Item 1. Business
Item 1. Business
DESCRIPTION OF THE TRUST
The Trust is an exchange-traded
fund that issues common shares of beneficial interest (the “Shares”) that trade on the Cboe BZX Exchange, Inc. (the “Exchange”)
under the symbol “ARKB.” The Trust’s investment objective is to seek to track the performance of bitcoin, as measured
by the performance of the CME CF Bitcoin Reference Rate - New York Variant (the “Index”), adjusted for the Trust’s expenses
and other liabilities. In seeking to achieve its investment objective, the Trust holds bitcoin and values its Shares daily based on the
Index. The Sponsor is the sponsor of the Trust and Delaware Trust Company (the “Trustee”) is the trustee of the Trust. The
Bank of New York Mellon (“BNYM”) serves as the Trust’s Administrator, Transfer Agent, and the Cash Custodian. Coinbase
Custody Trust Company, LLC (“Coinbase Custodian”), BitGo New York Trust Company, LLC (“BitGo”), and Anchorage
Digital Bank N.A (“Anchorage”, and, together with Coinbase Custodian and BitGo, as the context may require, the “Bitcoin
Custodians” and each a “Bitcoin Custodian”), are the Bitcoin Custodians for the Trust and hold all the Trust’s
bitcoin on the Trust’s behalf. ARK Investment Management LLC (the “Sub-Adviser”) is the sub-adviser of the Trust and
aids in the marketing of the Shares.
The Trust is an exchange-traded
fund. The Trust does not purchase or sell bitcoin other than in connection with the creation and redemption of Shares or to pay certain
expenses, which are facilitated by Coinbase, Inc. (the “Prime Broker”), or any other prime brokers with whom the Trust contracts.
The Trust is not managed like
a corporation or an active investment vehicle. It does not have any officers, directors, or employees. The Trust is not registered as
an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and is not required to register
under such act. The Trust does not and will not hold or trade in commodity futures contracts regulated under the Commodity Exchange Act,
as amended (“CEA”). The Trust is not a commodity pool for purposes of the CEA and none of the Sponsor, Trustee or the Marketing
Agent is subject to regulation by the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator or a commodity
trading advisor under the CEA in connection with the shares. The Sponsor is not registered with the SEC as an investment adviser and is
not subject to regulation by the SEC as such in connection with its activities with respect to the Trust.
The Sponsor maintains a website
at www.21shares.com/en-us, through which the Trust’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended (“Exchange Act”), are made available free of charge after they have been filed or furnished to the SEC. The information
on the Sponsor’s website is not, and shall not be deemed to be, part of this report or incorporated into any other filings we make
with the SEC. Additional information regarding the Trust may also be found on the SEC’s EDGAR database at www.sec.gov.
organization
The Trust is a Delaware statutory
trust, formed on June 22, 2021, pursuant to the Delaware Statutory Trust Act (“DSTA”). The Trust continuously issues Shares
that may be purchased and sold on the Exchange. The Trust operates pursuant to the Trust Agreement. Delaware Trust Company, a Delaware
trust company, is the Delaware trustee of the Trust. The Trust is managed and controlled by the Sponsor. The Sponsor is a limited liability
company formed in the state of Delaware on June 16, 2021.
Shares are issued and redeemed
by the Trust in blocks of 5,000 Shares (each a “Basket” or “Creation Basket”). The number of outstanding Shares
is expected to increase and decrease from time to time because of the creation and redemption of Baskets. The creation and redemption
of Baskets requires the delivery to the Trust or the distribution by the Trust of the amount of cash equivalent to the amount of bitcoin
represented by the NAV of the Baskets being created or redeemed. The total amount of bitcoin required for the creation of Baskets is based
on the combined net assets represented by the number of Baskets being created or redeemed.
The Trust and the Sponsor
face competition with respect to the creation of competing products, such as exchange-traded products offering exposure to the spot bitcoin
market or other digital assets. There can be no assurance that the Trust will grow to or maintain an economically viable size. There is
no guarantee that the Sponsor will maintain a commercial advantage relative to competitors offering similar products. Whether or not the
Trust is successful in achieving its intended scale may be impacted by a range of factors, such as the Trust’s timing in entering
the market and its fee structure relative to those of competitive products.
The Trust has no fixed termination
date.
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DESCRIPTION OF THE SHARES
Each Share represents a fractional
undivided beneficial interest in the net assets of the Trust. Upon redemption of the Shares, the applicable Authorized Participant is
paid solely out of the funds and property of the Trust. The assets of the Trust consist primarily of bitcoin held by the Bitcoin Custodians
on behalf of the Trust and cash. Creation Baskets are redeemed by the Trust in exchange for an amount of cash equal to the amount of bitcoin
represented by the aggregate number of Shares redeemed.
The Trust is a passive investment
vehicle and is not a leveraged product. The Sponsor does not actively manage the bitcoin held by the Trust. The bitcoin held by the Trust
will only be sold (1) on an as-needed basis to pay the Trust’s expenses and to meet redemption requests, (2) in the event the Trust
terminates and liquidates its assets, or (3) as otherwise required by law or regulation. The sale of bitcoin by the Trust is a taxable
event to its shareholders (the “Shareholders”).
Under the Trust’s Amended
and Restated Trust Agreement (the “Trust Agreement”), Shareholders have no voting rights except as the Sponsor may consider
desirable and so authorize in its sole discretion.
The Sponsor may terminate
the Trust in its sole discretion. The Sponsor will give written notice of the termination of the Trust, specifying the date of termination,
to Shareholders of the Trust, at least 30 days prior to the termination of the Trust. The Sponsor will, within a reasonable time after
such termination, sell all the Trust’s bitcoin not already distributed to Authorized Participants redeeming Creation Baskets, if
any, in such a manner to effectuate orderly sales. The Sponsor shall not be liable for or responsible in any way for depreciation or loss
incurred by reason of any sale or sales made in accordance with the provisions of the Trust Agreement. The Sponsor may suspend its sales
of the Trust’s bitcoin upon the occurrence of unusual or unforeseen circumstances.
Investment
Objective
The Trust’s investment
objective is to seek to track the performance of bitcoin, as measured by the Index, adjusted for the Trust’s expenses and other
liabilities. In seeking to achieve its investment objective, the Trust holds bitcoin and values its Shares daily as of 4:00 p.m. ET based
on the Index .
Principal
Market and Fair Value Determination of bitcoin
The NAV of the Trust is used by the Trust in its
day-to-day operations to measure the net value of the Trust’s assets. The NAV is calculated on each day other than a day when the
Exchange is closed for regular trading (a “Business Day”) and is equal to the aggregate value of the Trust’s assets
less its liabilities based on the Index price. In determining the NAV of the Trust on any Business Day, the Administrator will calculate
the price of the bitcoin held by the Trust as of 4:00 p.m. ET on such day. The Administrator will also calculate the “NAV per Share”
of the Trust, which equals the NAV of the Trust divided by the number of outstanding Shares.
In addition to calculating
NAV and NAV per Share, for purposes of the Trust’s financial statements, the Trust determines the Principal Market NAV and Principal
Market NAV per Share on each valuation date for such financial statements. The determination of the Principal Market NAV and Principal
Market NAV per Share is identical to the calculation of NAV and NAV per Share, respectively, except that the value of bitcoin is determined
using the fair value of bitcoin based on the price in the bitcoin market that the Trust considers its “principal market” as
of 4:00 p.m. ET on the valuation date, rather than using the Index.
NAV and NAV per Share are
not measures calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and are not intended as substitute for Principal Market and Principal Market NAV per Share, respectively.
The Trust follows the provisions
of ASC 820, Fair Value Measurements (“ASC 820”). ASC 820 provides guidance for determining fair value and requires increased
disclosure regarding the inputs to valuation techniques used to measure fair value. ASC 820 determines fair value to be the price that
would be received for bitcoin in a current sale, which assumes an exit price resulting from an orderly transaction between market participants
on the measurement date. ASC 820-10 requires the assumption that bitcoin is sold in its principal market to market participants (or in
the absence of a principal market, the most advantageous market).
The cost basis of the investment
in bitcoin recorded by the Trust for financial reporting purposes is the fair value of bitcoin at the time of transfer. The cost basis
recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.
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Fees, Expenses and Realized
Gain (Loss)
The Trust pays the unitary
Sponsor Fee of 0.21% of the Trust’s bitcoin holdings. The Sponsor Fee is paid by the Trust to the Sponsor as compensation for services
performed under the Trust Agreement. The Sponsor agreed to waive the entire Sponsor Fee for (i) a nine-month period which commenced on
January 11, 2024 (the day the Trust’s Shares were initially listed on the Exchange), or (ii) the first $1 billion of Trust assets,
whichever came first. The Trust assets exceeded $1 billion in April 2024, at which time the waiver period ended.
Except for during periods
during which the Sponsor Fee has been waived, the Sponsor Fee accrues daily and is payable in bitcoin weekly in arrears. The aggregate
Sponsor Fee paid to the Sponsor for the fiscal year ended December 31, 2024 was $5,732,049. The Administrator calculates the Sponsor Fee
on a daily basis by applying a 0.21% annualized rate to the Trust’s total bitcoin holdings, and the amount of bitcoin payable in
respect of each daily accrual is determined by reference to the Index. The Sponsor has agreed to pay all operating expenses (except for
litigation expenses and other extraordinary expenses) out of the Sponsor Fee.
As partial consideration for
receipt of the Sponsor Fee, the Sponsor assumes and pays all fees and other expenses incurred by the Trust in the ordinary course of its
affairs, excluding taxes, but including (i) fees to the Sub-Adviser; (ii) the Marketing Fee, (iii) fees to the Administrator, if any,
(iv) fees to the Bitcoin Custodians, (v) fees to the Transfer Agent, (vi) fees to the Trustee, (vii) the fees and expenses related to
any future listing, trading or quotation of the Shares on any listing exchange or quotation system (including legal, marketing and audit
fees and expenses), (viii) ordinary course legal fees and expenses but not litigation-related expenses, (ix) audit fees, (x) regulatory
fees, including if applicable any fees relating to the registration of the Shares under the Securities Act or the Exchange Act, (xi) printing
and mailing costs; (xii) costs of maintaining the Sponsor’s website and (xiii) applicable license fees (each, a “Sponsor-paid
Expense” and together, the “Sponsor-paid Expenses”), provided that any expense that qualifies as an Additional Trust
Expense (as defined below) will be deemed to be an Additional Trust Expense and not a Sponsor-paid Expense.
The Sponsor does not, however,
assume certain extraordinary, non-recurring expenses that are not Sponsor-paid Expenses (as defined below), including, but not limited
to, taxes and governmental charges, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider)
on behalf of the Trust to protect the Trust or the interests of Shareholders, any indemnification of the Bitcoin Custodians, Administrator
or other agents, service providers or counterparties of the Trust, the fees and expenses related to the listing, and extraordinary legal
fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation
matters (collectively, “Additional Trust Expenses”). Of the Sponsor-paid Expenses, ordinary course legal fees and expenses
are subject to a cap of not more than $100,000 per annum. In the Sponsor’s sole discretion, all or any portion of a Sponsor-paid
Expense may be redesignated as an Additional Trust Expense.
After the payment of the Sponsor
Fee to the Sponsor, the Sponsor may elect to convert some or all of the Sponsor Fee into cash by selling this bitcoin at market prices,
in the Sponsor’s sole discretion. Due to the variance in market prices for bitcoin, the rate at which the Sponsor converts bitcoin
to cash may differ from the rate at which the Sponsor Fee was initially paid in bitcoin.
The Bitcoin Custodians assume
the transfer fees associated with the transfer of bitcoin to the Sponsor with respect to the Sponsor Fee, and any further expenses associated
with such transfer are assumed by the Sponsor. The Trust is not responsible for any fees and expenses incurred by the Sponsor to convert
bitcoin received in payment of the Sponsor Fee into cash.
Pursuant to the Trust Agreement,
the Sponsor or its delegates direct the Bitcoin Custodians to transfer bitcoin from the Trust’s “cold storage” or similarly
secure technology (the “Cold Vault Balance”) as needed to pay the Sponsor’s Fee and Additional Trust Expenses, if any.
The Sponsor or its delegates endeavors to transfer the smallest amount of bitcoin needed to pay applicable expenses. The Sponsor, in arranging
for payment of Additional Trust Expenses, may in its discretion direct that the Trust’s bitcoin be exchanged for U.S. Dollars. Under
such circumstances, the Trust will not utilize the Bitcoin Custodians to arrange for the sale of the Trust’s bitcoin to pay the
Trust’s expenses and liabilities. Rather, the Sponsor will arrange for the Prime Broker, an affiliate of one of the Bitcoin Custodians,
or another third-party digital asset trading platform to exchange the Trust’s bitcoin for U.S. dollars in such a situation.
Creation
and Redemption of Shares
The Trust creates and redeems
Shares from time to time, but only in one or more Baskets (other than in the case of the Seed Creation Baskets) consisting of 5,000 Shares
or multiples thereof. Baskets are only made in exchange for delivery to the Trust or the distribution by the Trust of the amount of cash
equivalent to the amount of bitcoin represented by the Baskets being created or redeemed, the amount of which is based on the quantity
of bitcoin attributable to each Share of the Trust (net of accrued but unpaid Sponsor Fees and any accrued but unpaid extraordinary expenses
or liabilities) being created or redeemed determined as of 4:00 p.m. ET on the day the order to create or redeem Baskets is properly received.
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Authorized Participants are
the only persons that may place orders to create and redeem Baskets. Authorized Participants must be (1) registered broker-dealers or
other securities market participants, such as banks and other financial institutions, which are not required to register as broker-dealers
to engage in securities transactions described below, and (2) DTC Participants. To become an Authorized Participant, a person must enter
into an Authorized Participant Agreement with the Sponsor. The Authorized Participant Agreement provides the procedures for the creation
and redemption of Baskets and for the delivery of the bitcoin required for such creation and redemptions. The Authorized Participant Agreement
and the related procedures attached thereto may be amended by the Trust, without the consent of any Shareholder or Authorized Participant.
Authorized Participants pay the Transfer Agent a fee for each order they place to create or redeem one or more Baskets. The transaction
fee may be reduced, increased, or otherwise changed by the Sponsor.
Authorized Participants will
deliver only cash to create shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly
or indirectly purchase, hold, deliver, or receive bitcoin as part of the creation or redemption process or otherwise direct the Trust
or a Bitcoin Counterparty (defined below) with respect to purchasing, holding, delivering, or receiving bitcoin as part of the creation
or redemption process. A “Bitcoin Counterparty” is a designated third party, who is not an Authorized Participant but who
may be an affiliate of an Authorized Participant, or the Prime Broker or Lender, as applicable, with whom the Sponsor has entered into
an agreement on behalf of the Trust, that will, acting as a counterparty, deliver, receive or convert to U.S. dollars the bitcoin related
to the Authorized Participant’s creation or redemption order.
The Trust creates Shares by
receiving bitcoin from a Bitcoin Counterparty that is not the Authorized Participant, and the Trust—not the Authorized Participant—is
responsible for selecting the Bitcoin Counterparty to deliver the bitcoin. Further, the Bitcoin Counterparty does not act as an agent
of the Authorized Participant with respect to the delivery of the bitcoin to the Trust or act at the direction of the Authorized Participant
with respect to the delivery of the bitcoin to the Trust.
The Trust redeems Shares by
delivering bitcoin to a Bitcoin Counterparty that is not the Authorized Participant and the Trust—not the Authorized Participant
—is responsible for selecting the Bitcoin Counterparty to receive the bitcoin. Further, the Bitcoin Counterparty does not act as
an agent of the Authorized Participant with respect to the receipt of the bitcoin from the Trust or act at the direction of the Authorized
Participant with respect to the receipt of the bitcoin from the Trust.
Bitcoin Counterparties deliver
bitcoin related to the Authorized Participant’s purchase order to the Cold Vault Balance. Authorized Participants and Bitcoin Counterparties
are not required to maintain an account with any of the Bitcoin Custodians.
Creations and redemptions
of Shares may result in certain slippage being incurred as a result of, for example, trading fees, spreads, or commissions. Any slippage
so incurred will be the responsibility of the Authorized Participant, as a cash liability, and not of the Trust or Sponsor.
Each Authorized Participant
is required to be registered as a broker-dealer under the Exchange Act and a member in good standing with FINRA or exempt from being or
otherwise not required to be licensed as a broker-dealer or a member of FINRA and be qualified to act as a broker or dealer in the states
or other jurisdictions where the nature of its business so requires. Certain Authorized Participants may also be regulated under federal
and state banking laws and regulations. Each Authorized Participant has its own set of rules and procedures, internal controls, and information
barriers as it determines is appropriate considering its own regulatory regime.
Service
Providers of the Trust
The
sponsor
The Sponsor arranged for the
creation of the Trust and is responsible for the ongoing registration of the Shares for their public offering in the United States and
the listing of Shares on the Exchange. The Sponsor does not exercise day-to-day oversight over the Trustee, the Bitcoin Custodians, or
the Index Provider. The Sponsor develops a marketing plan for the Trust, prepares marketing materials regarding the Shares of the Trust,
and exercises the marketing plan of the Trust on an ongoing basis. The Sponsor engaged the Sub-Adviser pursuant to the Support Services
Agreement to serve as the Trust’s sub-adviser and provide marketing support to the Sponsor with respect to the Trust. The Sponsor
is responsible for supervising the Sub-Adviser. The Sponsor agreed to pay all operating expenses (except for litigation expenses and other
extraordinary expenses) out of the Sponsor’s unified fee.
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The Sponsor is a wholly owned
subsidiary of 21co Holdings Limited (formerly known as Amun Holdings Limited). At present, the primary business activities of 21co Holdings
Limited are providing exchange traded products and tokenization services in the crypto space through its subsidiaries.
21Shares AG, an affiliate
of the Sponsor, has considerable experience issuing and operating exchange-traded products that provide exposure to digital assets, operating
such exchange-traded products since 2018. As of December 31, 2024, 21Shares AG oversees approximately $4.9 billion in assets under management
and nearly 47 digital asset-related exchange-traded products across various jurisdictions. Although the Sponsor is a relatively new entity
within the broader structure of 21Shares AG and its affiliates (collectively, the “21Shares Group”), the Sponsor utilizes
a similar management team that the 21Shares Group has used in issuing and operating these exchange-traded products. Additionally, as of
December 31, 2024, the Sponsor serves as sub-adviser to five investment companies registered under the 1940 Act.
The Sponsor is not under any
liability to the Trust, the Trustee or any Shareholder for any action taken or for refraining from the taking of any action in good faith
pursuant to the Trust Agreement, or for errors in judgment or for depreciation or loss incurred by reason of the sale of any bitcoin or
other assets held in trust hereunder; provided, however, that this provision will not protect the Sponsor against any liability to which
it would otherwise be subject by reason of its own gross negligence, bad faith, or willful misconduct. The Sponsor may rely in good faith
on any paper, order, notice, list, affidavit, receipt, evaluation, opinion, endorsement, assignment, draft, or any other document of any
kind prima facie properly executed and submitted to it by the Trustee, the Trustee’s counsel or by any other Person for any matters
arising hereunder. The Sponsor will in no event be deemed to have assumed or incurred any liability, duty, or obligation to any Shareholder
or to the Trustee other than as expressly provided for herein. The Trust will not incur the cost of that portion of any insurance which
insures any party against any liability, the indemnification of which is herein prohibited.
The Sponsor and its shareholders,
members, directors, officers, employees, affiliates and subsidiaries (each a “Sponsor Indemnified Party”) are indemnified
by the Trust against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims arising out of or in connection
with the performance of its obligations under the Trust Agreement or any actions taken in accordance with the provisions of the Trust
Agreement, provided that (i) the Sponsor was acting on behalf of, or performing services for, the Trust and has determined, in good faith,
that such course of conduct was in the best interests of the Trust and such liability or loss was not the result of fraud, gross negligence,
bad faith, willful misconduct, or a material breach of this Trust Agreement on the part of the Sponsor and (ii) any such indemnification
will be recoverable only from the Trust Estate. Any amounts payable to a Sponsor Indemnified Party under the Trust Agreement may be payable
in advance or will be secured by a lien on the Trust. The Sponsor will not be under any obligation to appear in, prosecute or defend any
legal action that in its opinion may involve it in any expense or liability; provided, however, that the Sponsor may, in its discretion,
undertake any action that it may deem necessary or desirable in respect of the Trust Agreement and the rights and duties of the parties
hereto and the interests of the Shareholders and, in such event, the legal expenses and costs of any such action will be expenses and
costs of the Trust and the Sponsor will be entitled to be reimbursed therefor by the Trust. The obligations of the Trust to indemnify
the Sponsor Indemnified Parties will survive the termination of the Trust Agreement.
The
sub-adviser
ARK Investment Management
LLC, serves as the Trust’s sub-adviser. The Sub-Adviser provides data, research, and, as needed, operational support to the Trust.
As of December 31, 2024, the Sub-Adviser had approximately $29.36 billion in assets under management. The Trust is passively managed and
does not pursue active management investment strategies, and the Sponsor and the Sub-Adviser do not actively manage the bitcoin held by
the Trust. This means that the Sponsor and the Sub-Adviser do not sell bitcoin at times when its price is high or acquire bitcoin at low
prices in the expectation of future price increases. It also means that the Sponsor and the Sub-Adviser do not make use of any of the
hedging techniques available to professional bitcoin investors to attempt to reduce the risks of losses resulting from price decreases.
The Sponsor entered into the Support Services Agreement with the Sub-Adviser and pays the Sub-Adviser out of the unitary fee it receives
from the Trust.
The Trust does not directly
pay the Sub-Adviser.
the
trustee
Delaware Trust Company, a
Delaware trust company, acts as the trustee of the Trust for the purpose of creating a Delaware statutory trust in accordance with the
DSTA. The Trustee is appointed to serve as the trustee of the Trust in the State of Delaware for the sole purpose of satisfying the requirement
of Section 3807(a) of the DSTA that the Trust have at least one trustee with a principal place of business in the State of Delaware.
As further discussed in the
Trust Agreement, the Trustee is not liable for the acts or omissions of the Sponsor, nor is the Trustee liable for supervising or monitoring
the performance and the duties and obligations of the Sponsor or the Trust under the Trust Agreement. The Trustee is not personally liable
under any circumstances, except for its own willful misconduct, bad faith, or gross negligence.
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The Trustee or any officer,
affiliate, director, employee, or agent of the Trustee (each, an “Indemnified Person”) is entitled to indemnification from
the Sponsor or the Trust, to the fullest extent permitted by law, from and against any and all losses, claims, taxes, damages, reasonable
expenses, and liabilities (including liabilities under State or federal securities laws) of any kind and nature whatsoever (collectively,
“Expenses”), to the extent that such Expenses arise out of or are imposed upon or asserted against such Indemnified Persons
with respect to the creation, operation or termination of the Trust, the execution, delivery or performance of the Trust Agreement or
the transactions contemplated in the Trust Agreement; provided, however, that the Sponsor and the Trust are not required to indemnify
any Indemnified Person for any Expenses that are a result of the willful misconduct, bad faith or gross negligence of such Indemnified
Person.
the
administrator
The Sponsor entered into a
Fund Administration and Accounting Agreement with BNY Mellon Asset Servicing, a division of The Bank of New York Mellon, to provide administration
and accounting services to the Trust. Pursuant to the terms of the Agreement and under the supervision and direction of the Sponsor and
the Trust, BNY Mellon Asset Servicing keeps the operational records of the Trust and prepares and files certain regulatory filings on
behalf of the Trust. BNY Mellon Asset Servicing may also perform other services for the Trust pursuant to the Agreement as mutually agreed
upon by the Sponsor, the Trust and BNY Mellon Asset Servicing from time to time. The Administrator’s fees are paid on behalf of
the Trust by the Sponsor.
THE
Transfer AGENT
The Bank of New York Mellon
serves as the Transfer Agent of the Trust pursuant to the terms and provisions of the Transfer Agency and Service Agreement (the “Transfer
Agency and Service Agreement”). The Transfer Agent: (1) facilitates the issuance and redemption of Shares of the Trust; (2) responds
to correspondence by Trust shareholders and others relating to its duties; (3) maintains shareholder accounts; and (4) makes periodic
reports to the Trust.
the
bitcoin custodianS
Coinbase, BitGo and Anchorage
are the Bitcoin Custodians for the Trust and hold all of the Trust’s bitcoin on the Trust’s behalf.
The Bitcoin Custodians keep
custody of all the Trust’s bitcoin, other than which is maintained in the Trading Balance with the Prime Broker, in the Cold Vault
Balance. The Bitcoin Custodians keeps a substantial portion of the private keys associated with the Trust’s bitcoin in “cold
storage” or similarly secure technology. Cold storage is a safeguarding method with multiple layers of protections and protocols,
by which the private key(s) corresponding to the Trust’s bitcoin is (are) generated and stored in an offline manner. Private keys
are generated in offline computers that are not connected to the internet so that they are resistant to being hacked. By contrast, in
hot storage, the private keys are held online, where they are more accessible, leading to more efficient transfers, though they are potentially
more vulnerable to being hacked. While the Bitcoin Custodians will generally keep a substantial portion of the Trust’s bitcoin in
cold storage on an ongoing basis, it is possible that, from time to time, portions of the Trust’s bitcoin will be held outside of
cold storage temporarily in the Trading Balance maintained by the Prime Broker as part of trade facilitation in connection with creations
and redemptions of Baskets, to sell bitcoin including to pay Trust expenses, or to pay the Sponsor Fee, as necessary. The Trust’s
bitcoin held in the Cold Vault Balance by the Bitcoin Custodians are held in segregated wallets and therefore are not commingled with
the Bitcoin Custodians’ or other customer assets.
Cold storage of private keys
may involve keeping such keys on a non-networked computer or electronic device or storing the public key and private keys on a storage
device or printed medium and deleting the keys from all computers. The Bitcoin Custodians may receive deposits of bitcoin but may not
send bitcoin without use of the corresponding private keys. To send bitcoin when the private keys are kept in cold storage, unsigned transactions
must be physically transferred to the offline cold storage facility and signed using a software/hardware utility with the corresponding
offline keys. At that point, the Bitcoin Custodians can upload the fully signed transaction to an online network and transfer the bitcoin.
Such private keys are stored in cold storage facilities within the United States and Europe, exact locations of which are not disclosed
for security reasons. A limited number of employees at the Bitcoin Custodians are involved in private key management operations, and the
Bitcoin Custodians have each represented that no single individual has access to full private keys.
The Bitcoin Custodians’
internal audit team performs periodic internal audits over custody operations, and the Bitcoin Custodians have represented that Systems
and Organizational Control (“SOC”) attestations covering private key management controls are also performed on the Bitcoin
Custodians by an external provider.
The Bitcoin Custodians maintain
a commercial crime insurance policy, which is intended to cover the loss of client assets held in cold storage, including from employee
collusion or fraud, physical loss including theft, damage of key material, security breach or hack, and fraudulent transfer. The insurance
maintained by the Bitcoin Custodian is shared among all the Bitcoin Custodian’s customers, is not specific to the Trust or to customers
holding bitcoin with the Bitcoin Custodian and may not be available or sufficient to protect the Trust from all possible losses or sources
of losses.
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Bitcoin held in the Trust’s
account with the Bitcoin Custodians is the property of the Trust. The Trust, the Sponsor and the service providers will not loan or pledge
the Trust’s assets nor will the Trust’s assets serve as collateral for any loan or similar arrangement. The Trust will not
utilize leverage, derivatives, or any similar arrangements in seeking to meet its investment objective.
In the event of a fork, the
Custodial Services Agreement provides that the Bitcoin Custodians may temporarily suspend services, and may, in their sole discretion,
determine whether or not to support (or cease supporting) either branch of the forked protocol entirely, provided that the Bitcoin Custodians
shall use commercially reasonable efforts to avoid ceasing to support both branches of such forked protocol and will support, at a minimum,
the original digital asset. The Custodial Services Agreement provides that, other than as set forth therein, and provided that the Bitcoin
Custodians shall make commercially reasonable efforts to assist the Trust to retrieve and/or obtain any assets related to a fork, airdrop
or similar event the Bitcoin Custodians shall have no liability, obligation or responsibility whatsoever arising out of or relating to
the operation of the underlying software protocols relating to the Bitcoin network or an unsupported branch of a forked protocol and,
accordingly, the Trust acknowledges and assumes the risk of the same. The Custodial Services Agreement further provides that, unless specifically
communicated by the relevant Bitcoin Custodian and its affiliates through a written public statement on their website, such Bitcoin Custodian
does not support airdrops, metacoins, colored coins, side chains, or other derivative, enhanced or forked protocols, tokens or coins,
which supplement or interact with bitcoin.
Under the Trust Agreement,
the Sponsor has the right, in its sole discretion, to determine what action to take in connection with the Trust’s entitlement to
or ownership of Incidental Rights or any IR Virtual Currency, and Trust may take any lawful action necessary or desirable in connection
with the Trust’s ownership of Incidental Rights, including the acquisition of IR Virtual Currency, as determined by the Sponsor
in the Sponsor’s sole discretion, unless such action would adversely affect the status of the Trust as a grantor trust for U.S.
federal income tax purposes or otherwise be prohibited by this Trust Agreement.
With respect to any fork,
airdrop or similar event, the Sponsor will cause the Trust to irrevocably abandon the Incidental Rights or IR Virtual Currency. In the
event the Trust seeks to change this position, an application would need to be filed with the SEC by the Exchange seeking approval to
amend its listing rules.
Under the Custodial Services
Agreement, the Bitcoin Custodians’ liability is limited as follows, among others: (i) other than with respect to claims and losses
arising from spot trading of bitcoin, or fraud or willful misconduct, among others, the Bitcoin Custodians’ aggregate liability
under the Custodial Services Agreement shall not exceed the greater of (A) the greater of (x) $5 million and (y) the aggregate fees paid
by the Trust to the Bitcoin Custodians in the 12 months prior to the event giving rise to the Bitcoin Custodians’ liability, and
(B) the value of the affected bitcoin or cash giving rise to the Bitcoin Custodians’ liability; (ii) the Bitcoin Custodians’
aggregate liability in respect of each cold storage address shall not exceed $100 million; (iii) in respect of the Bitcoin Custodians’
obligations to indemnify the Trust and its affiliates against third party claims and losses to the extent arising out of or relating to,
among others, the Bitcoin Custodians’ violation of any law, rule or regulation with respect to the provision of its services, the
Bitcoin Custodians’ liability shall not exceed the greater of (A) $5 million and (B) the aggregate fees paid by the Trust to the
Bitcoin Custodians in the 12 months prior to the event giving rise to the Bitcoin Custodians’ liability; and (iv) in respect of
any incidental, indirect, special, punitive, consequential or similar losses, the Bitcoin Custodians are not liable, even if the Bitcoin
Custodians have been advised of or knew or should have known of the possibility thereof. The Bitcoin Custodians are not liable for delays,
suspension of operations, failure in performance, or interruption of service to the extent it is directly due to a cause or condition
beyond the reasonable control of the Bitcoin Custodians. Under the Custodial Services Agreement, except in the case of its negligence,
fraud, material violation of applicable law or willful misconduct, the Bitcoin Custodians shall not have any liability, obligation, or
responsibility for any damage or interruptions caused by any computer viruses, spyware, scareware, Trojan horses, worms or other malware
that may affect the Trust’s computer or other equipment, or any phishing, spoofing or other attack, unless the Bitcoin Custodians
fail to have commercially reasonable policies, procedures and technical controls in place to prevent such damages or interruptions.
The Bitcoin Custodians may
terminate the Custodial Services Agreement for any reason upon providing the applicable notice to the Trust, or immediately for Cause
(as defined in the Custodial Services Agreement), including, among others, if the Trust materially breaches the Prime Broker Agreement
and such breach remains uncured, or undergoes a bankruptcy event.
The Sponsor may, in its sole
discretion, add or terminate custodians at any time. The Sponsor may, in its sole discretion, change the custodians for the Trust’s
bitcoin holdings, but it will have no obligation whatsoever to do so or to seek any terms for the Trust from other such custodians.
7
the
prime broker
Pursuant to the Prime Broker
Agreement, a portion of the Trust’s bitcoin holdings and cash holdings from time to time may be held with the Prime Broker, an affiliate
of one of the Bitcoin Custodians, in the Trading Balance, in connection with the creation and redemption of Shares via cash transactions
or to pay for Trust Expenses not assumed by the Sponsor in consideration for the Sponsor Fee. The amount of bitcoin that may be held in
the Trading Balance will be limited to the amount necessary to process a given creation or redemption transaction, as applicable, or to
pay for Trust Expenses not assumed by the Sponsor in consideration for the Sponsor Fee.
The Sponsor may, in its sole
discretion, add or terminate prime brokers at any time. The Sponsor may, in its sole discretion, change the prime broker for the Trust,
but it will have no obligation whatsoever to do so or to seek any terms for the Trust from other such prime brokers.
These periodic holdings held
in the Trading Balance with the Prime Broker represent an omnibus claim on the Prime Broker’s bitcoin held on behalf of clients;
these holdings exist across a combination of omnibus hot wallets, omnibus cold wallets or in accounts in the Prime Broker’s name
on a trading venue (including third-party venues and the Prime Broker’s own execution venue) where the Prime Broker executes orders
to buy and sell bitcoin on behalf of clients (each such venue, a “Connected Trading Venue”). The Prime Broker is not required
to hold any of the bitcoin in the Trust’s Trading Balance in cold storage or to hold any such bitcoin in segregation, and neither
the Trust nor the Sponsor can control the method by which the Prime Broker holds the bitcoin credited to the Trust’s Trading Balance.
Within the Trust’s Trading Balance, the Prime Broker Agreement provides that the Trust does not have an identifiable claim to any
particular bitcoin (and cash). Instead, the Trust’s Trading Balance represents an entitlement to a pro rata share of the bitcoin
(and cash) the Prime Broker holds on to behalf of customers who hold similar entitlements against the Prime Broker. In this way, the Trust’s
Trading Balance represents an omnibus claim on the Prime Broker’s bitcoin (and cash) held on behalf of the Prime Broker’s
customers.
Within such omnibus hot and
cold wallets and accounts, the Prime Broker has represented to the Sponsor that it keeps the majority of assets in cold wallets, to promote
security, while the balance of assets is kept in hot wallets to facilitate rapid withdrawals. However, the Sponsor has no control over,
and for security reasons the Prime Broker does not disclose to the Sponsor, the percentage of bitcoin that the Prime Broker holds for
customers holding similar entitlements as the Trust which are kept in omnibus cold wallets, as compared to omnibus hot wallets or omnibus
accounts in the Prime Broker’s name on a trading venue. The Prime Broker has represented to the Sponsor that the percentage of assets
maintained in cold versus hot storage is determined by ongoing risk analysis and market dynamics, in which the Prime Broker attempts to
balance anticipated liquidity needs for its customers as a class against the anticipated greater security of cold storage.
The Prime Broker is not required
by the Prime Broker Agreement to hold any of the bitcoin in the Trust’s Trading Balance in cold storage or to hold any such bitcoin
in segregation, and neither the Trust nor the Sponsor can control the method by which the Prime Broker holds the bitcoin credited to the
Trust’s Trading Balance.
To the extent the Trust sells
bitcoin through the Prime Broker, the Trust’s orders will be executed at Connected Trading Venues that have been approved in accordance
with the Prime Broker’s due diligence and risk assessment process. The Prime Broker has represented that its due diligence on Connected
Trading Venues include reviews conducted by the legal, compliance, security, privacy and finance and credit-risk teams. The Connected
Trading Venues, which are subject to change from time to time, currently include Bitstamp, LMAX, Kraken, the exchange operated by the
Prime Broker, as well as four additional non-bank market makers (“NBMMs”). The Prime Broker has represented to the Trust that
it is unable to name the NBMMs due to confidentiality restriction.
Pursuant to the Prime Broker
Agreement, the Trust may engage in purchases or sales of bitcoin by placing orders with the Prime Broker. The Prime Broker will route
orders placed by the Sponsor through the Prime Broker’s execution platform (the “Trading Platform”) to a Connected Trading
Venue where the order will be executed. Each order placed by the Sponsor will be sent, processed, and settled at each Connected Trading
Venue to which it is routed. The Prime Broker Agreement provides that the Prime Broker is subject to certain conflicts of interest, including:
(i) the Trust’s orders may be routed to the Prime Broker’s own execution venue where the Trust’s orders may be executed
against other customers of the Prime Broker or with the Coinbase acting as principal, (ii) the beneficial identity of the counterparty
purchaser or seller with respect to the Trust’s orders may be unknown and therefore may inadvertently be another client of the Prime
Broker, (iii) the Prime Broker does not engage in front-running, but is aware of the Trust’s orders or imminent orders and may execute
a trade for its own inventory (or the account of an affiliate) while in possession of that knowledge and (iv) the Prime Broker may act
in a principal capacity with respect to certain orders. As a result of these and other conflicts, when acting as principal, the Prime
Broker may have an incentive to favor its own interests and the interests of its affiliates over the Trust’s interests.
Subject to the foregoing,
and to certain policies and procedures that the Prime Broker Agreement requires the Prime Broker to have in place to mitigate conflicts
of interest when executing the Trust’s orders, the Prime Broker Agreement provides that the Prime Broker shall have no liability,
obligation, or responsibility whatsoever for the selection or performance of any Connected Trading Venue, and that other Connected Trading
Venues and/or trading venues not used by Coinbase may offer better prices and/or lower costs than the Connected Trading Venue used to
execute the Trust’s orders.
8
Once the Sponsor, on behalf
of the Trust, places an order to purchase or sell bitcoin on the Trading Platform in connection with the creation or redemption of Shares
via a cash transaction, the associated bitcoin or cash used to fund or fill the order, if any, will be placed on hold and will generally
not be eligible for other use or withdrawal from the Trust’s Trading Balance. The Cold Vault Balance may be used directly to fund
orders. With each Connected Trading Venue, the Prime Broker shall establish an account in the Prime Broker’s name, or in its name
for the benefit of clients, to trade on behalf of its clients, including the Trust, and the Trust will not, by virtue of the Trading Balance
the Trust maintains with the Prime Broker, have a direct legal relationship, or account with, any Connected Trading Venue.
The Prime Broker may terminate
the Prime Broker Agreement in its entirety for any reason and without Cause (as defined below) by providing at least ninety (90) days’
prior written notice to the Trust. The Trust may terminate the Prime Broker Agreement in its entirety for any reason and without Cause
by providing at least 30 (thirty) days’ prior written notice to the Prime Broker; provided, however, the Trust’s termination
of the Prime Broker Agreement shall not be effective until the Trust has fully satisfied its obligations the Prime Broker Agreement.
The Prime Broker and the Bitcoin
Custodians may, in their sole discretion, suspend, restrict or terminate the Trust’s prime broker services, including by suspending,
restricting or closing any account of the Trust covered under the Prime Broker Agreement for Cause, at any time and with prior notice
to the Trust.
the
cash custodian
The
Cash Custodian is The Bank of New York Mellon. The Cash Custodian’s services are governed under the Custody Agreement between The
Bank of New York Mellon and the Trust. In performing its duties under the Custody Agreement, BNY Mellon is required to exercise the standard
of care and diligence that a professional custodian for exchange-traded funds would observe in these affairs considering the prevailing
rules, practices, procedures, and circumstances in the relevant market and to perform its duties without negligence, fraud, bad faith,
willful misconduct, or reckless disregard of its duties under the Custody Agreement. Under the Custody Agreement, BNY Mellon is not liable
for any losses, damages, costs, charges, expenses, or liabilities (including reasonable counsel fees and expenses) (collectively, “Losses”)
except to the extent caused by BNY Mellon’s own bad faith, negligence, willful misconduct, or reckless disregard of its duties under
the Custody Agreement. The Trust will indemnify and hold harmless BNY Mellon from and against all Losses, incurred by BNY Mellon
arising out of or relating to BNY Mellon’s performance under the Custody Agreement, except to the extent resulting from BNY Mellon’s
failure to perform its obligations under the Custody Agreement in accordance with the agreement’s standard of care. The Sponsor
may, in its sole discretion, add or terminate cash custodians at any time.
the
marketing agent
Foreside Global Services,
LLC (the “Marketing Agent”) is responsible for reviewing and approving the marketing materials prepared by the Sponsor for
compliance with applicable SEC and Financial Industry Regulatory Authority (“FINRA”) advertising laws, rules, and regulations.
authorized
participants
Creation Baskets are created
or redeemed only by Authorized Participants. Each Authorized Participant must be a registered broker-dealer, a participant in DTC, and
have entered into an agreement with the Sponsor and Administrator (the “Authorized Participant Agreement”). The Authorized
Participant Agreement provides the procedures for the creation and redemption of Creation Baskets and for the delivery of cash in connection
with such creations or redemptions. Additional Authorized Participants may be added at any time, subject to the discretion of the Sponsor.
Taxation
of the trust
The Sponsor intends to take
the position that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes. Assuming that the Trust is a
grantor trust, the Trust will not be subject to U.S. federal income tax. Rather, if the Trust is a grantor trust, each beneficial owner
of Shares is treated as directly owning its pro rata share of the Trust’s assets and a pro rata portion of the Trust’s
income, gain, losses and deductions will “pass through” to each beneficial owner of Shares. If the Trust sells bitcoin (for
example, to pay fees or expenses), such a sale is a taxable event to Shareholders. Upon a Shareholder’s sale of its Shares, the
Shareholder will be treated as having sold the pro rata share of the bitcoin held in the Trust at the time of the sale and may recognize
gain or loss on such sale.
9
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.