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Federal Register / Vol. 86, No. 160 / Monday, August 23, 2021 / Notices
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below, the investment objective of the Trust is to reflect the performance of the price of bitcoin less the expenses of the Trusts operations. The Trust will not seek to reflect the performance of any benchmark or index.
In seeking to achieve its investment objective, the Trust will hold bitcoin.
The Trust will value its assets daily in accordance with Generally Accepted Accounting Principles GAAP, which generally value bitcoin by reference to orderly transactions in the principal active market for bitcoin, as further described in the Calculation of NAV
section below. The Trust will process all creations and redemptions in-kind in transactions with authorized participants. The Trust is not actively managed.
Calculation of NAV
As described in the Registration Statement, the Sponsor has adopted a policy pursuant to which the Trust will value its assets and liabilities. Under this policy, the Sponsor uses fair value standards according to GAAP.
Generally, the fair value of an asset that is traded on a market is measured by reference to the orderly transactions on an active market. Among all active markets with orderly transactions, the market that is used to determine the fair value of an asset is the principal market with exceptions described in more detail below, which is either the market on which the Trust actually transacts, or if there is sufficient evidence, the market with the most trading volume and level of activity for the asset. Where there is no active market with orderly transactions for an asset, the Sponsors valuation committee follows policies and procedures described in more detail below to determine the fair value.
The Sponsor first determines which markets are likely to be active markets with orderly transactions for bitcoin.
Currently, the Sponsor has determined that active markets with orderly transactions are those that provide relevant and reliable price and volume information because the venues supporting such markets:
Conduct trading for bitcoin in U.S.
dollars;
are appropriately licensed to engage in bitcoin trading involving New Yorkbased customers and therefore, among other things, have programs to effectively detect, prevent, and respond to fraud; and otherwise have sufficient indicia of an active market with orderly transactions: Quality of execution overall costs of a trade, accurate and timely execution, clearance and error/
dispute resolution; reputation, financial
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strength, compliance with laws and regulations, and stability; hours of operation and willingness to transact;
confidentiality of trading activity; and integrity of trade and price data.
The Sponsor has determined that both certain bitcoin venues and the OTC
market meet these criteria. Among the venues supporting active markets with orderly transactions, the Sponsor determines to which such venues the Trust has access and refers to these as eligible venues. Eligible venues consist of eligible OTC venues and eligible exchanges.
The Sponsor then determines the principal market for bitcoin as either the market that the Trust normally transacts in for bitcoin, or, if the Trust does not normally transact in any market or the Sponsor has sufficient evidence that a particular market has the highest trading volume and level of activity, such market.
The Trust will not purchase or, barring the liquidation of the Trust or the Trust incurring certain extraordinary expenses or liabilities not contractually assumed by the Sponsor, sell bitcoin directly. As a result, the Sponsor expects that the principal market will generally be the market with the highest trading volume and level of activity, which the Sponsor expects will typically be an eligible exchange. The Sponsor determines the principal market for bitcoin at least quarterly and more frequently as circumstances warrant. Circumstances in which the Sponsor may re-determine the principal market include but are not limited to the following: Where the market is no longer an eligible market or when the trading volume for bitcoin on another eligible market increases such that that eligible market has the highest trading volume for the digital asset by a material margin.
Whether the principal market for bitcoin is an eligible exchange or the OTC market, the price on such principal market may not always represent fair value or the transactions on such market may not always represent orderly transactions. Thus, the Sponsor will not use the principal market to determine the fair value of bitcoin on a measurement date if the Sponsor determines, at the time of valuation, that transactions on the principal market are not orderly e.g., indicative of forced liquidations or distress sales. To make this determination, the Sponsor reviews criteria including:
A comparison of the prices on the principal market against the prices on other eligible venues that the Sponsor believes have the strongest regulatory
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compliance, surveillance, and enforcement mechanisms;
trading volume and prices on the principal market at and around the time of valuation relative to historical activity on the principal market and eligible venues;
the Sponsors understanding of the markets regulatory compliance, including with applicable federal and state licensing requirements, and practices regarding anti-money laundering;
the degree of intraday price fluctuations the market experiences at and around the time of valuation; and the ability of the Trust to trade on the market.
If the Sponsor determines that transactions on the principal market are not orderly, the Sponsor will determine the fair value of bitcoin based on the eligible exchange with the next-highest volume, as long as the Sponsor determines that that market has orderly transactions at the time of the valuation.
If market quotations are not readily available including in cases in which available market quotations are deemed to be unreliable or infrequent, the Trusts bitcoin will be valued as determined in good faith pursuant to policies and procedures approved by the Sponsors valuation committee fair value pricing. In these circumstances, the Trust determines fair value in a manner that seeks to reflect the market value of the investment at the time of valuation based on consideration of any information or factors the Sponsors valuation committee deems appropriate, as further described below. The Sponsors valuation committee is responsible for overseeing the implementation of the Trusts valuation procedures and fair value determinations. For purposes of determining the fair value of bitcoin, the valuation committee may consider, without limitation: i Indications or quotes from brokers, ii valuations provided by a third-party pricing agent, iii internal models that take into consideration different factors determined to be relevant by the Sponsor or iv any combination of the above.
Availability of Information In addition to the price transparency related to the price of bitcoin, the Trust will provide information regarding the Trusts bitcoin holdings as well as additional data regarding the Trust. The Trust will provide an Intraday Indicative Value IIV per Share updated every 15 seconds, as calculated by the Exchange or a third-party financial data provider during the
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