Item 1A. Risk Factors
Item 1A. Risk Factors.
Except as set forth below, there have been no material changes to the Risk Factors last reported under Item 1A of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 2, 2026, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on March 11, 2026.
Security threats and cyberattacks could result in the halting of Trust operations and a loss of Trust assets or damage to the reputation of the Trust, each of which could result in a reduction in the price of the Shares.
Security breaches, cyberattacks, computer malware, and computer hacking attacks have been a prevalent concern in relation to digital assets. Multiple thefts of bitcoin, ether, and other digital assets from other holders have occurred in the past. Because of the pseudonymous nature of most Crypto Asset blockchains, thefts can be difficult to trace, which may make Crypto Assets a particularly attractive target for theft. Cybersecurity failures or breaches of one or more of the Trust’s service providers (including but not limited to, the Transfer Agent, the Marketing Agent, the Administrator, Cash Custodian, or the Custodians) have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs.
The Trust and its service providers’ use of internet, technology and information systems (including mobile devices and cloud-based service offerings) may expose the Trust to potential risks linked to cybersecurity breaches of those technological or information systems. The Sponsor believes that the Trust’s Crypto Assets held in the Custodial Accounts at the Custodians or Trading Balance held with the Prime Execution Agent will be an appealing target to hackers or malware distributors seeking to destroy, damage, or steal the Trust’s Crypto Assets and will only become more appealing as the Trust’s assets grow. To the extent that the Trust, Sponsor, Custodians, or Prime Execution Agent is unable to identify and mitigate or stop new security threats or otherwise adapt to technological changes in the digital asset industry, the Trust’s Portfolio Crypto Assets may be subject to theft, loss, destruction, or other attack.
The Sponsor believes that the security procedures in place for the Trust, including but not limited to, offline storage or cold storage, HSMs with built-in logic, multiple encrypted private key “shards,” and other measures, are reasonably designed to safeguard the Trust’s Portfolio Crypto Assets. Nevertheless, the security procedures cannot guarantee the prevention of any loss due to a security breach, software defect, or act of God that may be borne by the Trust and the security procedures may not protect against all errors, software flaws, or other vulnerabilities in the Trust’s technical infrastructure, which could result in theft, loss or damage of its assets. The Sponsor does not control the Custodians’ or Prime Execution Agent’s operations or their implementation of such security procedures, and there can be no assurance that such security procedures will actually work as designed or prove to be successful in safeguarding the Trust’s assets against all possible sources of theft, loss, or damage. Assets not held in cold storage or in HSMs with built-in logic, such as assets held in a trading account, may be more vulnerable to security breach, hacking, or loss than assets held in cold storage or HSMs with built-in logic. Furthermore, assets held in a trading account, including the Trust’s Trading Balance at the Prime Execution Agent, are held on an omnibus, rather than segregated basis, which creates greater risk of loss.
The security procedures and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of an employee of the Sponsor, Prime Execution Agent, Custodians, or otherwise, and, as a result, an unauthorized party may obtain access to the Custodial Accounts with the Custodians or the Trust’s Trading Balance with the Prime Execution Agent, the private keys, or other data of the Trust. Additionally, outside parties may attempt to fraudulently induce employees of the Sponsor, Custodians, Prime Execution Agent, or the Trust’s other service providers to disclose sensitive information in order to gain access to the Trust’s infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, the Sponsor, Custodians, or Prime Execution Agent may be unable to anticipate these techniques or implement adequate preventative measures.
An actual or perceived breach of the Custodial Accounts with the Custodians or the Trust’s Trading Balance with the Prime Execution Agent could harm the Trust’s operations, result in partial or total loss of the Trust’s assets, damage the Trust’s reputation, and negatively affect the market perception of the effectiveness of the Trust, all of which could in turn reduce demand for the Shares, resulting in a reduction in the price of the Shares. The Trust may also cease operations, the occurrence of which could similarly result in a reduction in the price of the Shares.
While the Sponsor and the Trust’s service providers have established business continuity plans and systems that they
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respectively believe are reasonably designed to prevent cyberattacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been, or cannot be, identified. Service providers may have limited indemnification obligations to the Trust, which could be negatively impacted as a result.
If the Trust’s holdings of Portfolio Crypto Assets are lost, stolen, or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust’s claim. For example, as to a particular event of loss, the only source of recovery for the Trust may be limited to the relevant custodian or, to the extent identifiable, other responsible third parties (for example, a thief or terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim of the Trust. Similarly, as noted below, the Custodians and Prime Execution Agent have limited liability to the Trust, which could adversely affect the Trust’s ability to seek recovery from them, even when the Custodians’ or Prime Execution Agent’s actions or failure to act are the cause of the Trust’s loss.
It may not be possible, either because of a lack of available policies or because of prohibitive cost, for the Trust to obtain insurance that would cover losses of the Trust’s Portfolio Crypto Assets. If an uninsured loss occurs or a loss exceeds policy limits, the Trust could lose all of its assets.
The Trust’s Portfolio Crypto Assets may be subject to loss, damage, theft, or restriction on access.
There is a risk that part or all of the Trust’s Portfolio Crypto Assets could be lost, stolen, or destroyed, potentially by the loss or theft of the private keys held by the Custodians or Prime Execution Agent associated with Trust’s Portfolio Crypto Assets. The Sponsor believes that the Custodians’ and Prime Execution Agent’s operations are an appealing target to hackers or malware distributors seeking to destroy, damage, or steal Portfolio Crypto Assets or private keys. Although the Custodians and Prime Execution Agent use multiple means and layers of security to minimize the risk of loss, damage, and theft, neither the Custodians, Prime Execution Agent, nor the Sponsor can guarantee that such security will prevent such loss, damage, or theft, whether caused intentionally, accidentally, or by act of God. Access to the Trust’s Portfolio Crypto Assets could also be restricted by natural events (such as an earthquake or flood), human actions (such as a terrorist attack), or security or compliance measures (such as in response to a hard fork). Any of these events may adversely affect the operations of the Trust and, consequently, an investment in the Shares.
The value of the Shares will be adversely affected if the Trust is required to indemnify the Trustee, the Administrator, the Transfer Agent, the Custodian, Prime Execution Agent or the Cash Custodian.
Under the Trust Agreement and the Trust’s service provider agreements, each of the Trustee, Administrator, Transfer Agent, Custodians, Prime Execution Agent, Cash Custodian, and Sponsor has a right to be indemnified by the Trust for any liability or expense it incurs, subject to certain exceptions. Therefore, the Trustee, Administrator, Transfer Agent, Custodians, Prime Execution Agent, Cash Custodian, or Sponsor may require that the assets of the Trust be sold in order to cover losses or liability suffered by it. Any sale of that kind would reduce the net assets of the Trust and the NAV.
Shareholders’ limited rights of legal recourse against the Trust, Sponsor, Administrator, Transfer Agent, Sub-Transfer Agent, Cash Custodian, Prime Execution Agent, and Custodians, and the Trust’s lack of direct insurance protection expose the Trust and its Shareholders to the risk of loss of the Trust’s Portfolio Crypto Assets for which no person is liable.
The Trust is not a banking institution and is not a member of the FDIC or Securities Investor Protection Corporation (“SIPC”) and, therefore, investments in the Trust are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions. Likewise, the Custodians are not a depository institution and are not a member of the FDIC or SIPC and, therefore, the Trust’s assets held with the Custodians are not subject to FDIC or SIPC insurance coverage. In addition, neither the Trust nor the Sponsor insure the Trust’s Portfolio Crypto Assets.
Coinbase Custody’s parent, Coinbase Global, Inc. (“Coinbase Global”) maintains a commercial crime insurance policy of up to $320 million, which is intended to cover the loss of client assets held by Coinbase Global and all of its subsidiaries, including Coinbase Custody and the Prime Execution Agent (collectively, Coinbase Global and its subsidiaries are referred to as the “Coinbase Insureds”), 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 Coinbase Global is shared among all of Coinbase’s customers, is not specific to the Trust or to customers holding Portfolio Crypto Assets with Coinbase Custody or Prime Execution Agent and may not be available or sufficient to protect the Trust from all possible losses or sources of losses. Coinbase Global’s insurance may not cover the type of losses experienced by the Trust. Alternatively, the Trust may be forced to share such insurance proceeds with other clients or customers of the Coinbase Insureds, which could reduce the amount of such proceeds that are available to the Trust. In addition, the Crypto Asset insurance market is limited, and the level of insurance maintained by Coinbase Global may be substantially lower than the assets of the Trust. While Coinbase Custody maintains certain capital reserve requirements depending on the assets under custody, and such capital reserves may provide additional means to cover client asset losses, the Trust cannot be assured that Coinbase Custody will maintain capital reserves sufficient to cover actual or potential losses with respect to the Trust’s digital assets.
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Furthermore, under the Coinbase Custodian Agreement, Coinbase Custody’s liability is limited as follows, among others: (i) other than with respect to claims and losses arising from spot trading of Portfolio Crypto Assets, or fraud or willful misconduct, the Mutually Capped Liabilities (defined below), Coinbase Custody’s aggregate liability under the Coinbase Custodian Agreement shall not exceed the greater of (A) the greater of (x) $5 million and (y) the aggregate fees paid by the Trust to Coinbase Custody in the 12 months prior to the event giving rise to Coinbase Custody’s liability, and (B) the value of the affected Portfolio Crypto Assets or cash giving rise to Coinbase Custody’s liability; (ii) in respect of Coinbase Custody’s 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, Coinbase Custody’s gross negligence, violation of its confidentiality, data protection and/or information security obligations, or violation of any law, rule, or regulation with respect to the provision of its services (the “Mutually Capped Liabilities”), Coinbase Custody’s liability shall not exceed the greater of (A) $5 million and (B) the aggregate fees paid by the Trust to Coinbase Custody in the 12 months prior to the event giving rise to Coinbase Custody’s liability; and (iii) in respect of any incidental, indirect, special, punitive, consequential, or similar losses, Coinbase Custody is not liable, even if Coinbase Custody has been advised of or knew or should have known of the possibility thereof. In general, Coinbase Custody is not liable under the Coinbase Custodian Agreement unless in the event of its negligence, fraud, material violation of applicable law, or willful misconduct. Coinbase Custody is 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 Coinbase Custody. In the event of potential losses incurred by the Trust as a result of Coinbase Custody losing control of the Trust’s Portfolio Crypto Assets or failing to properly execute instructions on behalf of the Trust, Coinbase Custody’s liability with respect to the Trust will be subject to certain limitations, which may allow it to avoid liability for potential losses or may be insufficient to cover the value of such potential losses, even if Coinbase Custody directly caused such losses.
Any insurance coverage obtained by or for Anchorage Custody is solely for the benefit of Anchorage Custody and does not guarantee or insure the Trust in any way.
Furthermore, under the Anchorage Custodian Agreement, except for Anchorage Custody’s gross negligence, willful misconduct or fraud, Anchorage Custody shall not be liable for any losses, whether in contract, tort or otherwise, incurred by the Trust, for any amount in excess of fees paid by the Trust in the twelve (12) months prior to when the liability arises. Further, in no event will Anchorage Custody be liable (i) for acts or omissions under a mere negligence standard, (ii) losses which arise from Anchorage Custody’s compliance with applicable laws, including sanctions laws administered by OFAC; or (iii) special, indirect or consequential damages, or lost profits or loss of business arising in connection with the Anchorage Custodian Agreement. This limitation of liability shall not limit any losses or claims arising from Anchorage Custody’s gross negligence, willful misconduct or fraud. Anchorage Custody shall not be liable to the Trust for delays, suspension of operations, whether temporary or permanent, failure in performance of the Anchorage Custodian Agreement, or interruption of service in each case to the extent it is directly due to a cause or condition entirely beyond the reasonable control of Anchorage Custody.
Similarly, under the Prime Execution Agreement, the Prime Execution Agent’s liability is limited as follows, among others: (i) other than with respect to claims and losses arising from spot trading of Portfolio Crypto Assets, or fraud or willful misconduct, or the PB Mutually Capped Liabilities (defined below), the Prime Execution Agent’s aggregate liability shall not exceed the greater of (A) the greater of (x) $5 million and (y) the aggregate fees paid by the Trust to the Prime Execution Agent in the 12 months prior to the event giving rise to the Prime Execution Agent’s liability, and (B) the value of the cash or affected Portfolio Crypto Assets giving rise to the Prime Execution Agent’s liability; (ii) in respect of the Prime Execution Agent’s 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 Prime Execution Agent’s gross negligence, violation of its confidentiality, data protection and/or information security obligations, violation of any law, rule, or regulation with respect to the provision of its services, or the full amount of the Trust’s assets lost due to the insolvency of or security event at a Connected Trading Venue (as defined below) (the “PB Mutually Capped Liabilities”), the Prime Execution Agent’s liability shall not exceed the greater of (A) $5 million and (B) the aggregate fees paid by the Trust to the Prime Execution Agent in the 12 months prior to the event giving rise to the Prime Execution Agent’s liability; and (iii) in respect of any incidental, indirect, special, punitive, consequential, or similar losses, the Prime Execution Agent is not liable, even if the Prime Execution Agent has been advised of or knew or should have known of the possibility thereof. In general, with limited exceptions (such as for failing to execute an order), the Prime Execution Agent is not liable under the Prime Execution Agreement unless in the event of its gross negligence, fraud, material violation of applicable law, or willful misconduct. The Prime Execution Agent is 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 Prime Execution Agent. These and the other limitations on the Prime Execution Agent’s liability may allow it to avoid liability for potential losses or may be insufficient to cover the value of such potential losses, even if the Prime Execution Agent directly caused such losses. Both the Trust and the Prime Execution Agent and its affiliates (including Coinbase Custody) are required to indemnify each other under certain circumstances.
Moreover, in the event of an insolvency or bankruptcy of the Prime Execution Agent (in the case of the Trading Balance) or the Custodians (in the case of the Custodial Accounts) in the future, given that the contractual protections and legal rights of customers with respect to digital assets held on their behalf by third parties are relatively untested in a bankruptcy of an entity such as the Custodians
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or Prime Execution Agent in the virtual currency industry, there is a risk that customers’ assets—including the Trust’s assets—may be considered the property of the bankruptcy estate of the Prime Execution Agent (in the case of the Trading Balance) or the Custodians (in the case of the Custodial Accounts), and customers—including the Trust—may be at risk of being treated as general unsecured creditors of such entities and subject to the risk of total loss or markdowns on value of such assets.
The Coinbase Custodian Agreement and the Anchorage Custodian Agreement each contain an agreement by the parties to treat the Portfolio Crypto Assets credited to the Custodial Accounts as financial assets under Article 8 of the New York Uniform Commercial Code and Article 8 of the Uniform Commercial Code as adopted and implemented by South Dakota law, respectively (“Article 8”). Anchorage Custody has also agreed to hold Trust assets for the benefit of the Trust as the entitlement holder, meaning such assets will not be commingled with Anchorage Custody’s proprietary assets. The Coinbase Custodian Agreement also states that Coinbase Custody will serve as fiduciary and custodian on the Trust’s behalf. Coinbase Custody’s parent, Coinbase Global, Inc., has stated in its most recent public securities filings that in light of the inclusion in its custody agreements of provisions relating to Article 8 it believes that a court would not treat custodied digital assets as part of its general estate in the event Coinbase Custody were to experience insolvency. However, due to the novelty of digital asset custodial arrangements courts have not yet considered this type of treatment for custodied digital assets and it is not possible to predict with certainty how they would rule in such a scenario. If a Custodian became subject to insolvency proceedings and a court were to rule that the custodied Portfolio Crypto Assets were part of a Custodian’s general estate and not the property of the Trust, then the Trust would be treated as a general unsecured creditor in such Custodian’s insolvency proceedings and the Trust could be subject to the loss of all or a significant portion of its assets. Moreover, in the event of the bankruptcy of a Custodian, an automatic stay could go into effect and protracted litigation could be required in order to recover the assets held with such Custodian, all of which could significantly and negatively impact the Trust’s operations and the value of the Shares.
With respect to the Prime Execution Agreement, there is a risk that the Trading Balance, in which the Trust’s Portfolio Crypto Assets and cash is held in omnibus accounts by the Prime Execution Agent, could be considered part of the Prime Execution Agent’s bankruptcy estate in the event of the Prime Execution Agent’s bankruptcy. The Prime Execution Agreement contains an Article 8 opt-in clause with respect to the Trust’s assets held in the Trading Balance.
The Prime Execution Agent is not required to hold any of the Portfolio Crypto Assets or cash in the Trust’s Trading Balance in segregation. Within the Trading Balance, the Prime Execution Agreement provides that the Trust does not have an identifiable claim to any particular Portfolio Crypto Asset (and cash). Instead, the Trust’s Trading Balance represents an entitlement to a pro rata share of the Portfolio Crypto Assets (and cash) the Prime Execution Agent has allocated to the omnibus wallets the Prime Execution Agent holds, as well as the accounts in the Prime Execution Agent’s name that the Prime Execution Agent maintains at Connected Trading Venues (the “Connected Trading Venue”) (which are typically held on an omnibus, rather than segregated, basis). If the Prime Execution Agent suffers an insolvency event, there is a risk that the Trust’s assets held in the Trading Balance could be considered part of the Prime Execution Agent’s bankruptcy estate, and the Trust could be treated as a general unsecured creditor of the Prime Execution Agent, which could result in losses for the Trust and Shareholders. Moreover, in the event of the bankruptcy of the Prime Execution Agent, an automatic stay could go into effect and protracted litigation could be required in order to recover the assets held with the Prime Execution Agent, all of which could significantly and negatively impact the Trust’s operations and the value of the Shares.
Under the Trust Agreement, the Sponsor will not be liable for any liability or expense incurred, including, without limitation, as a result of any loss of Portfolio Crypto Assets by the Custodians or Prime Execution Agent, absent gross negligence, bad faith, or willful misconduct on the part of the Sponsor. As a result, the recourse of the Trust or the Shareholders to the Sponsor, including in the event of a loss of Portfolio Crypto Assets by the Custodians or Prime Execution Agent, is limited.
The Shareholders’ recourse against the Sponsor and the Trust’s other service providers for the services they provide to the Trust, including, without limitation, those relating to the holding of Portfolio Crypto Assets or the provision of instructions relating to the movement of Portfolio Crypto Assets, is limited. For the avoidance of doubt, neither the Sponsor, the Trustee, nor any of their affiliates, nor any other party has guaranteed the assets or liabilities, or otherwise assumed the liabilities, of the Trust, or the obligations or liabilities of any service provider to the Trust, including, without limitation, the Custodians and Prime Execution Agent. The Prime Execution Agreement and each Custodian Agreement provide that neither the Sponsor nor its affiliates shall have any obligation of any kind or nature whatsoever, by guaranty, enforcement, or otherwise, with respect to the performance of any the Trust’s obligations, agreements, representations, or warranties under the Prime Execution Agreement or a Custodian Agreement or any transaction thereunder. Consequently, a loss may be suffered with respect to the Trust’s Portfolio Crypto Assets that is not covered by insurance and for which no person is liable in damages. As a result, the recourse of the Trust or the Shareholders, under applicable law, is limited.
A loss of confidence or breach of the Custodians may adversely affect the Trust and the value of an investment in the Shares.
Custody and security services for the Trust’s Portfolio Crypto Assets are provided by Coinbase Custody and Anchorage Custody, although the Trust may retain one or more additional custodians at a later date. Portfolio Crypto Assets held by the Trust may be custodied or secured in different ways (for example, a portion of the Trust’s Portfolio Crypto Assets holdings may be custodied by Coinbase Custody, another portion may be custodied by Anchorage Custody and yet another portion by another third-party custodian).
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Over time, the Trust may change the custody or security arrangement for all or a portion of its holdings. The Sponsor will decide the appropriate custody and arrangements based on, among other factors, the availability of experienced custodians and the Trust’s ability to securely safeguard the Portfolio Crypto Assets.
If a Custodian Agreement or Prime Execution Agreement is terminated or the Custodians or Prime Execution Agent fails to provide services as required, the Sponsor may need to find and appoint a replacement custodian or prime broker, which could pose a challenge to the safekeeping of the Trust’s Portfolio Crypto Assets, and the Trust’s ability to continue to operate may be adversely affected.
The Trust is dependent on the Custodians, which are Coinbase Custody and Anchorage Custody, and to a lesser extent, the Prime Execution Agent, Coinbase, Inc., to operate. The Custodians perform essential functions in terms of safekeeping the Trust’s Portfolio Crypto Assets in the Custodial Accounts, and Coinbase Custody’s affiliate, Coinbase, Inc., in its capacity as Prime Execution Agent under the Agent Execution Model. If Coinbase Custody, Anchorage Custody, or Coinbase, Inc. fails to perform the functions they perform for the Trust, the Trust may be unable to operate or create or redeem Baskets, which could force the Trust to liquidate or adversely affect the price of the Shares.
Alternatively, the Sponsor could decide to replace Coinbase Custody or Anchorage Custody as a Custodian with custody of the Trust’s Portfolio Crypto Assets, pursuant to the Custodian Agreements. Similarly, Coinbase Custody, Anchorage Custody, or Coinbase, Inc. could terminate services under the Custodian Agreements or the Coinbase Prime Broker Agreement (the “Prime Execution Agreement”) respectively. Transferring maintenance responsibilities of a Custodial Account at a Custodian to another custodian will likely be complex and could subject the Trust’s Portfolio Crypto Assets to the risk of loss during the transfer, which could have a negative impact on the performance of the Shares or result in loss of the Trust’s assets. As Prime Execution Agent, Coinbase, Inc. does not guarantee uninterrupted access to the Trading Platform or the services it provides to the Trust as Prime Execution Agent. Under certain circumstances, Coinbase, Inc. is permitted to halt or suspend trading on its trading platform, or impose limits on the amount or size of, or reject, the Trust’s orders, including in the event of, among others, (a) delays, suspension of operations, failure in performance, or interruption of service that are directly due to a cause or condition beyond the reasonable control of Coinbase Inc, (b) the Trust has engaged in unlawful or abusive activities or fraud, (c) the acceptance of the Trust’s order would cause the amount of Trade Credits extended to exceed the maximum amount of Trade Credit (as defined below) that the Trust’s agreement with the Trade Credit Lender permits to be outstanding at any one time, or (d) a security or technology issue occurred and is continuing that results in Coinbase, Inc. being unable to provide trading services or accept the Trust’s order, in each case, subject to certain protections for the Trust. Also, if Coinbase Custody, Anchorage Custody or Coinbase, Inc. become insolvent, suffer business failure, cease business operations, default on or fail to perform their obligations under their contractual agreements with the Trust, or abruptly discontinue the services they provide to the Trust for any reason, the Trust’s operations would be adversely affected.
The Sponsor may not be able to find a party willing to serve as the custodian of the Trust’s Portfolio Crypto Assets or as the Trust’s prime execution agent under the same terms as the current Custodian Agreements or Prime Execution Agreement or at all. To the extent that Sponsor is not able to find a suitable party willing to serve as the custodian or prime execution agent, the Sponsor may be required to terminate the Trust and liquidate the Trust’s Portfolio Crypto Assets. In addition, to the extent that the Sponsor finds a suitable party but must enter into a modified Custodian Agreement or Prime Execution Agreement that is less favorable for the Trust, the value of the Shares could be adversely affected. If the Trust is unable to find a replacement prime execution agent, its operations could be adversely affected.
Coinbase Custody and Anchorage Custody both serve as a Custodian and Coinbase, Inc. serves as the prime broker for several competing exchange-traded Crypto Asset products which could adversely affect the Trust’s operations and ultimately the value of the Shares.
By virtue of the relatively limited number of institutionally capable providers of crypto asset custody services, Anchorage Custody and Coinbase Custody serve as the custodian for several exchange-traded products in the crypto category. Moreover, Coinbase Custody and Prime Execution Agent are both affiliates of Coinbase Global. As of the date hereof, Coinbase Global is the largest publicly traded Crypto Asset company in the world by market capitalization and is also the largest Crypto Asset custodian in the world by assets under custody. By virtue of its leading market position and capabilities, and the relatively limited number of institutionally capable providers of Crypto Asset brokerage and custody services, Coinbase Custody serves as the Custodian and Coinbase, Inc. serves as prime broker for several competing exchange-traded Crypto Asset products. Therefore, Coinbase Global has a critical role in supporting the U.S. spot Crypto Asset exchange-traded product ecosystem. Coinbase Global and Anchorage Custody may fail to properly resource their operations to adequately support all such products that use their services, which could harm the Trust, the Shareholders and the value of the Shares. If the Trust needed to utilize the Agent Execution Model to buy or sell Portfolio Crypto Assets because no Trading Counterparties were willing or able to effectuate the Trust’s transactions, and the Prime Execution Agent were to favor the interests of certain products over others, it could result in inadequate attention or comparatively unfavorable commercial terms to less favored products, which could adversely affect the Trust’s operations and ultimately the value of the Shares.
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The Sponsor may need to find and appoint a replacement Custodian or Cash Custodian quickly, which could pose a challenge to the safekeeping of the Trust’s Portfolio Crypto Assets and cash.
The Sponsor may need to replace Coinbase Custody or Anchorage Custody as a Custodian of the Trust’s Portfolio Crypto Assets or BNY Mellon as the cash custodian of the Trust’s cash and cash equivalents as a result of the insolvency, business failure or interruption, default, failure to perform, security breach, or other problems. Transferring maintenance responsibilities of the Trust’s accounts with a Custodian and/or Cash Custodian to another party will likely be complex and could subject the Trust’s Portfolio Crypto Assets to the risk of loss during the transfer, which could have a negative impact on the performance of the Shares or result in loss of the Trust’s assets. The Sponsor may not be able to find a party willing to serve as a Custodian or Cash Custodian under the same terms as the current Custodian Agreements or Cash Custody Agreement, respectively. To the extent that Sponsor is not able to find a suitable party willing to serve as a Custodian or Cash Custodian, as applicable, the Sponsor may be required to terminate the Trust and liquidate the Trust’s Portfolio Crypto Assets. In addition, to the extent that the Sponsor finds a suitable party but must enter into modified custodial services agreements that cost more, the value of the Shares could be adversely affected.
A Custodian could become insolvent.
The Trust’s assets will be held in one or more accounts maintained for the Trust by the Custodians and Cash Custodian. The Custodians are not a depository institution as they are not insured by the FDIC. The insolvency of a Custodian or of any broker, custodian bank, or clearing corporation used by a Custodian, may result in the loss of all or a substantial portion of the Trust’s assets or in a significant delay in the Trust having access to those assets. Additionally, custody of digital assets presents inherent and unique risks relating to access loss, theft, and means of recourse in such scenarios. These risks are applicable to the Trust’s use of Coinbase Custody and Anchorage Custody
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.