[Federal Register Volume 82, Number 80 (Thursday, April 27, 2017)]
[Notices]
[Pages 19398-19412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08462]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80502; File No. SR-NYSEArca-2017-06]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1, and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to the Listing and Trading of Shares of the 
Bitcoin Investment Trust Under NYSE Arca Equities Rule 8.201

April 21, 2017.
    On January 25, 2017, NYSE Arca, Inc. (``NYSE Arca'' 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 shares of the Bitcoin Investment 
Trust under NYSE Arca Equities Rule 8.201. The proposed rule change was 
published for comment in the Federal Register on February 9, 2017.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79955 (Feb. 3, 
2017), 82 FR 10086 (Feb. 9, 2017) (``Notice'').
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    On March 22, 2017, 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 approve or disapprove the proposed 
rule change.\5\ The Commission received four comment letters on the 
proposed rule change.\6\ On April 6, 2017, the Exchange filed Amendment 
No. 1 to the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 80297 (Mar. 22, 
2017), 82 FR 15408 (Mar. 28, 2017). The Commission designated May 
10, 2017, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to approve or disapprove 
the proposed rule change.
    \6\ See Letters from Joseph Stephen White (Feb. 5, 2017); 
Anonymous (Feb. 8, 2017) (purportedly from Jeffrey Wilcke, Ethereum 
Foundation); Mark T. Williams, Finance Professor, Boston University 
(Mar. 13, 2017); Clark J. Haley (Apr. 17, 2017). All comments on the 
proposed rule change are available on the Commission's Web site at 
https://www.sec.gov/comments/sr-nysearca-2017-06/nysearca201706.htm.
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    The Commission is publishing this notice to solicit comment on the 
proposed rule change, as modified by Amendment No. 1,\7\ from 
interested

[[Page 19399]]

persons and is instituting proceedings under Section 19(b)(2)(B) of the 
Act \8\ to determine whether to approve or disapprove the proposed rule 
change, as modified by Amendment No. 1.
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    \7\ The Exchange's description of the proposed rule change, as 
modified by Amendment No. 1, is described in Sections I and II 
below, which Sections have been prepared by the Exchange. In 
Amendment No. 1, the Exchange, among other things (a) added content 
relating to the Trust's security arrangements (see Section II.A.1, 
infra (discussion in subheading ``Bitcoin Security and Storage'')); 
(b) added content relating to changes in transactions fees and 
trading volumes on China-based bitcoin exchanges (see Section 
II.A.1, infra (discussion in subheading ``Bitcoin Exchanges'')); (c) 
revised information and statistics relating to the trading volumes 
on, and market shares of, the largest U.S. dollar denominated 
bitcoin exchanges (see Section II.A.1, infra (table entitled ``Eight 
Largest U.S. Dollar-Denominated Bitcoin Exchanges by Trade Volume'' 
under subheading ``Bitcoin Exchanges'')); (d) deleted content 
relating to a platform license agreement between the Index Provider 
and Genesis (see Section II.A.1, infra (discussion in subheading 
``Bitcoin Index Price'')); and (e) clarified and added content 
relating to the Trust's creation and redemption processes, 
particularly the Conversion Procedures (see Section II.A.1, infra 
(discussion in subheading ``Creation and Redemption of Shares'')). 
Amendment No. 1, which superseded and replaced the proposed rule 
change in its entirety, is available on the Commission's Web site 
at: https://www.sec.gov/comments/sr-nysearca-2017-06/nysearca201706-1689847-149663.pdf.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the following 
under NYSE Arca Equities Rule 8.201: Bitcoin Investment Trust 
(``Trust''). The proposed rule change is available on the Exchange's 
Web site at www.nyse.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

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

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

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

1. Purpose
    Under NYSE Arca Equities Rule 8.201, the Exchange may propose to 
list and/or trade pursuant to unlisted trading privileges (``UTP'') 
``Commodity-Based Trust Shares.'' \9\ The Exchange proposes to list and 
trade shares (``Shares'') of the Trust pursuant to NYSE Arca Equities 
Rule 8.201.\10\
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    \9\ Commodity-Based Trust Shares are securities issued by a 
trust that represent investors' discrete identifiable and undivided 
beneficial ownership interest in the commodities deposited into the 
Trust.
    \10\ On March 24, 2017, the Trust filed Amendment No. 1 to its 
registration statement (``Registration Statement'') on Form S-1 
under the Securities Act of 1933 (15 U.S.C. 77a) (File No. 333-
215627). The descriptions of the Trust, the Shares and bitcoin 
contained herein are based, in part, on the Registration Statement. 
This Amendment No. 1 to SR-NYSEArca-2017-06 replaces SR-NYSEArca-
2017-06 as originally filed and supersedes such filing in its 
entirety. On March 4, 2016, the Trust submitted to the Commission an 
amended Form D as a business trust. Shares of the Trust have been 
quoted on OTC Market's OTCQX Best Marketplace under the symbol 
``GBTC'' since March 26, 2015. On November 11, 2016, the Trust also 
published a quarterly report for GBTC for the period ended September 
30, 2016, which can be found on OTC Market's Web site: http://www.otcmarkets.com/stock/GBTC/filings. The Shares will be of the 
same class and will have the same rights as shares of GBTC. 
Effective October 28, 2014, the Trust suspended its redemption 
program for shares of GBTC, in which shareholders were permitted to 
request the redemption of their shares through Genesis Global 
Trading, Inc. (formerly known as SecondMarket, Inc.), an affiliate 
of the Sponsor and the Trust (``Genesis''). According to the 
Sponsor, freely tradeable shares of GBTC will remain unregistered 
freely tradeable Shares on the date of the listing of the Shares 
unless, if authorized by the Trust, holders of GBTC sell the shares 
in the initial public offering. Restricted shares of GBTC will 
remain subject to private placement restrictions and the holders of 
such restricted shares may either (i) continue to hold those shares 
subject to those restrictions or (ii) if authorized by the Trust, 
sell the restricted shares in the initial public offering.
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    The sponsor of the Trust is Grayscale Investments, LLC 
(``Sponsor''), a Delaware limited liability company. The Sponsor is a 
wholly-owned subsidiary of Digital Currency Group, Inc. (``Digital 
Currency Group''). The trustee for the Trust is Delaware Trust Company 
(``Trustee''). The Bank of New York Mellon will be the Trust's transfer 
agent (in such capacity, ``Transfer Agent'') and the administrator of 
the Trust (in such capacity, ``Administrator''). Xapo Inc. is the 
custodian for the Trust (``Custodian'').\11\ ALPS Portfolio Solutions 
Distributor, Inc. will be the marketing agent for the Trust 
(``Marketing Agent'').
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    \11\ According to the Registration Statement, Digital Currency 
Group owns a minority interest in the Custodian that represents less 
than 1.0% of the Custodian's equity.
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    The Trust is a Delaware statutory trust, organized on September 13, 
2013, that operates pursuant to a trust agreement between the Sponsor 
and the Trustee. The Trust has no fixed termination date.
    According to the Registration Statement, each Share will represent 
a proportional interest, based on the total number of Shares 
outstanding, in the bitcoins held by the Trust, less the Trust's 
liabilities, which include accrued but unpaid fees and expenses. The 
Trust's assets will consist solely of bitcoins held on the Trust's 
behalf by the Custodian. The Trust has not had a cash balance at any 
time since inception. When selling bitcoins to pay expenses, the 
Sponsor will endeavor to sell the exact number of bitcoins needed to 
pay expenses in order to minimize the Trust's holdings of assets other 
than bitcoin. As a consequence, the Trust expects that it will not 
record any cash flow from its operations and that its cash balance will 
be zero at the end of each reporting period.
    The activities of the Trust will be limited to (i) issuing 
``Baskets'' (as defined below) in exchange for bitcoins deposited by 
the ``Authorized Participants'' (as defined below) or ``Liquidity 
Providers'' (as defined below), as applicable, with the Custodian as 
consideration, (ii) transferring actual bitcoins as necessary to cover 
the Sponsor's management fee and selling bitcoins as necessary to pay 
certain other fees that are not contractually assumed by the Sponsor, 
(iii) transferring actual bitcoins in exchange for Baskets surrendered 
for redemption by the Authorized Participants, (iv) causing the Sponsor 
to sell bitcoins on the termination of the Trust and (v) engaging in 
all administrative and custodial procedures necessary to accomplish 
such activities in accordance with the provisions of applicable 
agreements. The Trust is not actively managed. It will not engage in 
any activities designed to obtain a profit from, or to ameliorate 
losses caused by, changes in the market price of bitcoins.
    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended, (``1940 Act'') \12\ nor a commodity pool for purposes of 
the Commodity Exchange Act,\13\ and neither the Sponsor nor the Trustee 
is subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
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    \12\ 15 U.S.C. 80a-1.
    \13\ 17 U.S.C. 1.
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Investment Objective
    According to the Registration Statement, and as further described 
below, the investment objective of the Trust will be for the Shares to 
reflect the performance of the value of a bitcoin as represented by the 
TradeBlock XBX

[[Page 19400]]

Index (``Index''),\14\ less the Trust's liabilities and expenses.
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    \14\ The Index is a U.S. dollar-denominated composite reference 
rate for the price of bitcoin based on the volume-weighted price at 
trading venues selected by TradeBlock, Inc. (``Index Provider''). 
According to the Registration Statement, Digital Currency Group, 
Inc. owns approximately 2.4% of the Index Provider's voting equity 
and warrants representing approximately 1.4% of the Index Provider's 
voting equity. See ``Bitcoin Index Price'' below.
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    The Shares are designed to provide investors with a cost-effective 
and convenient way to invest in bitcoin. A substantial direct 
investment in bitcoins may require expensive and sometimes complicated 
arrangements in connection with the acquisition, security and 
safekeeping of the bitcoins and may involve the payment of substantial 
fees to acquire such bitcoins from third-party facilitators through 
cash payments of U.S. dollars. Although the Shares will not be the 
exact equivalent of a direct investment in bitcoins, they will provide 
investors with an alternative that constitutes a relatively cost-
effective way to participate in bitcoin markets through the securities 
market.
Overview of the Bitcoin Industry and Market
    The following is a brief introduction to the bitcoin industry and 
the bitcoin market based on information provided in the Registration 
Statement.
The Bitcoin Network
    A bitcoin is a decentralized digital currency that is issued by, 
and transmitted through, an open-source digital protocol platform using 
cryptographic security that is known as the ``Bitcoin Network.'' The 
Bitcoin Network is an online, peer-to-peer user network that hosts a 
public transaction ledger, known as the ``Blockchain,'' and the source 
code that comprises the basis for the cryptography and digital 
protocols governing the Bitcoin Network. No single entity owns or 
operates the Bitcoin Network, the infrastructure of which is 
collectively maintained by a decentralized user base. Bitcoins can be 
used to pay for goods and services or can be converted to fiat 
currencies, such as the U.S. dollar, at rates determined on electronic 
marketplaces where exchange participants may first use fiat currency to 
trade, buy and sell bitcoins based on bid-ask trading (``Bitcoin 
Exchanges'') or in individual end-user-to-end-user transactions under a 
barter system.
    The Blockchain is comprised of a digital file, downloaded and 
stored, in whole or in part, on all bitcoin 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. As each newly solved 
block refers back to and ``connects'' with the immediately prior solved 
block, the addition of a new block adds to the Blockchain in a manner 
similar to a new link being added to a chain. Because each new block 
records outstanding bitcoin transactions, and outstanding transactions 
are settled and validated through such recording, the Blockchain 
represents a complete, transparent and unbroken history of all 
transactions on the Bitcoin Network.
    Bitcoins are ``stored'' or reflected on the Blockchain. The 
Blockchain records the transaction history of all bitcoins in existence 
and, through the transparent reporting of transactions, allows the 
Bitcoin Network to verify the association of each bitcoin with the 
digital wallet that owns them. The Bitcoin Network and bitcoin software 
programs can interpret the Blockchain to determine the exact bitcoin 
balance of any digital wallet listed in the Blockchain as having taken 
part in a transaction on the Bitcoin Network.
    In order to own, transfer or use bitcoins, a person generally must 
have internet access to connect to the Bitcoin Network. Bitcoin 
transactions between parties occur rapidly (typically between a few 
seconds and a few minutes) and may be made directly between end-users 
without the need for a third-party intermediary, although there are 
entities that provide third-party intermediary services. To prevent the 
possibility of double-spending a single bitcoin, each transaction is 
recorded, time stamped and publicly displayed in a block in the 
publicly available Blockchain. Thus, the Bitcoin Network provides 
confirmation against double-spending by memorializing every transaction 
in the Blockchain, which is publicly accessible and downloaded in part 
or in whole by all users' Bitcoin Network software programs as 
described above.
    The Bitcoin Network is decentralized and does not rely on either 
governmental authorities or financial institutions to create, transmit 
or determine the value of bitcoins. Rather, bitcoins are created and 
allocated by the Bitcoin Network protocol through a ``mining'' process 
subject to a strict, well-known issuance schedule. The value of 
bitcoins is determined by the supply of and demand for bitcoins in the 
bitcoin exchange market (and in private end-user-to-end-user 
transactions), as well as the number of merchants that accept them. As 
bitcoin transactions can be broadcast to the Bitcoin Network by any 
user's bitcoin software and bitcoins can be transferred without the 
involvement of intermediaries or third parties, there are little or no 
transaction costs in direct peer-to-peer transactions on the Bitcoin 
Network. Third-party service providers such as Bitcoin Exchanges and 
bitcoin third-party payment processing services may charge significant 
fees for processing transactions and for converting, or facilitating 
the conversion of, bitcoins to or from fiat currency.
    ``Off-Blockchain transactions'' involve the transfer of control 
over, or ownership of, a specific digital wallet holding bitcoins, or 
of the reallocation of ownership of certain bitcoins in a pooled-
ownership digital wallet, such as a digital wallet owned by a Bitcoin 
Exchange. Off-Blockchain transactions are not truly bitcoin 
transactions in that they do not involve the transfer of transaction 
data on the Bitcoin Network and do not reflect a movement of bitcoins 
between addresses recorded in the Blockchain. Information and data 
regarding Off-Blockchain transactions are generally not publicly 
available in contrast to ``true'' bitcoin transactions, which are 
publicly recorded on the Blockchain. Off-Blockchain transactions are 
subject to risks as any such transfer of bitcoin ownership is not 
protected by the protocol behind the Bitcoin Network or recorded in and 
validated through the Blockchain mechanism.

Overview of Bitcoin Transactions

    Prior to engaging in bitcoin transactions, a user must first obtain 
a digital bitcoin ``wallet'' (analogous to a bitcoin account) in which 
to store bitcoins. A wallet can be obtained, among other ways, through 
an open-source software program that generates bitcoin addresses and 
enables users to engage in the transfer of bitcoins with other users. A 
user may install a bitcoin software program on a computer or mobile 
device that will generate a bitcoin wallet or, alternatively, a user 
may retain a third party to create a digital wallet to be used for the 
same purpose. There is no limit on the number of digital wallets a user 
can have, and each such wallet includes one or more unique addresses 
and a verification system for each address consisting of a ``public 
key'' and a ``private key,'' which are mathematically related.
    In a typical bitcoin transaction, the bitcoin recipient must 
provide the spending party with the recipient's digital wallet address, 
an identifying series of 27 to 34 alphanumeric characters that 
represents the wallet's routing number on the Bitcoin Network and 
allows the Blockchain to record the

[[Page 19401]]

sending of bitcoins to the recipient's wallet. The receiving party can 
provide this address to the spending party in alphanumeric format or an 
encoded format such as a Quick Response Code (commonly known as a QR 
Code), which may be scanned by a smartphone or other device to quickly 
transmit the information. This activity is analogous to a recipient 
providing an address in wire instructions to the payor so that cash may 
be wired to the recipient's account.
    After the provision of the receiving wallet's digital address, the 
spending party must enter the address into its bitcoin software program 
along with the number of bitcoins to be sent. The number of bitcoins to 
be sent will typically be agreed upon between the two parties based on 
a set number of bitcoins or an agreed upon conversion of the value of 
fiat currency to bitcoins. Most bitcoin software programs also allow, 
and often suggest, the payment of a transaction fee (also known as a 
miner's fee). Transaction fees are not required to be included by many 
bitcoin software programs, but, when they are included, they are paid 
by the spending party on top of the specified amount of bitcoins being 
sent in the transaction. Transaction fees, if any, are typically a 
fractional number of bitcoins (for example, 0.005 or 0.0005 bitcoins) 
and are automatically transferred by the Bitcoin Network to the bitcoin 
miner that solves and adds the block recording the spending transaction 
on the Blockchain.
    After the entry of the receiving wallet's address, the number of 
bitcoins to be sent and the transaction fees, if any, to be paid, the 
spending party will transmit the spending transaction. The transmission 
of the spending transaction results in the creation of a data packet by 
the spending party's bitcoin software program. The data packet includes 
data showing (i) the receiving wallet's address, (ii) the number of 
bitcoins being sent, (iii) the transaction fees, if any, and (iv) the 
spending party's digital signature, verifying the authenticity of the 
transaction. The data packet also includes references called ``inputs'' 
and ``outputs,'' which are used by the Blockchain to identify the 
source of the bitcoins being spent and record the flow of bitcoins from 
one transaction to the next transaction in which the bitcoins are 
spent. The digital signature exposes the spending party's digital 
wallet address and public key to the Bitcoin Network, though, for the 
receiving party, only its digital wallet address is revealed. The 
spending party's bitcoin software will transmit the data packet onto 
the decentralized Bitcoin Network, resulting in the propagation of the 
information among the software programs of bitcoin users across the 
Bitcoin Network for eventual inclusion in the Blockchain. Typically, 
the data will spread to a vast majority of bitcoin miners within the 
course of less than one minute.
    Bitcoin miners record transactions when they solve for and add 
blocks of information to the Blockchain. When a miner solves for a 
block, it creates that block, which includes data relating to (i) the 
solution to the block, (ii) a reference to the prior block in the 
Blockchain to which the new block is being added and (iii) all 
transactions that have occurred but have not yet been added to the 
Blockchain. The miner becomes aware of outstanding, unrecorded 
transactions through the data packet transmission and propagation 
discussed above. Typically, bitcoin transactions will be recorded in 
the next chronological block if the spending party has an internet 
connection and at least one minute has passed between the transaction's 
data packet transmission and the solution of the next block. If a 
transaction is not recorded in the next chronological block, it is 
usually recorded in the next block thereafter.
    Bitcoin transactions that are micropayments (typically, less than 
0.01 bitcoins) and that do not include transaction fees to miners are 
currently deprioritized for recording, meaning that, depending on 
bitcoin miner policies, these transactions may take longer to record 
than typical transactions if the transactions do not include a 
transaction fee. Additionally, transactions initiated by spending 
wallets with poor connections to the Bitcoin Network (i.e., few or poor 
quality connections to nodes or ``supernodes'' that relay transaction 
data) may be delayed in the propagation of their transaction data and, 
therefore, transaction recording on the Blockchain. Finally, to the 
extent that a miner chooses to limit the transactions it includes in a 
solved block (whether by the payment of transaction fees or otherwise), 
a transaction not meeting that miner's criteria will not be included.
    To the extent that a transaction has not yet been recorded, there 
is a greater chance that the spending wallet can double-spend the 
bitcoins sent in the original transaction. If the next block solved is 
by an honest miner not involved in the attempt to double-spend bitcoin 
and if the transaction data for both the original and double-spend 
transactions have been propagated onto the Bitcoin Network, the 
transaction that is received with the earlier time stamp will be 
recorded by the solving miner, regardless of whether the double-
spending transaction includes a larger transaction fee. If the double-
spend transaction propagates to the solving miner and the original 
transaction has not, then the double-spending has a greater chance of 
success. As a result of the high difficulty in successfully initiating 
a double-spend without the assistance of a coordinated attack, the 
probability of success for a double-spend transaction attempt is 
limited.
    Upon the addition of a block included in the Blockchain, the 
bitcoin software program of both the spending party and the receiving 
party will show confirmation of the transaction on the Blockchain and 
reflect an adjustment to the bitcoin balance in each party's digital 
wallet, completing the bitcoin transaction. Typically, bitcoin software 
programs will automatically check for and display additional 
confirmations of six or more blocks in the Blockchain.
    To ensure the integrity of bitcoin transactions from the 
recipient's side (i.e., to prevent double-spending by a payor), every 
bitcoin transaction is broadcast to the Bitcoin Network and recorded in 
the Blockchain through the mining process, which time-stamps the 
transaction and memorializes the change in the ownership of the 
bitcoin(s) transferred. Adding a block to the Blockchain requires 
bitcoin miners to exert significant computational effort to verify it 
is a valid transaction. According to the Registration Statement, 
requiring this computational effort, or ``proof of work,'' prevents a 
malicious actor from either adding fraudulent blocks to generate 
bitcoins (i.e., counterfeit bitcoins) or overwriting existing valid 
blocks to reverse its prior transactions.
    A transaction in bitcoins between two parties is recorded in the 
Blockchain in a block only if that block is accepted as valid by a 
majority of the nodes on the Bitcoin Network. Validation of a block is 
achieved by confirming the cryptographic ``hash value'' included in the 
block's solution and by the block's addition to the longest confirmed 
Blockchain on the Bitcoin Network. For a transaction, inclusion in a 
block on the Blockchain constitutes a ``confirmation'' of the bitcoin 
transaction. As each block contains a reference to the immediately 
preceding block, additional blocks appended to and incorporated into 
the Blockchain constitute additional confirmations of the transactions 
in such prior blocks, and a transaction included in a block for the 
first time is confirmed once against double-spending. The layered 
confirmation process makes changing

[[Page 19402]]

historical blocks (and reversing transactions) exponentially more 
difficult the further back one goes in the Blockchain. Bitcoin 
Exchanges and users can set their own threshold as to how many 
confirmations are required until funds from the transferor are 
considered valid. However, statistically speaking, a transaction is 
virtually final after six confirmations as it would be extremely 
difficult to challenge the validity of the transaction at that point.
    According to the Registration Statement, at this point in the 
evolution of the Bitcoin Network, bitcoin transactions are considered 
irreversible. Once a transaction appears in the Blockchain, no one has 
the authority to reverse it. If someone were to attempt to undo a past 
transaction in a block recorded on the Blockchain, such individual 
would have to exert tremendous processing power in a series of 
complicated transactions that may not be achieved at this point in the 
Bitcoin Network's development.
Bitcoin Security and Storage
    According to the Registration Statement, all transactions on the 
Bitcoin Network are secured using public-key cryptography, a technique 
which underpins many online transactions. Public-key cryptography works 
by generating two mathematically related keys (one a public key and the 
other a private key). One of these, the private key, is retained in the 
individual's digital wallet and the other key is made public and serves 
as the address to which bitcoin(s) can be transferred and from which 
money can be transferred by the owner of the bitcoin wallet. In the 
case of bitcoin transactions, the public key is an address (a string of 
letters and numbers) that is used to encode payments, which can then 
only be retrieved with its associated private key, which is used to 
authorize the transaction. In other words, the payor uses his private 
key to approve any transfers to a recipient's account. Users on the 
Bitcoin Network can confirm that the user signed the transaction with 
the appropriate private key, but cannot reverse engineer the private 
key from the signature.
    According to the Registration Statement, the Custodian is 
responsible for keeping the private key or keys that provide access to 
the Trust's digital wallets and vaults secure. Pursuant to a request 
from the Sponsor or the Trust, the Custodian will establish and 
maintain an account with one or more wallets (``Wallet Account'') and 
one or more cold-storage vault accounts (``Vault Account'' and, 
together with the Wallet Account and any subaccounts associated 
therewith, the ``Bitcoin Account'') in the name of the Sponsor and the 
Trust. The Custodian deposits and withdraws bitcoins to and from the 
Bitcoin Account at the instruction of the Sponsor. The Custodian is 
responsible for administering the Bitcoin Account.
    The Bitcoin Account is maintained by the Custodian and cold storage 
mechanisms are used for the Vault Account by the Custodian. Each 
digital wallet of the Trust may be accessed using its corresponding 
private key. The Custodian's custodial operations maintain custody of 
the private keys that have been deposited in cold storage at its 
various vaulting premises which are located in geographically dispersed 
locations across the world, including but not limited to the United 
States, Europe (including Switzerland) and South America. According to 
the Registration Statement, the locations of the vaulting premises 
change regularly and are kept confidential by the Custodian for 
security purposes.
    The term ``cold storage'' refers to a safeguarding method by which 
the private keys corresponding to bitcoins stored on a digital wallet 
are removed from any computers actively connected to the internet. Cold 
storage of private keys may involve keeping such wallet on a non-
networked computer or electronic device or storing the public key and 
private keys relating to the digital wallet on a storage device (for 
example, a USB thumb drive) or printed medium (for example, papyrus or 
paper) and deleting the digital wallet from all computers. According to 
the Registration Statement, most of the private keys in the Wallet 
Account and all of the private keys in the Vault Account are kept in 
cold storage. A digital wallet may receive deposits of bitcoins but may 
not send bitcoins without use of the bitcoins' corresponding private 
keys. In order to send bitcoin from a digital wallet in which the 
private keys are kept in cold storage, either the private keys must be 
retrieved from cold storage and entered into a bitcoin software program 
to sign the transaction, or the unsigned transaction must be sent to 
the ``cold'' server in which the private keys are held for signature by 
the private keys. At that point, the user of the digital wallet can 
transfer its bitcoins.
    According to the Registration Statement, the Custodian is the 
custodian of the Trust's private keys and will utilize certain security 
procedures such as algorithms, codes, passwords, encryption or 
telephone call-backs in the administration and operation of the Trust 
and the safekeeping of its bitcoins and private keys. The Custodian has 
created a Vault Account for the Trust assets in which private keys are 
placed in cold storage. According to the Registration Statement, the 
Custodian segregates the private keys stored with it from any other 
assets it holds or holds for others.
    According to the Registration Statement, multiple distinct private 
keys must sign any transaction in order to transfer the Trust's 
bitcoins from a multi-signature address to any other address on the 
Bitcoin blockchain. Distinct private keys required for multi-signature 
address transfers reside in geographically dispersed vault locations. 
The Custodian refers to these vault locations, where transactions are 
signed by private keys, as ``signing vaults.'' In addition to multiple 
signing vaults, the Custodian maintains multiple ``back-up vaults'' in 
which backup private keys are stored. According to the Registration 
Statement, in the event that one or more of the ``signing vaults'' were 
to be compromised, back-up vaults can be activated and used as signing 
vaults to complete a transaction within 72 hours.
    Therefore, according to the Registration Statement, if any one 
signing vault were to be compromised, it would have no impact on the 
ability of the Trust to access its bitcoins, other than a possible 
delay in operations of 72 hours, while one or more of the back-up 
vaults was transitioned to a signing vault. According to the 
Registration Statement, these security procedures ensure that there is 
no single point of failure in the protection of the Trust's assets.
    The Custodian is authorized to accept, on behalf of the Trust, 
deposits of bitcoins from ``Authorized Participant Self-Administered 
Accounts'' (as defined below) or ``Liquidity Provider Accounts'' (as 
defined below), as applicable, held with the Custodian and transfer 
such bitcoins into the Bitcoin Account. Deposits of bitcoins will be 
immediately available to the Trust to the extent such bitcoins have not 
already been transferred to the Vault Account. Bitcoins transferred to 
the Bitcoin Account will be directly deposited into digital wallets for 
which the keys are already in cold storage.
    According to the Registration Statement, if bitcoins need to be 
withdrawn from the Trust in connection with a redemption, the Custodian 
will ensure that the private keys to those bitcoins sign the withdrawal 
transaction.

[[Page 19403]]

Bitcoin Mining and Creation of New Bitcoins
    According to the Registration Statement, the process by which 
bitcoins are created and bitcoin transactions are verified is called 
mining.\15\ To begin mining, a miner can download and run a mining 
client, which, like regular Bitcoin Network software programs, turns 
the user's computer into a ``node'' on the Bitcoin Network that 
validates blocks. Bitcoin transactions are recorded in new blocks that 
are added to the Blockchain and new bitcoins being issued to the 
miners. Miners, through the use of the bitcoin software program, engage 
in a set of prescribed complex mathematical calculations in order to 
add a block to the Blockchain and thereby confirm bitcoin transactions 
included in that block's data.
---------------------------------------------------------------------------

    \15\ None of the Trust, Sponsor or Genesis currently 
participates in mining or has plans to engage in mining in the 
future.
---------------------------------------------------------------------------

    In order to add blocks to the Blockchain, a miner must map an input 
data set (i.e., the Blockchain, plus a block of the most recent Bitcoin 
Network transactions and an arbitrary number called a ``nonce'') to a 
desired output data set of a predetermined length, i.e., a hash value, 
using the SHA-256 cryptographic hash algorithm. Each unique block can 
only be solved and added to the Blockchain by one miner; therefore, all 
individual miners and mining pools on the Bitcoin Network are engaged 
in a competitive process of constantly increasing their computing power 
to improve their likelihood of solving for new blocks. According to the 
Registration Statement, as more miners join the Bitcoin Network and its 
processing power increases, the Bitcoin Network adjusts the complexity 
of the block-solving equation to maintain a predetermined pace of 
adding a new block to the Blockchain approximately every ten minutes.
    A miner's proposed block is added to the Blockchain once a majority 
of the nodes on the Bitcoin Network confirms the miner's work. Miners 
that are successful in adding a block to the Blockchain are 
automatically awarded bitcoins for their effort plus any transaction 
fees paid by transferors whose transactions are recorded in the block. 
This reward system is the method by which new bitcoins enter into 
circulation to the public.
    The supply of new bitcoins is mathematically controlled in a manner 
so that the number of bitcoins grows at a limited rate pursuant to a 
pre-set schedule. The number of bitcoins awarded for solving a new 
block is automatically halved after every 210,000 blocks are added to 
the Blockchain. Recently, in July 2016, the fixed reward for solving a 
new block decreased from 25 bitcoins to 12.5 bitcoins per block and 
this is expected to decrease by half to become 6.25 bitcoins after the 
next 210,000 blocks have entered the Bitcoin Network, which is expected 
to be July 2020. This deliberately controlled rate of bitcoin creation 
means that the number of bitcoins in existence will increase at a 
controlled rate until the number of bitcoins in existence reaches the 
pre-determined 21 million bitcoins. According to the Registration 
Statement, as of March 15, 2017, approximately 16.22 million bitcoins 
have been mined, and estimates of when the 21 million bitcoin 
limitation will be reached range up to the year 2140.
Bitcoin Exchanges
    According to the Registration Statement, due to the peer-to-peer 
framework of the Bitcoin Network and the protocols thereunder, 
transferors and recipients of bitcoins are able to determine the value 
of the bitcoins transferred by mutual agreement or barter with respect 
to their transactions. As a result, the most common means of 
determining the value of a bitcoin is by surveying one or more Bitcoin 
Exchanges where bitcoins are bought, sold and traded. On each Bitcoin 
Exchange, bitcoins are traded with publicly disclosed valuations for 
each transaction, measured by one or more fiat currencies such as the 
U.S. dollar or the Chinese yuan.
    According to the Registration Statement, historically, a large 
percentage of the global trading volume occurred on self-reported, 
unregulated exchanges located in China. In January 2017, some of the 
largest China-based Bitcoin Exchanges implemented certain adjustments 
to their terms, including the introduction of a 0.2% fixed-rate 
transaction fee for all bitcoin buy and sell orders. In February 2017, 
certain smaller China-based Bitcoin Exchanges also imposed or increased 
trading fees on their respective exchanges. In the subsequent weeks, 
some of the largest China-based Bitcoin Exchanges halted bitcoin 
withdrawals. According to the Registration Statement, these events have 
substantially reduced the volume traded on Chinese exchanges and 
changed the global liquidity profile for bitcoins.
    For example, according to the Registration Statement, from May 10, 
2015 to January 24, 2017, the three primary China-based Bitcoin 
Exchanges, BTCC, Huobi and OKCoin, reported a total trade volume of 
approximately 1.35 billion bitcoins and an average daily trade volume 
of 2.16 million bitcoins, comprising more than 95% of the global 
exchange-traded volume based on data from the Index Provider. According 
to the Registration Statement, during this period, the exchanges that 
comprised the Index, reported a total trade volume of 33.03 million 
bitcoins and an average daily trade volume of approximately 53,000 
bitcoins, accounting for approximately 2.3% of the global exchange-
traded volume and 78.5% of the U.S. dollar-denominated trade volume.
    However, according to the Registration Statement, from January 25, 
2017 to March 15, 2017, following the introduction of fixed-rate 
transaction fees in response, the three primary China-based Bitcoin 
Exchanges, BTCC, Huobi and OKCoin, reported a total trade volume of 
approximately 1.35 million bitcoins and an average daily trade volume 
of approximately 27,000 bitcoins, comprising only 25.2% of the global 
exchange-traded volume based on data from the Index Provider. During 
this period, the exchanges that comprised the Index, reported a total 
trade volume of approximately 1.89 million bitcoins and an average 
daily trade volume of nearly 39,000 bitcoins, accounting for 35.2% of 
the global exchange-traded volume and 73.6% of the U.S. dollar-
denominated trade volume.
    According to the Registration Statement, similar to other currency 
pairs, such as euro to bitcoin, movements in pricing on the Chinese 
exchanges are generally in line with U.S. dollar-denominated exchanges. 
For example, according to the Registration Statement, based on data 
from the Index Provider, from May 10, 2015 to March 15, 2017, the 4:00 
p.m., Eastern Time (``E.T.''), spot price on the three primary Chinese 
yuan-denominated exchanges (BTC China, Huobi and OKCoin) differed from 
the ``Bitcoin Index Price'' (as defined below) by only 1.6% on average.
    According to the Registration Statement, bitcoin price indexes have 
also been developed by a number of service providers in the bitcoin 
space. For example, Coindesk, a digital currency content provider and 
wholly-owned subsidiary of Digital Currency Group, launched a 
proprietary bitcoin price index in September 2013, and 
bitcoinaverage.com provides an average of all bitcoin prices on several 
Bitcoin Exchanges. The Sponsor uses the Index calculated by the Index 
Provider to determine the ``Bitcoin Index Price,'' as described below 
under ``Bitcoin Index Price.''

[[Page 19404]]

    Currently, there are numerous Bitcoin Exchanges operating worldwide 
in a number of currency pairs including, among others, bitcoin to U.S. 
dollar, bitcoin to euro, bitcoin to Chinese yuan and bitcoin to Indian 
rupee. According to the Registration Statement, most of the data with 
respect to prevailing valuations of bitcoin come from such Bitcoin 
Exchanges. These exchanges include established exchanges such as 
Bitstamp, GDAX and Bitfinex, which provide a number of options for 
buying and selling bitcoins. Among the Bitcoin Exchanges eligible for 
inclusion in the Index, domicile, regulation and legal compliance 
varies.
    The table below sets forth (1) the aggregate number of bitcoin 
trades made on the eight largest U.S. dollar-denominated Bitcoin 
Exchanges by trade volume from May 10, 2015 to March 15, 2017 and (2) 
the market share of trade volume of each such Bitcoin Exchange.

------------------------------------------------------------------------
  Eight largest U.S. dollar-denominated    Volume (BTC)    Market share
 bitcoin exchanges by trade volume \16\      \17\ \18\       (percent)
------------------------------------------------------------------------
Bitcoin Exchanges included in the Index
 as of March 15, 2017:
Bitfinex................................      13,953,081           32.10
BitStamp................................       6,447,743           14.83
GDAX (formerly known as Coinbase               4,874,681           11.22
 Exchange)..............................
ItBit...................................       3,275,893            7.54
                                         -------------------------------
    Total U.S. dollar-bitcoin trade           28,551,399           65.69
     volume included in the Index as of
     March 15, 2017.....................
Bitcoin Exchanges not included in the
 Index as of March 15, 2017:
OKCoin..................................       6,444,440           14.83
BTC-E...................................       4,643,767           10.68
LakeBTC.................................       2,978,524            6.85
Gemini..................................         846,464            1.95
                                         -------------------------------
    Total U.S. dollar-bitcoin trade           14,913,196           34.31
     volume not included in the Index as
     of March 15, 2017..................
                                         ===============================
        Total U.S. dollar-bitcoin trade       43,464,594          100.00
         volume.........................
------------------------------------------------------------------------

    Information regarding each Bitcoin Exchange may be found, where 
available, on the Web sites for such Bitcoin Exchanges, among other 
places.
---------------------------------------------------------------------------

    \16\ According to the Registration Statement, although the 
Bitcoin Exchange, LocalBitcoins, accounts for approximately 3% of 
the U.S. dollar-bitcoin trade volume, the Sponsor does not consider 
it an appropriate Bitcoin Exchange to include in this analysis 
because LocalBitcoins does not have an online electronic trading 
platform that allows for the prices and volumes of bitcoin traded to 
be reliably tracked.
    \17\ According to the Registration Statement, these figures 
reflect the aggregate number of bitcoins traded on each named U.S. 
dollar-denominated Bitcoin Exchange from May 10, 2015 to March 15, 
2017.
    \18\ According to the Registration Statement, as of May 10, 
2015, Kraken EUR (U.S. dollar equivalent) was a component of the 
Index but was removed from the Index on May 11, 2015. The 
transactions on Kraken EUR were not a material component to the 
Index.
---------------------------------------------------------------------------

Off-Exchange Bitcoin Trading
    According to the Registration Statement, in addition to open online 
Bitcoin Exchanges, there are ``dark pools,'' which are bitcoin trading 
platforms that do not publicly report bitcoin trade data. Market 
participants have the ability to execute large block trades on a dark 
pool without revealing those trades and the related price data to the 
public bitcoin exchange market, although any withdrawal from or deposit 
to a dark pool platform may be recorded on the Blockchain.\19\
---------------------------------------------------------------------------

    \19\ According to the Registration Statement, Genesis operates 
an OTC trading desk that buys and sells large blocks of bitcoins 
without publicly reporting trade data. Informal dark pools are 
currently believed to exist, particularly among wholesale buyers of 
bitcoin and bitcoin mining groups that obtain large supplies of 
bitcoin through mining. Such informal dark pools function as a 
result of the peer-to-peer nature of the Bitcoin Network, which 
allows direct transactions between any seller and buyer.
---------------------------------------------------------------------------

    Bitcoin may also be traded over-the-counter (``OTC''). OTC trades 
are not required to be reported through any facilities. However, 
according to the Sponsor, based on publicly available information, OTC 
trading may not represent a material volume of overall bitcoin trading. 
The OTC markets operate in a similar manner to dark pools. However, 
typically, OTC trades are institutional size block transactions (though 
on a much lower scale relative to the size of block transactions for 
other commodities or industries) or transactions made on behalf of 
high-net worth individuals.
    According to the Sponsor, some OTC intermediaries that facilitate 
OTC trading, such as Genesis and itBit, provide summary statistics on 
an ad hoc basis. For instance, in April 2016, itBit reported that it 
had traded approximately 25,500 bitcoins, valued at approximately $10.3 
million U.S. dollars, which would account for roughly 1.94% of the 
bitcoin trading volume across the eight highest volume U.S. dollar-
denominated exchanges. For the fourth quarter of 2016, Genesis reported 
trading approximately 70,326 bitcoins, valued at approximately $51.4 
million U.S. dollars. According to the Sponsor, the reported Genesis 
volume would comprise roughly 2.33% of the trading volume across the 
eight highest volume U.S. dollar-denominated exchanges during that time 
period.
Bitcoin Price Volatility \20\
---------------------------------------------------------------------------

    \20\ Attached as Exhibit 3 hereto are tables relating to: (i) 
Rolling 3-month volatility of bitcoin and other commodities; (ii) 
average 3-month correlation of bitcoin to other commodities; (iii) 
rolling 6-month volatility of bitcoin and other commodities; (iv) 
average 6-month correlation of bitcoin to other commodities; (v) 
rolling 12-month volatility of bitcoin and other commodities; and 
(vi) average 12-month correlation of bitcoin to other commodities.
---------------------------------------------------------------------------

    According to the Sponsor, volatility in bitcoin was pronounced in 
its earliest days through late 2013. According to the Sponsor, during 
that time period, almost all bitcoin trading activity centered on two 
exchanges, which centralized the global order book and led to large 
price movements. Since then, the bitcoin trading environment has 
matured with the development of dozens of exchanges around the world, 
resulting in more transparency with respect to bitcoin pricing, in 
increased trading volume and in greater liquidity. Additionally, the 
globalization of bitcoin exchanges, ranging from those domiciled in the 
United States to other areas of the globe, such as China, has led to 
development of many bitcoin currency pairs, garnering more market 
participants. Today, the largest trading pairs are bitcoin to Chinese 
yuan, bitcoin to U.S. dollars and bitcoin to euro.

[[Page 19405]]

    Bitcoin price volatility has declined since the inception of 
bitcoin. According to the Sponsor and as detailed in Exhibit 3, recent 
figures, such as the three, six and twelve-month volatility charts, 
show that the volatility of bitcoin is now at levels comparable to 
those seen for other commodities such as natural gas and continues to 
trend downward.
    According to the Sponsor, while bitcoin price volatility has 
declined and its volatility approximately corresponds to that of 
certain commodities, the volatility of bitcoin is not correlated with 
the volatility of other commodities over shorter- (i.e., three to six 
months) and longer-term (i.e., longer than one year) investment 
horizons, reinforcing the important role bitcoin can play as a 
diversifying asset in an investor's portfolio.
Demand for Bitcoin
    According to the Sponsor, demand for bitcoins is based on several 
factors. Demand may be based on speculation regarding the future 
appreciation of the value of bitcoins. Continuing development of 
various applications utilizing the Bitcoin Network for uses such as 
remittance, payment for goods and services, recording transfer of 
ownership of certain assets and settlement of both financial and non-
financial assets have led many investors to speculate that the price of 
bitcoins will appreciate as use of these applications increases. As 
additional applications are developed, demand may increase. 
Additionally, some investors have developed analogs between bitcoin and 
other scarce assets such as gold. Bitcoin shares many of the same 
characteristics as gold, e.g., scarcity, but has superior utility, 
portability and divisibility. If investors shift a portion of their 
asset allocations from gold to bitcoin, the demand for bitcoins could 
increase. Furthermore, bitcoins are used in day-to-day transactions for 
the purchase of goods and services. As additional merchants continue to 
accept bitcoins for the purchase of goods and services, demand for 
bitcoins may increase. Relatedly, as merchants accept bitcoins for 
sales of goods and services, supply of bitcoins could increase on the 
exchange markets as these merchants look to liquidate their bitcoin for 
fiat currencies.
Bitcoin Index Price
    The ``Bitcoin Index Price'' is the U.S. dollar value of a bitcoin 
as represented by the Index, calculated at 4:00 p.m., E.T., on each 
business day. If the Index becomes unavailable, or if the Sponsor 
determines in good faith that the Index does not reflect an accurate 
bitcoin value, then the Sponsor will, on a best efforts basis, contact 
the Index Provider in order to obtain the Bitcoin Index Price. If after 
such contact the Index remains unavailable or the Sponsor continues to 
believe in good faith that the Index does not reflect an accurate 
bitcoin value, then the Administrator will utilize the following 
cascading set of rules to calculate the Bitcoin Index Price. For the 
avoidance of doubt, the Sponsor will employ the below rules 
sequentially and in the order presented below, should one or more 
specific rule(s) fail:
    (i) Bitcoin Index Price = The price set by the Index as of 4:00 
p.m., E.T., on the valuation date. According to the Registration 
Statement, the Index is a U.S. dollar-denominated composite reference 
rate for the price of bitcoin based on the volume-weighted price at 
trading venues selected by the Index Provider. Trading venues used to 
calculate the Index may include Bitcoin Exchanges, OTC markets or 
derivative platforms. According to the Registration Statement, to 
ensure that the Index Provider's trading venue selection process is 
impartial, the Index Provider considers depth of liquidity, compliance 
with applicable legal and regulatory requirements, data availability, 
U.S. domicile and acceptance of U.S. dollar deposits. The Index 
Provider conducts a quarterly review of these criteria. According to 
the Registration Statement, as of the date of the Registration 
Statement, the eligible Bitcoin Exchanges selected by the Index 
Provider include Bitfinex, Bitstamp, GDAX (formerly known as Coinbase 
Exchange) and itBit.\21\ Bitfinex is a trading platform based in Hong 
Kong for digital currencies, including bitcoin, that offers many 
advanced features such as margin and exchange trading and margin 
funding. Bitstamp is a European Union-based bitcoin marketplace that 
enables people from all around the world to safely buy and sell 
bitcoins. GDAX, based in San Francisco, California, is a digital 
currency exchange. itBit is a New York City-based, regulated global 
exchange that offers retail and institutional investors a powerful 
platform to buy and sell bitcoin. According to the Registration 
Statement, in the calculation of the Bitcoin Index Price, the Index 
Provider cleanses the trade data and compiles it in such a manner as to 
algorithmically reduce the impact of anomalistic or manipulative 
trading. This is accomplished by adjusting the weight of each input 
based on price deviation relative to the observable set of data for the 
relevant trading venue, as well as recent and long-term trading volume 
at each venue relative to the observable set for the relevant trading 
venues. The Index Provider reduces the weighting of data inputs as they 
get further from the mean price across the trading venues and 
ultimately excludes any trade with a price that deviates beyond a 
certain predetermined threshold level from the mean. In addition, the 
Index groups ``trade bursts'' (i.e., a group of small-size trades in a 
short period of time, typically under one second) and movements during 
off-peak trading hours on any given venue into single data inputs, 
which reduces the potentially erratic price movements caused by small, 
individual orders. The Index Provider formally reevaluates the 
weighting algorithm quarterly, but maintains discretion to change the 
way in which the Index is calculated based on its periodic review or in 
extreme circumstances. The precise formula underlying the Index is 
proprietary.
    According to the Registration Statement, the Index Provider does 
not currently include data from OTC markets or derivative platforms. 
OTC data is not currently included because of the potential for trades 
to include a significant premium or discount paid for larger liquidity, 
which creates an uneven comparison relative to more active markets. 
There is also a higher potential for OTC transactions to not be arms-
length and thus not be representative of a true market price. Bitcoin 
derivative markets are also not currently included as the markets 
remain relatively thin. According to the Registration Statement, the 
Index Provider will consider International Organization of Securities 
Commissions (``IOSCO'') principles for financial benchmarks and the 
management of trading venues of bitcoin derivatives when considering 
inclusion of OTC or derivative platform data in the future.
---------------------------------------------------------------------------

    \21\ According to the Registration Statement, Digital Currency 
Group owns a minority interest in Coinbase, which operates the GDAX, 
representing approximately 0.5% of its equity and a minority 
interest in Paxos, which operates itBit, representing less than 0.3% 
of its equity.
---------------------------------------------------------------------------

    According to the Registration Statement, to calculate the Bitcoin 
Index Price, the weighting algorithm is applied to the price and volume 
of all inputs for the immediately preceding 24-hour period as of 4:00 
p.m., E.T., on the valuation date. According to the Registration 
Statement, to measure volume data and trading halts, the Index Provider 
monitors trading activity and regards as eligible those Bitcoin 
Exchanges that it determines represent a substantial portion of U.S. 
dollar-denominated trading over a sustained

[[Page 19406]]

period on a platform without a significant history of trading 
disruptions. The Index Provider maintains a monitoring system that 
tests for these criteria on an ongoing basis.
    The description of the Index is based on information publicly 
available at the Index Provider's Web site at https://tradeblock.com/markets/index/. The Index spot price will be available on the Index 
Provider's Web site and/or from one or more major market data vendors.
    If the Index becomes unavailable, or if the Sponsor determines in 
good faith that the Index does not reflect an accurate bitcoin value, 
then the Sponsor will, on a best efforts basis, contact the Index 
Provider to obtain the Bitcoin Index Price directly from the Index 
Provider. If after such contact, the Index remains unavailable or the 
Sponsor continues to believe in good faith that the Index does not 
reflect an accurate bitcoin value, then the Sponsor will employ the 
next rule to determine the Bitcoin Index Price.
    (ii) Bitcoin Index Price = The volume-weighted average bitcoin 
price for the immediately preceding 24-hour period as of 4:00 p.m., 
E.T., on the valuation date as calculated based upon the volume-
weighted average bitcoin prices of the Major Bitcoin Exchanges as 
published by an alternative third party's public data feed that the 
Sponsor believes is accurately and reliably providing market data 
(i.e., is receiving up-to-date and timely market data from constituent 
exchanges) (``Second Source''). ``Major Bitcoin Exchanges'' are those 
Bitcoin Exchanges that are online, trade on a 24-hour basis and make 
transaction price and volume data publicly available. Subject to the 
next sentence, if the Second Source becomes unavailable (for example, 
data sources from the Second Source for bitcoin prices become 
unavailable, unwieldy or otherwise impractical for use), or if the 
Sponsor determines in good faith that the Second Source does not 
reflect an accurate bitcoin value, then the Sponsor will, on a best 
efforts basis, contact the Second Source in an attempt to obtain the 
relevant data. If after such contact the Second Source remains 
unavailable or the Sponsor continues to believe in good faith that the 
Second Source does not reflect an accurate bitcoin price, then the 
Sponsor will employ the next rule to determine the Bitcoin Index Price.
    (iii) Bitcoin Index Price = The volume-weighted average bitcoin 
price as calculated by dividing (a) the U.S. dollar value of the 
bitcoin transactions on the Major Bitcoin Exchanges by (b) the total 
number of bitcoins traded on the Major Bitcoin Exchanges, in each case 
for the 24-hour period from 4:00 p.m., E.T. (or as soon as practicable 
thereafter), on the business day prior to the valuation date to 4:00 
p.m., E.T. (or as soon as practicable thereafter), on the valuation 
date as published by a third party's public data feed that the Sponsor 
believes is accurately and reliably providing market data (i.e., is 
receiving up-to-date and timely market data from eligible exchanges), 
subject to the requirement that such data is calculated based upon a 
volume-weighted average bitcoin price obtained from the Major Bitcoin 
Exchanges (``Third Source''). Subject to the next sentence, if the 
Third Source becomes unavailable (for example, data sources from the 
Third Source become unavailable, unwieldy or otherwise impractical for 
use), or if the Sponsor determines in good faith that the Third Source 
does not reflect an accurate bitcoin price, then the Sponsor will, on a 
best efforts basis, contact the Third Source in an attempt to obtain 
the relevant data. If after such contact the Third Source remains 
unavailable or the Sponsor continues to believe in good faith that the 
Third Source does not reflect an accurate bitcoin value then the 
Sponsor will employ the next rule to determine the Bitcoin Index Price.
    (iv) Bitcoin Index Price = The volume-weighted average bitcoin 
price as calculated by dividing (a) the U.S. dollar value of the 
bitcoin transactions on the Bitcoin Benchmark Exchanges by (b) the 
total number of bitcoins traded on the Bitcoin Benchmark Exchanges, in 
each case for the 24-hour period from 4:00 p.m., E.T. (or as soon as 
practicable thereafter), on the business day prior to the valuation 
date to 4:00 p.m., E.T. (or as soon as practicable thereafter), on the 
valuation date. A ``Bitcoin Benchmark Exchange'' is a Bitcoin Exchange 
that represents at least 25% of the aggregate U.S. dollar-denominated 
trading volume of the bitcoin market during the last 30 consecutive 
calendar days and that to the knowledge of the Sponsor is in 
substantial compliance with the laws, rules and regulations, including 
any anti-money laundering (``AML'') and know-your-customer (``KYC'') 
procedures, of such Bitcoin Exchange's applicable jurisdiction; 
provided that if there are fewer than three such Bitcoin Exchanges, 
then the Bitcoin Benchmark Exchanges will include such Bitcoin Exchange 
or Bitcoin Exchanges that meet the above-described requirements as well 
as one or more additional Bitcoin Exchanges, selected by the Sponsor, 
that have had monthly trading volume of at least 50,000 bitcoins during 
the last 30 consecutive calendar days and that to the knowledge of the 
Sponsor is in substantial compliance with the laws, rules and 
regulations, including any AML and KYC procedures, of such Bitcoin 
Exchange's applicable jurisdiction.
    The Sponsor will review the composition of the exchanges that 
comprise the Bitcoin Benchmark Exchanges at the beginning of each 
month, or more frequently if necessary, in order to ensure the accuracy 
of its composition. Subject to the next sentence, if one or more of the 
Bitcoin Benchmark Exchanges become unavailable (for example, data 
sources from the Bitcoin Benchmark Exchanges of bitcoin prices become 
unavailable, unwieldy or otherwise impractical for use), or if the 
Sponsor determines in good faith that the Bitcoin Benchmark Exchange 
does not reflect an accurate bitcoin value, then the Sponsor will, on a 
best efforts basis, contact the Bitcoin Benchmark Exchange that is 
experiencing the service outages in an attempt to obtain the relevant 
data. If after such contact one or more of the Bitcoin Benchmark 
Exchanges remain unavailable or the Sponsor continues to believe in 
good faith that the Bitcoin Benchmark Exchange does not reflect an 
accurate bitcoin price, then the Sponsor will employ the next rule to 
determine the Bitcoin Index Price.
    (v) Bitcoin Index Price = The Sponsor will use its best judgment to 
determine a good faith estimate of the Bitcoin Index Price.
    Data used for the above calculation of the Bitcoin Index Price is 
gathered by the Administrator or its delegate who calculates the 
Bitcoin Index Price each business day as of 4:00 p.m., E.T., or as soon 
thereafter as practicable. The Administrator will disseminate the 
Bitcoin Index Price each business day.
    The Index Provider may change the trading venues that are used to 
calculate the Index, or otherwise change the way in which the Index is 
calculated at any time. The Index Provider does not have any obligation 
to consider the interests of the Sponsor, the Administrator, the Trust, 
the shareholders or anyone else in connection with such changes. The 
Index Provider is not required to publicize or explain the changes, or 
to alert the Sponsor or the Administrator to such changes. The Index 
Provider will consider IOSCO principles for financial benchmarks and 
the management of trading venues of bitcoin derivatives when 
considering inclusion of OTC or derivative platform data in the future.

Bitcoin Holdings

    According to the Registration Statement, the Trust's assets will 
consist

[[Page 19407]]

solely of bitcoin. The Administrator will determine the value of the 
Trust for operational purposes (herein referred to as ``Bitcoin 
Holdings''), which is the aggregate U.S. dollar value, based on the 
Bitcoin Index Price, of the Trust's bitcoins less its liabilities, on 
each day the Shares trade on the Exchange as of 4:00 p.m. E.T., or as 
soon thereafter as practicable.\22\ The Administrator will also 
determine the Bitcoin Holdings per Share, which equals the Trust's 
Bitcoin Holdings divided by the number of outstanding Shares. The 
Sponsor will publish the Bitcoin Holdings and the Bitcoin Holdings per 
Share each business day at 4:00 p.m., E.T., or as soon thereafter as 
practicable at the Trust's Web site at https://grayscale.co/bitcoin-investment-trust/#market-performance.
---------------------------------------------------------------------------

    \22\ Bitcoin Holdings is different than the GAAP net asset value 
referenced in the Registration Statement.
---------------------------------------------------------------------------

    To calculate the Bitcoin Holdings, the Administrator will determine 
the Bitcoin Index Price and multiply the Bitcoin Index Price by the 
aggregate number of bitcoins owned by the Trust as of 4:00 p.m., E.T., 
on the immediately preceding day. The Administrator will add the U.S. 
dollar value of any bitcoins, as calculated using the Bitcoin Index 
Price, receivable under pending creation orders, if any, determined by 
multiplying the number of creation Baskets represented by such creation 
orders by the Basket Bitcoin Amount and then multiplying such product 
by the Bitcoin Index Price. The Administrator will subtract (i) the 
U.S. dollar value of the bitcoins, as calculated using the Bitcoin 
Price Index, constituting any accrued but unpaid fees, (ii) the U.S. 
dollar value of the bitcoins to be distributed under pending redemption 
orders, determined by multiplying the number of redemption Baskets 
represented by such redemption orders by the Basket Bitcoin Amount and 
then multiplying such product by the Bitcoin Index Price and (iii) 
certain expenses of the Trust.
    The Sponsor will publish the Bitcoin Index Price, the Bitcoin 
Holdings and the Bitcoin Holdings per Share on the Trust's Web site as 
soon as practicable after its determination. If the Bitcoin Holdings 
and Bitcoin Holdings per Share have been calculated using a price per 
bitcoin other than the Bitcoin Index Price, the publication on the 
Trust's Web site will note the valuation methodology used and the price 
per bitcoin resulting from such calculation.
    While the Trust's investment objective is for the Shares to reflect 
the performance of the value of a bitcoin as represented by the Index, 
less the Trust's liabilities and expenses, the Shares may trade in the 
secondary market at prices that are lower or higher than the Bitcoin 
Holdings per Share. The amount of the discount or premium in the 
trading price relative to the Bitcoin Holdings per Share may be 
influenced by non-concurrent trading hours and liquidity between the 
secondary market and larger Bitcoin Exchanges in the bitcoin exchange 
market. While the Shares will be listed and trade on the Exchange from 
9:30 a.m. until 4:00 p.m., E.T., liquidity in the global bitcoin 
markets may fluctuate depending upon the volume and availability of 
larger Bitcoin Exchanges. As a result, during periods in which bitcoin 
exchange market liquidity is limited or a major Bitcoin Exchange is 
off-line, trading spreads, and the resulting premium or discount, on 
the Shares may widen.
Impact on Arbitrage
    Because of the potential for arbitrage inherent in the structure of 
the Trust, the Sponsor believes that the Shares will not trade at a 
material discount or premium to the underlying bitcoin held by the 
Trust. The arbitrage process, which in general provides investors the 
opportunity to profit from differences in prices of assets, increases 
the efficiency of the markets, serves to prevent potentially 
manipulative efforts, and can be expected to operate efficiently in the 
case of the Shares and bitcoin. If the price of the Shares deviates 
enough from the price of bitcoin to create a material discount or 
premium, an arbitrage opportunity is created. If the Shares are 
inexpensive compared to the bitcoin that underlies them, an arbitrageur 
may buy the Shares at a discount, immediately redeem them in exchange 
for bitcoin, and sell the bitcoin in the cash market at a profit. If 
the Shares are expensive compared to the bitcoin that underlies them, 
an arbitrageur may sell the Shares short, buy enough bitcoin to acquire 
the number of Shares sold short, acquire the Shares through the 
creation process, and deliver the Shares to close out the short 
position.\23\ In both instances, the arbitrageur serves to efficiently 
correct price discrepancies between the Shares and the underlying 
bitcoin.
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    \23\ The Exchange states that the Trust, which will only hold 
bitcoin, differs from index-based exchange-traded funds, which may 
involve a trust holding hundreds or even thousands of underlying 
component securities, necessarily involving in the arbitrage process 
movements in a large number of security positions. See, e.g., 
Securities Exchange Act Release No. 46306 (August 2, 2002) 
(approving the UTP trading of Vanguard Total Market VIPERs based on 
the Wilshire 5000 Total Market Index).
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Creation and Redemption of Shares
    According to the Registration Statement, the Trust will issue and 
redeem ``Baskets,'' each equal to a block of 100 Shares, only to 
Authorized Participants. The size of a Basket is subject to change. The 
creation and redemption of a Basket require the delivery to the Trust, 
or the distribution by the Trust, of the number of whole and fractional 
bitcoins represented by each Basket being created or redeemed, the 
number of which is determined by dividing the number of bitcoins owned 
by the Trust at 4:00 p.m., E.T., on the trade date of a creation or 
redemption order, by the number of Shares outstanding at such time 
(calculated to one one-hundred-millionth of one bitcoin), as adjusted 
for the number of whole and fractional bitcoins constituting accrued 
but unpaid fees and expenses of the Trust and multiplying the quotient 
obtained by 100 (``Basket Bitcoin Amount''). The Basket Bitcoin Amount 
multiplied by the number of Baskets being created or redeemed is the 
``Total Basket Bitcoin Amount.'' The Basket Bitcoin Amount will 
gradually decrease over time as the Trust's bitcoins are used to pay 
the Trust's expenses. According to the Registration Statement, as of 
the date of the Registration Statement, each Share currently represents 
approximately 0.093 of a bitcoin.
    Authorized Participants are the only persons that may place orders 
to create and redeem Baskets. Each Authorized Participant must (i) be a 
registered broker-dealer, (ii) enter into a participant agreement with 
the Sponsor, the Administrator, the Marketing Agent and the Liquidity 
Providers (``Participant Agreement'') and (iii) in the case of the 
creation or redemption of Baskets that do not use the ``Conversion 
Procedures'' (as defined below), own a bitcoin wallet address that is 
recognized by the Custodian as belonging to the Authorized Participant 
(``Authorized Participant Self-Administered Account''). Authorized 
Participants may act for their own accounts or as agents for broker-
dealers, custodians and other securities market participants that wish 
to create or redeem Baskets. Shareholders who are not Authorized 
Participants will only be able to redeem their Shares through an 
Authorized Participant.
    Although the Trust will create Baskets only upon the receipt of 
bitcoins, and will redeem Baskets only by distributing bitcoins, an 
Authorized Participant may deposit cash with the Administrator, which 
will facilitate the purchase or sale of bitcoins through a Liquidity

[[Page 19408]]

Provider on behalf of an Authorized Participant (``Conversion 
Procedures''). ``Liquidity Providers'' must (i) enter into a 
Participant Agreement with the Sponsor, the Trust, the Marketing Agent 
and each Authorized Participant and (ii) own a bitcoin wallet address 
that is recognized by the Custodian as belonging to a Liquidity 
Provider (``Liquidity Provider Account'').
    The Conversion Procedures will be facilitated by a single Liquidity 
Provider. On an order-by-order basis, the Sponsor will select the 
Liquidity Provider that it believes will provide the best execution of 
the Conversion Procedures, and will base its decision on factors such 
as the Liquidity Provider's creditworthiness, financial stability, 
ability to obtain the best price, the timing and speed of execution, 
liquidity and the likelihood of, and capabilities in, execution, 
clearance and settlement. In the event that an order cannot be filled 
in its entirety by a single Liquidity Provider, additional Liquidity 
Provider(s) will be selected by the Sponsor to fill the remaining 
amount based on the criteria above.
    The trade date on which the Basket Bitcoin Amount is determined is 
different for in-kind and in-cash orders. For in-kind orders, the trade 
date is the day on which an order is placed, whereas the trade date for 
in-cash orders is the day after which an order is placed. This could 
result in a different execution price for in-kind and in-cash orders.
    For example, if an Authorized Participant submits an in-kind order 
at 2:00 p.m., E.T., on a Monday, the Basket Bitcoin Amount required to 
purchase a Basket of Shares will be determined at 4:00 p.m., E.T., or 
as soon as practicable thereafter, on that same day. Alternatively, for 
in-cash orders, if an Authorized Participant submits an order at 2:00 
p.m., E.T., on a Monday and pays the requisite Cash Collateral Amount 
(as defined below) at 3:00 p.m., E.T., on that same date, the Total 
Basket Bitcoin Amount will nevertheless be determined at 4:00 p.m., 
E.T., or as soon as practicable thereafter, on Tuesday. Pursuant to the 
Conversion Procedures, the Authorized Participant is obligated to pay 
the Cash Exchange Rate (as defined below) which is calculated on 
Monday, times the Total Basket Bitcoin Amount, which is calculated on 
Tuesday. The Liquidity Provider is required to deposit the Total Basket 
Bitcoin Amount as calculated on Tuesday, even if there were a chance 
[sic] in the price of bitcoin since Monday.
    To create Baskets in-kind, Authorized Participants will send the 
Administrator a creation order on the trade date. In-kind creation 
orders must be placed no later than 3:59:59 p.m., E.T., on each 
business day. The Marketing Agent will accept or reject the creation 
order, and this determination will be communicated to the Authorized 
Participant by the Administrator on that same date. The Total Basket 
Bitcoin Amount will be determined as soon as practicable after 4:00 
p.m., E.T., on that date. On the business day following the trade date, 
the Authorized Participant will transfer the Total Basket Bitcoin 
Amount to the Custodian. Once the Total Basket Bitcoin Amount is 
received by the Custodian, the Administrator will instruct the Transfer 
Agent to deliver the creation Baskets to the Authorized Participant.
    To create Baskets using the Conversion Procedures, Authorized 
Participants will send the Administrator a creation order on the 
business day preceding the trade date. In-cash creation orders must be 
placed no later than 4:59:59 p.m., E.T., on each business day. The 
Marketing Agent will accept or reject the creation order, and this 
determination will be communicated to the Authorized Participants by 
the Administrator on that same date. Upon receiving instruction from 
the Administrator that a creation order has been accepted by the 
Marketing Agent, the Authorized Participant will send 110% of the U.S. 
dollar value of the Total Basket Bitcoin Amount (``Cash Collateral 
Amount''). The Total Basket Bitcoin Amount will be determined as soon 
as practicable after 4:00 p.m., E.T., the following day. Once the Cash 
Collateral Amount is received by the Administrator, the Sponsor will 
notify the Liquidity Provider of the creation order. The Liquidity 
Provider will then provide a firm quote to the Authorized Participant 
for the Total Basket Bitcoin Amount, determined by using the ``Cash 
Exchange Rate,'' which, in the case of a creation order, is the Index 
spot price at the time at which the Cash Collateral Amount is received 
by the Administrator, plus applicable fees. If the Liquidity Provider's 
quote is greater than the Cash Collateral Amount received, the 
Authorized Participant will be required to pay the difference. Provided 
that payment for the Total Basket Bitcoin Amount is received by the 
Administrator, the Liquidity Provider will deliver the bitcoins to the 
Custodian on the settlement date on behalf of the Authorized 
Participant. The Liquidity Provider may realize any arbitrage 
opportunity between the firm quote that it provides to the Authorized 
Participant and the price at which it sources the requisite bitcoin for 
the Total Basket Bitcoin Amount. After the Custodian receives the Total 
Basket Bitcoin Amount, the Administrator will instruct the Transfer 
Agent to deliver the Creation Baskets to the Authorized Participant. 
The Administrator will then send the Liquidity Provider the cash equal 
to the Cash Exchange Rate times the Total Basket Bitcoin Amount, plus 
applicable fees. The Administrator will return any remaining amount of 
the Cash Collateral Amount to the Authorized Participant.
    To redeem Baskets in-kind, Authorized Participants will send the 
Administrator a redemption order on the trade date. In-kind redemption 
orders must be placed no later than 3:59:59 p.m., E.T., on each 
business day. The Marketing Agent will accept or reject the redemption 
order and the Total Basket Bitcoin Amount will be determined as soon as 
practicable after 4:00 p.m., E.T., on that same date. On the second 
business day following the trade date, the Authorized Participant will 
deliver to the Transfer Agent redemption Baskets from its account. Once 
the redemption Baskets are received by the Transfer Agent, the 
Custodian will transfer the Total Basket Bitcoin Amount to the 
Authorized Participant and the Transfer Agent will cancel the Shares.
    To redeem Baskets using the Conversion Procedures, Authorized 
Participants will send the Administrator a redemption order. In-cash 
redemption orders must be placed no later than 4:59:59 p.m., E.T., on 
each business day. The Marketing Agent will accept or reject the 
redemption order on that same date. A Liquidity Provider will then 
provide a firm quote to an Authorized Participant for the Total Basket 
Bitcoin Amount, determined by using the ``Cash Exchange Rate,'' which, 
in the case of a redemption order, is the Index spot price minus 
applicable fees at the time at which the Administrator notifies the 
Authorized Participant that an order has been accepted.
    The Liquidity Provider will send the Administrator the cash 
proceeds equal to the Cash Exchange Rate times the Total Basket Bitcoin 
Amount, minus applicable fees. The Liquidity Provider may realize any 
arbitrage opportunity between the firm quote that it provides to the 
Authorized Participant and the price at which it sells the requisite 
bitcoin for the Total Basket Bitcoin Amount. Once the Authorized 
Participant delivers the redemption Baskets to the Transfer Agent, the 
Administrator will send the cash proceeds to the Authorized Participant

[[Page 19409]]

and the Transfer Agent will cancel the Shares. At the instruction of 
the Administrator, the Custodian will then send the Liquidity Provider 
the Total Basket Bitcoin Amount.
    The Sponsor represents that Liquidity Providers will only transact 
with exchanges and OTC trading partners that have met AML and KYC 
regulatory requirements. Authorized Participants that create and redeem 
Baskets using the Conversion Procedures will be responsible for 
reimbursing the relevant Liquidity Provider for any expenses incurred 
in connection with the Conversion Procedures. The Authorized 
Participants will also pay a variable fee to the Administrator for its 
facilitation of the Conversion Procedures. There are no other fees 
related to the Conversion Procedures that will be charged by the 
Sponsor or the Custodian.
    The creation or redemption of Shares may be suspended generally, or 
refused with respect to particular requested creations or redemptions, 
during any period when the transfer books of the Transfer Agent are 
closed or if circumstances outside the control of the Sponsor or its 
delegates make it for all practical purposes not feasible to process 
creation orders or redemption orders. The Administrator may reject an 
order if such order is not presented in proper form as described in the 
Participant Agreement or if the fulfillment of the order, in the 
opinion of counsel, might be unlawful.
Availability of Information
    The Trust's Web site (https://grayscale.co/bitcoin-investment-trust/) will include quantitative information on a per-Share basis 
updated on a daily basis, including, for the Trust (i) the current 
Bitcoin Holdings per Share daily and the prior business day's Bitcoin 
Holdings and the reported closing price, (ii) the mid-point of the bid-
ask price \24\ in relation to the Bitcoin Holdings as of the time the 
Bitcoin Holdings is calculated (``Bid-Ask Price'') and a calculation of 
the premium or discount of such price against such Bitcoin Holdings and 
(iii) data in chart format displaying the frequency distribution of 
discounts and premiums of the daily Bid-Ask Price against the Bitcoin 
Holdings, within appropriate ranges, for each of the four previous 
calendar quarters (or for the life of the Trust, if shorter). In 
addition, on each business day the Trust's Web site will provide 
pricing information for the Shares.
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    \24\ The bid-ask price of the Trust is determined using the 
highest bid and lowest offer on the Consolidated Tape as of the time 
of calculation of the closing day Bitcoin Holdings.
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    The Trust's Web site will provide an intra-day indicative value 
(``IIV'') per Share updated every 15 seconds, as calculated by the 
Exchange or a third party financial data provider during the Exchange's 
Core Trading Session (9:30 a.m. to 4:00 p.m., E.T.) \25\ The IIV will 
be calculated by using the prior day's closing Bitcoin Holdings per 
Share as a base and updating that value during the NYSE Arca Core 
Trading Session to reflect changes in the value of the Trust's bitcoin 
holdings during the trading day.
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    \25\ The IIV on a per Share basis disseminated during the Core 
Trading Session should not be viewed as a real-time update of the 
Bitcoin Holdings, which is calculated once a day.
---------------------------------------------------------------------------

    The IIV disseminated during the NYSE Arca Core Trading Session 
should not be viewed as an actual real time update of the Bitcoin 
Holdings, which will be calculated only once at the end of each trading 
day. The IIV will be widely disseminated on a per Share basis every 15 
seconds during the NYSE Arca Core Trading Session by one or more major 
market data vendors. In addition, the IIV will be available through on-
line information services.
    The Bitcoin Holdings for the Trust will be calculated by the 
Administrator once a day and will be disseminated daily to all market 
participants at the same time. To the extent that the Administrator has 
utilized the cascading set of rules described in ``Bitcoin Index 
Price'' above, the Trust's Web site will note the valuation methodology 
used and the price per bitcoin resulting from such calculation. 
Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the Consolidated Tape 
Association (``CTA'').
    Quotation and last sale information for bitcoin will be widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters. In addition, the complete real-time price (and 
volume) data for bitcoin is available by subscription from Reuters and 
Bloomberg. The spot price of bitcoin is available on a 24-hour basis 
from major market data vendors, including Bloomberg and Reuters. 
Information relating to trading, including price and volume 
information, in bitcoin will be available from major market data 
vendors and from the exchanges on which bitcoin are traded. The normal 
trading hours for bitcoin exchanges are 24-hours per day, 365-days per 
year.
    The Trust will provide Web site disclosure of its Bitcoin Holdings 
daily. The Web site disclosure of the Trust's Bitcoin Holdings will 
occur at the same time as the disclosure by the Sponsor of the Bitcoin 
Holdings to Authorized Participants so that all market participants are 
provided such portfolio information at the same time. Therefore, the 
same portfolio information will be provided on the public Web site as 
well as in electronic files provided to Authorized Participants. 
Accordingly, each investor will have access to the current Bitcoin 
Holdings of the Trust through the Trust's Web site.
    Additional information regarding the Index may be found at https://tradeblock.com/markets/index/.
Trading Rules
    The Trust will be subject to the criteria in NYSE Arca Equities 
Rule 8.201, including 8.201(e), for initial and continued listing of 
the Shares. A minimum of 100,000 Shares will be required to be 
outstanding at the start of trading. With respect to application of 
Rule 10A-3 under the Act, the Trust will rely on the exception 
contained in Rule 10A-3(c)(7). The Exchange believes that the 
anticipated minimum number of Shares outstanding at the start of 
trading is sufficient to provide adequate market liquidity.
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Trading in the Shares 
on the Exchange will occur in accordance with NYSE Arca Equities Rule 
7.34(a).\26\ The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, the minimum price variation (``MPV'') for 
quoting and entry of orders in equity securities traded on the NYSE 
Arca Marketplace is $0.01, with the exception of securities that are 
priced less than $1.00 for which the MPV for order entry is $0.0001.
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    \26\ The Exchange has three trading sessions for Commodity-Based 
Trust Shares each day the Corporation is open for business unless 
otherwise determined by the Corporation: (i) The Opening Session 
begins at 1:00 a.m., Pacific Time (``P.T.''), and conclude at the 
commencement of the Core Trading Session; (ii) the Core Trading 
Session begins for each security at 6:30 a.m., P.T., or at the 
conclusion of the Market Order Auction, whichever comes later, and 
conclude at 1:15 p.m., P.T.; and (iii) the Late Trading Session 
begins following the conclusion of the Core Trading Session and 
concludes at 5:00 p.m., P.T.
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    Further, NYSE Arca Equities Rule 8.201 sets forth certain 
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting 
as registered Market Makers in the Shares to facilitate surveillance. 
Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP Holder acting as a 
registered Market Maker in

[[Page 19410]]

the Shares is required to provide the Exchange with information 
relating to its trading in the underlying bitcoin, related futures or 
options on futures, or any other related derivatives. Commentary .04 of 
NYSE Arca Equities Rule 6.3 requires an ETP Holder acting as a 
registered Market Maker, and its affiliates, in the Shares to 
establish, maintain and enforce written policies and procedures 
reasonably designed to prevent the misuse of any material nonpublic 
information with respect to such products, any components of the 
related products, any physical asset or commodity underlying the 
product, applicable currencies, underlying indexes, related futures or 
options on futures and any related derivative instruments (including 
the Shares).
    As a general matter, the Exchange has regulatory jurisdiction over 
its ETP Holders and their associated persons, which include any person 
or entity controlling an ETP Holder. A subsidiary or affiliate of an 
ETP Holder that does business only in commodities or futures contracts 
would not be subject to Exchange jurisdiction, but the Exchange could 
obtain information regarding the activities of such subsidiary or 
affiliate through surveillance sharing agreements with regulatory 
organizations of which such subsidiary or affiliate is a member.
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. Trading on the Exchange in the Shares may be 
halted because of market conditions or for reasons that, in the view of 
the Exchange, make trading in the Shares inadvisable. These may 
include: (1) The extent to which conditions in the underlying bitcoin 
markets have caused disruptions and/or lack of trading or (2) whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. In addition, 
trading in Shares will be subject to trading halts caused by 
extraordinary market volatility pursuant to the Exchange's ``circuit 
breaker'' rule.\27\
---------------------------------------------------------------------------

    \27\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

    The Exchange will halt trading in the Shares if the Bitcoin 
Holdings of the Trust is not calculated or disseminated daily. The 
Exchange may halt trading during the day in which an interruption 
occurs to the dissemination of the IIV or the Index spot price, as 
discussed above. If the interruption to the dissemination of the IIV or 
the Index spot price persists past the trading day in which it occurs, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption.\28\ In addition, if the 
Exchange becomes aware that the Bitcoin Holdings with respect to the 
Shares is not disseminated to all market participants at the same time, 
it will halt trading in the Shares until such time as the Bitcoin 
Holdings is available to all market participants.
---------------------------------------------------------------------------

    \28\ The Exchange notes that the Exchange may halt trading 
during the day in which an interruption to the dissemination of the 
IIV or the Index spot price occurs.
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Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances administered by the Exchange, as 
well as cross-market surveillances administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\29\ The Exchange represents that 
these procedures are adequate to properly monitor Exchange trading of 
the Shares in all trading sessions and to deter and detect violations 
of Exchange rules and federal securities laws applicable to trading on 
the Exchange.
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    \29\ FINRA conducts cross market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares with other 
markets and other entities that are members of the Intermarket 
Surveillance Group (``ISG''), and the Exchange or FINRA, on behalf of 
the Exchange, or both, may obtain trading information regarding trading 
in the Shares from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares from 
markets and other entities that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement 
(``CSSA'').\30\
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    \30\ For the list of current members of ISG, see https://www.isgportal.org/home.html.
---------------------------------------------------------------------------

    Also, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is 
able to obtain information regarding trading in the Shares and the 
underlying bitcoin or any bitcoin derivative through ETP Holders acting 
as registered Market Makers, in connection with such ETP Holders' 
proprietary or customer trades through ETP Holders which they effect on 
any relevant market.
    The Exchange also has a general policy prohibiting the distribution 
of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(i) the description of the portfolio, (ii) limitations on portfolio 
holdings or reference assets or (iii) the applicability of Exchange 
rules and surveillance procedures shall constitute continued listing 
requirements for listing the Shares on the Exchange.
    The issuer has represented to the Exchange that it will advise the 
Exchange of any failure by the Trust to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Trust is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Equities Rule 5.5(m).
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in an ``Information Bulletin'' of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (1) 
The procedures for purchases and redemptions of Shares in Baskets 
(including noting that the Shares are not individually redeemable); (2) 
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence 
on its ETP Holders to learn the essential facts relating to every 
customer prior to trading the Shares; (3) how information regarding how 
the Index and the IIV are disseminated; (4) the requirement that ETP 
Holders deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction; 
(5) the possibility that trading spreads and the resulting premium or 
discount on the Shares may widen during the Opening and Late Trading 
Sessions, when an updated IIV will not be calculated or publicly 
disseminated; and (6) trading information. For example, the Information 
Bulletin will advise ETP Holders, prior to the commencement of

[[Page 19411]]

trading, of the prospectus delivery requirements applicable to the 
Trust. The Exchange notes that investors purchasing Shares directly 
from the Trust will receive a prospectus. ETP Holders purchasing Shares 
from the Trust for resale to investors will deliver a prospectus to 
such investors.
    In addition, the Information Bulletin will reference that the Trust 
is subject to various fees and expenses as described in the 
Registration Statement. The Information Bulletin will disclose that 
information about the Shares of the Trust is publicly available on the 
Trust's Web site.
    The Information Bulletin will also discuss any relief, if granted, 
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \31\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \31\ 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 and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.201. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. The Exchange or FINRA, on behalf of 
the Exchange, or both, will communicate as needed regarding trading in 
the Shares with other markets that are members of the ISG, and the 
Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading in the Shares from such markets. 
In addition, the Exchange may obtain information regarding trading in 
the Shares from markets that are members of ISG or with which the 
Exchange has in place a CSSA. Also, pursuant to NYSE Arca Equities Rule 
8.201(g), the Exchange is able to obtain information regarding trading 
in the Shares and the underlying bitcoin or any bitcoin derivative 
through ETP Holders acting as registered Market Makers, in connection 
with such ETP Holders' proprietary or customer trades through ETP 
Holders which they effect on any relevant market.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that there is a considerable amount of bitcoin price and bitcoin market 
information available on public Web sites and through professional and 
subscription services. Investors may obtain on a 24-hour basis bitcoin 
pricing information based on the spot price for bitcoin from various 
financial information service providers. The closing price and 
settlement prices of bitcoin are readily available from the bitcoin 
exchanges and other publicly available Web sites. In addition, such 
prices are published in public sources, or on-line information services 
such as Bloomberg and Reuters. The Trust will provide Web site 
disclosure of its bitcoin holdings daily. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the CTA. The IIV will be widely disseminated on a per 
Share basis every 15 seconds during the NYSE Arca Core Trading Session 
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major 
market data vendors. In addition, the IIV will be available through on-
line information services. The Exchange represents that the Exchange 
may halt trading during the day in which an interruption to the 
dissemination of the IIV or the Index spot price occurs. If the 
interruption to the dissemination of the IIV or the Index spot price 
persists past the trading day in which it occurred, the Exchange will 
halt trading no later than the beginning of the trading day following 
the interruption. In addition, if the Exchange becomes aware that the 
Bitcoin Holdings with respect to the Shares is not disseminated to all 
market participants at the same time, it will halt trading in the 
Shares until such time as the Bitcoin Holdings is available to all 
market participants. The Bitcoin Holdings per Share will be calculated 
daily and made available to all market participants at the same time. 
One or more major market data vendors will disseminate for the Trust on 
a daily basis information with respect to the most recent Bitcoin 
Holdings per Share and Shares outstanding.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of exchange-traded product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace. As noted above, the Exchange has in place surveillance 
procedures relating to trading in the Shares and may obtain information 
via ISG from other exchanges that are members of ISG or with which the 
Exchange has entered into a CSSA. In addition, as noted above, 
investors will have ready access to information regarding the Trust's 
bitcoin holdings, IIV and quotation and last sale information for the 
Shares.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional type of exchange-traded product, and the first such product 
based on bitcoin, which will enhance competition among market 
participants, to the benefit of investors and the marketplace.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2017-06 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \32\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of proceedings is appropriate at this time in 
view of the legal and policy issues raised by the proposed rule change, 
as discussed below. Institution of proceedings does not indicate that 
the Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide comments on the proposed rule 
change.
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    \32\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\33\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a

[[Page 19412]]

national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \34\
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    \33\ Id.
    \34\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal, as modified by Amendment No. 1. In particular, the 
Commission invites the written views of interested persons concerning 
whether the proposal is consistent with Section 6(b)(5) or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\35\
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    \35\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal, as modified by Amendment No. 
1, should be approved or disapproved by May 18, 2017. Any person who 
wishes to file a rebuttal to any other person's submission must file 
that rebuttal by June 1, 2017. The Commission asks that commenters 
address the sufficiency of the Exchange's statements in support of the 
proposal and statements of commenters.\36\ In addition to any other 
comments commenters may wish to submit about the proposed rule change, 
the Commission invites commenters' views concerning any features that 
distinguish the Exchange's proposal from other proposals to list and 
trade shares of commodity-trust ETPs.
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    \36\ See supra notes 6 & 7.
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    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-NYSEArca-2017-06 on the subject line.

Paper Comments

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

All submissions should refer to File Numbers SR-NYSEArca-2017-06. 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 these filings also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2017-06 and should 
be submitted on or before May 18, 2017. Rebuttal comments should be 
submitted by June 1, 2017.
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    \37\ 17 CFR 200.30-3(a)(12) and 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08462 Filed 4-26-17; 8:45 am]
 BILLING CODE 8011-01-P