Document ID: SEC-2018-1015-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2018-07-02T04:00Z

[Federal Register Volume 83, Number 127 (Monday, July 2, 2018)]
[Notices]
[Pages 31014-31028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14114]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83520; File No. SR-CboeBZX-2018-040]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To List and Trade Shares of SolidX 
Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust

June 26, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 20, 2018, Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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 shares of SolidX 
Bitcoin Shares (the ``Fund'') issued by the VanEck SolidX Bitcoin Trust 
(the ``Trust''), under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares.
    The text of the proposed rule change is available at the Exchange's 
website at www.markets.cboe.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.

[[Page 31015]]

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),\3\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\4\ SolidX Management LLC is the 
sponsor of the Trust (``Sponsor''). The Trust will be responsible for 
custody of the Trust's bitcoin. SolidX Management LLC is a wholly-owned 
subsidiary of SolidX Partners Inc. Delaware Trust Company is the 
trustee (``Trustee''). The Bank of New York Mellon will be the 
administrator (``Administrator''), transfer agent (``Transfer Agent'') 
and the custodian, with respect to cash, (``Cash Custodian'') of the 
Trust. Foreside Fund Services, LLC will be the marketing agent 
(``Marketing Agent'') in connection with the creation and redemption of 
``Baskets'' \5\ of Shares. Van Eck Securities Corporation (``VanEck'') 
provides assistance in the marketing of the Shares.
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    \3\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \4\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \5\ The Trust will issue and redeem ``Baskets'', each equal to a 
block of 5 Shares, only to ``Authorized Participants''. See 
``Creation and Redemption of Shares'' below.
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    The Trust was formed as a Delaware statutory trust on September 15, 
2016 and is operated as a grantor trust for U.S. federal tax purposes. 
The Trust has no fixed termination date.
    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the Trust's net assets. 
The Trust's assets will consist of bitcoin \6\ held by the Trust 
utilizing a secure process as described below in ``bitcoin Security and 
Storage for the Trust''. The Trust will not normally hold cash or any 
other assets, but may hold a very limited amount of cash in connection 
with the creation and redemption of Baskets and to pay Trust expenses, 
as described below.
    According to the Registration Statement, the Trust will invest in 
bitcoin only. The activities of the Trust are limited to: (1) Issuing 
Baskets in exchange for the cash and/or bitcoin deposited with the Cash 
Custodian or Trust, respectively, as consideration; (2) purchasing 
bitcoin from various exchanges and in OTC transactions; (3) selling 
bitcoin (or transferring bitcoin, at the Sponsor's discretion, to pay 
the Management Fee) as necessary to cover the Sponsor's Management Fee, 
bitcoin Insurance Fee, Trust principals' and employees' salaries, 
expenses associated with securing the Trust's bitcoin and Trust 
expenses not assumed by the Sponsor and other liabilities; (4) selling 
bitcoin as necessary in connection with redemptions; (5) delivering 
cash and/or bitcoin in exchange for Baskets surrendered for redemption; 
(6) maintaining insurance coverage for the bitcoin held by the Trust; 
and (7) securing the bitcoin held by the Trust.
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    \6\ A ``bitcoin'' is an asset that can be transferred among 
parties via the internet, but without the use of a central 
administrator or clearing agency (``bitcoin''). The asset, bitcoin, 
is generally written with a lower case ``b''. The asset, bitcoin, is 
differentiated from the computers and software (or the protocol) 
involved in the transfer of bitcoin among users, which constitute 
the ``Bitcoin Network''. The asset, bitcoin, is the intrinsically 
linked unit of account that exists within the Bitcoin Network. See 
``bitcoin and the Bitcoin Industry'' below.
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    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\7\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''),\8\ and neither the Trust nor the Sponsor is 
subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
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    \7\ 15 U.S.C. 80a-1.
    \8\ 17 U.S.C. 1.
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Investment Objective
    According to the Registration Statement and as further described 
below, the investment objective of the Trust is for the Shares to 
reflect the performance of the price of bitcoin, less the expenses of 
the Trust's operations. The Trust intends to achieve this objective by 
investing substantially all of its assets in bitcoin traded primarily 
in the over-the-counter (``OTC'') markets, though the Trust may also 
invest in bitcoin traded on domestic and international bitcoin 
exchanges, depending on liquidity and otherwise at the Trust's 
discretion. The Trust is not actively managed. It does not engage in 
any activities designed to obtain a profit from, or to ameliorate 
losses caused by, changes in the price of bitcoin.
Investment in bitcoin
    Subject to certain requirements and conditions described below and 
in the Registration Statement, the Trust, under normal market 
conditions,\9\ will use available offering proceeds to purchase bitcoin 
primarily in the OTC markets, without being leveraged or exceeding 
relevant position limits.
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    \9\ The term ``under normal circumstances'' includes, but is not 
limited to, the absence of extreme volatility or trading halts in 
the price of bitcoin or the financial markets generally; operational 
issues causing dissemination of inaccurate market information; or 
force majeure type events such as systems failure, natural or man-
made disaster, act of God, armed conflict, act of terrorism, riot or 
labor disruption or any similar intervening circumstance.
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bitcoin and the bitcoin Industry
General
    The following is a brief introduction to the global bitcoin market. 
The data presented below are derived from information released by 
various third-party sources, including white papers, other published 
materials, research reports and regulatory guidance.
The bitcoin Network
    A bitcoin is an asset that can be transferred among parties via the 
internet, but without the use of a central administrator or clearing 
agency. The term ``decentralized'' is often used in descriptions of 
bitcoin, in reference to bitcoin's lack of necessity for administration 
by a central party. The Bitcoin Network (i.e., the network of computers 
running the software protocol underlying bitcoin involved in 
maintaining the database of bitcoin ownership and facilitating the 
transfer of bitcoin among parties) and the asset, bitcoin, are 
intrinsically linked and inseparable. Bitcoin was first described in a 
white paper released in 2008 and published under the name ``Satoshi 
Nakamoto'', and the protocol underlying bitcoin was subsequently 
released in 2009 as open source software.
bitcoin Ownership and the Blockchain
    To begin using bitcoin, a user may download specialized software 
referred to as a ``bitcoin wallet''. A user's bitcoin wallet can run on 
a computer or smartphone. A bitcoin wallet can be used both to send and 
to receive bitcoin. Within a bitcoin wallet, a user will be able to 
generate one or more ``bitcoin addresses'', which are similar in 
concept to bank account numbers, and each address is unique. Upon 
generating a bitcoin address, a user can begin to transact in bitcoin 
by receiving bitcoin at his or her bitcoin address and sending it from 
his or her address to another user's address. Sending bitcoin from one 
bitcoin address to another is similar in concept to sending a bank wire 
from one person's bank account to another person's bank account.

[[Page 31016]]

    Balances of the quantity of bitcoin associated with each bitcoin 
address are listed in a database, referred to as the ``blockchain''. 
Copies of the blockchain exist on thousands of computers on the Bitcoin 
Network throughout the internet. A user's bitcoin wallet will either 
contain a copy of the blockchain or be able to connect with another 
computer that holds a copy of the blockchain.
    When a bitcoin user wishes to transfer bitcoin to another user, the 
sender must first request a bitcoin address from the recipient. The 
sender then uses his or her bitcoin wallet software, to create a 
proposed addition to the blockchain. The proposal would decrement the 
sender's address and increment the recipient's address by the amount of 
bitcoin desired to be transferred. The proposal is entirely digital in 
nature, similar to a file on a computer, and it can be sent to other 
computers participating in the Bitcoin Network. Such digital proposals 
are referred to as ``bitcoin transactions''. Bitcoin transactions and 
the process of one user sending bitcoin to another should not be 
confused with buying and selling bitcoin, which is a separate process 
(as discussed below in ``bitcoin Trading On Exchanges'' and ``bitcoin 
Trading Over-the-Counter'').
    A bitcoin transaction is similar in concept to an irreversible 
digital check. The transaction contains the sender's bitcoin address, 
the recipient's bitcoin address, the amount of bitcoin to be sent, a 
confirmation fee and the sender's digital signature. The sender's use 
of his or her digital signature enables participants on the Bitcoin 
Network to verify the authenticity of the bitcoin transaction.
    A user's digital signature is generated via usage of the user's so-
called ``private key'', one of two numbers in a so-called cryptographic 
``key pair''. A key pair consists of a ``public key'' and its 
corresponding private key, both of which are lengthy numerical codes, 
derived together and possessing a unique relationship.
    Public keys are used to create bitcoin addresses. Private keys are 
used to sign transactions that initiate the transfer of bitcoin from a 
sender's bitcoin address to a recipient's bitcoin address. Only the 
holder of the private key associated with a particular bitcoin address 
can digitally sign a transaction proposing a transfer of bitcoin from 
that particular bitcoin address.
    A user's bitcoin address (which is derived from a public key) may 
be safely distributed, but a user's private key must remain known 
solely by its rightful owner. The utilization of a private key is the 
only mechanism by which a bitcoin user can create a digital signature 
to transfer bitcoin from him or herself to another user. Additionally, 
if a malicious third party learns of a user's private key, that third 
party could forge the user's digital signature and send the user's 
bitcoin to any arbitrary bitcoin address (i.e., the third party could 
steal the user's bitcoin).
    When a bitcoin holder sends bitcoin to a destination bitcoin 
address, the transaction is initially considered unconfirmed. 
Confirmation of the validity of the transaction involves verifying the 
signature of the sender, as created by the sender's private key. 
Confirmation also involves verifying that the sender has not ``double 
spent'' the bitcoin (e.g., confirming Party A has not attempted to send 
the same bitcoin both to Party B and to Party C). The confirmation 
process occurs via a process known as ``bitcoin mining''.
    Bitcoin mining utilizes a combination of computer hardware and 
software to accomplish a dual purpose: (i) To verify the authenticity 
and validity of bitcoin transactions (i.e., the movement of bitcoin 
between addresses) and (ii) the creation of new bitcoin. Neither the 
Sponsor nor the Trust intends to engage in bitcoin mining.
    Bitcoin miners do not need permission to participate in verifying 
transactions. Rather, miners compete to solve a prescribed and 
complicated mathematical calculation using computers dedicated to the 
task. Rounds of the competition repeat approximately every ten minutes. 
In any particular round of the competition, the first miner to find the 
solution to the mathematical calculation is the miner who gains the 
privilege of announcing the next block to be added to the blockchain.
    A new block that is added to the blockchain serves to take all of 
the recent-yet-unconfirmed transactions and verify that none are 
fraudulent. The recent-yet-unconfirmed transactions also generally 
contain transaction fees that are awarded to the miner who produces the 
block in which the transactions are inserted, and thereby confirmed. 
The successful miner also earns the so-called ``block reward'', an 
amount of newly created bitcoin. Thus, bitcoin miners are financially 
incentivized to conduct their work. The financial incentives received 
by bitcoin miners are a vital part of the process by which the Bitcoin 
Network functions.
    Upon successfully winning a round of the competition (winning a 
round is referred to as mining a new block), the miner then transmits a 
copy of the newly-formed block to peers on the Bitcoin Network, all of 
which then update their respective copies of the blockchain by 
appending the new block, thereby acknowledging the confirmation of the 
transactions that had previously existed in an unconfirmed state.
    A recipient of bitcoin must wait until a new block is formed in 
order to see the transaction convert from an unconfirmed state to a 
confirmed state. According to the Registration Statement, with new 
rounds won approximately every ten minutes, the average wait time for a 
confirmation is five minutes.
    The protocol underlying bitcoin provides the rules by which all 
users and miners on the Bitcoin Network must operate. A user or miner 
attempting to operate under a different set of rules will be ignored by 
other network participants, thus rendering that user's or miner's 
behavior moot. The protocol also lays out the block reward, the amount 
of bitcoin that a miner earns upon creating a new block. The initial 
block reward when Bitcoin was introduced in 2009 was 50 bitcoin per 
block. That number has and will continue to halve approximately every 
four years until approximately 2140, when it is estimated that block 
rewards will go to zero. The most recent halving occurred on July 9, 
2016, which reduced the block reward from 25 to 12.5 bitcoin. The next 
halving is projected for June 2020, which will reduce the block reward 
to 6.25 bitcoin from its current level of 12.5. The halving thereafter 
will occur in another four years and will reduce the block reward to 
3.125 bitcoin, and so on. As of May 2018, there are approximately 17 
million bitcoin that have been created, a number that will grow with 
certainty to a maximum of 21 million, estimated to occur by the year 
2140. Bitcoin mining should not be confused with buying and selling 
bitcoin, which, as discussed below, is a separate process.
Use of bitcoin and the Blockchain
    Beyond using bitcoin as a value transfer mechanism, applications 
related to the blockchain technology underlying bitcoin have become 
increasingly prominent.\10\ Blockchain-focused applications take 
advantage of certain unique characteristics of the blockchain such as 
secure time stamping (secure time stamps are on newly created blocks), 
highly redundant storage (copies of the blockchain are distributed 
throughout the internet) and

[[Page 31017]]

tamper-resistant data secured by secure digital signatures.
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    \10\ Additional applications based on blockchain technology--
both the blockchain underlying bitcoin as well as separate public 
blockchains incorporating similar characteristics of the blockchain 
underlying bitcoin--are currently in development by numerous 
entities, including financial institutions like banks.
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    According to the Registration Statement, blockchain-focused 
applications in usage and under development include, but are not 
limited to asset title transfer, secure timestamping, counterfeit and 
fraud detection systems, secure document and contract signing, 
distributed cloud storage and identity management. Although value 
transfer is not the primary purpose for blockchain-focused 
applications, the usage of bitcoin, the asset, is inherently involved 
in blockchain-focused applications, thus linking the growth and 
adoption of bitcoin to the growth and adoption of blockchain-focused 
applications.
bitcoin Trading Over-the-Counter
    As referenced above, OTC trading of bitcoin is generally 
accomplished via bilateral agreements on a principal-to-principal 
basis. All risks and issues of credit are between the parties directly 
involved in the transaction. The OTC market provides a relatively 
flexible market in terms of quotes, price, size and other factors. The 
OTC market has no formal structure and no open-outcry meeting place. 
Parties engaging in OTC transactions will agree upon a price--often via 
phone or email--and one of the two parties would then initiate the 
transaction. For example, a seller of bitcoin could initiate the 
transaction by sending the bitcoin to the buyer's bitcoin address. The 
buyer would then wire U.S. dollars to the seller's bank account.
    Based on its observations and experience in the market, the Sponsor 
estimates that the U.S. dollar OTC bitcoin trading volume globally 
represents on average approximately fifty percent of the trading volume 
of bitcoin traded globally in U.S. dollars on U.S. dollar-denominated 
bitcoin exchanges.
    According to the Registration Statement, transaction costs in the 
OTC market are negotiable between the parties and therefore vary with 
some participants willing to offer competitive prices for larger 
volumes, although this will vary according to market conditions. Cost 
indicators can be obtained from OTC trading platforms as well as 
various information service providers, such as the bitcoin price 
indexes and bitcoin exchanges. OTC trading tends to be in large blocks 
of bitcoin and between institutions.
    The Trust intends to buy and sell bitcoin in the OTC bitcoin 
market. The Sponsor currently expects that often it will be more cost 
efficient for the Trust to effect large trades (e.g., $500,000 or 
greater) in the OTC market rather than on a bitcoin exchange. The Trust 
therefore expects to conduct most of its trading in the OTC bitcoin 
market, primarily on the OTC platforms that comprise the MVIS[supreg] 
Bitcoin OTC Index (``MVBTCO'').
    When buying and selling bitcoin in the OTC market, the Trust will 
consider various market factors, including the total U.S. dollar size 
of the trade, the volume of bitcoin traded across the various U.S. 
dollar-denominated bitcoin exchanges during the preceding 24-hour 
period, available liquidity offered by OTC market participants, and the 
bid and ask quotes offered by OTC market participants. The Trust's goal 
is to fill an order at the best possible price.
    While the Trust intends to conduct the majority of its trading in 
the OTC market on the OTC platforms that comprise the MVBTCO, the Trust 
also maintains an internal proprietary database, which it does not 
share with anyone, of potential OTC bitcoin trading counterparties, 
including hedge funds, family offices, private wealth managers and 
high-net-worth individuals. All such potential counterparties will be 
subject to the Trust's anti-money laundering (``AML'') and know your 
customer (``KYC'') compliance procedures. The Trust will begin trading 
with such potential OTC counterparties as their trading capabilities 
become viable. The Trust will also add additional potential 
counterparties to its internal proprietary database as it becomes aware 
of additional market participants. The Trust will decide which OTC 
counterparties it will trade with based on its ability to fill orders 
at the best available price amongst OTC market participants.
    To the extent a Basket creation or redemption order necessitates 
the buying or selling of a large block of bitcoin (e.g., an amount that 
if an order were placed on an exchange would potentially move the price 
of bitcoin), the Sponsor represents that placing such a trade in the 
OTC market may be advantageous to the Trust. OTC trades help avoid 
factors such as potential price slippage (causing the price of bitcoin 
to move as the order is filled on the exchange), while offering speed 
in trade execution and settlement (an OTC trade can be executed 
immediately upon agreement of terms between counterparties) and privacy 
(to avoid other market participants entering trades in advance of a 
large block order). OTC bitcoin trading is typically private and not 
regularly reported. The Trust does not intend to report its OTC 
trading. The Trust has established delivery-versus-payment like 
(``DVP'') and receive-versus-payment like (``RVP'') trading 
arrangements with its trading counterparties pursuant to which the 
Trust will be able to minimize counterparty risk. These arrangements 
are on a trade-by-trade basis and do not bind the Trust to continue to 
trade with any counterparty.
    The Trust expects to take custody of bitcoin within one business 
day of receiving an order from an Authorized Participant to create a 
Basket (as defined in ``Creation and Redemption of Shares'' below).
bitcoin Price Index
    MVBTCO Index. The MVBTCO represents the value of one bitcoin in 
U.S. dollars at any point in time. The index also generates a closing 
price as of 4:00 p.m., Eastern time (``E.T.''), each weekday, which is 
used to calculate the Trust's NAV. The index price and the closing 
price are calculated using the same methodology. The intra-day levels 
of the MVBTCO incorporate the real-time price of bitcoin based on 
executable bids and asks derived from constituent bitcoin OTC platforms 
that have entered into an agreement with MV Index Solutions GmbH 
(``MVIS'') to provide such information. The intra-day price and closing 
level of the MVBTCO is calculated using a proprietary methodology 
collecting executable bid/ask spreads and calculating a mid-point price 
from several U.S.-based bitcoin OTC platforms and is published at or 
after 4:00 p.m., E.T., each weekday. The MVBTCO is published to two 
decimal places rounded on the last digit.
    MVIS is the index sponsor and calculation agent for the MVBTCO. The 
Sponsor has entered into a licensing agreement with MVIS to use the 
MVBTCO. The Trust is entitled to use the MVBTCO pursuant to a sub-
licensing arrangement with the Sponsor.
    The MVBTCO calculates the intra-day price of bitcoin every 15 
seconds, including the closing price as of 4:00 p.m. E.T. The bitcoin 
OTC platforms included in the MVBTCO are U.S.-based entities. These 
platforms are well established institutions that comply with AML and 
KYC regulatory requirements with respect to trading counterparties and 
include entities that are regulated by the SEC and FINRA as registered 
broker-dealers and affiliates of broker-dealers.
    The logic utilized for the derivation of the intra-day and daily 
closing index level for the MVBTCO is intended to analyze actual 
executable bid/ask spread data, verify and refine the data set and 
yield an objective, fair-market value of one bitcoin throughout the day 
and as of 4:00 p.m. E.T. each weekday,

[[Page 31018]]

priced in U.S. dollars. As discussed herein, the MVBTCO intra-day price 
and the MVBTCO closing price are collectively referred to as the MVBTCO 
price, unless otherwise noted.
    The key elements of the algorithm underlying the MVBTCO include:
     Equal Weighting of OTC Platforms: This mitigates the 
impact of spikes at single platforms.
     Using executable bid/ask spreads and the respective mid-
point prices, which are consistently available.
    The Sponsor is not aware of any bitcoin derivatives currently 
trading based on the MVBTCO.
bitcoin Exchanges
    Bitcoin exchanges operate websites that facilitate the purchase and 
sale of bitcoin for various government-issued currencies, including the 
U.S. dollar, the euro or the Chinese yuan. Activity on bitcoin 
exchanges should not be confused with the process of users sending 
bitcoin from one bitcoin address to another bitcoin address, the latter 
being an activity that is wholly within the confines of the Bitcoin 
Network and the former being an activity that occurs entirely on 
private websites.
    Bitcoin exchanges operate in a manner that is unlike the 
traditional capital markets infrastructure in the U.S. and in other 
developed nations. Bitcoin exchanges combine the process of order 
matching, trade clearing, trade settlement and custody into a single 
entity. For example, a user can send U.S. dollars via wire to a bitcoin 
exchange and then visit the exchange's website to purchase bitcoin. The 
entirety of the transaction--from trade to clearing to settlement to 
custody (at least temporary custody)--is accomplished by the bitcoin 
exchange in a matter of seconds. The user can then withdraw the 
purchased bitcoin into a wallet to take custody of the bitcoin 
directly.
    According to the Registration Statement, there are currently 
several U.S.-based regulated entities that facilitate bitcoin trading 
and that comply with state and/or U.S. AML and KYC regulatory 
requirements. While the Commodity Futures Trading Commision (the 
``CFTC'') is responsible for regulating the bitcoin spot market with 
respect to fraud and manipulation--in the same way that it regulates 
the spot market for gold, silver or other exempt commodities--there is 
no direct, comprehensive federal oversight of bitcoin exchanges or 
trading platforms in the United States and no U.S. exchanges are 
registered with the Commission or the CFTC.
     GDAX (f/k/a Coinbase), which is based in California, is a 
bitcoin exchange that maintains money transmitter licenses in over 
thirty states, the District of Columbia and Puerto Rico. GDAX is 
subject to the regulations enforced by the various State agencies that 
issued their respective money transmitter licenses to GDAX. The New 
York Department of Financial Services (``NYDFS'') granted a BitLicense 
to GDAX in January 2017.
     itBit is a bitcoin exchange that was granted a limited 
purpose trust company charter by the NYDFS in May 2015. Limited purpose 
trusts, according to the NYDFS, are permitted to undertake certain 
activities, such as transfer agency, securities clearance, investment 
management, and custodial services, but without the power to take 
deposits or make loans.
     Gemini is a bitcoin exchange that is also regulated by the 
NYDFS. In October 2015, NYDFS granted Gemini an Authorization 
Certificate, which allows Gemini to operate as a limited purpose trust 
company.
     Genesis Global Trading is a FINRA member firm that makes a 
market in bitcoin by offering two-sided liquidity (``Genesis Global 
Trading''). In May 2018, NYDFS granted Genesis Global Trading a 
BitLicense.
     bitFlyer is a virtual currency exchange that is registered 
in Japan. In November 2017, NYDFS granted Tokyo-based bitFlyer a 
BitLicense.
    Bitcoin are traded with publicly disclosed valuations for each 
transaction, measured by one or more government currencies such as the 
U.S. dollar, the euro or the Chinese yuan. Bitcoin exchanges typically 
report publicly on their site the valuation of each transaction and bid 
and ask prices for the purchase or sale of bitcoin. Although each 
bitcoin exchange has its own market price, it is expected that most 
bitcoin exchanges' market prices should be relatively consistent with 
the bitcoin exchange market average since market participants can 
choose the bitcoin exchange on which to buy or sell bitcoin (i.e., 
exchange shopping).
bitcoin Trading on Exchanges
    According to the Registration Statement, to the extent the Trust 
conducts bitcoin trading on an exchange, it expects to do so on the 
following U.S. dollar-denominated bitcoin exchanges: Bitstamp (located 
in Slovenia and with an office in the U.K.), GDAX (f/k/a Coinbase) 
(located in California), Gemini (located in New York), itBit (located 
in New York), bitFlyer (located in New York) and Kraken (located in San 
Francisco). All of these exchanges follow AML and KYC regulatory 
requirements.
bitcoin Price Transparency
    In addition to the price transparency of the MVBTCO, with respect 
to the OTC market, and the bitcoin exchange market itself, the Trust 
will provide information regarding the Trust's bitcoin holdings as well 
as additional data regarding the Trust. The Sponsor expects that the 
dissemination of information on the Trust's website, along with 
quotations for and last-sale prices of transactions in the Shares and 
the intra-day indicative value (``IIV'') and net asset value (``NAV'') 
of the Trust will help to reduce the ability of market participants to 
manipulate the bitcoin market or the price of the Shares and that the 
Trust's arbitrage mechanism will facilitate the correction of price 
discrepancies in bitcoin and the Shares. The Sponsor believes that 
demand from new, larger investors accessing bitcoin through investment 
in the Shares will broaden the investor base in bitcoin, which could 
further reduce the possibility of collusion among market participants 
to manipulate the bitcoin market. The Sponsor expects that the Shares 
will be purchased primarily by institutional and other substantial 
investors (such as hedge funds, family offices, private wealth managers 
and high-net-worth individuals), which will provide additional 
liquidity and transparency to the bitcoin market in a regulated vehicle 
such as the Trust.
    According to the Sponsor, the MVBTCO's methodology decreases the 
influence on the MVBTCO of any particular OTC platform that diverges 
from the rest of the data points used by the MVBTCO, which reduces the 
possibility of an attempt to manipulate the price of bitcoin as 
reflected by the MVBTCO.
Historical Price of bitcoin
    The price of bitcoin is volatile and fluctuations are expected to 
have a direct impact on the value of the Shares. However, movements in 
the price of bitcoin in the past are not a reliable indicator of future 
movements. Movements may be influenced by various factors, including 
supply and demand, geo-political uncertainties, economic concerns such 
as inflation and real or speculative investor interest.
Additional bitcoin Trading Products
    Certain U.S. platforms and non-U.S. based bitcoin exchanges offer 
derivative products on bitcoin such as options, swaps and futures.
    According to the Registration Statement, BitMex, based in the

[[Page 31019]]

Republic of Seychelles, CryptoFacilites, based in the United Kingdom, 
796 Exchange, based in China, and OKCoin Exchange China all offer 
futures contracts settled in bitcoin. Coinut, based in Singapore, 
offers bitcoin binary options and vanilla options based on the Coinut 
index. Deribit, based in the Netherlands, offers vanilla options and 
futures contracts settled in bitcoin. IGMarkets, based in the United 
Kingdom, Avatrade, based in Ireland, and Plus500, based in Israel, all 
offer bitcoin derivative products.
    In July 2017, the CFTC issued an order granting LedgerX, LLC 
(``LedgerX'') registration as a derivatives clearing organization under 
the CEA. Under the order, LedgerX is authorized to provide clearing 
services for fully-collateralized digital currency swaps. LedgerX, 
which was also granted an order of registration as a Swap Execution 
Facility in July 2017, is the first federally-regulated exchange and 
clearing house for derivatives contracts settling in digital 
currencies. LedgerX began trading options and swaps on its platform in 
October 2017.
    The CFTC commissioners have expressed publicly that derivatives 
based on bitcoin are subject to regulation by the CFTC, including 
oversight to prevent market manipulation of the price of bitcoin. In 
addition, the CFTC has stated that bitcoin and other virtual currencies 
are encompassed in the definition of commodities under the CEA.\11\ 
While the CFTC does not regulate the bitcoin spot market--in the same 
way that it does not regulate the spot market for gold, silver or other 
exempt commodities--it is nevertheless responsible for overseeing and 
enforcing the CEA as it applies to trading in bitcoin derivatives. 
Further to this point, Cboe Futures Exchange, LLC and Chicago 
Mercantile Exchange, Inc. self-certified bitcoin futures contracts with 
the CFTC and began offering trading in December 2017 and Cantor Futures 
Exchange L.P. self-certified bitcoin swaps in December 2017.
---------------------------------------------------------------------------

    \11\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'') 
(CFTC Docket 15-29 (September 17, 2015)) (order instituting 
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making 
findings and imposing remedial sanctions), in which the CFTC stated 
the following:
    ``Section 1a(9) of the CEA defines `commodity' to include, among 
other things, `all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
---------------------------------------------------------------------------

    In May 2015, the Swedish FSA approved the prospectus for ``Bitcoin 
Tracker One'', an open-ended exchange-traded note that tracks the price 
of bitcoin in U.S. dollars. The Bitcoin Tracker One initially traded in 
Swedish krona on the Nasdaq Nordic in Stockholm, but is now also 
available to trade in euro. The Bitcoin Tracker One is available to 
retail investors in the European Union and to those investors in the 
U.S. who maintain brokerage accounts with Interactive Brokers.
    Founded in 2013, Bitcoin Investment Trust, a private, open-ended 
trust available to accredited investors, is another investment vehicle 
that derives its value from the price of bitcoin. Eligible shares of 
the Bitcoin Investment Trust are quoted on the OTCQX marketplace under 
the symbol ``GBTC''.
    In May 2016, the Gibraltar Financial Services Commission approved 
the BitcoinETI, which in July 2016 was listed on the Gibraltar Stock 
Exchange and on Deutsche B[ouml]rse Frankfurt in August 2016. The 
BitcoinETI is a bitcoin-backed exchange-traded instrument that is euro 
denominated.
bitcoin Security and Storage for the Trust
    According to the Sponsor, given the novelty and unique digital 
characteristics (as set forth above) of bitcoin as an innovative asset 
class, traditional custodians who normally custody assets do not 
currently offer custodial services for bitcoin. Accordingly, the Trust 
will secure bitcoin using multi-signature ``cold storage wallets'', an 
industry best practice. A cold storage wallet is created and stored on 
a computer with no access to a network, i.e., an ``air-gapped'' 
computer with no ability to access the internet. Such a computer is 
isolated from any network, including local or internet connections. A 
multi-signature address is an address associated with more than one 
private key. For example, a ``2 of 3'' address requires two signatures 
(out of three) from two separate private keys (out of three) to move 
bitcoin from a sender address to a receiver address.
    The Trust will utilize bitcoin private keys that are generated and 
stored on air-gapped computers. The movement of bitcoin will require 
physical access to the air-gapped computers and use of multiple 
authorized signers. For backup and disaster recovery purposes, the 
Trust will maintain cold storage wallet backups in locations 
geographically distributed throughout the United States, including in 
the Northeast and Midwest.
    In addition to its security system, the Trust will maintain 
comprehensive insurance coverage underwritten by various insurance 
carriers. The purpose of the insurance is to protect investors against 
loss or theft of the Trust's bitcoin. The insurance will cover loss of 
bitcoin by, among other things, theft, destruction, bitcoin in transit, 
computer fraud and other loss of the private keys that are necessary to 
access the bitcoin held by the Trust. The coverage is subject to 
certain terms, conditions and exclusions, as discussed in the 
Registration Statement. The insurance policy will carry initial limits 
of $25 million in primary coverage and $100 million in excess coverage, 
with the ability to increase coverage depending on the value of the 
bitcoin held by the Trust. To the extent the value of the Trust's 
bitcoin holdings exceeds the total $125,000,000 of insurance coverage, 
the Sponsor has made arrangements for additional insurance coverage 
with the goal of maintaining insurance coverage at a one-to-one ratio 
with the Trust's bitcoin holdings valued in U.S. dollars such that for 
every dollar of bitcoin held by the Trust there is an equal amount of 
insurance coverage.
    The Sponsor expects that the Trust's auditor will verify the 
existence of bitcoin held in custody by the Trust. In addition, the 
Trust's insurance carriers will have inspection rights associated with 
the bitcoin held in custody by the Trust.
bitcoin Market Price
    In the ordinary course of business, the Administrator will value 
the bitcoin held by the Trust based on the closing price set by the 
MVBTCO or one of the other pricing sources set forth below (each, a 
``bitcoin Market Price'') as of 4:00 p.m. E.T., on the valuation date 
on any day that the Exchange is open for regular trading. For further 
detail, see (i) below. If for any reason, and as determined by the 
Sponsor, the Administrator is unable to value the Trust's bitcoin using 
the procedures described in (i), the Administrator will value the 
Trust's bitcoin using the cascading set of rules set forth in (ii) 
through (iv) below. For the avoidance of doubt, the Administrator will 
employ the below rules sequentially and in the order as presented, 
should the Sponsor determine that one or more specific rule(s) fails. 
The Sponsor may determine that a rule has failed if a pricing source is 
unavailable or, in the judgment of the Sponsor, is deemed unreliable. 
To the extent the Administrator uses any of the cascading set of rules, 
the Sponsor will make public on the Trust's website the rule being 
used.
    (i) Except as further described below, the bitcoin Market Price 
will be: The

[[Page 31020]]

price set by the MVBTCO as of 4:00 p.m. E.T., on the valuation date. 
The MVBTCO is a real-time U.S. dollar-denominated composite reference 
rate for the price of bitcoin. The MVBTCO calculates the intra-day 
price of bitcoin every 15 seconds, including the closing price as of 
4:00 p.m. E.T. The intra-day price and closing price are based on a 
methodology that consists of collecting actual executable bid/ask 
spreads and calculating a mid-point price from constituent bitcoin OTC 
platforms that have entered into an agreement with MVIS. The logic 
utilized for the derivation of the daily closing index level for the 
MVBTCO is intended to analyze actual executable bid/ask spread data, 
verify and refine the data set, and yield an objective, fair-market 
value of one bitcoin throughout the day and as of 4:00 p.m. E.T. each 
weekday, priced in U.S. dollars.
    (ii) In the event that rule (i) above fails, the bitcoin Market 
Price will be: The mid-point price between the bid/ask obtained by the 
Sponsor from any one of the bitcoin OTC platforms included within the 
MVBTCO index as of 4:00 p.m. E.T., on the valuation date.
    (iii) In the event that rules (i) and (ii) above fail, the bitcoin 
Market Price will be: The volume weighted average bitcoin price for the 
immediately preceding 24-hour period at 4:00 p.m. E.T. on the valuation 
date as published by an alternative third party's public data feed that 
the Sponsor determines is reasonably reliable, subject to the 
requirement that such data is calculated based upon a volume weighted 
average bitcoin price obtained from the major U.S. dollar-denominated 
bitcoin exchanges (``Second Source''). Subject to the next sentence, if 
the Second Source becomes unavailable (e.g., data sources from the 
Second Source for bitcoin prices become unavailable, unwieldy or 
otherwise impractical for use), or if the Sponsor determines in good 
faith that the Second Source does not reflect an accurate bitcoin 
price, then the Sponsor will, on a best efforts basis, contact the 
Second Source in an attempt to obtain the relevant data. If after such 
contact the Second Source remains unavailable or the Sponsor continues 
to believe in good faith that the Second Source does not reflect an 
accurate bitcoin price, then the Administrator will employ the next 
rule to determine the bitcoin Market Price.
    (iv) In the event that rules (i), (ii), and (iii) above fail, the 
bitcoin Market Price will be: The Sponsor will use its best judgment to 
determine a good faith estimate of the bitcoin Market Price.
The Trust
    According to the Registration Statement, the Trust will invest in 
bitcoin only. The Trust will either (i) cause the Sponsor to receive 
bitcoin from the Trust in such quantity as may be necessary to pay the 
Management Fee or (ii) sell bitcoin in such quantity as may be 
necessary to permit payment in cash of the Management Fee and other 
Trust expenses and liabilities not assumed by the Sponsor, such as the 
bitcoin Insurance Fee, bitcoin storage fees and salaries of Trust 
principals and employees. As a result, the amount of bitcoin sold will 
vary from time to time depending on the level of the Trust's expenses 
and the market price of bitcoin.
    The Trust will pay the Sponsor a management fee as compensation for 
services performed on behalf of the Trust and for services performed in 
connection with maintaining the Trust. The Sponsor's fee will be 
payable monthly in arrears and will be accrued daily. The bitcoin 
Insurance Fee will be payable by the Trust monthly in advance, as 
described in the Registration Statement. Bitcoin storage fees and 
salaries of Trust principals and employees will be payable monthly in 
arrears and will be accrued daily.
    In exchange for the Management Fee, the Sponsor has agreed to 
assume the following administrative and marketing expenses incurred by 
the Trust: Each of the Trustee's, Administrator's, Cash Custodian's, 
Transfer Agent's and Marketing Agent's monthly fee and out-of-pocket 
expenses and expenses reimbursable in connection with such service 
provider's respective agreement; the marketing support fees and 
expenses; exchange listing fees; SEC registration fees; index license 
fees; printing and mailing costs; maintenance expenses for the Trust's 
website; audit fees and expenses; and up to $100,000 per annum in legal 
expenses. The Trust will be responsible for paying, or for reimbursing 
the Sponsor or its affiliates for paying, all the extraordinary fees 
and expenses, if any, of the Trust. The management fee to be paid to 
the Sponsor, the bitcoin Insurance Fee, the salaries of the Trust's 
principals and employees and the expenses associated with custody of 
the Trust's bitcoin are expected to be the only ordinary recurring 
operating expense of the Trust.
Net Asset Value
    The NAV for the Trust will equal the market value of the Trust's 
total assets, including bitcoin and cash, less liabilities of the 
Trust, which include estimated accrued but unpaid fees, expenses and 
other liabilities. Under the Trust's proposed operational procedures, 
the Administrator will calculate the NAV on each business day that the 
Exchange is open for regular trading, as promptly as practicable after 
4:00 p.m. E.T. To calculate the NAV, the Administrator will use the 
closing price set for bitcoin by the MVBTCO or one of the other bitcoin 
Market Prices set forth above. The Administrator will also determine 
the NAV per Share by dividing the NAV of the Trust by the number of the 
Shares outstanding as of the close of trading on Regular Trading Hours, 
i.e., 9:30 a.m. to 4:00 p.m. E.T. (which includes the net number of any 
Shares deemed created or redeemed on such day).
    According to the Registration Statement, Authorized Participants 
(as defined in ``Creation and Redemption of Shares'' below), or their 
clients or customers, may have an opportunity to realize a riskless 
profit if they can create a Basket (as defined in ``Creation and 
Redemption of Shares'' below) at a discount to the public trading price 
of the Shares or can redeem a Basket at a premium over the public 
trading price of the Shares. The Sponsor expects that the exploitation 
of such arbitrage opportunities by Authorized Participants and their 
clients and customers will tend to cause the public trading price to 
track NAV per Share closely over time. Such arbitrage opportunities 
will not be available to holders of Shares who are not Authorized 
Participants.
    While the Trust's investment objective is for the Shares to reflect 
the performance of the price of bitcoin, less expenses of the Trust's 
operations, the Shares may trade in the secondary market at prices that 
are lower or higher relative to their NAV per Share for a number of 
reasons, including price volatility, trading volume, and closing of 
bitcoin trading platforms due to fraud, failure, security breaches or 
otherwise.
    The NAV per Share may fluctuate with changes in the market value of 
the bitcoin held by the Trust. The value of the Shares may be 
influenced by non-concurrent trading hours between the Exchange and the 
various bitcoin OTC platforms comprising the MVBTCO. As a result, there 
will be periods when the Exchange is closed and the bitcoin OTC 
platforms continue to trade. Significant changes in the price of 
bitcoin during such time periods could result in a difference between 
the value of bitcoin as measured by the MVBTCO and the most recent NAV 
per Share or closing trading price. The Exchange, however,

[[Page 31021]]

expects that any meaningful divergence in the intraday price of the 
Shares and the MVTCO will be quickly arbitraged away when trading is 
available on the Exchange because when such a discount or premium 
exists, Authorized Participants will generally be able to create or 
redeem a Basket of Shares at a discount or a premium to the public 
trading price per Share.
Impact on Arbitrage
    Investors and market participants are able throughout the trading 
day to compare the market price of the Shares and the Share's IIV. If 
the market price of the Shares diverges significantly from the IIV, 
Authorized Participants will have strong economic incentive to execute 
arbitrage trades. Because of the potential for arbitrage inherent in 
the structure of the Trust, the Sponsor believes that the Shares will 
not trade at a material discount or premium to the underlying bitcoin 
held by the Trust. If the price of the Shares deviates enough from the 
price of bitcoin to create a material discount or premium, an arbitrage 
opportunity is created. If the Shares are inexpensive compared to the 
bitcoin that underlies them, an arbitrageur may buy the Shares at a 
discount, immediately redeem them in exchange for bitcoin, and sell the 
bitcoin in the cash market at a profit. If the Shares are expensive 
compared to the bitcoin that underlies them, an arbitrageur may sell 
the Shares short, buy enough bitcoin to acquire the number of Shares 
sold short, acquire the Shares through the creation process, and 
deliver the Shares to close out the short position. To facilitate the 
arbitrage process, Authorized Participants may source bitcoin through 
the OTC market or on exchanges; alternatively, Authorized Participants 
may create or redeem for cash and the Trust will source buyers and 
sellers of bitcoin in the OTC market. The arbitrage process, which in 
general provides investors the opportunity to profit from differences 
in prices of assets, increases the efficiency of the markets, serves to 
prevent potentially manipulative efforts, and can be expected to 
operate efficiently in the case of the Shares and bitcoin.
Creation and Redemption of Shares
    According to the Registration Statement, the Trust will issue and 
redeem ``Baskets'', each equal to a block of 5 Shares, only to 
``Authorized Participants'' (as described below). The size of a Basket 
is subject to change. The creation and redemption of a Basket require 
the delivery to the Trust, or the distribution by the Trust, of the 
number of whole and fractional bitcoins or the U.S. dollar equivalent 
represented by each Basket being created or redeemed, the number of 
which is determined by dividing the number of bitcoins owned by the 
Trust at such time by the number of Shares outstanding at such time 
(calculated to one one-hundred-millionth of one bitcoin), as adjusted 
for the number of whole and fractional bitcoins constituting accrued 
but unpaid fees and expenses of the Trust and multiplying the quotient 
obtained by 5 (``bitcoin Basket Amount''). The bitcoin Basket Amount 
will gradually decrease over time as the Trust's bitcoin are used to 
pay the Trust's expenses. According to the Registration Statement, as 
of the date of the Registration Statement, each Share currently 
represents approximately 25 bitcoin.
    Orders to create and redeem Baskets may be placed only by 
Authorized Participants.\12\ A transaction fee will be assessed on all 
creation and redemption transactions effected in-kind. In addition, the 
Trust reserves the right to charge a variable transaction fee to the 
Authorized Participants for creations and redemptions effected in cash 
to cover the Trust's expenses related to purchasing and selling bitcoin 
in the OTC market or on bitcoin exchanges if such expenses should 
exceed the fixed $1,000 transaction fee. The variable transaction fee 
would cover actual expenses paid for the purchase and sale of bitcoin 
in order that such expenses do not decrease the NAV of the Trust. Such 
expenses may vary, but the Trust expects such expenses, should they 
occur in the future, to constitute 1% or less of the value of a Basket. 
The creation and redemption of a Basket requires the delivery to the 
Trust, or the distribution by the Trust, of the bitcoin Basket Amount 
(that is, the number of bitcoins represented by each Basket or the U.S. 
dollar equivalent), for each Basket to be created or redeemed. The 
bitcoin Basket Amount multiplied by the number of Baskets being created 
or redeemed is the ``Total bitcoin Basket Amount.''
---------------------------------------------------------------------------

    \12\ An Authorized Participant must: (1) Be a registered broker-
dealer and a member in good standing with the Financial Industry 
Regulatory Authority (``FINRA''); (2) be a participant in Depository 
Trust Company (``DTC''). To become an Authorized Participant, a 
person must enter into an ``Authorized Participant Agreement'' with 
the Sponsor and the Transfer Agent. The Authorized Participant 
Agreement provides the procedures for the creation and redemption of 
Baskets and for the delivery of the cash (and, potentially, bitcoin 
in-kind) required for such creations and redemptions.
---------------------------------------------------------------------------

Creation Procedures
    On any business day, an Authorized Participant may place an order 
with the Transfer Agent to create one or more Baskets. For purposes of 
processing both purchase and redemption orders, a ``business day'' 
means any day other than a day when the Exchange is closed for regular 
trading. Cash purchase orders must be placed by 3:00 p.m. E.T., or the 
close of regular trading on the Exchange, whichever is earlier, and in-
kind purchase orders must be placed by 4:00 p.m. E.T., or the close of 
regular trading on the Exchange, whichever is earlier. The day on which 
the Transfer Agent receives a valid purchase order, as approved by the 
Marketing Agent, is the purchase order date. Purchase orders are 
irrevocable. By placing a purchase order, and prior to delivery of such 
Baskets, an Authorized Participant's DTC account will be charged the 
non-refundable transaction fee due for the purchase order.
Determination of Required Payment
    The total payment required to create each Basket is determined by 
calculating the NAV of 5 Shares of the Trust as of the closing time of 
the Exchange on the purchase order date. Baskets are issued as of 2:00 
p.m., E.T., on the business day immediately following the purchase 
order date at the applicable NAV as of the closing time of the Exchange 
on the purchase order date, but only if the required payment has been 
timely received.
    Orders to purchase Baskets for cash must be placed no later than 
3:00 p.m. E.T., or the close of regular trading on the Exchange, 
whichever is earlier, and orders to purchase Baskets in-kind must be 
placed no later than 4:00 p.m. E.T., or the close of regular trading on 
the Exchange, whichever is earlier. For cash creation orders, the total 
cash payment required to create a Basket will not be determined until 
approximately 4:00 p.m., E.T. (the time at which the Trust's NAV for 
that day is expected to be calculated) on the date the purchase order 
is received by the Transfer Agent and approved by the Marketing Agent. 
Authorized Participants therefore will not know the total amount of the 
payment required to create a Basket at the time they submit an 
irrevocable purchase order for the Basket. Valid cash orders to 
purchase Baskets received after 3:00 p.m. E.T., and valid in-kind 
orders to purchase Baskets received after 4:00 p.m. E.T., are 
considered received on the following business day. The NAV of the 
Trust, and thus the total amount of the payment required to create a 
Basket for cash could rise or fall substantially between the time an 
irrevocable purchase order is submitted and the time the amount of the 
purchase price in respect thereof is determined. Changes to the price 
of

[[Page 31022]]

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

[[Page 31023]]

been credited with the Baskets to be redeemed. If the Trust's DTC 
account has not been credited with all of the Baskets to be redeemed by 
such time, the redemption distribution is delivered to the extent of 
whole Baskets received. The Sponsor may, but is not obligated to, 
extend the redemption date with respect to a redemption order for which 
whole Baskets have not been delivered by the Authorized Participant. In 
such event, the Sponsor may charge the Authorized Participant a fee for 
such extension to reimburse the Trust for any losses incurred from the 
Authorized Participant's failure to deliver whole Baskets (including, 
but not limited to, expenses incurred in selling bitcoin in respect of 
the redemption order and/or buying bitcoin back following the failure 
of the Authorized Participant to deliver whole Baskets, as well as 
losses to the Trust from movements in the market value of bitcoin 
between selling the bitcoin and buying it back). If the Sponsor extends 
the redemption date, any remainder of the redemption distribution is 
delivered on the next business day to the extent of remaining whole 
Baskets received if the Sponsor receives the fee applicable to the 
extension of the redemption distribution date and the remaining Baskets 
to be redeemed are credited to the Trust's DTC account by 4:00 p.m. 
E.T. on such next business day. Any further outstanding amount of the 
redemption order shall be cancelled.
    The Sponsor makes available through the NSCC, prior to the opening 
of business on the Exchange on each business day, (a) for in-kind 
redemptions, the amount of bitcoin per Basket and (b) for cash 
redemptions, the amount of cash per Basket that will be applicable to 
redemption requests received in proper form.
    As with creation orders, the NAV of the Shares per Basket as of the 
day on which a redemption request is received and approved will be 
calculated after the deadline for redemption orders. The amount of cash 
payable per Basket for a cash redemption order accordingly will be 
calculated after the redemption order is received. The Administrator, 
by email or telephone correspondence, shall notify the Authorized 
Participant of the NAV of the Trust and the corresponding amount of 
cash (in the case of a cash redemption order) to be payable per Basket 
by approximately 4:00 p.m. E.T. on the day the purchase order is placed 
and approved.
    To the extent the Authorized Participant places an in-kind order to 
redeem a Basket, the Trust will deliver, on the business day 
immediately following the day the redemption order is received, the 
Total bitcoin Basket Amount. Expenses relating to transferring bitcoin 
to an Authorized Participant in a redemption Basket will be borne by 
Authorized Participants via the redemption transaction fee.
Availability of Information
    The Trust's website will provide an IIV per Share updated every 15 
seconds, as calculated by the Exchange or a third party financial data 
provider during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 
p.m. E.T.). The IIV will be calculated by using the prior day's closing 
NAV per Share as a base and updating that value during Regular Trading 
Hours to reflect changes in the value of the Trust's bitcoin holdings 
during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the mid-point of the bid-ask price \13\ in relation to the 
NAV as of the time the NAV is calculated (``Bid-Ask Price'') and a 
calculation of the premium or discount of such price against such NAV; 
(c) data in chart form displaying the frequency distribution of 
discounts and premiums of the Bid-Ask Price against the NAV, within 
appropriate ranges for each of the four previous calendar quarters (or 
for the life of the Trust, if shorter); (d) the prospectus; and (e) 
other applicable quantitative information. The Trust will also 
disseminate the Trust's holdings on a daily basis on the Trust's 
website. The price of bitcoin will be made available by one or more 
major market data vendors, updated at least every 15 seconds during 
Regular Trading Hours. Information about the MVBTCO, including key 
elements of how the MVBTCO is calculated, will be publicly available at 
www.mvis-indices.com/.
---------------------------------------------------------------------------

    \13\ The bid-ask price of the Trust is determined using the 
highest bid and lowest offer on the Consolidated Tape as of the time 
of calculation of the closing day NAV.
---------------------------------------------------------------------------

    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. To the extent that the Administrator has utilized the 
cascading set of rules described in ``bitcoin Market Price'' above, the 
Trust's website will note the valuation methodology used and the price 
per bitcoin resulting from such calculation. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the Consolidated Tape Association (``CTA'').
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the MVBTCO. Information relating to 
trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
    The Trust will provide website disclosure of its bitcoin holdings 
daily. The website disclosure of the Trust's bitcoin holdings will 
occur at the same time as the disclosure by the Sponsor of the bitcoin 
holdings to Authorized Participants so that all market participants are 
provided such portfolio information at the same time. Therefore, the 
same portfolio information will be provided on the public website as 
well as in electronic files provided to Authorized Participants. 
Accordingly, each investor will have access to the current bitcoin 
holdings of the Trust through the Trust's website.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a 
trust that holds a specified commodity \14\ 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

[[Page 31024]]

aggregated in the same specified minimum number, may be redeemed at a 
holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity. The Exchange notes 
that in addition to the in-kind creation and redemption processes 
described in Rule 14.11(e)(4)(C)(i), the Trust will also offer 
creations and redemptions of Shares for cash in addition to creating 
and redeeming in-kind. The Trust represents that the ability to create 
and redeem for cash will allow APs that may otherwise be unwilling or 
unable to source bitcoin on their own behalf to participate in the 
creation and redemption of Shares.
---------------------------------------------------------------------------

    \14\ 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.
---------------------------------------------------------------------------

    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the 
current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as required in Rule 
14.11(e)(4)(G), the Exchange notes that any registered market maker 
(``Market Maker'') in the Shares must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker shall 
trade in an underlying commodity, related commodity futures or options 
on commodity futures, or any other related commodity derivatives, in an 
account in which a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, which has not been reported to the Exchange as required 
by this Rule. In addition to the existing obligations under Exchange 
rules regarding the production of books and records (see, e.g., Rule 
4.2), the registered Market Maker in Commodity-Based Trust Shares shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
    The Trust currently expects that there will be at least 100 Shares 
outstanding at the time of commencement of trading on the Exchange, 
which the Exchange believes to be sufficient to provide adequate market 
liquidity. Assuming a bitcoin price of $8,000 and approximately 25 
bitcoin per Share, the Shares would be approximately $200,000 each. 
With a minimum of 100 Shares outstanding, the market value of all 
Shares outstanding would be approximately $20,000,000. Rules 
14.11(e)(4)(C)(ii)(b) [sic] and (c) provide that the Exchange will 
commence delisting proceedings for a series of Commodity-Based Trust 
Shares where the applicable trust has fewer than 50,000 receipts or the 
market value of all receipts issued and outstanding is less than 
$1,000,000, respectively, following the initial 12 month period 
following commencement of trading on the Exchange. These rules are 
designed to ensure that there are sufficient shares and market value 
outstanding to facilitate the creation and redemption process and 
ensure that the arbitrage mechanism will keep the price of a series of 
Commodity-Based Trust Shares in line with its NAV and prevent 
manipulation in the shares. The Exchange is proposing that Rule 
14.11(e)(4)(C)(ii)(b) [sic] would not apply to the Shares because the 
Exchange believes that such policy concerns are otherwise mitigated. 
The lower number of Shares is merely a function of price that will have 
no impact on the creation and redemption process and the arbitrage 
mechanism. Whether the Shares are priced equal to 25 bitcoin with a 
Basket of 5 Shares or the Shares are priced equal to .025 bitcoin with 
a Basket of 5,000 Shares, the cost to an AP to create or redeem will be 
the exact same and such a creation and redemption will have the same 
proportional impact on Shares and market value outstanding. Because the 
creation units and redemption units for most exchange-traded products 
are between 5,000 and 50,000 shares, it makes sense to apply a minimum 
number of shares outstanding to such products. Where a creation unit is 
5 shares, the policy concerns that Rule 14.11(e)(4)(C)(ii)(b) [sic] is 
designed to address are mitigated even where there are significantly 
fewer shares outstanding. As such, the Exchange is proposing that it 
would not commence delisting proceedings for the Shares if the Shares 
do not satisfy Rule 14.11(e)(4)(C)(ii)(b) [sic].
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) The extent to which trading is not occurring in the bitcoin 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a) the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect

[[Page 31025]]

violations of Exchange rules and the applicable federal securities 
laws. Trading of the Shares through the Exchange will be subject to the 
Exchange's surveillance procedures for derivative products, including 
Commodity-Based Trust Shares. The issuer has represented to the 
Exchange that it will advise the Exchange of any failure by the Trust 
or the Shares to comply with the continued listing requirements, and, 
pursuant to its obligations under Section 19(g)(1) of the Exchange Act, 
the Exchange will surveil for compliance with the continued listing 
requirements. If the Trust or the Shares are not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under Exchange Rule 14.12. The Exchange may obtain 
information regarding trading in the Shares and listed bitcoin 
derivatives via the Intermarket Surveillance Group (``ISG''), from 
other exchanges who are members or affiliates of the ISG, or with which 
the Exchange has entered into a comprehensive surveillance sharing 
agreement.\15\ 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 Bitcoin blockchain. The Exchange notes 
that it has entered into a comprehensive surveillance sharing agreement 
with Gemini Exchange.
---------------------------------------------------------------------------

    \15\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) The procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks 
involved in trading the Shares during the Pre-Opening \16\ and After 
Hours Trading Sessions \17\ when an updated IIV will not be calculated 
or publicly disseminated; (v) the requirement that members deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (vi) trading 
information.
---------------------------------------------------------------------------

    \16\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. 
Eastern Time.
    \17\ 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.
Policy Considerations
    The Exchange recognizes that certain policy concerns exist as it 
relates to any series of Commodity-Based Trust Shares that are listed 
on the Exchange, but that these concerns, as well as certain other 
concerns raised by this proposal specifically, are mitigated as it 
relates to the Trust and its holdings for the reasons enumerated below.
    First, the Exchange believes that the policy concerns related to an 
underlying reference asset and its susceptibility to manipulation are 
mitigated as it relates to bitcoin because the very nature of the 
bitcoin ecosystem makes manipulation of bitcoin difficult. 
Particularly, in the OTC markets, the dual elements of principal to 
principal trading combined with the large size at which trades are 
effected should effectively eliminate the ability of market 
participants to manipulate the market with small trades as may be the 
case on any individual exchange. As noted above, the OTC desks that 
comprise the MVBTCO with which the Trust intends to effect transactions 
are well established institutions that comply with AML and KYC 
regulatory requirements with respect to trading counterparties and 
include entities that are regulated by the SEC and FINRA as registered 
broker-dealers and affiliates of broker-dealers. It is the Sponsor's 
position that the OTC desks have a better measure of the market than 
any exchange-specific reference price, whether individually or indexed 
across multiple exchanges. The geographically diverse and continuous 
nature of bitcoin trading makes it difficult and prohibitively costly 
to manipulate the price of bitcoin and, in many instances, the bitcoin 
market is generally less susceptible to manipulation than the equity, 
fixed income, and commodity futures markets. There are a number of 
reasons this is the case, including that there is not inside 
information about revenue, earnings, corporate activities, or sources 
of supply; it is generally not possible to disseminate false or 
misleading information about bitcoin in order to manipulate; 
manipulation of the price on any single venue would require 
manipulation of the global bitcoin price in order to be effective; a 
substantial over-the-counter market provides liquidity and shock-
absorbing capacity; bitcoin's 24/7/365 nature provides constant 
arbitrage opportunities across all trading venues; and it is unlikely 
that any one actor could obtain a dominant market share.
    Further, bitcoin is arguably less susceptible to manipulation than 
other commodities that underlie ETPs; there may be inside information 
relating to the supply of the physical commodity such as the discovery 
of new sources of supply or significant disruptions at mining 
facilities that supply the commodity that simply are inapplicable as it 
relates to bitcoin. Further, the Exchange believes that the 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin prices 
through continuous trading activity unlikely. Moreover, the linkage 
between the bitcoin markets and the presence of arbitrageurs in those 
markets means that the manipulation of the price of bitcoin price on 
any single venue would require manipulation of the global bitcoin price 
in order to be effective. Arbitrageurs must have funds distributed 
across multiple trading platforms in order to take advantage of 
temporary price dislocations, thereby making it unlikely that there 
will be strong concentration of funds on any particular bitcoin 
exchange or OTC platform. As a result, the potential for manipulation 
on a trading platform would require overcoming the liquidity supply of 
such arbitrageurs who are effectively eliminating any cross-market 
pricing differences. For all of these reasons, bitcoin is not 
particularly susceptible to manipulation, especially as compared to 
other approved ETP reference assets.
    Second, the Trust maintains crime, excess crime and excess vault 
risk insurance coverage underwritten by various insurance carriers that 
will cover the entirety of the Trust's bitcoin holdings. While the 
Trust remains fully confident in its system for securing its bitcoin, 
insurance coverage of all of the Trust's bitcoin holdings eliminates 
exposure to the risk of loss to investors through fraud or theft, which 
in turn eliminates most of the custodial issues

[[Page 31026]]

associated with a series of Commodity-Based Trust Shares based on 
bitcoin.
    Finally, the Sponsor expects that the Shares will be purchased 
primarily by institutional and other substantial investors (such as 
hedge funds, family offices, private wealth managers and high-net-worth 
individuals), which will provide additional liquidity and transparency 
to the bitcoin market in a regulated vehicle such as the Trust. With an 
estimated initial per-share price equivalent to 25 bitcoin, the Shares 
will be cost-prohibitive for smaller retail investors while allowing 
larger and generally more sophisticated institutional investors to gain 
exposure to the price of bitcoin through a regulated product while 
eliminating the complications and reducing the risk associated with 
buying and holding bitcoin.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \18\ in general and Section 6(b)(5) of the Act \19\ 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.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

[[Page 31027]]

major market data vendors and from the exchanges on which bitcoin are 
traded. Depth of book information is also available from bitcoin 
exchanges. The normal trading hours for bitcoin exchanges are 24 hours 
per day, 365 days per year. The Trust will provide website disclosure 
of its bitcoin holdings daily. The website disclosure of the Trust's 
bitcoin holdings will occur at the same time as the disclosure by the 
Sponsor of the bitcoin holdings to Authorized Participants so that all 
market participants are provided such portfolio information at the same 
time. The website for the Trust, which will be publicly accessible at 
no charge, will contain the following information: (a) The current NAV 
per Share daily and the prior business day's NAV and the reported 
closing price; (b) the Bid-Ask Price and a calculation of the premium 
or discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Bid-Ask Price against the NAV, within appropriate ranges for each of 
the four previous calendar quarters (or for the life of the Trust, if 
shorter); (d) the prospectus; and (e) other applicable quantitative 
information. The Trust will also disseminate the Trust's holdings on a 
daily basis on the Trust's website. The price of bitcoin will be made 
available by one or more major market data vendors, updated at least 
every 15 seconds during Regular Trading Hours. Information about the 
MVBTCO, including key elements of how the MVBTCO is calculated, will be 
publicly available at www.mvis-indices.com/. The IIV will be widely 
disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The Exchange also recognizes that certain broader policy concerns 
exist as it relates to any series of Commodity-Based Trust Shares that 
are listed on the Exchange, but that these concerns, as well as certain 
other concerns raised by this proposal and related to bitcoin 
specifically, are mitigated as it relates to the Trust and its holdings 
for the reasons enumerated below.
    First, the Exchange believes that the policy concerns related to an 
underlying reference asset and its susceptibility to manipulation are 
mitigated as it relates to bitcoin because the very nature of the 
bitcoin ecosystem makes manipulation of bitcoin difficult. 
Particularly, in the OTC markets, the dual elements of principal to 
principal trading combined with the large size at which trades are 
effected should effectively eliminate the ability of market 
participants to manipulate the market with small trades as may be the 
case on any individual exchange. As noted above, the OTC desks that 
comprise the MVBTCO with which the Trust intends to effect transactions 
are well established institutions that comply with AML and KYC 
regulatory requirements with respect to trading counterparties and 
include entities that are regulated by the SEC and FINRA as registered 
broker-dealers and affiliates of broker-dealers. It is the Sponsor's 
position that the OTC desks have a better measure of the market than 
any exchange-specific reference price, whether individually or indexed 
across multiple exchanges. The geographically diverse and continuous 
nature of bitcoin trading makes it difficult and prohibitively costly 
to manipulate the price of bitcoin and, in many instances, the bitcoin 
market is generally less susceptible to manipulation than the equity, 
fixed income, and commodity futures markets. There are a number of 
reasons this is the case, including that there is not inside 
information about revenue, earnings, corporate activities, or sources 
of supply; it is generally not possible to disseminate false or 
misleading information about bitcoin in order to manipulate; 
manipulation of the price on any single venue would require 
manipulation of the global bitcoin price in order to be effective; a 
substantial over-the-counter market provides liquidity and shock-
absorbing capacity; bitcoin's 24/7/365 nature provides constant 
arbitrage opportunities across all trading venues; and it is unlikely 
that any one actor could obtain a dominant market share.
    Further, bitcoin is arguably less susceptible to manipulation than 
other commodities that underlie ETPs; there may be inside information 
relating to the supply of the physical commodity such as the discovery 
of new sources of supply or significant disruptions at mining 
facilities that supply the commodity that simply are inapplicable as it 
relates to bitcoin. Further, the Exchange believes that the 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin prices 
through continuous trading activity unlikely. Moreover, the linkage 
between the bitcoin markets and the presence of arbitrageurs in those 
markets means that the manipulation of the price of bitcoin price on 
any single venue would require manipulation of the global bitcoin price 
in order to be effective. Arbitrageurs must have funds distributed 
across multiple trading platforms in order to take advantage of 
temporary price dislocations, thereby making it unlikely that there 
will be strong concentration of funds on any particular bitcoin 
exchange or OTC platform. As a result, the potential for manipulation 
on a trading platform would require overcoming the liquidity supply of 
such arbitrageurs who are effectively eliminating any cross-market 
pricing differences. For all of these reasons, bitcoin is not 
particularly susceptible to manipulation, especially as compared to 
other approved ETP reference assets.
    Second, the Trust maintains crime, excess crime and excess vault 
risk insurance coverage underwritten by various insurance carriers that 
will cover the entirety of the Trust's bitcoin holdings. While the 
Trust remains fully confident in its system for securing its bitcoin, 
insurance coverage of all of the Trust's bitcoin holdings eliminates 
exposure to the risk of loss to investors through fraud or theft, which 
in turn eliminates most of the custodial issues associated with a 
series of Commodity-Based Trust Shares based on bitcoin.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

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

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and

[[Page 31028]]

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2018-040 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2018-040. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2018-040, and should be 
submitted on or before July 23, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14114 Filed 6-29-18; 8:45 am]
 BILLING CODE 8011-01-P