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


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

SECURITIES AND EXCHANGE COMMISSION

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


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 1 to a Proposed Rule Change to BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares, To List and Trade Winklevoss 
Bitcoin Shares Issued by the Winklevoss Bitcoin Trust

October 28, 2016.
    On June 30, 2016, Bats BZX Exchange, Inc. (``BZX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade Winklevoss Bitcoin Shares issued by the Winklevoss 
Bitcoin Trust under BZX Rule 14.11(e)(4). The proposed rule change was 
published for comment in the Federal Register on July 14, 2016.\3\
---------------------------------------------------------------------------

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

    On August 23, 2016, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On October 12, 2016, the Commission instituted proceedings 
under Section 19(b)(2)(B) of the Act \6\ to determine whether to 
approve or disapprove the proposed rule change.\7\ The Commission has

[[Page 76651]]

received 17 comment letters on the proposed rule change.\8\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78653, 81 FR 59256 
(Aug. 29, 2016). The Commission designated October 12, 2016, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 79084, 81 FR 71778 
(Oct. 18, 2016) (``Order Instituting Proceedings''). Specifically, 
the Commission instituted proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 
6(b)(5) of the Act, which requires, among other things, that the 
rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade,'' and ``to protect investors and the 
public interest.'' See id., 81 FR at 71781.
    \8\ See Letters from Robert D. Miller, VP Technical Services, 
RKL eSolutions (July 11, 2016); Jorge Stolfi, Full Professor, 
Institute of Computing UNICAMP (July 13, 2016); Guillaume 
Lethuillier (July 26, 2016); Michael B. Casey (July 31, 2016); Erik 
A. Aronesty, Sr. Software Engineer, Bloomberg LP (Aug. 2, 2016); Dan 
Anderson (Aug. 27, 2016); Robert Miller (Oct. 12, 2016); Lysle Shaw-
McMinn, O.D. (Oct. 13, 2016); Nils Neidhardt (Oct. 13, 2016); Dana 
K. Barish (2 letters; Oct. 13, 2016); Xin Lu (Oct. 13, 2016); Rodger 
Delehanty CFA (Oct. 14, 2016); Dylan (Oct. 14, 2016); Dana K. Barish 
(Oct. 14, 2016); and Dana K. Barish (2 letters; Oct. 15, 2016). All 
comments on the proposed rule change are available on the 
Commission's Web site at: https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630.shtml.
---------------------------------------------------------------------------

    On October 20, 2016, the Exchange filed Amendment No. 1 to the 
proposed rule change, as described in Items I and II below, which Items 
have been prepared by the Exchange.\9\ The Commission is publishing 
this notice to solicit comments on Amendment No. 1 to the proposed rule 
change from interested persons.\10\
---------------------------------------------------------------------------

    \9\ Among other things, Amendment No. 1 (1) identifies State 
Street Bank and Trust Company as the Trust's Administrator and 
Transfer Agent (see Section II.A.1, infra (discussion in subheading 
``Service Providers of the Trust'')); (2) clarifies that the price 
of bitcoin is measured by the clearing price of a two-sided auction 
which occurs every day at 4:00 p.m. Eastern Time on the Gemini 
exchange (see Section II.A.1, infra (discussion in subheading 
``Service Providers of the Trust'')) and notes various conflicts of 
interest that may arise among the Sponsor and its affiliates, 
including the Custodian and the Gemini Exchange, on one hand, and 
the Trust and its Shareholders, on the other hand (see Section 
II.A.1, infra (discussion in subheading ``Overview of the Bitcoin 
Industry and Market'' under ``The Gemini Exchange'')); (3) provides 
additional information on the Bitcoin exchange ``lit'' market (see 
Section II.A.1, infra (discussion in subheading ``Bitcoin Market'' 
under ``Bitcoin Exchange Lit Market'')); (4) provides additional 
information on security, the Custodian's Cold Storage System, the 
Custodian's insurance arrangements and proof of control auditing 
(see Section II.A.1, infra (discussion in subheading ``Description 
of the Trust and Shares'' under ``Proprietary Cold Storage 
System'')); and (5) changes the value of creation/redemption Baskets 
from 50,000 Shares to 10,000 Shares (see Section II.A.1, infra 
(discussion in subheading ``Creation and Redemption of Shares'')).
    \10\ In formulating comments, commenters should consider whether 
this Amendment No. 1 addresses any of the questions posed in the 
Order to Institute Proceeding mentioned in footnote 5, supra.
---------------------------------------------------------------------------

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

    The Exchange filed a proposal to list and trade Winklevoss Bitcoin 
Shares (the ``Shares'') issued by the Winklevoss Bitcoin Trust (the 
``Trust'') under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares.
    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    This Amendment No. 1 to SR-BatsBZX-2016-30 amends and replaces in 
its entirety the proposal as originally submitted on June 30, 2016. The 
Exchange submits this Amendment No. 1 in order to clarify certain 
points and add additional details about the Trust.
    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4),\11\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\12\ The Shares will be offered by 
the Trust, which was established as a Delaware statutory trust on 
December 30, 2014. The Trust will not be registered as an investment 
company under the Investment Company Act of 1940 \13\ and is not 
required to register under such act. The Trust will not be a commodity 
pool for purposes of the Commodity Exchange Act (``CEA'').\14\ The 
Shares of the Trust will be registered with the Commission by means of 
the Trust's registration statement on Form S-1 (the ``Registration 
Statement'') under the Securities Act of 1933 (the ``Securities Act''). 
The most recent amendment to the Registration Statement was filed on 
October 18, 2016 and the Registration Statement will be effective as of 
the date of any offer and sale pursuant to the Registration 
Statement.\15\
---------------------------------------------------------------------------

    \11\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \12\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \13\ 15 U.S.C. 80a-1.
    \14\ 17 U.S.C. 1.
    \15\ See Registration Statement on Form S-1, dated October 18, 
2016 (File No. 333-189752). The descriptions of the Trust and the 
Shares contained herein are based, in part, on information in the 
Registration Statement.
---------------------------------------------------------------------------

Service Providers of the Trust
    Digital Asset Services, LLC, formerly Math-Based Asset Services, 
LLC, will be the sponsor of the Trust (the ``Sponsor'').\16\ The 
Trust's administrator (the ``Administrator'') \17\ and transfer agent 
(the ``Transfer Agent'') will be State Street Bank and Trust Company 
(``State Street'').\18\ State Street is a trust company organized under 
the laws of the Commonwealth of Massachusetts. Gemini Trust Company, 
LLC will be the custodian of the Trust (the ``Custodian'').\19\ The 
Custodian is a New

[[Page 76652]]

York State-chartered limited liability trust company that operates 
under the direct supervision and regulatory authority of the NYSDFS. 
The Custodian is a fiduciary and must meet the capitalization, 
compliance, anti-money laundering, consumer protection and cyber 
security requirements as set forth by the NYSDFS. The Custodian will 
hold the bitcoin deposited with the Custodian on behalf of the Trust in 
a segregated custody account (the ``Trust Custody Account'') in 
accordance with the Trust Custody Agreement. The Custodian will use its 
proprietary and patent-pending offline (i.e., air-gapped) Cold Storage 
System to store the Trust's bitcoin, as further described herein. 
Delaware Trust Company acts as the trustee of the Trust (the 
``Trustee'').\20\
---------------------------------------------------------------------------

    \16\ The Sponsor is a Delaware limited liability company formed 
on May 9, 2013, and is wholly owned by Winklevoss Capital Fund LLC. 
Under the Delaware Limited Liability Company Act and the governing 
documents of the Sponsor, Winklevoss Capital Fund LLC, the sole 
member of the Sponsor, is not responsible for the debts, obligations 
and liabilities of the Sponsor solely by reason of being the sole 
member of the Sponsor. The Sponsor will be the exclusive licensee, 
within the field of use of operation of an exchange-traded product 
(``ETP''), of certain patent-pending intellectual property regarding 
the operation of the Trust. Winklevoss IP LLC, an affiliate of the 
Sponsor, is the owner of and is licensing to the Sponsor such 
intellectual property for use by the Trust and the Custodian and 
other service providers in the operation of the Trust. The Sponsor 
arranged for the creation of the Trust and will arrange for the 
registration of the Shares for their public offering in the United 
States and their listing on the Exchange.
    \17\ Pursuant to the Administration Agreement between the 
Administrator and the Trust, the Administrator provides fund 
administration and fund accounting services with regard to the 
Trust, including calculating the Trust's net asset value and NAV, 
maintaining the Trust's records, and providing such other 
administrative services as are specified in the Administration 
Agreement.
    \18\ The Transfer Agent serves as the transfer agent in 
accordance with the provisions of the Transfer Agency and Services 
Agreement. The Transfer Agent, among other things, provides transfer 
agent services with respect to the creation and redemption of 
Baskets by Authorized Participants.
    \19\ The Custodian is an affiliate of the Sponsor and a New York 
State-chartered limited liability trust company that operates under 
the direct supervision and regulatory authority of the New York 
State Department of Financial Services (``NYSDFS''). Although the 
Trust's bitcoin is not stored in a physical sense, all transactions 
involving the Trust's bitcoin are recorded on the Bitcoin Network's 
Blockchain and associated with a public Bitcoin address. The Trust's 
public Bitcoin addresses are established by the Custodian using its 
proprietary hardware and software security technology (``Cold 
Storage System''), which holds the Trust's bitcoin and permits the 
Trust to move its bitcoin. Access and control of those Bitcoin 
addresses, and the bitcoin associated with them, is restricted 
through the public-private key pair relating to each Bitcoin 
address. The Custodian is responsible for the safekeeping of the 
private keys used to access and transfer the Trust's bitcoin. The 
Custodian also facilitates the transfer of bitcoin in accordance 
with the Administrator's instructions pursuant to the terms of the 
Administration Agreement. Pursuant to the terms of the Trust 
Agreement and the trust custody agreement (``Trust Custody 
Agreement''), the Custodian will store all of the Trust's bitcoin on 
a segregated basis in its unique Bitcoin addresses with balances 
that can be directly verified on the Blockchain. It will provide the 
Trust's public Bitcoin addresses to the Administrator. Pursuant to 
the provisions of the Trust Custody Agreement, the Custodian will 
use the Cold Storage System to manage and safeguard a system 
utilizing numerous Bitcoin addresses that are kept offline either 
(i) in computers that are not directly connected to or accessible 
from the internet or (ii) through the storage of the public and 
private keys relating to such Bitcoin addresses only in ``cold 
storage.''
    \20\ The Trustee, a Delaware trust company, acts as the trustee 
of the Trust for the purpose of creating a Delaware statutory trust 
in accordance with the Delaware Statutory Trust Act (``DSTA''). The 
duties of the Trustee will be limited to (i) accepting legal process 
served on the Trust in the State of Delaware and (ii) the execution 
of any certificates required to be filed with the Delaware Secretary 
of State which the Delaware Trustee is required to execute under the 
DSTA. To the extent that, at law or in equity, the Trustee has 
duties (including fiduciary duties) and liabilities relating thereto 
to the Trust or the Sponsor, such duties and liabilities will be 
replaced by the duties and liabilities of the Trustee expressly set 
forth in the Trust Agreement.
---------------------------------------------------------------------------

    The Trust will only hold bitcoin, which is a digital commodity \21\ 
that is not issued by any government, bank or central organization. 
Bitcoin is a digital asset (``Digital Asset'') based on the 
decentralized, open source protocol of the peer-to-peer Bitcoin 
computer network (the ``Bitcoin Network'' or ``Bitcoin'') \22\ that 
hosts the decentralized public transaction ledger, known as the 
``Blockchain,'' on which all bitcoin is recorded. The Bitcoin Network 
software source code includes the protocols that govern the creation of 
bitcoin and the cryptographic system that secures and verifies Bitcoin 
transactions.
---------------------------------------------------------------------------

    \21\ Bitcoin is a commodity as defined in Section 1a(9) of the 
Commodity Exchange Act. 7 U.S.C. 1a(9). See In re Coinflip, Inc., 
No. 15-29 (CFTC Sept. 17, 2015), available at: http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf (``Coinflip'').
    \22\ By common convention, Bitcoin with a capital ``B'' 
typically refers to the Bitcoin Network as a whole, whereas bitcoin 
with a lowercase ``b'' refers to the Digital Asset of the Bitcoin 
Network, including the Trust's bitcoin. This naming convention is 
used throughout this document.
---------------------------------------------------------------------------

    The Trust is expected to issue and redeem Shares from time to time 
only in one or more whole Baskets. Certain Authorized Participants are 
the only persons that may place orders to create or redeem Baskets. 
Authorized Participants or their affiliated market makers are expected 
to have the facility to participate directly on one or more Bitcoin 
Exchanges (as defined below).
    The investment objective of the Trust is for the Shares to track 
the price of bitcoin, as measured by the clearing price of a two-sided 
auction which occurs every day at 4:00 p.m. Eastern Time on the Gemini 
exchange (``Gemini Exchange'') (the ``Gemini Exchange Auction Price''), 
each day the Exchange is open for trading (each a ``Business Day''), 
less the Trust's liabilities (which include accrued but unpaid fees and 
expenses). The Gemini Exchange is a Digital Asset exchange owned and 
operated by the Custodian and is an affiliate of the Sponsor. The 
Gemini Exchange does not receive any compensation from the Trust or the 
Sponsor for providing the Gemini Exchange Auction Price. The Sponsor 
believes that, for many investors, the Shares will represent a cost-
effective and convenient means of gaining investment exposure to 
bitcoin similar to a direct investment in bitcoin. The Shares represent 
units of fractional undivided beneficial interest in and ownership of 
the Trust and are expected to be traded under the ticker symbol 
``COIN.''
Overview of the Bitcoin Industry and Market
    Bitcoin is a Digital Asset that is issued by, and transmitted 
through, the decentralized, open source protocol of the peer-to-peer 
Bitcoin Network. The Bitcoin Network hosts the decentralized public 
transaction ledger, known as the Blockchain, on which all bitcoin is 
recorded. No single entity owns or operates the Bitcoin Network, the 
infrastructure of which is collectively maintained by a decentralized 
user base. Bitcoin can be used to pay for goods and services or can be 
converted to fiat currencies, such as the U.S. Dollar, at rates 
determined on bitcoin exchanges (each a ``Bitcoin Exchange'') \23\ or 
in individual end-user-to-end-user transactions under a barter system. 
See ``Uses of Bitcoin--Bitcoin Exchange Market,'' below.
---------------------------------------------------------------------------

    \23\ The Gemini Exchange is a United States-based Bitcoin 
Exchange that began trading on October 8, 2015. It is currently 
operational in 35 states, Washington, DC, Canada, Hong Kong, 
Singapore, and the U.K., and allows trading between bitcoin, U.S. 
Dollars, and other Digital Assets.
---------------------------------------------------------------------------

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

[[Page 76653]]

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

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

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

[[Page 76654]]

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

[[Page 76655]]

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

[[Page 76656]]

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

[[Page 76657]]

[GRAPHIC] [TIFF OMITTED] TN03NO16.000

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

[[Page 76658]]

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

    \25\ For most of 2013, Mt. Gox (a Japanese exchange operated by 
Tibanne Co. Ltd.) was the largest online Bitcoin Exchange in the 
world. Supporting trading of bitcoin using sixteen (16) different 
fiat currencies, Mt. Gox accounted for nearly three-quarters of all 
Bitcoin Exchange Market trading during the first half of 2013. On 
February 25, 2014, Mt. Gox suspended trading on its platform and, 
three (3) days later, filed for bankruptcy protection in Japanese 
courts, stating that it had lost approximately eight hundred and 
fifty thousand (850,000) bitcoin, including approximately seven 
hundred fifty thousand (750,000) bitcoin belonging to its customers. 
Mt. Gox subsequently recovered access to approximately two hundred 
thousand (200,000) of the lost bitcoin. As no full, reliable 
accounting has been publicly provided, it is difficult to assess 
whether Mt. Gox's collapse was due to cyber-attacks (including 
denial of service and hacking incidents reported in 2011 and 2013), 
mismanagement or fraud, although many market participants believe 
Mt. Gox's collapse was due to the latter. Following the cessation of 
trading activity on its platform, Mt. Gox has been in bankruptcy 
proceedings in Japan and the United States and is in the process of 
liquidation.
    \26\ Bitcoin Exchanges may also be vulnerable to security 
breaches. For example, in August 2016, a security breach at 
Bitfinex, a large, Hong Kong-based Bitcoin Exchange, resulted in the 
loss of one hundred twenty thousand (120,000) bitcoin.
---------------------------------------------------------------------------

The Gemini Exchange
    The Gemini Exchange, an affiliate of the Sponsor, is a Digital 
Asset exchange that has a U.S. dollar-denominated bitcoin order book. 
As a facility of a New York State-chartered limited liability trust 
company, the Gemini Exchange is one of only two (2) Bitcoin Exchanges 
in the world that have such a high level of regulatory oversight. The 
Bitcoin Exchange Market has experienced several significant incidents 
at unregulated Bitcoin Exchanges and it is widely-believed that much of 
the self-reported trade volume numbers of unregulated Bitcoin Exchanges 
are inaccurate (either intentionally or unintentionally). The Gemini 
Exchange was established in an effort to improve the Bitcoin ecosystem 
by having a regulated entity where participants could engage in trading 
bitcoin.
    In establishing the Gemini Exchange, Gemini Trust Company, LLC 
worked closely with the NYSDFS to obtain a limited purpose trust 
company license. The term ``limited purpose trust company'' refers to 
entities that are chartered under the bank and trust company provisions 
of the New York Banking Law. Under New York Banking Law, a ``trust 
company'' has general powers available to banks and trust companies, as 
well as powers generally associated with trustees and other 
fiduciaries.
    Apart from general fiduciary powers, the following activities are 
among those specifically identified in the statute as activities that 
New York Trust Companies may conduct with respect to their fiduciary 
accounts, including (i) the power to accept deposits exclusively in a 
fiduciary capacity, to receive and disburse money, to transfer, 
register and countersign evidences of indebtedness or other securities, 
and to act as attorney in fact or agent; \27\ and (ii) the power to 
accept appointment as receiver, trustee, or committee of the property 
of an estate of any person in insolvency or bankruptcy proceedings.
---------------------------------------------------------------------------

    \27\ N.Y. Banking Law Sec.  100 (McKinney).
---------------------------------------------------------------------------

    A ``limited purpose'' trust company must conduct its business and 
operations subject to the limitations or restrictions as the NYSDFS may 
prescribe in its sole discretion. In practice, most limited purpose 
trust companies typically engage in activities such as employee benefit 
trust, personal trust, corporate trust, transfer agency, securities 
clearance, investment management, and custodial services. A trust 
company, including a limited purpose trust company like Gemini Trust 
Company, LLC, can serve as the custodian of customer funds itself.
    Under New York Banking Law, the same general procedures, 
requirements and criteria for the formation of a full-service bank 
apply also to the formation of a limited purpose trust company with two 
(2) exceptions: (i) No requirement to carry FDIC insurance and (ii) a 
level of capitalization deemed satisfactory to the Superintendent of 
Financial Services. Once submitted in acceptable form, a limited 
purpose trust company application receives the same level of scrutiny 
as other bank and trust company proposals and ultimately requires the 
approval of the Superintendent of Financial Services. In addition, 
trust companies are subject to many of the same requirements that apply 
to a bank operating under a New York State banking charter, including: 
(i) Capital requirements, (ii) implementation of an anti-money 
laundering program,\28\ (iii) implementation of a cyber security 
program, and (iv) consumer protection disclosures.\29\ Furthermore, as 
a limited purpose trust company with fiduciary powers under the Banking 
Law, all activities of a trust company, including all exchange 
functions, are subject to examination and supervision by the NYSDFS. 
Gemini Trust Company, LLC complies with the capital requirements under 
New York State banking law, has implemented the required anti-money 
laundering program and cybersecurity program and makes the required 
consumer protection disclosures. As a facility of a regulated entity, 
the Gemini Exchange is obliged to put the interests of its customers 
before its own, to provide accurate public market data and

[[Page 76659]]

pricing information and to monitor for and prevent market manipulation.
---------------------------------------------------------------------------

    \28\ In particular, a prospective trust company must establish 
policies and procedures designed to ensure and monitor compliance 
with the Bank Secrecy Act (``BSA'') as amended by the USA PATRIOT 
Act and the anti-money laundering programs of Part 115 of the 
General Regulations of the Banking Board. A compliance program must 
include, at a minimum, a system of internal controls to assure 
ongoing compliance, independent testing for compliance to be 
conducted by bank personnel or by an outside party, the designation 
of an individual or individuals responsible for coordinating and 
monitoring day-to-day compliance, and training for appropriate 
personnel.
    \29\ Limited purpose trust companies operating virtual currency 
exchanges are required to provide disclosures to current and 
prospective customers (in a form approved by NYSDFS) regarding the 
risks of its services and products and are also required to disclose 
to current and prospective customers the terms and conditions for 
using the trust company's products and services prior to any 
customer using the product or service.
---------------------------------------------------------------------------

    As part of its supervision under the NYSDFS and New York Banking 
Law, Gemini Trust Company, LLC must (i) undergo semiannual bank exams, 
(ii) submit quarterly financial updates to NYSDFS, (iii) submit 
independent third-party year-end audited financial statements to 
NYSDFS,\30\ (iv) submit semiannual Federal Financial Institutions 
Examination Council (``FFIEC'') Call Reports \31\ to the NYSDFS, and 
(v) undergo an annual third-party review of its overall security 
program as implemented by its Chief Security Officer (``CSO'') that may 
take the form of a Service Organization Controls (``SOC'') Level 2 
audit.
---------------------------------------------------------------------------

    \30\ Gemini Trust Company, LLC, successfully completed an 
independent third-party opening day Balance Sheet audit for October 
2, 2015 as well as an independent third-party year-end Financial 
Statements audit for December 31, 2015. No material issues, 
weaknesses or concerns were raised.
    \31\ Gemini Trust Company, LLC, successfully completed and filed 
its first FFIEC Call Report with the NYSDFS on February 1, 2016.
---------------------------------------------------------------------------

    The Gemini Exchange is not the only venue on which Authorized 
Participants can purchase bitcoin for delivery to the Trust, but it may 
provide a convenient and stable venue given its regulatory oversight 
and superior liquidity characteristics. While Authorized Participants 
are not obliged to use the Gemini Exchange to trade their bitcoin, it 
may prove to be an efficient way to do so.
    Conflicts of interest may arise among the Sponsor and its 
affiliates, including the Custodian and the Gemini Exchange, on the one 
hand, and the Trust and its Shareholders, on the other hand. As a 
result of these conflicts, the Sponsor may favor its own interests and 
the interests of its affiliates over the Trust and its Shareholders. 
These potential conflicts include, among others, the following:
     The Sponsor has no fiduciary duties to, and is allowed to 
take into account the interests of parties other than, the Trust and 
its Shareholders in resolving conflicts of interest;
     The Trust's bitcoin is valued, and the Trust's NAV is 
calculated, using the Gemini Exchange Auction Price, and the Gemini 
Exchange Auction Price as provided by the Sponsor will be used by the 
Administrator to calculate the amount of the Sponsor's Fee due to the 
Sponsor;
     The Sponsor's relationship with the Gemini Exchange 
creates an incentive for the Sponsor to sell the bitcoin it collects as 
its Sponsor's fee for U.S. dollars on the Gemini Exchange, which 
benefits the Sponsor's affiliates through increased volume on the 
Gemini Exchange and which may negatively impact the value of the 
Trust's remaining bitcoin;
     The Sponsor, its affiliates and their officers and 
employees may own and trade bitcoin and are not prohibited from 
engaging in other businesses or activities, including those that might 
be in direct competition with the Trust; and
     The Sponsor decides whether to retain separate counsel, 
accountants or others to perform services for the Trust.
    Although the Trust has taken steps to mitigate these conflicts of 
interest, including having the Administrator calculate the Trust's NAV 
and determine the amount of the Sponsor's Fee (based on the publicly-
available Gemini Exchange Auction Price, which will be provided to the 
Administrator by the Sponsor each business day), it may not be possible 
to entirely eliminate these conflicts of interest.
Gemini Exchange Auction Price
    The Trust values its bitcoin using the Gemini Exchange Auction 
Price on each Business Day. At 4:00 p.m. Eastern Time every day, the 
Gemini Exchange conducts a two-sided auction which is open to all 
exchange customers. Similar to the closing auction on the Exchange and 
other U.S. equities exchanges, the auction process incorporates both 
auction-only and continuous trading book orders to find a single price 
at which the most interest is eligible to trade (sometimes called 
``Walrasian equilibrium''). Because indicative auction pricing is 
published publicly throughout the ten (10) minutes prior to the 
auction, this mechanism allows participants to engage in thorough price 
discovery while concentrating liquidity and trading volume at a single 
moment each day. The Gemini Exchange Auction Price is the clearing 
price of this auction. The Gemini Exchange has been conducting these 
auctions since September 21, 2016.
    The Sponsor believes that the Gemini Exchange Auction Price is 
representative of the accurate price of bitcoin because of the positive 
price discovery attributes of the Gemini Exchange marketplace, and 
because the two-sided auction process was specifically designed to 
maximize price discovery and liquidity. According to publicly available 
market data for U.S-based Bitcoin Exchanges as of October 1, 2016 for 
the prior six months:
     The Gemini Exchange was the third biggest by volume.
     The Gemini Exchange had the second tightest bid/ask spread 
as a percentage of price.
     The Gemini Exchange had the tightest spread ten (10) 
bitcoin deep and the second tightest spread one hundred (100) bitcoin 
deep.
     The Gemini Exchange had the lowest volatility (i.e., 
smallest standard deviation of daily prices).
    In addition, since opening in October 2015 and as of October 1, 
2016, pricing on the Gemini Exchange differed from the median price of 
all U.S.-based Bitcoin Exchanges on Business Days by 0.23% on average 
and 0.48% at most; that difference dropped to 0.15% on average in the 
third quarter of 2016.\32\
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

    Since launching on September 21, 2016 and through October 14, 2016, 
on Business Days, the Gemini Exchange Auction Price has deviated from 
the Gemini Exchange midpoint price (the midrange of the highest bid and 
lowest offer prices) by 0.17% on average and 0.71% at most, and it has 
deviated from the median price of all U.S.-based Bitcoin Exchanges by 
0.12% on average and 0.52% at most. On business days between September 
21 and October 14, 2016, the volume has averaged more than 1,900 
bitcoin (worth $1.2 million notional) representing more than 16% of all 
U.S.-based Bitcoin Exchange volume during that period. Additionally, 
the Gemini Exchange's auction market bolstered its share of the U.S.-
based Bitcoin Exchange market to almost $1.7 million of notional daily 
volume for the six-month period ending October 1, 2016, representing 
almost 32% of such market, since it was first instituted on September 
21, 2016. In addition, transactions on the Gemini Exchange appear to be 
substantially larger than typical daily transaction sizes on other 
Bitcoin Exchanges. These facts, taken together, suggest that the Gemini 
Exchange Auction Price is representative and indicative of the larger 
Bitcoin marketplace, and that it can support the liquidity and volume 
necessary to maintain an efficient arbitrage mechanism.
    As discussed above, the Gemini Exchange is uniquely positioned 
because of its regulatory status and licensing as a venue on which 
traditional financial institutions may be comfortable transacting in 
bitcoin. These institutions provide a vital bridge to the equities 
markets and other capital markets, serving to enrich price discovery, 
liquidity, and transparency. The Trust has entered into preliminary 
conversations with a number of potential Authorized Participants as

[[Page 76660]]

well as market makers, each of which is an experienced participant in 
the ETP \33\ marketplace and is actively engaged in trading ETPs. A 
number of these potential Authorized Participants, currently trade 
bitcoin and are already registered participants that trade on the 
Gemini Exchange. Authorized Participants will not be required to use 
the Gemini Exchange to trade their bitcoin, and the Gemini Exchange is 
not the only venue on which Authorized Participants can purchase 
bitcoin for delivery to the Trust. However, the Gemini Exchange may 
provide a convenient and stable venue in which to purchase bitcoin, as 
well as an efficient way to trade bitcoin, given its regulatory 
oversight and superior liquidity characteristics. See ``Bitcoin Value--
The Gemini Exchange'' above.
---------------------------------------------------------------------------

    \33\ For purposes of this filing, the term ETP means any product 
that may be listed on the Exchange pursuant to Rule 14.11.
---------------------------------------------------------------------------

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

[[Page 76661]]

Bitcoin Exchange, launched a dark pool for bitcoin trades separate from 
its public central limit order book. Informal dark pools are currently 
believed to exist, particularly among wholesale buyers of bitcoin and 
Bitcoin Network mining groups that obtain bitcoin through mining. Such 
informal dark pools function as a result of the peer-to-peer nature of 
the Bitcoin Network, which allows direct transactions between any 
seller and buyer. As the Bitcoin Exchange Market and bitcoin dark pools 
have a limited history and no publicly available limit order book data, 
it is difficult to estimate the impact of dark pools on the Bitcoin 
Exchange Market.
Global Bitcoin Derivatives Markets
    Nascent derivatives markets for bitcoin now exist. For example, 
certain types of options, futures contracts for differences and other 
derivative instruments are available in certain jurisdictions; however, 
many of these are not available in the United States and generally are 
not regulated to the degree that U.S. investors expect derivative 
instruments to be regulated. The U.S. Commodity Futures Trading 
Commission (``CFTC'') has approved TeraExchange, LLC as a swap 
execution facility (``SEF''), on which bitcoin swap contracts may be 
entered into. On October 9, 2014, TeraExchange announced that it had 
hosted the first executed bitcoin swap traded on a CFTC-regulated 
platform. Additionally, in September 2015, the CFTC issued an order 
temporarily registering LedgerX LLC as a SEF. LedgerX also previously 
applied for registration as a derivatives clearing organization 
(``DCO'') although its application is still in the process of CFTC 
approval. Other parties have acknowledged submitting applications for 
registration to the CFTC, though no other bitcoin-focused derivatives 
platform has been approved for registration by the CFTC. Various 
platforms and Bitcoin Exchanges also offer trading on margin. 
Currently, the open interest in these bitcoin derivative instruments is 
quite limited in comparison to the volume of actual bitcoin trades. 
CFTC commissioners have previously expressed publicly that derivatives 
based on Digital Assets such as bitcoin are subject to regulation by 
the CFTC, including oversight to prevent market manipulation of the 
price of bitcoin. As previously noted, in the September 2015 Coinflip 
case, the CFTC instituted and settled administrative proceedings that 
involved a bitcoin derivatives trading platform and its chief executive 
officer. In Coinflip,\34\ the CFTC determined that bitcoin and other 
``virtual currencies'' (aka Digital Assets) are properly defined as 
commodities under the CEA and CFTC regulations, and applied CEA 
provisions and CFTC regulations that apply to transactions in commodity 
options and swaps to the conduct of the bitcoin derivatives trading 
platform. The CFTC affirmed its approach to the regulation of bitcoin 
and bitcoin-related enterprises on June 2, 2016, when the CFTC settled 
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its 
Order, the CFTC found that Bitfinex engaged in ``illegal, off-exchange 
commodity transactions and failed to register as a futures commission 
merchant'' when it facilitated borrowing transactions among its users 
to permit the trading of bitcoin on a ``leveraged, margined or financed 
basis'' without first registering with the CFTC.\35\ While the 
Commission has not opined on the legal characterization of bitcoin as a 
security, it has taken various actions against persons or entities 
misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi 
schemes), inaccurate and inadequate publicly disseminated information, 
and the offering of unregistered securities.\36\
---------------------------------------------------------------------------

    \34\ See supra note 13 [sic].
    \35\ See In re BFXNA Inc., No. 16-19 (CFTC June 2, 2016), 
available at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf.
    \36\ See, e.g., SEC v. Homero Joshua Garza, GAW Miners, LLC and 
ZenMiner, LLC, Complaint and Demand for Jury Trial, Case 3:15-cv-
01760 (D. Conn. Dec. 1, 2015) (The Commission brought charges in 
connection with a bitcoin-related Ponzi scheme); In re Erik T. 
Voorhees, Securities Act Release No. 9592 (June 3, 2014), available 
at: https://www.sec.gov/litigation/admin/2014/33-9592.pdf (The 
Commission brought an administrative action in connection with the 
offering of unregistered securities of two bitcoin-related 
entities.); In re BTC Trading, Corp. and Ethan Burnside, Securities 
Act Release No. 9685 (Dec. 8, 2014), available at: http://www.sec.gov/litigation/admin/2014/33-9685.pdf (The Commission 
brought an administrative action in connection with the operation 
and offering of securities of two online exchanges, neither of which 
were registered with the Commission, that accepted payment in 
bitcoin and primarily listed virtual currency-related companies.); 
In re Sand Hill Exchange, et al., Securities Act Release No. 9809 
(June 17, 2015), available at: https://www.sec.gov/litigation/admin/2015/33-9809.pdf (The Commission took legal action against an online 
exchange that accepted payment in bitcoin in connection with 
disseminating fraudulent information, among other matters.).
---------------------------------------------------------------------------

Goods and Services
    Bitcoin can also be used to purchase goods and services, either 
online or at physical locations, although reliable data is not readily 
available about the retail and commercial market penetration of the 
Bitcoin Network. In January 2014, U.S. national online retailers 
Overstock.com and TigerDirect began accepting Bitcoin payments. Over 
the course of 2014, computer hardware and software company Microsoft 
began accepting bitcoin as online payment for certain digital content, 
online retailer NewEgg began accepting bitcoin, and computer hardware 
company Dell began accepting bitcoin. Additionally, Apple, Inc. 
approved the inclusion of certain approved bitcoin wallet applications 
on the Apple App Store. There are thousands of additional online 
merchants that accept bitcoin, and the variety of goods and services 
for which bitcoin can be exchanged is increasing. Currently, local, 
regional and national businesses, including Time Inc., Wikimedia, 
WordPress, Expedia and Foodler, accept bitcoin. Bitcoin service 
providers such as BitPay and Coinbase provide means to spend bitcoin 
for goods and services at additional retailers. There are also many 
real-world locations that accept bitcoin throughout the world.
    As of October 2016, it was estimated that as many as one hundred 
thousand (100,000) merchants or businesses accept, or have the 
technological infrastructure to choose to accept (e.g., Shopify 
merchants), bitcoin as payment. In September 2014, payments giant 
PayPal announced a partnership with merchant processors including 
BitPay and Coinbase and to expand their Bitcoin-related services to 
PayPal's merchant customers, thereby significantly expanding the reach 
of bitcoin-accepting merchants. To date, the rate of consumer adoption 
and use of bitcoin in paying merchants has trailed the broad expansion 
of retail and commercial acceptance of bitcoin. Nevertheless, there 
will likely be a strong correlation between continued expansion of the 
Bitcoin Network and its retail and commercial market penetration.
Market Participants
Miners
    Miners range from Bitcoin enthusiasts to professional mining 
operations that design and build dedicated machines and data centers, 
but the vast majority of mining is now undertaken by participants in 
mining pools. See ``Bitcoin Mining & Creation of New Bitcoin'' above.
Investment and Speculative Sector
    This sector includes the investment and trading activities of both 
private and professional investors and speculators. These participants 
range from exchange-traded products, such as

[[Page 76662]]

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

    \37\ According to the Registration Statement, the activities of 
the Trust will be limited to (1) issuing Baskets in exchange for the 
actual bitcoin deposited by the Authorized Participants with the 
Custodian as consideration, (2) transferring actual bitcoin as 
necessary to cover the Sponsor's Fee and as necessary to pay Trust 
expenses not assumed by the Sponsor and other liabilities, (3) 
transferring actual bitcoin in exchange for Baskets surrendered for 
redemption by the Authorized Participants, (4) causing the Trustee 
to sell bitcoin on the termination of the Trust, and (5) engaging in 
all administrative and custodial procedures necessary to accomplish 
such activities in accordance with the provisions of the Trust 
Agreement, the Administration Agreement, the Transfer Agency and 
Services Agreement, the Custody Agreement, the License Agreement, 
and Authorized Participant Agreements. The Trust will not be 
actively managed. It will not engage in any activities designed to 
obtain a profit from, or to ameliorate losses caused by, changes in 
the market prices of bitcoin. The Trust seeks to achieve its 
investment objective by directly owning bitcoin and will not 
speculate with regard to short-term changes in bitcoin prices. The 
Trust will not invest in bitcoin derivatives, futures, swaps, or 
other financial instruments that represent bitcoin or that may be 
exchanged for bitcoin. The Trust does not expect to make any cash 
distributions to shareholders.
---------------------------------------------------------------------------

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

[[Page 76663]]

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

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

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

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

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

[[Page 76664]]

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

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

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

[[Page 76665]]

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

[[Page 76666]]

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

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

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

[[Page 76667]]

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

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

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) The extent to which trading is not occurring

[[Page 76668]]

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

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

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

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

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

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

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

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

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

[[Page 76669]]

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

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

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

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional Commodity-Based Trust Share product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.

[[Page 76670]]

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

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

III. Solicitation of Comments

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

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

    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BatsBZX-2016-30 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsBZX-2016-30. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsBZX-2016-30 and should 
be submitted on or before November 25, 2016.
---------------------------------------------------------------------------

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

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