
[Federal Register Volume 82, Number 39 (Wednesday, March 1, 2017)]
[Notices]
[Pages 12253-12268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03983]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80099; File No. SR-NYSEARCA-2016-101]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1 to a Proposed Rule Change Relating to the Listing 
and Trading of Shares of SolidX Bitcoin Trust Under NYSE Arca Equities 
Rule 8.201

February 24, 2017.
    On July 13, 2016, NYSE Arca, Inc. 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 
SolidX Bitcoin Trust under NYSE Arca Equities Rule 8.201. The proposed 
rule change was published for comment in the Federal Register on August 
2, 2016.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78426 (Jul. 27, 
2016), 81 FR 50763 (Aug. 2, 2016).
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    On September 6, 2016, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or

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disapprove the proposed rule change.\5\ On October 27, 2016, the 
Commission instituted proceedings to determine whether to approve or 
disapprove the proposed rule change.\6\ On January 3, 2017, pursuant to 
Section 19(b)(2) of the Act,\7\ the Commission designated a longer 
period within which to approve or disapprove the proposed rule 
change.\8\ The Commission has received nine comments on the proposed 
rule change.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78770, 81 FR 62780 
(Sept. 12, 2016).
    \6\ See Securities Exchange Act Release No. 79171, 81 FR 76400 
(Nov. 2, 2016). Specifically, the Commission instituted proceedings 
to allow for additional analysis of the proposed rule change's 
consistency with Section 6(b)(5) of the Act, which requires, among 
other things, that the rules of a national securities exchange be 
``designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade,'' and 
``to protect investors and the public interest.'' See id. at 76401.
    \7\ 15 U.S.C. 78s(b)(2).
    \8\ See Securities Exchange Act Release No. 79726, 82 FR 2426 
(Jan. 9, 2017).
    \9\ See Letters from Daniel H. Gallancy, CFA, SolidX Management 
LLP (Nov. 23, 2016); Thaya B. Knight, Associate Director, Financial 
Regulation Studies, The Cato Institute (Dec. 1, 2016); Jerry Brito, 
Executive Director, Coin Center (Dec. 7, 2016); Joseph Colangelo, 
President, Consumers' Research (Dec. 7, 2016); Denise Krisko, CFA, 
President and Co-Founder, Vident Investment Advisory, LLC (Dec. 7, 
2016); Balaji Srinivasan, Chief Executive Officer & Cofounder, 21, 
et al. (Dec. 7, 2016); Ken I. Maher (Dec. 8, 2016); Craig M. Lewis, 
Madison S. Wigginton Professor of Finance, Owen Graduate School of 
Management, Vanderbilt University (Feb. 13, 2017); and Douglas M. 
Yones, Head of Exchange Traded Products, New York Stock Exchange 
(Feb. 22, 2017). All comments on the proposed rule change are 
available on the Commission's Web site at: https://www.sec.gov/comments/sr-nysearca-2016-101/nysearca2016101.shtml.
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    On February 15, 2017, the Exchange filed Amendment No. 1 to the 
proposed rule change, as described in Items I and II below, which Items 
have been prepared by the Exchange.\10\ The Commission is publishing 
this notice to solicit comments on Amendment No. 1 to the proposed rule 
change from interested persons.
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    \10\ Among other things, Amendment No. 1 (1) identifies Foreside 
Fund Services, LLC as the Order Examiner in connection with the 
creation and redemption of Baskets of Shares (see Section II.A.1, 
infra (discussion in subheading ``Purpose'')); (2) identifies SolidX 
Management LLC as the custodian of the Trust's bitcoin and The Bank 
of New York Mellon as custodian of the Trust's cash (see Section 
II.A.1, infra (discussion in subheading ``Purpose'')); (3) adds 
content regarding a recent loss of trading volume on the leading 
Chinese exchanges and asserts that trading volumes at these Chinese 
exchanges are now in line with volumes at U.S. exchanges (see 
Section II.A.1, infra (discussion in subheading ``bitcoin Price 
Transparency'')); (4) notes that in May 2016, the Gibraltar 
Financial Services Commission approved the BitcoinETI, which was 
listed on the Gibraltar Stock Exchange in July 2016 and on Deutsche 
B[ouml]rse Frankfurt in August 2016 (see Section II.A.1, infra 
(discussion in subheading ``Additional bitcoin Trading Products'')); 
(5) adds or changes certain details regarding the first alternative 
pricing source for the Shares (see Section II.A.1, infra (discussion 
in subheading ``bitcoin Market Price'')); (6) adds disclosure that 
the Sponsor (operating on a principal basis) also may offer non-
deliverable forwards and swaps in order to provide Authorized 
Participants and market makers with additional options for hedging 
their exposure to bitcoin (see Section II.A.1, infra (discussion in 
subheading ``bitcoin Trading Activities of the Sponsor with 
Authorized Participants and Market Makers'')); (7) deletes text 
relating to the suspension or rejection of redemption orders (see 
Section II.A.1, infra (discussion in subheading ``Determination of 
Required Payment'')); (8) deletes text stating that (a) the Exchange 
will also make available on its Web site daily trading volume of the 
Shares, and (b) that bitcoin prices are available from automated 
quotation systems, published or other public sources, or on-line 
information services (see Section II.A.1, infra (discussion in 
subheading ``Availability of Information'')); and (9) adds text 
stating that, to the extent that the Administrator has utilized the 
cascading set of rules described in ``bitcoin Market Price,'' the 
Trust's Web site will note the valuation methodology used and the 
price per bitcoin resulting from that calculation (see Section 
II.A.1, infra (discussion in subheading ``Availability of 
Information'')). Capitalized terms used but not defined in this 
footnote have the meaning given to them elsewhere in this Notice.
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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: SolidX Bitcoin 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 III below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    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''. \11\ The Exchange proposes to list 
and trade shares (``Shares'') of the Trust pursuant to NYSE Arca 
Equities Rule 8.201.\12\
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    \11\ 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.
    \12\ On February 3, 2017, the Trust filed Amendment No. 3 to its 
registration statement (``Registration Statement'') on Form S-1 
under the Securities Act of 1933 (15 U.S.C. 77a) (File No. 333-
212479). 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-2016-101 replaces SR-
NYSEArca-2016-101 as originally filed and supersedes such filing in 
its entirety.
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    SolidX Management LLC is the sponsor of the Trust (``Sponsor'') and 
custodian of the Trust's bitcoin (``bitcoin Custodian''). SolidX 
Management LLC is a wholly-owned subsidiary of SolidX Partners Inc. 
Delaware Trust Company is the trustee (``Trustee''). The Bank of New 
York Mellon will be the administrator (``Administrator''), transfer 
agent (``Transfer Agent'') and the custodian, with respect to cash, 
(``Cash Custodian'') of the Trust. Foreside Fund Services, LLC will be 
the order examiner (``Order Examiner'') in connection with the creation 
and redemption of ``Baskets'' \13\ of Shares.
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    \13\ The Trust will issue and redeem ``Baskets'', each equal to 
a block of 100,000 Shares, only to ``Authorized Participants''. See 
``Creation and Redemption of Shares'' below.
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    The Trust was formed as a Delaware statutory trust on September 15, 
2016 and is operated as a grantor trust for U.S. federal tax purposes. 
The Trust has no fixed termination date.
    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the Trust's net assets. 
The Trust's assets will consist of bitcoin \14\ held on the Trust's 
behalf by the Sponsor utilizing a secure process as described below in 
``bitcoin Security and Storage for the Trust''. The Trust will not 
normally hold cash or any other assets, but may hold a very limited 
amount of cash in connection with the creation and redemption of 
Baskets and to pay Trust expenses, as described below.
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    \14\ A ``bitcoin'' is an asset that can be transferred among 
parties via the Internet, but without the use of a central 
administrator or clearing agency (``bitcoin''). The asset, bitcoin, 
is generally written with a lower case ``b''. The asset, bitcoin, is 
differentiated from the computers and software (or the protocol) 
involved in the transfer of bitcoin among users, which constitute 
the ``Bitcoin Network''. The asset, bitcoin, is the intrinsically 
linked unit of account that exists within the Bitcoin Network. See 
``bitcoin and the Bitcoin Industry'' below.
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    According to the Registration Statement, the Trust will invest in

[[Page 12255]]

bitcoin only. The activities of the Trust are limited to: (i) Issuing 
Baskets in exchange for the cash and/or bitcoin deposited with the Cash 
Custodian or bitcoin Custodian, respectively, as consideration; (ii) 
purchasing bitcoin from various exchanges and in over-the-counter 
(``OTC'') transactions; (iii) selling bitcoin as necessary to cover the 
Sponsor's management fee (or, at the Sponsor's discretion, transferring 
bitcoin in-kind to pay the management fee), the insurance premium 
related to the insurance policies on the Trust's bitcoin (``bitcoin 
Insurance Fee''), Trust expenses not assumed by the Sponsor and other 
liabilities; (iv) selling bitcoin as necessary in connection with 
redemptions; (v) delivering cash and/or bitcoin in exchange for Baskets 
surrendered for redemption; and (vi) maintaining insurance coverage for 
the bitcoin held by the Trust.
    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\15\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''),\16\ and the Sponsor is not subject to 
regulation as a commodity pool operator or a commodity trading adviser 
in connection with the Shares.
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    \15\ 15 U.S.C. 80a-1.
    \16\ 17 U.S.C. 1.
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Investment Objective
    According to the Registration Statement and as further described 
below, the Trust will seek to provide investors with exposure to the 
daily change in the U.S. dollar price of bitcoin, before expenses and 
liabilities of the Trust, as measured by the TradeBlock XBX Index 
(``XBX''). The Trust intends to achieve this objective by investing 
substantially all of its assets in bitcoin traded on various domestic 
and international bitcoin exchanges and OTC markets depending on 
liquidity and otherwise at the Sponsor's discretion. The Trust is not 
actively managed. It does not engage in any activities designed to 
obtain a profit from, or to ameliorate losses caused by, changes in the 
price of bitcoin.
Investment in Bitcoin
    Subject to certain requirements and conditions described below and 
in the Registration Statement, the Trust, under normal market 
conditions,\17\ will use available offering proceeds to purchase 
bitcoin that are traded on various domestic and international exchanges 
and OTC markets, without being leveraged or exceeding relevant position 
limits. Generally, the Sponsor will directly place purchase or sale 
orders for bitcoin on behalf of the Trust on domestic and international 
exchanges and with OTC participants using delivery-versus-payment 
(``DVP'') and receive-versus-payment (``RVP'') arrangements.
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    \17\ The term ``under normal circumstances'' includes, but is 
not limited to, the absence of extreme volatility or trading halts 
in the price of bitcoin or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
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Bitcoin and the Bitcoin Industry
General
    The following is a brief introduction to the global bitcoin market. 
The data presented below are derived from information released by 
various third-party sources, including white papers, other published 
materials, research reports and regulatory guidance.
The Bitcoin Network
    A bitcoin is an asset that can be transferred among parties via the 
Internet, but without the use of a central administrator or clearing 
agency. The term ``decentralized'' is often used in descriptions of 
bitcoin, in reference to bitcoin's lack of necessity for administration 
by a central party. The Bitcoin Network (i.e., the network of computers 
running the software protocol underlying bitcoin involved in 
maintaining the database of bitcoin ownership and facilitating the 
transfer of bitcoin among parties) and the asset, bitcoin, are 
intrinsically linked and inseparable. Bitcoin was first described in a 
white paper released in 2008 and published under the name ``Satoshi 
Nakamoto'', and the protocol underlying bitcoin was subsequently 
released in 2009 as open source software.
Bitcoin Ownership and the Blockchain
    To begin using bitcoin, a user may download specialized software 
referred to as a ``bitcoin wallet''. A user's bitcoin wallet can run on 
a computer or smartphone. A bitcoin wallet can be used both to send and 
to receive bitcoin. Within a bitcoin wallet, a user will be able to 
generate one or more ``bitcoin addresses'', which are similar in 
concept to bank account numbers, and each address is unique. Upon 
generating a bitcoin address, a user can begin to transact in bitcoin 
by receiving bitcoin at his or her bitcoin address and sending it from 
his or her address to another user's address. Sending bitcoin from one 
bitcoin address to another is similar in concept to sending a bank wire 
from one person's bank account to another person's bank account.
    Balances of the quantity of bitcoin associated with each bitcoin 
address are listed in a database, referred to as the ``blockchain''. 
Copies of the blockchain exist on thousands of computers on the Bitcoin 
Network throughout the Internet. A user's bitcoin wallet will either 
contain a copy of the blockchain or be able to connect with another 
computer that holds a copy of the blockchain.
    When a bitcoin user wishes to transfer bitcoin to another user, the 
sender must first request a bitcoin address from the recipient. The 
sender then uses his or her bitcoin wallet software, to create a 
proposed addition to the blockchain. The proposal would decrement the 
sender's address and increment the recipient's address by the amount of 
bitcoin desired to be transferred. The proposal is entirely digital in 
nature, similar to a file on a computer, and it can be sent to other 
computers participating in the Bitcoin Network. Such digital proposals 
are referred to as ``bitcoin transactions''. Bitcoin transactions and 
the process of one user sending bitcoin to another should not be 
confused with buying and selling bitcoin, which is a separate process 
(as discussed below in ``bitcoin Trading On Exchanges'' and ``bitcoin 
Trading Over-the-Counter'').
    A bitcoin transaction is similar in concept to an irreversible 
digital check. The transaction contains the sender's bitcoin address, 
the recipient's bitcoin address, the amount of bitcoin to be sent, a 
confirmation fee and the sender's digital signature. The sender's use 
of his or her digital signature enables participants on the Bitcoin 
Network to verify the authenticity of the bitcoin transaction.
    A user's digital signature is generated via usage of the user's so-
called ``private key'', one of two numbers in a so-called cryptographic 
``key pair''. A key pair consists of a ``public key'' and its 
corresponding private key, both of which are lengthy numerical codes, 
derived together and possessing a unique relationship.
    Public keys are used to create bitcoin addresses. Private keys are 
used to sign transactions that initiate the transfer of bitcoin from a 
sender's bitcoin address to a recipient's bitcoin address. Only the 
holder of the private key associated with a particular bitcoin address 
can digitally sign a transaction proposing a transfer of bitcoin from 
that particular bitcoin address.
    A user's bitcoin address (which is derived from a public key) may 
be safely

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distributed, but a user's private key must remain known solely by its 
rightful owner. The utilization of a private key is the only mechanism 
by which a bitcoin user can create a digital signature to transfer 
bitcoin from him or herself to another user. Additionally, if a 
malicious third party learns of a user's private key, that third party 
could forge the user's digital signature and send the user's bitcoin to 
any arbitrary bitcoin address (i.e., the third party could steal the 
user's bitcoin).
    When a bitcoin holder sends bitcoin to a destination bitcoin 
address, the transaction is initially considered unconfirmed. 
Confirmation of the validity of the transaction involves verifying the 
signature of the sender, as created by the sender's private key. 
Confirmation also involves verifying that the sender has not ``double 
spent'' the bitcoin (e.g., confirming Party A has not attempted to send 
the same bitcoin both to Party B and to Party C). The confirmation 
process occurs via a process known as ``bitcoin mining''.
    Bitcoin mining utilizes a combination of computer hardware and 
software to accomplish a dual purpose: (i) To verify the authenticity 
and validity of bitcoin transactions (i.e., the movement of bitcoin 
between addresses) and (ii) the creation of new bitcoin. Neither the 
Sponsor nor the Trust intends to engage in bitcoin mining.
    Bitcoin miners do not need permission to participate in verifying 
transactions. Rather, miners compete to solve a prescribed and 
complicated mathematical calculation using computers dedicated to the 
task. Rounds of the competition repeat approximately every ten minutes. 
In any particular round of the competition, the first miner to find the 
solution to the mathematical calculation is the miner who gains the 
privilege of announcing the next block to be added to the blockchain.
    A new block that is added to the blockchain serves to take all of 
the recent-yet-unconfirmed transactions and verify that none are 
fraudulent. The recent-yet-unconfirmed transactions also generally 
contain transaction fees that are awarded to the miner who produces the 
block in which the transactions are inserted, and thereby confirmed. 
The successful miner also earns the so-called ``block reward'', an 
amount of newly created bitcoin. Thus, bitcoin miners are financially 
incentivized to conduct their work. The financial incentives received 
by bitcoin miners are a vital part of the process by which the Bitcoin 
Network functions.
    Upon successfully winning a round of the competition (winning a 
round is referred to as mining a new block), the miner then transmits a 
copy of the newly-formed block to peers on the Bitcoin Network, all of 
which then update their respective copies of the blockchain by 
appending the new block, thereby acknowledging the confirmation of the 
transactions that had previously existed in an unconfirmed state.
    A recipient of bitcoin must wait until a new block is formed in 
order to see the transaction convert from an unconfirmed state to a 
confirmed state. According to the Registration Statement, with new 
rounds won approximately every ten minutes, the average wait time for a 
confirmation is five minutes.
    The protocol underlying bitcoin provides the rules by which all 
users and miners on the Bitcoin Network must operate. A user or miner 
attempting to operate under a different set of rules will be ignored by 
other network participants, thus rendering that user's or miner's 
behavior moot. The protocol also lays out the block reward, the amount 
of bitcoin that a miner earns upon creating a new block. The initial 
block reward when Bitcoin was introduced in 2009 was 50 bitcoin per 
block. That number has and will continue to halve approximately every 
four years until approximately 2140, when it is estimated that block 
rewards will go to zero. The most recent halving occurred on July 9, 
2016, which reduced the block reward from 25 to 12.5 bitcoin. The next 
halving is projected for June 2020, which will reduce the block reward 
to 6.25 bitcoin from its current level of 12.5. The halving thereafter 
will occur in another four years and will reduce the block reward to 
3.125 bitcoin, and so on. As of January 2017, there are approximately 
16.12 million bitcoin that have been created, a number that will grow 
with certainty to a maximum of 21 million, estimated to occur by the 
year 2140. Bitcoin mining should not be confused with buying and 
selling bitcoin, which, as discussed below, is a separate process.
Use of Bitcoin and the Blockchain
    Beyond using bitcoin as a value transfer mechanism, applications 
related to the blockchain technology underlying bitcoin have become 
increasingly prominent.\18\ Blockchain-focused applications take 
advantage of certain unique characteristics of the blockchain such as 
secure time stamping (secure time stamps are on newly created blocks), 
highly redundant storage (copies of the blockchain are distributed 
throughout the Internet) and tamper-resistant data secured by secure 
digital signatures.
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    \18\ Additional applications based on blockchain technology--
both the blockchain underlying bitcoin as well as separate public 
blockchains incorporating similar characteristics of the blockchain 
underlying bitcoin--are currently in development by numerous 
entities, including financial institutions like banks.
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    According to the Registration Statement, blockchain-focused 
applications in usage and under development include, but are not 
limited to asset title transfer, secure timestamping, counterfeit and 
fraud detection systems, secure document and contract signing, 
distributed cloud storage and identity management. Although value 
transfer is not the primary purpose for blockchain-focused 
applications, the usage of bitcoin, the asset, is inherently involved 
in blockchain-focused applications, thus linking the growth and 
adoption of bitcoin to the growth and adoption of blockchain-focused 
applications.
    According to the Registration Statement, as a value transfer 
mechanism, over 100,000 merchants worldwide currently accept bitcoin as 
payment for goods and services. Notable merchants accepting bitcoin for 
certain types of purchases include Microsoft, Dell, Expedia, 
Overstock.com and Dish Network. Common bitcoin purchases include Web 
site hosting, home furnishings, gift cards and consumer electronics. 
Bitcoin is also accepted by a number of non-profit organizations 
worldwide, including United Way Worldwide, the American Red Cross, 
Wikipedia and Fidelity Charitable.\19\
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    \19\ Attached as Exhibit 3, Item 1 is a chart setting forth a 
summary of bitcoin transaction volume (i.e., transfers of bitcoin 
between parties on the Bitcoin Network, which is different than and 
should not be confused with bitcoin exchange-traded volume) from 
January 2009 through January 2017.
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Bitcoin Exchanges
    Bitcoin exchanges operate Web sites that facilitate the purchase 
and sale of bitcoin for various government-issued currencies, including 
the U.S. dollar, the euro or the Chinese yuan. Activity on bitcoin 
exchanges should not be confused with the process of users sending 
bitcoin from one bitcoin address to another bitcoin address, the latter 
being an activity that is wholly within the confines of the Bitcoin 
Network and the former being an activity that occurs entirely on 
private Web sites.
    Bitcoin exchanges operate in a manner that is unlike the 
traditional capital markets infrastructure in the U.S. and in other 
developed nations. Bitcoin exchanges combine the process of order 
matching, trade clearing, trade settlement and custody into a single 
entity. For example, a user can send U.S. dollars via wire to a bitcoin

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exchange and then visit the exchange's Web site to purchase bitcoin. 
The entirety of the transaction--from trade to clearing to settlement 
to custody (at least temporary custody)--is accomplished by the bitcoin 
exchange in a matter of seconds. The user can then withdraw the 
purchased bitcoin into a wallet to take custody of the bitcoin 
directly.
    According to the Registration Statement, there are currently 
several U.S.-based regulated entities that facilitate bitcoin trading 
and that comply with U.S. anti-money laundering (``AML'') and know your 
customer (``KYC'') regulatory requirements:
     GDAX (f/k/a Coinbase), which is based in California, is a 
bitcoin exchange that maintains money transmitter licenses in over 
thirty states, the District of Columbia and Puerto Rico (``GDAX''). 
GDAX is subject to the regulations enforced by the various state 
agencies that issued their respective money transmitter licenses to 
GDAX. In New York, GDAX applied for a BitLicense, a regulatory 
framework created by the New York Department of Financial Services 
(``DFS'') that sets forth consumer protection, AML compliance, and 
cyber security rules tailored for digital currency companies operating 
and transacting business in New York. The DFS granted a BitLicense to 
GDAX in January 2017.
     itBit is a bitcoin exchange that was granted a limited 
purpose trust company charter by the DFS in May 2015 (``itBit''). 
Limited purpose trusts, according to the DFS, are permitted to 
undertake certain activities, such as transfer agency, securities 
clearance, investment management, and custodial services, but without 
the power to take deposits or make loans.
     Gemini is a bitcoin exchange that is also regulated by the 
DFS. In October 2015, the DFS granted Gemini authorization to operate 
as a limited purpose trust company (``Gemini'').
     SecondMarket, Inc. d/b/a Genesis Global Trading is a FINRA 
member firm that makes a market in bitcoin by offering two-sided 
liquidity (``Genesis Global Trading'').
    According to the Registration Statement, the majority of bitcoin 
transactions are executed on public bitcoin exchanges where bitcoin are 
bought and sold daily for value in U.S. dollar, euro and other 
government currencies. These bitcoin exchanges provide the most data 
with respect to prevailing valuations of bitcoin. The exchanges 
typically publish real-time trade data including last price, bid and 
ask spread, and trade volume on their respective Web sites and through 
application programming interfaces. As a result, the prices on bitcoin 
exchanges are the most accurate expression of the value of bitcoin. The 
XBX, which the Trust will use to calculate the net asset value of the 
Shares, accordingly tracks the price of bitcoin across multiple 
exchanges (see ``bitcoin Price Indexes'' below).
    The bitcoin marketplace is a 24-hour, 365-day per year market. 
There currently exist globally over 30 bitcoin exchanges. The Sponsor 
represents that the exchanges with the most significant bitcoin trading 
by volume (i.e., Bitfinex,\20\ Bitstamp,\21\ BTCC,\22\ BTC-e,\23\ GDAX 
(f/k/a Coinbase), Huobi,\24\ itBit, Kraken,\25\ LakeBTC,\26\ OKCoin 
Exchange China \27\ and OKCoin International \28\) traded approximately 
1.34 billion bitcoin at U.S. dollar converted prices ranging between 
$199 and $1,203 for a total trade volume of over $784 billion during 
the period February 2014 through January 2017. The Sponsor represents 
that average global daily trade volume during this period was 
approximately $693 million.
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    \20\ Bitfinex is a bitcoin exchange that facilitates U.S. 
dollar-denominated bitcoin trading (``Bitfinex''). It is based in 
Hong Kong and holds a Money Services Operator license issued by the 
Customs and Excise Department, Money Services Supervision Bureau.
    \21\ Bitstamp is a bitcoin exchange that facilitates U.S. 
dollar-denominated bitcoin trading (``Bitstamp''). It is based in 
the United Kingdom with offices in London, Luxembourg and New York. 
The government of Luxembourg granted Bitstamp a license to operate 
as a regulated bitcoin exchange in the European Union.
    \22\ BTCC is a bitcoin exchange that is headquartered in 
Shanghai and facilitates yuan-denominated bitcoin trading 
(``BTCC'').
    \23\ BTC-e is a U.S. dollar-denominated bitcoin exchange (``BTC-
e'').
    \24\ Huobi is a bitcoin exchange that is based in Beijing and 
facilitates yuan-denominated bitcoin trading.
    \25\ Kraken is located in San Francisco (``Kraken''). Although 
Kraken conducts U.S. dollar bitcoin trading, it is primarily a euro-
denominated bitcoin exchange.
    \26\ LakeBTC is a U.S. dollar-denominated bitcoin exchange 
located in Shanghai, China.
    \27\ OKCoin Exchange China is located in Beijing and facilitates 
Chinese yuan-denominated bitcoin trading (``OKCoin Exchange 
China'').
    \28\ OKCoin International is located in Singapore and 
facilitates U.S. dollar-denominated bitcoin trading (``OKCoin 
International'').
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    The various bitcoin exchanges are generally available to the public 
through online web portals. Trading information, including pricing, 
volumes, and order book is available on the exchanges' Web sites, and 
most such information is publicly available to anyone who visits the 
site. According to the Sponsor, for those exchanges that comply with 
applicable KYC requirements, prior to trading bitcoin, users are 
required to provide the exchange with KYC verifiable identification and 
other such documentation. Once a user establishes an account with the 
exchange, the user deposits government currency with the exchange by 
completing a wire of government currency to the exchange's bank.
    Bitcoin are traded with publicly disclosed valuations for each 
transaction, measured by one or more government currencies such as the 
U.S. dollar, the euro or the Chinese yuan. Bitcoin exchanges typically 
report publicly on their site the valuation of each transaction and bid 
and ask prices for the purchase or sale of bitcoin. Although each 
bitcoin exchange has its own market price, it is expected that most 
bitcoin exchanges' market prices should be relatively consistent with 
the bitcoin exchange market average since market participants can 
choose the bitcoin exchange on which to buy or sell bitcoin (i.e., 
exchange shopping). According to the Registration Statement, price 
differentials across bitcoin exchanges enable arbitrage between bitcoin 
prices on the various exchanges.
Bitcoin Price Indexes
    XBX Index. Launched in July 2014, the XBX represents the value of 
one bitcoin in U.S. dollars at any point in time and closes as of 4:00 
p.m. Eastern time (``E.T.'') each weekday. The intra-day levels of the 
XBX incorporate the real-time price of bitcoin based on trading 
activity derived from constituent exchanges throughout each trading 
day. The closing level of the XBX is calculated using a proprietary 
methodology utilizing bitcoin trading data from constituent exchanges 
and is published at or after 4:00 p.m. E.T. each weekday. The XBX is 
published to two decimal places rounded on the last digit.
    Schvey, Inc. d/b/a TradeBlock (``TradeBlock'') is the index sponsor 
and calculation agent for the XBX. The Sponsor has entered into a 
licensing agreement with TradeBlock to use the XBX. The Trust is 
entitled to use the XBX pursuant to a sub-licensing arrangement with 
the Sponsor.
    The XBX is a real-time U.S. dollar-denominated composite reference 
rate for the price of bitcoin. The XBX calculates the intra-day price 
of bitcoin every second, including the closing price as of 4:00 p.m. 
E.T. The intra-day price and closing price are based on a methodology 
that consists of collecting and cleansing actual trade data from 
several bitcoin exchanges included within the XBX.

[[Page 12258]]

    According to the Registration Statement, to ensure that 
TradeBlock's exchange selection process is impartial, TradeBlock 
implements a standardized eligibility criteria framework based on 
periodically-reviewed governance principles that includes elements such 
as depth of liquidity, compliance with applicable legal and regulatory 
requirements, data availability and acceptance of U.S. dollar deposits. 
As of January 15, 2017, the eligible bitcoin exchanges selected by 
TradeBlock for inclusion in the XBX are Bitfinex, Bitstamp, GDAX (f/k/a 
Coinbase), itBit and OKCoin International. The XBX currently does not 
include any other bitcoin exchanges, derivative exchanges, dark pools, 
OTC or other trading venues.
    The logic utilized for the derivation of the daily closing index 
level for the XBX is intended to analyze actual bitcoin transactional 
data, verify and refine the data set and yield an objective, fair-
market value of one bitcoin as of 4:00 p.m. E.T. each weekday, priced 
in U.S. dollars. As discussed herein, the XBX intra-day price and the 
XBX closing price are collectively referred to as the XBX price, unless 
otherwise noted.
    The key elements of the algorithm underlying the XBX include:
     Volume/Liquidity Weighting: Exchanges with greater 
liquidity receive a higher weighting in the XBX, increasing the ability 
to execute against the XBX in the underlying spot markets. Liquidity 
weighting also mitigates the impact of volume spikes during off-peak 
trading hours.
     Price Variance Weighting: The XBX price reflects data 
points that are discretely weighted in proportion to their variance 
from contemporaneous pricing reflected on the XBX's constituent 
exchanges. As the price at a particular exchange diverges from the rest 
of the data points, its influence on the XBX consequently decreases.
     Inactivity Adjustment: The algorithm penalizes stale ticks 
on any given exchange. If an exchange does not have recent trading 
data, its weighting is gradually reduced, until it is de-weighted 
entirely. Similarly, once activity resumes, the corresponding weighting 
for that constituent is gradually increased until it reaches the 
appropriate level.
     Thin Order Books: The XBX minimizes the impact of thin 
order books and fluctuating prices, which provides a more stable and 
reliable benchmark for the price of bitcoin.
    The XBX index calculation methodology and governance protocol are 
based on principles established by the International Organization of 
Securities Commissions for financial benchmarks. TradeBlock conducts a 
quarterly review of the constituent exchanges and the algorithm used to 
calculate XBX prices and maintains a history of all updates. In the 
event of market stress or unresponsive input data from the constituent 
exchanges, the XBX algorithm will incorporate a minimum of one input to 
calculate a benchmark value. In the unlikely event of no input data 
from all constituent values, the XBX will default to the most recent 
value for which one or more inputs were present.
    The Sponsor is not aware of any bitcoin derivatives currently 
trading based on the XBX.
    CoinDesk Bitcoin Price Index. CoinDesk, a digital currency content 
provider (``Coindesk''), launched a proprietary bitcoin price index, 
the CoinDesk Bitcoin Price Index (``XBP'') in September 2013. The XBP 
takes the average of U.S. dollar bitcoin prices from leading exchanges.
    NYXBT Index. Launched in May 2015, the NYSE Bitcoin Index 
(``NYXBT'') represents the value of one bitcoin in U.S. dollars at any 
point in time and closes as of 4:00 p.m. E.T. each weekday.
Bitcoin Trading on Exchanges
    According to the Registration Statement, an individual who wishes 
to purchase bitcoin on a bitcoin exchange would create an account on 
the exchange Web site. After creating an account, the buyer would send 
government issued money to the Web site via traditional payment methods 
such as ACH and wire transfer. The buyer's account at the bitcoin 
exchange would be credited with the money sent, and the buyer would 
then be able to visit the Web site and make a purchase of bitcoin. 
Directly after the purchase is made, the bitcoin acquired still remains 
in the custody of the bitcoin exchange (i.e., it remains at a bitcoin 
address controlled by the exchange). To take custody of the bitcoin, 
the purchaser would direct the exchange Web site to transfer the 
bitcoin to a bitcoin address controlled by the purchaser, thereby 
completing the process of acquiring bitcoin. A sale of bitcoin using a 
bitcoin exchange involves the same process but in reverse. The seller 
would transfer bitcoin from an address under his or her control to an 
address under the bitcoin exchange's control. The seller's account at 
the bitcoin exchange would be credited with the bitcoin sent, and the 
seller would be able to commence the sale of the bitcoin via the Web 
site. Upon completion of the sale, the seller's account would reflect 
the seller's balance, in government currency, which the seller could 
then receive by directing the exchange to send the funds via 
traditional payment methods to the seller's bank account. Bitcoin 
exchange Web sites generally show users a central limit order book 
(i.e., a list of all bids and offers for purchases and sales of bitcoin 
on the exchange).
    The Sponsor has trading experience with several U.S. and foreign 
bitcoin exchanges that generally represent the highest daily U.S. 
dollar bitcoin trading volume.
    The Sponsor may conduct some of its bitcoin trading on behalf of 
the Trust through a wholly-owned subsidiary, SolidX Management Ltd., an 
exempted limited company established in the Cayman Islands 
(``Subsidiary''), to buy and sell bitcoin on behalf of the Trust on 
certain bitcoin exchanges which are only open to non-U.S. persons or 
which do not conduct business in New York or with New York residents. 
The officers of the Sponsor also serve as officers of the Subsidiary. 
When conducting trading through the Subsidiary, the Sponsor is 
responsible for the security of the bitcoin to the same extent as if 
trading bitcoin directly. Bitcoin traded through the Subsidiary will be 
stored in the same way as bitcoin that is traded directly by the 
Sponsor, and the Trust's bitcoin insurance on bitcoin traded through 
the Subsidiary will apply to the same extent as otherwise applicable. 
Furthermore, the Subsidiary will have the same trading arrangements 
with the applicable bitcoin exchanges as does the Sponsor itself. 
Accordingly, references herein to the Sponsor's trading arrangements 
with bitcoin exchanges on behalf of the Trust include trading conducted 
by the Sponsor through the Subsidiary, unless otherwise noted.
    The Sponsor intends to conduct its bitcoin exchange trading on the 
following U.S. dollar-denominated bitcoin exchanges: Bitfinex, 
Bitstamp, GDAX (f/k/a Coinbase), Gemini, itBit, Kraken and OKCoin 
International.\29\ The Sponsor represents that all of these exchanges 
follow AML and KYC regulatory requirements. Because Bitfinex and Kraken 
do not conduct business in New York or with New York residents, and 
OKCoin International is only open to non-U.S. persons, the Sponsor 
intends to conduct its bitcoin trading on these three exchanges through 
the Subsidiary. As discussed above, the Sponsor does not expect the 
Trust to experience any differences between bitcoin exchange trades on 
the

[[Page 12259]]

Trust's behalf conducted through the Subsidiary versus those conducted 
by the Sponsor directly.
---------------------------------------------------------------------------

    \29\ The Sponsor intends to trade with OKCoin International, the 
Singaporean entity, and not with the yuan-denominated OKCoin 
Exchange China.
---------------------------------------------------------------------------

    According to the Registration Statement, during the preceding 
twelve-month period (January 2016 through January 2017), the aggregate 
trading volume on the five constituent exchanges comprising the XBX 
(i.e., Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), itBit and OKCoin 
International) represented approximately 77% of the entire global U.S. 
dollar-denominated bitcoin exchange market.\30\According to the 
Registration Statement, during the period January 16, 2016 through 
January 15, 2017 (including weekends and holidays), average daily 
bitcoin trading on Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), Gemini, 
itBit and OKCoin International totaled approximately 44,000 bitcoin 
across all of those exchanges at prices that ranged between $371 and 
$1,161. Of that trading, Bitfinex accounted for 39%, Bitstamp accounted 
for 13%, GDAX (f/k/a Coinbase) accounted for 14%, Gemini accounted for 
4%, itBit accounted for 9%, Kraken accounted for 3% and OKCoin 
International accounted for 17%. With a Basket (as defined below) size 
of 1,000 bitcoin, the creation or redemption of one Basket would 
represent approximately 3.5% of the aggregate daily U.S. dollar-
denominated bitcoin trading volume across these exchanges and 
approximately 1.5% of the aggregate daily (i) U.S. dollar-denominated 
bitcoin trading volume on these exchanges plus (ii) global U.S. dollar-
denominated OTC bitcoin trading volume.
---------------------------------------------------------------------------

    \30\ In addition to the five constituent exchanges comprising 
the XBX, the global U.S. dollar-denominated bitcoin exchange market 
also includes BTC-e, Gemini, LakeBTC and Kraken. The Sponsor 
represents that although BTC-e is a U.S. dollar-denominated bitcoin 
exchange with significant trading volume, BTC-e does not comply with 
certain of the Sponsor's internal criteria regarding the exchanges 
on which the Sponsor will trade and, therefore, the Sponsor will not 
transact with BTC-e. The Sponsor represents that it is also aware of 
other smaller U.S. dollar-denominated bitcoin exchanges, but the 
trading volume on these exchanges is insignificant and the Sponsor 
does not intend to conduct business with these smaller exchanges.
---------------------------------------------------------------------------

    The Sponsor has established, on behalf of the Trust, DVP and RVP 
trading arrangements with several of the U.S. dollar-denominated 
bitcoin exchanges pursuant to which the Trust will be able to minimize 
exchange counterparty risk. These arrangements are on a trade-by-trade 
basis and do not bind the Sponsor or the Trust to continue to trade 
with any exchange. Under these arrangements, the Sponsor, on behalf of 
the Trust, will receive bitcoin from an exchange that has entered into 
a DVP/RVP arrangement with the Sponsor without having to deposit U.S. 
dollars with the exchange prior to trade execution. Once the Sponsor 
receives the bitcoin it purchased, the Sponsor will within 24 hours 
wire U.S. dollars to the exchange to settle the trade. When selling 
bitcoin on behalf of the Trust, an exchange that has entered into a 
DVP/RVP arrangement with the Sponsor will permit the Sponsor to sell 
bitcoin on the exchange without the need to deposit bitcoin with the 
exchange beforehand. The Sponsor will transmit bitcoin to the exchange 
only after the exchange has wired the U.S. dollar sales proceeds to the 
Sponsor. These DVP and RVP settlement terms reduce exchange 
counterparty risks for the Trust.
Bitcoin Price Transparency
    According to the Registration Statement, bitcoin trading currently 
occurs globally 24-hours per day, 365 days per year across over 30 
bitcoin exchanges. Individual bitcoin exchanges continually publish 
publicly available price and volume data that is utilized by service 
providers to create various bitcoin indexes. Bitcoin prices are also 
available via major market data vendors such as Bloomberg and Thomson 
Reuters. Real-time and historical price data is available through 
numerous public web platforms including: https://tradeblock.com/; 
http://www.coindesk.com/; https://bitcoinaverage.com; and others.
    According to the Registration Statement, through January 2017, the 
trading volume on BTCC, Huobi and OKCoin Exchange China was 
significant. In January 2017, these exchanges reduced leveraged trading 
and imposed various trading fees, which caused the volumes on the 
exchanges to decline to levels in-line with the trading volumes on U.S. 
dollar-denominated exchanges. According to the Registration Statement, 
these exchanges follow various AML and KYC procedures as such 
procedures are applied within the exchanges' respective jurisdictions. 
Trading on these exchanges is limited to Chinese yuan, and the Sponsor 
therefore does not intend to transact with these exchanges because the 
Sponsor intends to transact with U.S. dollar-denominated exchanges 
only. However, the Sponsor represents that the price of bitcoin on 
BTCC, Huobi and OKCoin Exchange China generally has been consistent 
with the price of bitcoin on U.S. dollar-denominated bitcoin exchanges, 
including Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), itBit and OKCoin 
International.
    The Sponsor represents that because bitcoin trades on more than 30 
exchanges globally on a 24-hour basis, it is difficult for attempted 
market manipulation on any one exchange to affect the global market 
price of bitcoin. Any such attempt to manipulate the price would result 
in an arbitrage opportunity among exchanges, which typically would be 
acted upon by market participants.
    In addition to the price transparency of the bitcoin exchange 
market itself, the Trust will provide information regarding the Trust's 
bitcoin holdings as well as additional data regarding the Trust. The 
Sponsor expects that the dissemination of information on the Trust's 
Web site, along with quotations for and last-sale prices of 
transactions in the Shares and the intra-day indicative value (``IIV'') 
and net asset value (``NAV'') of the Trust will help to reduce the 
ability of market participants to manipulate the bitcoin market or the 
price of the Shares and that the Trust's arbitrage mechanism will 
facilitate the correction of price discrepancies in bitcoin and the 
Shares. The Sponsor believes that demand from new investors accessing 
bitcoin through investment in the Shares will broaden the investor base 
in bitcoin, which could further reduce the possibility of collusion 
among market participants to manipulate the bitcoin market.
    According to the Sponsor, the XBX's price variance weighting, which 
decreases the influence on the XBX of any particular exchange that 
diverges from the rest of the data points used by the XBX, reduces the 
possibility of an attempt to manipulate the price of bitcoin as 
reflected by the XBX.
Bitcoin Trading Over-the-Counter
    OTC trading of bitcoin is generally accomplished via bilateral 
agreements on a principal-to-principal basis. All risks and issues of 
credit are between the parties directly involved in the transaction. 
The OTC market provides a relatively flexible market in terms of 
quotes, price, size and other factors. The OTC market has no formal 
structure and no open-outcry meeting place. Parties engaging in OTC 
transactions will agree upon a price--often via phone or email--and one 
of the two parties would then initiate the transaction. For example, a 
seller of bitcoin could initiate the transaction by sending the bitcoin 
to the buyer's bitcoin address. The buyer would then wire U.S. dollars 
to the seller's bank account.
    Based on its observations and experience in the market, the Sponsor

[[Page 12260]]

estimates that the U.S. dollar OTC bitcoin trading volume globally 
represents on average approximately fifty percent of the trading volume 
of bitcoin traded globally in U.S. dollars on U.S. dollar-denominated 
bitcoin exchanges.
    According to the Registration Statement, transaction costs in the 
OTC market are negotiable between the parties and therefore vary with 
some participants willing to offer competitive prices for larger 
volumes, although this will vary according to market conditions. Cost 
indicators can be obtained from various information service providers, 
such as the bitcoin price indexes and bitcoin exchanges. OTC trading 
tends to be in large blocks of bitcoin and between institutions.
    In addition to using Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), 
Gemini, itBit, Kraken and OKCoin International to buy and sell bitcoin, 
the Trust intends to participate in the OTC bitcoin market when such 
market opportunities are deemed by the Sponsor to be advantageous for 
the Trust. The Sponsor currently expects that often it will be more 
cost efficient to effect large trades (e.g., $500,000 or greater) on 
behalf of the Trust in the OTC market rather than on a bitcoin 
exchange. The Sponsor therefore expects to conduct most of its trading 
in the OTC bitcoin market.
    When deciding whether to buy and sell bitcoin in the OTC market, 
the Sponsor will consider various market factors, including the total 
U.S. dollar size of the trade, the volume of bitcoin traded across the 
various U.S. dollar-denominated bitcoin exchanges during the preceding 
24-hour period, available liquidity offered by OTC market participants 
and the bid and ask quotes offered by OTC market participants. When 
deciding whether to buy and sell bitcoin on exchange versus in the OTC 
market, the Sponsor's goal is to fill an order at the best possible 
price. The Sponsor's experience is that the prices at which trades in 
the OTC market are executed closely correspond to the XBX. The Sponsor 
expects the price at which it will trade bitcoin in the OTC market will 
generally track the XBX, and, therefore, should not affect the Trust's 
ability to track the XBX. The Sponsor also maintains an internal 
proprietary database, which it does not share with anyone, of potential 
OTC bitcoin trading counterparties, including hedge funds, family 
offices, private wealth managers and high-net-worth individuals. All 
such potential counterparties will be subject to the Sponsor's AML and 
KYC compliance procedures. The Sponsor will add additional potential 
counterparties to its internal proprietary database as it becomes aware 
of additional market participants. The Sponsor will decide whether or 
not to trade with OTC counterparties based on its ability to fill 
orders at the best available price amongst OTC market participants and 
bitcoin exchanges. Generally, the Sponsor will directly place purchase 
or sale orders for bitcoin on behalf of the Trust with participants in 
the OTC markets using DVP and RVP style arrangements.
    While the Sponsor expects that most of its bitcoin trading with 
exchanges and OTC counterparties on behalf of the Trust will occur 
pursuant to DVP and RVP arrangements, the Sponsor may also enter into 
collateral arrangements with certain bitcoin exchanges and OTC 
counterparties where DVP and RVP arrangements are not practicable. Such 
collateral arrangements require the Sponsor, out of its own assets, and 
the bitcoin exchange or OTC counterparty to open and maintain 
collateral deposit accounts with a bank or similar financial 
intermediary for the purpose of collateralizing pending bitcoin 
transactions effected by the Sponsor on behalf of the Trust and the 
bitcoin exchange or OTC counterparty. The Trust would not pledge (or 
receive) collateral pursuant to these arrangements and the Sponsor 
would bear any exchange counterparty risk. The Sponsor represents that 
a default of an exchange or OTC counterparty under such arrangement 
would have no greater impact on the Trust than a default under the DVP 
and RVP arrangements.
    To the extent a Basket creation or redemption order necessitates 
the buying or selling of a large block of bitcoin (e.g., an amount that 
if an order were placed on an exchange would potentially move the price 
of bitcoin), the Sponsor represents that placing such a trade in the 
OTC market may be advantageous to the Trust. OTC trades help avoid 
factors such as potential price slippage (causing the price of bitcoin 
to move as the order is filled on the exchange), while offering speed 
in trade execution and settlement (an OTC trade can be executed 
immediately upon agreement of terms between counterparties) and privacy 
(to avoid other market participants entering trades in advance of a 
large block order).
    OTC bitcoin trading is typically private and not regularly 
reported. For example, Genesis Global Trading and itBit release 
periodic reports that discuss their respective OTC trading volumes. The 
Trust does not intend to report its OTC trading.
    Regardless of whether the Sponsor buys bitcoin on an exchange or in 
the OTC market, the Sponsor expects the Trust to take custody of 
bitcoin within one business day of receiving an order from an 
Authorized Participant to create a Basket (as defined in ``Creation and 
Redemption of Shares'' below).
Historical Chart of the Price of Bitcoin
    The price of bitcoin is volatile and fluctuations are expected to 
have a direct impact on the value of the Shares. However, movements in 
the price of bitcoin in the past are not a reliable indicator of future 
movements. Movements may be influenced by various factors, including 
supply and demand, geo-political uncertainties, economic concerns such 
as inflation and real or speculative investor interest.\31\
---------------------------------------------------------------------------

    \31\ Attached as Exhibit 3, Item 2 is a chart illustrating the 
changes in the price of bitcoin during the period July 2010 through 
January 15, 2017. Attached as Exhibit 3, Item 3 is a chart comparing 
the trailing calendar month volatility in the price of bitcoin 
compared to the trailing calendar month volatility in the prices of 
gold, platinum, oil, natural gas, coffee, sugar, aluminum and copper 
during the period January 14, 2015 through January 13, 2017 
(excluding holidays and weekends). Attached as Exhibit 3, Item 4 is 
a chart comparing the trailing calendar month volatility in the 
price of bitcoin compared to the trailing calendar month volatility 
in the prices of gold, platinum, oil, natural gas, coffee, sugar, 
aluminum and copper during the period October 14, 2016 through 
January 13, 2017 (excluding holidays and weekends).
---------------------------------------------------------------------------

Additional Bitcoin Trading Products
    Certain non-U.S. based bitcoin exchanges offer derivative products 
on bitcoin such as options, swaps and futures.
    According to the Registration Statement, BitMex (based in the 
Republic of Seychelles), CryptoFacilites (based in the United Kingdom), 
796 Exchange (based in China) and OKCoin Exchange China all offer 
futures contracts settled in bitcoin. Coinut, based in Singapore, 
offers bitcoin binary options and vanilla options based on the Coinut 
index. Nadex, based in Chicago, offers bitcoin binary options 
denominated in U.S. dollars using the TeraBit Bitcoin Price Index.\32\ 
IGMarkets (based in the United Kingdom), Avatrade (based in Ireland) 
and Plus500 (based in Israel) also offer bitcoin derivative products.
---------------------------------------------------------------------------

    \32\ The TeraBit Bitcoin Price Index is disseminated by 
TeraExchange.
---------------------------------------------------------------------------

    The Commodity Futures Trading Commission (``CFTC'') has approved 
TeraExchange, LLC as a swap execution facility (``TeraExchange'') and 
LedgerX provisionally as a swap execution facility, where bitcoin swap 
and non-deliverable forward contracts may be entered into.

[[Page 12261]]

    The CFTC commissioners have expressed publicly that derivatives 
based on bitcoin are subject to regulation by the CFTC, including 
oversight to prevent market manipulation of the price of bitcoin. In 
addition, the CFTC has stated that bitcoin and other virtual currencies 
are encompassed in the definition of commodities under the CEA.\33\
---------------------------------------------------------------------------

    \33\ See ``In the Matter of Coinflip, Inc.'' (CFTC Docket 15-29 
(September 17, 2015)) (order instituting proceedings pursuant to 
Sections 6(c) and 6(d) of the CEA, making findings and imposing 
remedial sanctions), in which the CFTC stated the following:
    ``Section 1a(9) of the CEA defines `commodity' to include, among 
other things, `all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
---------------------------------------------------------------------------

    In May 2015, the Swedish FSA approved the prospectus for ``Bitcoin 
Tracker One'', an open-ended exchange-traded note that tracks the price 
of bitcoin in U.S. dollars. The Bitcoin Tracker One initially traded in 
Swedish krona on the Nasdaq Nordic in Stockholm, but is now also 
available to trade in euro. The Bitcoin Tracker One is available to 
retail investors in the European Union and to those investors in the 
U.S. who maintain brokerage accounts with Interactive Brokers.
    Founded in 2013, Bitcoin Investment Trust, a private, open-ended 
trust available to accredited investors, is another investment vehicle 
that derives its value from the price of bitcoin. Eligible shares of 
the Bitcoin Investment Trust are quoted on the OTCQX marketplace under 
the symbol ``GBTC''.
    In May 2016, the Gibraltar Financial Services Commission approved 
the BitcoinETI, which in July 2016 was listed on the Gibraltar Stock 
Exchange and on Deutsche B[ouml]rse Frankfurt in August 2016. The 
BitcoinETI is a bitcoin-backed exchange-traded instrument that is euro 
denominated.
Bitcoin Security and Storage for the Trust
    According to the Sponsor, given the novelty and unique digital 
characteristics (as set forth above) of bitcoin as an innovative asset 
class, traditional custodians who normally custody assets do not 
currently offer custodial services for bitcoin. Accordingly, the 
Sponsor, as bitcoin Custodian, will secure the bitcoin held by the 
Trust using multi-signature ``cold storage wallets'', an industry best 
practice. A cold storage wallet is created and stored on a computer 
with no access to a network, i.e., an ``air-gapped'' computer with no 
ability to access the Internet. Such a computer is isolated from any 
network, including local or Internet connections. A multi-signature 
address is an address associated with more than one private key. For 
example, a ``2 of 3'' address requires two signatures (out of three) 
from two separate private keys (out of three) to move bitcoin from a 
sender address to a receiver address.
    The Sponsor will utilize bitcoin private keys that are generated 
and stored on air-gapped computers. The movement of bitcoin will 
require physical access to the air-gapped computers and use of multiple 
authorized signers. For backup and disaster recovery purposes, the 
Sponsor will maintain cold storage wallet backups in locations 
geographically distributed throughout the United States, including in 
the Northeast and Midwest.
    In addition to the Sponsor's security system, the Sponsor has 
arranged for the Trust to maintain comprehensive insurance coverage 
underwritten by various insurance carriers. The purpose of the 
insurance is to protect investors against loss or theft of the Trust's 
bitcoin. The insurance will cover loss of bitcoin by, among other 
things, theft, destruction, bitcoin in transit, computer fraud and 
other loss of the private keys that are necessary to access the bitcoin 
held by the Trust. The coverage is subject to certain terms, conditions 
and exclusions, as discussed in the Registration Statement. The 
insurance policy will carry initial limits of $25 million in primary 
coverage and $100 million in excess coverage, with the ability to 
increase coverage depending on the value of the bitcoin held by the 
Trust.
    The Sponsor expects that the Trust's auditor will verify the 
existence of bitcoin held in custody by the Sponsor on behalf of the 
Trust. In addition, the Trust's insurance carriers will have inspection 
rights associated with the bitcoin held in custody by the Sponsor on 
behalf of the Trust.
Bitcoin Market Price
    In the ordinary course of business, the Administrator will value 
the bitcoin held by the Trust based on the price set by the XBX or one 
of the other pricing sources set forth below (each, a ``bitcoin Market 
Price'') as of 4:00 p.m. E.T., on the valuation date on any day that 
the NYSE Arca is open for regular trading. For further detail, see (i) 
below. If for any reason, and as determined by the Sponsor, the 
Administrator is unable to value the Trust's bitcoin using the 
procedures described in (i), the Administrator will value the Trust's 
bitcoin using the cascading set of rules set forth in (ii) through (iv) 
below. For the avoidance of doubt, the Administrator will employ the 
below rules sequentially and in the order as presented, should the 
Sponsor determine that one or more specific rule(s) fails. The Sponsor 
may determine that a rule has failed if a pricing source is unavailable 
or, in the judgment of the Sponsor, is deemed unreliable. To the extent 
the Administrator uses any of the cascading set of rules, the Sponsor 
will make public on the Trust's Web site the rule being used.
    (i) bitcoin Market Price = The price set by the XBX as of 4:00 p.m. 
E.T. on the valuation date. The XBX is a real-time U.S. dollar-
denominated composite reference rate for the price of bitcoin. The XBX 
calculates the intra-day price of bitcoin every second, including the 
closing price as of 4:00 p.m. E.T. The intra-day price and closing 
price are based on a methodology that consists of collecting and 
cleansing actual trade data from several bitcoin exchanges included 
within the index. TradeBlock uses standardized eligibility criteria 
based on periodically-reviewed governance principles to select trading 
venues for inclusion in the XBX. As of January 15, 2017, the eligible 
bitcoin exchanges selected by TradeBlock for inclusion in the XBX are 
Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), itBit and OKCoin 
International. The logic utilized for the derivation of the daily 
closing index level for the XBX is intended to analyze actual bitcoin 
transactional data, verify and refine the data set, and yield an 
objective, fair-market value of one bitcoin as of 4:00 p.m. E.T. each 
weekday, priced in U.S. dollars.
    (ii) bitcoin Market Price = The price set by the XBP as of 4:00 
p.m. E.T. on the valuation date. The XBP is a U.S. dollar-denominated 
composite reference rate for the price of bitcoin based on the simple 
average of bitcoin exchanges selected by CoinDesk. CoinDesk uses its 
discretion to select bitcoin exchanges that will be included in the XBP 
based on guidelines, including depth of liquidity, minimum trade size, 
data availability, maximum deposit and withdrawal time and acceptance 
of U.S. dollar deposits. As of January 15, 2017, the eligible bitcoin 
exchanges selected by CoinDesk for inclusion in the XBP are Bitstamp, 
GDAX (f/k/a Coinbase), itBit and OKCoin International.
    (iii) bitcoin Market Price = The volume-weighted average bitcoin 
price for the immediately preceding 24-hour period at 4:00 p.m. E.T. on 
the valuation

[[Page 12262]]

date as published by an alternative third party's public data feed that 
the Sponsor determines is reasonably reliable, subject to the 
requirement that such data is calculated based upon a volume-weighted 
average bitcoin price obtained from the major U.S. dollar-denominated 
bitcoin exchanges (``Second Source''). Subject to the next sentence, if 
the Second Source becomes unavailable (e.g., data sources from the 
Second Source for bitcoin prices become unavailable, unwieldy or 
otherwise impractical for use), or if the Sponsor determines in good 
faith that the Second Source does not reflect an accurate bitcoin 
price, then the Sponsor will, on a best efforts basis, contact the 
Second Source in an attempt to obtain the relevant data. If after such 
contact the Second Source remains unavailable or the Sponsor continues 
to believe in good faith that the Second Source does not reflect an 
accurate bitcoin price, then the Administrator will employ the next 
rule to determine the bitcoin Market Price.
    (iv) bitcoin Market Price = The Sponsor will use its best judgment 
to determine a good faith estimate of the bitcoin Market Price.
The Trust
    According to the Registration Statement, the Trust will invest in 
bitcoin only. The Trust will cause the Sponsor to either (i) receive 
bitcoin from the Trust in such quantity as may be necessary to pay the 
Sponsor's management fee and other Trust expenses and liabilities not 
assumed by the Sponsor or (ii) sell bitcoin in such quantity as may be 
necessary to permit payment in cash of the Sponsor's management fee and 
other Trust expenses and liabilities not assumed by the Sponsor, such 
as the bitcoin Insurance Fee. As a result, the amount of bitcoin sold 
will vary from time to time depending on the level of the Trust's 
expenses and the market price of bitcoin.
    The Trust will pay the Sponsor a management fee as compensation for 
services performed on behalf of the Trust and for services performed in 
connection with maintaining the Trust. The Sponsor's fee will be 
payable monthly in arrears and will be accrued daily. The bitcoin 
Insurance Fee will be payable by the Trust monthly in advance, as 
described in the Registration Statement.
    In exchange for the Sponsor's management fee, the Sponsor has 
agreed to assume the following administrative and marketing expenses 
incurred by the Trust: Each of the Trustee's, Administrator's, Cash 
Custodian's, Transfer Agent's and Order Examiner's monthly fee and out-
of-pocket expenses and expenses reimbursable in connection with such 
service provider's respective agreement; bitcoin storage fees in its 
capacity as bitcoin Custodian; marketing support fees and expenses; 
exchange listing fees; SEC registration fees; index license fees; 
printing and mailing costs; maintenance expenses for the Trust's Web 
site; audit fees and expenses; and up to $100,000 per annum in legal 
expenses. The Trust will be responsible for paying, or for reimbursing 
the Sponsor or its affiliates for paying, all the extraordinary fees 
and expenses, if any, of the Trust. The management fee to be paid to 
the Sponsor and the bitcoin Insurance Fee are expected to be the only 
ordinary recurring operating expense of the Trust.
Net Asset Value
    The NAV for the Trust will equal the market value of the Trust's 
total assets, including bitcoin and cash, less liabilities of the 
Trust, which include estimated accrued but unpaid fees, expenses and 
other liabilities. Under the Trust's proposed operational procedures, 
the Administrator will calculate the NAV on each business day that the 
NYSE Arca is open for regular trading, as promptly as practicable after 
4:00 p.m. E.T. To calculate the NAV, the Administrator will use the 
price set for bitcoin by the XBX or one of the other bitcoin Market 
Prices set forth above. The Administrator will also determine the NAV 
per Share by dividing the NAV of the Trust by the number of the Shares 
outstanding as of the close of trading on the NYSE Arca Core Trading 
Session, i.e., 9:30 a.m. to 4:00 p.m. E.T. (which includes the net 
number of any Shares deemed created or redeemed on such day).
    According to the Registration Statement, Authorized Participants 
(as defined in ``Creation and Redemption of Shares'' below), or their 
clients or customers, may have an opportunity to realize a riskless 
profit if they can create a Basket (as defined in ``Creation and 
Redemption of Shares'' below) at a discount to the public trading price 
of the Shares or can redeem a Basket at a premium over the public 
trading price of the Shares. The Sponsor expects that the exploitation 
of such arbitrage opportunities by Authorized Participants and their 
clients and customers will tend to cause the public trading price to 
track NAV per Share closely over time. Such arbitrage opportunities 
will not be available to holders of Shares who are not Authorized 
Participants.
    While the Trust's investment objective is to seek to provide 
shareholders with exposure to the daily change in the U.S. dollar price 
of bitcoin, before expenses and liabilities of the Trust, as measured 
by the XBX, the Shares may trade in the secondary market at prices that 
are lower or higher relative to their NAV per Share.
    The NAV per Share may fluctuate with changes in the market value of 
the bitcoin held by the Trust. The value of the Shares may be 
influenced by non-concurrent trading hours between NYSE Arca and the 
various bitcoin exchanges comprising the XBX, all of which constituent 
bitcoin exchanges operate 24 hours per day, 365 days per year. As a 
result, there will be periods when the NYSE Arca is closed and such 
bitcoin exchanges continue to trade. Significant changes in the price 
of bitcoin on such exchanges could result in a difference in 
performance between the value of bitcoin as measured by the XBX and the 
most recent NAV per Share or closing trading price. The non-concurrent 
trading hours also may result in trading spreads and the resulting 
premium or discount on the Shares widening, increasing the difference 
between the price of the Shares and the NAV of such Shares.
    The price difference may also be due to the fact that supply and 
demand forces at work in the secondary trading market for Shares are 
closely related, but not identical, to the same forces influencing the 
XBX spot price. Consequently, an Authorized Participant may be able to 
create or redeem a Basket of Shares at a discount or a premium to the 
public trading price per Share.
Bitcoin Trading Activities of the Sponsor With Authorized Participants 
and Market Makers
    The Sponsor represents that bitcoin is a bearer asset, so unlike 
most financial assets within the modern financial system, Authorized 
Participants seeking to acquire quantities of bitcoin will require 
specialized knowledge to source and secure the bitcoin. Such potential 
holders of bitcoin without sufficient technological knowledge will 
encounter both counterparty and custodial issues that will effectively 
lock them out of accessing the bitcoin market. Therefore, although 
there is nothing preventing Authorized Participants from participating 
directly in the bitcoin market, the Sponsor believes, based on the 
current state of the bitcoin market and its participants, many probably 
will not until such time as the bitcoin market matures so that the 
technological, counterparty and custodial issues

[[Page 12263]]

evolve to become similar to those of traditional financial instruments. 
Notwithstanding the foregoing, the Sponsor believes, based on 
conversations with market participants, that one or more Authorized 
Participants and/or market makers may be interested in participating 
directly in the bitcoin market and creating or redeeming Baskets in-
kind.
    According to the Sponsor, whether creating and redeeming baskets 
in-kind or for cash, Authorized Participants and market makers can 
hedge their exposure to bitcoin using non-deliverable forward contracts 
(``NDFs'') and swap contracts that will create synthetic long and short 
exposure to bitcoin for such hedging purposes. While the Sponsor 
expects that NDFs and/or swaps will be offered by several participants 
in the bitcoin marketplace, including bitcoin exchanges and bitcoin OTC 
market participants, the Sponsor itself (operating on a principal 
basis) also may offer NDFs and swaps in order to provide Authorized 
Participants and market makers with additional options for hedging 
their exposure to bitcoin. Such arrangements make it possible for 
Authorized Participants that lack the trading infrastructure to 
transact in bitcoin to be able to hedge their exposure by entering into 
an NDF or swap contract. Accordingly, an Authorized Participant may 
hedge its exposure to bitcoin without the need to custody bitcoin, or 
to engage a third party to custody bitcoin. In addition, to the extent 
requested by Authorized Participants and market makers, the Sponsor 
will act as agent by buying and selling bitcoin on behalf of the 
Authorized Participants and market makers, including short sale orders, 
solely for hedging purposes. According to the Registration Statement, 
the Sponsor will only enter into NDF or swap transactions with 
Authorized Participants and market makers, and/or act as agent by 
buying and selling bitcoin on behalf of Authorized Participants and 
market makers, to the extent requested by Authorized Participants and 
market makers. The Trust will not be a party to any such transactions.
    According to the Registration Statement, the NDF and swap contracts 
that the Sponsor will enter into as agent on behalf of the Authorized 
Participants and market makers will be bespoke, OTC and cash settled. 
The terms of the NDF and swap contracts will be negotiated between the 
counterparties to the NDF and swap contracts. The NDF and swap 
contracts may be traded electronically on at least one swap execution 
facility. According to the Registration Statement, generally, the NDF 
and swap contract strike prices will be based on the bitcoin spot 
price, as determined by the XBX, or other pricing source as agreed to 
between the NDF and swap contract counterparties, when the contract is 
entered into. The NDF termination price will be based on the NAV of the 
Trust determined as of 4:00 p.m. E.T. The terms of the NDF and swap 
contracts will be governed by International Swaps and Derivatives 
Associations, Inc. (``ISDA'') agreements. The ISDA terms, including to 
the extent necessary any collateral arrangements, will be negotiated 
between the counterparties to the NDF and swap contracts.
Impact on Arbitrage
    Investors and market participants are able throughout the trading 
day to compare the market price of the Shares and the Share's IIV. 
According to the Sponsor, if the market price of the Shares diverges 
significantly from the IIV, Authorized Participants will have an 
incentive to execute arbitrage trades. Because of the potential for 
arbitrage inherent in the structure of the Trust, the Sponsor believes 
that the Shares will not trade at a material discount or premium to the 
underlying bitcoin held by the Trust. 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.
    For example, if the Shares appear to be trading at a discount 
compared to the IIV, an Authorized Participant could buy the Shares on 
the NYSE Arca and simultaneously hedge their exposure to the price of 
the Shares by entering into an NDF or swap contract--in a dollar amount 
equal to the aggregate price of the Shares bought--that would provide 
the Authorized Participant with synthetic short exposure to bitcoin. 
The Authorized Participant then could redeem a Basket at NAV and 
realize a profit. Conversely, if the Shares appear to be trading at a 
premium compared to the IIV, an Authorized Participant could sell short 
the Shares on the NYSE Arca and simultaneously hedge their exposure to 
the short sale by entering into an NDF or swap contract--in a dollar 
amount equal to the aggregate price of the Shares sold--that would 
provide the Authorized Participant with synthetic long exposure to 
bitcoin. The Authorized Participant then could create a Basket at NAV, 
use those newly created Shares to cover the short sale and realize a 
profit. Such arbitrage trades can tighten the tracking between the 
market price of the Shares and the IIV and thus can be beneficial to 
all market participants.
Creation and Redemption of Shares
    According to the Registration Statement, the Trust will issue and 
redeem ``Baskets'', each equal to a block of 100,000 Shares, only to 
``Authorized Participants'' (as described below). The size of a Basket 
is subject to change. The creation and redemption of Baskets will 
principally be made in exchange for the delivery to the Trust or the 
distribution by the Trust of the amount of cash or bitcoin represented 
by the combined NAV of the Baskets being created or redeemed, the 
amount of which will be based on the combined bitcoin represented by 
the number of Shares included in the Baskets being created or redeemed 
determined on the day the order to create or redeem Baskets is properly 
received.
    Orders to create and redeem Baskets may be placed only by 
Authorized Participants.\34\ A transaction fee will be assessed on all 
creation and redemption transactions effected in-kind. In addition, a 
variable transaction fee will be charged to the Authorized Participants 
for creations and redemptions effected in cash to cover the Trust's 
expenses related to purchasing and selling bitcoin on bitcoin exchanges 
or in OTC transactions. Such expenses may vary, but the Trust currently 
expects such expenses to constitute 1% or less of the value of a 
Basket.
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    \34\ An Authorized Participant must: (1) Be a registered broker-
dealer and a member in good standing with the Financial Industry 
Regulatory Authority (``FINRA'') or other securities market 
participant, such as a bank or other financial institution, which, 
but for an exclusion from registration, would be required to 
register as a broker-dealer to engage in securities transactions; 
(2) be a participant in Depository Trust Company (``DTC''). To 
become an Authorized Participant, a person must enter into an 
``Authorized Participant Agreement'' with the Sponsor and the 
Transfer Agent. The Authorized Participant Agreement provides the 
procedures for the creation and redemption of Baskets and for the 
delivery of the cash (and, potentially, bitcoin in-kind) required 
for such creations and redemptions.
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Creation Procedures
    On any business day, an Authorized Participant may place an order 
with the Transfer Agent to create one or more Baskets. For purposes of 
processing both purchase and redemption orders, a ``business day'' 
means any day other than a day when the New York Stock Exchange is 
closed for regular trading. Cash purchase orders must be placed by 3:00 
p.m. E.T., or the close of regular trading on the New York Stock

[[Page 12264]]

Exchange, whichever is earlier, and in-kind purchase orders must be 
placed by 4:00 p.m. E.T., or the close of regular trading on the New 
York Stock Exchange, whichever is earlier. The day on which the 
Transfer Agent receives a valid purchase order, as approved by the 
Order Examiner, is the purchase order date. Purchase orders are 
irrevocable. By placing a purchase order, and prior to delivery of such 
Baskets, an Authorized Participant's DTC account will be charged the 
non-refundable transaction fee due for the purchase order.
Determination of Required Payment
    The total payment required to create each Basket is determined by 
calculating the NAV of 100,000 Shares of the Trust as of the closing 
time of the NYSE Arca Core Trading Session on the purchase order date. 
Baskets are issued as of 9:30 a.m. E.T. on the business day immediately 
following the purchase order date at the applicable NAV as of the 
closing time of the NYSE Arca Core Trading Session on the purchase 
order date, but only if the required payment has been timely received.
    Orders to purchase Baskets for cash must be placed no later than 
3:00 p.m. E.T., or the close of regular trading on the New York Stock 
Exchange, whichever is earlier, and orders to purchase Baskets in-kind 
must be placed no later than 4:00 p.m. E.T., or the close of regular 
trading on the New York Stock Exchange, whichever is earlier, but the 
total payment required to create a Basket will not be determined until 
4:00 p.m. E.T. on the date the purchase order is received by the 
Transfer Agent and approved by the Order Examiner. Authorized 
Participants therefore will not know the total amount of the payment 
required to create a Basket at the time they submit an irrevocable 
purchase order for the Basket. Valid cash orders to purchase Baskets 
received after 3:00 p.m. E.T., and valid in-kind orders to purchase 
Baskets received after 4:00 p.m. E.T., are considered received on the 
following business day. The NAV of the Trust and the total amount of 
the payment required to create a Basket could rise or fall 
substantially between the time an irrevocable purchase order is 
submitted and the time the amount of the purchase price in respect 
thereof is determined.
    The payment required to create a Basket typically will be made in 
cash, but it may also be made partially or wholly in-kind at the 
discretion of the Sponsor if the Authorized Participant requests to 
convey bitcoin directly to the Trust. To the extent the Authorized 
Participant places an in-kind order to create, the Authorized 
Participant must deliver bitcoin directly to the Sponsor, as bitcoin 
Custodian, (i.e., to the security system that holds the Trust's 
bitcoin) and an amount of cash (or bitcoin) referred to as the 
``Balancing Amount'', computed as described below, each no later than 
4:00 p.m. E.T. on the date the purchase order is received and accepted. 
The amount of bitcoin delivered by the Authorized Participant must be 
in an amount equal to the number of bitcoin necessary to create a 
Basket as of 4:00 p.m. E.T. on the date the purchase order is received 
and accepted. Upon delivery of the bitcoin to the Sponsor's security 
system and the Balancing Amount to the Cash Custodian (or the bitcoin 
component of the Balancing Amount, if applicable, to the Sponsor), the 
Transfer Agent will cause the Trust to issue a Basket to the Authorized 
Participant. Expenses relating to purchasing bitcoin in assembling an 
in-kind creation Basket, such as bitcoin exchange-related fees and/or 
transaction fees, will be borne by Authorized Participants. With 
respect to creations in cash, Authorized Participants will be charged a 
variable transaction fee to cover expenses as set forth above.
    The Balancing Amount is an amount equal to the difference between 
the NAV of the Shares (per Basket) and the ``Deposit Amount'', which is 
an amount equal to the market value of bitcoin (per Basket) which, for 
this purpose, is calculated in the same manner as the Trust values its 
bitcoin, as set forth in ``bitcoin Market Price'' above. The Balancing 
Amount serves to compensate for any difference between the NAV per 
Basket and the Deposit Amount. Payment of any tax or other fees and 
expenses payable upon transfer of bitcoin shall be the sole 
responsibility of the Authorized Participant purchasing a Basket.
    The Sponsor makes available through the National Securities 
Clearing Corporation (``NSCC'') on each business day, prior to the 
opening of business on the NYSE Arca, the amount of bitcoin required 
for an in-kind creation of a Basket. This amount is applicable in order 
to effect in-kind purchases of Baskets until such time as the next 
announced amount is made available.
    The Transfer Agent shall notify the Authorized Participant of the 
NAV of the Trust and the corresponding amount of cash (in the case of a 
cash purchase order) or bitcoin (in the case of an in-kind purchase 
order, together with any Balancing Amount) to be included in a Deposit 
Amount by email or telephone correspondence and such amount is 
available via the Trust's Web site.
Redemption Procedures
    The procedures by which an Authorized Participant can redeem one or 
more Baskets mirror the procedures for the creation of Baskets. On any 
business day, an Authorized Participant may place an order with the 
Transfer Agent to redeem one or more Baskets. Cash redemption orders 
must be placed no later than 3:00 p.m. E.T., or the close of regular 
trading on the New York Stock Exchange, whichever is earlier, and 
redemption orders submitted in-kind must be placed by 4:00 p.m. E.T., 
or the close of regular trading on the New York Stock Exchange, 
whichever is earlier. The day on which the Transfer Agent receives a 
valid redemption order, as approved by the Order Examiner, is the 
``redemption order date''. Redemption orders are irrevocable. The 
redemption procedures allow only Authorized Participants to redeem 
Baskets. A shareholder may not redeem Baskets other than through an 
Authorized Participant.
    By placing a redemption order, an Authorized Participant agrees to 
deliver the Baskets to be redeemed through DTC's book-entry system to 
the Trust not later than 4:00 p.m. E.T. on the business day immediately 
following the redemption order date. By placing a redemption order, and 
prior to receipt of the redemption proceeds, an Authorized 
Participant's DTC account will be charged the non-refundable 
transaction fee due for the redemption order.
Determination of Redemption Proceeds
    The redemption proceeds from the Trust consist of the ``cash 
redemption amount'' and, if making an in-kind redemption, bitcoin. The 
cash redemption amount is equal to the combined NAV of the number of 
Baskets of the Trust requested in the Authorized Participant's 
redemption order as of the closing time of the NYSE Arca Core Trading 
Session on the redemption order date. The Cash Custodian will 
distribute the cash redemption amount at 4:00 p.m., E.T., on the 
business day immediately following the redemption order date through 
DTC to the account of the Authorized Participant as recorded on DTC's 
book-entry system. At the discretion of the Sponsor and if the 
Authorized Participant requests to receive bitcoin directly, some or 
all of the redemption proceeds may be distributed to the Authorized 
Participant in-kind.
    Orders to redeem Baskets must be placed no later than 3:00 p.m. 
E.T. for cash redemption orders and 4:00 p.m. E.T. for in-kind 
redemptions orders, but

[[Page 12265]]

the total amount of redemption proceeds typically will not be 
determined until after 4:00 p.m. E.T. on the date the redemption order 
is received. Authorized Participants therefore will not know the total 
amount of the redemption proceeds at the time they submit an 
irrevocable redemption order.
Delivery of Redemption Proceeds
    The redemption proceeds due from the Trust are delivered to the 
Authorized Participant at 4:00 p.m. E.T. on the business day 
immediately following the redemption order date if, by such time on 
such business day immediately following the redemption order date, the 
Trust's DTC account has been credited with the Baskets to be redeemed. 
If the Trust's DTC account has not been credited with all of the 
Baskets to be redeemed by such time, the redemption distribution is 
delivered to the extent of whole Baskets received. Any remainder of the 
redemption distribution is delivered on the next business day to the 
extent of remaining whole Baskets received if the Sponsor receives the 
fee applicable to the extension of the redemption distribution date 
which the Sponsor may, from time to time, determine and the remaining 
Baskets to be redeemed are credited to the Trust's DTC account by 4:00 
p.m. E.T. on such next business day. Any further outstanding amount of 
the redemption order shall be cancelled.
    In the case of in-kind redemptions, the Sponsor makes available 
through the NSCC, prior to the opening of business on the NYSE Arca on 
each business day, the amount of bitcoin per Basket that will be 
applicable to redemption requests received in proper form.
    The Transfer Agent shall notify the Authorized Participant of the 
NAV of the Trust and the corresponding amount of cash (in the case of a 
cash purchase order) or bitcoin (in the case of an in-kind purchase 
order, together with any Balancing Amount) corresponding to a 
redemption Basket by email or telephone correspondence and such amount 
is available via the Trust's Web site.
    To the extent the Authorized Participant places an in-kind order to 
redeem a Basket, the Sponsor will deliver, on the business day 
immediately following the day the redemption order is received, bitcoin 
to the Authorized Participant in an amount equal to the number of 
bitcoin necessary to redeem a Basket as of 4:00 p.m. E.T. Expenses 
relating to transferring bitcoin to an Authorized Participant in a 
redemption Basket will be borne by Authorized Participants via the 
redemption transaction fee. With respect to redemptions in cash, 
Authorized Participants will be charged a variable transaction fee to 
cover expenses as set forth above.
Availability of Information
    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.). The IIV will be 
calculated by using the prior day's closing NAV per Share as a base and 
updating that value during the NYSE Arca Core Trading Session to 
reflect changes in the value of the Trust's bitcoin holdings during the 
trading day.
    The IIV disseminated during the NYSE Arca Core Trading Session 
should not be viewed as an actual real-time update of the NAV, which 
will be calculated only once at the end of each trading day. The IIV 
will be widely disseminated on a per Share basis every 15 seconds 
during the 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 Web site for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the mid-point of the bid-ask price \35\ in relation to the 
NAV as of the time the NAV is calculated (``Bid-Ask Price'') and a 
calculation of the premium or discount of such price against such NAV; 
(c) data in chart form displaying the frequency distribution of 
discounts and premiums of the Bid-Ask Price against the NAV, within 
appropriate ranges for each of the four previous calendar quarters (or 
for the life of the Trust, if shorter); (d) the prospectus; and (e) 
other applicable quantitative information. The Trust will also 
disseminate the Trust's holdings on a daily basis on the Trust's Web 
site. The price of bitcoin will be made available by one or more major 
market data vendors, updated at least every 15 seconds during the 
Exchange's Core Trading Session. Information about the XBX, including 
key elements of how the XBX algorithm is calculated, is publicly 
available at https://tradeblock.com/markets/index/.
---------------------------------------------------------------------------

    \35\ The bid-ask price of the Trust is determined using the 
highest bid and lowest offer on the Consolidated Tape as of the time 
of calculation of the closing day NAV.
---------------------------------------------------------------------------

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

[[Page 12266]]

on the Exchange will occur in accordance with NYSE Arca Equities Rule 
7.34(a). 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.
    Further, NYSE Arca Equities Rule 8.201 sets forth certain 
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting 
as registered Market Makers in the Shares to facilitate surveillance. 
Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP Holder acting as a 
registered Market Maker in the Shares is required to provide the 
Exchange with information relating to its trading in the underlying 
bitcoin, related futures or options on futures or any other related 
derivatives. Commentary .04 of NYSE Arca Equities Rule 6.3 requires an 
ETP Holder acting as a registered Market Maker, and its affiliates, in 
the Shares to establish, maintain and enforce written policies and 
procedures reasonably designed to prevent the misuse of any material 
nonpublic information with respect to such products, any components of 
the related products, any physical asset or commodity underlying the 
product, applicable currencies, underlying indexes, related futures or 
options on futures and any related derivative instruments (including 
the Shares).
    As a general matter, the Exchange has regulatory jurisdiction over 
its ETP Holders and their associated persons, which include any person 
or entity controlling an ETP Holder. A subsidiary or affiliate of an 
ETP Holder that does business only in commodities or futures contracts 
would not be subject to Exchange jurisdiction, but the Exchange could 
obtain information regarding the activities of such subsidiary or 
affiliate through surveillance sharing agreements with regulatory 
organizations of which such subsidiary or affiliate is a member.
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. Trading on the Exchange in the Shares may be 
halted because of market conditions or for reasons that, in the view of 
the Exchange, make trading in the Shares inadvisable. These may 
include: (1) The extent to which conditions in the underlying bitcoin 
markets have caused disruptions and/or lack of trading or (2) whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. In addition, 
trading in Shares will be subject to trading halts caused by 
extraordinary market volatility pursuant to the Exchange's ``circuit 
breaker'' rule.\36\
---------------------------------------------------------------------------

    \36\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

    The Exchange will halt trading in the Shares if the NAV 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 dissemination of the XBX spot price, as 
discussed above. If the interruption to the dissemination of the IIV or 
the XBX 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.\37\ In addition, if the 
Exchange becomes aware that the NAV 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 NAV is available to all 
market participants.
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    \37\ The Exchange notes that the Exchange may halt trading 
during the day in which an interruption to the dissemination of the 
IIV or the XBX 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 FINRA on behalf of 
the Exchange, which are designed to detect violations of Exchange rules 
and applicable federal securities laws.\38\ 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.
---------------------------------------------------------------------------

    \38\ FINRA conducts cross market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
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    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares with other 
markets and other entities that are members of the Intermarket 
Surveillance Group (``ISG''), and the Exchange or FINRA, on behalf of 
the Exchange, or both, may 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'').\39\
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    \39\ For the list of current members of ISG, see https://www.isgportal.org/home.html.
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    Also, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is 
able to obtain information regarding trading in the Shares and the 
underlying bitcoin or any bitcoin derivative through ETP Holders acting 
as registered Market Makers, in connection with such ETP Holders' 
proprietary or customer trades through ETP Holders which they effect on 
any relevant market.
    The Exchange also has a general policy prohibiting the distribution 
of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(i) the description of the portfolio or (ii) limitations on portfolio 
holdings or reference assets 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

[[Page 12267]]

trading the Shares; (3) how information regarding how the Index and the 
IIV are disseminated; (4) the requirement that ETP Holders deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; (5) the 
possibility that trading spreads and the resulting premium or discount 
on the Shares may widen during the Opening and Late Trading Sessions, 
when an updated IIV will not be calculated or publicly disseminated; 
and (6) trading information. For example, the Information Bulletin will 
advise ETP Holders, prior to the commencement of trading, of the 
prospectus delivery requirements applicable to the Trust. The Exchange 
notes that investors purchasing Shares directly from the Trust will 
receive a prospectus. ETP Holders purchasing Shares from the Trust for 
resale to investors will deliver a prospectus to such investors.
    In addition, the Information Bulletin will reference that the Trust 
is subject to various fees and expenses as described in the 
Registration Statement. The Information Bulletin will disclose that 
information about the Shares of the Trust is publicly available on the 
Trust's Web site.
    The Information Bulletin will also discuss any relief, if granted, 
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \40\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \40\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.201. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. The Exchange or FINRA, on behalf of 
the Exchange, or both, will communicate as needed regarding trading in 
the Shares with other markets that are members of the ISG, and the 
Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading in the Shares from such markets. 
In addition, the Exchange may obtain information regarding trading in 
the Shares from markets that are members of ISG or with which the 
Exchange has in place a CSSA. Also, pursuant to NYSE Arca Equities Rule 
8.201(g), the Exchange is able to obtain information regarding trading 
in the Shares and the underlying bitcoin or any bitcoin derivative 
through ETP Holders acting as registered Market Makers, in connection 
with such ETP Holders' proprietary or customer trades through ETP 
Holders which they effect on any relevant market.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that there is a considerable amount of bitcoin price and bitcoin market 
information available on public Web sites and through professional and 
subscription services. Investors may obtain on a 24-hour basis bitcoin 
pricing information based on the spot price for bitcoin from various 
financial information service providers. The closing price and 
settlement prices of bitcoin are readily available from the bitcoin 
exchanges and other publicly available Web sites. In addition, such 
prices are published in public sources or on-line information services 
such as Bloomberg and Reuters. The Trust will provide Web site 
disclosure of its bitcoin holdings daily. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the CTA. The IIV will be widely disseminated on a per 
Share basis every 15 seconds during the NYSE Arca Core Trading Session 
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 XBX spot price 
occurs. If the interruption to the dissemination of the IIV or the XBX 
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 NAV 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 NAV is available to all market 
participants. The NAV 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 NAV 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. Solicitation of Comments

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

[[Page 12268]]

in the Order Instituting Proceedings.\41\ Comments may be submitted by 
any of the following methods:
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    \41\ See Order Instituting Proceedings, supra note 6, at 76402.
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Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEARCA-2016-101 in the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEARCA-2016-101. This 
file number should be included in the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 the filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEARCA-2016-101 and should 
be submitted on or before March 16, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-03983 Filed 2-28-17; 8:45 am]
BILLING CODE 8011-01-P


