 transaction fee. The variable transaction fee would cover actual expenses paid for the purchase and sale of bitcoin in order that such expenses do not decrease the NAV of the Trust. Such expenses may vary, but the Trust expects such expenses, should they occur in the future, to constitute 1% or less of the value of a Basket. The creation and redemption of a Basket requires the delivery to the Trust, or the distribution by the Trust, of the bitcoin Basket Amount (that is, the number of bitcoins represented by each Basket or the U.S. dollar equivalent), for each Basket to be created or redeemed. The bitcoin Basket Amount multiplied by the number of Baskets being created or redeemed is the ‘‘Total bitcoin Basket Amount.’’ Creation Procedures On any business day, an Authorized Participant may place an order with the Transfer Agent to create one or more Baskets. For purposes of processing both purchase and redemption orders, a ‘‘business day’’ means any day other than a day when the Exchange is closed for regular trading. Cash purchase orders must be placed by 3:00 p.m. E.T., or the close of regular trading on the Exchange, whichever is earlier, and inkind purchase orders must be placed by 4:00 p.m. E.T., or the close of regular 36 An Authorized Participant must: (1) Be a registered broker-dealer and a member in good standing with the Financial Industry Regulatory Authority (‘‘FINRA’’); (2) be a participant in Depository Trust Company (‘‘DTC’’). To become an Authorized Participant, a person must enter into an ‘‘Authorized Participant Agreement’’ with the Sponsor and the Transfer Agent. The Authorized Participant Agreement provides the procedures for the creation and redemption of Baskets and for the delivery of the cash (and, potentially, bitcoin inkind) required for such creations and redemptions. E:\FR\FM\20FEN1.SGM 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices trading on the Exchange, whichever is earlier. The day on which the Transfer Agent receives a valid purchase order, as approved by the Marketing Agent, is the purchase order date. Purchase orders are irrevocable. By placing a purchase order, and prior to delivery of such Baskets, an Authorized Participant’s DTC account will be charged the non-refundable transaction fee due for the purchase order. Determination of Required Payment The total payment required to create each Basket is determined by calculating the NAV of 5 Shares of the Trust as of the closing time of the Exchange on the purchase order date. Baskets are issued as of 2:00 p.m., E.T., on the business day immediately following the purchase order date at the applicable NAV as of the closing time of the Exchange on the purchase order date, but only if the required payment has been timely received. Orders to purchase Baskets for cash must be placed no later than 3:00 p.m. E.T., or the close of regular trading on the Exchange, whichever is earlier, and orders to purchase Baskets in-kind must be placed no later than 4:00 p.m. E.T., or the close of regular trading on the Exchange, whichever is earlier. For cash creation orders, the total cash payment required to create a Basket will not be determined until approximately 4:00 p.m., E.T. (the time at which the Trust’s NAV for that day is expected to be calculated) on the date the purchase order is received by the Transfer Agent and approved by the Marketing Agent. Authorized Participants therefore will not know the total amount of the payment required to create a Basket at the time they submit an irrevocable purchase order for the Basket. Valid cash orders to purchase Baskets received after 3:00 p.m. E.T., and valid in-kind orders to purchase Baskets received after 4:00 p.m. E.T., are considered received on the following business day. The NAV of the Trust, and thus the total amount of the payment required to create a Basket for cash could rise or fall substantially between the time an irrevocable purchase order is submitted and the time the amount of the purchase price in respect thereof is determined. Changes to the price of bitcoin between the time an order is placed and the time the final price is determined by the Trust will be borne by the Authorized Participant and not by the Trust. The Sponsor makes available through the National Securities Clearing Corporation (‘‘NSCC’’) on each business day, prior to the opening of business on the Exchange (a) the amount of cash VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 required for a cash creation of a Basket (the ‘‘Cash Basket Amount’’), based on 100% of the NAV of the Shares per Basket as of the prior business day, which amount is applicable in order to effect cash purchases of Baskets until such time as the next announced amount is made available and (b) the bitcoin Basket Amount. The payment required to create a Basket typically will be made in cash, but it may also be made partially or wholly in-kind at the discretion of the Sponsor if the Authorized Participant requests to convey bitcoin directly to the Trust. For a cash order to create, the Authorized Participant must deliver the Cash Basket Amount to the Cash Custodian on the day the order is placed and accepted and, potentially, an amount of cash on the business day after the order is placed and approved referred to as the ‘‘Balancing Amount,’’ computed as described below. Upon delivery of the Cash Basket Amount and the Balancing Amount to the Cash Custodian, the Transfer Agent will cause the Trust to issue a Basket to the Authorized Participant. Expenses incurred by the Trust relating to purchasing bitcoin in assembling a cash creation Basket, such as OTC market fees, bitcoin exchange-related fees and/ or transaction fees, will be borne by Authorized Participants, rather than the Trust, through the transaction fee charged by the Trust. The Balancing Amount is an amount equal to the difference between the NAV of the Shares (per Basket) at the end of the business day the order is placed and approved and the Cash Basket Amount. The Balancing Amount serves to compensate for any difference between the NAV per Basket and the Cash Basket Amount. The Balancing Amount may be positive (in which case the Authorized Participant will be required to transfer the corresponding amount of cash to the Cash Custodian) or negative (in which case the amount of cash required to be transferred by the Authorized Participant will be less than the Cash Basket Amount, and if the Authorized Participant has already delivered the full Cash Basket Amount, the corresponding amount of cash will be returned to the Authorized Participant). Authorized Participants will be notified of the Balancing Amount that must be paid to the Cash Custodian or refunded by the Cash Custodian, if any, by approximately 4:00 p.m., E.T. on the business day the order is placed and approved. The Balancing Amount must be paid to the Cash Custodian no later than 2:00 p.m. E.T. on the business day following the date the order was placed and approved. Upon delivery of the PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 5149 Cash Basket Amount and Balancing Amount to the Cash Custodian, the Transfer Agent will cause the Trust to issue a Basket to the Authorized Participant the following business day by 2:00 p.m., E.T. To the extent the Authorized Participant places an in-kind order to create, the Authorized Participant must deliver the Bitcoin Basket Amount directly to the Trust (i.e. to the security system that holds the Trust’s bitcoin) no later than 4:00 p.m. E.T. on the date the purchase order is received and approved. Upon delivery of the bitcoin to the Trust’s security system, the Transfer Agent will cause the Trust to issue a Basket to the Authorized Participant the following business day by 2:00 p.m., E.T. Payment of any tax or other fees and expenses payable upon transfer of bitcoin shall be the sole responsibility of the Authorized Participant purchasing a Basket. Expenses incurred by Authorized Participants relating to purchasing bitcoin in assembling an in-kind creation Basket, such as OTC market fees, bitcoin exchange-related fees and/ or transaction fees, will be borne by Authorized Participants. The Administrator, by email or telephone correspondence, shall notify the Authorized Participant of the NAV of the Trust and the corresponding amount of cash (in the case of a cash purchase order) to be included in a Balancing Amount by approximately 4:00 p.m. E.T. on the day the purchase order is placed and approved. Redemption Procedures The procedures by which an Authorized Participant can redeem one or more Baskets mirror the procedures for the creation of Baskets. On any business day, an Authorized Participant may place an order with the Transfer Agent to redeem one or more Baskets. Cash redemption orders must be placed no later than 3:00 p.m. E.T., or the close of regular trading on the New York Stock Exchange, whichever is earlier, and redemption orders submitted inkind must be placed by 4:00 p.m. E.T., or the close of regular trading on the Exchange, whichever is earlier. The day on which the Transfer Agent receives a valid redemption order, as approved by the Marketing Agent, is the ‘‘redemption order date.’’ Redemption orders are irrevocable. The redemption procedures allow only Authorized Participants to redeem Baskets. A shareholder may not redeem Baskets other than through an Authorized Participant. By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through E:\FR\FM\20FEN1.SGM 20FEN1 5150 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices DTC’s book-entry system to the Trust not later than 4:00 p.m. E.T. on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant’s DTC account will be charged the non-refundable transaction fee due for the redemption order. Determination of Redemption Proceeds The redemption proceeds from the Trust consist of the ‘‘cash redemption amount’’ or, if making an in-kind redemption, bitcoin. The cash redemption amount is equal to the U.S. dollar equivalent of the Total bitcoin Basket Amount requested in the Authorized Participant’s redemption order as of the end of Regular Trading Hours on the redemption order date. The Cash Custodian will distribute the cash redemption amount at 4:00 p.m., E.T., on the business day immediately following the redemption order date through DTC to the account of the Authorized Participant as recorded on DTC’s book-entry system. The bitcoin redemption amount will be the Total bitcoin Basket Amount. At the discretion of the Sponsor and if the Authorized Participant requests to receive bitcoin directly, some or all of the redemption proceeds may be distributed to the Authorized Participant in-kind by the Trust. Orders to redeem Baskets must be placed no later than 3:00 p.m. E.T. for cash redemption orders and 4:00 p.m. E.T. for in-kind redemptions orders, but the total amount of redemption proceeds typically will not be determined until after 4:00 p.m. E.T. on the date the redemption order is received. Authorized Participants therefore will not know the total amount of the redemption proceeds at the time they submit an irrevocable redemption order. Delivery of Redemption Proceeds The redemption proceeds due from the Trust are delivered to the Authorized Participant at 4:00 p.m. E.T. on the business day immediately following the redemption order date if, by such time on such business day immediately following the redemption order date, the Trust’s DTC account has been credited with the Baskets to be redeemed. If the Trust’s DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption distribution is delivered to the extent of whole Baskets received. The Sponsor may, but is not obligated to, extend the redemption date with respect to a redemption order for which whole Baskets have not been delivered VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 by the Authorized Participant. In such event, the Sponsor may charge the Authorized Participant a fee for such extension to reimburse the Trust for any losses incurred from the Authorized Participant’s failure to deliver whole Baskets (including, but not limited to, expenses incurred in selling bitcoin in respect of the redemption order and/or buying bitcoin back following the failure of the Authorized Participant to deliver whole Baskets, as well as losses to the Trust from movements in the market value of bitcoin between selling the bitcoin and buying it back). If the Sponsor extends the redemption date, any remainder of the redemption distribution is delivered on the next business day to the extent of remaining whole Baskets received if the Sponsor receives the fee applicable to the extension of the redemption distribution date and the remaining Baskets to be redeemed are credited to the Trust’s DTC account by 4:00 p.m. E.T. on such next business day. Any further outstanding amount of the redemption order shall be cancelled. The Sponsor makes available through the NSCC, prior to the opening of business on the Exchange on each business day, (a) for in-kind redemptions, the amount of bitcoin per Basket and (b) for cash redemptions, the amount of cash per Basket that will be applicable to redemption requests received in proper form. As with creation orders, the NAV of the Shares per Basket as of the day on which a redemption request is received and approved will be calculated after the deadline for redemption orders. The amount of cash payable per Basket for a cash redemption order accordingly will be calculated after the redemption order is received. The Administrator, by email or telephone correspondence, shall notify the Authorized Participant of the NAV of the Trust and the corresponding amount of cash (in the case of a cash redemption order) to be payable per Basket by approximately 4:00 p.m. E.T. on the day the purchase order is placed and approved. To the extent the Authorized Participant places an in-kind order to redeem a Basket, the Trust will deliver, on the business day immediately following the day the redemption order is received, the Total bitcoin Basket Amount. Expenses relating to transferring bitcoin to an Authorized Participant in a redemption Basket will be borne by Authorized Participants via the redemption transaction fee. as calculated by the Exchange or a third party financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Trust’s bitcoin holdings during the trading day. The IIV disseminated during Regular Trading Hours should not be viewed as an actual real-time update of the NAV, which will be calculated only once at the end of each trading day. The IIV will be widely disseminated on a per Share basis every 15 seconds during the Exchange’s Regular Trading Hours by one or more major market data vendors. In addition, the IIV will be available through on-line information services. The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) The current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the mid-point of the bid-ask price 37 in relation to the NAV as of the time the NAV is calculated (‘‘Bid-Ask Price’’) and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The Trust will also disseminate the Trust’s holdings on a daily basis on the Trust’s website. The price of bitcoin will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. Information about the MVBTCO, including key elements of how the MVBTCO is calculated, will be publicly available at www.mvis-indices.com/. The NAV for the Trust will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. To the extent that the Administrator has utilized the cascading set of rules described in ‘‘bitcoin Market Price’’ above, the Trust’s website 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 Availability of Information The Trust’s website will provide an IIV per Share updated every 15 seconds, 37 The bid-ask price of the Trust is determined using the highest bid and lowest offer on the Consolidated Tape as of the time of calculation of the closing day NAV. PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 E:\FR\FM\20FEN1.SGM 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices the Consolidated Tape Association (‘‘CTA’’). Quotation and last sale information for bitcoin is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters, as well as the MVBTCO. Information relating to trading, including price and volume information, in bitcoin is available from major market data vendors and from the exchanges on which bitcoin are traded. Depth of book information is also available from bitcoin exchanges. The normal trading hours for bitcoin exchanges are 24 hours per day, 365 days per year. The Trust will provide website disclosure of its bitcoin holdings daily. The website 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 website 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 website. Rule 14.11(e)(4)—Commodity-Based Trust Shares The Shares will be subject to BZX Rule 14.11(e)(4), which sets forth the initial and continued listing criteria applicable to Commodity-Based Trust Shares. The Exchange will obtain a representation that the Trust’s NAV will be calculated daily and that these values and information about the assets of the Trust will be made available to all market participants at the same time. The Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a trust that holds a specified commodity 38 deposited with the trust; (b) issued by such trust in a specified aggregate minimum number in 38 For purposes of Rule 14.11(e)(4), the term commodity takes on the definition of the term as provided in the Commodity Exchange Act. The CFTC has opined that Bitcoin is a commodity as defined in Section 1a(9) of the Commodity Exchange Act. See ‘‘In the Matter of Coinflip, Inc.’’ (‘‘Coinflip’’) (CFTC Docket 15–29 (September 17, 2015)) (order instituting proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making findings and imposing remedial sanctions), in which the CFTC stated: ‘‘Section 1a(9) of the CEA defines ‘commodity’ to include, among other things, ‘all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.’ 7 U.S.C. 1a(9). The definition of a ‘commodity’ is broad. See, e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.’’ VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 return for a deposit of a quantity of the underlying commodity; and (c) when aggregated in the same specified minimum number, may be redeemed at a holder’s request by such trust which will deliver to the redeeming holder the quantity of the underlying commodity. The Exchange notes that in addition to the in-kind creation and redemption processes described in Rule 14.11(e)(4)(C)(i), the Trust will also offer creations and redemptions of Shares for cash in addition to creating and redeeming in-kind. The Trust represents that the ability to create and redeem for cash will allow APs that may otherwise be unwilling or unable to source bitcoin on their own behalf to participate in the creation and redemption of Shares. Upon termination of the Trust, the Shares will be removed from listing. The Trustee, Delaware Trust Company, is a trust company having substantial capital and surplus and the experience and facilities for handling corporate trust business, as required under Rule 14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee without prior notice to and approval of the Exchange. The Exchange also notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange shall have any liability for damages, claims, losses or expenses caused by any errors, omissions or delays in calculating or disseminating any underlying commodity value, the current value of the underlying commodity required to be deposited to the Trust in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by the Exchange, or any agent of the Exchange, or any act, condition or cause beyond the reasonable control of the Exchange, its agent, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission or delay in the reports of transactions in an underlying commodity. Finally, as required in Rule 14.11(e)(4)(G), the Exchange notes that any registered market maker (‘‘Market Maker’’) in the Shares must file with the Exchange in a manner prescribed by the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 5151 underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a registered Market Maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to the Exchange as required by this Rule. In addition to the existing obligations under Exchange rules regarding the production of books and records (see, e.g., Rule 4.2), the registered Market Maker in CommodityBased Trust Shares shall make available to the Exchange such books, records or other information pertaining to transactions by such entity or registered or non-registered employee affiliated with such entity for its or their own accounts for trading the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, as may be requested by the Exchange. The Trust currently expects that there will be at least 100 Shares outstanding at the time of commencement of trading on the Exchange, which the Exchange believes to be sufficient to provide adequate market liquidity. Assuming a bitcoin price of $4,000 and approximately 25 bitcoin per Share, the Shares would be approximately $100,000 each. With a minimum of 100 Shares outstanding, the market value of all Shares outstanding would be approximately $10,000,000. Rules 14.11(e)(4)(C)(ii)(b) [sic] and (c) provide that the Exchange will commence delisting proceedings for a series of Commodity-Based Trust Shares where the applicable trust has fewer than 50,000 receipts or the market value of all receipts issued and outstanding is less than $1,000,000, respectively, following the initial 12 month period following commencement of trading on the Exchange. These rules are designed to ensure that there are sufficient shares and market value outstanding to facilitate the creation and redemption process and ensure that the arbitrage mechanism will keep the price of a series of Commodity-Based Trust Shares in line with its NAV and prevent manipulation in the shares. The Exchange is proposing that Rule 14.11(e)(4)(C)(ii)(b) [sic] would not apply to the Shares because the Exchange believes that such policy concerns are otherwise mitigated. The lower number of Shares is merely a function of price that will have no impact on the creation and redemption process and the arbitrage mechanism. Whether the Shares are priced equal to E:\FR\FM\20FEN1.SGM 20FEN1 5152 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices 25 bitcoin with a Basket of 5 Shares or the Shares are priced equal to .025 bitcoin with a Basket of 5,000 Shares, the cost to an AP to create or redeem will be the exact same and such a creation and redemption will have the same proportional impact on Shares and market value outstanding. Because the creation units and redemption units for most exchange-traded products are between 5,000 and 50,000 shares, it makes sense to apply a minimum number of shares outstanding to such products. Where a creation unit is 5 shares, the policy concerns that Rule 14.11(e)(4)(C)(ii)(b) [sic] is designed to address are mitigated even where there are significantly fewer shares outstanding. As such, the Exchange is proposing that it would not commence delisting proceedings for the Shares if the Shares do not satisfy Rule 14.11(e)(4)(C)(ii)(b) [sic]. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. The Exchange will halt trading in the Shares under the conditions specified in BZX Rule 11.18. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the bitcoin underlying the Shares; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. BZX will allow trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in BZX Rule 11.11(a) the minimum price variation for quoting and entry of orders in securities traded on the Exchange is $0.01 where the price is greater than $1.00 per share or $0.0001 where the price is less than $1.00 per share. Surveillance The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and listed bitcoin derivatives via the Intermarket Surveillance Group (‘‘ISG’’), from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement.39 In addition, the Exchange may obtain information about bitcoin transactions, trades and market data from each of the OTC platforms that are included in the MVBTCO, from bitcoin exchanges with which the Exchange has entered into a comprehensive surveillance sharing agreement, as well as certain additional information that is publicly available through the Bitcoin blockchain. The Exchange notes that it has entered into a comprehensive surveillance sharing agreement with Gemini Exchange and is working to establish similar agreements with other bitcoin exchanges and the OTC Trading Desks. Shares during the Pre-Opening 40 and After Hours Trading Sessions 41 when an updated IIV will not be calculated or publicly disseminated; (v) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (vi) trading information. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Shares. Members purchasing the Shares for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, noaction and interpretive relief granted by the Commission from any rules under the Act. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (i) The procedures for the creation and redemption of Baskets (and that the Shares are not individually redeemable); (ii) BZX Rule 3.7, which imposes suitability obligations on Exchange members with respect to recommending transactions in the Shares to customers; (iii) how information regarding the IIV and the Trust’s NAV are disseminated; (iv) the risks involved in trading the Bitcoin Ownership and the Blockchain To begin using bitcoin, a user may download specialized software referred to as a ‘‘bitcoin wallet’’. A user’s bitcoin wallet can run on a computer or smartphone. A bitcoin wallet can be used both to send and to receive bitcoin. Within a bitcoin wallet, a user will be able to generate one or more ‘‘bitcoin addresses’’, which are similar in concept to bank account numbers, and each address is unique. Upon generating a bitcoin address, a user can begin to transact in bitcoin by receiving bitcoin at his or her bitcoin address and sending it from his or her address to another 39 For a list of the current members and affiliate members of ISG, see www.isgportal.com. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 Additional Background on the Bitcoin Industry The Bitcoin Network A bitcoin is an asset that can be transferred among parties via the internet, but without the use of a central administrator or clearing agency. The term ‘‘decentralized’’ is often used in descriptions of bitcoin, in reference to bitcoin’s lack of necessity for administration by a central party. The Bitcoin Network (i.e., the network of computers running the software protocol underlying bitcoin involved in maintaining the database of bitcoin ownership and facilitating the transfer of bitcoin among parties) and the asset, bitcoin, are intrinsically linked and inseparable. Bitcoin was first described in a white paper released in 2008 and published under the name ‘‘Satoshi Nakamoto’’, and the protocol underlying bitcoin was subsequently released in 2009 as open source software. 40 The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. Eastern Time. 41 The After Hours Trading Session is from 4:00 p.m. to 5:00 p.m. Eastern Time. E:\FR\FM\20FEN1.SGM 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices user’s address. Sending bitcoin from one bitcoin address to another is similar in concept to sending a bank wire from one person’s bank account to another person’s bank account. Balances of the quantity of bitcoin associated with each bitcoin address are listed in a database, referred to as the ‘‘blockchain’’. Copies of the blockchain exist on thousands of computers on the Bitcoin Network throughout the internet. A user’s bitcoin wallet will either contain a copy of the blockchain or be able to connect with another computer that holds a copy of the blockchain. When a bitcoin user wishes to transfer bitcoin to another user, the sender must first request a bitcoin address from the recipient. The sender then uses his or her bitcoin wallet software, to create a proposed addition to the blockchain. The proposal would decrement the sender’s address and increment the recipient’s address by the amount of bitcoin desired to be transferred. The proposal is entirely digital in nature, similar to a file on a computer, and it can be sent to other computers participating in the Bitcoin Network. Such digital proposals are referred to as ‘‘bitcoin transactions’’. Bitcoin transactions and the process of one user sending bitcoin to another should not be confused with buying and selling bitcoin, which is a separate process (as discussed below in ‘‘bitcoin Trading On Exchanges’’ and ‘‘bitcoin Trading Overthe-Counter’’). A bitcoin transaction is similar in concept to an irreversible digital check. The transaction contains the sender’s bitcoin address, the recipient’s bitcoin address, the amount of bitcoin to be sent, a confirmation fee and the sender’s digital signature. The sender’s use of his or her digital signature enables participants on the Bitcoin Network to verify the authenticity of the bitcoin transaction. A user’s digital signature is generated via usage of the user’s so-called ‘‘private key’’, one of two numbers in a so-called cryptographic ‘‘key pair’’. A key pair consists of a ‘‘public key’’ and its corresponding private key, both of which are lengthy numerical codes, derived together and possessing a unique relationship. Public keys are used to create bitcoin addresses. Private keys are used to sign transactions that initiate the transfer of bitcoin from a sender’s bitcoin address to a recipient’s bitcoin address. Only the holder of the private key associated with a particular bitcoin address can digitally sign a transaction proposing a transfer of bitcoin from that particular bitcoin address. VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 A user’s bitcoin address (which is derived from a public key) may be safely distributed, but a user’s private key must remain known solely by its rightful owner. The utilization of a private key is the only mechanism by which a bitcoin user can create a digital signature to transfer bitcoin from him or herself to another user. Additionally, if a malicious third party learns of a user’s private key, that third party could forge the user’s digital signature and send the user’s bitcoin to any arbitrary bitcoin address (i.e., the third party could steal the user’s bitcoin). When a bitcoin holder sends bitcoin to a destination bitcoin address, the transaction is initially considered unconfirmed. Confirmation of the validity of the transaction involves verifying the signature of the sender, as created by the sender’s private key. Confirmation also involves verifying that the sender has not ‘‘double spent’’ the bitcoin (e.g., confirming Party A has not attempted to send the same bitcoin both to Party B and to Party C). The confirmation process occurs via a process known as ‘‘bitcoin mining’’. Bitcoin mining utilizes a combination of computer hardware and software to accomplish a dual purpose: (i) To verify the authenticity and validity of bitcoin transactions (i.e., the movement of bitcoin between addresses) and (ii) the creation of new bitcoin. Neither the Sponsor nor the Trust intends to engage in bitcoin mining. Bitcoin miners do not need permission to participate in verifying transactions. Rather, miners compete to solve a prescribed and complicated mathematical calculation using computers dedicated to the task. Rounds of the competition repeat approximately every ten minutes. In any particular round of the competition, the first miner to find the solution to the mathematical calculation is the miner who gains the privilege of announcing the next block to be added to the blockchain. A new block that is added to the blockchain serves to take all of the recent-yet-unconfirmed transactions and verify that none are fraudulent. The recent-yet-unconfirmed transactions also generally contain transaction fees that are awarded to the miner who produces the block in which the transactions are inserted, and thereby confirmed. The successful miner also earns the so-called ‘‘block reward’’, an amount of newly created bitcoin. Thus, bitcoin miners are financially incentivized to conduct their work. The financial incentives received by bitcoin miners are a vital part of the process by which the Bitcoin Network functions. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 5153 Upon successfully winning a round of the competition (winning a round is referred to as mining a new block), the miner then transmits a copy of the newly-formed block to peers on the Bitcoin Network, all of which then update their respective copies of the blockchain by appending the new block, thereby acknowledging the confirmation of the transactions that had previously existed in an unconfirmed state. A recipient of bitcoin must wait until a new block is formed in order to see the transaction convert from an unconfirmed state to a confirmed state. According to the Registration Statement, with new rounds won approximately every ten minutes, the average wait time for a confirmation is five minutes. The protocol underlying bitcoin provides the rules by which all users and miners on the Bitcoin Network must operate. A user or miner attempting to operate under a different set of rules will be ignored by other network participants, thus rendering that user’s or miner’s behavior moot. The protocol also lays out the block reward, the amount of bitcoin that a miner earns upon creating a new block. The initial block reward when Bitcoin was introduced in 2009 was 50 bitcoin per block. That number has and will continue to halve approximately every four years until approximately 2140, when it is estimated that block rewards will go to zero. The most recent halving occurred on July 9, 2016, which reduced the block reward from 25 to 12.5 bitcoin. The next halving is projected for May 2020, which will reduce the block reward to 6.25 bitcoin from its current level of 12.5. The halving thereafter will occur in another four years and will reduce the block reward to 3.125 bitcoin, and so on. As of May 2018, there are approximately 17 million bitcoin that have been created, a number that will grow with certainty to a maximum of 21 million, estimated to occur by the year 2140. Bitcoin mining should not be confused with buying and selling bitcoin, which, as discussed below, is a separate process. Use of Bitcoin and the Blockchain Beyond using bitcoin as a value transfer mechanism, applications related to the blockchain technology underlying bitcoin have become increasingly prominent.42 Blockchainfocused applications take advantage of certain unique characteristics of the 42 Additional applications based on blockchain technology—both the blockchain underlying bitcoin as well as separate public blockchains incorporating similar characteristics of the blockchain underlying bitcoin—are currently in development by numerous entities, including financial institutions like banks. E:\FR\FM\20FEN1.SGM 20FEN1 5154 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices blockchain such as secure time stamping (secure time stamps are on newly created blocks), highly redundant storage (copies of the blockchain are distributed throughout the internet) and tamper-resistant data secured by secure digital signatures. According to the Registration Statement, blockchain-focused applications in usage and under development include, but are not limited to asset title transfer, secure timestamping, counterfeit and fraud detection systems, secure document and contract signing, distributed cloud storage and identity management. Although value transfer is not the primary purpose for blockchain-focused applications, the usage of bitcoin, the asset, is inherently involved in blockchain-focused applications, thus linking the growth and adoption of bitcoin to the growth and adoption of blockchain-focused applications. Bitcoin Exchanges Bitcoin exchanges operate websites that facilitate the purchase and sale of bitcoin for various government-issued currencies, including the U.S. dollar, the euro or the Chinese yuan. Activity on bitcoin exchanges should not be confused with the process of users sending bitcoin from one bitcoin address to another bitcoin address, the latter being an activity that is wholly within the confines of the Bitcoin Network and the former being an activity that occurs entirely on private websites. Bitcoin exchanges operate in a manner that is unlike the traditional capital markets infrastructure in the U.S. and in other developed nations. Bitcoin exchanges combine the process of order matching, trade clearing, trade settlement and custody into a single entity. For example, a user can send U.S. dollars via wire to a bitcoin exchange and then visit the exchange’s website to purchase bitcoin. The entirety of the transaction—from trade to clearing to settlement to custody (at least temporary custody)—is accomplished by the bitcoin exchange in a matter of seconds. The user can then withdraw the purchased bitcoin into a wallet to take custody of the bitcoin directly. According to the Registration Statement, there are currently several U.S.-based regulated entities that facilitate bitcoin trading and that comply with state and/or U.S. AML and KYC regulatory requirements. While the CFTC is responsible for regulating the bitcoin spot market with respect to fraud and manipulation—in the same way that it regulates the spot market for VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 gold, silver or other exempt commodities—there is no direct, comprehensive federal oversight of bitcoin exchanges or trading platforms in the United States and no U.S. exchanges are registered with the Commission or the CFTC. • Coinbase, which is based in California, is a bitcoin exchange that maintains money transmitter licenses in over thirty states, the District of Columbia and Puerto Rico. Coinbase is subject to the regulations enforced by the various State agencies that issued their respective money transmitter licenses to Coinbase. The New York Department of Financial Services (‘‘NYDFS’’) granted a BitLicense to Coinbase in January 2017. • itBit is a bitcoin exchange that was granted a limited purpose trust company charter by the NYDFS in May 2015. Limited purpose trusts, according to the NYDFS, are permitted to undertake certain activities, such as transfer agency, securities clearance, investment management, and custodial services, but without the power to take deposits or make loans. • Gemini is a bitcoin exchange that is also regulated by the NYDFS. In October 2015, NYDFS granted Gemini an Authorization Certificate, which allows Gemini to operate as a limited purpose trust company. • Genesis Global Trading is a FINRA member firm that makes a market in bitcoin by offering two-sided liquidity (‘‘Genesis Global Trading’’). In May 2018, NYDFS granted Genesis Global Trading a BitLicense. • bitFlyer is a virtual currency exchange that is registered in Japan. In November 2017, NYDFS granted Tokyobased bitFlyer a BitLicense. Bitcoin are traded with publicly disclosed valuations for each transaction, measured by one or more government currencies such as the U.S. dollar, the euro or the Chinese yuan. Bitcoin exchanges typically report publicly on their site the valuation of each transaction and bid and ask prices for the purchase or sale of bitcoin. Although each bitcoin exchange has its own market price, it is expected that most bitcoin exchanges’ market prices should be relatively consistent with the bitcoin exchange market average since market participants can choose the bitcoin exchange on which to buy or sell bitcoin (i.e., exchange shopping). Additional Bitcoin Trading Products In addition to the Bitcoin Futures market described above, certain U.S. platforms and non-U.S. based bitcoin exchanges offer derivative products on bitcoin such as options, swaps, and PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 futures. According to the Registration Statement, BitMex, based in the Republic of Seychelles, CryptoFacilites, based in the United Kingdom, 796 Exchange, based in China, and OKCoin Exchange China all offer futures contracts settled in bitcoin. Coinut, based in Singapore, offers bitcoin binary options and vanilla options based on the Coinut index. Deribit, based in the Netherlands, offers vanilla options and futures contracts settled in bitcoin. IGMarkets, based in the United Kingdom, Avatrade, based in Ireland, and Plus500, based in Israel, all offer bitcoin derivative products. The CFTC has stated that bitcoin and other virtual currencies are encompassed in the definition of commodities under the CEA.43 In July 2017, the CFTC issued an order granting LedgerX, LLC (‘‘LedgerX’’) registration as a derivatives clearing organization under the CEA. Under the order, LedgerX is authorized to provide clearing services for fully-collateralized digital currency swaps. LedgerX, which was also granted an order of registration as a Swap Execution Facility in July 2017, is the first federally-regulated exchange and clearing house for derivatives contracts settling in digital currencies. LedgerX began trading options and swaps on its platform in October 2017. While the CFTC does not regulate the bitcoin spot market—in the same way that it does not regulate the spot market for gold, silver or other exempt commodities—it is nevertheless responsible for overseeing and enforcing the CEA as it applies to trading in bitcoin derivatives. In May 2015, the Swedish FSA approved the prospectus for ‘‘Bitcoin Tracker One’’, an open-ended exchangetraded note that tracks the price of bitcoin in U.S. dollars. The Bitcoin Tracker One initially traded in Swedish krona on the Nasdaq Nordic in Stockholm, but is now also available to trade in euro. The Bitcoin Tracker One is available to retail investors in the European Union and to those investors in the U.S. who maintain brokerage accounts with Interactive Brokers. Founded in 2013, Bitcoin Investment Trust, a private, open-ended trust available to accredited investors, is another investment vehicle that derives its value from the price of bitcoin. Eligible shares of the Bitcoin Investment Trust are quoted on the OTCQX marketplace under the symbol ‘‘GBTC’’. 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) 43 See E:\FR\FM\20FEN1.SGM Coinflip. 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices of the Act 44 in general and Section 6(b)(5) of the Act 45 in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed on the Exchange pursuant to the initial and continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and listed bitcoin derivatives via the ISG, from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, the Exchange may obtain information about bitcoin transactions, trades and market data from each of the OTC platforms that are included in the MVBTCO, from bitcoin exchanges with which the Exchange has entered into a comprehensive surveillance sharing agreement as well as certain additional information that is publicly available through the Bitcoin blockchain. The Exchange notes that it has entered into a comprehensive surveillance sharing agreement with Gemini Exchange and is working to establish similar agreements 44 15 45 15 U.S.C. 78f. U.S.C. 78f(b)(5). VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 with other bitcoin exchanges and the OTC Trading Desks. The proposal is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of Commodity-Based Trust Shares based on the price of bitcoin that will enhance competition among market participants, to the benefit of investors and to the marketplace, and will allow institution and other substantial investors access to bitcoin exposure without requiring direct access to the bitcoin market and the associated complications. Despite the growing investor interest in bitcoin, the primary means for investors to gain access to bitcoin exposure remains either through direct investment through bitcoin exchanges, over-thecounter trading, or bitcoin derivatives contracts. For investors simply wishing to express an investment viewpoint in bitcoin, investment through derivatives is complex and requires active management and direct investment in bitcoin brings with it significant inconvenience, complexity, expense, and risk. The Shares would therefore represent a significant innovation in the bitcoin market by providing an inexpensive and simple vehicle for investors to gain exposure to bitcoin in a secure and easily accessible product that is familiar and transparent to investors. Such an innovation would help to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest by improving investor access to bitcoin exposure through efficient and transparent exchange-traded derivative products. As noted above, the Sponsor expects that the Shares will be purchased primarily by institutional and other substantial investors (such as hedge funds, family offices, private wealth managers and high-net-worth individuals), which will provide additional liquidity and transparency to the bitcoin market in a regulated vehicle such as the Trust. With an estimated initial per-share price equivalent to 25 bitcoin, the Shares will be costprohibitive for smaller retail investors while allowing larger and generally more sophisticated institutional investors to gain exposure to the price of bitcoin through a regulated product while eliminating the complications and reducing the risk associated with buying and holding bitcoin. The Exchange also believes that allowing cash creations and redemptions, in addition to the in-kind creations described in Rule 14.11(e)(4)(C)(i), will allow APs that PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 5155 may otherwise be unwilling or unable to source bitcoin on their own behalf to participate in the creation and redemption of Shares, further acting to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange also believes that not commencing delisting proceedings for the Shares if the Shares do not satisfy Rule 14.11(e)(4)(C)(ii)(b) [sic] is consistent with the Act because where a creation unit is 5 shares because the policy concerns that Rule 14.11(e)(4)(C)(ii)(b) [sic] is designed to address related to minimum receipts outstanding following the 12 month period following commencement of trading on the Exchange are mitigated even where there are significantly fewer shares outstanding. The Exchange believes that the lower number of Shares is merely a function of price and that, in this instance, will have no impact on the creation and redemption process and the arbitrage mechanism. The Exchange also believes that the proposal promotes market transparency in that a large amount of information is currently available about bitcoin and will be available regarding the Trust and the Shares. The Exchange will obtain a representation that the Trust’s NAV will be calculated daily and that these values and information about the assets of the Trust will be made available to all market participants at the same time. Quotation and last sale information for bitcoin is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. The spot price of bitcoin is available on a 24hour basis from major market data vendors, including Bloomberg and Reuters, as well as the MVBTCO. Information relating to trading, including price and volume information, in bitcoin is available from major market data vendors and from the exchanges on which bitcoin are traded. Depth of book information is also available from bitcoin exchanges. The normal trading hours for bitcoin exchanges are 24 hours per day, 365 days per year. The Trust will provide website disclosure of its bitcoin holdings daily. The website 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. The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) The current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the Bid-Ask E:\FR\FM\20FEN1.SGM 20FEN1 5156 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices Price and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The Trust will also disseminate the Trust’s holdings on a daily basis on the Trust’s website. The price of bitcoin will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. Information about the MVBTCO, including key elements of how the MVBTCO is calculated, will be publicly available at www.mvis-indices.com/. The IIV will be widely disseminated on a per Share basis every 15 seconds during the Exchange’s Regular Trading Hours by one or more major market data vendors. In addition, the IIV will be available through on-line information services. As discussed extensively above, Cboe believes that, based on previous application of the standard, the market for Bitcoin Futures is a regulated market of significant size with which the Exchange has in place comprehensive surveillance sharing agreements and, thus, the Commission should approve this proposal.46 In addition, the 46 As described above, the Exchange continues to believe that bitcoin itself is particularly resistant to price manipulation. The geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin and, in many instances, the bitcoin market is generally less susceptible to manipulation than the equity, fixed income, and commodity futures markets. There are a number of reasons this is the case, including that there is not inside information about revenue, earnings, corporate activities, or sources of supply, making it particularly difficult to disseminate false or misleading information about bitcoin in order to manipulate; manipulation of the price on any single venue would require manipulation of the global bitcoin price in order to be effective; a substantial over-the-counter market provides liquidity and shock-absorbing capacity; bitcoin’s 24/7/365 nature provides constant arbitrage opportunities across all trading venues; and it is unlikely that any one actor could obtain a dominant market share. Further, bitcoin is arguably less susceptible to manipulation than other commodities that underlie ETPs; there may be inside information relating to the supply of the physical commodity such as the discovery of new sources of supply or significant disruptions at mining facilities that supply the commodity that simply are inapplicable as it relates to bitcoin. Further, the Exchange believes that the fragmentation across bitcoin platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of bitcoin prices through continuous trading activity unlikely. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 Exchange also believes that there are sufficient other means to prevent fraudulent and manipulative acts and practices in the Shares, as was presented as an alternate means to demonstrate that a proposal is consistent with Section 6(b)(5) of the Act in the in the GraniteShares Disapproval Order. Specifically, the Exchange believes that the collective effect of the following factors are sufficient to prevent fraudulent and manipulative acts and practices in the Shares: 47 (i) The regulated nature of each of the firms that make up the MVBTCO; (ii) the notional volume of trading 48 and liquidity 49 available on the OTC Trading Desks; (iii) the principal to principal nature of the OTC Trading Desks; and (iv) in addition to its standard surveillance procedures, the Exchange will have in place a comprehensive surveillance sharing agreement with each of these firms prior to the Shares listing on the Exchange.50 Cboe believes that, if reviewed through the same lens as similar precedent, this proposal is consistent with the Act and should be approved. The Commission’s approval of this or of bitcoin price on any single venue would require manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular bitcoin exchange or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. 47 While not directly related to the issue of manipulation, the Exchange also notes that the Sponsor expects that the Shares will be purchased primarily by institutional and other substantial investors (such as hedge funds, family offices, private wealth managers and high-net-worth individuals), which will provide additional liquidity and transparency to the bitcoin market in a regulated vehicle such as the Trust. With an estimated initial per-share price equivalent to 25 bitcoin, the Shares will be cost-prohibitive for smaller retail investors while allowing larger and generally more sophisticated institutional investors to gain exposure to the price of bitcoin through a regulated product while eliminating the complications and reducing the risk associated with buying and holding bitcoin. 48 The Sponsor has indicated that there are tens of millions to hundreds of millions of dollars of bitcoin traded on the OTC Trading Desks on a daily basis. 49 Each constituent firm offers and will continue to offer firm, executable quotes of at least $250,000 depth on both the bid and ask at all times. 50 The Trust maintains crime, excess crime and excess vault risk insurance coverage underwritten by various insurance carriers that will cover the entirety of the Trust’s bitcoin holdings. While the Trust remains fully confident in its system for securing its bitcoin, insurance coverage of all of the Trust’s bitcoin holdings eliminates exposure to the risk of loss to investors through fraud or theft, which in turn eliminates most of the custodial issues associated with a series of Commodity-Based Trust Shares based on bitcoin. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 any proposal to list and trade an ETP is not an endorsement of the underlying asset and especially is not a guarantee against the ETP being an extremely risky and/or volatile investment. Rather, it signifies that the benefits to end investors that want exposure to a particular asset class from having a regulated and transparent U.S. exchange traded vehicle outweigh the applicable risk of manipulation. With this in mind, Cboe believes that the Bitcoin Futures market is a significant, regulated market, especially when compared to the dry bulk shipping futures market described in the Approval Order, and therefore the Commission should approve this proposal. Further, even if the Commission were to determine that the Bitcoin Futures market is not a significant, regulated market, the Exchange believes that the regulated nature of each of the firms that make up the MVBTCO, the nature of trading and liquidity available on each of its constituents, and the comprehensive surveillance sharing agreements that the Exchange will have in place with each of the OTC Trading Desks constitute sufficient record evidence to demonstrate that there are other means to prevent fraudulent and manipulative acts and practices in the Shares. For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change, rather will facilitate the listing and trading of an additional exchange-traded product that will enhance competition among both market participants and listing venues, 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 The Exchange has neither solicited nor received written comments on 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 E:\FR\FM\20FEN1.SGM 20FEN1 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Notices to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange 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. submissions should refer to File Number SR–CboeBZX–2019–004, and should be submitted on or before March 13, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.51 Eduardo A. Aleman, Deputy Secretary. 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: [FR Doc. 2019–02732 Filed 2–19–19; 8:45 am] 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– CboeBZX–2019–004 on the subject line. Self-Regulatory Organizations; The Options Clearing Corporation; Order Disapproving Proposed Rule Change Concerning The Options Clearing Corporation’s Capital Plan 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–CboeBZX–2019–004. 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 website (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 website 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 also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All VerDate Sep<11>2014 17:16 Feb 19, 2019 Jkt 247001 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–85121; File No. SR–OCC– 2015–02] February 13, 2019. I. Introduction The Options Clearing Corporation (‘‘OCC’’) submitted a proposed rule change in January 2015 that implements a plan to significantly increase OCC’s capitalization (‘‘Capital Plan’’ or ‘‘Plan’’). After being approved by the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’),1 the Capital Plan is now before the Commission on remand from the Court of Appeals for the District of Columbia Circuit (‘‘Court’’ or ‘‘D.C. Circuit’’).2 As discussed in more detail below, upon further review, the Commission is disapproving the proposed rule change because the information before us is insufficient to support a finding that the Plan is consistent with the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) and the rules and regulations thereunder. In particular, we conclude that the Commission does not have sufficient information to determine that the Capital Plan was adopted in a manner consistent with OCC’s own rules, as required by Exchange Act Section 19(g). OCC’s By-laws require that exchanges which are not shareholders of OCC be promptly provided with notice of certain matters that the Executive CFR 200.30–3(a)(12). No. 34–77112, File No. SR–OCC–2015– 02 (Feb. 11, 2016), 81 FR 8294 (Feb. 18, 2016) (‘‘Approval Order’’). 2 See Susquehanna Int’l Grp., LLP v. SEC, 866 F.3d 442, 443 (D.C. Cir. 2017) (‘‘Susquehanna Opinion’’). OCC implemented the Capital Plan in 2015. Neither the Commission nor the Court stayed the implementation of the plan on review, and the D.C. Circuit did not vacate the Commission’s approval order on remand. The Capital Plan therefore has remained in effect. 5157 Chairman of OCC considers to be of competitive significance to those exchanges. No such notice was given during consideration of the Capital Plan. Based on the information before us, we cannot determine whether or how the Executive Chairman concluded that the Capital Plan lacked competitive significance such that notification was not required. In addition, we conclude that we lack sufficient information to determine whether the Capital Plan imposes a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act, as prohibited by Section 17A(b)(3)(I) of that Act. Specifically, we cannot determine whether the Capital Plan, as implemented, has burdened competition. Nor do we have sufficient information to determine whether the dividend policy incorporated in the Capital Plan advantages the recipients of the dividends in a manner inconsistent with the Exchange Act. We recognize that the Commission previously approved this proposed rule change. But we did so, in significant part, in reliance upon OCC’s representations regarding the process through which the Plan was negotiated and developed by OCC and its Board.3 The D.C. Circuit’s Susquehanna Opinion makes clear that relying on such representations, without more, is insufficient. Rather, the Commission must critically evaluate the representations made and the conclusions drawn by OCC.4 After conducting such an analysis on remand, and after giving the parties the opportunity to submit additional materials to the Commission, we have determined that OCC has failed to meet its burden to demonstrate that the Capital Plan is consistent with the Exchange Act in at least two respects, as noted above and explained below. II. Background OCC is registered with the Commission as a clearing agency and, as such, is a self-regulatory organization (‘‘SRO’’) under the Exchange Act.5 OCC is the only clearing agency for standardized U.S. securities options listed on SEC-registered national securities exchanges (‘‘listed options’’). 51 17 1 Release PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 3 See, e.g., Approval Order at 8301, 8302, and 8305. 4 Susquehanna, 866 F.3d at 447 (‘‘the [Commission] should have critically reviewed OCC’s analysis or performed its own.’’); id. at 448 (‘‘the [Commission] cannot rely on OCC’s process totally divorced from any examination of the Plan.’’). 5 See 15 U.S.C. 78c(a)(26). OCC is also registered with the U.S. Commodity Futures Trading Commission as a derivatives clearing organization. E:\FR\FM\20FEN1.SGM 20FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 34 (Wednesday, February 20, 2019)]
[Notices]
[Pages 5140-5157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02732]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85119; File No. SR-CboeBZX-2019-004]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Proposed Rule Change To List and Trade Shares of SolidX
Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust, Under BZX
Rule 14.11(e)(4), Commodity-Based Trust Shares

February 13, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 30, 2019, Cboe BZX Exchange, Inc. (``BZX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
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\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

The Exchange proposes a rule change to list and trade shares of
SolidX Bitcoin Shares (the ``Fund'') issued by the VanEck SolidX
Bitcoin Trust (the ``Trust''), under BZX Rule 14.11(e)(4), Commodity-
Based Trust Shares. The shares of the Trust are referred to herein as
the ``Shares.''
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

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

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

[[Page 5141]]

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

1. Purpose
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\3\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\4\ SolidX Management LLC is the
sponsor of the Trust (``Sponsor''). The Trust will be responsible for
custody of the Trust's bitcoin. SolidX Management LLC is a wholly-owned
subsidiary of SolidX Partners Inc. Delaware Trust Company is the
trustee (``Trustee''). The Bank of New York Mellon will be the
administrator (``Administrator''), transfer agent (``Transfer Agent'')
and the custodian, with respect to cash, (``Cash Custodian'') of the
Trust. Foreside Fund Services, LLC will be the marketing agent
(``Marketing Agent'') in connection with the creation and redemption of
``Baskets'' \5\ of Shares. Van Eck Securities Corporation (``VanEck'')
provides assistance in the marketing of the Shares.
---------------------------------------------------------------------------

\3\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\4\ All statements and representations made in this filing
regarding (a) the description of the portfolio, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange rules and surveillance procedures shall constitute
continued listing requirements for listing the Shares on the
Exchange.
\5\ The Trust will issue and redeem ``Baskets'', each equal to a
block of 5 Shares, only to ``Authorized Participants''. See
``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------

The Trust was formed as a Delaware statutory trust on September 15,
2016 and is operated as a grantor trust for U.S. federal tax purposes.
The Trust has no fixed termination date.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Trust's net assets.
The Trust's assets will consist of bitcoin \6\ held by the Trust
utilizing a secure process as described below in ``bitcoin Security and
Storage for the Trust''. The Trust will not normally hold cash or any
other assets, but may hold a very limited amount of cash in connection
with the creation and redemption of Baskets and to pay Trust expenses,
as described below.
---------------------------------------------------------------------------

\6\ A ``bitcoin'' is an asset that can be transferred among
parties via the internet, but without the use of a central
administrator or clearing agency (``bitcoin''). The asset, bitcoin,
is generally written with a lower case ``b''. The asset, bitcoin, is
differentiated from the computers and software (or the protocol)
involved in the transfer of bitcoin among users, which constitute
the ``Bitcoin Network''. The asset, bitcoin, is the intrinsically
linked unit of account that exists within the Bitcoin Network. See
``bitcoin and the Bitcoin Industry'' below.
---------------------------------------------------------------------------

According to the Registration Statement, the Trust will invest in
bitcoin only. The activities of the Trust are limited to: (1) Issuing
Baskets in exchange for the cash and/or bitcoin deposited with the Cash
Custodian or Trust, respectively, as consideration; (2) purchasing
bitcoin from various exchanges and in OTC transactions; (3) selling
bitcoin (or transferring bitcoin, at the Sponsor's discretion, to pay
the Management Fee) as necessary to cover the Sponsor's Management Fee,
bitcoin Insurance Fee, Trust principals' and employees' salaries,
expenses associated with securing the Trust's bitcoin and Trust
expenses not assumed by the Sponsor and other liabilities; (4) selling
bitcoin as necessary in connection with redemptions; (5) delivering
cash and/or bitcoin in exchange for Baskets surrendered for redemption;
(6) maintaining insurance coverage for the bitcoin held by the Trust;
and (7) securing the bitcoin held by the Trust.
According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended,\7\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''),\8\ and neither the Trust nor the Sponsor 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 is for the Shares to
reflect the performance of the price of bitcoin, less the expenses of
the Trust's operations. The Trust intends to achieve this objective by
investing substantially all of its assets in bitcoin traded primarily
in the over-the-counter (``OTC'') markets, though the Trust may also
invest in bitcoin traded on domestic and international bitcoin
exchanges, depending on liquidity and otherwise at the Trust's
discretion. The Trust is not actively managed. It does not engage in
any activities designed to obtain a profit from, or to ameliorate
losses caused by, changes in the price of bitcoin.
Subject to certain requirements and conditions described below and
in the Registration Statement, the Trust, under normal market
conditions,\9\ will use available offering proceeds to purchase bitcoin
primarily in the OTC markets, without being leveraged or exceeding
relevant position limits.
---------------------------------------------------------------------------

\9\ Consistent with the definition in Rule 14.11(i)(3)(E), the
term ``Normal Market Conditions'' includes, but is not limited to,
the absence of trading halts in the applicable financial markets
generally; operational issues causing dissemination of inaccurate
market information or system failures; or force majeure type events
such as natural or man-made disaster, act of God, armed conflict,
act of terrorism, riot or labor disruption, or any similar
intervening circumstance.
---------------------------------------------------------------------------

Trust Issued Receipts--Standard of Review
Section 6(b)(5) and the Applicable Standards
Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt as laid out under Rule
14.11(f). The Commission has approved numerous series of Trust Issued
Receipts, including Commodity-Based Trust Shares, to be listed on U.S.
national securities exchanges. In order for any proposed rule change
from an exchange to be approved, the Commission must determine that,
among other things, the proposal is consistent with the requirements of
Section 6(b)(5) of the Act and, as is applicable here, the requirement
that a national securities exchange's rules are designed to prevent
fraudulent and manipulative acts and practices. In its recent analysis
of commodity-based exchange-traded products (``Commodity ETPs''), the
Commission has focused on this particular language of Section 6(b)(5)
of the Act and states that a proposed rule change must offer record
evidence to demonstrate that underlying markets are ``regulated
markets'' ``of significant size.'' The Commission has interpreted the
terms ``significant market'' and ``market of significant size'' to
include a market (or group of markets) as to which: (a) There is a
reasonable likelihood that a person attempting to manipulate the ETP
would also have to trade on that market to manipulate the ETP, so that
a surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct; and (b) it is unlikely that trading
in the ETP would be the predominant influence on prices in that market.
Cboe believes that, based on previous application of the standard,
the market for Bitcoin Futures \10\ is a regulated

[[Page 5142]]

market of significant size with which the Exchange has in place
comprehensive surveillance sharing agreements and, thus, the Commission
should approve this proposal.\11\ In addition, the Exchange also
believes that there are sufficient other means to prevent fraudulent
and manipulative acts and practices in the Shares, as was presented as
an alternate means to demonstrate that a proposal is consistent with
Section 6(b)(5) of the Act in the in the order disapproving SR-CboeBZX-
2018-001 (the ``GraniteShares Disapproval Order'').\12\ Specifically,
the Exchange believes that the collective effect of the following
factors are sufficient to prevent fraudulent and manipulative acts and
practices in the Shares: \13\ (i) The regulated nature of each of the
firms that make up the MVIS[supreg] Bitcoin OTC Index (the index that
is used to price the Shares, as further described below) (the
``MVBTCO''); \14\ (ii) the notional volume of trading \15\ and
liquidity \16\ available on the OTC Trading Desks; (iii) the principal
to principal nature of the OTC Trading Desks; and (iv) in addition to
its standard surveillance procedures, the Exchange will have in place a
comprehensive surveillance sharing agreement with each of the OTC
Trading Desks prior to the Shares listing on the Exchange.\17\ Each of
these points is further discussed below.
---------------------------------------------------------------------------

\10\ Both Cboe Futures Exchange, Inc. (``CFE'') and Chicago
Mercantile Exchange, Inc. (``CME''), both members of the Intermarket
Surveillance Group, have offered contracts for bitcoin futures
products since 2017. While the CFE bitcoin futures contracts and the
CME bitcoin futures contracts (collectively, the ``Bitcoin
Futures'') differ in certain of their implementation details,
Bitcoin Futures generally trade and settle like any other cash-
settled commodity futures contracts.
\11\ As the Exchange has stated in a number of other public
documents, it continues to believe that bitcoin itself is
particularly resistant to price manipulation. The geographically
diverse and continuous nature of bitcoin trading makes it difficult
and prohibitively costly to manipulate the price of bitcoin and, in
many instances, the bitcoin market is generally less susceptible to
manipulation than the equity, fixed income, and commodity futures
markets. There are a number of reasons this is the case, including
that there is not inside information about revenue, earnings,
corporate activities, or sources of supply, making it particularly
difficult to disseminate false or misleading information about
bitcoin in order to manipulate; manipulation of the price on any
single venue would require manipulation of the global bitcoin price
in order to be effective; a substantial over-the-counter market
provides liquidity and shock-absorbing capacity; bitcoin's 24/7/365
nature provides constant arbitrage opportunities across all trading
venues; and it is unlikely that any one actor could obtain a
dominant market share.
Further, bitcoin is arguably less susceptible to manipulation
than other commodities that underlie ETPs; there may be inside
information relating to the supply of the physical commodity such as
the discovery of new sources of supply or significant disruptions at
mining facilities that supply the commodity that simply are
inapplicable as it relates to bitcoin. Further, the Exchange
believes that the fragmentation across bitcoin platforms, the
relatively slow speed of transactions, and the capital necessary to
maintain a significant presence on each trading platform make
manipulation of bitcoin prices through continuous trading activity
unlikely. Moreover, the linkage between the bitcoin markets and the
presence of arbitrageurs in those markets means that the
manipulation of the price of bitcoin price on any single venue would
require manipulation of the global bitcoin price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular bitcoin exchange or OTC
platform. As a result, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market
pricing differences.
\12\ See Securities Exchange Act Release No. 83913 (August 22,
2018), 83 FR 43923 (August 28, 2018) at 3.
\13\ While not directly related to the issue of manipulation,
the Exchange also notes that the Sponsor expects that the Shares
will be purchased primarily by institutional and other substantial
investors (such as hedge funds, family offices, private wealth
managers and high-net-worth individuals), which will provide
additional liquidity and transparency to the bitcoin market in a
regulated vehicle such as the Trust. With an estimated initial per-
share price equivalent to 25 bitcoin, the Shares will be cost-
prohibitive for smaller retail investors while allowing larger and
generally more sophisticated institutional investors to gain
exposure to the price of bitcoin through a regulated product while
eliminating the complications and reducing the risk associated with
buying and holding bitcoin.
\14\ As further described below, Genesis Global Trading, Inc.
(``Genesis'') is a FINRA registered broker-dealer, Cumberland DRW
LLC (``Cumberland'') is an affiliate of DRW Execution Services, LLC,
a FINRA registred broker-dealer, and Circle Financial (``Circle'')
is awaiting FINRA approval of its purchase of SI Securities, LLC, a
FINRA registered broker-dealer. For purposes of this filing,
Genesis, Cumberland, and Circle are collectively referred to as the
``OTC Trading Desks.''
\15\ The Sponsor has indicated that there are tens of millions
to hundereds of millions of dollars of bitcoin traded on the OTC
Trading Desks on a daily basis.
\16\ Each constituent firm offers and will continue to offer
firm, executable quotes of at least $250,000 depth on both the bid
and ask at all times.
\17\ The Trust maintains crime, excess crime and excess vault
risk insurance coverage underwritten by various insurance carriers
that will cover the entirety of the Trust's bitcoin holdings. While
the Trust remains fully confident in its system for securing its
bitcoin, insurance coverage of all of the Trust's bitcoin holdings
eliminates exposure to the risk of loss to investors through fraud
or theft, which in turn eliminates most of the custodial issues
associated with a series of Commodity-Based Trust Shares based on
bitcoin.
---------------------------------------------------------------------------

Precedent--Dry Bulk Shipping Futures
Looking at the limited instances in which the Commission has
included in the record for an approval order an affirmative statement
about a ``significant regulated market'' provides some insight, but
very little specificity as to how the standard is applied to proposals
that are approved. Of particular interest is the approval order for the
Breakwave Dry Bulk Shipping ETF (the ``Shipping Futures ETF'') which is
designed to provide exposure to the daily change in the price of dry
bulk freight futures: An ETP that provides exposure to a unique
underlying instrument with no direct precedent for approval. Looking to
the language in the approval order for the Shipping Futures ETF, the
order states: ``[t]he Commission notes that the Exchange has
represented that the Freight Futures trade on well-established,
regulated markets that are members of the ISG. The Commission finds
that the Exchange will be able to share surveillance information with a
significant regulated market for trading futures on dry bulk freight.''
\18\ The Approval Order includes no additional analysis that
specifically discusses whether the markets with which the listing
exchange will be able to share surveillance information related to
freight futures, which the Shipping Futures ETF will invest
substantially all of its assets in,\19\ are significant regulated
markets. Importantly, the Approval Order included no mention of the
listing exchange establishing the existence of other means to
sufficiently prevent fraudulent and manipulative acts and practices.
---------------------------------------------------------------------------

\18\ See Securities Exchange Act Release No. 82390 (December 22,
2017), 82 FR 61625 (December 28, 2017) (the ``Approval Order'') at
30.
\19\ Id at 5.
---------------------------------------------------------------------------

Looking deeper, the Approval Order also states that:

Freight Futures are financial instruments that trade off-
exchange but then are cleared through an exchange. Market
participants communicate their buy or sell orders through a network
of execution brokers mainly through phone or instant messaging
platforms with specific trading instructions related to price, size,
and type of order. The execution broker receives such order and then
attempts to match it with a counterparty. Once there is a match and
both parties confirm the transaction, the execution broker submits
the transaction details including trade specifics, counterparty
details and accounts to the relevant exchange for clearing, thus
completing a cleared block futures transaction. The exchange will
then require the relevant member or FCM to submit the necessary
margin to support the position similar to other futures clearing and
margin requirements.\20\
---------------------------------------------------------------------------

\20\ See Approval Order at 12.

That is to say, freight futures trades occur off-exchange and are
coordinated through a broker network, mostly through phone and instant
messaging, and it is only post-trade that any information is shared
with a clearing exchange for the contracts to be cleared and for margin
requirements to be communicated.
The Approval Order also notes that the liquidity in freight futures
has generally been constant over the last five years and open interest
represents more than $3 billion.\21\ The Approval

[[Page 5143]]

Order didn't include any statistics about the daily market-wide trading
volume, but the sponsor of the Shipping Futures ETF estimates a daily
volume of $50-100 million in freight futures.\22\
---------------------------------------------------------------------------

\21\ Id at 14.
\22\ See page 3 of the slide show available at: https://www.drybulketf.com/assets/ETFMG-BDRY-ETF-Investment-Strategy.pdf.
---------------------------------------------------------------------------

While the Approval Order did include some background about the dry
bulk freight industry, dry bulk freight charter rates, and the indexes
designed to track those rates, there is no discussion or additional
facts included that can be used to infer that the market for freight
futures is a significant market. There was also no discussion about
whether the capacity in which exchanges participate in the freight
futures market constituted a regulated market. Because the Approval
Order includes no specific mention of the factors used to determine
that the freight futures market is significant and regulated, the best
reference is to look to the most obvious factors and where the
Commission retroactively provided guidance as to the basis for
determining that the market was a significant, regulated market.\23\
---------------------------------------------------------------------------

\23\ The GraniteShares Disproval Order provided some additional
insight into the basis for determining that the dry bulk shipping
futures market was a significant, regulated market than was
originally included in the Approval Order, as further described
below.
---------------------------------------------------------------------------

First, it's arguable based on the description in the Approval Order
that the exchanges' role in the freight futures ecosystem is not even
that of a ``market,'' but rather as a trade reporting facility and
clearing venue. The Commission obviously determined that even the
limited capacity in which the exchanges are involved in freight futures
constituted a ``market,'' but comparing that capacity where message and
phone based trades are reported after the fact to an exchange to the
fully transparent order books in Bitcoin Futures, the regulatory role
and the information available to surveil for manipulative activity are
both significantly greater in the Bitcoin Futures markets at CFE and
CME. As such, the Exchange represents that Bitcoin Futures trade on
regulated markets that are members of the ISG.
Second, the statistics related to Bitcoin Futures compare favorably
to freight futures.\24\ For instance, the notional average daily volume
for Bitcoin Futures in the third quarter and fourth quarter of 2018
were more than $150 million and $121 million, respectively,\25\ as
compared to the estimate of $50-100 million per day for freight
futures. Moreover, approximately $44.1 billion in Bitcoin Futures
traded in 2018 \26\ and more than $7.7 billion in Bitcoin Futures
traded in the fourth quarter of 2018, even as the price of bitcoin
declined.\27\ Further, open interest in Bitcoin Futures was
approximately $86 million as of December 31, 2018.\28\ Stated another
way, approximately 5.8 million bitcoin worth of Bitcoin Futures traded
in 2018 (more than 30% of the current total bitcoin supply), more than
1.5 million bitcoin worth traded in the fourth quarter alone (more than
4% of the current total bitcoin supply), and more than 22,600 bitcoin
worth of open interest exists in Bitcoin Futures. Looking at these
numbers, the liquidity in Bitcoin Futures was relatively consistent
over 2018. Given the favorable comparison to freight futures, the
Exchange believes that the significant trading volume in Bitcoin
Futures, especially as it relates to the total bitcoin supply, makes
the market for Bitcoin Futures a significant market.\29\
---------------------------------------------------------------------------

\24\ As noted above, the GraniteShares Disapproval Order
provided more detail about the analysis than the Approval Order
itself, pointing out that the length of time that the futures had
been trading (``at least a dozen years'') and that the proposal
included more than just daily volume figures, but also included
statistics related to open interest, yearly volume, and distribution
of open interest across contract types and had represented that
liquidity had remained relatively constant over a five-year period.
The GraniteShares Disapproval Order also noted that the listing
exchange had represented that ``the Freight Futures trade on well-
established, regulated markets that are members of the ISG.'' See
GraniteShares Disapproval Order at 24.
\25\ All statistics herein are based on publicly available
statistics from CFE and CME and a bitcoin price of $7107, $6691,
$6593, $6478, $5452, and $3720, for July through December,
respectively, and $7558 for 2018, which was the approximate average
daily price of bitcoin in 2018.
\26\ Based on publicly available statistics from CFE and CME and
a bitcoin price of $7558, which was the approximate average daily
price of bitcoin in 2018.
\27\ Based on publicly available statistics from CFE and CME and
a bitcoin price of $6478, $5452, and $3720, for October, November,
and December, respectively, which were each the approximate average
daily price of bitcoin during those months.
\28\ Based on publicly available statistics from CFE and CME and
a bitcoin price of $3791, which was the approximate price of bitcoin
on December 31, 2018.
\29\ The Exchange also notes that there has been a strong
correlation between the price of Bitcoin Futures and the bitcoin
spot price over the more than year-long trading history of Bitcoin
Futures, which is indicative of the easily arbitrageable bitcoin
spot and Bitcoin Futures prices. See Memorandum to File No. SR-
CboeBZX-2018-040, November 28, 2018, available at: https://www.sec.gov/comments/sr-cboebzx-2018-040/srcboebzx2018040-4691015-176590.pdf.
---------------------------------------------------------------------------

Volatility and Manipulation
The Exchange also takes issue with the implication that the price
volatility in bitcoin implies that the price of bitcoin is being
manipulated and, thus, the underlying markets cannot be significant and
regulated. Looking at the history of the Baltic Dry Index (the
``BDI''), which is a composite index designed to reflect the broader
dry bulk shipping industry and which the Approval Order states ``is a
common industry measure of dry bulk rates'' that ``has reflected the
volatility of charter rates over the last 15 years,'' the dry bulk
shipping industry often experiences even greater periods of volatility
than the price of bitcoin. For instance, the BDI hit a record high of
11,793 on May 20, 2008 and proceeded to fall to 663 by December 5,
2008, a decline of nearly 95% over approximately six and a half months.
While that was the largest decline, it is one of numerous significant
price declines in the recent history of the BDI. For instance, from
August 3, 2015 to February 8, 2016, the BDI went from 1200 to 291 (-
74.6% over six months). From December 9, 2013 to July 14, 2014 the BDI
went from 2330 to 732 (-68.6% over seven months) and further fell to
513 on February 7, 2015 (total decline of 78% over 14 months).\30\ Even
since the Approval Order was issued, the BDI dropped from 1702 in
December 2017 to 948 in April (-44.4% in five months), bounced back to
1773 in July and dropped to 1008 in November (-43.2% in five months).
The price of the fund (and investors' returns) reflects this
volatility. Just like the price of bitcoin, the price of dry bulk
shipping (and thus the BDI) is dependent on the complex interaction of
natural market forces, which can result in significant price movement
over short periods of time as supply or demand adjust.
---------------------------------------------------------------------------

\30\ The BDI is a composite index made up of sub-indices that
track the Capesize, Panamax, Supramax, and Handysize charter rates.
According to the Approval Order, the reference indexes for the dry
bulk shipping fund track the charter rate for only Capesize,
Panamax, and Supramax, meaning that, the fund in the Approval Order
excludes Handysize rates. Publicly available information indicates
that Capesize, Panamax, and Supramax rates have experienced similar,
if not more pronounced, volatility as the BDI index over the same
period of review. For example, the Baltic Capesize Index fell from
18,749 in May 2008 to 838 in November 2008 (96.6%).

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

[[Page 5144]]

[GRAPHIC] [TIFF OMITTED] TN20FE19.000

[GRAPHIC] [TIFF OMITTED] TN20FE19.001

Further to this point, the Exchange emphasizes that the standard
applicable under Section 6(b)(5) of the Act is not that there must be a
complete absence of manipulation in the underlying market. In fact, the
Commodity Futures Trading Commission (the ``CFTC'') significantly
increased the number of enforcement cases it brought in fiscal year
2018 related to manipulative conduct and spoofing,\33\ including
bringing cases involving futures related to gold, silver, and S&P 500
futures contracts, among others,\34\ each of which are also the
underlying reference asset for numerous ETPs. As noted in the
GraniteShares Disapproval Order, such manipulation on regulated markets
provides regulators, including the listing self-regulatory
organization, with

[[Page 5145]]

a window into such manipulative trading activity, leaving them better
able to detect, understand, and deter potential manipulation in the ETP
and the underlying reference asset. Based on the favorable comparison
laid out above between the Bitcoin Futures market and the dry bulk
shipping futures market combined with the Commission's determination
that the dry bulk shipping market is a significant, regulated market,
the Exchange believes that the Bitcoin Futures market is similarly
significant and regulated and would provide the window described above
into potential manipulation in the Shares. As further described below,
the Exchange will also be able to obtain information about bitcoin
transactions, trades and market data from each of the OTC platforms
that are included in the MVBTCO and from bitcoin exchanges with which
the Exchange has entered into a comprehensive surveillance sharing
agreement, as well as certain additional information that is publicly
available through the Bitcoin blockchain.
---------------------------------------------------------------------------

\31\ Chart sourced from United Nations Conference on Trade and
Development, Review of Maritime Transport 2018.
\32\ Chart sourced from cnbc.com.
\33\ See 2018 Annual Report on the Division of Enforcement at
the Commodity Futures Trading Commission, available: https://www.cftc.gov/sites/default/files/2018-11/ENFAnnualReport111418_0.pdf.
\34\ See James M. McDonald, Statement in Connection with
Manipulation and Spoofing Filings (Jan. 29, 2018). https://www.cftc.gov/PressRoom/SpeechesTestimony/mcdonaldstatement012918.
---------------------------------------------------------------------------

Basis for Approval
This analysis of the Approval Order is not to say that the Approval
Order should not have been issued--to the contrary, Cboe is only asking
that this proposal be reviewed through the same lens as similar
precedent and believes that such an analysis would result in this
proposal being approved. The Commission's approval of this or any
proposal to list and trade an ETP is not an endorsement of the
underlying asset and especially is not a guarantee against the ETP
being an extremely risky and/or volatile investment. Rather, it
signifies that the benefits to end investors that want exposure to a
particular asset class from having a regulated and transparent U.S.
exchange traded vehicle outweigh the applicable risk of manipulation.
With this in mind, Cboe believes that the Bitcoin Futures market is a
significant, regulated market, especially when compared to the dry bulk
shipping futures market described in the Approval Order, and therefore
the Commission should approve this proposal. Further, even if the
Commission were to determine that the Bitcoin Futures market is not a
significant, regulated market, the Exchange believes that the regulated
nature of each of the firms that make up the MVIS[supreg] Bitcoin OTC,
the nature of trading and liquidity available on each of its
constituents, and the comprehensive surveillance sharing agreements
that the Exchange will have in place with each of the OTC Trading
Desks, constitutes sufficient record evidence to demonstrate that there
are other means to prevent fraudulent and manipulative acts and
practices in the Shares.
Bitcoin Price Index
The Fund will use the MVBTCO to calculate the Trust's net asset
value (``NAV''). The MVBTCO represents the value of one bitcoin in U.S.
dollars at any point in time based on executable bids and asks derived
from constituent bitcoin OTC platforms.\35\ The index also generates a
closing price as of 4:00 p.m., Eastern Time (``E.T.''), each weekday,
which is the value used to calculate the Trust's NAV. The index price
and the closing price are calculated using the same methodology. The
intra-day levels of the MVBTCO incorporate the real-time price of
bitcoin based on executable bids and asks derived from constituent
bitcoin OTC platforms that have entered into an agreement with MV Index
Solutions GmbH (``MVIS'') to provide such information.
---------------------------------------------------------------------------

\35\ As noted above, each OTC Trade Desk offers constant,
executable bids and offers of at least $250,000 worth of bitcoin.
The index value is based on these bids and offers, the logic for
which is further described below. The OTC Trading Desks are the
three largest participants in the U.S. dollar OTC bitcoin trading
market. The Exchange will have in place a comprehensive surveillance
sharing agreement with each of the OTC Trading Desks prior to the
Shares listing on the Exchange.
---------------------------------------------------------------------------

The intra-day price and closing level of the MVBTCO are calculated
using a proprietary methodology collecting executable bid/ask spreads
and calculating a mid-point price from several U.S.-based bitcoin OTC
platforms and is published at or after 4:00 p.m., E.T., each weekday.
The MVBTCO is published to two decimal places rounded on the last
digit. The MVBTCO has been live since November 20, 2018 and additional
information about the index can be found on the MVBTCO's website
(https://www.mvis-indices.com/indices/digital-assets/mvis-bitcoin-us-otc-spot). MVIS is the index sponsor and calculation agent for the
MVBTCO. The Sponsor has entered into a licensing agreement with MVIS to
use the MVBTCO. The Trust is entitled to use the MVBTCO pursuant to a
sub-licensing arrangement with the Sponsor.
The MVBTCO calculates the intra-day price of bitcoin every 15
seconds, including the closing price as of 4:00 p.m. E.T. The bitcoin
OTC platforms included in the MVBTCO are U.S.-based entities. These
platforms are well established institutions that comply with anti-money
laundering (``AML'') and know your customer (``KYC'') regulatory
requirements with respect to trading counterparties and include
entities that are regulated by the SEC and FINRA as registered broker-
dealers and affiliates of broker-dealers.
The logic utilized for the derivation of the intra-day and daily
closing index level for the MVBTCO is intended to analyze actual
executable bid/ask spread data, verify and refine the data set and
yield an objective, fair-market value of one bitcoin throughout the day
and as of 4:00 p.m. E.T. each weekday, priced in U.S. dollars. As
discussed herein, the MVBTCO intra-day price and the MVBTCO closing
price are collectively referred to as the MVBTCO price, unless
otherwise noted.
The key elements of the algorithm underlying the MVBTCO include:
Equal Weighting of OTC Platforms: This mitigates the
impact of spikes at single platforms.
Using executable bid/ask spreads and the respective mid-
point prices, which are consistently available.
The Sponsor is not aware of any bitcoin derivatives currently
trading based on the MVBTCO.
OTC Trading
OTC trading of bitcoin is generally accomplished via bilateral
agreements on a principal-to-principal basis. All risks and issues of
credit are between the parties directly involved in the transaction.
The OTC market provides a relatively flexible market in terms of
quotes, price, size and other factors. The OTC market has no formal
structure and no open-outcry meeting place. Parties engaging in OTC
transactions will agree upon a price--often via phone or email--and one
of the two parties would then initiate the transaction. For example, a
seller of bitcoin could initiate the transaction by sending the bitcoin
to the buyer's bitcoin address. The buyer would then wire U.S. dollars
to the seller's bank account. The OTC Trading Desks are the three
largest participants in the U.S. dollar OTC bitcoin trading market.
Based on its observations and experience in the market, the Sponsor
estimates that the U.S. dollar OTC bitcoin trading volume globally
represents on average approximately 25-50% of the trading volume of
bitcoin traded globally in U.S. dollars on U.S. dollar-denominated
bitcoin exchanges.
According to the Registration Statement, transaction costs in the
OTC market are negotiable between the parties and therefore vary with
some participants willing to offer competitive prices for larger
volumes, although this will vary according to market conditions. Cost
indicators can be obtained from OTC trading platforms as well as
various information service providers, such as the bitcoin price

[[Page 5146]]

indexes and bitcoin exchanges. OTC trading tends to be in large blocks
of bitcoin and between institutions.
The Trust intends to buy and sell bitcoin in the OTC bitcoin
market. The Sponsor currently expects that often it will be more cost
efficient for the Trust to effect large trades (e.g., $500,000 or
greater) in the OTC market rather than on a bitcoin exchange. The Trust
therefore expects to conduct most of its trading in the OTC bitcoin
market, primarily on the OTC platforms that comprise the MVBTCO. As
noted above, each OTC Trade Desk offers constant, executable bids and
offers of at least $250,000 worth of bitcoin and offers near real-time
quotes for tens of millions of dollars of bitcoin and, in most
circumstances, minimal slippage.
When buying and selling bitcoin in the OTC market, the Trust will
consider various market factors, including the total U.S. dollar size
of the trade, the volume of bitcoin traded across the various U.S.
dollar-denominated bitcoin exchanges during the preceding 24-hour
period, available liquidity offered by OTC market participants, and the
bid and ask quotes offered by OTC market participants. The Trust's goal
is to fill an order at the best possible price.
To the extent a Basket creation or redemption order necessitates
the buying or selling of a large block of bitcoin (e.g., an amount that
if an order were placed on an exchange would potentially move the price
of bitcoin), the Sponsor represents that placing such a trade in the
OTC market may be advantageous to the Trust. OTC trades help avoid
factors such as potential price slippage (causing the price of bitcoin
to move as the order is filled on the exchange), while offering speed
in trade execution and settlement (an OTC trade can be executed
immediately upon agreement of terms between counterparties) and privacy
(to avoid other market participants entering trades in advance of a
large block order). OTC bitcoin trading is typically private and not
regularly reported. The Trust does not intend to report its OTC
trading. The Trust has established delivery-versus-payment like
(``DVP'') and receive-versus-payment like (``RVP'') trading
arrangements with its trading counterparties pursuant to which the
Trust will be able to minimize counterparty risk. These arrangements
are on a trade-by-trade basis and do not bind the Trust to continue to
trade with any counterparty.
The Trust expects to take custody of bitcoin within one business
day of receiving an order from an Authorized Participant to create a
Basket (as defined in ``Creation and Redemption of Shares'' below).
The dual elements of principal to principal trading combined with
the large size at which trades are effected should effectively
eliminate the ability of market participants to manipulate the market
with small trades as may be the case on any individual exchange. As
noted above, the OTC desks that comprise the MVBTCO with which the
Trust intends to effect transactions are well established institutions
that comply with AML and KYC regulatory requirements with respect to
trading counterparties and include entities that are regulated by the
SEC and FINRA as registered broker-dealers and affiliates of broker-
dealers. It is the Sponsor's position that the OTC desks have a better
measure of the market than any exchange-specific reference price,
whether individually or indexed across multiple exchanges.
Bitcoin Trading on Exchanges
According to the Registration Statement, to the extent the Trust
conducts bitcoin trading on an exchange, it expects to do so on the
following U.S. dollar-denominated bitcoin exchanges: Bitstamp (located
in Slovenia and with an office in the U.K.), Coinbase (located in
California), Gemini (located in New York), itBit (located in New York),
bitFlyer (located in New York) and Kraken (located in San Francisco).
All of these exchanges follow AML and KYC regulatory requirements.
Bitcoin Price Transparency
In addition to the price transparency of the MVBTCO, with respect
to the OTC market, and the bitcoin exchange market itself, the Trust
will provide information regarding the Trust's bitcoin holdings as well
as additional data regarding the Trust. The Sponsor expects that the
dissemination of information on the Trust's website, along with
quotations for and last-sale prices of transactions in the Shares and
the intra-day indicative value (``IIV'') and NAV of the Trust will help
to reduce the ability of market participants to manipulate the bitcoin
market or the price of the Shares and that the Trust's arbitrage
mechanism will facilitate the correction of price discrepancies in
bitcoin and the Shares. The Sponsor believes that demand from new,
larger investors accessing bitcoin through investment in the Shares
will broaden the investor base in bitcoin, which could further reduce
the possibility of collusion among market participants to manipulate
the bitcoin market. The Sponsor expects that the Shares will be
purchased primarily by institutional and other substantial investors
(such as hedge funds, family offices, private wealth managers and high-
net-worth individuals), which will provide additional liquidity and
transparency to the bitcoin market in a regulated vehicle such as the
Trust.
According to the Sponsor, the MVBTCO's methodology decreases the
influence on the MVBTCO of any particular OTC platform that diverges
from the rest of the data points used by the MVBTCO, which reduces the
possibility of an attempt to manipulate the price of bitcoin as
reflected by the MVBTCO.
Bitcoin Security and Storage for the Trust
According to the Sponsor, given the novelty and unique digital
characteristics (as set forth above) of bitcoin as an innovative asset
class, traditional custodians who normally custody assets do not
currently offer custodial services for bitcoin. Accordingly, the Trust
will secure bitcoin using multi-signature ``cold storage wallets'', an
industry best practice. A cold storage wallet is created and stored on
a computer with no access to a network, i.e., an ``air-gapped''
computer with no ability to access the internet. Such a computer is
isolated from any network, including local or internet connections. A
multi-signature address is an address associated with more than one
private key. For example, a ``2 of 3'' address requires two signatures
(out of three) from two separate private keys (out of three) to move
bitcoin from a sender address to a receiver address.
The Trust will utilize bitcoin private keys that are generated and
stored on air-gapped computers. The movement of bitcoin will require
physical access to the air-gapped computers and use of multiple
authorized signers. For backup and disaster recovery purposes, the
Trust will maintain cold storage wallet backups in locations
geographically distributed throughout the United States, including in
the Northeast and Midwest.
In addition to its security system, the Trust will maintain
comprehensive insurance coverage underwritten by various insurance
carriers. The purpose of the insurance is to protect investors against
loss or theft of the Trust's bitcoin. The insurance will cover loss of
bitcoin by, among other things, theft, destruction, bitcoin in transit,
computer fraud and other loss of the private keys that are necessary to
access the bitcoin held by the Trust. The coverage is subject to
certain terms, conditions and

[[Page 5147]]

exclusions, as discussed in the Registration Statement. The insurance
policy will carry initial limits of $25 million in primary coverage and
$100 million in excess coverage, with the ability to increase coverage
depending on the value of the bitcoin held by the Trust. To the extent
the value of the Trust's bitcoin holdings exceeds the total
$125,000,000 of insurance coverage, the Sponsor has made arrangements
for additional insurance coverage with the goal of maintaining
insurance coverage at a one-to-one ratio with the Trust's bitcoin
holdings valued in U.S. dollars such that for every dollar of bitcoin
held by the Trust there is an equal amount of insurance coverage.
The Sponsor expects that the Trust's auditor will verify the
existence of bitcoin held in custody by the Trust. In addition, the
Trust's insurance carriers will have inspection rights associated with
the bitcoin held in custody by the Trust.
Bitcoin Market Price
In the ordinary course of business, the Administrator will value
the bitcoin held by the Trust based on the closing price set by the
MVBTCO or one of the other pricing sources set forth below (each, a
``bitcoin Market Price'') as of 4:00 p.m. E.T., on the valuation date
on any day that the Exchange is open for regular trading. For further
detail, see (i) below. If for any reason, and as determined by the
Sponsor, the Administrator is unable to value the Trust's bitcoin using
the procedures described in (i), the Administrator will value the
Trust's bitcoin using the cascading set of rules set forth in (ii)
through (iv) below. For the avoidance of doubt, the Administrator will
employ the below rules sequentially and in the order as presented,
should the Sponsor determine that one or more specific rule(s) fails.
The Sponsor may determine that a rule has failed if a pricing source is
unavailable or, in the judgment of the Sponsor, is deemed unreliable.
To the extent the Administrator uses any of the cascading set of rules,
the Sponsor will make public on the Trust's website the rule being
used.
(i) Except as further described below, the bitcoin Market Price
will be: The price set by the MVBTCO as of 4:00 p.m. E.T., on the
valuation date. The MVBTCO is a real-time U.S. dollar-denominated
composite reference rate for the price of bitcoin. The MVBTCO
calculates the intra-day price of bitcoin every 15 seconds, including
the closing price as of 4:00 p.m. E.T. The intra-day price and closing
price are based on a methodology that consists of collecting actual
executable bid/ask spreads and calculating a mid-point price from
constituent bitcoin OTC platforms that have entered into an agreement
with MVIS. The logic utilized for the derivation of the daily closing
index level for the MVBTCO is intended to analyze actual executable
bid/ask spread data, verify and refine the data set, and yield an
objective, fair-market value of one bitcoin throughout the day and as
of 4:00 p.m. E.T. each weekday, priced in U.S. dollars.
(ii) In the event that rule (i) above fails, the bitcoin Market
Price will be: the mid-point price between the bid/ask obtained by the
Sponsor from any one of the bitcoin OTC platforms included within the
MVBTCO index as of 4:00 p.m. E.T., on the valuation date.
(iii) In the event that rules (i) and (ii) above fail, the bitcoin
Market Price will be: the volume weighted average bitcoin price for the
immediately preceding 24-hour period at 4:00 p.m. E.T. on the valuation
date as published by an alternative third party's public data feed that
the Sponsor determines is reasonably reliable, subject to the
requirement that such data is calculated based upon a volume weighted
average bitcoin price obtained from the major U.S. dollar-denominated
bitcoin exchanges (``Second Source''). Subject to the next sentence, if
the Second Source becomes unavailable (e.g., data sources from the
Second Source for bitcoin prices become unavailable, unwieldy or
otherwise impractical for use), or if the Sponsor determines in good
faith that the Second Source does not reflect an accurate bitcoin
price, then the Sponsor will, on a best efforts basis, contact the
Second Source in an attempt to obtain the relevant data. If after such
contact the Second Source remains unavailable or the Sponsor continues
to believe in good faith that the Second Source does not reflect an
accurate bitcoin price, then the Administrator will employ the next
rule to determine the bitcoin Market Price.
(iv) In the event that rules (i), (ii), and (iii) above fail, the
bitcoin Market Price will be: The Sponsor will use its best judgment to
determine a good faith estimate of the bitcoin Market Price.
The Trust
According to the Registration Statement, the Trust will invest in
bitcoin only. The Trust will either (i) cause the Sponsor to receive
bitcoin from the Trust in such quantity as may be necessary to pay the
Management Fee or (ii) sell bitcoin in such quantity as may be
necessary to permit payment in cash of the Management Fee and other
Trust expenses and liabilities not assumed by the Sponsor, such as the
bitcoin Insurance Fee, bitcoin storage fees and salaries of Trust
principals and employees. As a result, the amount of bitcoin sold will
vary from time to time depending on the level of the Trust's expenses
and the market price of bitcoin.
The Trust will pay the Sponsor a management fee as compensation for
services performed on behalf of the Trust and for services performed in
connection with maintaining the Trust. The Sponsor's fee will be
payable monthly in arrears and will be accrued daily. The bitcoin
Insurance Fee will be payable by the Trust monthly in advance, as
described in the Registration Statement. Bitcoin storage fees and
salaries of Trust principals and employees will be payable monthly in
arrears and will be accrued daily.
In exchange for the Management Fee, the Sponsor has agreed to
assume the following administrative and marketing expenses incurred by
the Trust: Each of the Trustee's, Administrator's, Cash Custodian's,
Transfer Agent's and Marketing Agent's monthly fee and out-of-pocket
expenses and expenses reimbursable in connection with such service
provider's respective agreement; the marketing support fees and
expenses; exchange listing fees; SEC registration fees; index license
fees; printing and mailing costs; maintenance expenses for the Trust's
website; audit fees and expenses; and up to $100,000 per annum in legal
expenses. The Trust will be responsible for paying, or for reimbursing
the Sponsor or its affiliates for paying, all the extraordinary fees
and expenses, if any, of the Trust. The management fee to be paid to
the Sponsor, the bitcoin Insurance Fee, the salaries of the Trust's
principals and employees and the expenses associated with custody of
the Trust's bitcoin are expected to be the only ordinary recurring
operating expense of the Trust.
Net Asset Value
The NAV for the Trust will equal the market value of the Trust's
total assets, including bitcoin and cash, less liabilities of the
Trust, which include estimated accrued but unpaid fees, expenses and
other liabilities. Under the Trust's proposed operational procedures,
the Administrator will calculate the NAV on each business day that the
Exchange is open for regular trading, as promptly as practicable after
4:00 p.m. E.T. To calculate the NAV, the Administrator will use the
closing price set for bitcoin by the MVBTCO or one of the other bitcoin
Market Prices set forth above. The Administrator will also

[[Page 5148]]

determine the NAV per Share by dividing the NAV of the Trust by the
number of the Shares outstanding as of the close of trading on Regular
Trading Hours, i.e., 9:30 a.m. to 4:00 p.m. E.T. (which includes the
net number of any Shares deemed created or redeemed on such day).
According to the Registration Statement, Authorized Participants
(as defined in ``Creation and Redemption of Shares'' below), or their
clients or customers, may have an opportunity to realize a riskless
profit if they can create a Basket (as defined in ``Creation and
Redemption of Shares'' below) at a discount to the public trading price
of the Shares or can redeem a Basket at a premium over the public
trading price of the Shares. The Sponsor expects that the exploitation
of such arbitrage opportunities by Authorized Participants and their
clients and customers will tend to cause the public trading price to
track NAV per Share closely over time. Such arbitrage opportunities
will not be available to holders of Shares who are not Authorized
Participants.
While the Trust's investment objective is for the Shares to reflect
the performance of the price of bitcoin, less expenses of the Trust's
operations, the Shares may trade in the secondary market at prices that
are lower or higher relative to their NAV per Share for a number of
reasons, including price volatility, trading volume, and closing of
bitcoin trading platforms due to fraud, failure, security breaches or
otherwise.
The NAV per Share may fluctuate with changes in the market value of
the bitcoin held by the Trust. The value of the Shares may be
influenced by non-concurrent trading hours between the Exchange and the
various bitcoin OTC platforms comprising the MVBTCO. As a result, there
will be periods when the Exchange is closed and the bitcoin OTC
platforms continue to trade. Significant changes in the price of
bitcoin during such time periods could result in a difference between
the value of bitcoin as measured by the MVBTCO and the most recent NAV
per Share or closing trading price. The Exchange, however, expects that
any meaningful divergence in the intraday price of the Shares and the
MVTCO will be quickly arbitraged away when trading is available on the
Exchange because when such a discount or premium exists, Authorized
Participants will generally be able to create or redeem a Basket of
Shares at a discount or a premium to the public trading price per
Share.
Impact on Arbitrage
Investors and market participants are able throughout the trading
day to compare the market price of the Shares and the Share's IIV. If
the market price of the Shares diverges significantly from the IIV,
Authorized Participants will have strong economic incentive to execute
arbitrage trades. Because of the potential for arbitrage inherent in
the structure of the Trust, the Sponsor believes that the Shares will
not trade at a material discount or premium to the underlying bitcoin
held by the Trust. 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. To facilitate the
arbitrage process, Authorized Participants may source bitcoin through
the OTC market or on exchanges; alternatively, Authorized Participants
may create or redeem for cash and the Trust will source buyers and
sellers of bitcoin in the OTC market. 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.
Creation and Redemption of Shares
According to the Registration Statement, the Trust will issue and
redeem ``Baskets'', each equal to a block of 5 Shares, only to
``Authorized Participants'' (as described below). 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 or the U.S. dollar equivalent
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 5 (``bitcoin Basket Amount''). The bitcoin Basket Amount
will gradually decrease over time as the Trust's bitcoin 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 25 bitcoin.
Orders to create and redeem Baskets may be placed only by
Authorized Participants.\36\ A transaction fee will be assessed on all
creation and redemption transactions effected in-kind. In addition, the
Trust reserves the right to charge a variable transaction fee to the
Authorized Participants for creations and redemptions effected in cash
to cover the Trust's expenses related to purchasing and selling bitcoin
in the OTC market or on bitcoin exchanges if such expenses should
exceed the fixed $1,000 transaction fee. The variable transaction fee
would cover actual expenses paid for the purchase and sale of bitcoin
in order that such expenses do not decrease the NAV of the Trust. Such
expenses may vary, but the Trust expects such expenses, should they
occur in the future, to constitute 1% or less of the value of a Basket.
The creation and redemption of a Basket requires the delivery to the
Trust, or the distribution by the Trust, of the bitcoin Basket Amount
(that is, the number of bitcoins represented by each Basket or the U.S.
dollar equivalent), for each Basket to be created or redeemed. The
bitcoin Basket Amount multiplied by the number of Baskets being created
or redeemed is the ``Total bitcoin Basket Amount.''
---------------------------------------------------------------------------

\36\ An Authorized Participant must: (1) Be a registered broker-
dealer and a member in good standing with the Financial Industry
Regulatory Authority (``FINRA''); (2) be a participant in Depository
Trust Company (``DTC''). To become an Authorized Participant, a
person must enter into an ``Authorized Participant Agreement'' with
the Sponsor and the Transfer Agent. The Authorized Participant
Agreement provides the procedures for the creation and redemption of
Baskets and for the delivery of the cash (and, potentially, bitcoin
in-kind) required for such creations and redemptions.
---------------------------------------------------------------------------

Creation Procedures
On any business day, an Authorized Participant may place an order
with the Transfer Agent to create one or more Baskets. For purposes of
processing both purchase and redemption orders, a ``business day''
means any day other than a day when the Exchange is closed for regular
trading. Cash purchase orders must be placed by 3:00 p.m. E.T., or the
close of regular trading on the Exchange, whichever is earlier, and in-
kind purchase orders must be placed by 4:00 p.m. E.T., or the close of
regular

[[Page 5149]]

trading on the Exchange, whichever is earlier. The day on which the
Transfer Agent receives a valid purchase order, as approved by the
Marketing Agent, is the purchase order date. Purchase orders are
irrevocable. By placing a purchase order, and prior to delivery of such
Baskets, an Authorized Participant's DTC account will be charged the
non-refundable transaction fee due for the purchase order.
Determination of Required Payment
The total payment required to create each Basket is determined by
calculating the NAV of 5 Shares of the Trust as of the closing time of
the Exchange on the purchase order date. Baskets are issued as of 2:00
p.m., E.T., on the business day immediately following the purchase
order date at the applicable NAV as of the closing time of the Exchange
on the purchase order date, but only if the required payment has been
timely received.
Orders to purchase Baskets for cash must be placed no later than
3:00 p.m. E.T., or the close of regular trading on the Exchange,
whichever is earlier, and orders to purchase Baskets in-kind must be
placed no later than 4:00 p.m. E.T., or the close of regular trading on
the Exchange, whichever is earlier. For cash creation orders, the total
cash payment required to create a Basket will not be determined until
approximately 4:00 p.m., E.T. (the time at which the Trust's NAV for
that day is expected to be calculated) on the date the purchase order
is received by the Transfer Agent and approved by the Marketing Agent.
Authorized Participants therefore will not know the total amount of the
payment required to create a Basket at the time they submit an
irrevocable purchase order for the Basket. Valid cash orders to
purchase Baskets received after 3:00 p.m. E.T., and valid in-kind
orders to purchase Baskets received after 4:00 p.m. E.T., are
considered received on the following business day. The NAV of the
Trust, and thus the total amount of the payment required to create a
Basket for cash could rise or fall substantially between the time an
irrevocable purchase order is submitted and the time the amount of the
purchase price in respect thereof is determined. Changes to the price
of bitcoin between the time an order is placed and the time the final
price is determined by the Trust will be borne by the Authorized
Participant and not by the Trust.
The Sponsor makes available through the National Securities
Clearing Corporation (``NSCC'') on each business day, prior to the
opening of business on the Exchange (a) the amount of cash required for
a cash creation of a Basket (the ``Cash Basket Amount''), based on 100%
of the NAV of the Shares per Basket as of the prior business day, which
amount is applicable in order to effect cash purchases of Baskets until
such time as the next announced amount is made available and (b) the
bitcoin Basket Amount.
The payment required to create a Basket typically will be made in
cash, but it may also be made partially or wholly in-kind at the
discretion of the Sponsor if the Authorized Participant requests to
convey bitcoin directly to the Trust. For a cash order to create, the
Authorized Participant must deliver the Cash Basket Amount to the Cash
Custodian on the day the order is placed and accepted and, potentially,
an amount of cash on the business day after the order is placed and
approved referred to as the ``Balancing Amount,'' computed as described
below. Upon delivery of the Cash Basket Amount and the Balancing Amount
to the Cash Custodian, the Transfer Agent will cause the Trust to issue
a Basket to the Authorized Participant. Expenses incurred by the Trust
relating to purchasing bitcoin in assembling a cash creation Basket,
such as OTC market fees, bitcoin exchange-related fees and/or
transaction fees, will be borne by Authorized Participants, rather than
the Trust, through the transaction fee charged by the Trust.
The Balancing Amount is an amount equal to the difference between
the NAV of the Shares (per Basket) at the end of the business day the
order is placed and approved and the Cash Basket Amount. The Balancing
Amount serves to compensate for any difference between the NAV per
Basket and the Cash Basket Amount. The Balancing Amount may be positive
(in which case the Authorized Participant will be required to transfer
the corresponding amount of cash to the Cash Custodian) or negative (in
which case the amount of cash required to be transferred by the
Authorized Participant will be less than the Cash Basket Amount, and if
the Authorized Participant has already delivered the full Cash Basket
Amount, the corresponding amount of cash will be returned to the
Authorized Participant). Authorized Participants will be notified of
the Balancing Amount that must be paid to the Cash Custodian or
refunded by the Cash Custodian, if any, by approximately 4:00 p.m.,
E.T. on the business day the order is placed and approved. The
Balancing Amount must be paid to the Cash Custodian no later than 2:00
p.m. E.T. on the business day following the date the order was placed
and approved. Upon delivery of the Cash Basket Amount and Balancing
Amount to the Cash Custodian, the Transfer Agent will cause the Trust
to issue a Basket to the Authorized Participant the following business
day by 2:00 p.m., E.T.
To the extent the Authorized Participant places an in-kind order to
create, the Authorized Participant must deliver the Bitcoin Basket
Amount directly to the Trust (i.e. to the security system that holds
the Trust's bitcoin) no later than 4:00 p.m. E.T. on the date the
purchase order is received and approved. Upon delivery of the bitcoin
to the Trust's security system, the Transfer Agent will cause the Trust
to issue a Basket to the Authorized Participant the following business
day by 2:00 p.m., E.T. Payment of any tax or other fees and expenses
payable upon transfer of bitcoin shall be the sole responsibility of
the Authorized Participant purchasing a Basket. Expenses incurred by
Authorized Participants relating to purchasing bitcoin in assembling an
in-kind creation Basket, such as OTC market fees, bitcoin exchange-
related fees and/or transaction fees, will be borne by Authorized
Participants.
The Administrator, by email or telephone correspondence, shall
notify the Authorized Participant of the NAV of the Trust and the
corresponding amount of cash (in the case of a cash purchase order) to
be included in a Balancing Amount by approximately 4:00 p.m. E.T. on
the day the purchase order is placed and approved.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place an order with the
Transfer Agent to redeem one or more Baskets. Cash redemption orders
must be placed no later than 3:00 p.m. E.T., or the close of regular
trading on the New York Stock Exchange, whichever is earlier, and
redemption orders submitted in-kind must be placed by 4:00 p.m. E.T.,
or the close of regular trading on the Exchange, whichever is earlier.
The day on which the Transfer Agent receives a valid redemption order,
as approved by the Marketing Agent, is the ``redemption order date.''
Redemption orders are irrevocable. The redemption procedures allow only
Authorized Participants to redeem Baskets. A shareholder may not redeem
Baskets other than through an Authorized Participant.
By placing a redemption order, an Authorized Participant agrees to
deliver the Baskets to be redeemed through

[[Page 5150]]

DTC's book-entry system to the Trust not later than 4:00 p.m. E.T. on
the business day immediately following the redemption order date. By
placing a redemption order, and prior to receipt of the redemption
proceeds, an Authorized Participant's DTC account will be charged the
non-refundable transaction fee due for the redemption order.
Determination of Redemption Proceeds
The redemption proceeds from the Trust consist of the ``cash
redemption amount'' or, if making an in-kind redemption, bitcoin. The
cash redemption amount is equal to the U.S. dollar equivalent of the
Total bitcoin Basket Amount requested in the Authorized Participant's
redemption order as of the end of Regular Trading Hours on the
redemption order date. The Cash Custodian will distribute the cash
redemption amount at 4:00 p.m., E.T., on the business day immediately
following the redemption order date through DTC to the account of the
Authorized Participant as recorded on DTC's book-entry system. The
bitcoin redemption amount will be the Total bitcoin Basket Amount. At
the discretion of the Sponsor and if the Authorized Participant
requests to receive bitcoin directly, some or all of the redemption
proceeds may be distributed to the Authorized Participant in-kind by
the Trust.
Orders to redeem Baskets must be placed no later than 3:00 p.m.
E.T. for cash redemption orders and 4:00 p.m. E.T. for in-kind
redemptions orders, but the total amount of redemption proceeds
typically will not be determined until after 4:00 p.m. E.T. on the date
the redemption order is received. Authorized Participants therefore
will not know the total amount of the redemption proceeds at the time
they submit an irrevocable redemption order.
Delivery of Redemption Proceeds
The redemption proceeds due from the Trust are delivered to the
Authorized Participant at 4:00 p.m. E.T. on the business day
immediately following the redemption order date if, by such time on
such business day immediately following the redemption order date, the
Trust's DTC account has been credited with the Baskets to be redeemed.
If the Trust's DTC account has not been credited with all of the
Baskets to be redeemed by such time, the redemption distribution is
delivered to the extent of whole Baskets received. The Sponsor may, but
is not obligated to, extend the redemption date with respect to a
redemption order for which whole Baskets have not been delivered by the
Authorized Participant. In such event, the Sponsor may charge the
Authorized Participant a fee for such extension to reimburse the Trust
for any losses incurred from the Authorized Participant's failure to
deliver whole Baskets (including, but not limited to, expenses incurred
in selling bitcoin in respect of the redemption order and/or buying
bitcoin back following the failure of the Authorized Participant to
deliver whole Baskets, as well as losses to the Trust from movements in
the market value of bitcoin between selling the bitcoin and buying it
back). If the Sponsor extends the redemption date, any remainder of the
redemption distribution is delivered on the next business day to the
extent of remaining whole Baskets received if the Sponsor receives the
fee applicable to the extension of the redemption distribution date and
the remaining Baskets to be redeemed are credited to the Trust's DTC
account by 4:00 p.m. E.T. on such next business day. Any further
outstanding amount of the redemption order shall be cancelled.
The Sponsor makes available through the NSCC, prior to the opening
of business on the Exchange on each business day, (a) for in-kind
redemptions, the amount of bitcoin per Basket and (b) for cash
redemptions, the amount of cash per Basket that will be applicable to
redemption requests received in proper form.
As with creation orders, the NAV of the Shares per Basket as of the
day on which a redemption request is received and approved will be
calculated after the deadline for redemption orders. The amount of cash
payable per Basket for a cash redemption order accordingly will be
calculated after the redemption order is received. The Administrator,
by email or telephone correspondence, shall notify the Authorized
Participant of the NAV of the Trust and the corresponding amount of
cash (in the case of a cash redemption order) to be payable per Basket
by approximately 4:00 p.m. E.T. on the day the purchase order is placed
and approved.
To the extent the Authorized Participant places an in-kind order to
redeem a Basket, the Trust will deliver, on the business day
immediately following the day the redemption order is received, the
Total bitcoin Basket Amount. Expenses relating to transferring bitcoin
to an Authorized Participant in a redemption Basket will be borne by
Authorized Participants via the redemption transaction fee.
Availability of Information
The Trust's website will provide an IIV per Share updated every 15
seconds, as calculated by the Exchange or a third party financial data
provider during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00
p.m. E.T.). The IIV will be calculated by using the prior day's closing
NAV per Share as a base and updating that value during Regular Trading
Hours to reflect changes in the value of the Trust's bitcoin holdings
during the trading day.
The IIV disseminated during Regular Trading Hours should not be
viewed as an actual real-time update of the NAV, which will be
calculated only once at the end of each trading day. The IIV will be
widely disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours by one or more major market data
vendors. In addition, the IIV will be available through on-line
information services.
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) The current NAV per
Share daily and the prior business day's NAV and the reported closing
price; (b) the mid-point of the bid-ask price \37\ in relation to the
NAV as of the time the NAV is calculated (``Bid-Ask Price'') and a
calculation of the premium or discount of such price against such NAV;
(c) data in chart form displaying the frequency distribution of
discounts and premiums of the Bid-Ask Price against the NAV, within
appropriate ranges for each of the four previous calendar quarters (or
for the life of the Trust, if shorter); (d) the prospectus; and (e)
other applicable quantitative information. The Trust will also
disseminate the Trust's holdings on a daily basis on the Trust's
website. The price of bitcoin will be made available by one or more
major market data vendors, updated at least every 15 seconds during
Regular Trading Hours. Information about the MVBTCO, including key
elements of how the MVBTCO is calculated, will be publicly available at
www.mvis-indices.com/.
---------------------------------------------------------------------------

\37\ The bid-ask price of the Trust is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day NAV.
---------------------------------------------------------------------------

The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. To the extent that the Administrator has utilized the
cascading set of rules described in ``bitcoin Market Price'' above, the
Trust's website 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

[[Page 5151]]

the Consolidated Tape Association (``CTA'').
Quotation and last sale information for bitcoin is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as the MVBTCO. Information relating to
trading, including price and volume information, in bitcoin is
available from major market data vendors and from the exchanges on
which bitcoin are traded. Depth of book information is also available
from bitcoin exchanges. The normal trading hours for bitcoin exchanges
are 24 hours per day, 365 days per year.
The Trust will provide website disclosure of its bitcoin holdings
daily. The website 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 website 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 website.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
The Shares will be subject to BZX Rule 14.11(e)(4), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV will be calculated daily and that these values and
information about the assets of the Trust will be made available to all
market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a
trust that holds a specified commodity \38\ deposited with the trust;
(b) issued by such trust in a specified aggregate minimum number in
return for a deposit of a quantity of the underlying commodity; and (c)
when aggregated in the same specified minimum number, may be redeemed
at a holder's request by such trust which will deliver to the redeeming
holder the quantity of the underlying commodity. The Exchange notes
that in addition to the in-kind creation and redemption processes
described in Rule 14.11(e)(4)(C)(i), the Trust will also offer
creations and redemptions of Shares for cash in addition to creating
and redeeming in-kind. The Trust represents that the ability to create
and redeem for cash will allow APs that may otherwise be unwilling or
unable to source bitcoin on their own behalf to participate in the
creation and redemption of Shares.
---------------------------------------------------------------------------

\38\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the Commodity Exchange
Act. The CFTC has opined that Bitcoin is a commodity as defined in
Section 1a(9) of the Commodity Exchange Act. See ``In the Matter of
Coinflip, Inc.'' (``Coinflip'') (CFTC Docket 15-29 (September 17,
2015)) (order instituting proceedings pursuant to Sections 6(c) and
6(d) of the CEA, making findings and imposing remedial sanctions),
in which the CFTC stated:
``Section 1a(9) of the CEA defines `commodity' to include, among
other things, `all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See,
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142
(7th Cir. 1982). Bitcoin and other virtual currencies are
encompassed in the definition and properly defined as commodities.''
---------------------------------------------------------------------------

Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Trust in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, in an
account in which a registered Market Maker, directly or indirectly,
controls trading activities, or has a direct interest in the profits or
losses thereof, which has not been reported to the Exchange as required
by this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g., Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own
accounts for trading the underlying physical commodity, related
commodity futures or options on commodity futures, or any other related
commodity derivatives, as may be requested by the Exchange.
The Trust currently expects that there will be at least 100 Shares
outstanding at the time of commencement of trading on the Exchange,
which the Exchange believes to be sufficient to provide adequate market
liquidity. Assuming a bitcoin price of $4,000 and approximately 25
bitcoin per Share, the Shares would be approximately $100,000 each.
With a minimum of 100 Shares outstanding, the market value of all
Shares outstanding would be approximately $10,000,000. Rules
14.11(e)(4)(C)(ii)(b) [sic] and (c) provide that the Exchange will
commence delisting proceedings for a series of Commodity-Based Trust
Shares where the applicable trust has fewer than 50,000 receipts or the
market value of all receipts issued and outstanding is less than
$1,000,000, respectively, following the initial 12 month period
following commencement of trading on the Exchange. These rules are
designed to ensure that there are sufficient shares and market value
outstanding to facilitate the creation and redemption process and
ensure that the arbitrage mechanism will keep the price of a series of
Commodity-Based Trust Shares in line with its NAV and prevent
manipulation in the shares. The Exchange is proposing that Rule
14.11(e)(4)(C)(ii)(b) [sic] would not apply to the Shares because the
Exchange believes that such policy concerns are otherwise mitigated.
The lower number of Shares is merely a function of price that will have
no impact on the creation and redemption process and the arbitrage
mechanism. Whether the Shares are priced equal to

[[Page 5152]]

25 bitcoin with a Basket of 5 Shares or the Shares are priced equal to
.025 bitcoin with a Basket of 5,000 Shares, the cost to an AP to create
or redeem will be the exact same and such a creation and redemption
will have the same proportional impact on Shares and market value
outstanding. Because the creation units and redemption units for most
exchange-traded products are between 5,000 and 50,000 shares, it makes
sense to apply a minimum number of shares outstanding to such products.
Where a creation unit is 5 shares, the policy concerns that Rule
14.11(e)(4)(C)(ii)(b) [sic] is designed to address are mitigated even
where there are significantly fewer shares outstanding. As such, the
Exchange is proposing that it would not commence delisting proceedings
for the Shares if the Shares do not satisfy Rule 14.11(e)(4)(C)(ii)(b)
[sic].
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in BZX Rule 11.18. Trading may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. These may include:
(1) The extent to which trading is not occurring in the bitcoin
underlying the Shares; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present. Trading in the Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading
in the Shares may be halted.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BZX will allow
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a) the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01 where the price is greater than $1.00
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Commodity-Based Trust
Shares. The issuer has represented to the Exchange that it will advise
the Exchange of any failure by the Trust or the Shares to comply with
the continued listing requirements, and, pursuant to its obligations
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil
for compliance with the continued listing requirements. If the Trust or
the Shares are not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under
Exchange Rule 14.12. The Exchange may obtain information regarding
trading in the Shares and listed bitcoin derivatives via the
Intermarket Surveillance Group (``ISG''), from other exchanges who are
members or affiliates of the ISG, or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.\39\ In
addition, the Exchange may obtain information about bitcoin
transactions, trades and market data from each of the OTC platforms
that are included in the MVBTCO, from bitcoin exchanges with which the
Exchange has entered into a comprehensive surveillance sharing
agreement, as well as certain additional information that is publicly
available through the Bitcoin blockchain. The Exchange notes that it
has entered into a comprehensive surveillance sharing agreement with
Gemini Exchange and is working to establish similar agreements with
other bitcoin exchanges and the OTC Trading Desks.
---------------------------------------------------------------------------

\39\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (i) The procedures for the
creation and redemption of Baskets (and that the Shares are not
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (iii) how information
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks
involved in trading the Shares during the Pre-Opening \40\ and After
Hours Trading Sessions \41\ when an updated IIV will not be calculated
or publicly disseminated; (v) the requirement that members deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (vi) trading
information.
---------------------------------------------------------------------------

\40\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
\41\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
---------------------------------------------------------------------------

In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
Additional Background on the Bitcoin Industry
The Bitcoin Network
A bitcoin is an asset that can be transferred among parties via the
internet, but without the use of a central administrator or clearing
agency. The term ``decentralized'' is often used in descriptions of
bitcoin, in reference to bitcoin's lack of necessity for administration
by a central party. The Bitcoin Network (i.e., the network of computers
running the software protocol underlying bitcoin involved in
maintaining the database of bitcoin ownership and facilitating the
transfer of bitcoin among parties) and the asset, bitcoin, are
intrinsically linked and inseparable. Bitcoin was first described in a
white paper released in 2008 and published under the name ``Satoshi
Nakamoto'', and the protocol underlying bitcoin was subsequently
released in 2009 as open source software.
Bitcoin Ownership and the Blockchain
To begin using bitcoin, a user may download specialized software
referred to as a ``bitcoin wallet''. A user's bitcoin wallet can run on
a computer or smartphone. A bitcoin wallet can be used both to send and
to receive bitcoin. Within a bitcoin wallet, a user will be able to
generate one or more ``bitcoin addresses'', which are similar in
concept to bank account numbers, and each address is unique. Upon
generating a bitcoin address, a user can begin to transact in bitcoin
by receiving bitcoin at his or her bitcoin address and sending it from
his or her address to another

[[Page 5153]]

user's address. Sending bitcoin from one bitcoin address to another is
similar in concept to sending a bank wire from one person's bank
account to another person's bank account.
Balances of the quantity of bitcoin associated with each bitcoin
address are listed in a database, referred to as the ``blockchain''.
Copies of the blockchain exist on thousands of computers on the Bitcoin
Network throughout the internet. A user's bitcoin wallet will either
contain a copy of the blockchain or be able to connect with another
computer that holds a copy of the blockchain.
When a bitcoin user wishes to transfer bitcoin to another user, the
sender must first request a bitcoin address from the recipient. The
sender then uses his or her bitcoin wallet software, to create a
proposed addition to the blockchain. The proposal would decrement the
sender's address and increment the recipient's address by the amount of
bitcoin desired to be transferred. The proposal is entirely digital in
nature, similar to a file on a computer, and it can be sent to other
computers participating in the Bitcoin Network. Such digital proposals
are referred to as ``bitcoin transactions''. Bitcoin transactions and
the process of one user sending bitcoin to another should not be
confused with buying and selling bitcoin, which is a separate process
(as discussed below in ``bitcoin Trading On Exchanges'' and ``bitcoin
Trading Over-the-Counter'').
A bitcoin transaction is similar in concept to an irreversible
digital check. The transaction contains the sender's bitcoin address,
the recipient's bitcoin address, the amount of bitcoin to be sent, a
confirmation fee and the sender's digital signature. The sender's use
of his or her digital signature enables participants on the Bitcoin
Network to verify the authenticity of the bitcoin transaction.
A user's digital signature is generated via usage of the user's so-
called ``private key'', one of two numbers in a so-called cryptographic
``key pair''. A key pair consists of a ``public key'' and its
corresponding private key, both of which are lengthy numerical codes,
derived together and possessing a unique relationship.
Public keys are used to create bitcoin addresses. Private keys are
used to sign transactions that initiate the transfer of bitcoin from a
sender's bitcoin address to a recipient's bitcoin address. Only the
holder of the private key associated with a particular bitcoin address
can digitally sign a transaction proposing a transfer of bitcoin from
that particular bitcoin address.
A user's bitcoin address (which is derived from a public key) may
be safely distributed, but a user's private key must remain known
solely by its rightful owner. The utilization of a private key is the
only mechanism by which a bitcoin user can create a digital signature
to transfer bitcoin from him or herself to another user. Additionally,
if a malicious third party learns of a user's private key, that third
party could forge the user's digital signature and send the user's
bitcoin to any arbitrary bitcoin address (i.e., the third party could
steal the user's bitcoin).
When a bitcoin holder sends bitcoin to a destination bitcoin
address, the transaction is initially considered unconfirmed.
Confirmation of the validity of the transaction involves verifying the
signature of the sender, as created by the sender's private key.
Confirmation also involves verifying that the sender has not ``double
spent'' the bitcoin (e.g., confirming Party A has not attempted to send
the same bitcoin both to Party B and to Party C). The confirmation
process occurs via a process known as ``bitcoin mining''.
Bitcoin mining utilizes a combination of computer hardware and
software to accomplish a dual purpose: (i) To verify the authenticity
and validity of bitcoin transactions (i.e., the movement of bitcoin
between addresses) and (ii) the creation of new bitcoin. Neither the
Sponsor nor the Trust intends to engage in bitcoin mining.
Bitcoin miners do not need permission to participate in verifying
transactions. Rather, miners compete to solve a prescribed and
complicated mathematical calculation using computers dedicated to the
task. Rounds of the competition repeat approximately every ten minutes.
In any particular round of the competition, the first miner to find the
solution to the mathematical calculation is the miner who gains the
privilege of announcing the next block to be added to the blockchain.
A new block that is added to the blockchain serves to take all of
the recent-yet-unconfirmed transactions and verify that none are
fraudulent. The recent-yet-unconfirmed transactions also generally
contain transaction fees that are awarded to the miner who produces the
block in which the transactions are inserted, and thereby confirmed.
The successful miner also earns the so-called ``block reward'', an
amount of newly created bitcoin. Thus, bitcoin miners are financially
incentivized to conduct their work. The financial incentives received
by bitcoin miners are a vital part of the process by which the Bitcoin
Network functions.
Upon successfully winning a round of the competition (winning a
round is referred to as mining a new block), the miner then transmits a
copy of the newly-formed block to peers on the Bitcoin Network, all of
which then update their respective copies of the blockchain by
appending the new block, thereby acknowledging the confirmation of the
transactions that had previously existed in an unconfirmed state.
A recipient of bitcoin must wait until a new block is formed in
order to see the transaction convert from an unconfirmed state to a
confirmed state. According to the Registration Statement, with new
rounds won approximately every ten minutes, the average wait time for a
confirmation is five minutes.
The protocol underlying bitcoin provides the rules by which all
users and miners on the Bitcoin Network must operate. A user or miner
attempting to operate under a different set of rules will be ignored by
other network participants, thus rendering that user's or miner's
behavior moot. The protocol also lays out the block reward, the amount
of bitcoin that a miner earns upon creating a new block. The initial
block reward when Bitcoin was introduced in 2009 was 50 bitcoin per
block. That number has and will continue to halve approximately every
four years until approximately 2140, when it is estimated that block
rewards will go to zero. The most recent halving occurred on July 9,
2016, which reduced the block reward from 25 to 12.5 bitcoin. The next
halving is projected for May 2020, which will reduce the block reward
to 6.25 bitcoin from its current level of 12.5. The halving thereafter
will occur in another four years and will reduce the block reward to
3.125 bitcoin, and so on. As of May 2018, there are approximately 17
million bitcoin that have been created, a number that will grow with
certainty to a maximum of 21 million, estimated to occur by the year
2140. Bitcoin mining should not be confused with buying and selling
bitcoin, which, as discussed below, is a separate process.
Use of Bitcoin and the Blockchain
Beyond using bitcoin as a value transfer mechanism, applications
related to the blockchain technology underlying bitcoin have become
increasingly prominent.\42\ Blockchain-focused applications take
advantage of certain unique characteristics of the

[[Page 5154]]

blockchain such as secure time stamping (secure time stamps are on
newly created blocks), highly redundant storage (copies of the
blockchain are distributed throughout the internet) and tamper-
resistant data secured by secure digital signatures.
---------------------------------------------------------------------------

\42\ Additional applications based on blockchain technology--
both the blockchain underlying bitcoin as well as separate public
blockchains incorporating similar characteristics of the blockchain
underlying bitcoin--are currently in development by numerous
entities, including financial institutions like banks.
---------------------------------------------------------------------------

According to the Registration Statement, blockchain-focused
applications in usage and under development include, but are not
limited to asset title transfer, secure timestamping, counterfeit and
fraud detection systems, secure document and contract signing,
distributed cloud storage and identity management. Although value
transfer is not the primary purpose for blockchain-focused
applications, the usage of bitcoin, the asset, is inherently involved
in blockchain-focused applications, thus linking the growth and
adoption of bitcoin to the growth and adoption of blockchain-focused
applications.
Bitcoin Exchanges
Bitcoin exchanges operate websites that facilitate the purchase and
sale of bitcoin for various government-issued currencies, including the
U.S. dollar, the euro or the Chinese yuan. Activity on bitcoin
exchanges should not be confused with the process of users sending
bitcoin from one bitcoin address to another bitcoin address, the latter
being an activity that is wholly within the confines of the Bitcoin
Network and the former being an activity that occurs entirely on
private websites.
Bitcoin exchanges operate in a manner that is unlike the
traditional capital markets infrastructure in the U.S. and in other
developed nations. Bitcoin exchanges combine the process of order
matching, trade clearing, trade settlement and custody into a single
entity. For example, a user can send U.S. dollars via wire to a bitcoin
exchange and then visit the exchange's website to purchase bitcoin. The
entirety of the transaction--from trade to clearing to settlement to
custody (at least temporary custody)--is accomplished by the bitcoin
exchange in a matter of seconds. The user can then withdraw the
purchased bitcoin into a wallet to take custody of the bitcoin
directly.
According to the Registration Statement, there are currently
several U.S.-based regulated entities that facilitate bitcoin trading
and that comply with state and/or U.S. AML and KYC regulatory
requirements. While the CFTC is responsible for regulating the bitcoin
spot market with respect to fraud and manipulation--in the same way
that it regulates the spot market for gold, silver or other exempt
commodities--there is no direct, comprehensive federal oversight of
bitcoin exchanges or trading platforms in the United States and no U.S.
exchanges are registered with the Commission or the CFTC.
Coinbase, which is based in California, is a bitcoin
exchange that maintains money transmitter licenses in over thirty
states, the District of Columbia and Puerto Rico. Coinbase is subject
to the regulations enforced by the various State agencies that issued
their respective money transmitter licenses to Coinbase. The New York
Department of Financial Services (``NYDFS'') granted a BitLicense to
Coinbase in January 2017.
itBit is a bitcoin exchange that was granted a limited
purpose trust company charter by the NYDFS in May 2015. Limited purpose
trusts, according to the NYDFS, are permitted to undertake certain
activities, such as transfer agency, securities clearance, investment
management, and custodial services, but without the power to take
deposits or make loans.
Gemini is a bitcoin exchange that is also regulated by the
NYDFS. In October 2015, NYDFS granted Gemini an Authorization
Certificate, which allows Gemini to operate as a limited purpose trust
company.
Genesis Global Trading is a FINRA member firm that makes a
market in bitcoin by offering two-sided liquidity (``Genesis Global
Trading''). In May 2018, NYDFS granted Genesis Global Trading a
BitLicense.
bitFlyer is a virtual currency exchange that is registered
in Japan. In November 2017, NYDFS granted Tokyo-based bitFlyer a
BitLicense.
Bitcoin are traded with publicly disclosed valuations for each
transaction, measured by one or more government currencies such as the
U.S. dollar, the euro or the Chinese yuan. Bitcoin exchanges typically
report publicly on their site the valuation of each transaction and bid
and ask prices for the purchase or sale of bitcoin. Although each
bitcoin exchange has its own market price, it is expected that most
bitcoin exchanges' market prices should be relatively consistent with
the bitcoin exchange market average since market participants can
choose the bitcoin exchange on which to buy or sell bitcoin (i.e.,
exchange shopping).
Additional Bitcoin Trading Products
In addition to the Bitcoin Futures market described above, certain
U.S. platforms and non-U.S. based bitcoin exchanges offer derivative
products on bitcoin such as options, swaps, and futures. According to
the Registration Statement, BitMex, based in the Republic of
Seychelles, CryptoFacilites, based in the United Kingdom, 796 Exchange,
based in China, and OKCoin Exchange China all offer futures contracts
settled in bitcoin. Coinut, based in Singapore, offers bitcoin binary
options and vanilla options based on the Coinut index. Deribit, based
in the Netherlands, offers vanilla options and futures contracts
settled in bitcoin. IGMarkets, based in the United Kingdom, Avatrade,
based in Ireland, and Plus500, based in Israel, all offer bitcoin
derivative products.
The CFTC has stated that bitcoin and other virtual currencies are
encompassed in the definition of commodities under the CEA.\43\ In July
2017, the CFTC issued an order granting LedgerX, LLC (``LedgerX'')
registration as a derivatives clearing organization under the CEA.
Under the order, LedgerX is authorized to provide clearing services for
fully-collateralized digital currency swaps. LedgerX, which was also
granted an order of registration as a Swap Execution Facility in July
2017, is the first federally-regulated exchange and clearing house for
derivatives contracts settling in digital currencies. LedgerX began
trading options and swaps on its platform in October 2017. While the
CFTC does not regulate the bitcoin spot market--in the same way that it
does not regulate the spot market for gold, silver or other exempt
commodities--it is nevertheless responsible for overseeing and
enforcing the CEA as it applies to trading in bitcoin derivatives.
---------------------------------------------------------------------------

\43\ See Coinflip.
---------------------------------------------------------------------------

In May 2015, the Swedish FSA approved the prospectus for ``Bitcoin
Tracker One'', an open-ended exchange-traded note that tracks the price
of bitcoin in U.S. dollars. The Bitcoin Tracker One initially traded in
Swedish krona on the Nasdaq Nordic in Stockholm, but is now also
available to trade in euro. The Bitcoin Tracker One is available to
retail investors in the European Union and to those investors in the
U.S. who maintain brokerage accounts with Interactive Brokers.
Founded in 2013, Bitcoin Investment Trust, a private, open-ended
trust available to accredited investors, is another investment vehicle
that derives its value from the price of bitcoin. Eligible shares of
the Bitcoin Investment Trust are quoted on the OTCQX marketplace under
the symbol ``GBTC''.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b)

[[Page 5155]]

of the Act \44\ in general and Section 6(b)(5) of the Act \45\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------

\44\ 15 U.S.C. 78f.
\45\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Trust or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under Section 19(g)(1)
of the Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. The Exchange
may obtain information regarding trading in the Shares and listed
bitcoin derivatives via the ISG, from other exchanges who are members
or affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement. In addition, the Exchange
may obtain information about bitcoin transactions, trades and market
data from each of the OTC platforms that are included in the MVBTCO,
from bitcoin exchanges with which the Exchange has entered into a
comprehensive surveillance sharing agreement as well as certain
additional information that is publicly available through the Bitcoin
blockchain. The Exchange notes that it has entered into a comprehensive
surveillance sharing agreement with Gemini Exchange and is working to
establish similar agreements with other bitcoin exchanges and the OTC
Trading Desks.
The proposal is designed to perfect the mechanism of a free and
open market and, in general, to protect investors and the public
interest in that it will facilitate the listing and trading of
Commodity-Based Trust Shares based on the price of bitcoin that will
enhance competition among market participants, to the benefit of
investors and to the marketplace, and will allow institution and other
substantial investors access to bitcoin exposure without requiring
direct access to the bitcoin market and the associated complications.
Despite the growing investor interest in bitcoin, the primary means for
investors to gain access to bitcoin exposure remains either through
direct investment through bitcoin exchanges, over-the-counter trading,
or bitcoin derivatives contracts. For investors simply wishing to
express an investment viewpoint in bitcoin, investment through
derivatives is complex and requires active management and direct
investment in bitcoin brings with it significant inconvenience,
complexity, expense, and risk. The Shares would therefore represent a
significant innovation in the bitcoin market by providing an
inexpensive and simple vehicle for investors to gain exposure to
bitcoin in a secure and easily accessible product that is familiar and
transparent to investors. Such an innovation would help to perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest by improving investor access to
bitcoin exposure through efficient and transparent exchange-traded
derivative products.
As noted above, the Sponsor expects that the Shares will be
purchased primarily by institutional and other substantial investors
(such as hedge funds, family offices, private wealth managers and high-
net-worth individuals), which will provide additional liquidity and
transparency to the bitcoin market in a regulated vehicle such as the
Trust. With an estimated initial per-share price equivalent to 25
bitcoin, the Shares will be cost-prohibitive for smaller retail
investors while allowing larger and generally more sophisticated
institutional investors to gain exposure to the price of bitcoin
through a regulated product while eliminating the complications and
reducing the risk associated with buying and holding bitcoin.
The Exchange also believes that allowing cash creations and
redemptions, in addition to the in-kind creations described in Rule
14.11(e)(4)(C)(i), will allow APs that may otherwise be unwilling or
unable to source bitcoin on their own behalf to participate in the
creation and redemption of Shares, further acting to perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest.
The Exchange also believes that not commencing delisting
proceedings for the Shares if the Shares do not satisfy Rule
14.11(e)(4)(C)(ii)(b) [sic] is consistent with the Act because where a
creation unit is 5 shares because the policy concerns that Rule
14.11(e)(4)(C)(ii)(b) [sic] is designed to address related to minimum
receipts outstanding following the 12 month period following
commencement of trading on the Exchange are mitigated even where there
are significantly fewer shares outstanding. The Exchange believes that
the lower number of Shares is merely a function of price and that, in
this instance, will have no impact on the creation and redemption
process and the arbitrage mechanism.
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about bitcoin and will be available regarding the Trust and
the Shares. The Exchange will obtain a representation that the Trust's
NAV will be calculated daily and that these values and information
about the assets of the Trust will be made available to all market
participants at the same time. Quotation and last sale information for
bitcoin is widely disseminated through a variety of major market data
vendors, including Bloomberg and Reuters. The spot price of bitcoin is
available on a 24-hour basis from major market data vendors, including
Bloomberg and Reuters, as well as the MVBTCO. Information relating to
trading, including price and volume information, in bitcoin is
available from major market data vendors and from the exchanges on
which bitcoin are traded. Depth of book information is also available
from bitcoin exchanges. The normal trading hours for bitcoin exchanges
are 24 hours per day, 365 days per year. The Trust will provide website
disclosure of its bitcoin holdings daily. The website 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. The website for the Trust, which will be publicly
accessible at no charge, will contain the following information: (a)
The current NAV per Share daily and the prior business day's NAV and
the reported closing price; (b) the Bid-Ask

[[Page 5156]]

Price and a calculation of the premium or discount of such price
against such NAV; (c) data in chart form displaying the frequency
distribution of discounts and premiums of the Bid-Ask Price against the
NAV, within appropriate ranges for each of the four previous calendar
quarters (or for the life of the Trust, if shorter); (d) the
prospectus; and (e) other applicable quantitative information. The
Trust will also disseminate the Trust's holdings on a daily basis on
the Trust's website. The price of bitcoin will be made available by one
or more major market data vendors, updated at least every 15 seconds
during Regular Trading Hours. Information about the MVBTCO, including
key elements of how the MVBTCO is calculated, will be publicly
available at www.mvis-indices.com/. The IIV will be widely disseminated
on a per Share basis every 15 seconds during the Exchange's Regular
Trading Hours by one or more major market data vendors. In addition,
the IIV will be available through on-line information services.
As discussed extensively above, Cboe believes that, based on
previous application of the standard, the market for Bitcoin Futures is
a regulated market of significant size with which the Exchange has in
place comprehensive surveillance sharing agreements and, thus, the
Commission should approve this proposal.\46\ In addition, the Exchange
also believes that there are sufficient other means to prevent
fraudulent and manipulative acts and practices in the Shares, as was
presented as an alternate means to demonstrate that a proposal is
consistent with Section 6(b)(5) of the Act in the in the GraniteShares
Disapproval Order. Specifically, the Exchange believes that the
collective effect of the following factors are sufficient to prevent
fraudulent and manipulative acts and practices in the Shares: \47\ (i)
The regulated nature of each of the firms that make up the MVBTCO; (ii)
the notional volume of trading \48\ and liquidity \49\ available on the
OTC Trading Desks; (iii) the principal to principal nature of the OTC
Trading Desks; and (iv) in addition to its standard surveillance
procedures, the Exchange will have in place a comprehensive
surveillance sharing agreement with each of these firms prior to the
Shares listing on the Exchange.\50\
---------------------------------------------------------------------------

\46\ As described above, the Exchange continues to believe that
bitcoin itself is particularly resistant to price manipulation. The
geographically diverse and continuous nature of bitcoin trading
makes it difficult and prohibitively costly to manipulate the price
of bitcoin and, in many instances, the bitcoin market is generally
less susceptible to manipulation than the equity, fixed income, and
commodity futures markets. There are a number of reasons this is the
case, including that there is not inside information about revenue,
earnings, corporate activities, or sources of supply, making it
particularly difficult to disseminate false or misleading
information about bitcoin in order to manipulate; manipulation of
the price on any single venue would require manipulation of the
global bitcoin price in order to be effective; a substantial over-
the-counter market provides liquidity and shock-absorbing capacity;
bitcoin's 24/7/365 nature provides constant arbitrage opportunities
across all trading venues; and it is unlikely that any one actor
could obtain a dominant market share.
Further, bitcoin is arguably less susceptible to manipulation
than other commodities that underlie ETPs; there may be inside
information relating to the supply of the physical commodity such as
the discovery of new sources of supply or significant disruptions at
mining facilities that supply the commodity that simply are
inapplicable as it relates to bitcoin. Further, the Exchange
believes that the fragmentation across bitcoin platforms, the
relatively slow speed of transactions, and the capital necessary to
maintain a significant presence on each trading platform make
manipulation of bitcoin prices through continuous trading activity
unlikely. Moreover, the linkage between the bitcoin markets and the
presence of arbitrageurs in those markets means that the
manipulation of the price of bitcoin price on any single venue would
require manipulation of the global bitcoin price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular bitcoin exchange or OTC
platform. As a result, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market
pricing differences.
\47\ While not directly related to the issue of manipulation,
the Exchange also notes that the Sponsor expects that the Shares
will be purchased primarily by institutional and other substantial
investors (such as hedge funds, family offices, private wealth
managers and high-net-worth individuals), which will provide
additional liquidity and transparency to the bitcoin market in a
regulated vehicle such as the Trust. With an estimated initial per-
share price equivalent to 25 bitcoin, the Shares will be cost-
prohibitive for smaller retail investors while allowing larger and
generally more sophisticated institutional investors to gain
exposure to the price of bitcoin through a regulated product while
eliminating the complications and reducing the risk associated with
buying and holding bitcoin.
\48\ The Sponsor has indicated that there are tens of millions
to hundreds of millions of dollars of bitcoin traded on the OTC
Trading Desks on a daily basis.
\49\ Each constituent firm offers and will continue to offer
firm, executable quotes of at least $250,000 depth on both the bid
and ask at all times.
\50\ The Trust maintains crime, excess crime and excess vault
risk insurance coverage underwritten by various insurance carriers
that will cover the entirety of the Trust's bitcoin holdings. While
the Trust remains fully confident in its system for securing its
bitcoin, insurance coverage of all of the Trust's bitcoin holdings
eliminates exposure to the risk of loss to investors through fraud
or theft, which in turn eliminates most of the custodial issues
associated with a series of Commodity-Based Trust Shares based on
bitcoin.
---------------------------------------------------------------------------

Cboe believes that, if reviewed through the same lens as similar
precedent, this proposal is consistent with the Act and should be
approved. The Commission's approval of this or any proposal to list and
trade an ETP is not an endorsement of the underlying asset and
especially is not a guarantee against the ETP being an extremely risky
and/or volatile investment. Rather, it signifies that the benefits to
end investors that want exposure to a particular asset class from
having a regulated and transparent U.S. exchange traded vehicle
outweigh the applicable risk of manipulation. With this in mind, Cboe
believes that the Bitcoin Futures market is a significant, regulated
market, especially when compared to the dry bulk shipping futures
market described in the Approval Order, and therefore the Commission
should approve this proposal. Further, even if the Commission were to
determine that the Bitcoin Futures market is not a significant,
regulated market, the Exchange believes that the regulated nature of
each of the firms that make up the MVBTCO, the nature of trading and
liquidity available on each of its constituents, and the comprehensive
surveillance sharing agreements that the Exchange will have in place
with each of the OTC Trading Desks constitute sufficient record
evidence to demonstrate that there are other means to prevent
fraudulent and manipulative acts and practices in the Shares.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.

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

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change, rather will facilitate the listing and trading of
an additional exchange-traded product that will enhance competition
among both market participants and listing venues, 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

The Exchange has neither solicited nor received written comments on
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

[[Page 5157]]

to be appropriate and publishes its reasons for so finding or (ii) as
to which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CboeBZX-2019-004 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2019-004. 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 website (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 website 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 also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2019-004, and should be
submitted on or before March 13, 2019.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
---------------------------------------------------------------------------

\51\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-02732 Filed 2-19-19; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.