Document ID: SEC-2016-1217-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2016-07-14T04:00Z

[Federal Register Volume 81, Number 135 (Thursday, July 14, 2016)]
[Notices]
[Pages 45554-45573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16604]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78262; File No. SR-BatsBZX-2016-30]

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

July 8, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on June 30, 2016, Bats BZX Exchange, Inc. (the ``Exchange'' 
or ``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

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

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV 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
    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ The Shares will be offered by 
the Trust, which was established as a Delaware statutory trust on 
December 30, 2014. The Trust will not be registered as an investment

[[Page 45555]]

company under the Investment Company Act of 1940 \6\ and is not 
required to register under such act. The Trust will not be a commodity 
pool for purposes of the Commodity Exchange Act (``CEA'').\7\ The 
Shares of the Trust will be registered with the Commission by means of 
the Trust's registration statement on Form S-1 (the ``Registration 
Statement'') under the Securities Act of 1933 (the ``Securities Act''). 
The most recent amendment to the Registration Statement was filed on 
June 29, 2016 and the Registration Statement will be effective as of 
the date of any offer and sale pursuant to the Registration 
Statement.\8\
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    \4\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \5\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \6\ 15 U.S.C. 80a-1.
    \7\ 17 U.S.C. 1.
    \8\ See Registration Statement on Form S-1, dated June 29, 2016 
(File No. 333-189752). The descriptions of the Trust and the Shares 
contained herein are based, in part, on information in the 
Registration Statement.
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Service providers of the Trust
    Digital Asset Services, LLC, formerly Math-Based Asset Services, 
LLC, will be the sponsor of the Trust (the ``Sponsor'').\9\ The Trust's 
administrator (the ``Administrator'') \10\ and trust agency service 
provider (the ``Trust Agency Service Provider'') will be the same 
entity.\11\ Gemini Trust Company, LLC will be the custodian of the 
Trust (the ``Custodian'').\12\ The Custodian is a New York State-
chartered limited liability trust company that operates under the 
direct supervision and regulatory authority of the NYSDFS. The 
Custodian is a fiduciary and must meet the capitalization, compliance, 
anti-money laundering, consumer protection and cyber security 
requirements as set forth by the NYSDFS. The Custodian will hold the 
bitcoin deposited with the Custodian on behalf of the Trust in a 
segregated custody account (the ``Trust Custody Account'') in 
accordance with the Trust Custody Agreement. The Custodian will use its 
proprietary and patent-pending offline (i.e., air-gapped) Cold Storage 
System to store the Trust's bitcoin, as further described herein. 
Delaware Trust Company acts as the trustee of the Trust (the 
``Trustee'').\13\
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    \9\ The Sponsor is a Delaware limited liability company formed 
on May 9, 2013, and is wholly-owned by Winklevoss Capital Management 
LLC. Under the Delaware Limited Liability Company Act and the 
governing documents of the Sponsor, Winklevoss Capital Management 
LLC, the sole member of the Sponsor, is not responsible for the 
debts, obligations and liabilities of the Sponsor solely by reason 
of being the sole member of the Sponsor. The Sponsor will be the 
exclusive licensee, within the field of use of operation of an 
exchange-traded product (``ETP''), of certain patent-pending 
intellectual property regarding the operation of the Trust. 
Winklevoss IP LLC, an affiliate of the Sponsor, is the owner of and 
is licensing to the Sponsor such intellectual property for use by 
the Trust and the Custodian and other service providers in the 
operation of the Trust. The Sponsor arranged for the creation of the 
Trust and will arrange for the registration of the Shares for their 
public offering in the United States and their listing on the 
Exchange.
    \10\ The Administrator is generally responsible for the day-to-
day administration of the Trust under the trust servicing agreement 
(``Trust Servicing Agreement'') and in accordance with the 
provisions of the trust agreement (``Trust Agreement''). This 
includes (1) assisting the Sponsor in receiving and processing 
orders from authorized participants (``Authorized Participants'') to 
create and redeem blocks of 50,000 Shares (a block of 50,000 Shares 
is called a ``Basket'') and coordinating the processing of such 
orders with the Trust Agency Service Provider (which, in this case 
is, or is affiliated with, the Administrator) and The Depository 
Trust Company (``DTC''), (2) calculating the net asset value per 
Share (``NAV''), (3) instructing the Custodian to transfer the 
Trust's bitcoin as needed to pay the remuneration due to the Sponsor 
(``Sponsor's Fee'') in bitcoin (such Bitcoin transfers are expected 
to occur approximately monthly in the ordinary course), (4) 
instructing the Custodian to transfer the Trust's bitcoin as needed 
to pay any extraordinary Trust expenses that are not assumed by the 
Sponsor and (5) selling or directing the sale of the Trust's 
remaining bitcoin in the event of termination of the Trust and 
distributing the cash proceeds to the owners of beneficial interests 
in the Shares (``Shareholders'') of record.
    \11\ The Trust Agency Service Provider is authorized by the 
Sponsor under the Trust Agreement to serve as the transfer agent in 
accordance with the provisions of the Trust Agency Service Provider 
Agreement. The Trust Agency Service Provider, among other things, 
provides transfer agent services with respect to the creation and 
redemption of Baskets by Authorized Participants. The Trust Agency 
Service Provider is, or is affiliated with, the Administrator.
    \12\ The Custodian is an affiliate of the Sponsor and a New York 
State-chartered limited liability trust company that operates under 
the direct supervision and regulatory authority of the New York 
State Department of Financial Services (``NYSDFS''). Although the 
Trust's bitcoin is not stored in a physical sense, all transactions 
involving the Trust's bitcoin are recorded on the Bitcoin Network's 
Blockchain and associated with a public Bitcoin address. The Trust's 
public Bitcoin addresses are established by the Custodian using its 
proprietary hardware and software security technology (``Cold 
Storage System''), which holds the Trust's bitcoin and permits the 
Trust to move its bitcoin. Access and control of those Bitcoin 
addresses, and the bitcoin associated with them, is restricted 
through the public-private key pair relating to each Bitcoin 
address. The Custodian is responsible for the safekeeping of the 
Trust's private keys used to access and transfer the Trust's 
bitcoin. The Custodian also facilitates the transfer of bitcoin in 
accordance with the Administrator's instructions pursuant to the 
terms of the Trust Servicing Agreement. Pursuant to the terms of the 
Trust Agreement and the trust custody agreement (``Trust Custody 
Agreement''), the Custodian will store all of the Trust's bitcoin on 
a segregated basis in its unique Bitcoin addresses with balances 
that can be directly verified on the Blockchain. It will provide the 
Trust's public Bitcoin addresses to the Administrator. Pursuant to 
the provisions of the Trust Custody Agreement, the Custodian will 
use the Cold Storage System to manage and safeguard a system 
utilizing numerous Bitcoin addresses that are kept offline either 
(i) in computers that are not directly connected to or accessible 
from the internet or (ii) through the storage of the public and 
private keys relating to such Bitcoin addresses only in ``cold 
storage.''
    \13\ The Trustee, a Delaware trust company, acts as the trustee 
of the Trust for the purpose of creating a Delaware statutory trust 
in accordance with the Delaware Statutory Trust Act (``DSTA''). The 
duties of the Trustee will be limited to (i) accepting legal process 
served on the Trust in the State of Delaware and (ii) the execution 
of any certificates required to be filed with the Delaware Secretary 
of State which the Delaware Trustee is required to execute under the 
DSTA. To the extent that, at law or in equity, the Trustee has 
duties (including fiduciary duties) and liabilities relating thereto 
to the Trust or the Shareholders, such duties and liabilities will 
be replaced by the duties and liabilities of the Trustee expressly 
set forth in the Trust Agreement.
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    The Trust will only hold bitcoin, which is a digital commodity \14\ 
that is not issued by any government, bank or central organization. 
Bitcoin is a digital asset (``Digital Asset'') based on the 
decentralized, open source protocol of the peer-to-peer Bitcoin 
computer network (the ``Bitcoin Network'' or ``Bitcoin'') \15\ that 
hosts the decentralized public transaction ledger, known as the 
``Blockchain,'' on which all bitcoin is recorded. The Bitcoin Network 
software source code includes the protocols that govern the creation of 
bitcoin and the cryptographic system that secures and verifies Bitcoin 
transactions.
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    \14\ Bitcoin is a commodity as defined in Section 1a(9) of the 
Commodity Exchange Act. 7 U.S.C. 1a(9). See In re Coinflip, Inc., 
No. 15-29 (CFTC Sept. 17, 2015), available at: http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf (``Coinflip'').
    \15\ By common convention, Bitcoin with a capital ``B'' 
typically refers to the Bitcoin Network as a whole, whereas bitcoin 
with a lowercase ``b'' refers to the Digital Asset of the Bitcoin 
Network, including the Trust's bitcoin. This naming convention is 
used throughout this document.
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    The Trust is expected to issue and redeem Shares from time to time 
only in one or more whole Baskets. Certain Authorized Participants are 
the only persons that may place orders to create or redeem Baskets. 
Authorized Participants or their affiliated market makers are expected 
to have the facility to participate directly on one or more Bitcoin 
Exchanges (as defined below).
    The investment objective of the Trust is for the Shares to track 
the price of bitcoin, as measured by the spot price at 4:00 p.m. 
Eastern time on the Gemini exchange (``Gemini Exchange'') (the ``Gemini 
Exchange Spot Price''), each day the Exchange is open for trading (each 
a ``Business Day''), less the Trust's liabilities (which include 
accrued but unpaid fees and expenses). The Gemini Exchange is a Digital 
Asset exchange owned and operated by the Custodian and is an affiliate 
of the Sponsor. The Gemini Exchange does not receive any compensation 
from the Trust or the Sponsor for providing the Gemini

[[Page 45556]]

Exchange Spot Price. The Sponsor believes that, for many investors, the 
Shares will represent a cost-effective and convenient means of gaining 
investment exposure to bitcoin similar to a direct investment in 
bitcoin. The Shares represent units of fractional undivided beneficial 
interest in and ownership of the Trust and are expected to be traded 
under the ticker symbol ``COIN'' on the Exchange.
Overview of the Bitcoin Industry and Market
    Bitcoin is a Digital Asset that is issued by, and transmitted 
through, the decentralized, open source protocol of the peer-to-peer 
Bitcoin Network. The Bitcoin Network hosts the decentralized public 
transaction ledger, known as the Blockchain, on which all bitcoin is 
recorded. No single entity owns or operates the Bitcoin Network, the 
infrastructure of which is collectively maintained by a decentralized 
user base. Bitcoin can be used to pay for goods and services or can be 
converted to fiat currencies, such as the U.S. Dollar, at rates 
determined on bitcoin exchanges (each a ``Bitcoin Exchange'') \16\ or 
in individual end-user-to-end-user transactions under a barter system. 
See ``Uses of Bitcoin--Bitcoin Exchange Market,'' below.
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    \16\ The Gemini Exchange is a United States-based Bitcoin 
Exchange that began trading on October 8, 2015. It is currently 
operational in 31 states and Washington, DC and allows trading 
between Bitcoin, U.S. Dollars, and other Digital Assets.
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    Bitcoin is ``stored'' or reflected on the Blockchain, which is a 
digital file stored in a decentralized manner on the computers of each 
Bitcoin Network user. The Bitcoin Network software source code includes 
the protocols that govern the creation of bitcoin and the cryptographic 
system that secures and verifies Bitcoin transactions. The Blockchain 
is a canonical record of every bitcoin, every Bitcoin transaction 
(including the creation or ``mining'' of new bitcoin) and every Bitcoin 
address associated with a quantity of bitcoin. The Bitcoin Network and 
Bitcoin Network software programs can interpret the Blockchain to 
determine the exact bitcoin balance, if any, of any public Bitcoin 
address listed in the Blockchain as having taken part in a transaction 
on the Bitcoin Network. The Bitcoin Network utilizes the Blockchain to 
evidence the existence of bitcoin in any public Bitcoin address. A 
Bitcoin private key controls the transfer or ``spending'' of bitcoin 
from its associated public Bitcoin address. A Bitcoin ``wallet'' is a 
collection of private keys and their associated public Bitcoin 
addresses.
    The Blockchain is comprised of a digital file, downloaded and 
stored, in whole or in part, on all Bitcoin Network users' software 
programs. The file includes all blocks that have been solved by miners 
and is updated to include new blocks as they are solved. See ``Bitcoin 
Mining & Creation of New Bitcoin.'' As each newly solved block refers 
back to and ``connects'' with the immediately prior solved block, the 
addition of a new block adds to the Blockchain in a manner similar to a 
new link being added to a chain. Each new block records outstanding 
Bitcoin transactions, and outstanding transactions are settled and 
validated through such recording. The Blockchain represents a complete, 
transparent and unbroken history of all transactions of the Bitcoin 
Network. Each Bitcoin transaction is broadcast to the Bitcoin Network 
and recorded in the Blockchain.
    The Bitcoin Network is decentralized and does not rely on either 
governmental authorities or financial institutions to create, transmit 
or determine the value of bitcoin. Rather, bitcoin is created and 
allocated by the Bitcoin Network protocol through a ``mining'' process 
subject to a strict, well-known issuance schedule. The value of bitcoin 
is determined by the supply of and demand for bitcoin in the ``Bitcoin 
Exchange Market'' \17\ (and in private end-user-to-end-user 
transactions), as well as the number of merchants that accept them. As 
Bitcoin transactions can be broadcast to the Bitcoin Network by any 
user's Bitcoin Network software and bitcoin can be transferred without 
the involvement of intermediaries or third parties, there are currently 
little or no transaction fees in direct peer-to-peer transactions on 
the Bitcoin Network. Third party service providers such as Bitcoin 
Exchanges and third-party Bitcoin payment processing services may 
charge fees for processing transactions and for converting, or 
facilitating the conversion of, bitcoin to or from fiat currency.
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    \17\ For purposes of this filing, the term Bitcoin Exchange 
Market means the global Bitcoin Exchange Market for the trading of 
bitcoin, which consists of transactions on various electronic 
Bitcoin Exchanges.
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    The Bitcoin Network was initially contemplated in a white paper 
that also described bitcoin and the operating software to govern the 
Bitcoin Network. The white paper was purportedly authored by Satoshi 
Nakamoto; however, no individual with that name has been reliably 
identified as Bitcoin's creator, and the general consensus is that the 
name is a pseudonym for the actual inventor or inventors. The first 
bitcoin was created in 2009 after Nakamoto released the Bitcoin Network 
source code (the software and protocol that created and launched the 
Bitcoin Network). Since its introduction, the Bitcoin Network has been 
under active development by a group of contributors currently headed by 
Wladimir J. van der Laan who was appointed project maintainer in April 
2014 by Gavin Andresen (who was previously appointed maintainer by 
Satoshi Nakamoto in 2010). As an open source project, Bitcoin is not 
represented by an official organization or authority.
Overview of the Bitcoin Network's Operations
    In order to own, transfer or use bitcoin, a person generally must 
have Internet access to connect to the Bitcoin Network. Bitcoin 
transactions may be made directly between end-users without the need 
for a third-party intermediary, although there are entities that 
provide third-party intermediary services. To prevent the possibility 
of double-spending bitcoin, a user must notify the Bitcoin Network of 
the transaction by broadcasting the transaction data to its network 
peers. The Bitcoin Network provides confirmation against double-
spending by memorializing every transaction in the Blockchain, which is 
publicly accessible and transparent. This memorialization and 
verification against double-spending is accomplished through the 
Bitcoin Network mining process, which adds ``blocks'' of data, 
including recent transaction information, to the Blockchain. See 
``Cryptographic Security Used in the Bitcoin Network--Double-Spending 
and the Bitcoin Network Confirmation System,'' below.
Brief Description of Bitcoin Transfers
    Prior to engaging in Bitcoin transactions, a user generally must 
first install on its computer or mobile device a Bitcoin Network 
software program that will allow the user to generate a private and 
public key pair associated with a Bitcoin address (analogous to a 
Bitcoin account). The Bitcoin Network software program and the Bitcoin 
address also enable the user to connect to the Bitcoin Network and 
engage in the transfer of bitcoin with other users. The computer of a 
user that downloads a version of the Bitcoin Network software program 
will become a ``node'' on the Bitcoin Network that assists in 
validating and relaying transactions from other users. See 
``Cryptographic Security Used in the Bitcoin Network--Double-Spending 
and the Bitcoin Network Confirmation System,'' below. Alternatively, a 
user

[[Page 45557]]

may retain a third party to create a Bitcoin address, or collection of 
Bitcoin addresses known as a digital wallet to be used for the same 
purpose. There is no limit on the number of Bitcoin addresses a user 
can have, and each such Bitcoin address consists of a ``public key'' 
and a ``private key,'' which are mathematically related. See 
``Cryptographic Security Used in the Bitcoin Network--Public and 
Private Keys,'' below.
    In a Bitcoin transaction, the bitcoin recipient must provide its 
public Bitcoin address, which serves as a routing number for the 
recipient on the Blockchain, to the party initiating the transfer. This 
activity is analogous to a recipient providing a routing address in 
wire instructions to the payor so that cash may be wired to the 
recipient's account. The recipient, however, does not make public or 
provide to the sender its related private key. The payor, or 
``spending'' party, does reveal its public key in signing and verifying 
its spending transaction to the Blockchain.
    Neither the recipient nor the sender reveal their public Bitcoin 
addresses' private key in a transaction, because the private key 
authorizes access to, and transfer of, the funds in that Bitcoin 
address to other users. Therefore, if a user loses his private key, the 
user permanently loses access to the bitcoin contained in the 
associated Bitcoin address. Likewise, bitcoin is irretrievably lost if 
the private key associated with them is deleted and no backup has been 
made. When sending bitcoin, a user's Bitcoin Network software program 
must ``sign'' the transaction with the associated private key. The 
resulting digitally signed transaction is sent by the user's Bitcoin 
Network software program to the Bitcoin Network to allow transaction 
confirmation. The digital signature serves as validation that the 
transaction has been authorized by the holder of the Bitcoin addresses' 
private key. This signature process is typically automated by software 
that has access to the public and private keys.
Summary of a Bitcoin Transaction
    In a Bitcoin transaction between two parties, the following 
circumstances must be in place: (i) The party seeking to send bitcoin 
must have a public Bitcoin address and the Bitcoin Network must 
recognize that public Bitcoin address as having sufficient bitcoin for 
the spending transaction; (ii) the receiving party must have a public 
Bitcoin address; and (iii) the spending party must have Internet access 
with which to send its spending transaction.
    Next, the receiving party must provide the spending party with its 
public Bitcoin address, an identifying series of twenty-seven (27) to 
thirty-four (34) alphanumeric characters that represents the routing 
number on the Bitcoin Network and allow the Blockchain to record the 
sending of bitcoin to that public Bitcoin address. The receiving party 
can provide this address to the spending party in alphanumeric format 
or an encoded format such as a Quick Response Code (commonly known as a 
QR Code), which may be scanned by a smartphone or other device to 
quickly transmit the information.
    After the provision of a recipient's public Bitcoin address, the 
spending party must enter the address into its Bitcoin Network software 
program along with the number of bitcoin to be sent. The number of 
bitcoin to be sent will typically be agreed upon between the two 
parties based on a set number of bitcoin or an agreed upon conversion 
of the value of fiat currency to bitcoin. Most Bitcoin Network software 
programs also allow, and often suggest, the payment of a transaction 
fee (also known as a miner's fee). Transaction fees are not required to 
be included by many Bitcoin Network software programs, but, when they 
are included, they are paid by the spending party on top of the 
specified amount of bitcoin being sent in the transaction. Transaction 
fees, if any, are typically a fractional number of bitcoin (e.g., 0.005 
or 0.0005 bitcoin) and are automatically transferred by the Bitcoin 
Network to the Bitcoin Network miner that solves and adds the block 
recording the spending transaction on the Blockchain.
    After the entry of the Bitcoin address, the number of bitcoin to be 
sent and the transaction fees, if any, to be paid, the spending party 
will transmit the spending transaction. The transmission of the 
spending transaction results in the creation of a data packet by the 
spending party's Bitcoin Network software program, which data packet 
includes data showing (i) the destination public Bitcoin address, (ii) 
the number of bitcoin being sent, (iii) the transaction fees, if any, 
and (iv) the spending party's digital signature, verifying the 
authenticity of the transaction. The data packet also includes 
references called ``inputs'' and ``outputs,'' which are used by the 
Blockchain to identify the source of the bitcoin being spent and record 
the flow of bitcoin from one transaction to the next transaction in 
which the bitcoin is spent. The digital signature exposes the spending 
party's public Bitcoin address and public key to the Bitcoin Network, 
though, for the receiving party, only its public Bitcoin address is 
revealed. The spending party's Bitcoin Network software will transmit 
the data packet onto the decentralized Bitcoin Network, resulting in 
the propagation of the information among the software programs of 
Bitcoin users across the Bitcoin Network for eventual inclusion in the 
Blockchain. Typically, the data will spread to a vast majority of 
Bitcoin Network miners within the course of less than a minute.
    As discussed in greater detail below in ``Bitcoin Mining & Creation 
of New Bitcoin,'' Bitcoin Network miners record transactions when they 
solve for and add blocks of information to the Blockchain. When a miner 
solves for a block, it creates that block, which includes data relating 
to (i) the solution to the block, (ii) a reference to the prior block 
in the Blockchain to which the new block is being added and (iii) 
transactions that have occurred but have not yet been added to the 
Blockchain. The miner becomes aware of outstanding, unrecorded 
transactions through the data packet transmission and propagation 
discussed above. Typically, Bitcoin transactions will be recorded in 
the next chronological block if the spending party has an Internet 
connection and at least one (1) minute has passed between the 
transaction's data packet transmission and the solution of the next 
block. If a transaction is not recorded in the next chronological 
block, it is usually recorded in the next block thereafter.
    Upon the addition of a block included in the Blockchain, the 
Bitcoin Network software program of both the spending party and the 
receiving party will show confirmation of the transaction on the 
Blockchain and reflect an adjustment to the bitcoin balance in each 
party's public Bitcoin address, completing the bitcoin transaction. 
Typically, Bitcoin Network software programs will automatically check 
for and display additional confirmations of six or more blocks in the 
Blockchain. See ``Cryptographic Security Used in the Bitcoin Network--
Double-Spending and the Bitcoin Network Confirmation System.''
Cryptographic Security Used in the Bitcoin Network
Public and Private Keys
    The Bitcoin Network uses sophisticated cryptography to maintain the 
integrity of the Blockchain ledger. Transactions are digitally signed 
by their senders. Before adding a transaction to a block, miners will 
verify both that the sender has not already

[[Page 45558]]

spent the bitcoin being sent and that the digital signature information 
in the transaction is valid. Besides the requirement of containing only 
valid transactions (as described in the preceding sentence), blocks are 
validated by means of properties of their cryptographic hashes. By 
extension, blocks in the Blockchain can be validated by verifying that 
each block contains the cryptographic hash of the prior block. The 
cryptographic algorithms and cryptographic parameters, including key 
sizes, used by the Bitcoin Network provide adequate security for the 
foreseeable future.
Double-Spending and the Bitcoin Network Confirmation System
    To ensure the integrity of Bitcoin transactions from the 
recipient's side (i.e., to prevent double-spending by a spending 
party), every Bitcoin transaction is broadcast to the Bitcoin Network 
and recorded in the Blockchain through the ``mining'' process, which 
time-stamps the transaction and memorializes the change in the 
ownership of bitcoin transferred. See ``Bitcoin Mining & Creation of 
New Bitcoin,'' below. Adding a block to the Blockchain requires Bitcoin 
Network miners to exert significant computational effort. Requiring 
this ``proof of work'' prevents a malicious actor from either adding 
fraudulent blocks to generate bitcoin (i.e., counterfeit bitcoin) or 
overwriting existing valid blocks to reverse prior transactions.
    A Bitcoin transaction between two parties is recorded in the 
Blockchain in a block only if that block is accepted as valid by a 
majority of the nodes on the Bitcoin Network. Validation of a block is 
achieved by confirming the cryptographic hash value included in the 
block's solution and by the block's addition to the longest confirmed 
Blockchain on the Bitcoin Network. For a transaction, inclusion in a 
block on the Blockchain constitutes a ``confirmation'' of a Bitcoin 
transaction. As each block contains a reference to the immediately 
preceding block, additional blocks appended to and incorporated into 
the Blockchain constitute additional confirmations of the transactions 
in such prior blocks, and a transaction included in a block for the 
first time is confirmed once against double-spending. The layered 
confirmation process makes changing historical blocks (and reversing 
transactions) exponentially more difficult the further back one goes in 
the Blockchain. Bitcoin Exchanges and users can set their own threshold 
as to how many confirmations they require until funds from the 
transferor are considered valid.
    To undo past transactions in a block recorded on the Blockchain, a 
malicious actor would have to exert tremendous hashrate in resolving 
each block in the Blockchain starting with and after the target block 
and broadcasting all such blocks to the Bitcoin Network. The Bitcoin 
Network is generally programmed to consider the longest Blockchain 
containing solved blocks to be the most accurate Blockchain. In order 
to undo multiple layers of confirmation and alter the Blockchain, a 
malicious actor must resolve all of the old blocks sought to be 
regenerated and be able to continuously add new blocks to the 
Blockchain at a speed that would have to outpace that of all of the 
other miners on the Bitcoin Network, who would be continuously solving 
for and adding new blocks to the Blockchain. Given the size and speed 
of the Bitcoin Network, it is generally agreed that the cost of 
amassing such computational power exceeds the profit to be obtained by 
double-spending or attempting to fabricate prior blocks.
    If a malicious actor is able to amass ten (10) percent of the 
Bitcoin Network's aggregate hashrate, there is estimated to be a 0.1 
percent chance that it would be able to overcome six (6) confirmations. 
Therefore, given the difficulty in amassing such hashrate, six (6) 
confirmations is an often-cited standard for the validity of 
transactions. The Trust has adopted a policy whereby a transaction will 
be deemed confirmed upon this industry standard of six (6) 
confirmations (the ``Confirmation Protocol''). As one (1) block is 
added to the Blockchain approximately every six (6) to twelve (12) 
minutes, a Bitcoin transaction will be, on average, confirmed using the 
Confirmation Protocol beyond a reasonable doubt in approximately one 
(1) hour. Merchants selling high-value goods and services, as well as 
Bitcoin Exchanges and many experienced users, are believed to generally 
use the six (6) confirmations standard. This confirmation system, 
however, does not mean that merchants must always wait for multiple 
confirmations for transactions involving low-value goods and services. 
As discussed below, the value of a successful double-spending attack 
involving a low-value transaction may, and perhaps likely will, be 
significantly less than the cost involved in arranging and executing 
such double-spending attacks. Furthermore, merchants engaging in low-
value transactions may then view the reward of quicker transaction 
settlements with limited or no Blockchain confirmation as greater than 
the related risk of not waiting for six (6) confirmations with respect 
to low-value transactions at points of sale. Conversely, for high-value 
transactions that are not time sensitive, additional settlement 
security can be provided by waiting for more than six (6) 
confirmations.
Bitcoin Mining & Creation of New Bitcoin
Mining Process
    The process by which bitcoin is ``mined'' results in new blocks 
being added to the Blockchain and new bitcoin being issued to the 
miners. Bitcoin Network miners engage in a set of prescribed complex 
mathematical calculations in order to add a block to the Blockchain and 
thereby confirm Bitcoin transactions included in that block's data. 
Miners that are successful in adding a block to the Blockchain are 
automatically awarded a fixed number of bitcoin for their effort. This 
reward system is the method by which new bitcoin enter into circulation 
to the public and is accomplished in the added block through the 
notation of the new bitcoin creation and their allocation to the 
successful miner's public Bitcoin address. To begin mining, a user can 
download and run Bitcoin Network mining software, which, like regular 
Bitcoin Network software programs, turns the user's computer into a 
``node'' on the Bitcoin Network that validates blocks. See ``Overview 
of the Bitcoin Network's Operations,'' above.
    All Bitcoin transactions are recorded in blocks added to the 
Blockchain. Each block contains (i) the details of some or all of the 
most recent transactions that are not memorialized in prior blocks, 
(ii) a reference to the most recent prior block, and (iii) a record of 
the award of bitcoin to the miner who added the new block. In order to 
add blocks to the Blockchain, a miner must map an input data set (i.e., 
a reference to the immediately preceding block in the Blockchain, plus 
a block of the most recent Bitcoin Network transactions and an 
arbitrary number called a ``nonce'') to a desired output data set of 
predetermined length (``hash value'') using a cryptographic hash 
algorithm. To ``solve'' or ``calculate'' a block, a miner must repeat 
this computation with a different nonce until the miner generates a 
hash of a block's header that has a value less than or equal to the 
current target set by the Bitcoin Network. Each unique block can only 
be solved and added to the Blockchain by one (1) miner; therefore, all 
individual miners and mining pools on the Bitcoin

[[Page 45559]]

Network are engaged in a competitive process and are incentivized to 
increase their computing power to improve their likelihood of solving 
for new blocks.
    The cryptographic hash function that a miner uses is one-way only 
and is, in effect, irreversible: Hash values are easy to generate from 
input data (i.e., valid recent network transactions, Blockchain and 
nonce), but neither a miner nor participant is able to determine the 
original input data solely from the hash value. As a result, generating 
a new valid block with a header value less than or equal to the target 
prescribed by the Bitcoin Network is initially difficult for a miner, 
yet other nodes can easily confirm a proposed block by running the hash 
function just once with the proposed nonce and other input data. A 
miner's proposed block is added to the Blockchain once a majority of 
the nodes on the Bitcoin Network confirms the miner's work, and the 
miner that solved such block receives the reward of a fixed number of 
bitcoin (plus any transaction fees paid by spenders of transactions 
that are recorded in the block). Therefore, ``hashing'' is akin to a 
mathematical lottery, and miners that have devices with greater 
processing power (i.e., the ability to make more hash calculations per 
second) are more likely to be successful miners because they can 
generate more hashes or ``entries'' into that lottery.
    As more miners join the Bitcoin Network and its aggregate hashrate 
increases, the Bitcoin Network automatically adjusts the complexity of 
the block-solving equation in an effort to set distribution such that 
newly-created blocks will be added to the Blockchain, on average, 
approximately every ten (10) minutes. Hashrate is added to the Bitcoin 
Network at irregular rates that have grown with increasing speed since 
early 2013, though the rate of additional mining power slowed steadily 
through 2014, until the computational speed of the network temporarily 
and marginally declined during December 2014. The following chart, 
sourced from Bitcoin.sipa.be, shows the estimated growth of the Bitcoin 
Network's computational power from the first calendar quarter in 2009 
to the first calendar quarter in 2016.
[GRAPHIC] [TIFF OMITTED] TN14JY16.002

    The rapid growth of the computational power of the Bitcoin Network 
means that blocks are typically solved faster than the Bitcoin 
protocol's target of, on average, approximately every ten (10) minutes. 
Although the difficulty of the mining process is adjusted on a periodic 
basis, after 2,016 blocks have been added to the Blockchain since the 
last adjustment, the average solution time for a block has been 
approximately 9.3 minutes for the one hundred and eighty (180) days 
prior to and including May 1, 2016.
Incentives for Mining
    Miners dedicate substantial resources to mining. Given the 
increasing difficulty of the target established by the Bitcoin Network, 
current miners must invest in expensive mining devices with adequate 
processing power to hash at a competitive rate. The first mining 
devices were standard home computers; however, mining computers are 
currently designed solely for mining purposes. Such devices include 
application specific integrated circuit (``ASIC'') machines built by 
specialized companies such as BitFury. Miners also incur substantial 
electricity costs in order to continuously power and cool their devices 
while solving for a new block. In June 2013, blockchain.info estimated 
that the aggregate electricity costs of mining across the Bitcoin 
Network exceeded $300,000 every twenty-four (24) hours. Although 
variables such as the rate and cost of electricity are estimated, as of 
September 1, 2013, blockchain.info had revised upward the average 24-
hour electricity cost of all mining on the Bitcoin Network to more than 
$1.5 million. In late 2013, blockchain.info ceased publishing estimated 
electric consumption on the Bitcoin Network, in

[[Page 45560]]

part due to uncertainty in estimating electrical usage as newer, more 
energy efficient mining hardware became prevalent. As of May 2016, over 
the past year, two (2) years, and three (3) years, the aggregate 
hashrate of the Bitcoin Network has increased more than 3.76-fold, 
22.33-fold and 17,730-fold, respectively, due in part to the 
development of more energy efficient ASIC mining chips and, during the 
second half of 2013, the substantial increase in the price of bitcoin. 
Additionally, it can be estimated that the scale of total computing 
resources devoted to mining on the Bitcoin Network is commensurate with 
the total rewards, which was approximately $1.6 million U.S. dollars 
per day as of May 1, 2016.
    The Bitcoin Network is designed in such a way that the reward for 
adding new blocks to the Blockchain decreases over time and the 
production (and reward) of bitcoin will eventually cease. Once such 
reward ceases, it is expected that miners will demand compensation in 
the form of transaction fees to ensure that there is adequate incentive 
for them to continue mining. The amount of transaction fees will be 
based upon the need to provide sufficient revenue to incentivize 
miners, counterbalanced by the need to retain sufficient Bitcoin 
Network users (and transactions) to make mining profitable.
    Though not free from doubt, Bitcoin industry participants have 
expressed a belief that transaction fees would be enforced through (i) 
mining operators collectively refusing to record transactions that do 
not include a payment of a transaction fee or (ii) the updating of 
Bitcoin Network software to require a minimum transaction fee payment. 
Indeed, most miners already have a policy regarding transactions fees, 
albeit the minimum fees are currently low under such policies. Under a 
regime whereby large miners require fees to record transactions, a 
transaction where the spending party did not include a payment of 
transaction fees would not be recorded on the Blockchain until a miner 
who does not require transaction fees solves for a new block (thereby 
recording all outstanding transaction records for which it has received 
data). If popular Bitcoin Network software were to require a minimum 
transaction fee, users of such programs would be required to include 
such fees; however, because of the open-source nature of the Bitcoin 
Network, there may be no way to require that all software instances 
include minimum transaction fees for spending transactions. 
Alternatively, a future Bitcoin Network software update could simply 
build a small transaction fee payment into all spending transactions 
(e.g., by deducting a fractional number of bitcoin from all 
transactions on the Bitcoin Network as transaction fees).
    The Bitcoin Network protocol already includes transaction fee rules 
and the mechanics for awarding transaction fees to the miners that 
solve for blocks in which the fees are recorded; however, users 
currently may opt not to pay transaction fees (depending on the Bitcoin 
Network software they use) and miners may choose not to enforce the 
transaction fee rules since, at present, the bitcoin rewards are far 
more substantial than transaction fees. As of April 2016, transaction 
fees accounted for an average of 1.44 percent of miners' total revenue 
based upon information available at www.blockchain.info, though the 
percentage of revenue represented by transaction fees is not static and 
fluctuates based on the number of transactions for which sending users 
include transaction fees, the levels of those transaction fees and the 
number of transactions a miner includes in its solved blocks. 
Typically, transactions do not have difficulty being recorded if 
transaction fees are not included.
Mining Pools
    A miner's daily expected reward is proportional to their 
contribution to the Bitcoin Network's aggregate hashrate. Given the 
limited number of blocks produced per day and the statistically 
uncertain nature of finding blocks, a small miner acting alone would 
experience very high variance in block rewards. Because of this fact 
most miners join mining pools wherein multiple miners act cohesively 
and share any rewards.
    According to blockchain.info, as of April 28, 2016, the largest 
three (3) known mining pools were AntPool, F2Pool and BTCC Pool, which, 
when aggregated, represented approximately sixty-three (63) percent of 
the aggregate hashrate of the Bitcoin Network (as calculated by 
determining the percentage of blocks mined by each such pool over the 
prior four (4) days). Also according to blockchain.info, on such date, 
the nine (9) largest pools (AntPool, F2Pool, BTCC Pool, BitFury, 
BW.COM, Slush, BitClub Network, Kano CKPool and KnCMiner) accounted for 
approximately ninety-seven (97) percent of the aggregate hashrate of 
the Bitcoin Network. In late May and early June 2014, reports indicated 
that a mining pool named GHash.io approached and, during a twenty-four 
(24)- to forty-eight (48)-hour period in early June, may have exceeded 
one-half of the aggregate hashrate of the Bitcoin Network, as measured 
by the self-reported hashrate of the pool and by measuring the 
percentage of blocks mined by the pool. As of April 28, 2016, 
GHash.io's percentage of the aggregate hashrate of the Bitcoin Network 
has since fallen to approximately two (2) percent. As of April 28, 
2016, Antpool was determined to be the largest mining pool, having 
solved for twenty-eight (28) percent of the block discovered during the 
prior four (4) days.
Mathematically Controlled Supply
    The method for creating new bitcoin is mathematically controlled in 
a manner so that the supply of bitcoin grows at a limited rate pursuant 
to a pre-set schedule. The number of bitcoin awarded for solving a new 
block is automatically halved every two hundred and ten thousand 
(210,000) blocks. Thus, the current fixed reward for solving a new 
block is twenty-five (25) bitcoin per block and the reward will 
decrease by half to become twelve and a half (12.5) bitcoin in or 
around the start of July 2016 (based on estimates of the rate of block 
solution calculated by BitcoinClock.com). This deliberately controlled 
rate of bitcoin creation means that the number of bitcoin in existence 
will never exceed twenty-one (21) million and that bitcoin cannot be 
devalued through excessive production unless the Bitcoin Network's 
source code (and the underlying protocol for bitcoin issuance) is 
altered. See ``Modifications to the Bitcoin Protocol,'' below. As of 
April 28, 2016, fifteen million, four hundred and eighty-two thousand, 
three hundred (15,482,300) bitcoin have been mined. It is estimated 
that more than ninety (90) percent of the twenty-one (21) million 
bitcoin will have been produced by 2022.
    The following chart from blockchain.info indicates the number of 
bitcoin that have been mined since the Bitcoin Network began operation 
in January 2009 through April 2016.

[[Page 45561]]

[GRAPHIC] [TIFF OMITTED] TN14JY16.003

Modifications to the Bitcoin Protocol
    Bitcoin is an open source project (i.e., a product whose source 
code is freely available to the public and that utilizes crowdsourcing 
to identify possible issues, problems and defects) and there is no 
official developer or group of developers that controls the Bitcoin 
Network. The Bitcoin Network's development is furthered by a collection 
of active contributors who can access and propose alterations to the 
Bitcoin Network source code hosted on GitHub.com, an online service and 
forum used to share and develop open source code. Other programmers 
have access to and can propose changes to the Bitcoin Network source 
code on GitHub.com, but some contributors have an elevated level of 
influence over the process. As a result, these contributors are 
responsible for quasi-official releases of updates and other changes to 
the Bitcoin Network's source code. Users and miners can accept any 
changes made to the Bitcoin Network (including those proposed by 
contributors) by downloading the proposed modification of the source 
code.
    A modification of the source code is only effective with respect to 
the Bitcoin users and miners that download it. Consequently, as a 
practical matter, a modification to the source code (e.g., a proposal 
to increase the twenty-one (21) million total limit on bitcoin or to 
reduce the average confirmation time target from ten (10) minutes per 
block) only becomes part of the Bitcoin Network if accepted by 
participants collectively having an effective majority of the aggregate 
hashrate of the Bitcoin Network. Additionally, an issue may arise in 
which a modification is overwhelmingly supported by users but miners do 
not support it, or vice versa. If a modification is accepted only by a 
percentage of users and miners, a division in the Bitcoin Network will 
occur such that one (1) network will run the pre-modification source 
code and the other network will run the modified source code; such a 
division is known as a ``fork'' in the Bitcoin Network. It should be 
noted that, although their power to amend the source code is 
effectively subject to the approval of users and miners, some 
contributors have substantial influence over the development of the 
Bitcoin Network and the direction of the Bitcoin community.
Bitcoin Value
Bitcoin Exchange Valuation
    The value of bitcoin is determined by the value that various market 
participants place on bitcoin through their transactions. The most 
common means of determining the value of a bitcoin is by surveying one 
or more Bitcoin Exchanges where bitcoin is traded publicly and 
transparently (i.e., the Bitcoin Exchange Market) or an index tracking 
prices on the Bitcoin Exchange Market (e.g., the CoinDesk Bitcoin Price 
Index).
Bitcoin Exchange Public Market Data
    On each online Bitcoin Exchange, bitcoin is traded with publicly 
disclosed valuations for each executed trade, measured by one or more 
fiat currencies such as the U.S. Dollar, the Euro or the Chinese Yuan. 
Bitcoin Exchanges typically publish trade data including last price, 
bid and ask information, and trade volume, among other data. Although 
each Bitcoin Exchange has its own market price, it is expected that 
most Bitcoin Exchanges' market prices should be relatively consistent 
with the Bitcoin Exchange Market average since market participants can 
choose the Bitcoin Exchange on which to buy or sell bitcoin (i.e., 
exchange shopping). Arbitrage between the prices on various Bitcoin 
Exchanges is possible, but varying fees and fiat currency deposit/
withdrawal policies and other concerns appear to have, at times, 
prevented an active arbitrage mechanism among users on some Bitcoin 
Exchanges. For example, delayed fiat currency withdrawals imposed by 
Bitcoin Exchanges and the perceived risks associated with such delayed 
withdrawals have, at times, resulted in trading on such Bitcoin 
Exchange to be at a premium for certain periods.
Bitcoin Exchange Price Convergence
    Price differentials across Bitcoin Exchanges remain; however, such 
differentials have been decreasing. For example, the daily opening 
price data for the one hundred (100) days prior to May 9, 2016 shows 
that the Bitifinex

[[Page 45562]]

and BTC-e absolute price difference was less than 1% percent [sic] 
according to data from BitcoinWisdom.com. Since 2015, prices on U.S. 
Dollar-denominated Bitcoin Exchanges have generally been converging. In 
January of 2015, the average range in prices across all Bitcoin 
Exchanges was approximately 3.80%; as of May 2016, that figure has 
dropped to less than 1.30%.\18\ This convergence serves to illustrate 
the fungibility of bitcoin across Bitcoin Exchanges and the ease with 
which market participants transfer their assets amongst them.
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    \18\ See, e.g., https://data.bitcoinity.org/markets/price/2y/USD?c=e&t=l).
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Bitcoin Exchange Market Manipulation
    As the Bitcoin Exchange Market has evolved and matured, licensed 
entrants have emerged, including two (2) New York limited purpose trust 
companies, markedly changing the once concentrated and non-regulated 
landscape of the Bitcoin Exchange Market. For example, in the first 
half of 2013, Mt. Gox accounted for nearly three-quarters of all 
Bitcoin Exchange Market trading.\19\ Any disruption to Mt. Gox trading, 
such as a distributed denial of service (``DDOS'') attack had a 
dramatic impact on the bitcoin price and subsequently the Bitcoin 
Exchange Market as a whole. Since then, the number of constituents in 
the Bitcoin Exchange Market has considerably increased and no single 
Bitcoin Exchange represents a systemically critical part or single 
point of failure of the Bitcoin ecosystem. In addition, the advent of 
market participants who are chiefly arbitrageurs results in Bitcoin 
Exchange prices generally converging after dislodgement. Arbitrageurs 
must have funds distributed across multiple Bitcoin Exchanges in order 
to take advantage of temporary price dislocations, thereby discouraging 
the strong concentration of funds on any particular Bitcoin Exchange. 
As a result, the potential for manipulation on a particular Bitcoin 
Exchange would require overcoming the liquidity supply of such 
arbitrageurs who are actively eliminating any cross-market pricing 
differences.
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    \19\ For most of 2013, Mt. Gox (a Japanese exchange operated at 
www.mtgox.com by Tibanne Co. Ltd.) was the largest online Bitcoin 
Exchange in the world. Supporting trading of bitcoin using sixteen 
(16) different fiat currencies, Mt. Gox accounted for nearly three-
quarters of all Bitcoin Exchange Market trading during the first 
half of 2013. On February 25, 2014, Mt. Gox suspended trading on its 
platform and, three (3) days later, filed for bankruptcy protection 
in Japanese courts, stating that it had lost approximately eight 
hundred and fifty thousand (850,000) bitcoin, including 
approximately seven hundred fifty thousand (750,000) bitcoin 
belonging to its customers. Mt. Gox subsequently recovered access to 
approximately two hundred thousand (200,000) of the lost bitcoin. As 
no full, reliable accounting has been publicly provided, it is 
difficult to assess whether Mt. Gox's collapse was due to cyber-
attacks (including denial of service and hacking incidents reported 
in 2011 and 2013), mismanagement or fraud, although many market 
participants believe Mt. Gox's collapse was due to the latter. 
Following the cessation of trading activity on its platform, Mt. Gox 
has been in bankruptcy proceedings in Japan and the United States 
and is in the process of liquidation.
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The Gemini Exchange
    The Gemini Exchange, an affiliate of the Sponsor, is a Digital 
Asset exchange that has a U.S. dollar-denominated bitcoin order book. 
As a facility of a New York State-chartered limited liability trust 
company, the Gemini Exchange is one of only two (2) Bitcoin Exchanges 
in the world that have such a high level of regulatory oversight. The 
Bitcoin Exchange Market has experienced several significant incidents 
at unregulated Bitcoin Exchanges and it is widely-believed that much of 
the self-reported trade volume numbers of unregulated Bitcoin Exchanges 
are inaccurate (either intentionally or unintentionally). The Gemini 
Exchange was established in an effort to improve the Bitcoin ecosystem 
by having a regulated entity where participants could engage in trading 
bitcoin.
    In establishing the Gemini Exchange, Gemini Trust Company, LLC 
worked closely with the NYSDFS to obtain a limited purpose trust 
company license. The term ``limited purpose trust company'' refers to 
entities that are chartered under the bank and trust company provisions 
of the New York Banking Law. Under New York Banking Law, a ``trust 
company'' has general powers available to banks and trust companies, as 
well as powers generally associated with trustees and other 
fiduciaries.
    Apart from general fiduciary powers, the following activities are 
among those specifically identified in the statute as activities that 
New York Trust Companies may conduct with respect to their fiduciary 
accounts, including (i) the power to accept deposits exclusively in a 
fiduciary capacity, to receive and disburse money, to transfer, 
register and countersign evidences of indebtedness or other securities, 
and to act as attorney in fact or agent; \20\ and (ii) the power to 
accept appointment as receiver, trustee, or committee of the property 
of an estate of any person in insolvency or bankruptcy proceedings.
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    \20\ N.Y. Banking Law Sec.  100 (McKinney).
---------------------------------------------------------------------------

    A ``limited purpose'' trust company must conduct its business and 
operations subject to the limitations or restrictions as the NYSDFS may 
prescribe in its sole discretion. In practice, most limited purpose 
trust companies typically engage in activities such as employee benefit 
trust, personal trust, corporate trust, transfer agency, securities 
clearance, investment management, and custodial services. A trust 
company, including a limited purpose trust company like Gemini Trust 
Company, LLC, can serve as the custodian of customer funds itself.
    Under New York Banking Law, the same general procedures, 
requirements and criteria for the formation of a full-service bank 
apply also to the formation of a limited purpose trust company with two 
(2) exceptions: (i) No requirement to carry FDIC insurance and (ii) a 
level of capitalization deemed satisfactory to the Superintendent of 
Financial Services. Once submitted in acceptable form, a limited 
purpose trust company application receives the same level of scrutiny 
as other bank and trust company proposals and ultimately requires the 
approval of the Superintendent of Financial Services. In addition, 
trust companies are subject to many of the same requirements that apply 
to a bank operating under a New York State banking charter, including: 
(i) Capital requirements, (ii) implementation of an anti-money 
laundering program,\21\ (iii) implementation of a cyber security 
program, and (iv) consumer protection disclosures.\22\ Furthermore, as 
a limited purpose trust company with fiduciary powers under the Banking 
Law, all activities of a trust company, including all exchange 
functions, are subject to examination and supervision by the NYSDFS. 
Gemini Trust Company, LLC complies with the capital requirements under 
New York State banking law, has implemented the required anti-money 
laundering program and cybersecurity program and makes the required

[[Page 45563]]

consumer protection disclosures. As a facility of a regulated entity, 
the Gemini Exchange is obliged to put the interests of its customers 
before its own, to provide accurate public market data and pricing 
information and to monitor for and prevent market manipulation.
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    \21\ In particular, a prospective trust company must establish 
policies and procedures designed to ensure and monitor compliance 
with the Bank Secrecy Act (``BSA'') as amended by the USA PATRIOT 
Act and the anti-money laundering programs of Part 115 of the 
General Regulations of the Banking Board. A compliance program must 
include, at a minimum, a system of internal controls to assure 
ongoing compliance, independent testing for compliance to be 
conducted by bank personnel or by an outside party, the designation 
of an individual or individuals responsible for coordinating and 
monitoring day-to-day compliance, and training for appropriate 
personnel.
    \22\ Limited purpose trust companies operating virtual currency 
exchanges are required to provide disclosures to current and 
prospective customers (in a form approved by NYSDFS) regarding the 
risks of its services and products and are also required to disclose 
to current and prospective customers the terms and conditions for 
using the trust company's products and services prior to any 
customer using the product or service.
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    As part of its supervision under the NYSDFS and New York Banking 
Law, Gemini Trust Company, LLC must (i) undergo semiannual bank exams, 
(ii) submit quarterly financial updates to NYSDFS, (iii) submit 
independent third-party year-end audited financial statements to 
NYSDFS,\23\ (iv) submit semiannual Federal Financial Institutions 
Examination Council (``FFIEC'') Call Reports \24\ to the NYSDFS, and 
(v) undergo an annual third-party review of its overall security 
program as implemented by its Chief Security Officer (``CSO'') that may 
take the form of a Service Organization Controls (``SOC'') Level 2 
audit.
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    \23\ Gemini Trust Company, LLC, successfully completed an 
independent third-party opening day Balance Sheet audit for October 
2, 2015 as well as an independent third-party year-end Financial 
Statements audit for December 31, 2015. No material issues, 
weaknesses or concerns were raised.
    \24\ Gemini Trust Company, LLC, successfully completed and filed 
its first FFIEC Call Report with the NYSDFS on February 1, 2016.
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    The Gemini Exchange is not the only venue on which Authorized 
Participants can purchase bitcoin for delivery to the Trust, but it may 
provide a convenient and stable venue given its regulatory oversight 
and superior liquidity characteristics. While Authorized Participants 
are not obliged to use the Gemini Exchange to trade their bitcoin, it 
may prove to be an efficient way to do so.
Gemini Exchange Spot Price
    The Trust values its bitcoin as measured at 4:00 p.m. Eastern time 
using the Gemini Exchange Spot Price on each Business Day. The Gemini 
Exchange Spot Price is the price of bitcoin on the Gemini Exchange as 
of 4:00 p.m. Eastern time on each Business Day.
    The Sponsor believes that the Gemini Exchange Spot Price is 
representative of the accurate price of bitcoin because of the positive 
price discovery attributes of the Gemini Exchange marketplace. 
According to market data on bitcoinity.org, as of May 23, 2016, the 
Gemini Exchange is a top three (3) U.S.-based Bitcoin Exchange by 
volume for the seven (7) days prior and had the tightest spread as a 
percentage of price, the tightest spread ten (10) bitcoin wide on the 
bid and ask, the tightest spread one hundred (100) bitcoin wide on the 
bid and ask and the lowest volatility (i.e., smallest standard 
deviation) of any U.S. dollar-denominated bitcoin order book on any 
Bitcoin Exchange in the world. In addition, since opening in October 
2015, the Gemini Exchange Spot Price differed from the median price of 
all U.S. Dollar-denominated Bitcoin Exchanges by 0.35% on average; that 
difference dropped to 0.15% on average in May 2016.\25\ These facts, 
taken together, suggest that the Gemini Exchange Spot Price is 
representative and indicative of the larger Bitcoin marketplace.
---------------------------------------------------------------------------

    \25\ Id.
---------------------------------------------------------------------------

    As discussed above, the Gemini Exchange is uniquely positioned 
because of its regulatory status and licensing as a venue on which 
traditional financial institutions may be comfortable transacting in 
bitcoin. These institutions provide a vital bridge to the equities 
markets and other capital markets, serving to enrich price discovery, 
liquidity, and transparency. The Trust has entered into preliminary 
conversations with a number of potential Authorized Participants as 
well as market makers, each of which is an experienced participant in 
the ETP \26\ marketplace and is actively engaged in trading ETPs. A 
number of these potential Authorized Participants, currently trade 
bitcoin and are already registered participants that trade on the 
Gemini Exchange. Authorized Participants will not be required to use 
the Gemini Exchange to trade their bitcoin, and the Gemini Exchange is 
not the only venue on which Authorized Participants can purchase 
bitcoin for delivery to the Trust. However, the Gemini Exchange may 
provide a convenient and stable venue in which to purchase bitcoin, as 
well as an efficient way to trade bitcoin, given its regulatory 
oversight and superior liquidity characteristics.\27\ See ``Bitcoin 
Value--The Gemini Exchange'' above.
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    \26\ For purposes of this filing, the term ETP means any product 
that may be listed on the Exchange pursuant to Rule 14.11.
    \27\ See, e.g., https://data.bitcoinity.org/markets/exchanges/USD/30d#volatility_asc.
---------------------------------------------------------------------------

Bitcoin Market
Global Bitcoin Market
    Global trade in bitcoin consists of individual end-user-to-end-user 
transactions, together with facilitated exchange-based bitcoin trading 
on ``lit'' markets as well as ``dark pools''. A limited market 
currently exists for bitcoin-based derivatives. The Trust represents 
the first known ETP in the United States that seeks to track the price 
of a Digital Asset (a ``Digital Asset ETP''). Securitized instruments 
have been created for other marketplaces, but have encountered limited 
success due to their lack of transparency and thorough regulatory 
oversight. Two notable examples are the Grayscale Investment Trust, 
which trades under the ticker GBTC on OTC Markets (formerly the ``Pink 
Sheets'') and does not qualify as an exchange-listed product, and 
Bitcoin Tracker One, which trades under the ticker COINXBT on the 
Stockholm Stock Exchange. Neither of these instruments are held to the 
same regulatory scrutiny and oversight as a security listed under the 
Securities Act. Because of the high standards pursued in the creation 
and listing of the Trust, it will finally provide investors with a 
reliable and transparent vehicle for access to bitcoin as an asset 
class.
End-User-to-End-User
    The Bitcoin end-user-to-end-user ecosystem operates on a 
continuous, 24-hour per day basis. This is accomplished through 
decentralized peer-to-peer transactions between parties on a principal-
to-principal basis. All risks and issues of credit are between the 
parties directly involved in the transaction. Liquidity can change from 
time to time during the course of a 24-hour trading day. The Bitcoin 
Network rules that require transaction fees are generally not enforced; 
therefore transaction costs, if any, are negotiable between the parties 
and may vary widely, although, where transaction fees are included, 
they are paid by the spending party in a Bitcoin transaction. These 
transactions occur remotely through the Internet or in-person through 
forums such as Satoshi Square (an open-air bitcoin trading market held 
in New York City) and bulletin boards such as LocalBitcoins. 
Marketplaces like LocalBitcoins and ICBIT are intended to bring 
together counterparties trading in bitcoin but do not provide any 
clearing or intermediary function and may or may not report transaction 
data such as price and volume.
Bitcoin Exchange ``Lit'' Market
    Online Bitcoin Exchanges traded over $450,000,000 dollars of 
notional value during a twenty-four (24) hour period on May 31, 
2016.\28\ These marketplaces provide significant data with respect to 
prevailing valuations of bitcoin. Most Bitcoin Exchanges operate 
through pooled account systems, whereby the users of the Bitcoin 
Exchange send bitcoin and/or fiat currency to an account of the Bitcoin 
Exchange, which records user sub-account balances in a

[[Page 45564]]

ledger entry system. Trades on pooled account exchanges are typically 
conducted ``off-Blockchain,'' meaning that they are settled by 
reallocating bitcoin and money to and from users on the balanced ledger 
of the Bitcoin Exchange. Therefore, a trade on a pooled account 
exchange will not result in a Bitcoin transaction being transmitted and 
subsequently recorded on the Blockchain, or of a money transfer going 
from one bank account to another. For a pooled-account Bitcoin 
Exchange, Bitcoin transactions and money transfers typically only occur 
during the withdrawal or deposit of bitcoin or fiat currency by an 
exchange customer, or if the Bitcoin Exchange needs to shift bitcoin or 
fiat currency between its pooled accounts for internal purposes. 
Nevertheless, Bitcoin Exchanges typically publish trade data including 
last price, bid and ask information, and trade volume, among other 
data, on their respective Web sites and through application programming 
interfaces (``APIs'').
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    \28\ See, e.g., https://data.bitcoinity.org/markets/volume/30d?c=e&t=a.
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    As noted above, Gemini Exchange, an affiliate of the Sponsor and 
the source of the Gemini Exchange Spot Price used by the Trust to 
calculate its NAV, operates the Web site www.gemini.com. Gemini 
Exchange is owned and operated by Gemini Trust Company, LLC, the 
Trust's Custodian. As a facility of a New York State-chartered limited 
liability trust company, Gemini Exchange operates under the direct 
supervision and regulatory authority of the NYSDFS. The Gemini Trust 
Company is a fiduciary and must meet the capitalization, compliance, 
anti-money laundering, consumer protection and cyber security 
requirements as set forth by the NYSDFS. Gemini Exchange's principal 
business is to provide an electronic trading platform and associated 
online presence to allow customers to exchange fiat currency (e.g., 
U.S. Dollars) for Digital Assets (e.g., bitcoin or ether) and vice 
versa.
Bitcoin Exchange Market ``Dark Pools'' and OTC Trading
    In addition to transparent or ``lit'' online Bitcoin Exchanges with 
a traditional central limit order book structure, some trading in 
bitcoin takes place on an on-demand or over-the-counter (``OTC'') 
basis. Similar to mature securities, there are also private request for 
quote (RFQ) venues and ``dark pools,'' which are bitcoin trading 
platforms that do not publicly report limit order book data. Market 
participants have the ability to execute large block trades in a dark 
pool without revealing those trades and the related price data to the 
public Bitcoin Exchange Market; however, any withdrawal from or deposit 
to a dark pool platform must ultimately be recorded on the Blockchain, 
as must OTC transactions. Genesis Trading also operates a form of dark 
pool through a trading desk that buys and sells blocks of bitcoin 
without publicly reporting trade data. In June 2015, Kraken, a Bitcoin 
Exchange, launched a dark pool for bitcoin trades separate from its 
public central limit order book. Informal dark pools are currently 
believed to exist, particularly among wholesale buyers of bitcoin and 
Bitcoin Network mining groups that obtain bitcoin through mining. Such 
informal dark pools function as a result of the peer-to-peer nature of 
the Bitcoin Network, which allows direct transactions between any 
seller and buyer. As the Bitcoin Exchange Market and bitcoin dark pools 
have a limited history and no publicly available limit order book data, 
it is difficult to estimate the impact of dark pools on the Bitcoin 
Exchange Market.
Global Bitcoin Derivatives Markets
    Nascent derivatives markets for bitcoin now exist. For example, 
certain types of options, futures contracts for differences and other 
derivative instruments are available in certain jurisdictions; however, 
many of these are not available in the United States and generally are 
not regulated to the degree that U.S. investors expect derivative 
instruments to be regulated. The U.S. Commodity Futures Trading 
Commission (``CFTC'') has approved TeraExchange, LLC as a swap 
execution facility (``SEF''), on which bitcoin swap contracts may be 
entered into. On October 9, 2014, TeraExchange announced that it had 
hosted the first executed bitcoin swap traded on a CFTC-regulated 
platform. Additionally, in September 2015, the CFTC issued an order 
temporarily registering LedgerX LLC as a SEF. LedgerX also previously 
applied for registration as a derivatives clearing organization 
(``DCO'') although its application is still in the process of CFTC 
approval. Other parties have acknowledged submitting applications for 
registration to the CFTC, though no other bitcoin-focused derivatives 
platform has been approved for registration by the CFTC. Various 
platforms and Bitcoin Exchanges also offer trading on margin. 
Currently, the open interest in these bitcoin derivative instruments is 
quite limited in comparison to the volume of actual bitcoin trades. 
CFTC commissioners have previously expressed publicly that derivatives 
based on Digital Assets such as bitcoin are subject to regulation by 
the CFTC, including oversight to prevent market manipulation of the 
price of bitcoin. As previously noted, in the September 2015 Coinflip 
case, the CFTC instituted and settled administrative proceedings that 
involved a bitcoin derivatives trading platform and its chief executive 
officer. In Coinflip,\29\ the CFTC determined that bitcoin and other 
``virtual currencies'' (aka Digital Assets) are properly defined as 
commodities under the CEA and CFTC regulations, and applied CEA 
provisions and CFTC regulations that apply to transactions in commodity 
options and swaps to the conduct of the bitcoin derivatives trading 
platform. The CFTC affirmed its approach to the regulation of bitcoin 
and bitcoin-related enterprises on June 2, 2016, when the CFTC settled 
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its 
Order, the CFTC found that Bitfinex engaged in ``illegal, off-exchange 
commodity transactions and failed to register as a futures commission 
merchant'' when it facilitated borrowing transactions among its users 
to permit the trading of bitcoin on a ``leveraged, margined or financed 
basis'' without first registering with the CFTC.\30\ While the 
Commission has not opined on the legal characterization of bitcoin as a 
security, it has taken various actions against persons or entities 
misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi 
schemes), inaccurate and inadequate publicly disseminated information, 
and the offering of unregistered securities.\31\
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    \29\ See supra note 13.
    \30\ See In re BFXNA Inc., No. 16-19 (CFTC June 2, 2016), 
available at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf.
    \31\ See, e.g., Complaint and Demand for Jury Trial, SEC v. 
Homero Joshua Garza, GAW Miners, LLC and ZenMiner, LLC, Case 3:15-
cv-01760 (D. Conn. Dec. 1, 2015) (The Commission brought charges in 
connection with a bitcoin-related Ponzi scheme); SEC v. Erik T. 
Voorhees, SEC Administrative Proceeding File No. 3-15902 (June 3, 
2014), available at https://www.sec.gov/litigation/admin/2014/33-9592.pdf (The Commission brought an administrative action in 
connection with the offering of unregistered securities of two 
bitcoin-related entities.); BTC Trading, Corp. and Ethan Burnside, 
Securities Act Release No. 9685 (Dec. 8, 2014), available at http://www.sec.gov/litigation/admin/2014/33-9685.pdf (The Commission 
brought an administrative action in connection with the operation 
and offering of securities of two online exchanges, neither of which 
were registered with the Commission, that accepted payment in 
bitcoin and primarily listed virtual currency-related companies.); 
SEC v. Sand Hill Exchange, et al., Securities Act Release No. 9809 
(June 17, 2015), available at https://www.sec.gov/litigation/admin/2015/33-9809.pdf (The Commission took legal action against an online 
exchange that accepted payment in bitcoin in connection with 
disseminating fraudulent information, among other matters.).

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[[Page 45565]]

Goods and Services
    Bitcoin can also be used to purchase goods and services, either 
online or at physical locations, although reliable data is not readily 
available about the retail and commercial market penetration of the 
Bitcoin Network. In January 2014, U.S. national online retailers 
Overstock.com and TigerDirect began accepting Bitcoin payments. Over 
the course of 2014, computer hardware and software company Microsoft 
began accepting bitcoin as online payment for certain digital content, 
online retailer NewEgg began accepting bitcoin, and computer hardware 
company Dell began accepting bitcoin. There are thousands of additional 
online merchants that accept bitcoin, and the variety of goods and 
services for which bitcoin can be exchanged is increasing. Currently, 
local, regional and national businesses, including Time Inc., 
Wikimedia, WordPress, Expedia and Foodler, accept bitcoin. Bitcoin 
service providers such as BitPay, Coinbase and GoCoin and online gift 
card retailer Gyft provide other means to spend bitcoin for goods and 
services at additional retailers. There are also many real-world 
locations that accept bitcoin throughout the world.
    As of April 2016, it was estimated that as many as one hundred 
thousand (100,000) merchants or businesses accept, or have the 
technological infrastructure to choose to accept (e.g., Shopify 
merchants), bitcoin as payment. In September 2014, payments giant 
PayPal announced a partnership with BitPay, Coinbase and GoCoin to 
expand their Bitcoin-related services to PayPal's merchant customers, 
thereby significantly expanding the reach of bitcoin-accepting 
merchants. To date, the rate of consumer adoption and use of bitcoin in 
paying merchants has trailed the broad expansion of retail and 
commercial acceptance of bitcoin. Nevertheless, there will likely be a 
strong correlation between continued expansion of the Bitcoin Network 
and its retail and commercial market penetration.
Market Participants
Miners
    Miners range from Bitcoin enthusiasts to professional mining 
operations that design and build dedicated machines and data centers, 
but the vast majority of mining is now undertaken by participants in 
mining pools. See ``Bitcoin Mining & Creation of New Bitcoin'' above.
Investment and Speculative Sector
    This sector includes the investment and trading activities of both 
private and professional investors and speculators. These participants 
range from exchange-traded products, such as ARK Web x.0 ETF, or hedge 
funds such as the Pantera Bitcoin Fund Ltd. to day-traders who invest 
in bitcoin by trading on Bitcoin Exchanges such as Slovenia-based 
BitStamp and Hong Kong-based Bitfinex. See ``Uses of Bitcoin--Bitcoin 
Exchange Market'' below.
    Historically, larger financial services institutions are publicly 
reported to have limited involvement in investment and trading in 
bitcoin. In December 2013, Wedbush Securities and Bank of America 
Merrill Lynch released preliminary research reports on Bitcoin as both 
a payment tool and investment vehicle. Additionally in December, the 
Federal Reserve Bank of Chicago released a primer on Bitcoin prepared 
by a senior economist. In early 2014, Fitch Ratings, Goldman Sachs, 
JPMorgan Chase, PricewaterhouseCoopers, UBS Securities and Wedbush 
Securities, among others, released additional research reports 
analyzing the Bitcoin Network on the basis of bitcoin value, 
technological innovation or payment system mechanics. In December 2014, 
the Federal Reserve Board's Divisions of Research & Statistics and 
Monetary Affairs released an analysis of the Bitcoin Network's 
transaction system and the Bitcoin Exchange Market's economics. 
Additionally, institutions including Fortress Investment Group and 
Pantera Capital made, or proposed to make, direct or indirect 
investments in bitcoin or the Bitcoin ecosystem. In addition, in 
October 2015, the Congressional Research Service, at the request of one 
(1) or more Members, released a report detailing the background and 
regulatory landscape of Bitcoin.
Retail Sector
    The retail sector includes users transacting in direct peer-to-peer 
Bitcoin transactions through the direct sending of bitcoin over the 
Bitcoin Network. The retail sector also includes transactions between 
consumers paying for goods or services from commercial or service 
businesses through direct transactions or third-party service providers 
such as BitPay, Coinbase and GoCoin. BitPay, Coinbase and GoCoin each 
provide a merchant platform for instantaneous transactions whereby the 
consumer sends bitcoin to BitPay, Coinbase, or GoCoin, which then 
provides either the bitcoin or the cash value thereof to the commercial 
or service business utilizing the platform. PayPal, Square and Shopify 
are examples of traditional merchant payment processors or merchant 
platforms that have also added Bitcoin payment options for their 
merchant customers. Payment processing through the Bitcoin Network 
typically reduces the transaction cost for merchants, relative to the 
costs paid for credit card transaction processing. Consumers can now 
purchase goods or services through retail companies such as 
Overstock.com, DISH, Dell, Expedia, Microsoft, and Time, Inc.
Service Sector
    This sector includes companies that provide a variety of services 
including the buying, selling, payment processing and storing of 
bitcoin. Bitfinex, Bit-X and BTC-e are three (3) of the largest global 
U.S. Dollar-denominated Bitcoin Exchanges in the world based on 
Bitcoinity.org as of May 3, 2016. Huobi and OKCoin are large Bitcoin 
Exchanges based in China that primarily feature trading of bitcoin for 
Chinese Yuan based on Bitcoinity.org as of May 3, 2016. Coinbase and 
Circle are each multi-service financial institutions that provide 
digital wallets that store bitcoin for users and also serve as a retail 
gateway whereby users can purchase bitcoin for fiat currency. Coinbase, 
BitPay, BitPagos, and GoCoin are examples of Bitcoin payment processors 
that allow merchants to accept bitcoin as payment.
    As the Bitcoin Network continues to grow in acceptance, it is 
anticipated that service providers will expand the currently available 
range of services and that additional parties will enter the service 
sector for the Bitcoin Network.
Competition
    Bitcoin is not the only Digital Asset founded on math-based 
algorithms and cryptographic security, although it is considered the 
most prominent. Approximately seven hundred (700) other Digital Assets 
or ``altcoins'' have been developed since the Bitcoin Network's 
inception, including Litecoin, Ether and Ripple. The Bitcoin Network, 
however, possesses the ``first-to-market'' advantage and thus far has 
the largest market capitalization and is secured by a mining network 
with significantly more aggregate hashrate than the networks of any 
other Digital Assets.
Description of the Trust and the Shares
    According to the Registration Statement, the investment objective 
of the Trust is for the Shares to track the price of bitcoin as 
measured at 4:00 p.m. Eastern time using the Gemini Exchange

[[Page 45566]]

Spot Price on each Business Day, less the Trust's liabilities (which 
include accrued but unpaid fees and expenses).\32\ The Shares are 
designed for investors seeking a cost-effective and convenient means of 
gaining investment exposure to bitcoin similar to a direct investment 
in bitcoin. A substantial direct investment in bitcoin may require 
expensive and sometimes complicated arrangements in connection with the 
acquisition, security and safekeeping of the bitcoin and may involve 
the payment of substantial fees to acquire such bitcoin from third-
party facilitators through cash payments of U.S. Dollars. Although the 
Shares will not be the exact equivalent of a direct investment in 
bitcoin, they provide investors with an alternative that allows them to 
gain investment exposure to bitcoin. In addition, the Trust will 
provide its investors with other advantages including easy 
accessibility, relative cost efficiencies and minimal credit risk as 
the Trust will wholly-own all of its bitcoin assets, as discussed 
below. The Shares offer an investment that is:
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    \32\ According to the Registration Statement, the activities of 
the Trust will be limited to (1) issuing Baskets in exchange for the 
actual bitcoin deposited by the Authorized Participants with the 
Custodian as consideration, (2) transferring actual bitcoin as 
necessary to cover the Sponsor's Fee and as necessary to pay Trust 
expenses not assumed by the Sponsor and other liabilities, (3) 
transferring actual bitcoin in exchange for Baskets surrendered for 
redemption by the Authorized Participants, (4) causing the 
Administrator to sell bitcoin on the termination of the Trust, and 
(5) engaging in all administrative and custodial procedures 
necessary to accomplish such activities in accordance with the 
provisions of the Trust Agreement, the Trust Servicing Agreement, 
the Trust Agency Service Provider Agreement, the Custody Agreement, 
the License Agreement and Authorized Participant Agreements. The 
Trust will not be actively managed. It will not engage in any 
activities designed to obtain a profit from, or to ameliorate losses 
caused by, changes in the market prices of bitcoin. The Trust seeks 
to achieve its investment objective by directly owning bitcoin and 
will not speculate with regard to short-term changes in bitcoin 
prices. The Trust will not invest in bitcoin derivatives, futures, 
swaps, or other financial instruments that represent bitcoin or that 
may be exchanged for bitcoin. The Trust does not expect to make any 
cash distributions to shareholders.
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     Easily Accessible and Relatively Cost Efficient. Investors 
in the Shares can also directly access bitcoin through the Bitcoin 
Exchange Market. The Sponsor believes that investors will be able to 
more effectively implement strategic and tactical asset allocation 
strategies that use bitcoin by using the Shares instead of directly 
purchasing and holding bitcoin, and for many investors, transaction 
costs related to the Shares will be lower than those associated with 
the direct purchase, storage and safekeeping of bitcoin.
     Exchange-Traded and Transparent. The Shares will be listed 
and trade on BZX, providing investors with an efficient means to 
implement various investment strategies. Upon effectiveness of the 
registration statement of which this prospectus is a part, the Shares 
will be eligible for margin accounts and will be backed by the assets 
of the Trust. The Trust will not hold or employ any derivative 
securities. The value of the Trust's holdings will be reported each day 
on the Trust's Web site. Furthermore, the fact that the Trust will be 
regulated by the Exchange and by the Commission under the Act provides 
a level of oversight not provided by any other current Bitcoin 
Exchanges or service providers. The Sponsor represents that the Trust 
will enter into an information sharing agreement with the Gemini 
Exchange enabling it to obtain and publish the Gemini Exchange Spot 
Price on the Trust's Web site. In addition, the Sponsor will arrange 
for the Gemini Exchange to share data regarding the Gemini Exchange 
Spot Price and other trading data with the Exchange. See ``Overview of 
the Bitcoin Industry and Market--Bitcoin Value--Gemini Exchange Spot 
Price'' above. Lastly, the Exchange has the ability to halt trading and 
delist the Shares of the Trust under certain circumstances and, more 
generally, retains broad discretionary authority over the continued 
listing of securities on the Exchange, as further described below.
     Proprietary Cold Storage System. The Custodian has been 
appointed to store and safekeep the Trust's bitcoin using a state-of-
the-art, proprietary Cold Storage System. Similar hardware, software, 
administration and continued technological development may not be 
available or cost-efficient for many investors. Winklevoss IP, LLC 
(``WIP'') is the owner of certain intellectual property and it has 
licensed such intellectual property to the Sponsor for use by the 
Custodian and its service providers in the safekeeping of the Trust's 
bitcoin.
    Using the precious metals exchange-traded trusts currently trading 
on U.S. exchanges \33\ as design paradigms, the Sponsor has structured 
the Trust to be a similar passive investment vehicle holding a single 
asset. Like the precious metals exchange traded trusts cited above, the 
Trust will only own and store bitcoin and will not be permitted to hold 
cash or any other Digital Asset.
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    \33\ See, e.g., SPDR Gold Trust: See Securities Exchange Act 
Release No. 50603 (October 28, 2004), 69 FR 64614 (November 5, 2004) 
(SR-NYSE-2004-22) (approving listing of the SPDR Gold Trust); 
iShares Gold Trust: See Securities Exchange Act Release No. 51058 
(January 19, 2005), 70 FR 3749 (January 26, 2005) (SR-Amex-2004-38) 
(approving listing of the iShares Gold Trust); ETFS Gold Trust: See 
Securities Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993 
(May 15, 2009) (SR-NYSEArca-2009-40) (approving listing of the ETFS 
Gold Trust); ETFS Silver Trust: See Securities Exchange Act Release 
No. 59781 (April 17, 2009), 74 FR 18771 (April 24, 2009) (SR-
NYSEArca-2009-95) (approving listing of the ETFS Silver Trust); ETFS 
Platinum Trust: See Securities Exchange Act Release No. 61219 
(December 22, 2009), 74 FR 68886 (December 29, 2009) (SR-NYSEArca-
2009-94) (approving listing of the ETFS Platinum Trust); and ETFS 
Palladium Trust: See Securities Exchange Act Release No. 61220 
(December 22, 2009), 74 FR 68895 (December 29, 2009) (SR-NYSEArca-
2009-94) (approving listing of the ETFS Palladium Trust).
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    The Custodian has been appointed to store and safekeep the Trust's 
bitcoin using a state-of-the-art, proprietary Cold Storage System.\34\ 
Similar hardware, software, administration and continued technological 
development may not be available or cost-efficient for many investors. 
As such, the logistics of accepting, transferring and safekeeping of 
actual bitcoin are dealt with by the Custodian using the Cold Storage 
System, and the related expenses are built into the price of the 
Shares. Therefore, the investor does not have any additional tasks or 
costs over and above those associated with dealing in any other 
publicly traded security. The Shares are intended to provide investors 
with a cost-efficient and convenient means of gaining exposure to 
bitcoin similar to a direct investment in bitcoin.
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    \34\ WIP is the owner of certain intellectual property and it 
has licensed such intellectual property to the Sponsor for use by 
the Custodian and its service providers in the safekeeping of the 
Trust's bitcoin. The Sponsor believes that the use of this Cold 
Storage System and other security features described below, the 
technological experience of the Custodian's employees and the 
Sponsor's management team, as well as the use of independent 
auditors for periodic reviews, will provide a level of security not 
available through other Digital Asset custodians.
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    All bitcoin is recorded on the Blockchain, the decentralized 
transaction ledger of the Bitcoin Network. The Blockchain is a 
canonical record of every bitcoin, every Bitcoin transaction (including 
the mining of new bitcoin) and every Bitcoin address associated with a 
quantity of bitcoin. In order to transfer or ``spend'' bitcoin, one 
must control the private key that is mathematically associated with a 
given Bitcoin address. The private keys that control the Trust's 
bitcoin are secured by the Custodian and stored completely offline 
(i.e., air-gapped) using the Custodian's state-of-the-art, proprietary 
Cold Storage System. The Custodian's Cold Storage System is founded on 
the principles of (i) building defense-in-depth against external 
threats; (ii) protecting against human error; and (iii) guarding 
against misuse of insider access.

[[Page 45567]]

    In order to accomplish these principles, the Custodian's Cold 
Storage System generates, stores and manages the private keys that 
control the Trust's bitcoin onboard hardware security modules 
(``HSMs'') for the lifetime of each private key. HSMs (each, a 
``Signer'') are tamper-resistant computers used by the Custodian to 
digitally sign (i.e., authenticate) any transfer of the Trust's 
bitcoin. All Signers are stored, as well as backed up, in various 
geographically distributed, access-controlled facilities throughout the 
United States. In addition, the Custodian's Cold Storage System 
utilizes multiple-signature (``Multisig'') technology with an ``M-of-
N'' signing design that requires a signature from more than one (1) 
Signer (but fewer than the full complement of potential Signers) in 
order to move the Trust's bitcoin. This provides both security against 
attacks and tolerance to losing access to a minority of facilities or 
private keys, thereby eliminating single points of failure. In 
addition, the operation of a Signer requires the coordinated actions of 
multiple employees (each a ``Signatory'') to protect against insider 
malfeasance. Lastly, the Cold Storage System is comprised of hardware 
that is sourced from multiple, diverse manufacturers to guard against 
supply-chain risks.
    The Custodian's Cold Storage System was purpose-built to 
demonstrate ``proof of control'' of the private keys associated with 
its public Bitcoin addresses. More specifically, the Custodian can use 
Signers to sign a specific message chosen by the Custodian that 
references a current event (i.e., to prove recency), thereby proving 
control of the private keys associated with the public Bitcoin 
addresses in which the Trust's bitcoin are held. This allows the 
Custodian to evidence control of the Trust's assets periodically during 
audits on-demand and without necessitating the transfer of any of the 
Trust's bitcoin.
    The Custodian has evaluated different insurance policy options and 
determined not to obtain coverage at this time due to insurers' lack of 
understanding and sophistication with respect to Digital Assets, which 
has led to a thin marketplace of policies that are (i) not priced in an 
actuarially-fair manner and (ii) don't properly model relevant loss 
vectors. Unfortunately, an efficient and effective marketplace for 
bitcoin insurance has not yet developed.
    The Custodian is the custodian of the Trust's bitcoin in accordance 
with the terms and provisions of the Trust Custody Agreement and 
utilizes its Cold Storage System in the administration and operation of 
the Trust and the safekeeping of its bitcoin. The Custodian segregates 
the Trust's bitcoin which are held in unique Bitcoin addresses with 
balances that can be directly verified on the Bitcoin Blockchain. Under 
the Trust Custody Agreement, the Custodian is also responsible for the 
maintenance of, and periodic updates to, the Cold Storage System.
    Acting on standing instructions specified in the Trust Custody 
Agreement, the Custodian will accept, on behalf of the Trust, delivery 
of bitcoin from Authorized Participants into the Trust Custody Account 
in the creation of a Basket. In order for an Authorized Participant to 
redeem a Basket and receive a distribution of bitcoin from the Trust, 
the Custodian, upon receiving instructions from the Administrator, will 
sign transactions necessary to transfer bitcoin out of the Trust 
Custody Account and distribute to the Bitcoin address specified by the 
Authorized Participant. See ``Net Asset Value--Creation and Redemption 
of Shares.''
    The Sponsor has adopted several control procedures in addition to 
the safety features integral to the Cold Storage System's design. For 
example, the Sponsor must engage an independent audit firm to 
periodically audit the Custodian's Cold Storage System protocols and 
internal controls (``Internal Controls Audit''), and report to the 
Sponsor at least annually on such matters. Additionally, the Sponsor 
must engage an independent audit firm to biannually verify that the 
Custodian can demonstrate ``proof of control'' of the private keys that 
control the Trust's bitcoin (``Proof of Control Audit''). One Proof of 
Control Audit will be conducted at the end of each calendar year and 
the other at random.
Net Asset Value
    According to the Registration Statement, on each Business Day, the 
Administrator will use the Gemini Exchange Spot Price as measured at 
4:00 p.m. Eastern time (the ``Evaluation Time'') to calculate the 
Trust's NAV.
    At the Evaluation Time, the Administrator will value the bitcoin 
held by the Trust using the Gemini Exchange Spot Price or such other 
publicly available price as the Sponsor in good faith may deem fairly 
represents the fair market value of the Trust's bitcoin. In the event 
that the Sponsor determines that the Gemini Exchange Spot Price is not 
an appropriate basis for evaluation of the Trust's bitcoin, the Sponsor 
will instruct the Administrator to use the spot price of the itBit 
bitcoin exchange (the ``itBit Exchange'') as an alternative basis for 
calculating the Trust's NAV. The itBit Exchange is operated by the 
itBit Trust Company, LLC, a New York State-chartered limited liability 
trust company that, like the Gemini Exchange, operates under the direct 
supervision and regulatory oversight of the NYSDFS. Any determination 
that the Gemini Exchange Spot Price is unavailable or otherwise not an 
appropriate basis for calculating the Trust's NAV would be based upon 
extraordinary criteria in which the operation of Gemini Exchange is 
disrupted or otherwise experiencing material calculation or reporting 
irregularities. If the Sponsor determines in good faith that neither 
the Gemini Exchange Spot Price nor the spot price on the itBit Exchange 
is reliable for calculating the Trust's NAV on a particular Business 
Day, including but not limited to situations where it does not reflect 
material events occurring between the time of calculation of such 
Gemini Exchange Spot Price or the spot price on the itBit Exchange and 
the time the Trust's Shares are valued, bitcoin will be valued using 
fair market value pricing as determined in good faith by the Sponsor 
and calculated by the Administrator under procedures established in the 
Trust Servicing Agreement. Determining the fair market value of bitcoin 
involves the consideration of a number of subjective factors and thus 
the prices for bitcoin may differ from the Gemini Exchange Spot Price 
or the spot price on the itBit Exchange. The Sponsor may consider the 
market price for bitcoin on other Bitcoin Exchanges, or in other forums 
for which bitcoin prices are published publicly. Neither the 
Administrator nor the Sponsor shall be liable to any person for the 
determination that the Gemini Exchange Spot Price or an alternative 
basis for a fair market value of bitcoin is not appropriate as a basis 
for calculation of the Trust's NAV provided that such determination is 
made in good faith.
    In order to calculate the Trust's NAV, the Administrator will first 
determine the value of the Trust's bitcoin and then subtract all of the 
Trust's liabilities (including accrued but unpaid fees and expenses) to 
determine the Trust's net assets. The Administrator will calculate the 
Trust's NAV by dividing the net assets of the Trust by the number of 
the Shares outstanding as of the close of trading on the Exchange 
(which includes the net number of any of the Shares created or redeemed 
on such Business Day).
    The Sponsor will publish the Trust's NAV on the Trust's Web site as 
soon as

[[Page 45568]]

practicable after determination by the Administrator. To the extent 
that the NAV has been calculated using a price per bitcoin other than 
the Gemini Exchange Spot Price for such Business Day, the publication 
on the Trust's Web site will note the valuation methodology and the 
price per bitcoin resulting from such calculation.
Creation and Redemption of Shares
    The Trust is expected to issue and redeem Shares from time to time 
only in one or more whole Baskets. The Trust will issue and redeem the 
Shares in Baskets only to certain Authorized Participants on an ongoing 
basis. On a creation, Baskets will be distributed to the Authorized 
Participants by the Trust in exchange for the delivery to the Trust of 
the appropriate number of bitcoin (i.e., bitcoin equal in value to the 
value of the Shares being purchased). On a redemption, the Trust will 
distribute bitcoin equal in value to the value of the Shares being 
redeemed to the redeeming Authorized Participant in exchange for the 
delivery to the Trust of one or more Baskets. On each Business Day, the 
value of each Basket accepted by the Administrator in a creation or 
redemption transaction will be the same (i.e., each Basket will consist 
of 50,000 Shares and the value of the Basket will be equal to the value 
of 50,000 Shares at their net asset value per Share on that day). The 
Trust will not issue or redeem fractions of a Basket.
    Only Authorized Participants will be able to place orders to create 
or redeem Baskets. Authorized Participants must be (i) registered 
broker-dealers or other securities market participants, such as banks 
and other financial institutions, which are not required to register as 
broker-dealers to engage in securities transactions, and (ii) DTC 
Participants. A Transaction Fee may be imposed to offset the transfer 
and other transaction costs associated with creation or redemption. 
Authorized Participants or their affiliated market makers are expected 
to have the facility to participate directly on one or more Bitcoin 
Exchanges.
    The Trust currently expects that prior to the commencement of 
trading on the Exchange, at least two Authorized Participants will have 
signed an Authorized Participant Agreement with the Trust and may 
create and redeem Baskets as described above. Persons interested in 
placing orders to create or redeem Baskets should contact the Sponsor 
or the Administrator to obtain the contact information for the 
Authorized Participants. Shareholders who are not Authorized 
Participants will only be able to redeem their Shares through an 
Authorized Participant.
    Bitcoin will be (i) delivered to the Trust Custody Account from an 
Authorized Participant in connection with the creation of one or more 
Baskets and (ii) distributed by the Custodian from the Trust Custody 
Account to the Authorized Participant in connection with the redemption 
of one or more Baskets.
    Under the Authorized Participant Agreement, the Sponsor has agreed 
to indemnify the Authorized Participants against certain liabilities, 
including liabilities under the Securities Act.
    The following description of the procedures for the creation and 
redemption of Baskets is only a summary and an investor should refer to 
the relevant provisions of the Trust Agreement, the Trust Servicing 
Agreement and the form of Authorized Participant Agreement for more 
detail, each of which is attached as an exhibit to the Registration 
Statement of which the prospectus is a part.
Creation Procedures
    On any Business Day, an Authorized Participant may place an order 
with the Administrator to create one or more Baskets (each a ``Creation 
Basket''). The settlement of Creation Basket orders, including the 
delivery of bitcoin by the Authorized Participant and distribution of 
Shares to the Authorized Participant, will occur only on days BZX is 
open for regular trading.
Creation Basket Order Requirements
    The number of bitcoin required to be delivered to the Trust in 
exchange for a Creation Basket is determined by the Trust Agreement. 
All questions as to the amount of bitcoin necessary to deliver to 
purchase a Creation Basket will be conclusively determined by the 
Administrator. The Administrator's determination of the cost of a 
Creation Basket shall be final and binding on all persons interested in 
the Trust.
Creation Basket Distribution
    An Authorized Participant who places a Creation Basket order with 
the Administrator is responsible for delivering the bitcoin to the 
Trust required to purchase the Creation Basket on the order date. 
Bitcoin delivered by an Authorized Participant will be considered 
settled upon the completion of the Confirmation Protocol. Under the 
Confirmation Protocol, the Custodian must wait until the bitcoin 
delivery transaction has been confirmed by six (6) consecutive blocks 
on the Blockchain before it is considered settled. The confirmation 
process should take approximately one (1) hour depending upon the speed 
with which Bitcoin Network miners add new blocks to the Blockchain. See 
``Overview of the Bitcoin Industry and Market--Cryptographic Security 
Used in the Bitcoin Network--Double-Spending and the Bitcoin Network 
Confirmation System,'' above. An Authorized Participant shall not be 
deemed to have fulfilled its bitcoin delivery requirement until the 
completion of the Confirmation Protocol.
    Following confirmation of the receipt of bitcoin into the Trust 
Custody Account by the Custodian, the Administrator will direct DTC to 
credit the Authorized Participant's DTC account with the Shares 
representing the number of Creation Baskets purchased. The expense and 
risk of delivery, ownership and safekeeping of a bitcoin delivery until 
it has been received by the Trust in the Trust Custody Account shall be 
borne solely by the Authorized Participant.
    The Custodian may accept delivery of bitcoin by such other means as 
the Sponsor, from time to time, may determine to be acceptable for the 
Trust, provided that the same is disclosed in a prospectus relating to 
the Trust filed with the Commission pursuant to Rule 424 under the 
Securities Act. If bitcoin is to be delivered other than as described 
above, the Sponsor is authorized to establish such procedures and to 
appoint such custodians and establish such custody accounts in addition 
to those described in this prospectus, as the Sponsor determines to be 
desirable.
Suspension or Rejection of Creation Basket Orders
    The Administrator may, in its discretion, and when directed by the 
Sponsor, suspend the right to place Creation Basket orders, or postpone 
the Creation Basket settlement date, (i) for any period during which 
BZX is closed other than customary weekend or holiday closings, or 
trading on BZX is suspended or restricted or (ii) for any period during 
which an emergency exists as a result of which receipt or evaluation of 
bitcoin delivery is not reasonably practicable or presents, in the 
judgment of the Administrator, the Custodian or the Sponsor or their 
agents, a security risk to the Cold Storage System. The inability of 
the Custodian to operate the Cold Storage System because of a failure 
of hardware, software or personnel or an inability to access the Cold 
Storage System (e.g., because of power failure or acts of God) are 
examples of such emergencies. None of the Administrator, the Custodian, 
the

[[Page 45569]]

Sponsor or their agents will be liable to any person or in any way for 
any loss or damages that may result from any such suspension or 
postponement.
    The Administrator may also reject a Creation Basket order if (i) 
such order is not presented in proper form as described in the 
Authorized Participant Agreements, (ii) such order is incorrect, (iii) 
if the Creation Basket Order presents, in the opinion of the 
Administrator, the Custodian, the Sponsor, or their agents, a security 
risk to the Cold Storage System, or (iv) the fulfillment of the 
Creation Basket order, in the opinion of counsel, might be unlawful. 
None of the Trustee, Administrator, Trust Agency Service Provider, 
Custodian, Sponsor, or their agents, will be liable for the rejection 
of any Creation Basket order.
Redemption Procedures
    The procedures by which an Authorized Participant can redeem one or 
more Baskets (each a ``Redemption Basket'') will mirror the procedures 
for the creation of Baskets. On any Business Day, an Authorized 
Participant may place a Redemption Basket order with the Administrator. 
The settlement of Redemption Baskets orders, including the delivery of 
Shares to the Trust and distribution of bitcoin to the Authorized 
Participant, will only occur when BZX is open for regular trading. 
Settlement of Redemption Baskets orders may be delayed longer than 
three (3), but no more than five (5), Business Days following the 
Redemption Basket order date. Settlement of Redemption Baskets may be 
delayed only in the instance of administrative or custodial delays in 
the processing of a distribution of bitcoin from the Trust Custody 
Account, whether by reason of Bitcoin Network delays, mechanical or 
clerical error or by act of God. Settlement of a Redemption Basket will 
occur only on Business Days. Redemption Basket orders must be placed no 
later than 4:00 p.m. Eastern time on a Business Day. A Redemption 
Basket order so received will be effective on the date it is received 
if the Administrator finds it to be in satisfactory form. The 
redemption procedures allow only Authorized Participants to place 
Redemption Basket orders and do not entitle an Authorized Participant 
to receive a distribution of bitcoin in an amount that is different 
than the value of a Redemption Basket.
    By placing a Redemption Basket order, an Authorized Participant 
agrees to deliver the number of Shares in the Redemption Basket through 
DTC's book-entry system to the Administrator's DTC account not later 
than the third Business Day following the effective date of the 
Redemption Basket order.
Redemption Basket Order Requirements
    The Redemption Basket distribution from the Trust will consist of a 
transfer to the redeeming Authorized Participant of the number of the 
bitcoin held by the Trust in the Trust Custody Account evidenced by the 
Shares being delivered. Redemption distributions will be subject to the 
deduction of any applicable taxes or other governmental charges that 
may be due.
Redemption Basket Distribution
    The distribution of bitcoin representing a Redemption Basket will 
be transferred to the Authorized Participant on the third Business Day 
following the Redemption Basket order date if, by 9:00 a.m. Eastern 
time on such third Business Day, the Administrator's DTC account has 
been credited with the Redemption Baskets to be redeemed. Subsequently, 
the Administrator will instruct the Custodian to transfer bitcoin from 
the Trust Custody Account and distribute it to the redeeming Authorized 
Participant. If the Administrator's DTC account has not been credited 
with all of the Shares representative of the Redemption Baskets to be 
redeemed by such time, the delivery will be considered unfulfilled. The 
Administrator is also authorized to instruct the Custodian to transfer 
to the Authorized Participant the distribution of bitcoin resulting 
from the Redemption Basket order, notwithstanding that the Redemption 
Baskets to be redeemed are not credited to the Administrator's DTC 
account by 9:00 a.m. Eastern time on the third Business Day following 
the Redemption Basket order date, if the Authorized Participant has 
collateralized its obligation to deliver the Redemption Baskets through 
DTC's book-entry system on such terms as the Sponsor and the 
Administrator may from time to time agree upon.
    In order to facilitate the distribution of the bitcoin representing 
a Redemption Basket order, the Administrator will calculate the number 
of bitcoin representing the value of the Redemption Basket order and 
instruct the Custodian to distribute that amount of bitcoin to the 
redeeming Authorized Participant.
Suspension or Rejection of Redemption Basket Orders
    The Administrator may, in its discretion, and will, when directed 
by the Sponsor, suspend the right to place Redemption Basket orders, or 
postpone the Redemption Basket order settlement date, (i) for any 
period during which BZX is closed other than customary weekend or 
holiday closings, or trading on BZX is suspended or restricted or (ii) 
for any period during which an emergency exists as a result of which 
the distribution or evaluation of bitcoin is not reasonably practicable 
or presents, in the judgment of Administrator, the Custodian, the 
Sponsor or their agents, a security risk to the Cold Storage System. 
The inability of the Custodian to operate the Cold Storage System 
because of a failure of hardware, software or personnel or an inability 
to access the Cold Storage System (e.g., because of power failure or 
acts of God) are examples of such emergencies. None of the 
Administrator, the Custodian, the Sponsor or their agents will be 
liable to any person or in any way for any loss or damages that may 
result from any such suspension or postponement.
    The Administrator will also reject a Redemption Basket order if the 
order is not in proper form as described in the Authorized Participant 
Agreement or if the fulfillment of the Redemption Basket order, in the 
opinion of its counsel, might be unlawful.
Availability of Information
    The Trust's Web site, which will be publicly available prior to the 
public offering of the Shares, will include a form of the prospectus 
for the Trust that may be downloaded. The Web site will include 
additional quantitative information updated on a daily basis, 
including, for the Trust: (i) The prior Business Day's reported NAV, 
the highest quoted bid price for the Shares (the ``Best Bid'') and 
lowest quoted offer price for the Shares (the ``Best Ask''), the mid-
point of the spread between the Best Bid and the Best Ask at the time 
of the NAV calculation (the ``Best Bid/Best Ask''),\35\ the daily 
trading volume of the Shares, and the calculation of the premium and 
discount of the Best Bid/Best Ask against the NAV; and (ii) data in 
chart format displaying the frequency distribution of discounts and 
premiums of the daily Best Bid/Best Ask against the NAV, within 
appropriate ranges, for each of the four (4) previous calendar 
quarters. Daily trading volume information for the Shares will also be 
available in the financial section of newspapers, through subscription 
services such as Bloomberg, Thomson

[[Page 45570]]

Reuters and International Data Corporation, which can be accessed by 
Authorized Participants and other investors, as well as through other 
electronic services, including major public Web sites.
---------------------------------------------------------------------------

    \35\ The Best Bid/Best Ask of the Shares will be determined 
using the midpoint of the spread between the Best Bid and the Best 
Ask on the Exchange at the time of the NAV calculation. The records 
relating to Best Bid/Best Ask will be retained by the Trust and its 
service providers.
---------------------------------------------------------------------------

    In addition, the Sponsor will calculate an estimated fair value of 
the Shares based on the most recent Gemini Exchange Spot Price (the 
``Intraday Indicative Value''), which will be updated and widely 
disseminated by one or more major market data vendors at least every 
fifteen (15) seconds during the Exchange's regular trading hours.\36\ 
The dissemination of the Intraday Indicative Value will provide 
investors with an estimate of the fair value of the Shares throughout 
the trading day.
---------------------------------------------------------------------------

    \36\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Intraday Indicative Values published via the Consolidated Tape 
Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    Investors may obtain bitcoin pricing information twenty-four (24) 
hours a day or from various financial information service providers or 
Bitcoin Network information sites such as BitcoinCharts.com or 
bitcoinity.org. Bloomberg financial terminals include pricing data in 
USD and in Euro from several Bitcoin Exchanges. Recently, the CME and 
the ICE announced bitcoin pricing indices. Current Bitcoin market 
prices are also generally available with bid/ask spreads directly from 
Bitcoin Exchanges. In addition, on each Business Day, the Trust's Web 
site will provide pricing information for the Gemini Exchange Spot 
Price and the Shares. The Gemini Exchange itself provides comprehensive 
last trade information as well as the aggregate quantity available at 
each price level within its limit order book, all through its public 
Web site (www.gemini.com) and public market data feeds.
    Additional information regarding the Trust and its Shares, 
including risks, creation and redemption procedures, fees, 
distributions and taxes, is included in the Registration Statement.
Arbitrage Mechanism
    Similar to other ETPs listed and traded on the Exchange, the Trust 
will rely on the Basket creation and redemption process to reduce any 
premium or discount that may occur in the Share trading prices on the 
Exchange relative to the NAV. Baskets may be created or redeemed only 
by Authorized Participants who have entered into an Authorized 
Participant Agreement with the Trust and the Sponsor. The Basket 
creation and redemption process is important for the Trust in providing 
Authorized Participants with an arbitrage mechanism through which they 
may keep Share trading prices in line with the NAV. See ``Overview of 
the Bitcoin Industry and Market--Bitcoin Value--Gemini Exchange Spot 
Price'' above.
    As the Shares trade intraday on the Exchange, their market prices 
will fluctuate due to supply and demand, which will be driven in large 
part by the price of bitcoin. The following examples generally describe 
the conditions surrounding Basket creation and redemption:
     If the market price of the Shares is greater than the NAV, 
an Authorized Participant can purchase sufficient bitcoin to create a 
Basket, and then sell the new Shares on the secondary market at a 
profit. This process increases the selling interest of the Shares and 
is expected to decrease the market price of the Shares such that their 
market price will be closer to the NAV.
 If the NAV is greater than the market price of the Shares, an 
Authorized Participant can purchase Shares on the secondary market in 
an amount equal to a Basket and redeem them for bitcoin, and then sell 
the bitcoin at a profit. This process increases the buying interest for 
the Shares and is expected to increase the market price of the Shares 
such that their market price will be closer to the NAV.
    This process is referred to as the arbitrage mechanism (``Arbitrage 
Mechanism''). The Arbitrage Mechanism helps to minimize the difference 
between the trading price of a Share and the NAV. Over time, these 
buying and selling pressures should balance, and a Share's market 
trading price is expected to remain at a level that is at or close to 
the NAV. The Arbitrage Mechanism provided by the Basket creation and 
redemption process is designed, and required, in order to maintain the 
relationship between the market trading price of the Shares and the 
NAV. The Exchange expects that arbitrageurs will take advantage of 
price variations between the Shares' market price and the NAV and that 
the Arbitrage Mechanism will be facilitated by the transparency and 
simplicity of the Trust's holdings, the availability of the Intraday 
Indicative Value, the liquidity of the bitcoin market, each Authorized 
Participant's ability to access the bitcoin market, and each Authorized 
Participant's ability to create workable hedges.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a 
trust that holds a specified commodity \37\ deposited with the trust; 
(b) issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and (c) 
when aggregated in the same specified minimum number, may be redeemed 
at a holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity. The Trust currently 
expects that there will be at least 100,000 Shares outstanding at the 
time of commencement of trading on the Exchange. Upon termination of 
the Trust, the Shares will be removed from listing. The Trustee, 
Delaware Trust Company, is a trust company having substantial capital 
and surplus and the experience and facilities for handling corporate 
trust business, as required under Rule 14.11(e)(4)(E)(iv)(a) and that 
no change will be made to the trustee without prior notice to and 
approval of the Exchange. The Exchange also notes that, pursuant to 
Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange 
shall have any liability for damages, claims, losses or expenses caused 
by any errors, omissions or delays in calculating or disseminating any 
underlying commodity value, the current value of the underlying 
commodity required to be deposited to the Trust in connection with 
issuance of Commodity-Based Trust Shares; resulting from any negligent 
act or omission by the Exchange, or any agent of the Exchange, or any 
act, condition or cause beyond the reasonable control of the Exchange, 
its agent, including, but not limited to, an act of God; fire; flood; 
extraordinary weather conditions; war; insurrection; riot; strike; 
accident; action of government; communications or power failure; 
equipment or software malfunction; or any error, omission or delay in 
the reports of transactions in an underlying commodity. Finally, as 
required in Rule 14.11(e)(4)(G), the Exchange notes that any registered 
market maker (``Market Maker'') in the

[[Page 45571]]

Shares must file with the Exchange in a manner prescribed by the 
Exchange and keep current a list identifying all accounts for trading 
in an underlying commodity, related commodity futures or options on 
commodity futures, or any other related commodity derivatives, which 
the registered Market Maker may have or over which it may exercise 
investment discretion. No registered Market Maker shall trade in an 
underlying commodity, related commodity futures or options on commodity 
futures, or any other related commodity derivatives, in an account in 
which a registered Market Maker, directly or indirectly, controls 
trading activities, or has a direct interest in the profits or losses 
thereof, which has not been reported to the Exchange as required by 
this Rule. In addition to the existing obligations under Exchange rules 
regarding the production of books and records (see, e.g., Rule 4.2), 
the registered Market Maker in Commodity-Based Trust Shares shall make 
available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
---------------------------------------------------------------------------

    \37\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act. As noted above, the CFTC has opined that Bitcoin is a commodity 
as defined in Section 1a(9) of the Commodity Exchange Act. See 
Coinflip, supra note 13.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) The extent to which trading is not occurring in the bitcoin 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a) the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Commodity-Based Trust 
Shares. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Trust or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil 
for compliance with the continued listing requirements. If the Trust or 
the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12. The Exchange may obtain information regarding 
trading in the Shares via the Intermarket Surveillance Group (``ISG''), 
from other exchanges who are members or affiliates of the ISG, or with 
which the Exchange has entered into a comprehensive surveillance 
sharing agreement.\38\ In addition, the Exchange may obtain information 
about bitcoin transactions, trades and market data from Bitcoin 
Exchanges with which the Exchange has entered into a comprehensive 
surveillance sharing agreement as well as certain additional 
information that is publicly available through the Blockchain. The 
Exchange notes that it has entered into a comprehensive surveillance 
sharing agreement with Gemini Exchange.
---------------------------------------------------------------------------

    \38\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) The procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the Intraday Indicative Value and the Trust's NAV are 
disseminated; (iv) the risks involved in trading the Shares during the 
Pre-Opening \39\ and After Hours Trading Sessions \40\ when an updated 
Intraday Indicative Value will not be calculated or publicly 
disseminated; (v) the requirement that members deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (vi) trading information.
---------------------------------------------------------------------------

    \39\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. 
Eastern Time.
    \40\ The After Hours Trading Session is from 4:00 p.m. to 5:00 
p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
    In addition, the Information Circular will reference that the Trust 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also reference the fact that, 
apart from the CFTC, the Financial Crimes Enforcement Network of the 
U.S. Department of the Treasury (``FinCEN'') and the US Internal 
Revenue Service (``IRS''), most major U.S. regulators, including the 
Commission, have yet to make official pronouncements or adopt rules 
providing guidance with respect to the classification and treatment of 
bitcoin and other Digital Assets for purposes of commodities, tax and 
securities laws. The Information Circular will also contain information 
regarding the CFTC's determination that bitcoin and other ``virtual 
currencies'' (aka Digital Assets) are properly defined as commodities 
under the CEA,\41\ and will reference the fact that the CFTC has 
applied CEA provisions and CFTC regulations that apply to transactions 
in commodity options and swaps to the conduct of the bitcoin 
derivatives trading platform.
---------------------------------------------------------------------------

    \41\ See Coinflip, supra note 13.

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[[Page 45572]]

2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \42\ in general and Section 6(b)(5) of the Act \43\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78f.
    \43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Exchange Rule 14.11(e)(4), 
which as noted above includes all statements and representations made 
in this filing regarding the description of the portfolio and 
limitations on portfolio holdings or reference assets. The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. The Exchange may obtain information 
regarding trading in the Shares via the ISG from other exchanges who 
are members or affiliates of the ISG, or with which the Exchange has 
entered into a comprehensive surveillance sharing agreement.\44\ In 
addition, the Exchange may obtain information about Bitcoin 
transactions, trades, and market data from Bitcoin Exchanges with which 
the Exchange has entered into a comprehensive surveillance sharing 
agreement, which includes the Gemini Exchange, as well as certain 
additional information that is publicly available through the 
Blockchain.
---------------------------------------------------------------------------

    \44\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

    According to the Registration Statement, the Trust will only own 
and store bitcoin and will not be permitted to hold cash or any other 
Digital Asset. The proposal also promotes market transparency in that 
large amount of information is publicly available regarding the Trust 
and the Shares, thereby promoting market transparency. The Exchange 
will obtain a representation from the Sponsor that the Trust's NAV will 
be determined by the Administrator and published by the Sponsor at 4:00 
p.m. Eastern time each Business Day (using the 4:00 p.m. Eastern time 
Gemini Exchange Spot Price) on the Trust's Web site and that such 
information will be made available to all market participants at the 
same time. Furthermore, the Trust's Web site will provide an Intraday 
Indicative Value during regular trading hours on each Business Day. The 
Trust's Web site will also provide its current prospectus, as well as 
the two (2) most recent reports to shareholders. The Web site will 
include additional quantitative information updated on a daily basis, 
including, for the Trust: (i) The prior Business Day's reported NAV, 
the Best Bid, the Best Ask, the Best Bid/Best Ask, the daily trading 
volume of the Shares, and the calculation of the premium and discount 
of the Best Bid/Best Ask against the NAV; and (ii) data in chart format 
displaying the frequency distribution of discounts and premiums of the 
daily Best Bid/Best Ask against the NAV, within appropriate ranges, for 
each of the four (4) previous calendar quarters. In addition, the 
Exchange will publish (via the CTA) quotation information, trading 
volume, closing prices and the prior Business Day's NAV. The Intraday 
Indicative Value and the intraday Gemini Exchange Spot Price will be 
widely disseminated by one (1) or more major market data vendors, such 
as Reuters or Bloomberg, and broadly displayed on at least a 15-second 
delayed basis during regular trading hours. In addition, information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the Business Day 
on brokers' computer screens and other electronic services, and 
quotation and last sale information will also be available via the 
Exchange's data feeds.
    The proposed rule change is further designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest and to promote market transparency in that there is a 
considerable amount of bitcoin price and market information available 
for free on public Web sites and through financial, professional and 
subscription services. Investors may obtain bitcoin pricing information 
twenty-four (24) hours a day or from various financial information 
service providers or Bitcoin Network information sites such as 
www.BitcoinCharts.com or www.bitcoinity.org. Bloomberg financial 
terminals include pricing data in USD and in Euro from several Bitcoin 
Exchanges. Recently, the CME and the ICE announced bitcoin pricing 
indices. Current Bitcoin market prices are also generally available 
with bid/ask spreads directly from various Bitcoin Exchanges.
    The Exchange also believes that the widespread availability of 
information regarding bitcoin, the Trust, and the Shares, combined with 
the ability of Authorized Participants to create and redeem Baskets 
each Business Day, thereby utilizing the Arbitrage Mechanism, will be 
sufficient for market participants to value and trade the Shares in a 
manner that will not lead to significant deviations between intraday 
Best Bid/Best Ask and the Intraday Indicative Value as well as between 
the Best Bid/Best Ask and the NAV. In addition, the numerous options 
for buying and selling bitcoin will both provide Authorized 
Participants with many options for hedging their positions and provide 
market participants generally with potential arbitrage opportunities, 
further strengthening the Arbitrage Mechanism as it relates to the 
Shares. Furthermore, the Trust has discussed with several prominent 
market participants the possibility of acting as an Authorized 
Participant and/or a Market Maker, each of which is an experienced 
participant in the ETP marketplace and is actively engaged in trading 
ETPs. A number of these potential Authorized Participants and Market 
Makers currently trade bitcoin and are already registered participants 
that trade on the Gemini Exchange. Based on their experience in ETPs 
and in the Bitcoin marketplace, these market participants have 
indicated that they believe that they will be able to make efficient 
and liquid markets in the Shares at prices generally in line with the 
NAV.
    Authorized Participants will be able to acquire bitcoin for 
delivery to the Trust by a variety of means. Authorized Participants 
will not be required to use the Gemini Exchange to trade their bitcoin 
and the Gemini Exchange is not the only venue on which Authorized 
Participants can purchase bitcoin for delivery to the Trust. However, 
as discussed above, the ability to transact in bitcoin on the Gemini 
Exchange may provide (i) a convenient and stable venue with superior 
liquidity characteristics in which to purchase or sell bitcoin, (ii) an 
efficient way to trade bitcoin, and (iii) a safe place to store 
purchased bitcoin for future use in the creation of Baskets given the 
regulatory oversight to which the Gemini Exchange is subject.
    The Exchange may consider all relevant factors in exercising its 
discretion to halt or suspend trading in the Shares. The Exchange will 
halt

[[Page 45573]]

trading in the Shares under the conditions specified in BZX Rule 11.18. 
Trading may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
These may include: (i) The extent to which trading is not occurring in 
the financial instruments underlying the Shares; or (ii) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present. Trading in the Shares also will be 
subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances 
under which trading in the Shares may be halted.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
Commodity-Based Trust Shares that will enhance competition among market 
participants, to the benefit of investors and the marketplace. As noted 
above, the Exchange has in place surveillance procedures relating to 
trading in the Shares and may obtain information from other Bitcoin 
Exchanges with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding bitcoin pricing and 
bitcoin information, as well as equitable access to the Trust's 
Intraday Indicative Value, NAV, and quotation and last sale information 
for the Shares.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

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

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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(a) By order approve or disapprove such proposed rule change; or (b) 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

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

Paper Comments

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

All submissions should refer to File Number SR-BatsBZX-2016-30. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsBZX-2016-30 and should 
be submitted on or before August 4, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-16604 Filed 7-13-16; 8:45 am]
 BILLING CODE 8011-01-P