10-K
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking
statements” that generally relate to future events or future performance. In
some cases, you can identify forward-looking statements by terminology such as
“may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential” or the negative of these terms or other comparable
terminology. All statements (other than statements of historical fact) included
in this Annual Report that address activities, events or developments that will
or may occur in the future, including such matters as movements in the digital
asset markets and indexes that track such movements, the Trust’s operations, the
Sponsor’s plans and references to the Trust’s future success and other similar
matters, are forward-looking statements. These statements are only predictions.
Actual events or results may differ materially. These statements are based upon
certain assumptions and analyses the Sponsor has made based on its perception of
historical trends, current conditions and expected future developments, as well
as other factors appropriate in the circumstances. These statements are not
guarantees of future performance and are subject to risks, uncertainties, and
other factors, some of which are beyond our control and are difficult to
predict, that could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements including, without
limitation, the risks, uncertainties and other factors we identify in this
Annual Report and in our filings with the Securities and Exchange Commission
(the “SEC”).
Whether
or not actual results and developments will conform to the Sponsor’s
expectations and predictions, however, is subject to a number of risks and
uncertainties, including the special considerations discussed in this Annual
Report, general economic, market and business conditions, changes in laws or
regulations, including those concerning taxes, made by governmental authorities
or regulatory bodies, and other world economic and political developments.
Consequently, all the forward-looking statements made in this Annual Report are
qualified by these cautionary statements, and there can be no assurance that
actual results or developments the Sponsor anticipates will be realized or, even
if substantially realized, that they will result in the expected consequences
to, or have the expected effects on, the Trust’s operations or the value of its
Shares.
Should
one or more of these risks discussed in this Annual Report or other
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those described in forward-looking
statements. Forward-looking statements are made based on the Sponsor’s beliefs,
estimates and opinions on the date the statements are made and neither the Trust
nor the Sponsor is under a duty or undertakes an obligation to update
forward-looking statements if these beliefs, estimates and opinions or other
circumstances should change, other than as required by applicable laws.
Moreover, neither the Trust, the Sponsor, nor any other person assumes
responsibility for the accuracy and completeness of any of these forward-looking
statements. Investors are therefore cautioned against placing undue reliance on
forward-looking statements.
Risk
Factors Summary
The
following is only a summary of the principal risks that could materially and
adversely affect our business, financial condition, results of operations and
cash flows, which should be read in conjunction with the detailed description of
these risks in “Item
1A. Risk Factors.”
Some of the factors that could materially and adversely affect our business,
financial condition, results of operations and cash flows include, but are not
limited to, the following:
Risk
Factors Related to Digital Assets
•
The
trading prices of many digital assets, including ether, have experienced extreme
volatility in recent periods and may continue to do so. Extreme volatility in
the future, including further declines in the trading prices of ether, could
have a material adverse effect on the value of the Shares.
•
The
value of the Shares is subject to a number of factors relating to the
fundamental investment characteristics of ether as a digital asset, including
the fact that digital assets are bearer instruments and loss, theft,
destruction, or compromise of the associated private keys could result in
permanent loss of the asset, and the capabilities and development of blockchain
technologies such as the blockchain ledger for ether.
•
Digital
assets represent a new and rapidly evolving industry, and the value of the
Shares depends on the acceptance of ether.
•
Changes
in the governance of a digital asset network may not receive sufficient support
from users and validators, which may negatively affect that digital asset
network’s ability to grow and respond to challenges.
Risks
Associated with Ether and the Ethereum Network
•
The
value of the Shares relates directly to the value of ether, the value of which
may be highly volatile and subject to fluctuations due to a number of
factors.
Risks
Associated with Investing in the Trust
•
If
the process of creation and redemption of Baskets encounters any unanticipated
difficulties, the possibility for arbitrage transactions by registered
broker-dealers who have entered into written agreements with the Sponsor and the
Trustee (each, an “Authorized Participant”) intended to keep the price of the
Shares closely linked to the price of ether may not exist and, as a result, the
price of the Shares may fall or otherwise diverge from the net asset value per
Share (“NAV”).
•
The
liquidity of the Shares may also be affected by the withdrawal from
participation of Authorized Participants or ether trading
counterparties.
•
Security
threats to the Trust’s account at the Custodian 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 value of the
Shares.
•
Ether
transactions are irrevocable and stolen or incorrectly transferred ether may be
irretrievable. As a result, any incorrectly executed ether transactions could
adversely affect the value of the Shares.
Risks
Associated with the Index and Index Pricing
•
The
Index has a limited performance history, the Index price could fail to track the
global ether price, and a failure of the Index price could adversely affect the
value of the Shares.
•
The
Index price used to calculate the value of the Trust’s ether may be volatile,
adversely affecting the value of the Shares.
Regulatory
Risk
•
Digital
asset markets in the United States exist in a state of regulatory uncertainty,
and adverse legislative or regulatory developments could significantly harm the
value of ether or the Shares, such as by banning, restricting or imposing
onerous conditions or prohibitions on the use of ether, validation activity,
digital wallets, the provision of services related to trading and custody of
ether, the operation of the Ethereum network, or the digital asset markets
generally.
•
Regulatory
changes or interpretations could obligate an Authorized Participant, the Trust,
or the Sponsor to register and comply with new regulations, resulting in
potentially extraordinary, nonrecurring expenses to the
Trust.
•
The
treatment of digital assets for U.S. federal, state and local income tax
purposes is uncertain.
PART
I
Item
1. Business.
Summary
Fidelity
Ethereum Fund (the “Trust”) is a Delaware statutory trust formed on October 31,
2023. The Trust issues common shares of beneficial interest (“Shares”), which
represent fractional undivided beneficial interest in and ownership of the
Trust. The Shares of the Trust are listed on the Cboe BZX Exchange, Inc. (“Cboe
BZX” or the “Exchange”). FD Funds Management LLC (the “Sponsor”) is the sponsor
of the Trust, CSC Delaware Trust Company (the “Trustee”) is the trustee of the
Trust, State Street Bank and Trust Company (“State Street” or the “Transfer
Agent”) is the Trust’s transfer agent (in such capacity, the “Transfer Agent”)
and cash custodian (in such capacity, the “Cash Custodian”), and Fidelity
Digital Assets, N.A. (formerly Fidelity Digital Asset Services, LLC) (“FDA” or
the “Custodian”) is the custodian for the Trust, and will hold all of the
Trust’s ether on the Trust’s behalf. The operations of the Trust are governed by
the Trust Agreement, as amended and/or restated from time to time (the “Trust
Agreement”). The Trust is an exchange-traded product. When the Trust sells or
redeems its Shares, it will do so in blocks of 25,000 Shares (a “Basket”) based
on the quantity of ether attributable to each Share of the Trust (net of accrued
but unpaid expenses and liabilities).
The
Trust’s inception of operation was July 23, 2024. The Trust has not had any
operations prior to July 23, 2024, other than matters relating to its
organization and the registration of the Shares under the Securities Act of 1933
(the “1933 Act”).
The
Sponsor maintains a website www.fidelity.com, through which the Trust’s Annual
Report 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 (the “1934 Act”), can
be accessed free of charge, as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the U.S. Securities and
Exchange Commission (the “SEC”). The information on the Trust’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.
Investment
Objectives and Principal Investment Strategies
Investment
Objectives
The
Trust’s investment objective is to seek to track the performance of ether, the
native token of the Ethereum blockchain, as measured by the performance of the
Fidelity Ethereum Reference Rate (the “Index”), adjusted for the Trust’s
expenses and other liabilities. In seeking to achieve its investment objective,
the Trust holds ether.
Principal
Investment Strategies
The
Trust will hold ether and values its Shares daily as of 4:00 p.m. Eastern time
(“EST”) using the same methodology used to calculate the Index. All of the
Trust’s ether is held by the Custodian.
The
Index is designed to reflect the performance of ether in U.S. dollars. The Index
is constructed using ether price feeds from eligible ether spot markets and a
volume-weighted median price (“VWMP”) methodology, calculated every 15 seconds
based on VWMP spot market data over rolling sixty-minute increments to develop
an ether price composite. The Index methodology was developed by Fidelity
Product Services LLC (the “Index Provider”) and is monitored by the Fidelity
Index Committee (the “Committee”) with the assistance of the Fidelity Digital
Asset Management Investment Committee. Coin Metrics, Inc. is the third-party
calculation agent (“Calculation Agent”) for the Index.
The
Trust provides exposure to the value of ether, and the Shares of the Trust are
valued on a daily basis using the same methodology used to calculate the Index.
The Trust provides investors with the opportunity to access the market for ether
through a traditional brokerage account without the potential barriers to entry
or risks involved with holding or transferring ether directly or acquiring it
from an ether spot market. The Trust is passively managed and does not pursue
active management investment strategies. The Trust keeps custody of its ether at
an affiliate of the Sponsor, Fidelity Digital Assets, N.A. (“FDA” or the
“Custodian”), a national trust bank that provides custody and trade execution
services for digital assets. The Trust will not stake the ether custodied at the
Custodian. The Trust will not invest in derivatives.
Information
About Ether, Ether Markets and Regulation of Ether
This
section of the Annual Report provides a more detailed description of ether,
including information about the historical development of ether, how a person
holds ether, how to use ether in transactions, how to trade ether, the spot
markets where ether can be bought, held and sold, the ether over-the-counter
(“OTC”) market and the proof-of-stake concept.
Ether
and the Ethereum network
Ether
is a digital asset that is created and transmitted through the operations of the
Ethereum peer-to-peer network and associated blockchain ledger (the “Ethereum
blockchain” and together the “Ethereum network”), a network of computers, known
as nodes, that operates on cryptographic computer-code based logic, called a
protocol. No single entity owns or operates the Ethereum network, the
infrastructure of which is collectively maintained by a distributed user base, a
phenomenon known as decentralization. Ether is not issued by governments, banks
or any other centralized authority. The Ethereum network allows people to
exchange tokens of value, called ether, which are recorded on a public
transaction ledger known as the Ethereum blockchain. Ether can be used to pay
for goods and services, including computational power on the Ethereum network,
or it can be converted to fiat currencies, such as the U.S. dollar, at rates
determined on digital asset exchanges or in individual end-user-to-end-user
transactions under a barter system.
The
Ethereum network allows users to write and implement computer programs called
smart contracts—that is, general-purpose code that executes on every computer in
the network and can instruct the transmission of information and value based on
a sophisticated set of logical conditions. Using smart contracts, users can
create markets, store registries of debts or promises, represent the ownership
of property, move funds in accordance with conditional instructions and create
digital assets other than ether on the Ethereum network. Smart contract
operations are executed on the Ethereum blockchain in exchange for payment of
ether. The Ethereum network is one of a number of projects intended to expand
blockchain use beyond just a peer-to-peer money system.
The
Ethereum network is commonly understood to be decentralized and does not require
governmental authorities or financial institution intermediaries to create,
transmit or determine the value of ether. Rather, following the initial
distribution of ether, ether is created, burned and allocated by the Ethereum
network protocol through a process that is currently subject to an issuance and
burn rate as further described under “Limits
on Ether Supply”
below. The value of ether is determined by the supply of and demand for ether on
the digital asset exchanges or in private end-user-to-end-user transactions.
There is no hard cap which would limit the number of outstanding ether at any
one time to a predetermined maximum.
New
ether are created and rewarded to the validators of a block in the Ethereum
blockchain for verifying transactions. The Ethereum blockchain is effectively a
decentralized database that includes all blocks that have been validated and it
is updated to include new blocks as they are validated. Each ether transaction
is broadcast to the Ethereum network and, when included in a block, recorded in
the Ethereum blockchain. As each new block records outstanding ether
transactions, and outstanding transactions are settled and validated through
such recording, the Ethereum blockchain represents a complete, transparent and
unbroken history of all transactions of the Ethereum network.
Among
other things, ether is used to pay for transaction fees and computational
services (i.e., smart contracts) on the Ethereum network; users of the Ethereum
network pay for the computational power of the machines executing the requested
operations with ether. Requiring payment in ether on the Ethereum network
incentivizes developers to write quality applications and increases the
efficiency of the Ethereum network because wasteful code costs more. It also
ensures that the Ethereum network remains economically viable by compensating
people for their contributed computational resources.
History
of Ethereum
The
Ethereum network was originally described in a 2013 white paper by Vitalik
Buterin, a programmer involved with bitcoin, with the goal of creating a
peer-to-peer, open-source network enabling users to create so-called
decentralized applications powered by smart contracts, which are general-purpose
code that executes on the Ethereum network. By combining the Ethereum blockchain
with a flexible scripting language that is designed to be capable of
implementing sophisticated logic and to execute a wide variety of instructions,
the Ethereum network was designed to act as a programmable infrastructure layer
that would enable users to create their own rules for ownership, transaction
formats and state transition functions that they could build into custom
software programs of their own creation. The formal development of the Ethereum
network began through a Swiss firm called Ethereum Switzerland GmbH
(“EthSuisse”) in conjunction with several other entities. Subsequently, the
Ethereum Foundation, a Swiss non-profit organization, was set up to oversee the
Ethereum network protocol’s development. The Ethereum network went live on July
30, 2015. Decentralized applications may be controlled by a single user or small
group. Smart contracts, including those relating to decentralized finance
(“DeFi”) applications, are a new technology and their ongoing development and
operation may result in problems, which could reduce the demand for ether or
cause a wider loss of confidence in the Ethereum network, either of which could
have an adverse impact on the value of ether.”
Ether
is the digital asset that powers the Ethereum network and serves as the
network’s native unit of account that is used to pay the “gas” fees needed to
power decentralized applications and smart contracts and execute transactions.
Unlike other digital assets, such as bitcoin, which are solely created through a
progressive mining process, 72.0 million ether were created in connection with
the launch of the Ethereum network. Coinciding with the network launch, it was
decided that EthSuisse would be dissolved, designating the Ethereum Foundation
as the sole organization dedicated to protocol development.
Smart
Contracts and Development on the Ethereum Network
Smart
contracts are programs that run on a blockchain that can execute automatically
when certain conditions are met. Smart contracts facilitate the exchange of
anything representative of value, such as money, information, property, or
voting rights. Using smart contracts, users can send or receive digital assets,
create markets, store registries of debts or promises, represent ownership of
property or a company, move funds in accordance with conditional instructions
and create new digital assets.
Development
on the Ethereum network involves building more complex tools on top of smart
contracts, such as decentralized applications (“DApps”); organizations that are
autonomous, known as decentralized autonomous organizations (“DAOs”); and
entirely new decentralized networks. For example, a company that distributes
charitable donations on behalf of users could hold donated funds in smart
contracts that are paid to charities only if the charity satisfies certain
pre-defined conditions.
The
Ethereum network has also been used as a platform for creating new digital
assets and conducting their associated initial coin offerings. As of December
31, 2025, it is believed that a majority of digital assets not issued as the
native token on their own blockchains were built on the Ethereum network, with
such assets representing a significant amount of the total market value of all
digital assets.
More
recently, the Ethereum network has been used for DeFi or open finance platforms,
which seek to democratize access to financial services, such as borrowing,
lending, custody, trading, derivatives and insurance, by removing third-party
intermediaries. DeFi can allow users to lend and earn interest on their digital
assets, exchange one digital asset for another and create derivative digital
assets such as algorithmic stablecoins, which are digital assets pegged to a
reserve asset such as fiat currency. During 2025, between $43.1 billion and
$97.4 billion worth of digital assets were locked up as collateral on DeFi
platforms on the Ethereum network.
In
addition, the Ethereum network and other smart contract platforms have been used
for creating non-fungible tokens (“NFTs”). Unlike digital assets native to smart
contract platforms which are fungible and enable the payment of fees for smart
contract execution, NFTs allow for digital ownership of assets that convey
certain rights to other digital or real-world assets. This new paradigm allows
users to own rights to other assets through NFTs, which enable users to trade
them with others on the Ethereum network. For example, an NFT may convey rights
to a digital asset that exists in an online game or a DApp, and users can trade
their NFT in the DApp or game, and carry them to other digital experiences,
creating an entirely new free-market internet-native economy that can be
monetized in the physical world.
The
DAO and Ethereum Classic
In
July 2016, the Ethereum network experienced what is referred to as a permanent
hard fork that resulted in two different versions of its blockchain: Ethereum
and Ethereum Classic.
In
April 2016, a blockchain solutions company known as Slock announced the launch
of a decentralized autonomous organization, known as “The DAO” on the Ethereum
network. The DAO was designed as a decentralized crowdfunding model, in which
anyone could contribute ether to The DAO in order to become a voting member and
equity stakeholder in the organization. Members of The DAO could then make
proposals about different projects to pursue and put them to a vote. By
committing to profitable projects, members would be rewarded based on the terms
of a smart contract and their proportional interest in The DAO. As of May 27,
2016, $150 million, or approximately 14% of all ether outstanding, was
contributed to, and invested in, The DAO.
On
June 17, 2016, an anonymous hacker exploited The DAO’s smart contract code to
siphon approximately $60 million, or 3.6 million ether, into a segregated
account. Upon the news of the breach, the price of ether was quickly cut in half
as investors liquidated their holdings and members of the Ethereum community
worked to determine a solution.
In
the days that followed, several attempts were made to retrieve the stolen funds
and secure the Ethereum network. However, it soon became apparent that direct
interference with the protocol (i.e., a hard fork) would be necessary. The
argument for the hard fork was that it would create an entirely new version of
the Ethereum blockchain, erasing any record of the theft, and restoring the
stolen funds to their original owners. The counterargument was that it would be
antithetical to the core principle of immutability of the Ethereum
blockchain.
The
decision as to whether or not to hard fork the Ethereum blockchain was put to a
vote of Ethereum community members. A majority of votes were cast in favor of a
hard fork. On July 15, 2016, a hard fork specification was implemented by the
Ethereum Foundation. On July 20, 2016, the Ethereum network completed the hard
fork, and a new version of the blockchain, without recognition of the theft, was
born.
Many
believed that after the hard fork the original version of the Ethereum
blockchain would dissipate entirely. However, a group of validators continued to
mine the original Ethereum blockchain for philosophical and economic reasons. On
July 20, 2016, the original Ethereum protocol was rebranded as “Ethereum
Classic,” and its native token as ether classic (ETC), preserving the untampered
transaction history (including the theft involving The DAO). Following the hard
fork of Ethereum, each holder of ether automatically received an equivalent
number of ETC tokens.
Overview
of the Ethereum Network’s Operations
In
order to own, transfer or use ether directly on the Ethereum network on a
peer-to-peer basis (as opposed to through an intermediary, such as a custodian
or centralized exchange), a person generally must have internet access to
connect to the Ethereum network. Ether transactions may be made directly between
end-users without the need for a third-party intermediary. To prevent the
possibility of double-spending ether, a user must notify the Ethereum network of
the transaction by broadcasting the transaction data to its network peers. The
Ethereum network provides confirmation against double-spending by memorializing
every peer-to-peer transaction in the Ethereum blockchain, which is publicly
accessible and transparent. This memorialization and verification against
double-spending of peer-to-peer transactions is accomplished through the
Ethereum network validation process, which adds “blocks” of data, including
recent transaction information, to the Ethereum blockchain.
Summary
of an Ether Transaction
A
“transaction request” refers to a request to the Ethereum network made by a
user, in which the requesting user (the “sender”) asks the Ethereum network to
send some ether or execute some code. A “transaction” refers to a fulfilled
transaction request and the associated change in the Ethereum network’s state.
An Ethereum client (“Ethereum Client”) is a software application that implements
the Ethereum network specification and communicates with the Ethereum network. A
node is a computer or other device, such as a mobile phone, running an
individual Ethereum Client that is connected to other computers also running
their own Ethereum Clients, which collectively form the Ethereum network. Nodes
can be full nodes (meaning they host a local copy of the entire Ethereum
blockchain) or light nodes, which only host a local copy of a sub-portion of the
full Ethereum blockchain with reduced data. Nodes may (but do not have to) be
validators, which requires them to download an additional piece of software in
the node’s Ethereum Client and stake a certain amount of ether, which is
discussed below.
Any
user can broadcast a transaction request to the Ethereum network from a node
located on the network. A user can run their own node, or they can connect to a
node operated by others. For the transaction request to actually result in a
change to the current state of the Ethereum network, it must be validated,
executed, and “committed to the network” by another node (specifically, a
validator node). Execution of the transaction request by the validator results
in a change to the Ethereum network’s state once the transaction is broadcast to
all other nodes across the Ethereum network. Transactions can include, for
example, sending ether from one account to another, as discussed below;
publishing a new smart contract onto the Ethereum network; or activating and
executing the code of an existing smart contract, in accordance with the terms
and conditions specified in the sender’s transaction request.
The
Ethereum blockchain can be thought of as a ledger recording a history of
transactions and the balances associated with individual accounts, each of which
has an address on the Ethereum network. An Ethereum network account can be used
to store ether. There are two types of Ethereum accounts: “externally owned
accounts,” which are controlled by a private key, and “smart contract accounts,”
which are controlled by their own code. Externally owned accounts are controlled
by users, do not contain executable code, and are associated with a unique
“public key” and “private key” pair, commonly referred to as a “wallet,” with
the private key being used to execute transactions. Smart contract accounts
contain, and are controlled by, their own executable code: every time the smart
contract account receives a transaction from, or is “called” by, another user,
the smart contract account’s code activates, allowing it to read and write to
internal storage, send ether, or perform other operations. Both externally owned
accounts and smart contract accounts can be used to send, hold, or receive
ether, and both can interact with other smart contracts. However, only
externally owned accounts have the power to initiate transactions; smart
contract accounts can only send transactions of their own after they are first
activated or called by another transaction. An externally owned account is
associated with both a public address on the Ethereum network and a private key,
while a smart contract account is only associated with a public address. While a
smart contract account does not use a private key to authorize transactions,
including transfers of ether, the developer of a smart contract may hold an
“admin key” to the smart contract account, or have special access privileges,
allowing the developer to make changes to the smart contract, enable or disable
features on the smart contract, or change how the smart contract receives
external inputs and data, among others.
Accounts
depend on nodes to access the peer-to-peer Ethereum network. Through the node’s
Ethereum Client, a user’s Ethereum wallet and its associated Ethereum network
address enable the user to connect to the Ethereum network and transfer ether
to, and receive ether from, other users, and interact with smart contracts, on a
peer-to-peer basis. A user with an externally owned account can run their own
node (and their own Ethereum Client) and connect that node to their Ethereum
wallet, allowing them to make transactions from their Ethereum wallet on the
Ethereum network, or a user’s wallet can connect to third-party nodes operated
as a service (e.g., Infura) and access the Ethereum network that way. Multiple
accounts can access the Ethereum network through one node.
Each
user’s Ethereum wallet is associated with a unique “public key” and “private
key” pair. To receive ether in a peer-to-peer transaction, the ether recipient
must provide its public key to the sender. This activity is analogous to a
recipient for a transaction in U.S. dollars providing a routing address in wire
instructions to the payor so that cash may be wired to the recipient’s account.
The sender approves the transfer to the address provided by the recipient by
“signing” a transaction that consists of the recipient’s public key with the
private key of the address from which the sender is transferring the ether. The
recipient, however, does not make public or provide to the sender the
recipient’s related private key, only its public key.
Neither
the recipient nor the sender reveal their private keys in a peer-to-peer
transaction because the private key authorizes transfer of the funds in that
address to other users. Therefore, if a user loses their private key, the user
may permanently lose access to the ether contained in the associated address.
Likewise, ether is irretrievably lost if the private key associated with them is
deleted and no backup has been made. When sending ether, a user’s Ethereum
wallet must sign the transaction with the sender’s associated private key. In
addition, since every computation on the Ethereum network requires processing
power, there is a mandatory transaction fee involved with the transfer that is
paid by the sender to the Ethereum network itself (“base fee”), plus additional
transaction fees the sender can elect (or not) to pay at their discretion to the
validators who validate their transaction (“tip”). The resulting digitally
signed transaction is sent by the user’s Ethereum wallet, via a node (whether
run by the user or operated by others), to other Ethereum network nodes, who in
turn broadcast it on a peer-to-peer basis to validators to allow transaction
confirmation.
Ethereum
network validators record and confirm transactions when they validate and add
blocks of information to the Ethereum blockchain. Validators operate through
nodes whose Ethereum Clients have an extra piece of software that permits the
node to perform validation transactions. In a proof-of-stake consensus protocol
like that used by the Ethereum network, validators are randomly selected to
validate transactions. A validator must stake 32 ether to become a validator,
which allows it to activate a unique validator key pair (consisting of a public
and private validator key). Each 32 ether that is staked results in issuance of
a validator key pair, meaning that multiple validators can operate through a
single validator node (including a validator node operated by a third party as a
service). Validators generally both propose blocks (“proposers”) and participate
in a committee that approves the block (“attesters”). Validators are selected
based on a random process. A single person or entity running a group of
validators does not gain an advantage in any one of their validators being
selected. Further, an ether balance less than 32 ether (implying a slashing or
inactivity leak penalty) will reduce the probability of being selected providing
a bias to the better performing validators and good actors. A single person or
entity can increase the numerical chances that any of their validators will be
randomly selected by staking ether over multiple validators. When a validator is
randomly selected by the protocol’s algorithm to propose a block, it submits a
proposal for the block to be committed to the blockchain subject to completion
of validation by other validators on the network, which includes data relating
to (i) the verification of newly submitted transaction requests submitted by
senders and (ii) a reference to the prior block in the Ethereum blockchain to
which the new block is being added. The proposing validator becomes aware of
outstanding transaction requests through peer-to-peer data packet transmission
and distribution enforced by the Ethereum protocol rules, which connects the
proposer to users who want transactions recorded. If, once created, the
proposing validator’s block is confirmed by a committee of randomly selected
attesters, the block is committed to the Ethereum network and added to the
Ethereum blockchain. Any smart contract code that has been called by the
transaction request is also executed (provided the base fee is paid for the
Ethereum network’s computational power associated with executing the code, and
up to the amount of the base fee). Upon the addition of a block included in the
Ethereum blockchain, an adjustment to the ether balance in both the sender’s and
the recipient’s Ethereum network public key will occur, completing the ether
transaction. Once a transaction is confirmed on the Ethereum blockchain, it is
irreversible.
As
a reward for their services in adding the block to the Ethereum blockchain, the
proposing validators receive redistributed ether (i.e., “tips”) and the
attesting validators receive newly minted ether. If the proposing validator’s
block is determined by the approving validator committee to be faulty or to
break protocol rules, the proposer is penalized by having their staked ether
reduced. Validators can also be penalized for attesting to transactions that
break protocol rules or are inconsistent with the majority of other validators,
or for inactivity or missing attestations that the Ethereum network protocol
assigned to them. In extreme cases, a proposing or attesting validator can be
“slashed”, meaning forcibly ejected by other validators, with their staked ether
continuously drained, potentially up to the loss of their entire stake. In this
way, the Ethereum network attempts to reduce double-spend and other attacks by
validators and incentivize validator integrity.
Some
ether transactions are conducted “off-blockchain” and are therefore not recorded
in the Ethereum blockchain. Some “off-blockchain transactions” involve the
transfer of ownership of a specific digital wallet holding ether or the
reallocation of ownership of certain ether in a pooled-ownership digital wallet,
such as a digital wallet owned by a digital asset exchange. If a transaction
takes place through a centralized digital asset exchange or a custodian’s
internal books and records, it is not broadcast to the Ethereum network or
recorded on the Ethereum blockchain. In contrast to on-blockchain transactions,
which are publicly recorded on the Ethereum blockchain, information and data
regarding off-blockchain transactions are generally not publicly available.
Therefore, off-blockchain transactions are not peer-to-peer ether transactions
in that they do not involve a transaction on the Ethereum network and do not
reflect a movement of ether between addresses recorded in the Ethereum
blockchain. For these reasons, off-blockchain transactions are not immutable or
irreversible as any such transfer of ether ownership is not cryptographically
protected by the protocol behind the Ethereum network or recorded in, and
validated through, the blockchain mechanism.
Ether
Markets and Exchanges
Ether
spot markets hosted on centralized venues typically permit investors to open
accounts with the market and then purchase and sell ether via websites or
through mobile applications. Prices for trades on ether spot markets are
typically reported publicly. In general, an investor opening a trading account
on such a venue must deposit an accepted government-issued currency into its
account with the spot market, or a previously acquired digital asset, before
they can purchase or sell assets on the spot market. The process of establishing
an account with an ether market and trading ether is different from, and should
not be confused with, the process of users sending ether from one ether address
to another ether address on the Ethereum network. This latter process is an
activity that occurs on the Ethereum network, while the former is an activity
that occurs entirely within the order book operated by the spot market. The spot
market typically records the investor’s ownership of ether in its internal books
and records, rather than on the Ethereum blockchain. The spot market ordinarily
does not transfer ether to the investor on the Ethereum blockchain unless the
investor makes a request to the exchange to withdraw the ether in its exchange
account to an off-exchange ether wallet.
Outside
of the spot markets, ether can be traded OTC. The OTC market is largely
institutional in nature, and OTC market participants generally consist of
institutional entities, such as firms that offer two-sided liquidity for ether,
investment managers, proprietary trading firms, high-net-worth individuals that
trade ether on a proprietary basis, entities with sizable ether holdings and
family offices. The OTC market provides a relatively flexible market in terms of
quotes, price, quantity, and other factors, although it tends to involve large
blocks of ether. The OTC market has no formal structure and no open-outcry
meeting place. Parties engaging in OTC transactions will agree upon a
price—often via chat or voice—and then one of the two parties will initiate the
transaction. For example, a seller of ether could initiate the transaction by
sending the ether to the buyer’s Ethereum network address. The buyer would then
wire U.S. dollars to the seller’s bank account. OTC trades are sometimes hedged
and eventually settled with accompanying trades on ether spot
markets.
In
addition, ether futures and options trading occurs on exchanges in the United
States regulated by the Commodity Futures Trading Commission (the “CFTC”). The
market for CFTC-regulated trading of ether derivatives has developed
substantially. Ether futures on the CME (“CME Ether Futures”) traded around
$43.42 billion per month in the one year ending December 31, 2025 and
represented around $56.23 billion in open interest per month.
Initial
Creation of Ether
Unlike
other digital assets, such as bitcoin, which are solely created through a
progressive mining process, 72.0 million ether were created in connection with
the launch of the Ethereum network. The initial 72.0 million ether were
distributed as follows:
Initial
Distribution:
60.0 million ether, or 83.33% of the supply, was sold to the public in a crowd
sale conducted between July and August 2014 that raised approximately $18
million.
Ethereum
Foundation:
6.0 million ether, or 8.33% of the supply, was distributed to the Ethereum
Foundation for operational costs.
Ethereum
Developers:
3.0 million ether, or 4.17% of the supply, was distributed to developers who
contributed to the Ethereum network.
Developer
Purchase Program:
3.0 million ether, or 4.17% of the supply, was distributed to members of the
Ethereum Foundation to purchase at the initial crowd sale price.
Following
the launch of the Ethereum network, ether supply initially increased through a
progressive validation process. Following the introduction of EIP-1559,
described below, the ether supply and issuance rate has varied based on factors
such as recent use of the network.
Proof-of-Work
Validation Process
Prior
to September 2022, Ethereum operated using a proof-of-work consensus mechanism.
Under proof-of-work, in order to incentivize those who incurred the
computational costs of securing the network by validating transactions, there
was a reward given to the computer (under proof-of-work, validators were known
as “miners”) that was able to create the latest block on the chain. Every 12
seconds, on average, a new block was added to the Ethereum blockchain with the
latest transactions processed by the network, and the miner that generated this
block was awarded a variable amount of ether, depending on use of the network at
the time. In certain validation scenarios, ether was sometimes sent to another
miner if they were also able to find a solution but their block was not
included. This is referred to as an “uncle/aunt reward.” Due to the nature of
the algorithm for block generation, this process (generating a “proof-of-work”)
was guaranteed to be random. Prior to the Merge upgrade, described below, miners
on the Ethereum network engaged in a set of prescribed complex mathematical
calculations in order to add a block to the Ethereum blockchain and thereby
confirm ether transactions included in that block’s data.
Proof-of-Stake
Process
In
the second half of 2020, the Ethereum network began the first of several stages
of an upgrade that was initially known as “Ethereum 2.0.” and eventually became
known as the “Merge” to transition the Ethereum network from a proof-of-work
consensus mechanism to a proof-of-stake consensus mechanism. The Merge was
completed on September 15, 2022, and the Ethereum network has operated on a
proof-of-stake model since such time.
Unlike
proof-of-work, in which validators expend computational resources to compete to
validate transactions and are rewarded coins in proportion to the amount of
computational resources expended, in proof-of-stake, validators risk or “stake”
coins to compete to be randomly selected to validate transactions and are
rewarded coins in proportion to the amount of coins staked. Any malicious
activity, such as validating multiple blocks, disagreeing with the eventual
consensus or otherwise violating protocol rules, results in the forfeiture or
“slashing” of a portion of the staked coins. Proof-of-stake is believed by some
to be more energy efficient and scalable than proof-of-work. Every 12 seconds,
approximately, a new block is added to the Ethereum blockchain with the latest
transactions processed by the network, and the validator that generated this
block is awarded ether.
Limits
on Ether Supply
The
rate at which new ether are issued and put into circulation is expected to vary.
In September 2022 the Ethereum network converted from proof-of-work to a new
proof-of-stake consensus mechanism. Following the Merge, approximately 1,700
coins are issued per day, though the issuance rate varies based on factors such
as recent use of the network. In addition, the issuance of new ether could be
partially or completely offset by the burn mechanism introduced by the EIP-1559
modification, under which ether are removed from supply at a rate that varies
with network usage. See “Modifications
to the Ethereum Protocol.”
On occasion, the ether supply has been deflationary over a 24-hour period as a
result of the burn mechanism. The attributes of the new consensus algorithm are
subject to change but, in sum, the new consensus algorithm and related
modifications reduced total new ether issuances and could turn the ether supply
deflationary over the long term.
As
of December 31, 2025, the current circulating supply of ether is estimated to be
around 120.69 million coins.
Modifications
to the Ethereum Protocol
The
Ethereum network is an open-source project with no official developer or group
of developers that controls it. However, historically the Ethereum network’s
development has been overseen by the Ethereum Foundation and other core
developers. The Ethereum Foundation and core developers are able to access and
alter the Ethereum network source code and, as a result, they are responsible
for quasi-official releases of updates and other changes to the Ethereum
network’s source code. However, the release of proposed updates to the Ethereum
network’s source code by core developers does not guarantee that the updates
will be adopted. Nodes must accept any changes made to the Ethereum source code
by choosing to download the proposed modification of the Ethereum network’s
source code in their individual Ethereum Client, and ultimately a critical mass
(in practice, a substantial majority) of validators and users—such as DApp and
smart contract developers, as well as users of DApps and smart contracts, and
anyone else who transacts on the Ethereum blockchain or Ethereum network—must
support the shift, or the upgrades will lack adoption. A modification of the
Ethereum network’s source code is only effective with respect to the Ethereum
nodes that download it and modify their Ethereum Clients accordingly, and in
practice such decisions are heavily influenced by the preferences of validators
and users. If a modification is accepted by less than a substantial majority of
users and validators, a division in the Ethereum network will occur such that
one network will run the pre-modification source code and the other network will
run the modified source code. Such a division is known as a “fork.” See
“Risk
Factors — Risk Factors Related to Digital Assets — A
temporary or permanent “fork” could adversely affect the value of the
Shares.”
Consequently, as a practical matter, a modification to the source code becomes
part of the Ethereum network only if accepted by a sufficiently broad
cross-section of the Ethereum network’s participants.
For
example, in 2019 the Ethereum network completed a network upgrade called
Metropolis that was designed to enhance the usability of the Ethereum network
and was introduced in two stages. The first stage, called Byzantium, was
implemented in October 2017. The purpose of Byzantium was to increase the
network’s privacy, security, and scalability and reduce the block reward for
validators (at that time, validators on the proof-of-work consensus version of
Ethereum were known as “miners”) who created new blocks in proof-of-work
consensus from 5.0 ether to 3.0 ether. The second stage, called Constantinople,
was implemented in February 2019, along with another upgrade, called St.
Petersburg. Another network upgrade, called Istanbul, was implemented in
December 2019. The purpose of Istanbul was to make the network more resistant to
denial-of-service attacks, enable greater ether and Zcash interoperability as
well as other Equihash-based proof-of-work digital assets, and to increase the
scalability and performance for solutions on zero-knowledge privacy technology
like SNARKs and STARKs. The purpose of these upgrades was to prepare the
Ethereum network for the introduction of a proof-of-stake algorithm and reduce
the block reward from 3.0 ether to 2.0 ether.
In
the second half of 2020, the Ethereum network began the first of several stages
of an upgrade culminating in the Merge. The Merge amended the Ethereum network’s
consensus mechanism to be proof-of-stake, and was intended to address the
perceived shortcomings of the proof-of-work consensus mechanism in terms of
labor intensity and duplicative computational effort expended by validators
(known under proof-of-work as “miners”) who did not win the race, under proof of
work, to be the first in time to solve the cryptographic puzzle that would allow
them to be the only validator permitted to validate the block and receive the
resulting block reward (which was given only to the first validator to
successfully solve the puzzle and hash a given block, and not to
others).
Following
the Merge, core development of the Ethereum source code has increasingly focused
on modifications of the Ethereum protocol to increase speed, throughput and
scalability and also improve existing or next generation uses. Future upgrades
to the Ethereum protocol and Ethereum blockchain to address scaling issues—such
as network congestion, slow throughput and periods of high transaction fees
owing to spikes in network demand—have been discussed by network participants,
such as sharding. The purpose of sharding, which has been discussed for years,
is to increase scalability of the Ethereum blockchain by splitting the
blockchain into subsections, called shards, and dividing validation
responsibility so that a defined subset of validators would be responsible for
each shard, rather than all validators being responsible for the entire
blockchain, allowing for parallel processing and validation of transactions.
However, there appears to be uncertainty and a lack of existing widespread
consensus among network participants about how to solve the scaling challenges
faced by the Ethereum network.
The
rapid development of other competing scalability solutions, such as those that
would rely on handling the bulk of computational work relating to transactions
or smart contracts and decentralized applications (“DApps”) outside of the main
Ethereum network and Ethereum blockchain, has caused alternatives to sharding to
emerge. “Layer 2” is a collective term for solutions that are designed to help
increase throughput and reduce transaction fees by handling or validating
transactions off the main Ethereum network (known as “Layer 1”) and then
attempting to take advantage of the perceived security and integrity advantages
of the Layer 1 Ethereum network by uploading the transactions validated on the
Layer 2 protocol back to the Layer 1 Ethereum network. The details of how this
is done vary significantly between different Layer 2 technologies and
implementations. For example, “rollups” perform transaction execution outside
the Layer 1 blockchain and then post the data, typically in batches, back to the
Layer 1 Ethereum blockchain where consensus is reached. “Zero knowledge rollups”
are generally designed to run the computation needed to validate the
transactions off-chain, on the Layer 2 protocol, and submit a proof of validity
of a batch of transactions (not the entire transactions themselves). By
contrast, “optimistic rollups” assume transactions are valid by default and only
run computation, via a fraud proof, in the event of a challenge. Other proposed
Layer 2 scaling solutions include, among others, “state channels”, which are
designed to allow participants to run a large number of transactions on the
Layer 2 side channel protocol and only submit two transactions to the main Layer
1 Ethereum blockchain (the transaction opening the state channel, and the
transaction closing the channel); and “side chains,” in which an entire Layer 2
blockchain network with capabilities similar to those of the existing Layer 1
Ethereum blockchain runs in parallel with the existing Layer 1 Ethereum
blockchain and allows smart contracts and DApps to run on the Layer 2 side chain
without burdening the main Layer 1 network. To date, the Ethereum network
community has not coalesced overwhelmingly around any particular Layer 2
solution, though this could change.
Apart
from solutions designed to address scalability challenges, there have been other
upgrades as well. In 2021, the Ethereum network implemented the EIP-1559
upgrade. EIP-1559 changed the methodology used to calculate the fees paid to
validators. EIP 1559 resulted in the splitting of fees into two components: a
base fee and tip. Ether used to pay the base fee is as a result of EIP 1559
removed from circulation, or “burnt,” and the tip is paid to validators.
EIP-1559 has reduced the total net issuance of ether fees to validators. Future
updates may impact the supply of or demand for ether or its price. On March 13,
2024, the Ethereum network underwent a planned fork called “Dencun” implementing
a series of EIPs. EIP 4844, which some commentators perceive to be the most
significant EIP within the Dencun series, is intended to improve the economics
of Layer 2s by introducing a temporary storage solution, called Binary Large
Objects (“blobs”), which is expected to reduce the cost of recording batched
transactions on the Ethereum Network. Operators of Layer 2 blockchains now have
a choice of using two types of data storage: as temporary blob space stored for
4096 epochs (approximately 18 days) or as permanent smart contract call data.
Because the data is pruned from the Ethereum Network new service providers are
likely to emerge which store the historical blob data beyond the pruning period.
As expected, and immediately following the upgrade, some Layer 2s reported
reduced gas fees when batching transactions to the Ethereum network which in
turn lowered the transaction costs on the Layer 2. As with any change to
software code, planned forks such as Dencun could introduce bugs, coding
defects, unanticipated or undiscovered problems, flaws, security risks, or
problematic incentive structures, or such planned forks could otherwise fail to
work as intended or achieve the expected benefits that proponents hope for in
the short term or the long term, which could also have an adverse effect on
adoption of the Ethereum network and the value of ether, and therefore the
Shares.
The
Trust’s activities will not directly relate to scalability or upgrade projects,
though such projects may potentially increase demand for ether and the utility
of the Ethereum network as a whole. Conversely, if they are unsuccessful or they
cause users or application or smart contract developers to migrate away from the
Ethereum blockchain, demand for ether could potentially be reduced. Also,
projects that operate and are built within the Layer 1 Ethereum blockchain and
network may increase the data flow on the Ethereum network and could either
“bloat” the size of the Ethereum blockchain or slow confirmation
times.
Forms
of Attack Against the Ethereum Network
All
networked systems are vulnerable to various kinds of attacks. As with any
computer network, the Ethereum network contains certain flaws. For example, the
Ethereum network is currently vulnerable to a “51% attack” where, if a validator
or group of validators acting in concert were to gain control of more than 50%
of the staked ether, a malicious actor would be able to gain full control of the
network and the ability to manipulate the Ethereum blockchain. The top three
largest staking pools controlled nearly 50% of the ether staked on the Ethereum
network.
In
addition, many digital asset networks have been subjected to a number of
denial-of-service attacks, which have led to temporary delays in block creation
and in the transfer of Ethereum. Any similar attacks on the Ethereum network
that impact the ability to transfer ether could have a material adverse effect
on the price of ether and the value of the Shares.
This
is not intended as an exhaustive list of all forms of attack against the
Ethereum network. For additional information, see the “Risk
Factors”
section of this Annual Report.
Market
Participants
Validators
In
proof-of-stake, validators risk or stake coins to be randomly selected to
validate transactions and are rewarded for performing their responsibilities and
behaving in accordance with protocol rules. Malfunctions that cause validators
to go offline and, in turn, inhibit them from performing their duties can result
in financial penalties (e.g., inactivity leak). Any malicious activity, such as
proposing multiple blocks for the same slot, making incorrect attestations or
otherwise violating protocol rules, results in the penalization or slashing of
staked coins and forced exit from performing validator duties. The penalty
varies depending on the type of offense and correlation to potential offenses by
other validators.
Validators
range from Ethereum enthusiasts to professional operations that design and build
dedicated machines and data centers. On the Ethereum network, a validator must
stake 32 ether in order to participate in maintaining the network. Once
consensus is reached, the participating validator receives newly issued ETH as
part of their consensus rewards and the priority fee as part of their execution
rewards. The priority fee represents one of two components of the transaction
fee. The second component is the base fee, which makes up the vast majority of
the transaction fees paid by users and is not received by validators, but is
instead taken out of circulation, or burnt. The base fee and the priority fee
both fluctuate with network usership.
Investment
and Speculative Sector
This
sector includes the investment and trading activities of both private and
professional investors and speculators. Historically, larger financial services
institutions are publicly reported to have limited involvement in investment and
trading in digital assets, although the participation landscape is beginning to
change. Currently, there is relatively limited use of digital assets in the
retail and commercial marketplace in comparison to relatively extensive use by
speculators, and a significant portion of demand for digital assets is generated
by speculators and investors seeking to profit from the short- or long-term
holding of digital assets.
Retail
Sector
The
retail sector includes users transacting in direct peer-to-peer ether
transactions through the direct sending of ether over the Ethereum network. The
retail sector also includes transactions in which consumers pay for goods or
services from commercial or service businesses through direct transactions or
third-party service providers, although the use of ether as a means of payment
is still developing and has not been accepted in the same manner as bitcoin due
to ether’s relative nascency and because ether has a generally different purpose
than bitcoin.
Service
Sector
This
sector includes companies that provide a variety of services including the
buying, selling, payment processing and storing of ether. For example, Coinbase,
Kraken, Bitstamp, Gemini, and LMAX Digital are some of the largest digital asset
exchanges by volume traded. As the Ethereum network continues to grow in
acceptance, it is anticipated that service providers will expand the currently
available range of services and that additional parties will enter the service
sector for the Ethereum network.
Competition
As
of December 31, 2025, more than 10,000 other digital assets, as tracked by
CoinMarketCap.com, have been developed since the inception of bitcoin, which is
currently the most developed digital asset because of the length of time it has
been in existence, the investment in the infrastructure that supports it, and
the network of individuals and entities that are using bitcoin in transactions.
While ether has enjoyed some success in its limited history, the aggregate value
of outstanding ether is smaller than that of bitcoin and may be eclipsed by the
more rapid development of other digital assets. In addition, while ether was the
first digital asset with a network that served as a smart contracts platform,
newer digital assets also function as smart contracts platforms, including
Solana, Avalanche and Cardano. Some industry groups are also creating private,
permissioned blockchain versions of Ethereum.
Government
Oversight, Though Increasing, Remains Limited
As
digital assets have grown in both popularity and market size, the U.S. Congress
and a number of U.S. federal and state agencies (including Financial Crimes
Enforcement Network (“FinCEN”), SEC, CFTC, the Financial Industry Regulatory
Authority (“FINRA”), the Consumer Financial Protection Bureau (“CFPB”), the
Department of Justice, the Department of Homeland Security, the Federal Bureau
of Investigation, the IRS and state financial institution and securities
regulators) have been examining the operations of digital asset networks,
digital asset users and the digital asset markets, with particular focus on the
extent to which digital assets can be used to launder the proceeds of illegal
activities or fund criminal or terrorist enterprises and the safety and
soundness of exchanges or other service providers that hold or custody digital
assets for users. Many of these state and federal agencies have issued consumer
advisories regarding the risks posed by digital assets to investors. In
addition, federal and state agencies and other countries and international
bodies have issued rules or guidance about the treatment of digital asset
transactions or requirements for businesses engaged in digital asset
activity.
In
addition, the SEC, U.S. state securities regulators and several foreign
governments have issued warnings and instituted legal proceedings in which they
argue that certain digital assets may be classified as securities and that both
those digital assets and any related initial coin offerings are subject to
securities regulations. The outcomes of these proceedings, as well as ongoing
and future regulatory actions may alter, perhaps to a materially adverse extent,
the nature of an investment in the Shares or the ability of the Trust to
continue to operate. Additionally, U.S. state and federal as well as foreign
regulators and legislatures have taken action against virtual currency
businesses or enacted restrictive regimes in response to adverse publicity
arising from hacks, consumer harm, or criminal activity stemming from virtual
currency activity.
The
CFTC has regulatory jurisdiction over the ether futures markets. In addition,
because the CFTC has determined that ether is a “commodity” under the CEA and
the rules thereunder, it has jurisdiction to prosecute fraud and manipulation in
the cash, or spot, market for ether. The CFTC has pursued enforcement actions
relating to fraud and manipulation involving ether and ether markets. Beyond
instances of fraud or manipulation, the CFTC generally does not oversee cash or
spot market exchanges or transactions involving ether that do not use
collateral, leverage, or financing.
On
February 8, 2021, the CME, a designated contract market (“DCM”) registered with
the CFTC launched new contracts for ether futures products. DCMs are boards of
trades (or exchanges) that operate under the regulatory oversight of the CFTC,
pursuant to Section 5 of the Commodity Exchange Act. To obtain and maintain
designation as a DCM, an exchange must comply on an initial and ongoing basis
with twenty-three Core Principles established in Section 5(d) of the CEA. Among
other things, a DCM is required to establish self- regulatory programs designed
to enforce the DCM’s rules, prevent market manipulation and customer and market
abuses, and ensure the recording and safe storage of trade information. The CFTC
engaged in a “heightened review” of the self-certification of ether futures,
which required DCMs to enter direct or indirect information sharing agreements
with spot market platforms to allow access to trade and trader data; to monitor
data from cash markets with respect to price settlements and other ether prices
more broadly, and identify anomalies and disproportionate moves in the cash
markets compared to the futures markets; to engage in inquiries, including at
the trade settlement level when necessary; and agree to regular coordination
with CFTC surveillance staff on trade activities, including providing the CFTC
surveillance team with trade settlement data upon request.
Various
foreign jurisdictions have adopted, and may continue to, in the near future,
adopt laws, regulations or directives that affect the Ethereum network, the
ether markets, and their users, particularly ether spot markets and service
providers that fall within such jurisdictions’ regulatory scope.
The
effect of any future regulatory change on the Trust or ether is impossible to
predict, but such change could be substantial and adverse to the Trust and the
value of the Shares.
Calculation
of Net Asset Value
For
purposes of calculating the Trust’s net asset value (“NAV”) per Share, the
Trust’s holdings of ether will be valued using the same methodology as used to
calculate the Index. The Index is constructed using ether price feeds from
eligible spot markets and the VWMP methodology, calculated every 15 seconds
based on VWMP market data over rolling sixty-minute increments.
The
Sponsor believes that use of the Index mitigates against idiosyncratic market
risk, as the failure of any individual spot market will not materially impact
pricing for the Trust. It also allows the Administrator to calculate the NAV in
a manner that significantly deters manipulation.
The
Sponsor believes that the fact that there are multiple ether spot markets
contributing prices to the NAV makes manipulation more difficult in a
well-arbitraged and fractured market, as a malicious actor would need to
manipulate multiple spot markets simultaneously to impact the NAV, or
dramatically skew the historical distribution of volume between the various
markets.
Since
the Index is intended to represent the U.S. dollar value of one ether every 15
seconds based on VWMP spot market data over rolling sixty-minute increments,
malicious actors would need to sustain efforts to manipulate the market over an
extended period of time, or would need to replicate efforts multiple times
across markets, potentially triggering review. This extended period also
supports Authorized Participant activity by capturing volume over a longer time
period, rather than forcing Authorized Participants to mark an individual close
or auction. The use of a median price eliminates the ability of outlier prices
to impact the NAV, as it systematically excludes those prices from the NAV
calculation. The use of a volume-weighted median (as opposed to a traditional
median) protects against attempts to manipulate the NAV by executing a large
number of low-dollar trades, because any manipulation attempt would have to
involve a majority of global spot ether volume in a narrow window to have any
influence on the NAV.
The
Trust’s NAV per Share is calculated by:
•
taking
the fair market value of its total assets based on the volume-weighted median
price of ether used for the calculation of the Index;
•
subtracting
any liabilities; and
•
dividing
that total by the total number of outstanding Shares.
The
Administrator calculates the NAV of the Trust once each Exchange trading day.
The NAV for a normal trading day will be released after 4:00 p.m. EST. Trading
during the core trading session on the Exchange typically closes at 4:00 p.m.
EST. However, NAVs are not officially struck until after 4:00 p.m. EST. The
pause after 4:00 p.m. EST provides an opportunity for the Sponsor to
algorithmically detect, flag, investigate, and correct unusual pricing should it
occur. The Sponsor has established a Fair Value Valuation and Liquidity
Committee to carry out the day-to-day fair valuation responsibilities and has
adopted policies and procedures to govern the fair valuation process and the
activities of the Valuation and Liquidity Committee. If the Valuation and
Liquidity Committee determines in good faith that the Index does not reflect an
accurate ether price, then the Valuation and Liquidity Committee will instruct
the Administrator to employ an alternative method to determine the fair value of
the Trust’s assets. In determining an alternative fair value method, the
Valuation and Liquidity Committee generally considers such criteria as
observable market-based inputs, including market quotations and last sale
information from third-party pricing services and/or trading platforms on which
ether are traded. The Valuation and Liquidity Committee’s selection of
third-party pricing services used considers the qualifications, experience, and
history of the pricing services and whether their valuation methodologies and
procedures are reasonably designed to produce prices that reflect fair value
under the prevailing market conditions. Moreover, the terms of the Trust
Agreement do not prohibit the Sponsor from changing the Index or other valuation
method used to calculate the NAV of the Trust. Any such change in the Index or
other valuation method could affect the value of the Shares and investors could
suffer a substantial loss on their investment in the Trust. In the event of a
material change, the Sponsor will notify Shareholders in a prospectus supplement
and/or a current report on Form 8-K or in its annual or quarterly reports, as
applicable.
In
addition, in order to provide updated information relating to the Trust for use
by Shareholders and market professionals, a third-party financial data provider
will calculate and disseminate throughout the core trading session on each
trading day an updated intraday indicative value (“IIV”). The IIV will be
calculated based on the Trust’s ether holdings and any other assets expected to
comprise that day’s NAV calculation. The third-party financial data provider
will use the Blockstream Crypto Data Feed Streaming Level 1 as the pricing
source for the spot ether. The Blockstream Crypto Data Feed Streaming Level 1
calculates an average of current ether price levels of the ether trading
platforms that are available on its feed. The ether trading platforms included
in the Blockstream Crypto Data Feed Streaming Level 1 include Bitfinex,
Bitstamp, and Gemini. The Trust will provide an IIV per Share updated every 15
seconds, as calculated by the Exchange or a third-party financial data provider
during the Exchange’s regular trading hours of 9:30 a.m. to 4:00 p.m. EST
(“Regular Trading Hours”). The IIV disseminated during Regular Trading Hours
should not be viewed as an actual real-time update of the NAV, which will be
calculated only once at the end of each trading day as described herein. The IIV
will be widely disseminated on a per Share basis every 15 seconds during Regular
Trading Hours through the facilities of the consolidated tape association (CTA)
and Consolidated Quotation System (CQS) high speed lines. In addition, the IIV
will be available through on-line information services such as Bloomberg and
Reuters.
The
Trust’s periodic financial statements may not utilize the NAV of the Trust
determined by reference to the Index to the extent the methodology used to
calculate the Index is deemed not to be consistent with GAAP. The Trust’s
periodic financial statements will be prepared in accordance with the Financial
Accounting Standards Board Accounting Standards Codification Topic 820, “Fair
Value Measurements and Disclosures” (“ASC Topic 820”) and utilize an
exchange-traded price from the Trust’s principal market for ether on the Trust’s
financial statement measurement date. The Sponsor will determine in its sole
discretion the valuation sources and policies used to prepare the Trust’s
financial statements in accordance with GAAP. The Trust intends to engage a
third-party vendor to obtain a price from a principal market for ether, which
will be either the market the Trust normally transacts in for ether or, if the
Trust does not normally transact in any market or such market suffers an
operational interruption and is unavailable, determined and designated by such
third-party vendor daily based on its consideration of several exchange
characteristics, including oversight, and the volume and frequency of trades.
Under GAAP, such a price is expected to be deemed a Level 1 input in accordance
with the ASC Topic 820 because it is expected to be a quoted price in active
markets for identical assets or liabilities.
The
Sponsor reserves the right to adjust the Share price of the Trust in the future
to maintain convenient trading ranges for Shareholders. Any adjustments would be
accomplished through stock splits or reverse stock splits. Such splits would
decrease (in the case of a split) or increase (in the case of a reverse split)
the proportionate NAV per Share but would have no effect on the net assets of
the Trust or the proportionate voting rights of Shareholders or the value of any
Shareholder’s investment.
Fees
and Expenses
Sponsor
Fee
The
Trust will pay the Sponsor an annual unified fee of 0.25% of the Trust’s Ether
Holdings (the “Sponsor Fee”). The Trust’s “Ether Holdings” is the quantity of
the Trust’s ether plus any cash or other assets held by the Trust represented in
ether as calculated using the Index price, less its liabilities (which include
estimated accrued but unpaid fees and expenses) represented in ether as
calculated using the Index price. The Sponsor Fee is paid by the Trust to the
Sponsor as compensation for services performed under the Trust Agreement. The
Administrator will calculate the Sponsor Fee in respect of each day by reference
to the prior day’s Ether Holdings. The Sponsor Fee will accrue daily in ether
and be payable monthly in ether or cash. To the extent there are any on-chain
transaction fees incurred in connection with the transfers of ether to pay the
Sponsor Fee, the Sponsor, and not the Trust, shall bear such fees. The Sponsor
may, at its sole discretion and from time to time, waive all or a portion of the
Sponsor Fee for stated periods of time. The Sponsor is under no obligation to
waive any portion of its fees and any such waiver shall create no obligation to
waive any such fees during any period not covered by the waiver.
Routine
Operational, Administrative and Other Ordinary Expenses
As
partial consideration for its receipt of the Sponsor Fee, the Sponsor is
obligated under the Trust Agreement to assume and pay all fees and other
expenses incurred by the Trust in the ordinary course of its affairs, excluding
taxes, but including: (i) the fees of the Trust’s third-party service providers
including, but not limited to, the Distributor, the Administrator, the
Custodian, the Cash Custodian, the Transfer Agent, the Index Provider, and the
Trustee, (ii) the fees and expenses related to the listing, quotation or trading
of the Shares on the Exchange (including customary legal, marketing and audit
fees and expenses), (iii) legal fees and expenses incurred in the ordinary
course, (iv) audit fees, (v) regulatory fees, including, if applicable, any fees
relating to the registration of the Trust and Shares, including any ongoing
filings related to the offering of Shares, under the 1933 Act or the 1934 Act,
(vi) printing and mailing costs, (vii) costs of maintaining the Trust’s website
and (viii) applicable license fees (each, a “Sponsor-paid Expense” and
collectively, the “Sponsor-paid Expenses”), provided that any expense that
qualifies as an Extraordinary Expense (as defined below) will not be deemed to
be a Sponsor-paid Expense. There is no cap on the amount of Sponsor-paid
Expenses. The Sponsor has also assumed all fees and expenses related to the
organization and offering of the Trust and the Shares.
Non
Recurring Fees and Expenses
The
Trust may incur certain extraordinary, nonrecurring expenses that are not
Sponsor-paid Expenses, including, but not limited to, brokerage and transaction
costs associated with the sale or transfer of ether, 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, the Trust’s assets, or the interests of Shareholders, any indemnification
of the Custodian or other agents, service providers or counterparties of the
Trust, and extraordinary legal fees and expenses, including any legal fees and
expenses incurred in connection with litigation, regulatory enforcement or
investigation matters (collectively, “Extraordinary Expenses”). To the extent
on-chain transaction fees are incurred in connection with transfers or sales of
ether to pay Extraordinary Expenses, the Trust will bear such fees.
To
the extent it does not have cash readily available, the Sponsor shall cause the
transfer or sale of ether in such quantity as may be necessary to permit the
payment of Trust expenses and liabilities not assumed by the Sponsor or for
payment of redemption proceeds to Authorized Participants. The Trust will not
bear any costs associated with the transfer or sale of ether to pay the Sponsor
Fee. To the extent the Trust incurs any Extraordinary Expenses, the Trust will
bear the costs of any transfers or sales of ether to pay such expenses. The
Trust will seek to transfer ether at such times and in the smallest amounts
required to permit such payments as they become due. With respect to transfers
or sales necessary to pay Trust expenses and liabilities that are denominated
other than in ether, the amount of ether transferred or sold may vary from time
to time depending on the actual sales price of ether relative to the Trust’s
expenses and liabilities (e.g., if the price of ether falls, the amount of ether
needed to be transferred or sold to pay an expense denominated in U.S. dollars
will increase). To the extent the Trust must buy or sell ether, the Trust may do
so through a third-party digital asset broker or dealer. When the Trust buys or
sells ether, the Sponsor seeks quotes from its ether trading counterparties.
Such transactions are typically conducted over the counter rather than over a
trading platform or similar order matching service. The Sponsor will select
third party brokers or dealers that it believes have implemented adequate
anti-money laundering, know-your-customer and other legal compliance policies
and procedures.
Under
the terms of each Authorized Participant Agreement, the Authorized Participants
will be responsible for any brokerage or transaction costs associated with the
sale or transfer of ether incurred in connection with the fulfillment of a
creation or redemption order.
Creation
and Redemption of Shares
The
Trust creates and redeems Shares from time to time, but only in one or more
Baskets. Baskets are only made in exchange for delivery to the Trust or the
distribution by the Trust of the amount of ether or cash represented by the
Baskets being created or redeemed (the “Basket Deposit”). The amount of ether
required in a Basket Deposit (the “Basket Ether Deposit”) and the amount of cash
required in a Basket Deposit (the “Basket Cash Deposit”) are based on the
quantity or value of the quantity, as applicable, of ether or cash attributable
to each Share of the Trust (net of accrued but unpaid Sponsor Fees and any
accrued but unpaid Extraordinary Expenses) being created or redeemed determined
as of 4:00 p.m. EST on the day the order to create or redeem Baskets is properly
received.
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) direct participants (“DTC Participants”) in
the Depository Trust Company (“DTC”). To become an Authorized Participant, a
person must enter into an Authorized Participant Agreement with the Distributor.
As of the Trust’s commencement of operations, Baskets may only be purchased or
redeemed by Authorized Participants for ether or cash.
In
connection with a Cash Creation Order (as defined below) or Cash Redemption
Order (as defined below), an Authorized Participant is responsible for any
operational processing and brokerage costs, transfers fees, network fees and
stamp taxes (the “Transaction Fee”). The Transaction Fee may be reduced,
increased or otherwise changed by the Sponsor. Authorized Participants who make
deposits with the Trust in exchange for Baskets receive no fees, commissions or
other form of compensation or inducement of any kind from either the Trust or
the Sponsor, and no such person will have any obligation or responsibility to
the Sponsor or the Trust to effect any sale or resale of Shares.
Certain
Authorized Participants and their agents and affiliates are expected to be
capable of participating directly in the spot markets. Some Authorized
Participants or their agents and affiliates may from time to time buy or sell
ether and may profit in these instances. To the extent that the activities of
Authorized Participants or their agents and affiliates have a meaningful effect
on the ether market, it could affect the price of ether and impact the ability
of the Authorized Participants to effectively arbitrage the difference between
the price at which the shares trade and the NAV of the Trust. While the Sponsor
currently expects that Authorized Participants’ and their agents’ and
affiliates’ direct activities in the ether or securities markets in connection
with the creation and redemption activities of the Trust will not significantly
affect the price of ether or the Shares, the impact of the activities of the
Trust and its Authorized Participants and their agents and affiliates on ether
or securities markets is unknown and beyond the control of the
Sponsor.
Each
Authorized Participant will be required to be registered as a broker-dealer
under the 1934 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 will 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 in light of its own regulatory regime.
The
following description of the procedures for the creation and redemption of
Baskets is only a summary and a Shareholder should refer to the form of
Authorized Participant Agreement for more detail, which is attached to this
Annual Report as an exhibit.
Creation
Procedures
On
any business day, an Authorized Participant may place an order with the Transfer
Agent to create one or more Baskets. For purposes of processing creation and
redemption orders, a “business day” means any day other than a day when the
Exchange is closed for regular trading. Purchase orders must be placed by the
close of Regular Trading Hours on the Exchange or an earlier time as determined
and communicated by the Sponsor and its agent. A purchase order will be
effective on the date it is received in good order by the Transfer Agent
(“Purchase Order Date”).
The
manner by which creations are made is dictated by the terms of the Authorized
Participant Agreement. Creation orders may be denominated and settled in an
amount of ether (“In-Kind Creation Order”) or cash (“Cash Creation Order”). By
placing an In-Kind Creation Order, an Authorized Participant agrees to
facilitate the deposit of ether with the Custodian, either directly or
indirectly through an Authorized Participant Designee. By placing a Cash
Creation Order, an Authorized Participant agrees to facilitate the deposit of
cash with the Cash Custodian. An Authorized Participant may not withdraw a
creation order without the prior consent of the Sponsor in its
discretion.
Following
an In-Kind Creation Order from an Authorized Participant, the Trust’s account at
the Custodian must be credited with the required ether by 11:00 a.m. EST on the
following business day or such other time designated by the Sponsor. The
Authorized Participant or its Authorized Participant Designee will normally send
the required ether in an “on chain” transaction over the Ethereum network. Such
on chain transactions are subject to the risks associated with Ethereum network
transactions, including the irreversibility of transactions made in error or
unavoidable delays due to Ethereum network congestion. Upon receipt of the
Basket Ether Deposit amount in the Trust’s account at the Custodian, the
Administrator will notify the Transfer Agent. The Transfer Agent will then
direct DTC to credit the number of Shares created to the Authorized
Participant’s DTC account.
Following
an Authorized Participant’s Cash Creation Order, the Trust’s account at the Cash
Custodian must be credited with the Basket Cash Deposit amount by 11:00 a.m. EST
on the following business day or such other time designated by the Sponsor. Upon
receipt of the Basket Cash Deposit amount in the Trust’s account at the Cash
Custodian, the Transfer Agent will notify the Distributor, the Authorized
Participant, and the Sponsor that the Basket Cash Amount has been deposited. The
Sponsor, on behalf of the Trust, will instruct an ether trading counterparty to
purchase the amount of ether equivalent in value to the cash deposit amount
associated with the creation order, with such purchase transaction prearranged
to be executed, in the Sponsor’s reasonable efforts, at the Index price used by
the Trust to calculate NAV, taking into account any spread, commissions, or
other trading costs on the applicable Purchase Order Date. The resulting ether
will be deposited in the Trust’s account with the Ether Custodian. Any slippage
incurred (including, but not limited to, any trading fees, spreads, or
commissions), on a cash equivalent basis, will be the responsibility of the
Authorized Participant and not of the Trust or Sponsor. To the extent the
execution price of the ether acquired by the trading counterparty exceeds the
cash deposit amount, such cash difference will be the responsibility of the
Authorized Participant and not the Trust or Sponsor. The Transfer Agent will
then direct DTC to credit the number of Shares created to the Authorized
Participant’s DTC account.
The
Trust has entered into agreements with each of A1, Ltd., Cumberland DRW LLC,
Flow Traders B.V., Galaxy Digital Trading Cayman LLC, JSCT, LLC, Virtu Financial
Singapore Pte. Ltd., and Wintermute Trading Ltd to serve as an ether trading
counterparty to the Trust. JSCT, LLC is an affiliate of Jane Street Capital LLC
and Virtu Financial Singapore Pte. Ltd. is an affiliate of Virtu Americas LLC.
Each of Jane Street Capital LLC and Virtu Americas LLC is an Authorized
Participant. The Sponsor is not aware of, nor has it requested any information
relating to, any other affiliation or material relationship between such ether
trading counterparties and the Authorized Participants or other service
providers of the Trust in executing a transaction in ether with the Trust. The
agreements with the ether trading counterparties provide that once the Sponsor
determines based on its execution procedures which counterparty to execute a
trade with and the Sponsor has placed a trade with a specific counterparty, that
counterparty is contractually obligated to settle that trade. Each of these
third parties are, and any other trading counterparty the Trust places orders
with will be, subject to U.S. federal and/or state licensing requirements or
similar laws in non-U.S. jurisdictions and maintain practices and policies
designed to comply with AML and KYC regulations or similar laws in non-U.S.
jurisdictions.
Determination
of Required Deposits
The
amount of the Basket Deposit changes from day to day. On each day that the
Exchange is open for regular trading, the Administrator adjusts the quantity of
ether or cash constituting the Basket Deposit as appropriate to reflect the
value of the Trust’s ether and cash less accrued expenses. The computation is
made by the Administrator as promptly as practicable after 4:00 p.m. EST or at
an earlier time set forth in the Authorized Participant Agreement or otherwise
provided to all Authorized Participants on the date such order is placed in
order for the creation of Baskets to be effected based on the NAV of Shares as
next determined on such date after receipt of the order in proper
form.
The
Basket Ether Deposit for a given day is determined by dividing the number of
ether held by the Trust as of the opening of business on that business day,
adjusted for the amount of ether constituting accrued expenses and other
liabilities of the Trust as of the opening of business on that business day, by
the number of Shares outstanding at the opening of business and multiplying such
amount by the number of Shares constituting a Basket. Fractions of ether smaller
than .00000001 are disregarded for purposes of the computation of the Basket
Ether Deposit.
The
Basket Cash Deposit is an amount of cash that is in the same proportion to the
total assets of the Trust, net of accrued expenses and other liabilities, on the
Purchase Order Date, as the number of Shares constituting a Basket is in
proportion to the total number of Shares outstanding on the Purchase Order Date,
plus the amount of any Transaction Fee. For a discussion of how the Trust
determines the value of ether, see “Calculation
of Net Asset Value”
above. The Basket Cash Deposit so determined is communicated via electronic mail
message to all Authorized Participants.
To
the extent the price at which the Trust executes an ether purchase in connection
with a Cash Creation exceeds the amount described in the paragraph above, the
Authorized Participant that placed such order will be responsible for any such
difference in price. The Sponsor expects that its ether trading counterparties
will be able to provide pricing based on the Index price at 4:00 p.m. EST, which
would minimize or eliminate any such shortfall. However, there can be no
guarantee that the price at which the Trust executes ether trades will be the
Index price at 4:00 p.m. EST, and Authorized Participants bear the risk of any
such differences in price.
Delivery
of Required Deposits
An
Authorized Participant who places a purchase order must follow the procedures
outlined in the “Creation Procedures” as summarized above and further described
in the Trust’s registration statement. Upon receipt of the deposit amount by the
Custodian or the Cash Custodian, as applicable, the Transfer Agent will direct
DTC to credit the number of Shares ordered to the Authorized Participant’s DTC
account on the following business day or such later time as may be agreed upon
by the Authorized Participant and the Sponsor, following the Purchase Order
Date. The Sponsor has the authority to set or modify the cut-off time for
purchase orders in order for the creation of Baskets to be effected based on the
Index price at 4:00 p.m. EST as next determined on such date after receipt of
the order in proper form. For example, the Sponsor may modify the cut-off time
in the event of an early market close, perceived capacity constraints from the
Trust’s ether trading counterparties, or highly volatile markets. Cut-off times
are communicated periodically to Authorized Participants. In circumstances where
purchase orders are due before 4:00 p.m. EST, Authorized Participants will not
know the total Basket Deposit at the time they submit a purchase order for the
Basket. The Trust’s NAV and the price of a Basket Deposit could rise or fall
substantially between the time a purchase order is submitted and the time the
amount of the purchase price in respect thereof is determined, and the risk of
such price movements will be borne solely by the Authorized Participant. In the
event an Authorized Participant or its Authorized Participant Designee fails to
deliver a Basket Ether Deposit pursuant to an In-Kind Creation Order, such
In-Kind Creation Order may, in the Sponsor’s sole discretion, be converted to a
Cash Creation Order and subject to the procedures applicable to Cash Creation
Orders described herein. If an Authorized Participant fails to consummate a Cash
Creation Order, such order will be cancelled or delayed until the full deposit
has been received.
Rejection
of Purchase Orders
The
Sponsor or its designee has the absolute right, but does not have any
obligation, to reject any purchase order or Basket Deposit for any reason,
including if the Sponsor determines that:
a)
the
purchase order is not in proper form;
b)
the
Basket Deposit delivered is not as specified by the Trust through the Sponsor
and/or Transfer Agent, and the Sponsor has not consented to acceptance of an
in-kind deposit that varies from the designated portfolio;
c)
the
acceptance of the Basket Deposit would have certain adverse tax consequences to
the Trust;
d)
the
acceptance of the Basket Deposit would, in the opinion of counsel, be
unlawful;
e)
the
acceptance of the Basket Deposit would otherwise, in the discretion of the Trust
or the Sponsor, have an adverse effect on the Trust or the rights of beneficial
owners of the Trust;
f)
the
value of Baskets to be created exceeds a purchase authorization limit afforded
to the Authorized Participant by the Trust, and the Authorized Participant has
not deposited an amount in excess of such purchase authorization with the
Custodian prior to the designated cut-off time; or
g)
there
exist circumstances outside the control of the Trust, the Transfer Agent, or the
Sponsor that make it impossible to process purchase orders for all practical
purposes.
The
Sponsor may in its sole discretion limit the number of Shares created pursuant
to purchase orders on any specified day without notice to the Authorized
Participants and may direct the Distributor to reject any purchase orders in
excess of such capped amount. The Sponsor may choose to limit the number of
Shares created pursuant to purchase orders when it deems so doing to be in the
best interest of Shareholders. It may choose to do so when it believes the
market is too volatile to execute an ether transaction, when it believes the
price of ether is being inconsistently, irregularly, or discontinuously
published from ether trading venues and other data sources, or when it believes
other similar circumstances may create a scenario in which accepting purchase
orders would not be in the best interests of the Shareholders. The Sponsor does
not believe that the Trust’s ability to arrive at such a determination will have
a significant impact on the Shares in the secondary market because it believes
that the ability to create Shares would be reinstated shortly after such
determination is made, and any entity desiring to create Shares would be able to
do so once the ability to create Shares is reinstated. However, it is possible
that such a determination would cause the Shares to trade at premiums or
discounts relative to the Trust’s NAV on the secondary market if arbitrageurs
believe that there is risk that the creation and redemption process is not
available, as this process is a component of keeping the price of the Shares on
the secondary market closely aligned to the Trust’s NAV.
Neither
the Sponsor, nor the Transfer Agent, nor the Trust will be liable for the
rejection of any purchase order or Basket Deposit.
Redemption
Procedures
The
procedures by which an Authorized Participant can redeem one or more Baskets
mirror the procedures for the creation of Baskets with an additional safeguard
on ether being removed from the Ether Account at the Custodian. On any business
day, an Authorized Participant may place an order with the Transfer Agent to
redeem one or more Baskets. Redemption orders must be placed by the close of
Regular Trading Hours on the Exchange or an earlier time as determined and
communicated by the Sponsor and its agent. A redemption order will be effective
on the date it is received by the Transfer Agent (“Redemption Order
Date”).
The
manner by which redemptions are made is dictated by the terms of the Authorized
Participant Agreement. Redemption orders are denominated and settled either in
kind (“In-Kind Redemption Order”) or in cash (“Cash Redemption Order”). By
placing a redemption order, an Authorized Participant agrees to facilitate the
deposit of Shares with the Transfer Agent. If an Authorized Participant fails to
consummate the foregoing, the order will be cancelled or delayed until the
required Shares have been received. An Authorized Participant may not withdraw a
redemption order without the prior consent of the Sponsor in its
discretion.
In
the case of an In-Kind Redemption Order, the redemption distribution from the
Trust consists of a movement of ether to the Authorized Participant, or its
Authorized Participant Designee, representing the amount of ether held by the
Trust, net of accrued expenses and other liabilities, evidenced by the Shares
being redeemed on the Redemption Order Date. In the case of a Cash Redemption
Order, the redemption distribution from the Trust consists of a transfer to the
Authorized Participant of an amount of cash that is in the same proportion to
the total assets of the Trust, net of accrued expenses and other liabilities, on
the Redemption Order Date, as the number of Shares to be redeemed under the
purchase order is in proportion to the total number of Shares outstanding on the
Redemption Order Date. With respect to either an In-Kind Redemption Order or
Cash Redemption Order, the redemption distribution due from the Trust will be
delivered once the Transfer Agent notifies the Cash Custodian, the
Administrator, the Distributor and the Sponsor that the Authorized Participant
has delivered the Shares represented by the Baskets to be redeemed to the
Transfer Agent’s DTC account. If the Transfer Agent’s DTC account has not been
credited with all of the Shares of the Baskets to be redeemed, the redemption
distribution will be cancelled or delayed until such time as the Transfer Agent
confirms receipt of all such Shares.
By
placing a redemption order, an Authorized Participant agrees to deliver the
Baskets to be redeemed through DTC’s book-entry system to the Trust by the end
of the following business day or such time as may be agreed upon by the
Authorized Participant and the Sponsor following the Redemption Order Date. An
Authorized Participant may not withdraw a redemption order without the prior
consent of the Sponsor in its discretion.
Determination
of Redemption Distribution
The
redemption distribution from the Trust will consist of a transfer to the
redeeming Authorized Participant or its Authorized Participant Designee of an
amount of either ether (in the case of an In-Kind Redemption Order) or cash (in
the case of a Cash Redemption Order) that is determined in the same manner as
the determination of Basket Deposits discussed above.
Delivery
of Redemption Distribution
The
Transfer Agent notifies the Administrator, the Cash Custodian, the Distributor
and the Sponsor that the Shares have been received in the Transfer Agent’s DTC
account. For an In-Kind Redemption Order, the Sponsor will transfer the
redemption ether amount from the Custodian to the designated wallet address of
the Authorized Participant or its Authorized Participant Designee. For a Cash
Redemption Order, the redemption distribution due from the Trust will be sent by
the Cash Custodian, to the Authorized Participant on the following business day
or such time as may be agreed upon by the Authorized Participant and the
Sponsor, following the Redemption Order Date if, by 4:00 p.m. EST, on such
business day, the Transfer Agent’s DTC account has been credited with the
Baskets to be redeemed. If the Transfer Agent’s DTC account has not been
credited with all of the Baskets to be redeemed by such time, the redemption
distribution will be cancelled or delayed until such time as the Transfer Agent
confirms receipt of all such Shares.
Rejection
of Redemption Orders
Redemption
orders must be made in whole Baskets. The Distributor acting by itself or
through the person authorized to take redemption orders in the manner provided
in the Authorized Participant Agreement may, in its sole discretion, reject any
redemption order (1) the Sponsor determines not to be in proper form or (2) if
requested by the Distributor, the Authorized Participant fails to deliver or
execute supporting documentation evidencing ownership or the Authorized
Participant’s right to deliver sufficient Shares.
Suspension
of Orders
The
Sponsor may, in its discretion, suspend redemption or creation transactions
during any period when the transfer books of the Transfer Agent are closed or if
circumstances outside the control of the Sponsor or its delegate make it for all
practicable purposes not feasible to process Redemption Orders or for any other
reason at any time or from time to time. For example, the Sponsor may determine
that it is necessary to suspend redemptions to allow for the orderly liquidation
of the Trust’s assets. If the Sponsor has difficulty liquidating the Trust’s
positions, e.g., because of a market disruption event or an unanticipated delay
in the liquidation of a position in an over-the-counter contract, it may be
appropriate to suspend creations and redemptions until such time as such
circumstances are rectified. Neither the Distributor, the person authorized to
take redemption orders in the manner provided in the Authorized Participant
Agreement, nor the Custodian will be liable to any person or in any way for any
loss or damages that may result from any such suspension or postponement. Any
such suspension may cause the price of the Shares to deviate more significantly
from the Trust’s NAV per Share than would be the case if such suspension had not
occurred. The Trust will notify Shareholders of any such suspension in a
prospectus supplement and/or a current report on Form 8-K or in its annual or
quarterly reports.
Creation
and Redemption Transaction Fees
In
connection with a Creation Order or Redemption Order, an Authorized Participant
is responsible for the Transaction Fee, which consists of the operational
processing and brokerage costs, transfers fees, network fees and stamp taxes.
The Transaction Fee may be reduced, increased or otherwise changed by the
Sponsor.
Tax
Responsibility
Authorized
Participants are responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such tax
or charge is imposed directly on the Authorized Participant, and agree to
indemnify the Sponsor and the Trust if they are required by law to pay any such
tax, together with any applicable penalties, additions to tax and interest
thereon.
Secondary
Market Transactions
As
noted, the Trust will create and redeem Shares from time to time, but only in
one or more Baskets. The creation and redemption of baskets are only made in
exchange for delivery to the Trust or the distribution by the Trust of the
amount of ether or cash equal to the number of Shares included in the Baskets
being created or redeemed determined on the day the order to create or redeem
Baskets is properly received.
As
discussed above, Authorized Participants are the only persons that may place
orders to create and redeem Baskets. Authorized Participants must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers to
engage in securities transactions. An Authorized Participant is under no
obligation to create or redeem Baskets, and an Authorized Participant is under
no obligation to offer to the public Shares of any Baskets it does
create.
Authorized
Participants that do offer to the public Shares from the Baskets they create
will do so at per-Share offering prices that are expected to reflect, among
other factors, the trading price of the Shares on the Exchange, the NAV of the
Trust at the time the Authorized Participant purchased the Baskets, the NAV of
the Shares at the time of the offer of the Shares to the public, the supply of
and demand for Shares at the time of sale, and the liquidity of ether. Baskets
are generally redeemed when the price per Share is at a discount to the NAV per
Share. Shares initially comprising the same basket but offered by Authorized
Participants to the public at different times may have different offering
prices. An order for one or more Baskets may be placed by an Authorized
Participant on behalf of multiple clients. Authorized Participants who make
deposits with the Trust in exchange for Baskets receive no fees, commissions or
other forms of compensation or inducement of any kind from either the Trust or
the Sponsor and no such person has any obligation or responsibility to the
Sponsor or the Trust to effect any sale or resale of Shares.
Shares
are expected to trade in the secondary market on the Exchange. Shares may trade
in the secondary market at prices that are lower or higher relative to their NAV
per Share. The amount of the discount or premium in the trading price relative
to the NAV per Share may be influenced by various factors, including the number
of Shareholders who seek to purchase or sell Shares in the secondary market and
the liquidity of ether.
Selling
Commission
Retail
investors may purchase and sell Shares through traditional brokerage accounts.
Investors are expected to be charged a customary commission by their brokers in
connection with purchases of Shares that will vary from investor to investor.
Investors are encouraged to review the terms of their brokerage accounts for
applicable charges. The price at which an Authorized Participant sells a Share
may be higher or lower than the price paid by such Authorized Participant in
connection with the creation of such Share in a Creation Unit.
Employees
The
Trust has no employees.
United
States Federal Income Tax Consequences
The
following discussion describes the material U.S. federal income tax consequences
associated with the purchase, ownership and disposition of Shares by a U.S.
Shareholder (as defined below), and certain U.S. federal income consequences
that may apply to an investment in Shares by a Non-U.S. Shareholder (as defined
below). The discussion below is based on the U.S. Internal Revenue Code of 1986
(the “Code”), Treasury Regulations promulgated thereunder and judicial and
administrative interpretations of the Code, all as in effect on the date of this
Annual Report and all of which are subject to change either prospectively or
retroactively. The tax treatment of Shareholders may vary depending upon their
own particular circumstances. Except where noted, this discussion only deals
with Shares held as capital assets (generally, property held for investment),
and does not address special situations, including those of banks, financial
institutions, insurance companies, regulated investment companies, real estate
investment trusts, dealers in securities, currencies, or commodities, tax-exempt
organizations, tax-exempt or tax-advantaged retirement plans or accounts,
traders using a mark-to-market method of accounting, entities that are
partnerships for U.S. federal income tax purposes, persons holding Shares as a
position in a “hedging,” “straddle,” “conversion,” “constructive sale” or other
integrated transaction for U.S. federal income tax purposes, persons whose
“functional currency” is not the U.S. dollar, persons required for U.S. federal
income tax purposes to accelerate the recognition of any item of gross income
with respect to the Shares as a result of such income being recognized on an
applicable financial statement, or persons subject to the federal alternative
minimum tax. Moreover, the discussion below does not address the effect of any
state, local or foreign tax law consequences that may apply to an investment in
Shares. Purchasers of Shares are urged to consult their own tax advisers with
respect to all federal, state, local and foreign tax law considerations
potentially applicable to their investment in Shares.
For
purposes of this discussion, a “U.S. Shareholder” is a Shareholder that
is:
•
an
individual who is treated as a citizen or resident of the United States for U.S.
federal income tax purposes;
•
a
corporation (or entity treated as a corporation for U.S. federal income tax
purposes) created or organized in or under the laws of the United States, any
state thereof or the District of Columbia;
•
an
estate, the income of which is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
•
a
trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the
trust.
If
a partnership or other entity or arrangement treated as a partnership for U.S.
federal income tax purposes holds Shares, the tax treatment of a partner
generally depends upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding Shares, the
discussion below may not be applicable and we urge you to consult your own tax
adviser for the U.S. federal income tax implications of the purchase, ownership
and disposition of such Shares.
Taxation
of the Trust
The
Sponsor and the Trustee will treat the Trust as a “grantor trust” for U.S.
federal income tax purposes. Assuming that the Trust is a grantor trust (and the
following discussion assumes such classification), the Trust itself should not
be subject to U.S. federal income tax. Instead, the Trust’s income and expenses
should “flow through” to the Shareholders, and the Trustee will report to
Shareholders and the IRS on that basis.
Taxation
of U.S. Shareholders
Each
Shareholder will be treated, for U.S. federal income tax purposes, as if it
directly owned a pro rata share of the underlying assets held in the Trust. A
Shareholder also will be treated as if it directly received its respective pro
rata share of the Trust’s income, if any, and as if it directly incurred its
respective pro rata share of the Trust’s expenses, subject to some specialized
allocation rules for widely held fixed investment trusts. In the case of a
Shareholder that acquires Shares as part of the creation of a Basket in cash,
the delivery of cash to the Trust in exchange for a pro rata share of the
underlying ether represented by the Shares and the additional ether purchased
with the cash will not be a taxable event to the Shareholder, and the
Shareholder’s tax basis and holding period for the Shareholder’s pro rata share
of the ether held in the Trust will be based upon the amount of cash contributed
and the date that the Trust purchased the ether with the cash. In the case of a
Shareholder that acquires Shares as part of the creation of a Basket in kind,
the delivery of ether to the Trust in exchange for a pro rata share of the
underlying ether represented by the Shares will not be a taxable event to the
Shareholder, and the Shareholder’s tax basis and holding period for the
Shareholder’s pro rata share of the ether held in the Trust will be the same as
its tax basis and holding period for the ether delivered in exchange therefor.
For purposes of this discussion, and unless stated otherwise, it is assumed that
all of a Shareholder’s Shares are acquired on the same date and at the same
price per Share. Shareholders that hold multiple lots of Shares, or that are
contemplating acquiring multiple lots of Shares, should consult their own tax
advisers as to the determination of the tax basis and holding period for the
underlying ether related to such Shares.
Current
IRS guidance on the treatment of convertible virtual currencies classifies ether
as “property” that is not currency for U.S. federal income tax purposes and
clarifies that ether can be held as a capital asset, but it does not address
several other aspects of the U.S. federal income tax treatment of ether. Because
ether is a new technological innovation, the U.S. federal income tax treatment
of ether or transactions relating to investments in ether may evolve and change
from that discussed below, possibly with retroactive effect. In this regard, the
IRS has indicated that it has made it a priority to issue additional guidance
related to the taxation of virtual currency transactions, such as transactions
involving ether. While the IRS has started to issue such additional guidance,
whether any future guidance will adversely affect the U.S. federal income tax
treatment of an investment in ether or in transactions relating to investments
in ether is unknown. Moreover, future developments that may arise with respect
to digital currencies may increase the uncertainty with respect to the treatment
of digital currencies for U.S. federal income tax purposes.
The
Trust expects to sell or use ether to pay certain expenses of the Trust or to
fund cash redemptions if and when applicable. If the Trust sells ether (for
example to generate cash to pay fees or expenses) or is treated as selling ether
(for example by using ether to pay fees or expenses), a Shareholder will
generally recognize gain or loss in an amount equal to the difference between
(a) the Shareholder’s pro rata share of the amount realized by the Trust upon
the sale and (b) the Shareholder’s tax basis for its pro rata share of the ether
that was sold. A Shareholder’s tax basis for its share of any ether sold by the
Trust will generally be a pro rata portion of the Shareholder’s total tax basis
for its share of all of the ether held in the Trust. After any such sale, a
Shareholder’s tax basis for its pro rata share of the ether remaining in the
Trust should be equal to its tax basis for its share of the total amount of the
ether held in the Trust immediately prior to the sale less the portion of such
basis allocable to its share of the ether that was sold.
Upon
a Shareholder’s sale of some or all of its Shares, the Shareholder will be
treated as having sold the pro rata share of the ether held in the Trust at the
time of the sale that is attributable to the Shares sold. Accordingly, the
Shareholder generally will recognize gain or loss on the sale in an amount equal
to the difference between (a) the amount realized pursuant to the sale of the
Shares, and (b) the Shareholder’s tax basis for the pro rata share of the ether
held in the Trust at the time of sale that is attributable to the Shares sold,
as determined in the manner described in the preceding paragraph. A selling
Shareholder may recognize additional gain or loss when the Trust sells or
disposes of ether, as described above, attributable to the portion of the year
the Shares were held. Based on current IRS guidance, such gain or loss on the
sale of Shares (as well as any gain or loss realized by a Shareholder on account
of the Trust selling ether) will generally be long-term capital gain or loss if
the Shareholder has a holding period of greater than one year in its pro rata
share of the ether that was sold and otherwise will be short-term capital gain
or loss.
Sales
of ether to fund cash redemptions are expected to result in gains and losses
with such gains and losses expected to be treated as incurred by the Shareholder
that is being redeemed. These gains or losses generally would equal the
difference between the amount realized from the sale of the ether and the
Shareholder’s tax basis for the portion of the Shareholder’s pro rata share of
the ether held in the Trust that is sold to fund the redemption, as determined
in the manner described above. A redemption of some or all of a Shareholder’s
Shares in exchange for the cash received from such sale is not expected to be
treated as a separate taxable event for the Shareholder.
If
permitted, Authorized Participants may request an in-kind distribution of Trust
assets when an Authorized Participant redeems its Shares at any time prior to 30
business days before the Trust’s termination date. An Authorized Participant
will not recognize gain or loss if the Authorized Participant only receives
whole Trust assets in exchange for the identical amount of the Authorized
Participant’s pro rata portion of the same Trust assets held by the Trust.
However, if the Authorized Participant is acting on its own behalf and also
receives cash in exchange for a Trust asset or a fractional portion of a Trust
asset, the Authorized Participant will generally recognize gain or loss based on
the difference between the amount of cash received and the Authorized
Participant’s tax basis in such Trust asset or fractional portion.
A
redemption of some or all of a Shareholder’s Shares in exchange for the
underlying ether represented by the Shares redeemed generally will not be a
taxable event to the Shareholder. The Shareholder’s tax basis and holding period
for the ether received in the redemption generally will be the same as the
Shareholder’s tax basis and holding period for the pro rata share of the ether
held in the Trust immediately prior to the redemption that is attributable to
the Shares redeemed. A Shareholder’s tax basis for ether received in a
redemption generally will be the same as the Shareholder’s tax basis for the
portion of the Shareholder’s pro rata share of the ether held in the Trust
immediately prior to the redemption that is attributable to the Shares redeemed.
The Shareholder’s holding period for the ether received generally will include
the period during which the Shareholder held the Shares being redeemed. A
subsequent sale of the ether received the Shareholder generally will be a
taxable event
After
any sale or redemption of less than all of a Shareholder’s Shares, the
Shareholder’s tax basis for its pro rata share of the ether held in the Trust
immediately after such sale or redemption generally will be equal to its tax
basis in its share of the total amount of the ether held in the Trust
immediately prior to the sale or redemption, less the portion of such basis
which is taken into account in determining the amount of gain or loss recognized
by the Shareholder upon such sale or cash redemption or, in the case of an
in-kind redemption for ether, that is treated as the basis of the ether received
by the Shareholder in the redemption.
Except
for cash temporarily held to pay Trust expenses, to facilitate redemption
transactions, or received in creation transactions, the Trust will only invest
in ether. In the event of a fork, the Sponsor will cause the Trust to
irrevocably abandon any digital asset resulting from a fork in the Ethereum
network (other than what the Sponsor determines to be ether). If the Trust were
to change this policy, the Trust would need to seek and obtain certain
regulatory approvals, including an amendment to the Trust’s registration
statement and approval of an application by the Exchange to amend its listing
rules. If, despite such abandonment, the Trust were to receive any digital asset
resulting from a fork in the Ethereum network (other than what the Sponsor
determines to be ether), the Trust Agreement requires the Sponsor to cause the
forked asset to be sold and have the proceeds distributed to the Shareholders.
The sale of a forked asset received by the Trust will give rise to gain or loss,
for U.S. federal income tax purposes, if the amount realized on the sale differs
from the value of the new forked asset at the time it was received by the Trust.
A hard fork may therefore give rise to additional tax liabilities for
Shareholders.
3.8%
Tax on Net Investment Income
Certain
U.S. Shareholders, who are individuals, are required to pay a 3.8% tax on the
lesser of the excess of their modified adjusted gross income over a threshold
amount ($250,000 for married persons filing jointly and $200,000 for single
taxpayers) or their “net investment income,” which generally includes capital
gains from the disposition of property. This tax is in addition to any capital
gains taxes due on such investment income. A similar tax applies to estates and
trusts. U.S. Shareholders should consult their own tax advisers regarding the
effect, if any, this tax may have on their investment in the Shares.
Brokerage
Fees and Trust Expenses
Any
brokerage or other transaction fee incurred by a Shareholder in purchasing
Shares will be treated as part of the Shareholder’s tax basis in the underlying
assets of the Trust. Similarly, any brokerage fee incurred by a Shareholder in
selling Shares will reduce the amount realized by the Shareholder with respect
to the sale. Shareholders will be required to recognize the full amount of gain
or loss upon a sale or deemed sale of ether by the Trust (as discussed above),
even though some or all of the proceeds of such sale are used by the Trustee to
pay Trust expenses.
Shareholders
may deduct their respective pro rata shares of each expense incurred by the
Trust to the same extent as if they directly incurred the expense. However, most
trust expenses are expected to result in miscellaneous itemized deductions, and
noncorporate taxpayers generally are not allowed any deduction with respect to
miscellaneous itemized deductions for tax years beginning after December 31,
2017 and before January 1, 2026. For tax years beginning after December 31,
2025, noncorporate taxpayers may deduct certain miscellaneous itemized
deductions only to the extent they exceed in the aggregate 2% of the taxpayer’s
adjusted gross income.
Investment
by Certain Retirement Plans
Individual
retirement accounts (“IRAs”) and participant-directed accounts under
tax-qualified retirement plans are limited in the types of investments they may
make under the Code. Potential purchasers of Shares that are IRAs or
participant-directed accounts under a Code section 401(a) plan should consult
with their own tax advisors as to the tax consequences of a purchase of
Shares.
United
States Information Reporting and Backup Withholding; Tax Return Reporting for
Cryptocurrency
The
Trustee will file certain information returns with the IRS, and provide certain
tax-related information to Shareholders, in connection with the Trust. To the
extent required by applicable regulations, each Shareholder will be provided
with information regarding its allocable portion of the Trust’s annual income,
expenses, gains and losses (if any). A U.S. Shareholder may be subject to United
States backup withholding tax in certain circumstances unless it provides its
taxpayer identification number and complies with certain certification
procedures. Non-U.S. Shareholders may have to comply with certification
procedures to establish that they are not a United States person, and some
Non-U.S. Shareholders may be required to meet certain information reporting or
certification requirements imposed by Code requirements popularly referred to as
“FATCA” in order to avoid certain information reporting and withholding tax
requirements.
The
amount of any backup withholding will be allowed as a credit against a
Shareholder’s U.S. federal income tax liability and may entitle the Shareholder
to a refund, provided that the required information is furnished to the IRS in a
timely manner.
Individual
U.S. Shareholders will be required to report on their federal income tax return
the receipt, acquisition, sale, or exchange of any financial interest in virtual
currency, which includes a Shareholder’s interest in ether held by the
Trust.
Taxation
of Authorized Participants
If
an Authorized Participant invests in the Trust on its own behalf, the Authorized
Participant will generally recognize income, gain, loss or deduction as
described for U.S. Shareholders. If an Authorized Participant is acting as agent
for one or more other persons, who are the beneficial owners of the Shares, the
Authorized Participant will be obligated to issue an information statement to
the beneficial owners, who will recognize the consequences described above for
U.S. Shareholders.
Taxation
in Jurisdictions Other Than the United States
Prospective
purchasers of Shares that are based in or acting out of a jurisdiction other
than the United States are advised to consult their own tax advisers as to the
tax consequences under the laws of such jurisdiction (or any other jurisdiction
other than the United States in which they are subject to taxation) of their
purchase, holding, sale and redemption of or any other dealing in Shares and, in
particular, as to whether any value added tax, other consumption tax or transfer
tax is payable in relation to such purchase, holding, sale, redemption or other
dealing.
The
foregoing is only a general summary of the material U.S. federal income tax
consequences associated with the purchase, ownership and disposition of Shares
by a U.S. Shareholder. Each prospective Shareholder should consult the
Shareholder’s own tax advisor concerning the U.S. federal, state, local, and
non-U.S. tax considerations relevant to an investment in Shares in the
Shareholder’s particular tax situation.
PROSPECTIVE
SHAREHOLDERS ARE URGED TO CONSULT THEIR LEGAL AND TAX ADVISERS BEFORE DECIDING
WHETHER TO INVEST IN THE SHARES OF THE TRUST.
Purchases
by Employee Benefit Plans
The
Employee Retirement Income Security Act of 1974 (“ERISA”) and/or Section 4975 of
the Code impose certain requirements on: (i) employee benefit plans and certain
other plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and certain collective investment funds or insurance
company general or separate accounts in which such plans or arrangements are
invested, that are subject to Title I of ERISA and/or Section 4975 of the Code
(collectively, “Plans”); and (ii) persons who are fiduciaries with respect to
the investment of assets treated as “plan assets” within the meaning of U.S.
Department of Labor (the “DOL”) regulation 29 C.F.R. § 2510.3-101, as modified
by Section 3(42) of ERISA (the “Plan Assets Regulation”), of a Plan. Investments
by Plans are subject to the fiduciary requirements and the applicability of
prohibited transaction restrictions under ERISA and the Code. It is anticipated
that the Shares will constitute “publicly-held offered securities” as defined in
the Department of Labor Regulations § 2510.3-101(b)(2). Accordingly, Shares
purchased by a Plan, and not the Plan’s interest in the underlying ether held in
the Trust represented by the Shares, should be treated as assets of the Plan,
for purposes of applying the “fiduciary responsibility” and “prohibited
transaction” rules of ERISA and the Code.
“Governmental
plans” within the meaning of Section 3(32) of ERISA, certain “church plans”
within the meaning of Section 3(33) of ERISA and “non-U.S. plans” described in
Section 4(b)(4) of ERISA, while not subject to the fiduciary responsibility and
prohibited transaction provisions of Title I of ERISA or Section 4975 of the
Code, may be subject to any federal, state, local, non-U.S. or other law or
regulation that is substantially similar to the foregoing provisions of ERISA
and the Code. Fiduciaries of any such plans are advised to consult with their
counsel prior to an investment in the Shares.
In
contemplating an investment of a portion of Plan assets in the Shares, the Plan
fiduciary responsible for making such investment should carefully consider,
taking into account the facts and circumstances of the Plan, Risk Factors and
whether such investment is consistent with its fiduciary responsibilities. The
Plan fiduciary should consider, among other issues, whether: (1) the fiduciary
has the authority to make the investment under the appropriate governing plan
instrument; (2) the investment would constitute a direct or indirect non-exempt
prohibited transaction with a “party in interest” or “disqualified person”
within the meaning of ERISA and Section 4975 of the Code respectively; (3) the
investment is in accordance with the Plan’s funding objectives; and (4) such
investment is appropriate for the Plan under the general fiduciary standards of
investment prudence and diversification, taking into account the overall
investment policy of the Plan, the composition of the Plan’s investment
portfolio and the Plan’s need for sufficient liquidity to pay benefits when due.
When evaluating the prudence of an investment in the Shares, the Plan fiduciary
should consider the DOL’s regulation on investment duties, which can be found at
29 C.F.R. § 2550.404a-1.
Item
1A. Risk Factors.
Risk
Factors Related to Digital Assets
The
trading prices of many digital assets, including ether, have experienced extreme
volatility in recent periods and may continue to do so. Extreme volatility in
the future, including further declines in the trading prices of ether, could
have a material adverse effect on the value of the Shares and the Shares could
lose all or substantially all of their value.
The
trading prices of many digital assets, including ether, have experienced extreme
volatility in recent periods and may continue to do so. For instance, there were
steep increases in the value of certain digital assets, including ether, over
the course of 2017, followed by steep drawdowns throughout 2018 in digital asset
trading prices, including for ether. These drawdowns notwithstanding, digital
asset prices, including ether, increased significantly again during 2019,
decreased significantly again in the first quarter of 2020 and increased
significantly again over the remainder of 2020 and the first quarter of 2021.
Beginning in the fourth quarter of 2021 and continuing to date, digital asset
prices have fluctuated widely.
Extreme
volatility in the future, including further declines in the trading prices of
ether, could have a material adverse effect on the value of the Shares and the
Shares could lose all or substantially all of their value. Furthermore, negative
perception, a lack of stability and standardized regulation in the digital asset
economy may reduce confidence in the digital asset economy and may result in
greater volatility in the price of ether and other digital assets, including a
depreciation in value. The Trust is not actively managed and will not take any
actions to take advantage, or mitigate the impacts, of volatility in the price
of ether.
Digital
assets such as ether are a relatively new asset class, and the medium-to-long
term value of the Shares is subject to a number of factors relating to the
capabilities and development of blockchain technologies and to the fundamental
investment characteristics of digital assets.
Digital
assets such as ether are a relatively new asset class, and the medium-to-long
term value of the Shares is subject to a number of factors relating to the
capabilities and development of blockchain technologies, such as the recentness
of their development, their dependence on the internet and other technologies,
usership, developers and node operators (as described below) and the potential
for malicious activity. For example, the realization of one or more of the
following risks could materially adversely affect the value of the
Shares:
•
Digital
asset networks, including the Ethereum network, and the software used to operate
them are in the early stages of development. Given the recentness of the
development of blockchain networks, their associated digital assets may not
function as intended and, in turn, parties may be unwilling to use digital
assets, which would dampen the potential growth of blockchain networks. Because
ether is a digital asset, the value of the Shares is subject to a number of
factors relating to the fundamental investment characteristics of digital
assets, including the fact that digital assets are bearer instruments and loss,
theft, compromise, or destruction of the associated private keys could result in
permanent loss of the asset.
•
Blockchains
are dependent upon the internet. A disruption of the internet or a digital asset
network, such as the Ethereum network, could affect the ability to transfer
digital assets, including ether, and, consequently, their
value.
•
The
acceptance of software patches or upgrades by a significant, but not
overwhelming, percentage of the node operators in a digital asset network, such
as the Ethereum network, could result in a “fork” in such network’s blockchain,
including the Ethereum blockchain, resulting in the operation of multiple
separate networks.
•
Governance
of the Ethereum network is by voluntary consensus and open competition. As a
result, there may be a lack of consensus or clarity on the governance of the
Ethereum network, which may stymie the Ethereum network’s utility and ability to
grow and face challenges or serve as a catalyst for a hard fork of the network.
In particular, it may be difficult to find solutions or martial sufficient
effort to overcome any future problems on the Ethereum network, especially
long-term problems.
•
The
foregoing notwithstanding, the Ethereum network’s protocol is informally
overseen by a collective of core developers who, along with members of the
Ethereum community, can introduce proposals, known as Ethereum Improvement
Proposals (“EIPs”), for updating the Ethereum network. The core developers
evolve over time, largely based on self-determined participation. An Ethereum
Client is a software application that implements the Ethereum network
specification and communicates with the Ethereum network. A “node” is a computer
or other device that has downloaded the Ethereum Client and is connected to
other computers also running the Ethereum Client software, together forming the
Ethereum network. To the extent that a significant majority of node operators
update their individual Ethereum Client to the new specification, the Ethereum
network could be subject to new protocols that may adversely affect the value of
ether. In addition, if a digital asset network has high-profile contributors, a
perception that such contributors will no longer contribute to the network could
have an adverse effect on the market price of the related digital
asset.
•
To
the extent that any validators cease to process transactions that do not include
the payment of a transaction fee in validated blocks, such transactions will not
be recorded on the Ethereum blockchain. Any widespread delays in the processing
of transactions could result in a loss of confidence in a digital asset
network.
•
Many
digital asset networks, including the Ethereum network, face significant scaling
challenges and are being upgraded with various features designed to increase the
speed of digital asset transactions and the number of transactions that can be
processed in a given period (known as “throughput”). These attempts to increase
the volume of transactions may not be effective, and such upgrades may fail,
resulting in potentially irreparable damage to the Ethereum network and the
value of ether. Furthermore, successful improvements to the scalability of
digital asset networks often come at the expense of decentralization and/or
security.
•
Moreover,
in the past, flaws in the source code for blockchains, their respective native
assets, and digital assets they host have been exposed and exploited, including
flaws that disabled some functionality for users, exposed users’ personal
information and/or resulted in the theft of users’ digital assets. The
cryptography underlying ether could prove to be breakable or ineffective, or
developments in mathematics and/or technology, including advances in digital
computing, algebraic geometry and quantum computing, could result in such
cryptography becoming ineffective. In any of these circumstances, a malicious
actor may be able to compromise the security of the Ethereum network or take the
Trust’s ether, which would adversely affect the value of the Shares. Moreover,
functionality of the Ethereum network may be negatively affected such that it is
no longer attractive to users, thereby dampening demand for ether. Even if
another digital asset other than ether were affected by similar circumstances,
any reduction in confidence in the source code or cryptography underlying
digital assets generally could negatively affect the demand for digital assets
and therefore adversely affect the value of the Shares.
•
The
Ethereum network has been in the process of implementing a series of software
upgrades and other changes to its protocol, which were previously referred to
collectively as “Ethereum 2.0” and some of which were implemented during 2022,
such as “the Merge” that transitioned the Ethereum network from a proof-of-work
consensus mechanism to a proof-of-stake consensus mechanism. These upgrades will
result in new iterations of the Ethereum network. Many of the contemplated
upgrades to the Ethereum network will include updates to material aspects of its
source code. Although some of these upgrades have been successfully implemented,
such as “the Merge” and the “Pectra” upgrade, which were completed in September
2022 and May 2025, respectively, there is no guarantee that there are not
undiscovered flaws that will emerge in the future even in upgrades previously
considered successful, and previously successful upgrades do not guarantee that
future upgrades will be successful. Any such undiscovered flaws, or the failure
to properly implement future changes, could have a material adverse effect on
the value of ether and the value of the Shares. One completed upgrade is known
as the “Shanghai” upgrade, which allows users to unstake their ether and remove
it from the relevant smart contract. As a result of this or future upgrades, it
is possible that significant volumes of currently locked and illiquid ether may
become unlocked and sold, which could increase volatility in ether prices or
have a material adverse effect on the value of ether and the value of the
Shares. Upgrades currently being considered, such as “sharding” or so-called
“Layer 2” solutions, could have effects that are difficult to anticipate at this
time, but could—if unsuccessfully implemented, or if they contain undiscovered
flaws—materially adversely impact or even effectively eliminate the value of
ether, and therefore impact the price of the Shares. In addition, the acceptance
of software patches or upgrades by a significant, but not overwhelming,
percentage of the users and validators in a digital asset network could result
in a “fork” in such network’s blockchain, resulting in the operation of multiple
separate networks. See
“A
temporary or permanent “fork” could adversely affect the value of the
Shares”
for additional information.
•
The
Ethereum network is still in the process of developing and making significant
decisions that will affect policies that govern the supply and issuance of ether
as well as other Ethereum network protocols. For example, the Ethereum network
has on three separate occasions reduced the quantity of ether rewarded per block
and may make additional changes in the future. See
“Ether,
Ether Markets and Regulation of Ether”
for additional information. The open-source nature of many digital asset network
protocols, such as the protocol for the Ethereum network, means that developers
and other contributors are generally not directly compensated for their
contributions in maintaining and developing such protocols. As a result, the
developers and other contributors of a particular digital asset may lack a
financial incentive to maintain or develop the network, or they may lack the
resources to adequately address emerging issues. Alternatively, some developers
may be funded by companies whose interests are at odds with those of other
participants in a particular digital asset network. If the Ethereum network does
not successfully develop its policies on supply and issuance, or does so in a
manner that is not attractive to network participants, there may not be
sufficient network level support for such network, which could lead to a decline
in the support and price of
ether.
•
Decentralized
application and smart contract developers depend on being able to obtain ether
to be able to run their programs and operate their businesses. In particular,
decentralized applications and smart contracts require ether in order to pay the
gas fees needed to power such applications and smart contracts and execute
transactions. Thus, they represent a significant source of demand for ether.
Ether’s price volatility (particularly where ether prices increase), or the
Ethereum network’s wider inability to meet the demands of decentralized
applications and smart contracts in terms of inexpensive, reliable, and prompt
transaction execution (including during congested periods), or to solve its
scaling challenges or increase its throughput, may discourage such decentralized
application and smart contract developers from using the Ethereum network as the
foundational infrastructure layer for building their applications and smart
contracts. If decentralized application and smart contract developers abandon
the Ethereum blockchain for other blockchain or digital asset networks or
protocols for whatever reason, the value of ether could be negatively
affected.
Moreover,
because digital assets, including ether, have been in existence for a relatively
short period of time and are continuing to develop, there may be additional
risks in the future that are impossible to predict as of the date of this Annual
Report.
Digital
assets represent a new and rapidly evolving industry, and the value of the
Shares depends on the acceptance of ether.
The
first digital asset, bitcoin, was launched in 2009. The Ethereum network
launched in 2015 (though some ether was sold in a pre-mine in 2014). Ether,
along with bitcoin, was one of the first cryptographic digital assets to gain
global adoption and critical mass. In general, digital asset networks, including
the Ethereum network and other cryptographic and algorithmic protocols governing
the issuance of digital assets, represent a new and rapidly evolving industry
that is subject to a variety of factors that are difficult to evaluate. For
example, the realization of one or more of the following risks could materially
adversely affect the value of the Shares:
•
Ether
is only selectively accepted as a means of payment by retail and commercial
outlets, and use of ether by consumers to pay such retail and commercial outlets
remains limited. Banks and other established financial institutions may refuse
to process funds for ether transactions; process wire transfers to or from
digital asset exchanges, ether-related companies or service providers; or
maintain accounts for persons or entities transacting in ether. As a result, the
prices of ether may be influenced to a significant extent by speculators, thus
contributing to price volatility that makes retailers less likely to accept
ether in the future.
•
Banks
may not provide banking services, or may cut off banking services, to businesses
that provide digital asset-related services or that accept digital assets as
payment, which could dampen liquidity in the market and damage the public
perception of digital assets generally or any one digital asset in particular,
such as ether, and their or its utility as a payment system, which could
decrease the price of digital assets generally or individually. Further, the
lack of availability of banking services could prevent the Trust from being able
to complete creations and redemptions of Baskets, the timely liquidation of
ether and withdrawal of assets from the Ether Custodian even if the Sponsor
determined that such liquidation was appropriate or suitable, or otherwise
disrupt the Trust’s operations.
•
Certain
privacy-preserving features have been or are expected to be introduced to
digital asset networks, including the Ethereum network. For example, some
prominent contributors to the Ethereum network have proposed the concept of
“privacy pools,” zero-knowledge proofs, and other privacy-preserving features.
If any such features are introduced to the Ethereum network, any exchanges or
businesses that facilitate transactions in ether may be at an increased risk of
criminal or civil lawsuits, or of having banking services cut off if there is a
concern that these features interfere with the performance of anti-money
laundering duties and economic sanctions checks or facilitate illicit financing
or crime.
•
Users,
protocol and application developers and validators may otherwise switch to or
adopt certain digital assets at the expense of their engagement with other
digital asset networks, which may negatively impact those networks, including
the Ethereum network.
The
Trust is not actively managed and will not have any formal strategy relating to
the development of the Ethereum network.
Recent
developments in the digital asset economy have led to extreme volatility and
disruption in digital asset markets, a loss of confidence in participants of the
digital asset ecosystem, significant negative publicity surrounding digital
assets broadly and market-wide declines in liquidity.
Beginning
in the fourth quarter of 2021 and continuing to date, digital asset prices have
fluctuated widely. This has led to volatility and disruption in the digital
asset markets and financial difficulties for several prominent industry
participants, including digital asset trading platforms, hedge funds and lending
platforms. For example, in the first half of 2022, digital asset lenders Celsius
Network LLC and Voyager Digital Ltd. and digital asset hedge fund Three Arrows
Capital each declared bankruptcy, and the stablecoin TerraUSD collapsed. These
events caused a loss of confidence in participants in the digital asset
ecosystem, negative publicity surrounding digital assets more broadly and
market-wide declines in digital asset trading prices and
liquidity.
Thereafter,
in November 2022, FTX Trading Ltd. (“FTX”), the third largest digital asset
trading platform by volume at the time, halted customer withdrawals amid rumors
of the company’s liquidity issues and likely insolvency. Shortly thereafter,
FTX’s CEO resigned and FTX and numerous affiliates of FTX filed for bankruptcy.
The U.S. Department of Justice subsequently brought criminal charges, including
charges of fraud, violations of federal securities laws, money laundering, and
campaign finance offenses, against FTX’s former CEO and others. In November
2023, FTX’s former CEO was convicted of fraud and money laundering. Similar
charges related to violations of anti-money laundering laws were brought in
November 2023 against Binance and its former CEO. FTX is also under
investigation by the SEC, the Justice Department, and the Commodity Futures
Trading Commission, as well as by various regulatory authorities in the Bahamas,
Europe and other jurisdictions. In response to these events, the digital asset
markets have experienced extreme price volatility and declines in liquidity, and
regulatory and enforcement scrutiny has increased, including from the DOJ, the
SEC, the CFTC, the White House and Congress. In addition, several other entities
in the digital asset industry filed for bankruptcy following FTX’s bankruptcy
filing, such as BlockFi Inc. and Genesis Global Capital, LLC. The SEC also
brought charges against Genesis Global Capital, LLC and Gemini Trust Company,
LLC on January 12, 2023 for their alleged unregistered offer and sale of
securities to retail investors. In October 2023, the New York Attorney General
brought charges against Gemini, Genesis Global Capital and numerous affiliates
of Genesis Global Capital, and Digital Currency Group alleging violations of law
relating to the Gemini Earn program. In May 2024, the Bankruptcy Court of the
Southern District of New York approved a settlement of the charges with the
Genesis entities.
These
events resulted in calls for heightened scrutiny and regulation of the digital
asset industry, with a specific focus on digital asset trading platforms, and
custodians. For example, in June 2023, the SEC brought charges against Binance
(the “Binance Complaint”) and Coinbase (the “Coinbase Complaint”), two of the
largest digital asset trading platforms, alleging that they solicited U.S.
investors to buy, sell, and trade “crypto asset securities” through their
unregistered trading platforms and operated unregistered securities exchanges,
brokerages and clearing agencies. Binance subsequently announced that it would
be suspending USD deposits and withdrawals on Binance.US and that it plans to
delist its USD trading pairs. In addition, in November 2023, the SEC brought
similar charges against Kraken (the “Kraken Complaint”), alleging that it
operated as an unregistered securities exchange, brokerage and clearing agency.
The Binance Complaint, the Coinbase Complaint and the Kraken Complaint led to
further volatility in digital asset prices. In January 2025, the SEC launched
the Crypto Task Force dedicated to developing a comprehensive and clear
regulatory framework for digital assets led by Commissioner Hester Peirce.
Subsequently, Commissioner Peirce announced a list of specific priorities to
further that initiative, which included pursuing final rules related to a
digital asset’s security status, a revised path to registered offerings and
listings for digital asset-based investment vehicles, and clarity regarding
digital asset custody, lending and staking. In February 2025, a 60-day stay was
granted in the SEC’s lawsuit against Binance in response to a joint request by
both the SEC and Binance, which acknowledged that the SEC’s newly formed Crypto
Task Force’s focus on developing a federal securities law framework for digital
assets may resolve the case. In February 2025, Coinbase and the SEC entered into
a joint stipulation to dismiss the SEC’s lawsuit with prejudice, subject to the
court’s approval. Kraken has also announced that it reached an agreement in
principle with the SEC to dismiss the SEC’s lawsuit, subject to formal approval
by the SEC’s Commissioners. Several other digital asset market participants have
also announced that the SEC informed them that the SEC was terminating its
investigation or enforcement action into their firm. The final outcome of these
lawsuits (to the extent not yet dismissed), their effect on the broader digital
asset ecosystem and the reputational impact on industry participants, remain
uncertain.
The
U.S. regulatory regime—namely the Federal Reserve Board, U.S. Congress and
certain U.S. agencies (e.g., the SEC, the CFTC, FinCEN, the Office of the
Comptroller of the Currency, the FDIC and the Federal Bureau of Investigation)
as well as the White House have issued reports and releases concerning digital
assets, including ether and digital asset markets. However, the extent and
content of any forthcoming laws and regulations are not yet ascertainable with
certainty, and it may not be ascertainable in the near future. It is possible
that new laws and increased regulation and regulatory scrutiny may require the
Trust to comply with certain regulatory regimes, which could result in new costs
for the Trust. The Trust may have to devote increased time and attention to
regulatory matters, which could increase costs to the Trust. New laws,
regulations and regulatory actions could significantly restrict or eliminate the
market for, or uses of, digital assets including ether, which could have a
negative effect on the value of ether, which in turn would have a negative
effect on the value of the Trust’s Shares.
These
events are continuing to develop at a rapid pace and it is not possible to
predict at this time all of the risks that they may pose to the Sponsor, the
Trust, their affiliates and/or the Trust’s third-party service providers, or to
the digital asset industry as a whole.
Continued
disruption and instability in the digital asset markets as these events develop,
including further declines in the trading prices and liquidity of ether, could
have a material adverse effect on the value of the Shares and the Shares could
lose all or substantially all of their
value.
Digital
assets may have concentrated ownership and large sales or distributions by
holders of such digital assets could have an adverse effect on the market price
of such digital assets.
A
concentrated number of ether wallets is believed to hold, in aggregate, a
significant percentage of the ether in circulation. Moreover, it is possible
that other persons or entities control multiple wallets that collectively hold a
significant number of ether, even if they individually only hold a small amount,
and it is possible that some of these wallets are controlled by the same person
or entity. As a result of this concentration of ownership, large sales or
distributions by such holders could have an adverse effect on the market price
of ether.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use digital
assets in one or more countries.
Countries
such as China, India and Russia have previously taken regulatory action to
prohibit certain activities relating to digital assets and may take additional
steps to prohibit or otherwise limit the use of digital assets in the future. In
addition, countries may impose new or existing regulatory regimes on digital
assets that are inconsistent with their intended operation. The imposition of
such regulatory regimes on digital assets may have wide ranging implications on
the offer, sale, trading, clearing and use of such assets, which may impede
their continued adoption. Such regulatory regimes may adversely affect an
investment in the Shares.
For
example, in the United States, the SEC has been active in asserting its
jurisdiction over digital assets. Specifically, the SEC and its staff have taken
the position that certain digital assets fall within the definition of a
security under the U.S. federal securities laws, beginning with the June 2017
Report of Investigation that concluded that “DAO Tokens” were investment
contracts, because they were issued with the purpose of raising funds for
investing in digital assets. The bankruptcy filings of FTX, the third largest
digital asset trading platform by volume at the time of its filing, and other
bankruptcy filings of crypto companies throughout calendar year 2022 increased
the regulatory scrutiny of the digital asset industry. In 2023, the SEC charged
each of Coinbase and Binance with operating its digital asset trading platform
as an unregistered national securities exchange, broker and clearing agency,
asserting that certain assets supported on each trading platform are securities.
The SEC also brought similar charges against Kraken, alleging that it operated
as an unregistered securities exchange, brokerage and clearing agency. While the
SEC has entered into joint stipulations with Coinbase, Binance and Kraken to
dismiss the SEC’s lawsuits with prejudice, subject to court approval, the final
outcome of these lawsuits, and other investigations or enforcement actions with
other digital asset market participants (to the extent not yet dismissed), their
effect on the broader digital asset ecosystem and the reputational impact on
industry participants remain uncertain. Furthermore, in August 2022, OFAC banned
all U.S. citizens from using Tornado Cash, a digital asset protocol designed to
obfuscate blockchain transactions, by adding certain Ethereum wallet addresses
associated with the protocol to its Specially Designated Nationals
list.
In
addition, Congress continues to consider potential legislation designed to
comprehensively regulate the digital asset industry in the U.S. If enacted, such
new legislation could dramatically restructure the regulatory framework within
which digital assets may be offered, sold, traded, cleared and used in the U.S.
Such a restructuring could affect the viability of digital assets in the U.S.
and accordingly adversely affect an investment in the
Shares.
Risks
Associated with Ether and the Ethereum Network
The
Ethereum network and its native digital asset, ether, are a relatively new
technological innovation with a limited operating history.
Ether
has a relatively limited history of existence and operations compared to
traditional commodities. There is a limited established performance record for
the price of ether and, in turn, a limited basis for evaluating an investment in
ether. Although past performance is not necessarily indicative of future result,
if ether had a more established history, such history might (or might not)
provide investors with more information on which to evaluate an investment in
the trust.
Changes
in the governance of a digital asset network may not receive sufficient support
from users and validators, which may negatively affect that digital asset
network’s ability to grow and respond to challenges.
The
governance of decentralized networks, such as the Ethereum network, is by
voluntary consensus and open competition. As a result, there may be a lack of
consensus or clarity on the governance of any particular decentralized digital
asset network, which may stymie such network’s utility and ability to grow and
face challenges. The foregoing notwithstanding, the protocols for some
decentralized networks, such as the Ethereum network, are informally managed by
a group of core developers that propose amendments to the relevant network’s
source code. Core developers’ roles evolve over time, largely based on
self-determined participation. If a significant majority of users and validators
adopt amendments to a decentralized network based on the proposals of such core
developers, such network will be subject to new protocols that may adversely
affect the value of the relevant digital asset.
As
a result of the foregoing, it may be difficult to find solutions or marshal
sufficient effort to overcome any future problems, especially long-term
problems, on digital asset
networks.
Digital
asset networks face significant scaling challenges and efforts to increase the
volume and speed of transactions may not be successful.
Many
digital asset networks, including the Ethereum network, face significant scaling
challenges due to the fact that public blockchains generally face a tradeoff
between security, scalability, and decentralization. This is commonly known as
the Blockchain Trilemma under which only two of the three ideal blockchain
features have been attainable. One means through which public blockchains
achieve security is decentralization, meaning that no intermediary is
responsible for securing and maintaining these systems. This is one reason why
security and decentralization is the most popular pairing. In practice, this
typically means that every single validator on a given digital asset network is
responsible for securing the system by processing every transaction and every
single full node is responsible for maintaining a copy of the entire state of
the network. As a result, a digital asset network may be limited in the number
of transactions it can process by the fact that all validators participate in
validating in each block and the capabilities of each single fully participating
node.
As
of December 31, 2025, the Ethereum network handled approximately 24.7
transactions per second. In an effort to increase the volume of transactions
that can be processed on a given digital asset network, many digital assets are
being upgraded with various features to increase the speed and throughput of
digital asset transactions. As corresponding increases in throughput lag behind
growth in the use of digital asset networks, average fees and settlement times
may increase considerably. For example, the Ethereum network has been, at times,
at capacity, which has led to increased transaction fees. In December 2017, the
popularity of the blockchain-based game Cryptokitties led to significant network
congestion on the Ethereum network. The game, which allows players to trade and
create virtual kitties, represented by NFTs, was reported by some sources to
have accounted for more than 10% of the entire Ethereum network traffic at the
time causing increases in transaction fees and delays in transaction processing
times, and driving Ethereum network traffic to a reported then all-time high.
Since January 1, 2020, ether transaction fees have increased from $0.08 average
daily transaction fees per ether transaction, to a high of up to approximately
$200 (in ether) average daily transaction fees per transaction on April 30,
2022. Transaction fees on the Ethereum network have fluctuated significantly
over time and may continue to do so, including during periods of network
congestion. Elevated fees and slower settlement can reduce demand for network
usage and adversely affect ether’s price. Increased fees and decreased
settlement speeds could preclude certain uses for ether (e.g., micropayments),
and could reduce demand for, and the price of, ether, which could adversely
impact the value of the Shares.
In
the second half of 2020, the Ethereum network began the first of several stages
of an upgrade culminating in the Merge. The Merge amended the Ethereum network’s
consensus mechanism to include a process known as proof-of-stake, and was
intended to address the perceived shortcomings of the proof-of-work consensus
mechanism in terms of labor intensity and duplicative computational effort
expended by validators (known under proof-of-work as “miners”) who did not win
the race, under proof-of-work, to be the first in time to solve the
cryptographic puzzle that would allow them to be the only validator permitted to
validate the block and receive the resulting block reward (which was given only
to the first validator to successfully solve the puzzle and hash a given block,
and not to others). Instead, under proof-of-stake, a single validator is
randomly selected to solve the cryptographic puzzle needed to validate a block,
which it proposes to a committee of other validators, who vote for whether to
include the block (or not), which reduces the computational work performed—and
energy expended—to validate each block compared to proof-of-work. See
“Ether,
Ether Markets and Regulation of Ether”
for additional information.
Following
the Merge, core development of the Ethereum source code has increasingly focused
on modifications of the Ethereum protocol to increase speed, throughput and
scalability and also to improve existing or next generation uses. Future
upgrades to the Ethereum protocol and Ethereum blockchain to address scaling
issues—such as network congestion, slow throughput and periods of high
transaction fees owing to spikes in network demand—have been discussed by
network participants, such as sharding. The purpose of sharding is to increase
scalability of the Ethereum blockchain by splitting the blockchain into
subsections, called shards, and dividing validation responsibility so that a
defined subset of validators would be responsible for each shard, rather than
all validators being responsible for the entire blockchain, allowing for
parallel processing and validation of transactions. However, there appears to be
uncertainty and a lack of existing widespread consensus among network
participants about how to solve the scaling challenges faced by the Ethereum
network.
The
rapid development of other competing scalability solutions, such as those that
would rely on handling the bulk of computational work relating to transactions
or smart contracts and DApps outside of the main Ethereum network and Ethereum
blockchain, has caused alternatives to sharding to emerge. “Layer 2” is a
collective term for solutions that are designed to help increase throughput and
reduce transaction fees by processing or executing transactions off the main
Ethereum network (known as “Layer 1”) and then attempting to take advantage of
the perceived security and integrity advantages of the Layer 1 Ethereum network
by posting the transactions executed on the Layer 2 protocol back to the Layer 1
Ethereum network. The details of how this is done vary significantly between
different Layer 2 technologies and implementations. For example, “rollups”
perform transaction execution outside the Layer 1 blockchain and then post the
data, typically in batches, back to the Layer 1 Ethereum blockchain where
consensus is reached. “Zero knowledge rollups” are generally designed to run the
computation needed to validate the transactions off-chain, on the Layer 2
protocol, and submit a proof of validity of a batch of transactions (not the
entire transactions themselves). By contrast, “optimistic rollups” assume
transactions are valid by default and only run computation in the event of a
challenge. Other proposed Layer 2 scaling solutions include, among others,
“state channels,” which are designed to allow participants to run a large number
of transactions on the Layer 2 side channel protocol and only submit two
transactions to the main Layer 1 Ethereum blockchain (the transaction opening
the state channel, and the transaction closing the channel); and “side chains,”
in which an entire Layer 2 blockchain network with capabilities similar to those
of the existing Layer 1 Ethereum blockchain runs in parallel with the existing
Layer 1 Ethereum blockchain and allows smart contracts and DApps to run on the
Layer 2 side chain without burdening the main Layer 1 network. To date, the
Ethereum network community has not coalesced overwhelmingly around any
particular Layer 2 solution, though this could change.
There
is no guarantee that any of the mechanisms in place or being explored for
increasing the speed and throughput of settlement of Ethereum network
transactions will be effective, or how long these mechanisms will take to become
effective, which could cause the Ethereum network to not adequately resolve
scaling challenges and could adversely impact the adoption of ether and the
Ethereum network and the value of the Shares. There is no guarantee that any
potential scaling solution, whether a change to the Layer 1 blockchain like
sharding or the introduction of a Layer 2 solution like rollups, state channels
or side chains, will achieve widespread adoption. It is possible that proposed
changes to the Layer 1 Ethereum network could divide the community, potentially
even causing a hard fork, or that the decentralized governance of the Ethereum
network could cause network participants to fail to coalesce overwhelmingly
around any particular solution, resulting in the Ethereum network suffering
reduced adoption or causing users or validators to migrate to other blockchain
networks. It is also possible that scaling solutions could fail to work as
intended or could introduce bugs, coding defects or flaws, security risks, or
other problems that could cause the Ethereum network to suffer operational
disruptions. Any of the foregoing could adversely affect the price of ether or
the value of the Shares of the Trust.
If
a malicious actor or botnet obtains control of more than 50% of the validating
stake on the Ethereum network, or otherwise obtains control over the Ethereum
network through its influence over core developers or otherwise, such actor or
botnet could manipulate the Ethereum blockchain, which could adversely affect
the value of the Shares or the ability of the Trust to operate.
All
networked systems are vulnerable to various kinds of attacks. As with any
computer network, the Ethereum network contains certain flaws. For example, the
Ethereum network is currently vulnerable to several types of attacks,
including:
•
“>33%
attack” where, if a validator or group of validators were to gain control of
more than 33% of the staked ether, a malicious actor could cause a temporary
fork in the blockchain.
•
“>50%
attack” where, if a validator or group of validators acting in concert were to
gain control of more than 50% of the staked ether, a malicious actor would be
able to gain full control of the network and the ability to manipulate the
blockchain, potentially for an extended period or even
permanently.
•
“>66%
attack” where, if a validator or group of validators acting in concert were to
gain control of more than 66% of the staked ether, a malicious actor could
permanently and irreversibly manipulate the blockchain.
The
success of these types of attacks depends on the malicious actor’s ability to
gather an enormous amount of ether and other resources, which serves as the
primary practical defense of the network. If a malicious actor or botnet (a
volunteer or hacked collection of computers controlled by networked software
coordinating the actions of the computers) obtains a majority of the validating
power on the Ethereum network, it may be able to alter the Ethereum blockchain
on which transactions in ether rely by constructing fraudulent blocks or
preventing certain transactions from completing in a timely manner, or at all.
The malicious actor or botnet could also control, exclude or modify the ordering
of transactions. Although the malicious actor or botnet would not be able to
generate new tokens or transactions using such control, it could “double-spend”
its own tokens (i.e., spend the same tokens in more than one transaction) and
prevent the confirmation of other users’ transactions for so long as it
maintained control. To the extent that such malicious actor or botnet did not
yield its control of the validating power on the Ethereum network or the
Ethereum community did not reject the fraudulent blocks as malicious, reversing
any changes made to the Ethereum blockchain may not be possible. Further, a
malicious actor or botnet could create a flood of transactions in order to slow
down the Ethereum
network.
For
example, in August 2020, the Ethereum Classic Network was the target of two
double-spend attacks by an unknown actor or actors that gained more than 50% of
the processing power of the Ethereum Classic Network. The attack resulted in
reorganizations of the Ethereum Classic Blockchain that allowed the attacker or
attackers to reverse previously recorded transactions in excess of $5.0 million
and $1.0 million.
In
addition, in May 2019, the Bitcoin Cash network experienced a 51% attack when
two large mining pools reversed a series of transactions in order to stop an
unknown miner from taking advantage of a flaw in a recent Bitcoin Cash protocol
upgrade. Although this particular attack was arguably benevolent, the fact that
such coordinated activity was able to occur may negatively impact perceptions of
the Bitcoin Cash network. Although the two attacks described above took place on
proof-of-work-based networks, it is possible that a similar attack may occur on
the proof-of-stake Ethereum network, which could negatively impact the value of
ether and the value of the Shares.
Although
there are no known reports of malicious activity on, or control of, the Ethereum
network, it is believed that certain groups of coordinating or connected ether
holders may together have more than 50% of outstanding ether which, if staked
and if the users run validators, would permit them to exert authority over the
validation of ether transactions. This risk is heightened if over 50% of the
processing power on the network falls within the jurisdiction of a single
governmental authority. If network participants, including the core developers
and the administrators of validating pools, do not act to ensure greater
decentralization of ether, the feasibility of a malicious actor obtaining
control of the validating power on the Ethereum network will increase, which may
adversely affect the value of the Shares.
A
malicious actor may also obtain control over the Ethereum network through its
influence over core developers by gaining direct control over a core developer
or an otherwise influential programmer. To the extent that users and validators
accept amendments to the source code proposed by the controlled core developer,
other core developers do not counter such amendments, and such amendments enable
the malicious exploitation of the Ethereum network, the risk that a malicious
actor may be able to obtain control of the Ethereum network in this manner
exists. Moreover, it is possible that a group of ether holders that together
control more than 50% of outstanding ether are in fact part of the initial or
core developer group, or are otherwise influential members of the Ethereum
community. To the extent that the initial or existing core developer groups also
control more than 50% of outstanding ether, as some believe, the risk of and
arising from this particular group of users obtaining control of the validating
power on the Ethereum network will be even greater and, should this materialize,
it may adversely affect the value of the Shares.
Any
name change and any associated rebranding initiative by the core developers of
ether may not be favorably received by the digital asset community, which could
negatively impact the value of ether and the value of the Shares.
From
time to time, digital assets may undergo name changes and associated rebranding
initiatives. For example, Bitcoin Cash may sometimes be referred to as Bitcoin
ABC in an effort to differentiate itself from any Bitcoin Cash hard forks, such
as Bitcoin Satoshi’s Vision, and in the third quarter of 2018, the team behind
ZEN rebranded and changed the name of ZenCash to “Horizen.” The Sponsor cannot
predict the impact of any name change and any associated rebranding initiative
on ether. After a name change and an associated rebranding initiative, a digital
asset may not be able to achieve or maintain brand name recognition or status
that is comparable to the recognition and status previously enjoyed by such
digital asset. The failure of any name change and any associated rebranding
initiative by a digital asset may result in such digital asset not realizing
some or all of the anticipated benefits contemplated by the name change and
associated rebranding initiative, and could negatively impact the value of ether
and the value of the
Shares.
Smart
contracts, including those relating to DeFi applications, are a new technology
and their ongoing development and operation may result in problems, which could
reduce the demand for ether or cause a wider loss of confidence in the Ethereum
network, either of which could have an adverse impact on the value of
ether.
Smart
contracts are programs that run on the Ethereum blockchain that execute
automatically when certain conditions are met. Since smart contracts typically
cannot be stopped or reversed, vulnerabilities in their programming can have
damaging effects. For example, in June 2016, a vulnerability in the smart
contracts underlying The DAO (as described below) allowed an attack by a hacker
to syphon approximately $60 million worth of ether from The DAO’s accounts into
a segregated account. In the aftermath of the theft, certain core developers and
contributors pursued a “hard fork” of the Ethereum network in order to erase any
record of the theft. Despite these efforts, the price of ether reportedly
dropped approximately 35% in the aftermath of the attack and subsequent hard
fork. In addition, in July 2017, a vulnerability in a smart contract for a
multi-signature wallet software developed by Parity led to a reportedly $30
million theft of ether, and in November 2017, a new vulnerability in Parity’s
wallet software reportedly led to roughly $160 million worth of ether being
indefinitely frozen in an account. Furthermore, in April 2018, a batch overflow
bug was found in many Ethereum-based ERC20-compatible smart contract tokens,
allowing hackers to create a large number of smart contract tokens and causing
multiple crypto asset platforms worldwide to shut down ERC20-compatible token
trading. Similarly, in March 2020, a design flaw in the MakerDAO smart contract
caused forced liquidations of crypto assets at significantly discounted prices,
resulting in millions of dollars of losses to users who had deposited crypto
assets into the smart contract. Other smart contracts, such as bridges between
blockchain networks and DeFi protocols have also been manipulated, exploited or
used in ways that were not intended or envisioned by their creators such that
attackers siphoned over $3.8 billion worth of digital assets from smart
contracts in 2022. Problems with the development, deployment, and operation of
smart contracts may have an adverse effect on the value of ether.
In
some cases, smart contracts can be controlled by one or more “admin keys,” users
with special privileges, or “super users.” These users may have the ability to
unilaterally make changes to the smart contract, enable or disable features on
the smart contract, change how the smart contract receives external inputs and
data or transmits ether or other digital assets, and make other changes to the
smart contract. Furthermore, in some cases inadequate public information may be
available about certain smart contracts or applications, and information
asymmetries may exist, even with respect to open-source smart contracts or
applications; certain participants may have hidden informational or
technological advantages, making for an uneven playing field. There may be
opportunities for bad actors to perpetrate fraudulent schemes and engage in
illicit activities and other misconduct, such as exit scams and rug pulls
(orchestrated by developers and/or influencers who promote a smart contract or
application and, ultimately, escape with the money at an agreed time), or Ponzi
or similar fraud schemes.
Many
DeFi applications are currently deployed on the Ethereum network, and smart
contracts relating to DeFi applications currently represent a significant source
of demand for ether. DeFi applications may achieve their investment purposes
through self-executing smart contracts that may allow users, for example, to
invest digital assets in a pool from which other users can borrow without
requiring an intermediate party to facilitate these transactions. These
investments may earn interest to the investor based on the rates at which
borrowers repay the loan, and can generally be withdrawn by the investor. For
smart contracts that hold a pool of digital asset reserves, smart contract super
users or admin key holders may be able to extract funds from the pool, liquidate
assets held in the pool, or take other actions that decrease the value of the
digital assets held by the smart contract in reserves. Even for digital assets
that have adopted a decentralized governance mechanism, such as smart contracts
that are governed by the holders of a governance token, such governance tokens
can be concentrated in the hands of a small group of core community members, who
would be able to make similar changes unilaterally to the smart contract. If any
such super user or group of core members unilaterally makes adverse changes to a
smart contract or to the design, functionality, features and value of the smart
contract, its related digital assets may be harmed. In addition, assets held by
the smart contract in reserves may be stolen, misused, burnt or locked up, or
otherwise become unusable and irrecoverable. Super users can also become targets
of hackers and malicious attackers. If an attacker is able to access or obtain
the super user privileges of a smart contract, or if a smart contract’s super
users or core community members take actions that adversely affect the smart
contract, users who transact with the smart contract may experience decreased
functionality of the smart contract or may suffer a partial or total loss of any
digital assets they have used to transact with the smart contract.
Furthermore,
the underlying smart contracts may be insecure, may contain bugs or other
vulnerabilities, or otherwise may not work as intended. Any of the foregoing
could cause users of the DeFi application to be negatively affected or could
cause the DeFi application to be the subject of negative publicity. Because DeFi
applications may be built on the Ethereum network and represent a significant
source of demand for ether, public confidence in the Ethereum network itself
could be negatively affected, such sources of demand could diminish, and the
value of ether could decrease. Similar risks apply to any smart contract or
decentralized application, not just DeFi
applications.
Validators
may suffer losses due to staking, which could make the Ethereum network less
attractive.
Validation
on the Ethereum network requires ether to be deposited (i.e., “staked”) to
activate a validator node. If the Ethereum network source code or protocol fail
to behave as expected, suffer cybersecurity attacks or hacks, experience
security issues, or encounter other problems, such assets may be irretrievably
lost. The Ethereum network imposes three types of sanctions for validator
misbehavior or inactivity, which would result in a portion of their staked ether
being confiscated, withdrawn or “burned”: penalties, slashing, and inactivity
leaks. A validator may face penalties if it fails to take certain actions, such
as providing a timely attestation to a block proposed by another validator.
Under this scenario, a validator’s staked ether could be burned in an amount
equal to the reward to which the validator would have been entitled for
performing the actions. A more severe sanction (i.e., “slashing”) is imposed if
a validator commits malicious acts related to the proposal or attestation of
blocks with invalid transactions. After an initial slashing, as described in the
previous sentence, the validator is queued for forceful removal from the
Ethereum network’s validator “pool,” and more of the validator’s staked ether is
burned over a period of approximately thirty-six (36) days with the exact amount
of ether burned and time period determined by the network regardless of whether
the validator makes any further slashable errors, at which point the validator
is automatically removed from the validator pool. Staked ether may also be
burned through a process known as an “inactivity leak,” which is triggered if
the Ethereum network has gone too long without finalizing a new block. For a new
block to be successfully added to the blockchain, validators that account for at
least two-thirds of all staked ether must agree on the validity of a proposed
block. This means that if validators representing more than one-third of the
total staked ether are offline, no new blocks can be finalized. To prevent this,
an inactivity leak causes the ether staked by the inactive validators to
gradually “bleed away” until these inactive validators represent less than
one-third of the total stake, thereby allowing the remaining active validators
to finalize proposed blocks. Any cybersecurity attacks, security issues, hacks,
penalties, slashing events, or other problems could damage validators’
willingness to participate in validation, discourage existing and future
validators from serving as such, and adversely impact the Ethereum network’s
adoption or the price of ether. Any disruption of validation on the Ethereum
network could interfere with network operations and cause the Ethereum network
to be less attractive to users and application developers than competing
blockchain networks, which could cause the price of ether to decrease. The
limited liquidity during the “activation” or “exiting” processes could dissuade
potential validators from participating, which could interfere with network
operations or security and cause the Ethereum network to be less attractive to
users and application developers than competing blockchain networks, which could
cause the price of ether to decrease.
Proof-of-stake
blockchains are a relatively recent innovation and have not been subject to as
widespread use or adoption over as long of a period of time as proof-of-work
blockchains.
Certain
digital assets, such as bitcoin, use a “proof-of-work” consensus algorithm. The
genesis block on the Bitcoin blockchain was mined in 2009, and Bitcoin’s
blockchain has been in operation since then. Many newer blockchains enabling
smart contract functionality, including the current Ethereum network following
the completion of the Merge in 2022, use a newer consensus algorithm known as
“proof-of-stake.” While their proponents believe that they may have certain
advantages, the “proof-of-stake” consensus mechanisms and governance systems
underlying many newer blockchain protocols, including the Ethereum network
following the Merge, and their associated digital assets—including the ether
held by the Trust—have not been tested at scale over as long of a period of time
or subject to as widespread use or adoption as, for example, bitcoin’s
proof-of-work consensus mechanism has. This could lead to these blockchains, and
their associated digital assets, having undetected vulnerabilities, structural
design flaws, suboptimal incentive structures for network participants (e.g.,
validators), technical disruptions, or a wide variety of other problems, any of
which could cause these blockchains not to function as intended; could lead to
outright failure to function entirely causing a total outage or disruption of
network activity; or could cause them to suffer other operational problems or
reputational damage, leading to a loss of users or adoption or a loss in value
of the associated digital assets, including the Trust’s assets. Over the long
term, there can be no assurance that the proof-of-stake blockchain on which the
Trust’s assets rely will achieve widespread scale or adoption or will perform
successfully; any failure to do so could negatively impact the value of the
Trust’s assets.
Centralization
concerns around a single person or entity controlling a large percentage of the
validating stake.
Validators
must deposit at least 32 ether to establish a node and activate a unique
validator key pair that is used to sign block proposals and attestations on
behalf of its stake (i.e., vote on its view of the chain). For each node that
established, a unique validator key pair is generated. An application built on
the Ethereum network, or a single node operator, can manage many validator key
pairs. For example, Lido,
an application that provides a so-called “liquid staking” solution which permits
holders of ether to deposit them with Lido,
which
stakes the ether while issuing the holder a transferrable token, is reported by
some sources to have or have had up to 275,000 validator key pairs divided
across over 30 node operators. At times, Lido
has
reportedly controlled around, or in excess of, 33% of the total staked ether on
the Ethereum network. While it is widely believed that Lido
has
little incentive to attempt to interfere with transaction finality or block
confirmations using its reported 33% stake, since doing so would likely cause
its entire stake to be slashed and thus lost (assuming good actors unaffiliated
with Lido
controlled
the remainder), and also because Lido
is
believed to not control most of the third party node operators where its ether
is staked, and finally since the occurrence of such manipulation of the Ethereum
network’s consensus process by Lido or any other actor would likely cause ether
to lose substantial value (which would hurt Lido economically), it nevertheless
poses centralization concerns. If Lido, or a bad actor with a similar sized
stake, were to attempt to interfere with transaction finality or block
confirmations, it could negatively affect the use and adoption of the Ethereum
network and the value of ether, and thus the value of the Shares.
Spot
markets on which ether trades are relatively new and largely unregulated or may
not be complying with existing regulations and, therefore, may be more exposed
to fraud and security breaches than established, regulated exchanges for other
financial assets or instruments, which could have a negative impact on the
performance of the Trust.
Digital
asset trading platforms are relatively new and, in some cases, unregulated or
may not be complying with existing regulations. Several digital asset trading
platforms are unlicensed, unregulated, operate without extensive supervision by
governmental authorities, and do not provide the public with significant
information regarding their ownership structure, management team, corporate
practices, cybersecurity, and regulatory compliance.
In
the U.S., digital asset trading platforms may not be subject to, or may not
comply with, regulations governing the operation of national securities
exchanges or designated contract markets. Furthermore, while many prominent
digital asset trading platforms provide the public with significant information
regarding their ownership structure, management teams, corporate practices and
regulatory compliance, many digital asset trading platforms do not provide this
information. Furthermore, because these platforms are largely unregulated or may
not be complying with existing regulations, there is an increased risk of fraud,
manipulation and other malfeasance on these platforms, both by malicious
third-party actors and the platforms’ own personnel. For example, persons with
access to trade order information on a digital asset trading platform may use
such information to “front-run” those orders, which may go undetected in part
due to the lack of regulations requiring those platforms to adopt deterrence
mechanisms.
Outside
the U.S., digital asset trading platforms may be subject to significantly less
stringent regulatory and compliance requirements in their local jurisdictions.
As a result, trading activity on or reported by these digital asset trading
platforms is generally significantly less regulated than trading in regulated
U.S. securities and commodities markets, and may reflect behavior that would be
prohibited in regulated U.S. trading venues. For example, in 2019 there were
reports claiming that 80.95% of bitcoin trading volume on digital asset trading
platforms was false or noneconomic in nature, with specific focus on unregulated
platforms located outside of the United States. Such reports may indicate that
the digital asset trading platform market is significantly smaller than expected
and that the U.S. makes up a significantly larger percentage of the digital
asset trading platform market than is commonly understood. Nonetheless, any
actual or perceived false trading in the digital asset trading platform market,
and any other fraudulent or manipulative acts and practices, could adversely
affect the value of digital assets, including ether, and/or negatively affect
the market perception of digital assets, including ether. As a result, the
marketplace may lose confidence in digital asset trading platform, including
prominent exchanges that handle a significant volume of ether
trading.
The
ether market globally and in the United States is not subject to comparable
regulatory guardrails as exist in regulated securities markets. Furthermore,
many ether trading venues lack certain safeguards put in place by exchanges for
more traditional assets to enhance the stability of trading on the exchanges and
prevent “flash crashes,” such as limit-down circuit breakers. As a result, the
prices of ether on trading venues may be subject to larger and/or more frequent
sudden declines than assets traded on more traditional exchanges. Tools to
detect and deter fraudulent or manipulative trading activities such as market
manipulation, front-running of trades, and wash-trading may not be available to
or employed by digital asset exchanges, or may not exist at all. The SEC has
identified possible sources of fraud and manipulation in the digital asset
markets generally, including, among others (1) “wash trading”; (2) persons with
a dominant position in a digital asset manipulating the digital asset’s pricing;
(3) hacking of the digital asset’s peer-to-peer network, protocols and trading
platforms; (4) malicious control of the digital asset network; (5) trading based
on material, non-public information (for example, plans of market participants
to significantly increase or decrease their holdings in the digital asset, new
sources of demand for the digital asset, etc.) or based on the dissemination of
false and misleading information; (6) manipulative activity involving purported
“stablecoins” (for more information, see
“Prices of ether may be affected by stablecoins, the activities of stablecoin
issuers and their regulatory treatment”);
and (7) fraud and manipulation at digital asset trading platforms. The effect of
potential market manipulation, front-running, wash-trading, and other fraudulent
or manipulative trading practices may inflate the volumes actually present in
the digital asset markets and/or cause distortions in price, which could
adversely affect the Trust or cause losses to Shareholders.
In
addition, over the past several years, some digital asset trading platforms have
been closed due to fraud and manipulative activity, business failure or security
breaches. In many of these instances, the customers of such digital asset
trading platforms were not compensated or made whole for the partial or complete
losses of their account balances in such digital asset trading platforms. While,
generally speaking, smaller digital asset trading platforms are less likely to
have the infrastructure and capitalization that make larger digital asset
trading platforms more stable, larger digital asset trading platforms are more
likely to be appealing targets for hackers and malware and may be more likely to
be targets of regulatory enforcement action. For example, the collapse of Mt.
Gox, which filed for bankruptcy protection in Japan in late February 2014,
demonstrated that even the largest digital asset trading platforms could be
subject to abrupt failure with consequences for both users of digital asset
trading platforms and the digital asset industry as a whole. In particular, in
the two weeks that followed the February 7, 2014 halt of bitcoin withdrawals
from Mt. Gox, the value of one bitcoin fell on other platforms from around $795
on February 6, 2014 to $578 on February 20, 2014. Additionally, in January 2015,
Bitstamp announced that approximately 19,000 bitcoin had been stolen from its
operational or “hot” wallets. Further, in August 2016, it was reported that
almost 120,000 bitcoin worth around $78 million were stolen from Bitfinex, a
large digital asset trading platform. The value of bitcoin and other digital
assets immediately decreased over 10% following reports of the theft at
Bitfinex. In November 2022, FTX, one of the largest digital asset trading
platforms by volume at the time, halted customer withdrawals amid rumors of the
company’s liquidity issues and likely insolvency, which were subsequently
corroborated by its CEO. Shortly thereafter, FTX’s CEO resigned and FTX and many
of its affiliates filed for bankruptcy in the United States, while other
affiliates have entered insolvency, liquidation, or similar proceedings around
the globe, following which the U.S. Department of Justice brought criminal fraud
and other charges, and the SEC and CFTC brought civil securities and commodities
fraud charges, against certain of FTX’s and its affiliates’ senior executives,
including its former CEO. Around the same time, there were reports that
approximately $300-600 million of digital assets were removed from FTX and the
full facts remain unknown, including whether such removal was the result of a
hack, theft, insider activity, or other improper behavior. In February 2025,
approximately $1.5 billion of ether was stolen from the Dubai-based Bybit
exchange. Bybit claims the hack occurred when the company was making a routine
transfer of ether from an offline “cold” wallet to a hot wallet, with the
attacker suspected to be agents of North Korea exploiting security controls to
gain control of the assets
Negative
perception, a lack of stability in the digital asset markets and the closure or
temporary shutdown of digital asset trading platforms due to fraud, failure or
security breaches may reduce confidence in the Ethereum network and result in
greater volatility or decreases in the prices of ether. Furthermore, the closure
or temporary shutdown of a digital asset trading platforms used in calculating
the Index may result in a loss of confidence in the Trust’s ability to determine
its NAV on a daily basis. The potential consequences of a digital asset trading
platform’s failure could adversely affect the value of the Shares.
Furthermore,
some spot markets, including both centralized and decentralized venues, lack
certain safeguards put in place by more traditional exchanges to enhance the
stability of trading on the exchange and prevent flash crashes, such as
limit-down circuit breakers. As a result, the prices of digital assets such as
ether on digital asset trading platforms may be subject to larger and/or more
frequent sudden declines than assets traded on more traditional
exchanges.
A
lack of stability in the ether spot markets, including as a result of any
manipulation of ether spot markets and the termination or suspension of spot
market operations due to fraud, operational failures, cybersecurity breaches, or
violations or alleged violations of laws and regulations, may reduce confidence
in ether generally and result in greater volatility in the market price of ether
and the Shares of the Trust. Furthermore, the closure or temporary shutdown of
an ether spot market may impact the Trust’s ability to determine the value of
its ether holdings or for the Trust’s Authorized Participants to effectively
arbitrage the Trust’s Shares. The potential consequences of a spot market’s
failure or failure to prevent market manipulation could adversely affect the
value of the
Shares.
Momentum
pricing.
The
value of a single unit of ether as represented by the Index may also be subject
to momentum pricing due to speculation regarding future appreciation in value,
leading to greater volatility that could adversely affect the value of the
Shares. Momentum pricing typically is associated with growth stocks and other
assets whose valuation, as determined by the investing public, is impacted by
appreciation in value. Momentum pricing may result in speculation regarding
future appreciation in the value of digital assets, which inflates prices and
leads to increased volatility. As a result, ether may be more likely to
fluctuate in value due to changing investor confidence in future appreciation or
depreciation in prices, which could adversely affect the price of ether, and, in
turn, an investment in the Trust.
Some
market observers have asserted that the ether market is experiencing a “bubble”
and have predicted that, in time, the value of ether will fall to a fraction of
its current value, or even to zero. Ether has not been in existence long enough
for market participants to assess these predictions with any precision, but if
these observers are even partially correct, an investment in the Shares may turn
out to be substantially worthless.
Irrevocable
nature of blockchain-recorded transactions.
Ether
transactions recorded on the Ethereum network are not, from an administrative
perspective, reversible, in theory, without the control or consent of a majority
of the nodes on the Ethereum network. Once a transaction has been verified and
recorded in a block that is added to the blockchain, an incorrect transfer of an
ether or a theft of ether generally will not be reversible, and the Trust may
not be capable of seeking compensation for or return of any such transfer or
theft. It is possible that, through computer or human error, or through theft or
criminal action, the Trust’s ether could be transferred from custody accounts in
incorrect quantities or to unauthorized third parties. To the extent that the
Trust is unable to seek a corrective transaction with such third-party or is
incapable of identifying the third-party that has received the Trust’s ether
through error or theft, the Trust will be unable to revert or otherwise recover
incorrectly transferred ether. To the extent that the Trust is unable to seek
redress for such error or theft, such loss could adversely affect the value of
the Shares.
The
loss or destruction of a private key required to access ether may be
irreversible.
Digital
assets, including ether, are controllable only by the possessor of both the
unique public key and private key or keys relating to the “digital wallet” in
which the digital asset is held. Private keys must be safeguarded and kept
private in order to prevent a third-party from accessing the digital asset held
in such wallet. To the extent a private key is lost, destroyed or otherwise
compromised and no backup of the private key is accessible, the Trust will be
unable to access, and will effectively lose, the ether held in the related
digital wallet. In addition, if the Trust’s private keys are misappropriated and
the Trust’s ether holdings are stolen, including from or by the Custodian, the
Trust could lose some or all of its ether holdings, which would adversely impact
an investment in the Shares of the Trust. Any loss of private keys relating to
digital wallets used to store the Trust’s ether would adversely affect the value
of the Shares.
A
disruption of the internet may affect Ethereum network operations, which may
adversely affect the ether industry and an investment in the Trust.
The
Ethereum network relies on the Internet. A significant disruption of Internet
connectivity could disrupt the Ethereum network’s functionality and operations
until the disruption in the Internet is resolved. A disruption in the Internet
could adversely affect an investment in the Trust or the ability of the Trust to
operate. In particular, some variants of digital assets have experienced a
number of denial-of-service attacks, which have led to temporary delays in block
creation and digital asset transfers. Moreover, it is possible that as ether
increases in value, it may become a bigger target for hackers and subject to
more frequent hacking and denial-of-service attacks.
Digital
assets are also susceptible to border gateway protocol hijacking (“BGP
hijacking”). Such an attack can be a very effective way for an attacker to
intercept traffic en route to a legitimate destination. BGP hijacking impacts
the way different nodes are connected to one another to isolate portions of them
from the remainder of the network, which could lead to a risk of the network
allowing double-spending and other security issues. If BGP hijacking occurs on
the Ethereum network, participants may lose faith in the security of ether,
which could affect ether’s value and consequently the value of the
Shares.
Any
future attacks that impact the ability to transfer ether could have a material
adverse effect on the price of ether and the value of an investment in the
Shares.
Potential
amendments to the Ethereum network’s protocols and software could, if accepted
and authorized by the Ethereum network community, adversely affect an investment
in the Trust.
The
Ethereum network uses cryptographic protocols to govern the interactions within
the Ethereum network. A loose community known as the core developers has evolved
to informally manage the source code for the protocol. Membership in the
community of core developers evolves over time, largely based on self-determined
participation in the resource section dedicated to Ethereum on GitHub.com. The
core developers can propose amendments to the Ethereum network’s source code
that, if accepted by validators and users, could alter the protocols and
software of the Ethereum network and the properties of ether. These alterations
would occur through software upgrades, and could potentially include changes to
the irreversibility of transactions and limitations on the issuance of new ether
or changes to the ether supply, which could undermine the appeal and market
value of ether. Alternatively, software upgrades and other changes to the
protocols of the Ethereum network could fail to work as intended or could
introduce bugs, coding defects or flaws, or security risks, or could otherwise
adversely affect, the speed, security, usability, or value of the Ethereum
network or ether. As a result, the Ethereum network could be subject to changes
to its protocols and software in the future that may adversely affect an
investment in the Trust.
The
open-source structure of the Ethereum network protocol means that the core
developers and other contributors are generally not directly compensated for
their contributions in maintaining and developing the Ethereum network protocol.
A failure to properly monitor and upgrade the Ethereum network protocol could
damage the Ethereum network and an investment in the Trust.
The
Ethereum network operates based on an open-source protocol maintained by the
core developers and other contributors, largely on the GitHub resource section
dedicated to Ethereum network development. As new ether are rewarded solely for
validator activity (other than the 2014 pre-mine) and are not sold on an ongoing
basis to generate revenue to support development activity, and the Ethereum
network protocol itself is made available for free rather than sold or made
available subject to licensing or subscription fees and its use does not
generate revenues for its development team, the core developers are generally
not compensated for maintaining and updating the source code for the Ethereum
network protocol. Consequently, there is a lack of financial incentive for
developers to maintain or develop the Ethereum network and the core developers
may lack the resources to adequately address emerging issues with the Ethereum
network protocol. Although the Ethereum network is currently supported by the
core developers, there can be no guarantee that such support will continue or be
sufficient in the future. For example, there have been recent reports that the
number of core developers who have the authority to make amendments to the
Ethereum network’s source code in the GitHub repository is relatively small,
although there is believed to be a larger number of developers who contribute to
the overall development of the source code of the Ethereum network. The
perception that high-profile contributors may no longer contribute to the
network may have an adverse effect on the market price of any related digital
assets. For example, in June 2017, an unfounded rumor circulated that Ethereum
core developer Vitalik Buterin had died. Following the rumor, the price of ether
decreased approximately 20% before recovering after Buterin himself dispelled
the rumor. Some have speculated that the rumor led to the decrease in the price
of ether. In the event a high-profile contributor to the Ethereum network, such
as Vitalik Buterin, is perceived as no longer able to contribute to the Ethereum
network due to death, retirement, withdrawal, incapacity, or otherwise, whether
or not such perception is valid, it could negatively affect the price of ether,
which could adversely impact the value of the Shares.
Alternatively,
some developers may be funded by entities whose interests are at odds with those
of other participants in the Ethereum network. In addition, a bad actor could
also attempt to interfere with the operation of the Ethereum network by
attempting to exercise a malign influence over a core developer. To the extent
that material issues arise with the Ethereum network protocol and the core
developers and open-source contributors are unable to address the issues
adequately or in a timely manner, the Ethereum network and an investment in the
Trust may be adversely affected.
Decentralized
governance of the Ethereum network could have a negative impact on the
performance of the Trust.
Governance
of decentralized networks, such as the Ethereum network, is achieved through
voluntary consensus and open competition. In other words, while the Ethereum
Foundation does serve as a driver of implementation of certain upgrades, the
Ethereum network has no central decision-making body or clear manner in which
participants can come to an agreement other than through overwhelming consensus.
The lack of clarity on governance may adversely affect ether’s utility and
ability to grow and face challenges, both of which may require solutions and
directed effort to overcome problems, especially long-term problems. For
example, a seemingly simple technical issue once divided the Ethereum network
community: namely, whether to increase the block size of the blockchain or
implement another change to increase the scalability of ether.
To
the extent lack of clarity in corporate governance of the Ethereum network leads
to ineffective decision- making that slows development and growth, the value of
the Shares may be adversely
affected.
A
temporary or permanent “fork” could adversely affect the value of the
Shares.
The
Ethereum network operates using open-source protocols, meaning that any user can
become a node by downloading the Ethereum Client, modifying it and then
proposing that the other nodes (and users and validators of ether) support that
modification (in the case of nodes, by downloading it into their own Ethereum
Clients; in the case of validators and users who are not nodes, by continuing to
use the Ethereum network rather than abandoning it or switching to a competing
blockchain network).
The
Ethereum Foundation and core developers are able to access and alter the
Ethereum network source code and, as a result, they are typically responsible
for proposing quasi-official or widely publicized releases of updates and other
changes to the Ethereum network’s source code (although any user can do so).
However, the release of proposed updates to the Ethereum network’s source code
by core developers does not guarantee that the updates will be adopted. Nodes
must accept any changes made to the Ethereum source code by choosing to download
the proposed modification of the Ethereum network’s source code in their
individual Ethereum Client, and ultimately a critical mass of validators and
users—such as DApp and smart contract developers, as well as users of DApps and
smart contracts, and anyone else who transacts on the Ethereum blockchain or
within the Ethereum network—must support the shift, or the upgrades will lack
adoption. A modification of the Ethereum network’s source code is only effective
with respect to the Ethereum nodes that download it and modify their Ethereum
Clients accordingly, and in practice such decisions are heavily influenced by
the preferences of validators and users. When a modification is introduced and a
sufficiently broad critical mass of users and validators supports the
modification and nodes download the modification into their individual Ethereum
Clients, the change is implemented and the network remains uninterrupted.
However, if less than a sufficiently broad critical mass (in practice, amounting
to a substantial majority) of users and validators support the proposed
modification and nodes refuse to download the modification to their Ethereum
Clients, and the modification is not backwards compatible with the Ethereum
blockchain or network or the Ethereum Clients of nodes prior to their
modification, the consequence would be what is known as a “hard fork” of the
Ethereum network, with one group of nodes running the pre-modified software and
with users and validators continuing to use the pre-modified software, while the
other group would adopt and run the modified software. The effect of such a fork
would be the existence of two versions of the Ethereum network running in
parallel on separate networks using separate blockchain ledgers, yet lacking
interchangeability. In practice, the two networks would compete with each other
for users, validators, and adoption, potentially to their mutual detriment (for
example, if the number of validators on each network is too small leading to
security concerns, as discussed below, or if the number of users on each is
reduced compared to the number of users of the single pre-fork blockchain
network). Debates relating to hard forks can be contentious and hard fought
among network participants, and can lead to ill will.
A
future fork in the Ethereum network could adversely affect the value of the
Shares or the ability of the Trust to operate. A hard fork could also adversely
affect the price of ether at the time of announcement or adoption or
subsequently. The announcement of a hard fork could lead to increased demand for
the pre-fork digital asset, in anticipation that ownership of the pre-fork
digital asset would entitle holders to a new digital asset following the fork.
The increased demand for the pre-fork digital asset may cause the price of the
digital asset to rise. For example, following the hack of The DAO in July 2016,
holders of ether voted on-chain to reverse the hack, effectively causing a hard
fork. For the days following the vote, the price of ether rose from $11.65 on
July 15, 2016, to $14.66 on July 21, 2016, the day after the first Ethereum
Classic block was mined (as discussed further below). By comparison, when
Bitcoin Cash forked from the bitcoin network, the value of bitcoin went from
$2,800 to $2,700. Examples listed above are for illustrative purposes only.
Price movements of digital assets subject to or resulting from a hard fork
cannot be predicted in advance. After a hard fork, it is possible the aggregate
price of the two versions of the digital asset running in parallel would be less
than the price of the digital asset immediately prior to the fork. If the hard
fork caused operational problems for either the post-fork network or the
blockchain, the digital assets associated with the affected network could lose
some or all of their value. Furthermore, while the Sponsor will, as permitted by
the terms of the Trust Agreement, determine which network is generally accepted
as the Ethereum network and should therefore be considered the appropriate
network for the Trust’s purposes, there is no guarantee that the Sponsor will
choose the network and the associated digital asset that is ultimately the most
valuable fork. Any of these events could therefore adversely impact the value of
the Shares.
In
September 2022, the Ethereum network transitioned to a proof-of-stake model, in
an upgrade referred to as the “Merge.” Following the Merge, a hard fork of the
Ethereum network occurred, as certain Ethereum validators and network
participants planned to maintain the proof-of-work consensus mechanism that was
removed as part of the Merge. This version of the network was rebranded as
“Ethereum
Proof-of-Work.”
Forks
may also occur as a network community’s response to a significant security
breach. For example, in July 2016, Ethereum “forked” into Ethereum and a new
digital asset, Ethereum Classic, as a result of the Ethereum network community’s
response to a significant security breach. In June 2016, an anonymous hacker
exploited a smart contract running on the Ethereum network to siphon
approximately $60 million of ether held by The DAO, a distributed autonomous
organization, into a segregated account. In response to the hack, most
participants in the Ethereum community elected to adopt a “fork” that
effectively reversed the hack. However, a minority of users continued to develop
the original blockchain, referred to as Ethereum Classic with the digital asset
on that blockchain now referred to as ETC. ETC now trades on several digital
asset exchanges. A fork may also occur as a result of an unintentional or
unanticipated software flaw in the various versions of otherwise compatible
software that users run. Such a fork could lead to users and validators
abandoning the digital asset and associated network with the flawed software. It
is possible, however, that a substantial number of users and validators could
adopt an incompatible version of the digital asset while resisting community-led
efforts to merge the two chains. This could result in a permanent fork, as in
the case of Ethereum and Ethereum Classic.
Furthermore,
a hard fork can lead to new security concerns. For example, when the Ethereum
and Ethereum Classic networks split in July 2016, replay attacks, in which
transactions from one network were rebroadcast to nefarious effect on the other
network, plagued Ethereum trading platforms through at least October 2016. An
Ethereum trading platform announced in July 2016 that it had lost 40,000
Ethereum Classic, worth about $100,000 at that time, as a result of replay
attacks. Similar replay attack concerns occurred in connection with the Bitcoin
Cash and Bitcoin Satoshi’s Vision networks split in November 2018. Another
possible result of a hard fork is an inherent decrease in the level of security
due to significant amounts of validating power remaining on one network or
migrating instead to the new forked network. After a hard fork, it may become
easier for an individual validator or validating pool’s validating power to
exceed 50% of the validating power of a digital asset network that retained or
attracted less validating power, thereby making digital asset networks that rely
on proof-of-stake more susceptible to attack.
Protocols
may also be cloned. Unlike a fork, which modifies an existing blockchain and
results in two competing networks, each with the same genesis block, a “clone”
is a copy of a protocol’s codebase but results in an entirely new blockchain and
new genesis block. Tokens are created solely from the new “clone” network and,
in contrast to forks, holders of tokens of the existing network that was cloned
do not receive any tokens of the new network. A “clone” results in a competing
network that has characteristics substantially similar to the network it was
based on, subject to any changes as determined by the developer(s) that
initiated the clone. A clone may also adversely affect the price of ether at the
time of announcement or adoption, or subsequently. For example, on November 6,
2016, Rhett Creighton, a Zcash developer, cloned the Zcash Network to launch
Zclassic, a substantially identical version of the Zcash Network that eliminated
the Founders’ Reward. For the days following the date the first Zclassic block
was mined, the price of ZEC fell from $504.57 on November 5, 2016, to $236.01 on
November 7, 2016, in the midst of a broader sell off of ZEC beginning
immediately after the Zcash Network launch on October 28, 2016.
The
inability to recognize the economic benefit of a “fork” or an “air drop” could
adversely impact an investment in the Trust.
Network
Forks.
The
Ethereum network is open source, meaning that any user can download the
software, modify it and then propose that the users and validators of ether
transactions adopt the modification. When a modification is introduced and a
substantial majority of users and validators consent to the modification, the
change is implemented and the Ethereum network remains uninterrupted. However, a
“hard fork” occurs if less than a substantial majority of users and validators
consent to the proposed modification, and the modification is not compatible
with the software prior to its modification. In other words, two incompatible
networks would then exist: (1) one network running the pre-modified software and
(2) another network running the modified software. The effect of such a fork
would be the existence of two versions of the network running in parallel, yet
lacking interchangeability. This is in contrast to a “soft fork,” or a proposed
modification to the software governing the network that results in a post-update
network that is compatible with the network as it existed prior to the update,
because it restricts the network operations that can be performed after the
update.
The
only digital asset that will be held by the Trust is ether. By investing in the
Trust rather than directly in ether, Shareholders forgo potential economic
benefits associated with forks. If ether were to fork into two digital assets,
the Trust may hold, in addition to its existing ether balance, a right to claim
an equivalent amount of the new “forked” asset following the hard fork. The
Sponsor will cause the Trust to irrevocably abandon any digital asset resulting
from a fork in the Ethereum network (other than what the Sponsor determines to
be ether). If the Trust were to change this policy, the Trust would need to seek
and obtain certain regulatory approvals, including an amendment to the Trust’s
registration statement and approval of an application by the Exchange to amend
its listing
rules.
Air
Drops.
Ether
may become subject to an occurrence similar to a fork, which is known as an “air
drop.” In an air drop, the promotors of a new digital asset announce to holders
of another digital asset that they will be entitled to claim a certain amount of
the new digital asset for free, based on the fact that they hold such other
digital asset. Air drops are not included in the Index under its current
methodology.
The
Index does not track air drops involving ether. Accordingly, the Trust will
disclaim, and the Sponsor will cause the Trust to irrevocably abandon, all
rights to digital assets air dropped to holders of ether. By investing in the
Trust rather than directly in ether, Shareholders forgo potential economic
benefits associated with air drops. Any change to the Trust’s policy on air
dropped assets would require the Trust to seek and obtain certain regulatory
approvals, including an amendment to the Trust’s registration statement and
approval of an application by the Exchange to amend its listing
rules.
In
the event of a hard fork of the Ethereum network that results in the spinoff of
another network, the Sponsor will, as permitted by the terms of the Trust
Agreement, use its discretion to determine which network should be considered
the appropriate network for the Trust’s purposes, and in doing so may adversely
affect the value of the Shares.
The
only digital asset that will be held by the Trust is ether. In the event of a
hard fork of the Ethereum network, the Sponsor will, as permitted by the terms
of the Trust Agreement, use its sole discretion to determine, in good faith,
which peer-to-peer network, among a group of incompatible forks of the Ethereum
network, is generally accepted as the Ethereum network and should therefore be
considered the appropriate network for the Trust’s purposes. The Sponsor will
base its determination on whatever factors it deems relevant, including, but not
limited to, the Sponsor’s beliefs regarding expectations of the core developers
of Ethereum, the developer roadmap, users of block space (available capacity
within a block to store data and execute code) including services and
businesses, suppliers of block space (i.e., validators) and their associated
incentives, and other constituencies, as well as other non-fundamental factors,
the Ethereum network, the Custodian’s ability and willingness to support the
fork, or whatever other factors it deems relevant. There is no guarantee that
the Sponsor will choose the digital asset that is ultimately the most valuable
fork, and the Sponsor’s decision may adversely affect the value of the Shares as
a result. The Sponsor may also disagree with Shareholders, the Custodian, other
service providers, the Index Provider, cryptocurrency exchanges, or other market
participants on what is generally accepted as ether and should therefore be
considered “ether” for the Trust’s purposes, which may also adversely affect the
value of the Shares as a result. The Sponsor will cause the Trust to irrevocably
abandon any digital asset resulting from a fork in the Ethereum network (other
than what the Sponsor determines to be ether). If the Trust were to change this
policy, the Trust would need to seek and obtain certain regulatory approvals,
including an amendment to the Trust’s registration statement and approval of an
application by the Exchange to amend its listing rules.
Malicious
actors may “double spend” ether by altering the formation of the
blockchain.
A
malicious actor may attempt to “double spend” (i.e., spend the same units in
more than one transaction) ether by altering the formation of the blockchain. In
this type of attack, a validator creates a valid new block containing a
double-spend transaction and schedules the release of such attack block so that
it is added to the blockchain before a target user’s legitimate transaction can
be included in a block. All double-spend attacks require that the validator
sequence and execute the steps of its attack with sufficient speed and accuracy.
Double- spend attacks require extensive coordination and are very expensive.
Typically, transactions that allow for a zero-confirmation acceptance tend to be
prone to these types of attacks. Accordingly, traders and merchants may execute
instantaneous/zero-confirmation transactions only if they are of sufficiently
low-value. Users and merchants can take additional precautions by adjusting
their network software programs to connect only to other well-connected
participants in the Ethereum network and to disable incoming
connections.
Flaws
in source code for digital asset networks could adversely affect the value of
ether and other digital assets.
In
the past, flaws in the source code for digital asset networks have been exposed
and exploited, including flaws that disabled some functionality for users,
exposed users’ personal information and/or resulted in the theft of users’
digital assets. Discovery of flaws in or exploitations of the source code that
allow malicious actors to take or create money in contravention of known network
rules have occurred. The cryptography underlying ether could prove to be flawed
or ineffective, or developments in mathematics and/or technology, such as
advances in digital computing, algebraic geometry and quantum computing, could
make cryptography ineffective. In any of these circumstances, a malicious actor
may be able to steal ether held by others, which could adversely affect the
demand for ether and therefore adversely impact the price of ether and the value
of the Shares. Even if another digital asset other than ether were affected by
similar circumstances, any reduction in confidence in the robustness of the
source code or cryptography underlying digital assets generally could negatively
affect the demand for all digital assets, including ether, and therefore
adversely affect the value of the
Shares.
Mathematical
or technological advances could undermine the Ethereum network’s consensus
mechanism.
The
Ethereum network relies on cryptographic algorithms for various operations,
including address generation, transaction verification and smart contract
execution. It is possible that mathematical or technological advances, such as
the development of quantum computers with significantly more power than
computers presently available, could undermine or vitiate the cryptographic
consensus mechanism underpinning the Ethereum Blockchain. Quantum computing
technology is an emerging phenomenon, because it is still developing, which
makes it difficult to predict its ultimate effect on the future value of ether
and other digital assets. However, recent announcements by computer technology
companies have suggested that quantum computing technology may be advancing
faster than previously anticipated. For example, in February 2025, Microsoft
announced its Majorana 1 chip, which is claimed to have the potential to support
a one-million-qubit quantum computer. If quantum computing technology is able to
advance and significantly increase its capacity relative to the capacity of
today’s leading quantum computers, it could potentially undermine the viability
of many of the cryptographic algorithms used across the world’s information
technology infrastructure, including the cryptographic algorithms used for
digital assets like ether. If quantum computing is able to advance in that way,
there is a risk that quantum computing could result in the cryptography
underlying the Ethereum network becoming ineffective, which, if realized, could
compromise the security of the Ethereum network, or allow a malicious actor to
compromise the wallets holding ether owned by the Trust or others on the
Ethereum network, which would result in losses to Shareholders. While various
actors in the Ethereum community are taking steps to enable the uses of
cryptographic algorithms that would be resistant to advanced quantum computers,
there is no guarantee that new quantum-proof architectures will be built and
appropriate transitions will be implemented across the network at scale in a
timely manner; any such changes could require the achievement of broad consensus
within the Ethereum network community and a fork (or multiple forks), and there
can be no assurance that such consensus would be achieved or the changes
implemented successfully. If any of the foregoing were to occur, it could result
in losses to Shareholders. Moreover, normal operations and functionality of the
Ethereum network may be negatively affected. Such losses of functionality could
lead to the Ethereum network losing attractiveness to users, nodes, validators,
or other stakeholders, thereby dampening demand for ether. Even if another
digital asset other than ether were affected by similar circumstances, any
reduction in confidence in the source code or cryptography underlying digital
assets generally could negatively affect the demand for digital assets and
therefore adversely affect the value of the Shares.
Competition
from central bank digital currencies (“CBDCs”) could adversely affect the value
of ether and other digital assets.
Central
banks in various countries have introduced digital forms of legal tender.
China’s CBDC project, known as Digital Currency Electronic Payment, has
reportedly been tested in a live pilot program conducted in multiple cities in
China. Central banks representing at least 130 countries have published retail
or wholesale CBDC work ranging from research to pilot projects. Whether or not
they incorporate blockchain or similar technology, CBDCs, as legal tender in the
issuing jurisdiction, could have an advantage in competing with, or replacing,
ether and other cryptocurrencies as a medium of exchange or store of value.
Central banks and other governmental entities have also announced cooperative
initiatives and consortia with private sector entities, with the goal of
leveraging blockchain and other technology to reduce friction in cross-border
and interbank payments and settlement, and commercial banks and other financial
institutions have also announced a number of initiatives of their own to
incorporate new technologies, including blockchain and similar technologies,
into their payments and settlement activities, which could compete with, or
reduce the demand for, ether. As a result of any of the foregoing factors, the
value of ether could decrease, which could adversely affect an investment in the
Trust.
Prices
of ether may be affected by stablecoins, the activities of stablecoin issuers
and their regulatory treatment.
While
the Trust does not invest in stablecoins, it may nonetheless be exposed to
certain risks that stablecoins pose to the ether market. Stablecoins are digital
assets designed to have a stable value over time as compared to typically
volatile digital assets, and may be backed by a fiat currency, such as the U.S.
dollar, commodities, such as gold, or other digital assets. Given the
foundational role that stablecoins play in global digital asset markets, their
fundamental liquidity could have a dramatic impact on the broader digital asset
market, including the market for ether. Volatility in stablecoins, operational
issues with stablecoins (for example, technical issues that prevent settlement),
concerns about the sufficiency of any reserves that support stablecoins or
potential manipulative activity when unbacked stablecoins are used to pay for
other digital assets (including ether), or regulatory concerns about stablecoin
issuers or intermediaries, such as exchanges, that support stablecoins, could
impact individuals’ willingness to trade on trading venues that rely on
stablecoins, reduce liquidity in the ether market, and affect the value of
ether, and in turn impact an investment in the
Shares.
For
example, because a large portion of the digital asset market still depends on
stablecoins such as Tether and USDC, there is a risk that a disorderly
de-pegging or a run on Tether or USDC could lead to dramatic market volatility
in digital assets more broadly. Questions about the sufficiency of the backing
of certain stablecoins has caused the prices for such stablecoins to fluctuate,
which fluctuations may affect the price of ether. For example, some have argued
that the issuance of Tether has been used to artificially increase demand for
ether, thereby inflating its price. On February 17, 2021, the New York Attorney
General entered into an agreement with Tether’s operators, requiring them to
cease any further trading activity with New York persons and pay $18.5 million
in penalties for false and misleading statements made regarding the assets
backing Tether. On October 15, 2021, the CFTC announced a settlement with
Tether’s operators in which they agreed to pay $42.5 million in fines to settle
charges that, among others, Tether’s claims that it maintained sufficient U.S.
dollar reserves to back every Tether stablecoin in circulation with the
“equivalent amount of corresponding fiat currency” held by Tether were untrue.
In addition, a large amount of Tether is issued as ERC-20 tokens on the Ethereum
network. If Tether were to no longer be issued or operating on the Ethereum
network, there would be no need to use ether to pay the gas fees needed to
record ERC-20 Tether transactions on the Ethereum blockchain, and a substantial
source of demand for ether could be eliminated, which could cause the price of
ether to decrease, affecting the value of the Shares.
USDC
is a reserve-backed stablecoin issued by Circle Internet Financial that is
commonly used as a method of payment in digital asset markets, including the
ether market. While USDC is designed to maintain a stable value at 1 U.S. dollar
at all times, on March 10, 2023, the value of USDC fell below $1.00 for multiple
days after Circle Internet Financial disclosed that $3.3 billion of the USDC
reserves were held at Silicon Valley Bank, which had entered FDIC receivership
earlier that day. Stablecoins are reliant on the U.S. banking system and U.S.
treasuries, and the failure of either to function normally could impede the
function of stablecoins, and therefore could adversely affect the value of the
Shares. Similar to Tether, a large amount of USDC is issued as ERC-20 tokens on
the Ethereum network. If USDC were to no longer be issued or operating on the
Ethereum network, there would be no need to use ether to pay the gas fees needed
to record ERC-20 USDC transactions on the Ethereum blockchain, and a substantial
source of demand for ether could be eliminated, which could cause the price of
ether to decrease, affecting the value of the Shares.
Given
the foundational role that stablecoins play in global digital asset markets,
their fundamental liquidity can have a dramatic impact on the broader digital
asset market, including the market for ether. Because a large portion of the
digital asset market still depends on stablecoins such as Tether and USDC, there
is a risk that a disorderly de-pegging or a run on Tether or USDC could lead to
dramatic market volatility in digital assets more broadly. Volatility in
stablecoins; operational issues with stablecoins (for example, technical issues
that prevent settlement); concerns about the sufficiency of any reserves that
support stablecoins or potential manipulative activity when unbacked stablecoins
are used to pay for other digital assets (including ether); regulatory concerns
about stablecoin issuers or intermediaries, such as exchanges, that support
stablecoins; or the removal or migration of prominent stablecoins away from the
Ethereum network, could impact individuals’ willingness to trade on trading
venues that rely on stablecoins, reduce liquidity in the ether market, and
affect the value of ether, and in turn impact an investment in the
Shares.
Competition
from the emergence or growth of other digital assets or methods of investing in
ether could have a negative impact on the price of ether and adversely affect
the value of the Shares.
As
of December 31, 2025, ether was the second largest digital asset by market
capitalization as tracked by CoinMarketCap.com. As of December 31, 2025, there
were over 10,000 alternative digital assets tracked by CoinMarketCap.com, having
a total market capitalization of approximately $2.96 trillion (including the
approximately $360.0 billion market cap of ether), as calculated using market
prices and total available supply of each digital asset, excluding tokens pegged
to other assets. In addition, many consortia and financial institutions are also
researching and investing resources into private or permissioned smart contracts
platforms rather than open platforms like the Ethereum network. Competition from
the emergence or growth of alternative digital assets and smart contracts
platforms, such as Solana, Avalanche or Cardano, could have a negative impact on
the demand for, and price of, ether and thereby adversely affect the value of
the Shares.
In
addition, some digital asset networks, including the Ethereum network, may be
the target of ill will from users of other digital asset networks. For example,
in July 2016, the Ethereum network underwent a contentious hard fork that
resulted in the creation of a new digital asset network called Ethereum Classic.
As a result, some users of the Ethereum Classic network may harbor ill will
toward the Ethereum network. These users may attempt to negatively impact the
use or adoption of the Ethereum network. For additional information on the hard
fork that resulted in the creation of Ethereum Classic. See
“Ether,
Ether Markets and Regulation of Ether”
Investors
may invest in ether through means other than the Shares, including through
direct investments in ether and other potential financial vehicles, possibly
including securities backed by or linked to ether and digital asset financial
vehicles similar to the Trust, or ether futures-based products. Market and
financial conditions, and other conditions beyond the Sponsor’s control, may
make it more attractive to invest in other financial vehicles or to invest in
ether directly, which could limit the market for, and reduce the liquidity of,
the Shares. In addition, to the extent digital asset financial vehicles other
than the Trust tracking the price of ether are formed and represent a
significant proportion of the demand for ether, large purchases or redemptions
of the securities of these digital asset financial vehicles, or private funds
holding ether, could negatively affect the Index, the Trust’s ether holdings,
the price of the Shares, the net asset value of the Trust and the per share NAV
of the Trust.
Large-scale
sales or distributions could significantly reduce the price of ether and
adversely affect the value of the Shares.
Some
entities hold large amounts of ether relative to other market participants, and
to the extent such entities engage in large-scale hedging, sales or
distributions on non-market terms, or sales in the ordinary course, it could
result in a reduction in the price of ether and adversely affect the value of
the Shares. Additionally, political or economic crises may motivate large-scale
acquisitions or sales of such digital assets, including ether, either globally
or locally. Such large-scale sales or distributions could result in selling
pressure that may reduce the price of ether and adversely affect an investment
in the Shares.
As
of the date of this Annual Report, the 200 largest ether wallets held
approximately one-quarter of the outstanding supply of ether and it is possible
that some of these wallets are controlled by the same person or entity.
Moreover, it is possible that other persons or entities control multiple wallets
that collectively hold a significant number of ether, even if each wallet
individually only holds a small amount. As a result of this concentration of
ownership, large sales by such holders could have an adverse effect on the
market price of ether.
Congestion
or delay in the Ethereum network may delay purchases, sales or transfers of
ether by the Trust.
The
size of each block on the Ethereum network is currently limited and the
transaction rate is significantly below the level that centralized systems can
provide. Increased transaction volume could result in delays in the recording of
transactions due to congestion in the Ethereum network. Moreover, unforeseen
system failures, disruptions in operations, or poor connectivity may also result
in delays in the recording of transactions on the Ethereum network. Any delay in
the Ethereum network could affect the Authorized Participant’s, or the
Authorized Participant Designee’s, ability to buy or sell ether at an
advantageous price resulting in decreased confidence in the Ethereum network.
Over the longer term, delays in confirming transactions could reduce the
attractiveness to merchants and other commercial parties as a means of payment.
As a result, the Ethereum network and the value of the Trust would be adversely
affected.
If
the digital asset award or transaction fees for recording transactions on the
Ethereum network are not sufficiently high to incentivize validators may demand
high transaction fees, which could negatively impact the value of ether and the
value of the Shares.
In
2021, the Ethereum network implemented the EIP-1559 upgrade. EIP-1559 changed
the methodology used to calculate transaction fees paid to ether validators in
such a manner that reduced the total net issuance of ether fees paid to
validators. If the digital asset awards for validating blocks or the transaction
fees for recording transactions on the Ethereum network are not sufficiently
high to incentivize validators, or if certain jurisdictions continue to limit or
otherwise regulate validating activities, validators may cease expending
validating power to validate blocks and confirmations of transactions on the
Ethereum blockchain could be slowed. For example, the realization of one or more
of the following risks could materially adversely affect the value of the
Shares:
•
A
reduction in the processing power expended by validators on the Ethereum network
could increase the likelihood of a malicious actor or botnet (a volunteer or
hacked collection of computers controlled by networked software coordinating the
actions of the computers) obtaining control. See
“If a malicious actor or botnet obtains control of more than 50% of the
validating stake on the Ethereum network, or otherwise obtains control over the
Ethereum network through its influence over core developers or otherwise, such
actor or botnet could manipulate the Ethereum blockchain, which would adversely
affect the value of the Shares or the ability of the Trust to
operate.”
•
Validators
have historically accepted relatively low transaction confirmation fees on most
digital asset networks. If validators demand higher transaction fees for
recording transactions in the Ethereum blockchain or a software upgrade
automatically charges fees for all transactions on the Ethereum network, the
cost of using ether may increase and the marketplace may be reluctant to accept
ether as a means of payment. Alternatively, validators could collude in an
anti-competitive manner to reject low transaction fees on the Ethereum network
and force users to pay higher fees, thus reducing the attractiveness of the
Ethereum network. Higher transaction confirmation fees resulting through
collusion or otherwise may adversely affect the attractiveness of the Ethereum
network, the value of ether and the value of the
Shares.
•
To
the extent that any validators cease to record transactions that do not include
the payment of a transaction fee in blocks or do not record a transaction
because the transaction fee is too low, such transactions will not be recorded
on the Ethereum blockchain until a block is validated by a validator who does
not require the payment of transaction fees or is willing to accept a lower fee.
Any widespread delays or disruptions in the recording of transactions could
result in a loss of confidence in the Ethereum network and could prevent the
Trust from completing transactions associated with the day-to-day operations of
the Trust, including creations and redemptions of the Shares in exchange for
ether with Authorized Participants.
•
During
the course of the block validation processes, validators exercise the discretion
to select which transactions to include within a block and in what order to
include these transactions. Beyond the standard block reward and transaction
fees, validators have the ability to extract what is known as Maximal
Extractable Value (“MEV”) by strategically choosing, reordering, or excluding
certain transactions during block production in return for increased transaction
fees or other forms of revenue for such validators. In blockchain networks that
facilitate DeFi protocols in particular, such as the Ethereum network, users may
attempt to gain an advantage over other users by offering additional fees to
validators for effecting the order or inclusions of transactions within a block.
Certain software solutions, such as MEV Boost by Flashbots, have been developed
which facilitate validators and other parties in the ecosystem in capturing MEV.
The presence of MEV may incentivize associated practices such as sandwich
attacks or front running that can have negative repercussions on DeFi users. A
“sandwich attack” is executed by placing two transactions around a large,
detected transaction to capitalize on the expected price impact. For instance, a
market participant might identify a sizable transaction within the mempool that
will significantly alter an asset’s price on a decentralized exchange. The
participant could then, for example, orchestrate a transaction bundle: one
transaction to acquire the asset prior to the detected transaction, followed by
the large transaction itself, and a final transaction to sell the asset after
the market price has increased due to the large transaction’s execution. Such
transaction bundles can be submitted to validators through mechanisms like
MEV-Boost, with validators receiving a share of the profits as an incentive to
include the specific transaction bundle in the block. In the context of MEV,
“front running” is said to occur when a user spots a transaction in the publicly
visible so-called memory pool (“mempool”) of pending but unexecuted transactions
awaiting validation, and then pays a high transaction fee to a validator to have
their transaction executed on a priority basis in a manner designed to profit
from the pending but unexecuted transaction that is still in the mempool. MEV
may also compromise the predictability of transaction execution, which may deter
usage of the network as a whole. Although based on widely available information
given that transactions in the mempool are publicly visible, any potential
perception of MEV as unfair manipulation may also discourage users and other
stakeholders from engaging with DeFi protocols or the Ethereum network in
general. In addition, it’s possible regulators or legislators could enact rules
that restrict practices associated with MEV, which could diminish the popularity
of the Ethereum network among users and validators. Any of these or other
outcomes related to MEV may adversely affect the value of ether and the value of
the Shares.
If
the Ethereum network is used to facilitate illicit activities or evade
sanctions, businesses that facilitate transactions in ether could be at
increased risk of criminal or civil lawsuits, or of having services cut off,
which could negatively affect the price of ether and the value of the
Shares.
Digital
asset networks have in the past been, and may continue to be, used to facilitate
illicit activities. If the Ethereum network is used to facilitate illicit
activities or evade sanctions, businesses that facilitate transactions in ether
could be at increased risk of potential criminal or civil lawsuits, or of having
banking or other services cut off, and ether could be removed from digital asset
trading platforms as a result of these concerns. Other service providers of such
businesses may also cut off services if there is a concern that the Ethereum
network is being used to facilitate crime. Any of the aforementioned occurrences
could increase regulatory scrutiny of the Ethereum network and/or adversely
affect the price of ether, the attractiveness of the Ethereum network and an
investment in the Shares of the Trust.
The
Trust and the Sponsor, acting on behalf of the Trust, directly interact with (i)
parties that are themselves subject to AML program requirements under the Bank
Secrecy Act or similar laws (i.e., Authorized Participants and/or financial
institution counterparties) and/or (ii) Authorized Participant
Designees.
The
Authorized Participants are registered broker-dealers or other financial
institutions that are subject to AML and countering the financing of terrorism
obligations under the Bank Secrecy Act as administered by FinCEN and further
overseen by the SEC and FINRA, including the obligation to conduct due diligence
on their customers (including but not limited to their Authorized Participant
Designees).
When
the Trust and the Sponsor, acting on behalf of the Trust, buy or sell, as
applicable, ether, they transact directly with financial institution
counterparties that are subject to U.S. federal and/or state licensing
requirements or similar laws in non-U.S. jurisdictions and maintain practices
and policies designed to comply with AML and KYC regulations or similar laws in
non-U.S. jurisdictions. The Trust will not hold any ether except those that have
been delivered by the Trust’s ether trading counterparties, Authorized
Participants, or the Authorized Participant Designees, in connection with
creation requests.
If
the Sponsor, the Trust, or an Authorized Participant were nevertheless to
transact with such a sanctioned entity, the Sponsor, the Trust, and such
Authorized Participant would be at increased risk of potential criminal or civil
lawsuits.
Risks
Associated with Investing in the Trust
Investment-Related
Risks.
Investing
in ether and, consequently, the Trust, is speculative. The price of ether is
volatile, and market movements of ether are difficult to predict. Supply and
demand changes rapidly are affected by a variety of factors, including
regulation and general economic trends, such as interest rates, availability of
credit, credit defaults, inflation rates and economic uncertainty. All
investments made by the Trust will risk the loss of capital. Therefore, an
investment in the Trust involves a high degree of risk, including the risk that
the entire amount invested may be lost. No guarantee or representation is made
that the Trust’s investment program will be successful, that the Trust will
achieve its investment objective or that there will be any return of capital
invested to investors in the Trust, and investment results may vary.
The
NAV may not always correspond to the market price of ether.
The
NAV of the Trust will change as fluctuations occur in the market price of the
Trust’s ether holdings. Shareholders should be aware that the public trading
price per share may be different from the NAV for a number of reasons, including
price volatility and the fact that supply and demand forces at work in the
secondary trading market for shares are related, but not identical, to the
supply and demand forces influencing the market price of ether.
An
Authorized Participant may be able to create or redeem a Basket at a discount or
a premium to the public trading price per share, although some creations or
redemptions may take place in kind, and the Trust will therefore maintain its
intended fractional exposure to a specific amount of ether per share.
Different
from directly owning ether.
The
performance of the Trust will not reflect the specific return an investor would
realize if the investor actually held or purchased ether directly. The
differences in performance may be due to factors such as fees, transaction
costs, and index tracking risk. Investors will also forgo certain rights
conferred by owning ether directly, such as the right to claim air drops.
See
“Risk Factors—The inability to recognize the economic benefit of a ‘fork’ or an
‘air drop’ could adversely impact an investment in the Trust.”
Index
tracking risk.
The
Trust may not achieve the desired degree of correlation between its performance
and that of the Index and thus may not achieve its investment objective. The
difference in performance may be due to factors such as fees, transaction costs,
redemptions of, and subscriptions for, Shares, pricing differences, differences
in the timing of the addition or removal of constituent exchanges underlying the
Index or the cost to the Trust of complying with various new or existing
regulatory requirements.
Liquidity
risk.
The
Trust’s and an Authorized Participant’s, or its Authorized Participant
Designee’s, ability to buy or sell ether may be adversely affected by limited
trading volume, lack of a market maker, or legal restrictions. It is also
possible that an ether spot market or governmental authority may suspend or
restrict trading in ether altogether. Therefore, it may not always be possible
to execute a buy or sell order at the desired price or to liquidate an open
position due to market conditions on spot markets, regulatory issues affecting
ether or other issues affecting counterparties. Ether is a new asset with a very
limited trading history. Therefore, the markets for ether may be less liquid and
more volatile than other markets for more established
products.
The
value of the Shares may be influenced by a variety of factors unrelated to the
value of ether.
The
value of the Shares may be influenced by a variety of factors unrelated to the
price of ether and the ether exchanges included in the Index that may have an
adverse effect on the price of the Shares. These factors include, but are not
limited to, the following factors:
•
Unanticipated
problems or issues with respect to the mechanics of the Trust’s operations and
the trading of the Shares may arise, in particular due to the fact that the
mechanisms and procedures governing the creation and offering of the Shares and
storage of ether have been developed specifically for this
product;
•
The
Trust could experience difficulties in operating and maintaining its technical
infrastructure, including in connection with expansions or updates to such
infrastructure, which are likely to be complex and could lead to unanticipated
delays, unforeseen expenses and security vulnerabilities;
•
The
Trust could experience unforeseen issues relating to the performance and
effectiveness of the security procedures used to protect the Trust’s account
with the Custodian, or 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;
or
•
Service
providers may decide to terminate their relationships with the Trust due to
concerns that the introduction of privacy enhancing features to the Ethereum
network may increase the potential for ether to be used to facilitate crime,
exposing such service providers to potential reputational
harm.
Any
of these factors could affect the value of the Shares, either directly or
indirectly through their effect on the Trust’s assets.
An
Authorized Participant’s, or its Authorized Participant Designee’s, buying and
selling activity associated with the creation and redemption of Baskets may
adversely affect an investment in the Shares.
An
Authorized Participant’s, or its Authorized Participant Designee’s, purchase of
ether in connection with Basket creation orders may cause the price of ether to
increase, which will result in higher prices for the Shares. Increases in the
ether prices may also occur as a result of ether purchases by other market
participants who attempt to benefit from an increase in the market price of
ether when baskets are created. The market price of ether may therefore decline
immediately after Baskets are created.
Selling
activity associated with sales of ether by an Authorized Participant, or its
Authorized Participant Designee, in connection with redemption orders may
decrease ether prices, which will result in lower prices for the Shares.
Decreases in ether prices may also occur as a result of selling activity by
other market participants.
In
addition to the effect that purchases and sales of ether by an Authorized
Participant, or its Authorized Participant Designee, may have on the price of
ether, sales and purchases of ether by similar investment vehicles (if
developed) could impact the price of ether. If the price of ether declines, the
trading price of the Shares will generally also decline.
The
inability of Authorized Participants and market makers to hedge their ether
exposure may adversely affect the liquidity of Shares and the value of an
investment in the Shares.
Authorized
Participants and market makers will generally want to hedge their exposure in
connection with Basket creation and redemption orders. To the extent Authorized
Participants and market makers are unable to hedge their exposure due to market
conditions (e.g., insufficient ether liquidity in the market, inability to
locate an appropriate hedge counterparty, extreme volatility in the price of
ether, wide spreads between prices quotes on different ether trading platforms,
etc.), such conditions may make it difficult to create or redeem Baskets or
cause them to not create or redeem Baskets. In addition, the hedging mechanisms
employed by Authorized Participants and market makers to hedge their exposure to
ether may not function as intended, which may make it more difficult for them to
enter into such transactions. Such events could negatively impact the market
price of Shares and the spread at which Shares trade on the open market. To the
extent Authorized Participants wish to use futures to hedge their exposure, note
that while growing in recent years, the market for exchange-traded ether futures
has a limited trading history and operational experience and may be less liquid,
more volatile and more vulnerable to economic, market and industry changes than
more established futures markets. The liquidity of the market will depend on,
among other things, the adoption of ether and the commercial and speculative
interest in the
market.
Arbitrage
transactions intended to keep the price of Shares closely linked to the price of
ether may be problematic if the process for the creation and redemption of
Baskets encounters difficulties, which may adversely affect an investment in the
Shares.
If
the processes of creation and redemption of the Shares encounter any
unanticipated difficulties, potential market participants who would otherwise be
willing to purchase or redeem Baskets to take advantage of any arbitrage
opportunity arising from discrepancies between the price of the Shares and the
price of the underlying ether may not take the risk that, as a result of those
difficulties, they may not be able to realize the profit they expect. In
addition, the Trust’s NAV and the price of a Basket Deposit (as defined below)
could rise or fall substantially between the time a purchase order is submitted
by an Authorized Participant and the time the amount of the purchase price in
respect thereof is determined, and the risk of such price movements will be
borne solely by the Authorized Participant. Such price movements may further
frustrate efforts to effectively seize arbitrage opportunities. If this is the
case, the liquidity of Shares may decline and the price of the Shares may
fluctuate independently of the price of ether and may fall.
The
use of cash creations and redemptions, to the extent used by Authorized
Participants, may adversely affect the arbitrage transactions by Authorized
Participants intended to keep the price of the Shares closely linked to the
price of ether and, as a result, the price of the Shares may fall or otherwise
diverge from NAV.
To
the extent Authorized Participants effectuate creations and redemptions for
cash, there may be delays in trade execution due to potential operational issues
arising from implementing a cash creation and redemption model, which involves
more complex operational steps (and therefore execution risk) than in-kind
creation and redemption models. Such delays could cause the execution price
associated with such trades to materially deviate from the Index price used to
determine the NAV. Even though the Authorized Participant is responsible for the
dollar cost of such difference in prices, Authorized Participants could default
on their obligations to the Trust, or such potential risks and costs could lead
Authorized Participants, who would otherwise be willing to purchase or redeem
Baskets to take advantage of any arbitrage opportunity arising from
discrepancies between the price of the Shares and the price of the underlying
ether, to elect to not participate in the Trust’s Share creation and redemption
processes. This may adversely affect the arbitrage mechanism intended to keep
the price of the Shares closely linked to the price of ether, and as a result,
the price of the Shares may fall or otherwise diverge from NAV. If the arbitrage
mechanism is not effective, purchases or sales of Shares on the secondary market
could occur at a premium or discount to NAV, which could harm Shareholders by
causing them to buy Shares at a price higher than the value of the underlying
ether held by the Trust or sell Shares at a price lower than the value of the
underlying ether held by the Trust, causing Shareholders to suffer
losses.
The
Authorized Participants serve in such capacity for several competing
exchange-traded ether products, which could adversely affect the Trust’s
operations and the secondary market for the Shares.
Authorized
Participants are the only persons that may place orders to create and redeem
Baskets with the Trust. The Trust may have a limited number of financial
institutions that act as Authorized Participants, none of which are obligated to
engage in creation and/or redemption transactions. Some or all of the Trust’s
Authorized Participants are expected to serve as authorized participants or
market makers for one or more exchange-traded ether products that compete with
the Trust. This may make it more difficult to engage or retain Authorized
Participants for the Trust. There is no guarantee that the Trust will be able to
attract Authorized Participants. Furthermore, decisions by Authorized
Participants to reduce their role with respect to market making or creation and
redemption activities during times of market stress, or a decline in the number
of Authorized Participants due to decisions to exit the business, bankruptcy,
competing products in the same asset class or other factors, could inhibit the
effectiveness of the arbitrage process in maintaining the relationship between
the underlying value of the Trust’s ether and the market price of the Shares. To
the extent that other Authorized Participants do not step forward to engage in
creation and redemption orders, there may be a significantly diminished trading
market for the Shares or the Shares may trade at a discount (or premium) to NAV
and possibly face trading halts and/or de-listing.
Security
threats and cyber-attacks 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, cyber-attacks, computer malware and computer hacking attacks have been
a prevalent concern in relation to digital assets. Multiple thefts of ether and
other digital assets from other holders have occurred in the past. Because of
the pseudonymous nature of the Ethereum Blockchain, thefts can be difficult to
trace, which may make ether a particularly attractive target for theft. Cyber
security failures or breaches of one or more of the Trust’s service providers
(including, but not limited to, the Index Provider, the Transfer Agent, the
Distributor, the Administrator, or the Custodian) 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 cyber-security breaches of those
technological or information systems. The Sponsor believes that the Trust’s
ether held in the Trust’s account with the Custodian will be an appealing target
to hackers or malware distributors seeking to destroy, damage or steal the
Trust’s ether or private keys and will only become more appealing as the Trust’s
assets grow. While the Trust, the Sponsor and the Custodian have implemented
procedures to identify and or stop new security threats and expect to adapt to
technological changes in the digital asset industry, to the extent such efforts
are unsuccessful the Trust’s ether may be subject to theft, loss, destruction or
other attack.
Additionally,
access to the Trust’s ether could be restricted by natural events (such as an
earthquake or flood) or human actions (such as a terrorist attack). The Sponsor
has evaluated the security procedures in place for safeguarding the Trust’s
ether. 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.
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,
the Custodian, or otherwise, and, as a result, an unauthorized party may obtain
access to the Trust’s account with the Custodian, the private keys (and
therefore ether) or other data of the Trust. Additionally, outside parties may
attempt to fraudulently induce employees of the Sponsor, the Custodian, 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 and the
Custodian may be unable to anticipate these techniques or implement adequate
preventative measures.
An
actual or perceived breach of the Trust’s account with the Custodian 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 respectively believe are reasonably
designed to prevent cyber attacks, 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,
see
“Liability and Indemnification” and
“Material
Contracts” below.
If
the Trust’s holdings of ether 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 Trust’s
Custodian has limited liability to the Trust, which could adversely affect the
Trust’s ability to seek recovery from them, even when the Custodian’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 ether. If an uninsured loss occurs or a loss exceeds policy
limits, the Trust could lose all of its
assets.
The
Trust’s risk management processes and policies may prove to not be adequate to
prevent any loss of the Trust’s ether.
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 FDA, despite its status as an affiliate of the Sponsor. The
Sponsor is continuing to monitor and evaluate the Trust’s risk management
processes and policies and believes that the current risk management processes
and procedures are reasonably designed and effective. The Trust does not
normally interact with any digital asset trading platforms, and the Trust’s
ether is held in a cold storage wallet with the Custodian, a national trust
bank, pursuant to an express custodial relationship. The Sponsor believes that
the security procedures that the Sponsor and the Custodian utilize, such as
hardware redundancy, segregation and offline data storage (i.e., the maintenance
of data on computers and/or storage media that is not directly connected to or
accessible from the internet and/or networked with other computers, also known
as “cold storage”) protocols are reasonably designed to safeguard the Trust’s
ether from theft, loss, destruction or other issues relating to hackers and
technological attack. Despite the number of security procedures that the Sponsor
and Custodian employ, it is impossible to guarantee the prevention of any loss
due to a security breach, software defect, act of God, pandemic or riot that may
be borne by the Trust. Notwithstanding the above, the Sponsor and the Custodian
are responsible for their own gross negligence, willful misconduct or bad faith.
In the event that the Trust’s risk management processes and policies prove to
not be adequate to prevent any loss of the Trust’s ether and such loss is not
covered by insurance or is otherwise recoverable, the value of the Shares will
decrease as a result and investors would experience a decrease in the value of
their investment.
The
Trust’s Custodian could become insolvent or become subject to a receivership or
bankruptcy proceeding, which may result in a loss of or delay in access to Trust
assets.
If
the Custodian becomes insolvent or subject to a receivership or bankruptcy
proceeding, the Trust’s operations may be adversely affected, and there is a
risk that the insolvency, receivership or bankruptcy of the 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.
The
Trust’s assets will be held in one or more accounts maintained for the Trust by
the Custodian. The Custodian is a national trust bank and is subject to the
supervision of Office of the Comptroller of the Currency. The Custodial Services
Agreement for Trust assets contains an agreement by the parties to treat the
ether credited to the Trust as financial assets under Article 8 of the New York
Uniform Commercial Code (“Article 8”), in addition to stating that the Custodian
will serve as a securities intermediary with respect to such assets. Further,
the Custodian has agreed to hold Trust assets for the benefit of the Trust as
the entitlement holder, and while the Trust assets will be commingled with
assets of the Custodian’s other customers in an omnibus account, such assets
will not be commingled with the Custodian’s proprietary assets. While other
types of assets held in a similarly-segregated manner have been deemed not to be
part of the asset custodian’s bankruptcy estate under various regulatory
regimes, bankruptcy courts have not yet fully addressed the appropriate
treatment of custodial holdings of digital assets and any such determination may
be highly fact-specific.
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 or receivership proceeding of an entity such as the Custodian, in
the event of an insolvency, receivership or bankruptcy proceeding with respect
to the Custodian, there is a risk that the Trust’s assets may be considered the
property of the bankruptcy estate of the Custodian, and that customers of the
Custodian—including the Trust—may be at risk of being treated as general
unsecured creditors of the Custodian and subject to the risk of total loss or
markdowns on value of such assets. Moreover, even if the Trust’s assets
ultimately are not treated as part of the Custodian’s bankruptcy estate, the
automatic stay could apply until the bankruptcy court made such a determination,
and the limited precedent and fact-dependent nature of the determination could
delay or preclude the return of such assets to the Trust. Further, the
bankruptcy court may permit the Custodian to retain possession or custody of its
customers’ assets until any claims the estate may have against the customers
(including the Trust) are resolved.
An
actual or perceived business failure or interruption, default, failure to
perform security breach or other problems affecting the Custodian 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 change the custodial arrangements described in this Annual Report at
any time without notice to
Shareholders.
Loss
of a critical banking relationship for, or the failure of a bank used by, the
Trust could adversely impact the Trust’s ability to create or redeem Baskets, or
could cause losses to the Trust.
The
Cash Custodian is necessary to facilitate the creation and redemption of Baskets
(in exchange for cash subscriptions by Authorized Participants, or in exchange
for redemptions of Shares by Authorized Participants), and other cash movements,
including in connection with the purchase of ether by the Sponsor to effectuate
subscriptions for cash and the selling of ether to effect redemptions for cash
and, to the extent applicable, other Trust expenses, and in extraordinary
circumstances, to effect the liquidation of the Trust’s ether. The Trust relies
on the Cash Custodian to hold any cash related to the purchase or sale of ether.
To the extent that the Trust or Sponsor face difficulty establishing or
maintaining banking relationships, the loss of the Trust’s banking partners,
including the Cash Custodian, or the imposition of operational restrictions by
these banking partners and the inability of the Trust to utilize other financial
institutions may result in a disruption of creation and redemption activity of
the Trust, or cause other operational disruptions or adverse effects for the
Trust. In the future, it is possible that the Trust could be unable to establish
accounts at new banking partners, or that the banks with which the Trust is able
to establish relationships may not be as large or well-capitalized or subject to
the same degree of prudential supervision as the existing providers.
The
Trust could also suffer losses in the event that a bank in which the Trust holds
customer cash, including the Cash Custodian, fails, becomes insolvent, enters
receivership, is taken over by regulators, enters financial distress, or
otherwise suffers adverse effects to its financial condition or operational
status. If the Cash Custodian were to experience financial distress or its
financial condition is otherwise affected, the Cash Custodian’s ability to
provide services to the Trust could be affected. Moreover, the future failure of
the Cash Custodian or other bank at which the Trust maintains cash could result
in losses to the Trust, to the extent the balances are not covered by deposit
insurance. As a result, the Trust could suffer losses.
The
Trust is subject to risks due to its concentration of investments in a single
asset class.
Unlike
other funds that may invest in diversified assets, the Trust’s investment
strategy is concentrated in a single asset within a single asset class. This
concentration maximizes the degree of the Trust’s exposure to a variety of
market risks associated with ether and digital assets. By concentrating its
investment strategy solely in ether, any losses suffered as a result of a
decrease in the value of ether can be expected to reduce the value of an
interest in the Trust and will not be offset by other gains if the Trust were to
invest in underlying assets that were diversified.
The
lack of active trading markets for the Shares may result in losses on
Shareholders’ investments at the time of disposition of Shares.
Although
Shares of the Trust are publicly listed and traded on an exchange, there can be
no guarantee that an active trading market for the Shares will be maintained. If
Shareholders need to sell their Shares at a time when no active market for them
exists, the price Shareholders receive for their Shares, assuming that
Shareholders are able to sell them, may be lower than the price that
Shareholders would receive if an active market did exist and, accordingly, a
Shareholder may suffer losses.
Several
factors may affect the Trust’s ability to achieve its investment objective on a
consistent basis.
There
can be no assurance that the Trust will achieve its investment objective.
Prospective investors should read this entire Annual Report and consult with
their own advisers before subscribing for Shares. Factors that may affect the
Trust’s ability to meet its investment objective include: (1) an Authorized
Participant’s, or its Authorized Participant Designee’s, ability to transfer
ether in an efficient manner to effectuate creation and redemption orders; (2)
transaction fees associated with the Ethereum network; (3) the ether market
becoming illiquid or disrupted; (4) the need to conform the Trust’s portfolio
holdings to comply with investment restrictions or policies or regulatory or tax
law requirements; (5) early or unanticipated closings of the markets on which
ether trades, resulting in the inability of such Authorized Participant, or its
Authorized Participant Designee, to execute intended portfolio transactions; and
(6) accounting standards.
The
amount of ether represented by the Shares will decline over time.
Each
outstanding Share represents a fractional, undivided interest in the ether held
by the Trust. The Trust does not generate any income and transfers ether to pay
for the Sponsor Fee and other liabilities. Therefore, the amount of ether
represented by each Share will gradually decline over time. This is also true
with respect to Shares that are issued in exchange for additional deposits of
ether over time, as the amount of ether required to create Shares proportionally
reflects the amount of ether represented by the Shares outstanding at the time
of such creation unit being created. Assuming a constant ether price, the
trading price of the Shares is expected to gradually decline relative to the
price of ether as the amount of ether represented by the Shares gradually
declines.
Shareholders
should be aware that the gradual decline in the amount of ether represented by
the Shares will occur regardless of whether the trading price of the Shares
rises or falls in response to changes in the price of ether.
In
addition, to the extent that the Trust incurs transaction expenses in connection
with the creation and redemption process, litigation expenses, indemnification
obligations under the Trust’s service provider agreements and other
Extraordinary Expenses that are not Sponsor-paid Expenses, such expenses will be
borne by the Trust. To the extent that the Trust fails to attract a sufficiently
large amount of investors, the effect of such expenses on the value of the
Shares may be significantly greater than would be the case if the Trust had
attracted more assets.
The
Sponsor may need to find and appoint a replacement custodian quickly, which
could pose a challenge to the safekeeping of the Trust’s ether.
The
Sponsor could decide to replace the Custodian as the custodian of the Trust’s
ether, or the Custodian may cease providing the custodial services necessary for
the Trust’s normal operations. For example, the Trust’s custodian may become
insolvent and enter bankruptcy or receivership proceedings, or discontinue
business operations with little or no warning to the Sponsor or the Trust.
Transferring maintenance responsibilities of the Trust’s account with the
Custodian to another party will likely be complex and could subject the Trust’s
ether 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 the custodian under
the same terms as the current Custodial Services Agreement. To the extent that
Sponsor is not able to find a suitable party willing to serve as the custodian,
the Sponsor may be required to terminate the Trust and liquidate the Trust’s
ether.
Limited
recourse.
The
Custodian has limited liability for any loss, claim, or damage to the Trust,
impairing the ability of the Trust to recover losses relating to its ether and
any recovery may be limited, except to the extent of a final, non- appealable
judicial determination that such loss, claim or damage directly resulted from
the gross negligence, willful misconduct or fraud of the Custodian. In addition,
the Custodian is generally not be liable for any loss caused, directly or
indirectly, by the failure of the Trust to adhere to the Custodian’s policies
and procedures that have been disclosed to the Trust, a force majeure event or
certain actions determined by the Custodian to be necessary or advisable to
inspect and protect the security of the Trust’s assets. Furthermore, the
Custodian is generally not liable for a loss caused, directly or indirectly, by
any failure or delay to act by any service provider to the Custodian or any
system failure (other than a system failure caused by the gross negligence,
willful misconduct or fraud of the Custodian or the Custodian’s affiliates),
that prevents the Custodian from fulfilling its obligations.
Under
the Trust Agreement, the Trustee and the Sponsor will not be liable for any
liability or expense incurred absent fraud, gross negligence, bad faith or
willful misconduct on the part of the Trustee or the Sponsor or breach by the
Sponsor of the Trust Agreement, as the case may be. As a result, the recourse of
the Trust or the Shareholder to Trustee or the Sponsor may be
limited.
The
Index Provider has limited liability relating to the use of the Index, impairing
the ability of the Trust to recover losses relating to its use of the Index. The
Index Provider does not guarantee the accuracy, completeness, or performance of
the Index or the data included therein and shall have no liability in connection
with the Index or index calculation, errors, omissions or interruptions of any
Fidelity index or any data included therein. The Index could be calculated now
or in the future in a way that adversely affects an investment in the
Trust.
The
Calculation Agent also has limited liability, impairing the ability of the Trust
to recover losses relating to the calculation of the Index.
The
value of the Shares will be adversely affected if the Trust is required to
indemnify the Sponsor, the Trustee, the Transfer Agent or the
Custodian.
Each
of the Sponsor, the Trustee, the Transfer Agent and the Custodian has a right to
be indemnified by the Trust for certain liabilities or expenses that it incurs
without gross negligence, bad faith or willful misconduct on its part.
Therefore, the Sponsor, Trustee, Transfer Agent or the Custodian 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 ether holdings of the
Trust and the value of the
Shares.
Intellectual
property rights claims may adversely affect the Trust and the value of the
Shares.
The
Sponsor is not aware of any intellectual property rights claims that may prevent
the Trust from operating and holding ether. However, third parties may assert
intellectual property rights claims relating to the operation of the Trust and
the mechanics instituted for the investment in, holding of and transfer of
ether. Regardless of the merit of an intellectual property or other legal
action, any legal expenses to defend or payments to settle such claims would be
Extraordinary Expenses that would be borne by the Trust through the sale or
transfer of its ether and any threatened action that reduces confidence in
long-term viability or the ability of end-users to hold and transfer ether may
adversely affect the value of the Shares. Additionally, a meritorious
intellectual property rights claim could prevent the Trust from operating and
force the Sponsor to terminate the Trust and liquidate its ether. As a result,
an intellectual property rights claim against the Trust could adversely affect
the value of the Shares.
Unforeseeable
risks.
Ether
has gained commercial acceptance only within recent years and, as a result,
there is little data on its long-term investment potential. Additionally, due to
the rapidly evolving nature of the ether market, including advancements in the
underlying technology, changes to ether may expose investors in the Trust to
additional risks which are impossible to predict.
The
Sponsor’s policies and procedures may not fully mitigate the risk of conflicts
of interest.
The
Sponsor does not have operating practices that require personnel to pre-clear
personal trading activity in which ether is the referenced asset. In general,
pre-clearance policies prohibit employees and agents from engaging in certain
personal trading activity without first obtaining pre-clearance of the
transaction from the firm’s chief compliance officer, chief financial officer,
or some senior officer with similar responsibilities.
Without
implementing pre-clearance requirements, the Sponsor may not be able to fully
mitigate the risk of conflicts of interest or avoid the appearance of
impropriety in connection with the purchase and sale of ether. There is no
guarantee that every employee, officer, director, or similar person associated
with the Sponsor, or its affiliates will refrain from engaging in insider
trading in violation of their duties to the Trust and Sponsor.
This
risk is present in traditional financial markets and is not unique to ether. If
such employees or others affiliated with the Sponsor engage in illegal conduct
or conduct which fails to meet applicable regulatory standards, the Sponsor and
its affiliates could be the target of civil or criminal fines, penalties,
punishments, or other regulatory sanctions or lawsuits or could be the target of
an investigation. Any of these outcomes could cause the Trust and Shareholders
to suffer harm.
The
Sponsor and its affiliates may also participate in transactions related to
ether, either for their own account (subject to certain internal employee
trading operating practices) or for the account of others, such as clients, and
such transactions may occur prior to, during, or after the commencement of this
offering. Such transactions may not serve to benefit the Shareholders of the
Trust and may have a positive or negative effect on the value of the ether held
by the Trust and, consequently, on the market value of ether.
Potential
conflicts of interest may arise among the Sponsor or its affiliates and the
Trust. The Sponsor and its affiliates have no fiduciary duties to the Trust and
its Shareholders other than as provided in the Trust Agreement, which may permit
them to favor their own interests to the detriment of the Trust and its
Shareholders.
The
Sponsor will manage the affairs of the Trust. Conflicts of interest may arise
among the Sponsor and its affiliates, on the one hand, and the Trust and its
Shareholders, on the other hand. As a result of these conflicts, the Sponsor may
favor its own interests and the interests of its affiliates over the Trust and
its Shareholders. These potential conflicts include, among others, the
following:
•
the
Sponsor has no fiduciary duties to, and is allowed to take into account the
interests of parties other than, the Trust and its Shareholders in resolving
conflicts of interest, provided the Sponsor does not act in bad
faith;
•
the
Trust has agreed to indemnify the Sponsor, the Trustee and their respective
affiliates pursuant to the Trust Agreement;
•
the
Sponsor is responsible for allocating its own limited resources among different
clients and potential future business ventures, to each of which it may owe
fiduciary duties;
•
the
Sponsor and its staff also service affiliates of the Sponsor, and may also
service other digital asset investment vehicles, and their respective clients
and cannot devote all of its, or their, respective time or resources to the
management of the affairs of the
Trust;
•
Fidelity
Product Services LLC, the Index Provider of the Fidelity Ethereum Reference
Rate, Fidelity Digital Asset Services, N.A., the Custodian of the Trust, and
Fidelity Service Company, Inc., the Administrator of the Trust, are all
affiliates of the Sponsor, and as such the Sponsor is disincentivized from
replacing them as the Trust’s service providers;
•
the
Sponsor, its affiliates and their officers and employees are not prohibited from
engaging in other businesses or activities, including those that might be in
direct competition with the Trust;
•
affiliates
of the Sponsor may start to have substantial direct investments in ether, or
other digital assets or companies in the digital assets ecosystem that they are
permitted to manage taking into account their own interests without regard to
the interests of the Trust or its Shareholders, and any increases, decreases or
other changes in such investments could affect the Index price and, in turn, the
value of the Shares; and
•
the
Sponsor decides whether to retain separate counsel, accountants or others to
perform services for the Trust.
By
purchasing the Shares, Shareholders agree and consent to the provisions set
forth in the Trust Agreement.
Risks
Associated with the Index and Index Pricing
The
Index was developed by an affiliate of the Sponsor, the Index Provider. The
Index Provider has substantial discretion at any time to change the methodology
used to calculate the Index, including the spot markets that contribute prices
to the Trust’s NAV. Any such changes could affect the present, past and expected
levels of the Index and could adversely affect performance of the Index. The
Index Provider does not have any obligation to take the needs of the Trust, the
Trust’s Shareholders, or anyone else into consideration in connection with such
changes. There is no guarantee that the methodology currently used in
calculating the Index will appropriately track the price of ether in the future.
The Index Provider has no obligation to take the needs of the Trust or the
Shareholders into consideration in determining, composing, or calculating the
Index. By investing in the Trust, Shareholders will have no rights against the
Index Provider or any other persons that have discretion over the Index, even
though these entities administer, oversee and determine the Index.
Pricing
sources used by the Index are digital asset spot markets that facilitate the
buying and selling of ether and other digital assets. Although many pricing
sources refer to themselves as “exchanges,” they are not registered with, or
supervised by, the SEC or CFTC and do not meet the regulatory standards of a
national securities exchange or designated contract market. For these reasons,
among others, purchases and sales of ether may be subject to temporary
distortions or other disruptions due to various factors, including the lack of
liquidity in the markets and government regulation and intervention. These
circumstances could affect the price of ether used in Index calculations and,
therefore, could adversely affect the level of the Index.
The
Index is based on various inputs which include price data from various
third-party ether spot markets. The Index Provider does not guarantee the
validity of any of these inputs, which may be subject to technological error,
manipulative activity, or fraudulent reporting from their initial
source.
Right
to change index.
The
Sponsor, in its sole discretion, may cause the Trust to track (or price its
portfolio based upon) an index or standard other than the Index at any time,
with notice to the Shareholders, if investment conditions change or the Sponsor
believes that another index or standard better reflects the price of ether. The
Sponsor, however, is under no obligation whatsoever to make such changes in any
circumstance.
Risks
related to pricing.
As
set forth under “Item
1. Business
—
Calculation
of Net Asset Value”,
the Trust’s portfolio will be priced, including for purposes of determining the
NAV, based upon the VWMP of ether used for the calculation of the Index as of
the time of such valuation.
Using
a VWMP methodology and price feeds from eligible ether spot markets, the Index
intends to represent the U.S. dollar value of one ether every 15 seconds based
on VWMP spot market data over rolling sixty-minute increments. As such, the VWMP
methodology used to determine the NAV may not be reflective of market events and
other developments that occur after its pricing window and thus this methodology
may not be reflective of the then-available market price of ether in periods
between its calculation. Additionally, as the methodology references a median
price, it may not reflect the price of ether available for the Trust to transact
on any single spot market. The Sponsor does not intend, and disclaims any
obligation, to determine whether the methodology used to determine the level of
the Index accurately reflects the value of ether or the price at which market
transactions in ether could be readily effected at any given
time.
Because
the NAV of the Trust will be based almost entirely on the value of the Trust’s
ether portfolio as determined by such VWMP methodology, and subscriptions and
redemptions are processed based on the NAV of the Trust, if the methodology does
not reflect the market value of ether at a given time, subscription and
redemption transactions will be effected at prices that may adversely affect the
Trust.
The
NAV of the Trust will change as fluctuations occur in the market price of the
Trust’s ether holdings. Shareholders should be aware that the public trading
price per Share may be different from the NAV for a number of reasons, including
price volatility, trading activity, the closing of ether trading platforms due
to fraud, failure, security breaches or otherwise, and the fact that supply and
demand forces at work in the secondary trading market for Shares are related,
but not identical, to the supply and demand forces influencing the market price
of ether.
An
Authorized Participant may be able to create or redeem a Basket at a discount or
a premium to the public trading price per Share and the Trust will therefore
maintain its intended fractional exposure to a specific amount of ether per
Share.
Shareholders
also should note that the size of the Trust in terms of total ether held may
change substantially over time and as Baskets are created and
redeemed.
In
the event that the value of the Trust’s ether holdings or ether holdings per
Share is incorrectly calculated, neither the Sponsor nor the Administrator will
be liable for any error and such misreporting of valuation data could adversely
affect the value of the Shares.
Regulatory
Risk
As
ether and digital assets have grown in both popularity and market size, the U.S.
Congress and a number of U.S. federal and state agencies have been examining the
operations of digital asset networks, digital asset users and the digital asset
spot market. Many of these state and federal agencies have brought enforcement
actions and issued advisories and rules relating to digital asset markets. The
SEC had charged certain large U.S. digital asset trading platforms of supporting
trading and settlement of securities in violation of the U.S. federal securities
laws. Specifically, the SEC alleged that these exchanges are operating as
unregistered securities exchanges, brokers and clearing agencies. For example,
on June 5, 2023, the SEC filed lawsuits against cryptocurrency exchanges
Coinbase and Binance alleging, among other things, their operation of an
unlicensed securities exchange. Although the SEC has not alleged that ether is a
security, the outcome of these enforcement actions and others may result in the
substantial restructuring of the digital asset market in the United States.
Moreover, until these actions are resolved, the structure of the digital asset
market in the United States will remain subject to substantial regulatory risk,
which may impact the demand for digital assets and the continued availability of
existing exchanges and offerings. The U.S. Congress is also actively preparing
new legislation to address certain market structure issues relating to digital
assets and stablecoins. The outcome of this legislation is unknown. Both the
outcome of the pending SEC enforcement actions and federal legislation are
highly uncertain and may alter, perhaps to a materially adverse extent, the
nature of an investment in the Shares and/or the ability of the Trust to
continue to operate.
Although
neither the SEC nor the CFTC has exerted direct authority over ether or ether
spot trading activity, the SEC and CFTC have broad authority over the regulation
of issuances of securities (including digital asset securities) and commodity
interests (including derivative instruments utilizing or referencing digital
assets). The SEC and CFTC’s engagement with the digital asset industry has had a
material impact on the development of digital asset markets, including initial
coin offerings, margin trading, regulated and unregulated derivatives markets,
and decentralized finance markets. For example, the SEC has issued guidance as
to the application of the securities laws to digital assets and initiated
enforcement actions against certain digital asset issuers and offerings on the
basis that such digital assets and offerings are securities under U.S.
securities laws. In these actions, the SEC reasoned that the unregistered offer
and sale of digital assets can, in certain circumstances, including ICOs, be
considered an illegal public offering of securities. Similarly, the CFTC,
together with the Department of Justice, has initiated enforcement actions
against digital asset trading platforms relating to violations of the CEA, on
the basis that such platforms engaged in illegal, off-exchange retail commodity
transactions in digital assets and digital asset derivative transactions.
Further enforcement actions against participants in the digital asset industry
could have negative impacts on the price of digital assets, including
ether.
In
August 2021, the previous chair of the SEC, stated that he believed investors
using digital asset trading platforms are not adequately protected, and that
activities on the platforms can implicate the securities laws, commodities laws
and banking laws, raising a number of issues related to protecting investors and
consumers, guarding against illicit activity, and ensuring financial stability.
It is not possible to predict whether the U.S. Congress will grant additional
authorities to the SEC or other regulators, what the nature of such additional
authorities might be, how they might impact the ability of digital assets
markets to function or how any new regulations that may flow from such
authorities might impact the value of digital assets generally and ether held by
the Trust
specifically.
On
January 21, 2025, the SEC’s acting Chairman Mark T. Uyeda announced the SEC
Crypto Task Force. The task force has an objective of developing a comprehensive
and clear regulatory framework for crypto assets. Following the task force
announcement, on January 23, 2025, President Trump executed the Strengthening
American Leadership in Digital Financial Technology Executive Order. It is
currently unknown how the actions or recommendations of the task force and this
Executive Order or future governmental actions may impact the status of ether or
any other digital asset as a “security” or how ether or the Trust would be
treated under any new or revised regulatory framework.
In
addition to the SEC’s actions targeting digital assets and trading platforms
directly, the SEC has also targeted regulated investments that provide exposure
to digital assets indirectly. For example, in a letter regarding the SEC’s
review of proposed rule changes to list and trade shares of certain
ether-related investment vehicles on public markets, the SEC staff stated that
it has significant investor protection concerns regarding the markets for
digital assets, including the potential for market manipulation and fraud. In
March 2018, it was reported that the SEC was examining as many as 100 investment
funds with strategies focused on digital assets. The reported focus of the
examinations is on the accuracy of risk disclosures to investors in these funds,
digital asset pricing practices, and compliance with rules meant to prevent the
theft of investor funds, as well as on information gathering so that the SEC can
better understand new technologies and investment products.
In
May 2025, the staff of the Division of Trading and Markets of the SEC released
guidance in the form of frequently asked questions relating to crypto asset
activities. The SEC staff’s guidance addressed several key points for
broker-dealers acting as Authorized Participants. According to the guidance,
broker-dealers may custody non-security crypto assets and may treat crypto asset
securities as being held at a permissible “control location” under 1934 Act Rule
15c3-3(c). The guidance also clarified that broker-dealers may conduct
non-security crypto asset businesses, including facilitating transactions in
crypto asset securities that settle in crypto rather than cash. In addition,
broker-dealers may hold crypto assets as proprietary positions for net capital
purposes, subject to applicable haircuts and other limitations. Furthermore, the
SEC staff indicated that broker-dealers may engage in in-kind creations and
redemptions for spot crypto exchange-traded products. However, this guidance is
non-binding, and may be modified, superseded, or withdrawn at any time without
notice, as emphasized in the guidance. Additionally, there is no guarantee that
Authorized Participants will actually transact in-kind at all despite this
guidance.
OFAC
has added digital currency addresses to the list of Specially Designated
Nationals whose assets are blocked, and with whom U.S. persons are generally
prohibited from dealing. Such actions by OFAC, or by similar organizations in
other jurisdictions, may introduce uncertainty in the market as to whether ether
that has been associated with such addresses in the past can be easily sold.
This “tainted” ether may trade at a substantial discount to untainted ether.
Reduced fungibility in the ether markets may reduce the liquidity of ether and
therefore adversely affect its price.
In
December 2020, FinCEN, a bureau within the U.S. Treasury Department, proposed a
rule that would require financial institutions to submit reports, keep records,
and verify the identity of customers for certain transactions to or from
so-called “unhosted” wallets, also commonly referred to as self-hosted wallets.
In May 2021, the U.S. Department of Treasury proposed new rules potentially
requiring businesses to record transactions in digital assets that exceed
$10,000 in value. It remains unclear if these proposed rules will ultimately be
adopted.
President
Trump’s January 23, 2025 Executive Order, titled “Strengthening American
Leadership in Digital Financial Technology, aimed to reorient the federal
government’s approach to digital assets. The Executive Order emphasized the
importance of the digital asset industry in innovation and economic development,
and outlined policies to support the growth and use of digital assets,
blockchain technology and related technologies. President Trump’s order also
revoked former President Biden’s March 9, 2022 Executive Order, titled,
“Responsible Development of Digital Assets” and the U.S. Department of
Treasury’s July 7, 2022 “Framework for International Engagement of Digital
Assets” and all policies, directives and guidance issued pursuant to those items
produced by the previous administration. The consequences of federal regulation
of digital assets and digital asset activities could have a material adverse
effect on the Trust and the Shares. If the Sponsor determines not to comply with
such regulatory and registration requirements, it may seek to cease certain or
all of the Trust’s operations. Any such action could have a material adverse
effect on our business, financial condition and results of
operations.
The
entire cryptocurrency industry experienced a significant drawdown in 2022,
particularly throughout the latter half of the year. The decline was due to
numerous factors, including a slowing macroeconomic environment, rising interest
rates, expiring pandemic financial assistance, and the public collapse of
several major industry participants, including Three Arrows Capital, Voyager,
Celsius, and most recently, FTX and Genesis. The cryptocurrency industry’s
turbulent drawdown in 2022 is expected to draw increased regulatory scrutiny
from the U.S. Congress, SEC, and
CFTC.
Under
regulations from the New York State Department of Financial Services (“NYDFS”),
businesses involved in certain digital asset business activity involving New
York or a New York resident must apply for a license, commonly known as a
BitLicense, from the NYDFS and must comply with anti-money laundering, cyber
security, consumer protection, and financial and reporting requirements, among
others. As an alternative to a BitLicense, a firm can apply for a charter to
become a limited purpose trust company under New York law qualified to engage in
digital asset business activity. Other states have considered or approved
digital asset business activity statutes or rules, passing, for example,
regulations or guidance indicating that certain digital asset business
activities constitute money transmission requiring licensure. The regulation of
digital asset activity under state money transmission laws varies substantially.
Differences between state regimes increase the complexity and compliance burden
of operating digital asset businesses across the U.S., which may affect consumer
adoption of ether and its price. In an attempt to address these issues, the
Uniform Law Commission passed a model law in July 2017, the Uniform Regulation
of Virtual Currency Businesses Act, which has many similarities to the
BitLicense and features a multistate reciprocity licensure feature, wherein a
business licensed in one state could apply for accelerated licensure procedures
in other states. As of December 31, 2025, only California, Louisiana and Rhode
Island have adopted the model law, while Iowa has introduced the model law. It
is still unclear; however, how many states will ultimately adopt some or all of
the model legislation.
In
2025, Congress undertook significant legislative efforts to address the rapidly
evolving landscape of digital assets and cryptocurrencies, culminating in the
passage of two landmark bills: the Digital Asset Market Clarity Act of 2025 (the
“CLARITY Act”) and the Guiding and Establishing National Innovation for U.S.
Stablecoins Act (the “GENIUS Act”). These legislative actions represent the
first comprehensive federal frameworks for the regulation of digital assets and
stablecoins in the United States.
The
CLARITY Act, which was passed by the House of Representatives but awaits
consideration by the Senate, was designed to resolve longstanding regulatory
uncertainty regarding the classification and oversight of digital assets. The
CLARITY Act establishes a clear framework for distinguishing between digital
assets that are securities, commodities, or payment stablecoins. It delineates
the respective jurisdictions of the SEC and the CFTC, granting the CFTC
exclusive authority over “digital commodities” and the SEC authority over
“digital securities.” The CLARITY Act also introduces criteria for determining
when a digital asset is sufficiently decentralized to be treated as a commodity
rather than a security.
In
addition, the CLARITY Act imposes registration requirements and operational
standards for digital asset intermediaries, including exchanges, brokers, and
dealers. It mandates consumer protection measures, anti-money laundering (AML)
and countering the financing of terrorism (CFT) compliance, and enhanced
disclosure obligations. The Act aims to foster innovation while providing market
participants with greater regulatory certainty and aligning U.S. policy with
emerging international standards.
The
GENIUS Act, signed into law in July 2025, establishes the first federal
regulatory framework for the issuance and operation of payment
stablecoins—digital assets designed to maintain a stable value relative to a
fiat currency, such as the U.S. dollar. The GENIUS Act requires that all payment
stablecoins be fully backed on a one-to-one basis by high-quality liquid assets,
such as U.S. dollars or short-term U.S. Treasury securities, and subjects
issuers to rigorous reserve, audit, and disclosure requirements.
The
GENIUS Act introduces a dual licensing regime, allowing stablecoin issuers to
operate under either federal or state regulatory oversight, provided that state
regimes are “substantially similar” to federal standards. Issuers with more than
$10 billion in outstanding stablecoins must obtain a federal license. The GENIUS
Act also imposes strict AML, sanctions compliance, and consumer protection
obligations, including prioritizing stablecoin holders’ claims in the event of
issuer insolvency. Notably, the Act prohibits non-financial public companies
from issuing stablecoins without special approval and restricts the payment of
interest or yield on stablecoins.
These
legislative efforts were accompanied by additional measures, such as the
Anti-CBDC Surveillance State Act, which prohibits the Federal Reserve from
issuing a retail central bank digital currency without congressional
authorization. While the CLARITY Act and the GENIUS Act represent significant
progress toward a comprehensive regulatory regime for digital assets,
substantial uncertainty remains regarding the implementation and interpretation
of these new laws. The effectiveness of these frameworks will depend on
subsequent rulemaking by federal and state regulators, interagency coordination,
and the evolving approach to enforcement. Market participants may face
transitional risks as regulatory standards are developed and applied, and there
is potential for further legislative or regulatory changes as the digital asset
ecosystem continues to evolve.
The
continued evolution of federal, state and foreign government regulators and
policymakers will continue to impact the viability and success of digital asset
markets, broadly, and ether,
specifically.
Shareholders
do not have the protections associated with ownership of shares in an investment
company registered under the 1940 Act or commodity pools under the Commodity
Exchange Act.
The
1940 Act establishes a comprehensive federal regulatory framework for investment
companies. Regulation of investment companies under the 1940 Act is designed to,
among other things: prevent insiders from managing the companies to their
benefit and to the detriment of public investors; prevent the inequitable or
discriminate issuance of investment company securities and prevent the use of
unsound or misleading methods of computing asset values. For example, registered
investment companies subject to the 1940 Act must have a board of directors, a
certain minimum percentage of whom must be independent (generally, at least a
majority). Further, after an initial two-year period, such registered investment
companies’ advisory and sub-advisory contracts must be annually reapproved by a
majority of (1) the entire board of directors and (2) the independent directors.
Additionally, such registered investment companies are subject to prohibitions
and restrictions on transactions with their affiliates and required to maintain
fund assets with special types of custodians (generally, banks or
broker-dealers). Moreover, such registered investment companies are subject to
significant limits on the use of leverage, as well as limits on the form of
capital structure and the types of securities a registered fund can
issue.
The
Trust is not registered as an investment company under the 1940 Act, and the
Sponsor believes that the Trust is not permitted or required to register under
such act. Consequently, Shareholders do not have the regulatory protections
provided to investors in investment companies.
The
Trust will not hold or trade in commodity interests regulated by the CEA, as
administered by the CFTC. Furthermore, the Sponsor believes that the Trust is
not a commodity pool for purposes of the CEA, and that neither the Sponsor nor
the Trustee is subject to regulation by the CFTC as a commodity pool operator or
a commodity trading advisor in connection with the operation of the Trust.
Consequently, Shareholders will not have the regulatory protections provided to
investors in CEA-regulated instruments or commodity pools.
Future
and current regulations by a United States or foreign government or
quasi-governmental agencies could have an adverse effect on an investment in the
Trust.
The
regulation of ether and related products and services continues to evolve, may
take many different forms and will, therefore, impact ether and its usage in a
variety of manners. The inconsistent, unpredictable, and sometimes conflicting
regulatory landscape may make it more difficult for ether businesses to provide
services, which may impede the growth of the ether economy and have an adverse
effect on consumer adoption of ether. There is a possibility of future
regulatory change altering, perhaps to a material extent, the nature of an
investment in the Trust or the ability of the Trust to continue to operate.
Additionally, changes to current regulatory determinations of ether’s status as
not being a security, changes to regulations surrounding ether futures or
related products, or actions by a United States or foreign government or
quasi-governmental agencies exerting regulatory authority over ether, the
Ethereum network, ether trading, or related activities impacting other parts of
the digital asset market, may adversely impact ether and therefore may have an
adverse effect on the value of your investment in the Trust.
Ether
and other digital assets currently face an uncertain regulatory landscape in
many foreign jurisdictions such as the European Union, China, the United
Kingdom, Australia, Japan, Russia, Israel, Poland, India, Hong Kong, Canada and
Singapore. Cybersecurity attacks by state actors, particularly for the purpose
of evading international economic sanctions, are likely to attract additional
regulatory scrutiny to the acquisition, ownership, sale and use of digital
assets, including ether. The effect of any existing regulation or future
regulatory change on the Trust or ether is impossible to predict, but such
change could be substantial and adverse to the Trust and the value of the
Shares.
Various
foreign jurisdictions have adopted, and may continue to adopt in the near
future, laws, regulations or directives that affect ether, particularly with
respect to ether spot markets, trading venues and service providers that fall
within such jurisdictions’ regulatory scope. Such laws, regulations or
directives may conflict with those of the United States and may negatively
impact the acceptance of ether by users, merchants and service providers outside
the United States and may therefore impede the growth or sustainability of the
ether economy in these jurisdictions as well as in the United States and
elsewhere, or otherwise negatively affect the value of ether, and, in turn, the
value of the
Shares.
Future
regulations may require the Trust or the Sponsor to become registered, which may
cause the Trust to liquidate.
Current
and future legislation, SEC and CFTC rulemaking, and other regulatory
developments may impact the manner in which ether is treated. While the SEC has
not officially affirmed that ether is not a security under U.S. federal
securities laws, public statements by senior officials at the SEC, including a
June 2018 speech by the director of the SEC’s division of Corporation Finance,
indicate that such officials do not believe that ether is a security; however,
more recently, statements by other SEC officials have shown reluctance to agree
with that assessment Such statements are not official policy statements by the
SEC and reflect only the speaker’s views, which are not binding on the SEC or
any other agency or court. If ether is determined to be a “security” under
federal or state securities laws by the SEC or any other agency, or in a
proceeding in a court of law or otherwise, it may have material adverse
consequences for ether’s utility as a means of exchange and accordingly for its
continued adoption. In the face of such developments, the required registrations
and compliance steps may result in extraordinary, nonrecurring expenses to the
Trust. Specifically, the Trust and the Sponsor may be subject to additional
regulatory requirements including under the 1940 Act, and the Sponsor may be
required to register as an investment adviser under the Investment Advisers Act.
If the Sponsor determines not to comply with such additional regulatory and
registration requirements, the Sponsor will terminate the Trust. Any such
termination could result in the liquidation of the Trust’s ether at a time that
is disadvantageous to Shareholders. Alternatively, compliance with these
requirements could result in additional expenses to the Trust or significantly
limit the ability of the Trust to pursue its investment objective. These
additional requirements may result in extraordinary, recurring and/or
nonrecurring expenses of the Trust, thereby materially and adversely impacting
the Shares. If the Sponsor and/or the Trust determines not to comply with such
additional regulatory and registration requirements, the Sponsor may terminate
the Trust. Any such termination could result in the liquidation of the Trust’s
ether at a time that is disadvantageous to Shareholders.
If
regulatory changes or interpretations of an Authorized Participant’s, the
Trust’s or the Sponsor’s activities require the regulation of an Authorized
Participant, the Trust or the Sponsor as a money services business under the
regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy
Act or as a money transmitter or digital asset business under state regimes for
the licensing of such businesses, an Authorized Participant, the Trust or the
Sponsor may be required to register and comply with such regulations, which
could result in extraordinary, recurring and/or nonrecurring expenses to the
Authorized Participant, Trust or Sponsor or increased commissions for the
Authorized Participant’s clients, thereby reducing the liquidity of the
Shares.
To
the extent that the activities of any Authorized Participant, the Trust or the
Sponsor cause it to be deemed a “money services business” under the regulations
promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, such
Authorized Participant, the Trust or the Sponsor may be required to comply with
FinCEN regulations, including those that would mandate the implementation of an
anti-money laundering program, the submission of certain reports to FinCEN and
the maintenance of certain records. Similarly, the activities of an Authorized
Participant, the Trust or the Sponsor may require it to be licensed as a money
transmitter or as a digital asset business, such as under NYDFS’ BitLicense
regulation.
Such
additional regulatory obligations may cause the Authorized Participant, the
Trust or the Sponsor to incur Extraordinary Expenses. If the Authorized
Participant, the Trust or the Sponsor decide to seek the required licenses,
there is no guarantee that they will receive them in a timely manner. In
addition, to the extent an Authorized Participant, the Trust, or the Sponsor is
found to have operated without appropriate state or federal licenses, it may be
subject to investigation, administrative or court proceedings, and civil or
criminal monetary fines and penalties or other remediation, all of which could
harm the reputation of the Authorized Participant, the Trust or the Sponsor and
affect the value of the Shares. Furthermore, an Authorized Participant, the
Trust, or the Sponsor may not be able to acquire necessary state licenses or be
capable of complying with certain federal or state regulatory obligations
applicable to money services businesses, money transmitters, and businesses
engaged in digital asset activity in a timely manner. The Authorized Participant
may also instead decide to terminate its role as Authorized Participant of the
Trust, or the Sponsor may decide to terminate the Trust. Termination by the
Authorized Participant may decrease the liquidity of the Shares, which may
adversely affect the value of the Shares, and any termination of the Trust in
response to the changed regulatory circumstances may be at a time that is
disadvantageous to the
Shareholders.
Tax
Risk
The
ongoing activities of the Trust may generate tax liabilities for
Shareholders.
As
described below under “United
States Federal Income Tax Consequences—Taxation of U.S.
Shareholders,”
it is expected that each Shareholder will include in the computation of their
taxable income their proportionate share of the taxable income and expenses of
the Trust and amounts realized in connection with the use of ether or the sale
of ether to pay Trust expenses or facilitate redemption transactions. The Trust
does not anticipate making distributions to Shareholders, so any tax liability
that a Shareholder incurs as a result of holding Shares will need to be
satisfied from some other source of funds. Sales of ether to fund cash
redemptions are expected to result in gains or losses, with such gains or losses
expected to be treated as incurred by the Shareholder that is being redeemed.
These gains or losses generally would equal the difference between the amount
realized from the sale of the ether and the Shareholder’s tax basis for the
portion of the Shareholder’s pro rata share of the ether held in the Trust that
is sold to fund the redemption, as determined in the manner described above. A
redemption of some or all of a Shareholder’s Shares in exchange for the cash
received from such sale is not expected to be treated as a separate taxable
event for the Shareholder. Shareholders receiving a redemption in kind will not
generally be taxed on the distribution in kind. If a Shareholders sells Shares
in order to raise funds to satisfy such a tax liability, the sale itself may
generate additional taxable gain or loss.
The
tax treatment of ether and transactions involving ether for United States
federal income tax purposes may change.
Under
current IRS guidance, ether is treated as property, not as currency, for U.S.
federal income tax purposes and transactions involving payment in ether in
return for goods and services are treated as barter exchanges. Such exchanges
result in capital gain or loss measured by the difference between the price at
which ether is exchanged and the taxpayer’s basis in the ether. However, because
ether is a new technological innovation, because IRS guidance has taken the form
of administrative pronouncements that may be modified without prior notice and
comment, and because there is as yet little case law on the subject, the U.S.
federal income tax treatment of an investment in ether or in transactions
relating to investments in ether may change from that described in this Annual
Report, possibly with retroactive effect. Any such change in the U.S. federal
income tax treatment of ether may have a negative effect on prices of ether and
may adversely affect the value of the Shares. In this regard, the IRS has
indicated that it has made it a priority to issue additional guidance related to
the taxation of virtual currency transactions, such as transactions involving
ether. While it has started to issue such additional guidance, whether any
future guidance will adversely affect the U.S. federal income tax treatment of
an investment in ether or in transactions relating to investments in ether is
unknown. Moreover, future developments that may arise with respect to digital
currencies may increase the uncertainty with respect to the treatment of digital
currencies for U.S. federal income tax purposes.
The
tax treatment of ether and transactions involving ether for state and local tax
purposes is not settled.
Because
ether is a new technological innovation, the tax treatment of ether for state
and local tax purposes, including, without limitation state and local income and
sales and use taxes, is not settled. It is uncertain what guidance, if any, on
the treatment of ether for state and local tax purposes may be issued in the
future. A state or local government authority’s treatment of ether may have
negative consequences, including the imposition of a greater tax burden on
investors in ether or the imposition of a greater cost on the acquisition and
disposition of ether generally. Any such treatment may have a negative effect on
prices of ether and may adversely affect the value of the Shares.
A
hard “fork” of the Ethereum Blockchain could result in Shareholders incurring a
tax liability.
Except
for cash temporarily held to pay Trust expenses, facilitate redemption
transactions, or received in creation transactions, the Trust will only invest
in ether. The Trust has no obligation to claim a digital asset created by a fork
of the Ethereum network. The Sponsor will cause the Trust to irrevocably abandon
any digital asset resulting from a fork in the Ethereum network (other than what
the Sponsor determines to be ether). If the Trust were to change this policy,
the Trust would need to seek and obtain certain regulatory approvals, including
an amendment to the Trust’s registration statement and approval of an
application by the Exchange to amend its listing rules. Under current IRS
guidance, a hard fork resulting in the receipt of new units of cryptocurrency is
a taxable event giving rise to ordinary income equal to the value of the new
cryptocurrency. The Trust Agreement requires that if, despite abandoning such
digital asset, the Trust receives or claims a forked asset, the Sponsor will
cause the forked asset to be sold and have the proceeds distributed to the
Shareholders. Such a sale will give rise to gain or loss, for U.S. federal
income tax purposes, if the amount realized on the sale differs from the value
of the new forked or air dropped asset at the time it was received by the Trust.
A hard fork may therefore give rise to additional tax liabilities for
Shareholders.
The
intended tax treatment of the Trust will limit the flexibility of the Trust’s
investment decisions.
The
Trust is intended to be a grantor trust for Federal income tax purposes. A
grantor trust is not permitted to change the investment of the Shareholders to
take advantage of market fluctuations. Thus, the Sponsor may allow the Trust to
hold when an actively managed fund would sell. The Sponsor may distribute
proceeds when an actively managed fund would reinvest the proceeds. In addition,
a fund treated as a grantor trust may not participate in trading or lending
activity without raising a risk of change in status. This means that the returns
of the Trust may be less than a successfully actively managed
fund.
Other
Risks
The
Exchange on which the Shares are listed may halt trading in the Trust’s Shares,
which would adversely impact a Shareholder’s ability to sell Shares.
The
Trust’s Shares are listed for trading on the Exchange under the market symbol
“FETH.” Trading in Shares may be halted due to market conditions or, in light of
the Exchange rules and procedures, for reasons that, in the view of the
Exchange, make trading in Shares inadvisable. In addition, trading is subject to
trading halts or pauses caused by extraordinary market volatility pursuant to
“circuit breaker” rules and/or “limit up/limit down” rules that require trading
to be halted or paused for a specified period based on a specified market
decline. Additionally, there can be no assurance that the requirements necessary
to maintain the listing of the Trust’s Shares will continue to be met or will
remain unchanged.
The
liquidity of the Shares may also be affected by the withdrawal from
participation of Authorized Participants, which could adversely affect the
market price of the Shares.
In
the event that one or more Authorized Participants or market makers that have
substantial interests in the Trust’s Shares withdraw or “step away” from
participation in the purchase (creation) or sale (redemption) of the Trust’s
Shares, the liquidity of the Shares will likely decrease, which could adversely
affect the market price of the Shares and result in Shareholders incurring a
loss on their investment.
The
market infrastructure of the ether spot market could result in the absence of
active Authorized Participants able to support the trading activity of the
Trust.
Ether
is extremely volatile, and concerns exist about the stability, reliability and
robustness of many spot markets where ether trade. In a highly volatile market,
or if one or more spot markets supporting the ether market faces an issue, it
could be extremely challenging for any Authorized Participants to provide
continuous liquidity in the Shares. There can be no guarantee that the Sponsor
will be able to find an Authorized Participant to actively and continuously
support the Trust.
Shareholders
that are not Authorized Participants may only purchase or sell their Shares in
secondary trading markets, and the conditions associated with trading in
secondary markets may adversely affect Shareholders’ investment in the
Shares.
Only
Authorized Participants may create or redeem Baskets. All other Shareholders
that desire to purchase or sell Shares must do so through the Exchange or in
other markets, if any, in which the Shares may be traded. Shares may trade at a
premium or discount to the NAV per Share.
The
Sponsor relies heavily on key personnel.
The
Sponsor relies heavily on key personnel to manage its activities. These key
personnel intend to allocate their time managing the Trust in a manner that they
deem appropriate. If such key personnel were to leave or be unable to carry out
their present responsibilities, it may have an adverse effect on the management
of the Sponsor.
Shareholders
have no right or power to take part in the management of the Trust. Accordingly,
no investor should purchase Shares unless such investor is willing to entrust
all aspects of the management of the Trust to the Trustee and the
Sponsor.
Additionally,
there can be no assurance that all of the personnel who provide services to the
Trust will continue to be associated with the Trust for any length of time. The
loss of the services of one or more such individuals could have an adverse
impact on the Trust’s ability to realize its investment
objective.
The
Trust is new, and if it is not profitable, the Trust may terminate and liquidate
at a time that is disadvantageous to Shareholders.
The
Trust is new. If the Trust does not attract sufficient assets to remain open, or
if the trust experiences excessive withdrawals, then the Trust could be
terminated and liquidated at the direction of the Sponsor (or required to do so
because it is delisted by the Exchange). Termination and liquidation of the
Trust could occur at a time that is disadvantageous to Shareholders. When the
Trust’s assets are sold as part of the Trust’s liquidation, the resulting
proceeds distributed to Shareholders may be less than those that may be realized
in a sale outside of a liquidation context.
Shareholders
do not have the rights enjoyed by investors in certain other vehicles and may be
adversely affected by a lack of statutory rights and by limited voting and
distribution rights.
The
Shares have limited voting and distribution rights. For example, Shareholders do
not have the right to elect directors, the Trust may enact splits or reverse
splits without Shareholder approval, and the Trust is not required to pay
regular distributions, although the Trust may pay distributions at the
discretion of the Sponsor.
Shareholders
may be adversely affected by creation or redemption orders that are subject to
postponement, suspension or rejection under certain circumstances.
The
Trust may, in its discretion, suspend the right of creation or redemption or may
postpone the redemption or purchase settlement date, for (1) any period during
which an emergency exists as a result of which the fulfillment of a purchase
order or the redemption distribution is not reasonably practicable, or (2) such
other period as the Sponsor determines to be necessary for the protection of the
Shareholders of the Trust. When determining whether such an emergency exists,
the Sponsor may consider, among other things, the overall impact such emergency
has had on price, volume, volatility and liquidity in ether markets; the
Sponsor’s view on the how long such emergency will persist; and the Sponsor’s
view on whether such emergency is likely to ease or worsen. An emergency could
include, but is not limited to, situations where the Trust is unable to transact
in ether or where the Trust is unable to value its ether holdings, such as a
circumstance where a digital asset trading platform experiences technical
failure, power outage, network error or other circumstance resulting in a
market-wide halt to trading, or the Trust is unable to access the ether in the
Trust’s ether custody account at the Custodian due to technical or operating
issues at the Trust or the Custodian. Such disruptions may have an effect on
overall ether liquidity or cause price spreads of ether to widen, which may have
a detrimental effect on the value of the Shares.
In
addition, the Trust may reject a redemption order if the order is not in proper
form as described in the Authorized Participant Agreement or if the fulfillment
of the order might be unlawful. Any such postponement, suspension or rejection
could adversely affect a redeeming Authorized Participant. Suspension of
creation privileges may adversely impact how the Shares are traded and
arbitraged on the secondary market, which could cause them to trade at levels
materially different (premiums and discounts) from the fair value of their
underlying holdings.
Furthermore,
in connection with an In-Kind Creation Order (as defined below), if an
Authorized Participant Designee fails to deliver ether in accordance with the
Trust’s creation and redemption procedures as described herein and in the
relevant Authorized Participant Agreement, the Sponsor may convert such In-Kind
Creation Order to a Cash Creation Order. In such an event, an Authorized
Participant will be solely responsible for delivering the Basket Cash Amount to
the Trust.
Shareholders
may be adversely affected by an overstatement or understatement of the NAV
calculation of the Trust due to the valuation methodology employed on the date
of the NAV calculation.
If
the Index is not available or the Sponsor determines, in its sole discretion,
that the Index should not be used, the Trust’s ether investments may be valued
using techniques other than reliance on the price established by the Index. The
value established by using the Index may be different from what would be
produced through the use of another methodology. Ether valued using techniques
other than those employed by the Index, including ether investments that are
“fair valued,” may differ from the value established by the
Index.
The
Trust Agreement includes provisions that limit Shareholders’ voting rights and
restrict Shareholders’ right to bring a derivative action.
Under
the Trust Agreement, Shareholders generally have no voting rights and the Trust
will not have regular Shareholder meetings. Shareholders take no part in the
management or control of the Trust. Accordingly, Shareholders do not have the
right to authorize actions, appoint service providers or take other actions as
may be taken by shareholders of other trusts or companies where shares carry
such rights. The Sponsor may take actions in the operation of the Trust that may
be adverse to the interests of Shareholders and may adversely affect the value
of the Shares.
Moreover,
pursuant to the terms of the Trust Agreement, Shareholders’ statutory right
under Delaware law to bring a derivative action (i.e., to initiate a lawsuit in
the name of the Trust in order to assert a claim belonging to the Trust against
a fiduciary of the Trust or against a third-party when the Trust’s management
has refused to do so) is restricted. Under Delaware law, a shareholder may bring
a derivative action if the shareholder is a shareholder at the time the action
is brought and either (i) was a shareholder at the time of the transaction at
issue or (ii) acquired the status of shareholder by operation of law or the
Trust’s governing instrument from a person who was a shareholder at the time of
the transaction at issue. Additionally, Section 3816(e) of the Delaware
Statutory Trust Act specifically provides that a “beneficial owner’s right to
bring a derivative action may be subject to such additional standards and
restrictions, if any, as are set forth in the governing instrument of the
statutory trust, including, without limitation, the requirement that beneficial
owners owning a specified beneficial interest in the statutory trust join in the
bringing of the derivative action.” In addition to the requirements of
applicable law and in accordance with Section 3816(e), the Trust Agreement
provides that no Shareholder will have the right, power or authority to bring or
maintain a derivative action, suit or other proceeding on behalf of the Trust
unless two or more Shareholders who (i) are not “Affiliates” (as defined in the
Trust Agreement) of one another and (ii) collectively hold at least 10.0% of the
outstanding Shares join in the bringing or maintaining of such action, suit or
other proceeding. This provision applies to any derivative actions brought in
the name of the Trust other than claims under the federal securities laws and
the rules and regulations thereunder.
Due
to this additional requirement, a Shareholder attempting to bring or maintain a
derivative action in the name of the Trust will be required to locate other
Shareholders with which it is not affiliated and that have sufficient Shares to
meet the 10.0% threshold based on the number of Shares outstanding on the date
the claim is brought and thereafter throughout the duration of the action, suit
or proceeding. This may be difficult and may result in increased costs to a
Shareholder attempting to seek redress in the name of the Trust in court.
Moreover, if Shareholders bringing a derivative action, suit or proceeding
pursuant to this provision of the Trust Agreement do not hold 10.0% of the
outstanding Shares on the date such an action, suit or proceeding is brought, or
such Shareholders are unable to maintain Share ownership meeting the 10.0%
threshold throughout the duration of the action, suit or proceeding, such
Shareholders’ derivative action may be subject to dismissal. As a result, the
Trust Agreement limits the likelihood that a Shareholder will be able to
successfully assert a derivative action in the name of the Trust, even if such
Shareholder believes that he or she has a valid derivative action, suit or other
proceeding to bring on behalf of the
Trust.
None.
Item
1C. Cybersecurity.
Overview
The
Sponsor, Fidelity Management & Research LLC, and their respective affiliates
operating as a business organization (collectively, “Fidelity”) and its
Enterprise Cybersecurity organization, on behalf of the Trust, have established
a risk management program which includes processes to identify,
assess, and manage cybersecurity risks, including material risks from
cybersecurity threats, and to put in place appropriate controls to mitigate
these risks and reduce the potential impact to the Trust and its
Shareholders.
The Trust does not have any employees and relies upon Fidelity and its
Enterprise Cybersecurity organization for the Trust’s day-to-day operations and
to establish strategies, policies, and standards for the security of, and
operations in, cyberspace.
Management
of cybersecurity risk is a key area of focus for the Enterprise Cybersecurity
organization, as threat actors continue to target Fidelity with sophisticated,
ever-evolving attacks. Enterprise Cybersecurity’s mission is to protect Fidelity
and its customers from these attacks and other cyber incidents through risk
optimization, policies, controls, technical capabilities, and employee training
and awareness on risks, policies and standards. As Enterprise Cybersecurity
implements measures to address cyber risk, it also continuously reviews its
resources to better enhance security of systems, networks, data, and other
technology.
The
potential impact of risks from cybersecurity threats on the Trust are assessed
on an ongoing basis. These risks are regularly evaluated to determine if they
could materially affect the Trust’s business strategy, operational results, and
financial condition. During the reporting period, Fidelity did
not identify any material risks
from cybersecurity threats that have materially affected or are reasonability
likely to materially affect the Trust, including its day-to-day operations,
financial condition, or business strategies.
While
Fidelity will continue to enhance its approach to address cybersecurity risk, it
is possible that it will not be successful in preventing or mitigating a future
cybersecurity incident that could have a material impact on Fidelity or the
Trust’s operations, financial condition, and business strategies.
Third
Party Risk and Engagement
The
Trust depends on and engages various third parties, including suppliers,
vendors, and service providers, to operate its business. Third party incidents,
such as supply chain attacks, ransomware operations, or insider misconduct,
could result in a material impact to the Trust through the compromise of
sensitive information or system failures. To address these risks, Fidelity has a
vendor oversight program which includes periodic reviews of the cyber controls
of third-party
service providers,
with the frequency of such reviews generally based on the nature of the Trust’s
information processed by the vendor and the vendor’s criticality to business
operations.
Independent
Assessment of Controls
On
behalf of the Trust, Fidelity engages third-party consultants to assess,
identify, and/or manage material risks from cybersecurity threats. For example,
Fidelity engages
third-party consultants to perform audits of its cybersecurity measures and risk
management processes, including those applicable to Trust. Fidelity has also
hired qualified independent assessors to review applicable security controls in
accordance with the American Institute of Certified Public Accountants’ System
and Organization Controls assurance programs. Additionally, Fidelity utilizes
third-party consultants with specific areas of cybersecurity expertise to review
and report on various aspects of its cybersecurity program, including those
applicable to the Trust. The results of these consulting engagements are shared
with the Sponsor as part of periodic reporting.
Monitoring
Emerging Threats
Threat
actors’ utilization of emerging and new technologies such as Artificial
Intelligence to enhance cyber-attacks is an ongoing risk. Fidelity’s Cyberthreat
Intelligence (CTI) unit within Enterprise Cybersecurity is designed to alert
stakeholders, control owners, and decision-makers of emerging cyber threats to
Fidelity infrastructure, vendors, and clients. CTI operates via a follow-the-sun
approach, monitoring criminal, nation-state, hacktivist, and insider groups and
their use of these technologies to carry out attacks.
CTI
utilizes information gathered from public and private sources, including
industry groups such as the U.S. Cybersecurity and Infrastructure Security
Agency and the Financial Services Information Sharing and Analysis Center. The
organization analyzes such information and incorporates threat actors’ tactics,
techniques, and procedures into the program’s security monitoring and detection
tools and processes.
Organization
and Management
Fidelity
Enterprise Cybersecurity is comprised of several product areas that are designed
to defend against attack, damage, and unauthorized action to information, data,
and systems. Among these functions are:
Detect
and Respond,
which is responsible for delivering global cybersecurity operations,
intelligence, and analytics to ensure data confidentiality, integrity, and
availability for Fidelity and its customers. This product area utilizes the
latest tools and technology to monitor Fidelity’s environment for signs of
suspicious activity, as well as proactively detect and hunt for the latest cyber
threats. Key functions include the Security Operations Center, Threat
Intelligence, Insider Threat, and Endpoint Security.
The
Information Security Office,
which is a team that assists with the migration and implementation of Enterprise
Cybersecurity policy into each of the firm’s business units. Each Fidelity
business unit has a dedicated Information Security Office team that partners
with the business on cyber client engagement, security advisory, risk reduction,
regulatory compliance, and education and awareness.
Application
and Infrastructure Security,
which is responsible for identifying, assessing, and mitigating risks posed by
software vulnerabilities, malware, and configuration exposures in Fidelity’s
applications and technology infrastructure. This product area focuses on
critical functions such as vulnerability scanning, penetration testing, and
vendor application remediation, enabling Fidelity to address risks from
vulnerabilities before they are exploited.
Enterprise
Cybersecurity also employs several teams that work together and are responsible
for enabling Fidelity with a persistent readiness posture through comprehensive
cyber risk management from risk identification through remediation. These teams
include Cyber Risk, Cyber Controls & Policy, and Cyber Regulatory &
Audit. Together, these teams provide a foundation and framework for the
Enterprise Cybersecurity organization to align with industry standards, meet
regulatory expectations, and adjust to changing risks.
Governance
and Oversight
The
Sponsor, in conjunction with Fidelity’s Enterprise Cybersecurity organization,
provides strategic oversight regarding cybersecurity risks and threats to the
Trust. The
Sponsor’s Compliance and Risk Management Committee (“CRMC”), comprised of
various officers of the Sponsor and the broader Fidelity organization, receives
and reviews periodic reports from senior executives in Fidelity’s Enterprise
Cybersecurity Organization, including Fidelity’s Chief
Information Security Officer
(“CISO”) and members of the CISO’s staff.
These reports contain information about risks from cybersecurity threats,
including results of independent reviews of the cybersecurity program, summaries
of recent threat intelligence assessments, progress on key initiatives and
strategies, and updates on recent regulatory activities, including new
regulations and examinations.
The
CRMC is responsible for assessing and managing material risks from cybersecurity
threats. In connection with the Trust's reliance on Fidelity and its Enterprise
Cybersecurity organization, the CRMC relies on the cybersecurity expertise of
Fidelity’s CISO and members of the CISO’s staff to assist in assessing and
managing the Trust's material risks from cybersecurity threats. Fidelity’s
CISO has over thirty years of experience as a technology and information risk
management leader, holding global senior management roles with large,
diversified financial services companies. He has served as Fidelity’s CISO since
May 2024. He reports to Fidelity’s Head of Technology and Global
Services.
The
Sponsor is informed about cybersecurity incidents, including material
cybersecurity incidents, impacting the Trust. The
Sponsor monitors the prevention, detection, mitigation, and remediation of such
incidents, including through the receipt of notifications from service providers
and reliance on communications with risk management, legal, cybersecurity,
information technology, and/or compliance personnel of Fidelity.
In
conjunction with Fidelity’s Enterprise Cybersecurity organization, the Sponsor,
on behalf of the Trust, also participates in regular testing of applicable
incident response processes to ensure appropriate escalation, mitigation,
communication, and reporting processes are in place.
Item
2. Properties.
Not
applicable.
Item
3. Legal Proceedings.
None.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
a)
The
Shares of the Trust are listed in the accompanying table. The date the Shares of
the Trust began trading, their symbols and their primary listing exchange are
indicated below:
|
|
|
| |
|
Trust |
Commencement
of Operations |
Ticker
Symbol |
Name
of each exchange on which registered |
|
Fidelity
Ethereum Fund |
July 23,
2024 |
FETH |
Cboe BZX
Exchange, Inc. |
As
of February 20, 2026, there was one DTC participating shareholder of record of
the Trust. Because most of the Trust’s Shares are held by brokers and other
institutions on behalf of shareholders, we are unable to estimate the total
number of shareholders represented by these record holders.
The
Trust made no distributions to Shareholders during the year ended December 31,
2025. The Trust has no obligation to make periodic distributions to
Shareholders.
c)
The
Trust does not purchase Shares directly from its shareholders. The following
table summarizes the redemptions by Authorized Participants during the three
months ended December 31, 2025:
|
|
|
|
|
|
|
|
|
|
| |
|
Title
of Securities Registered* |
|
Date |
|
Total
Number of Shares Redeemed |
|
|
Average
Price
Per Share |
|
|
Fidelity®
Ethereum Fund |
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
10/01/2025
to 10/31/2025 |
|
|
12,275,000 |
|
|
$ |
40.18 |
|
|
|
|
11/01/2025
to 11/30/2025 |
|
|
7,925,000 |
|
|
$ |
31.58 |
|
|
|
|
12/01/2025
to 12/31/2025 |
|
|
3,500,000 |
|
|
$ |
30.02 |
|
*
The registration statement covers an indeterminate amount of securities to be
offered or sold.
Item
6. [Reserved]
Item
7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The
following discussion and analysis of our financial condition and results of
operations should be read together with, and is qualified in its entirety by
reference to, our audited financial statements and related notes included
elsewhere in this Annual Report, which have been prepared in accordance with
generally accepted accounting principles in the United States (“GAAP”). The
following discussion may contain forward-looking statements based on assumptions
we believe to be reasonable. Our actual results could differ materially from
those discussed in these forward-looking statements.
Overview
of the Trust
Fidelity
Ethereum Fund (the “Trust”) is an exchange-traded product that issues shares of
beneficial interest (the “Shares”) that trade on the Cboe BZX Exchange, Inc.
(the “Exchange”). The Trust’s investment objective is to seek to track the
performance of ether, as measured by the performance of the Index, adjusted for
the Trust’s expenses and other liabilities. The Index is constructed using ether
price feeds from eligible ether spot markets and a volume-weighted median price
(“VWMP”) methodology, calculated every 15 seconds based on VWMP spot market data
over rolling sixty-minute increments. The Index is designed to reflect the
performance of ether in U.S. dollars. In seeking to achieve its investment
objective, the Trust holds ether and values its Shares daily based on the same
methodology used to calculate the Index. The Trust is sponsored by FD Funds
Management LLC (the “Sponsor”), a wholly owned subsidiary of FMR
LLC.
The
Trust is passively managed and does not pursue active management investment
strategies. The Trust will not participate in the proof-of-stake validation
mechanism of the Ethereum network (i.e., the Trust will not “stake” its ether)
to earn additional ether or seek other means of generating income from its Ether
Holdings. The Sponsor believes that the Shares are designed to provide investors
with a cost-effective and convenient way to invest in ether without purchasing,
holding and trading ether directly. The Trust sells and redeems Shares only with
Authorized Participants in exchange for cash and only in blocks of 25,000
Shares.
The
Shareholders of the Trust take no part in the management or control, and have no
voice in, the Trust’s operations or business. Except in limited circumstances,
Shareholders have no voting rights under the Trust Agreement.
Valuation
of Ether and Computation of Net Asset Value
For
purposes of calculating the Trust’s net asset value (“NAV”) per Share, the
Trust’s holdings of ether are valued using the same methodology as used to
calculate the Index.
The
Trust’s NAV per Share is calculated by:
•
taking
the fair market value of its total assets based on the volume-weighted median
price of ether used for the calculation of the Index;
•
subtracting
any liabilities; and
•
dividing
that total by the total number of outstanding Shares.
The
Administrator calculates the Trust’s NAV once each Exchange trading day. The
Trust’s NAV for a normal trading day is released after 4:00 p.m. Eastern time
(“EST”). Trading during the core trading session on the Exchange typically
closes at 4:00 p.m. EST. However, the Trust’s NAVs are not officially struck
until after 4:00 p.m. EST. The pause after 4:00 p.m. EST provides an opportunity
for the Sponsor to algorithmically detect, flag, investigate, and correct
unusual pricing should it occur. The Sponsor has established a Valuation and
Liquidity Committee to carry out the day-to-day fair valuation responsibilities
and has adopted policies and procedures to govern the fair valuation process and
the activities of the Valuation and Liquidity Committee. If the Valuation and
Liquidity Committee determines in good faith that the Index does not reflect an
accurate ether price, then the Valuation and Liquidity Committee instructs the
Administrator to employ an alternative method to determine the fair value of the
Trust’s assets. In determining an alternative fair value method, the Valuation
and Liquidity Committee generally considers such criteria as observable
market-based inputs, including market quotations and last sale information from
third-party pricing services and/or trading platforms on which ether are traded.
The Valuation and Liquidity Committee’s selection of third-party pricing
services used considers the qualifications, experience, and history of the
pricing services and whether their valuation methodologies and procedures are
reasonably designed to produce prices that reflect fair value under the
prevailing market conditions.
In
addition, in order to provide updated information relating to the Trust for use
by Shareholders and market professionals, a third-party financial data provider
calculates and disseminates throughout the core trading session on each trading
day an updated intraday indicative value (“IIV”). The IIV is calculated based on
the Trust’s ether holdings and any other assets expected to comprise that day’s
Trust’s NAV calculation. The third-party financial data provider uses the
Blockstream Crypto Data Feed Streaming Level 1 as the pricing source for the
spot ether. The Blockstream Crypto Data Feed Streaming Level 1 calculates an
average of current ether price levels of the ether trading platforms that are
available on its feed. The Trust will provide an IIV per Share updated every 15
seconds, as calculated by the Exchange or a third-party financial data provider
during the Exchange’s regular trading hours of 9:30 a.m. to 4:00 p.m. EST
(“Regular Trading Hours”). The IIV disseminated during Regular Trading Hours
should not be viewed as an actual real-time update of the Trust’s NAV, which
will be calculated only once at the end of each trading day as described
herein.
Critical
Accounting Policies and Estimates
Principal
Market and Fair Value Determination
The
Trust’s periodic financial statements are prepared in accordance with the
Financial Accounting Standards Board Accounting Standards Codification Topic
820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”). ASC Topic 820
requires the fair value measurement of ether to assume that transactions take
place in the principal market or, in the absence of a principal market, the most
advantageous market, for ether that the Trust has access to. The Trust may buy
and sell ether through brokered, dealer, over-the-counter, exchange or other
markets. The Sponsor determines in its sole discretion the valuation sources and
policies used to prepare the Trust’s financial statements in accordance with
GAAP. The Trust engaged a third-party pricing service to obtain an
exchange-traded price from a principal market for ether, which was determined
and designated based on its consideration of several exchange characteristics,
including oversight, and the volume and frequency of trades. The exchange-traded
price from the principal market on the periodic financial statements is as of
11:59:59 p.m. EST on the Trust’s financial statement measurement
date.
Results
of Operation
The
Trust’s commencement of operations was July 23, 2024. The Trust had no
operations prior to July 23, 2024, other than matters relating to its
organization and the registration of the Shares under the 1933 Act.
The
Year Ended December 31, 2025
The
Trust’s net assets increased from $1.6 billion as of December 31, 2024, to $2.2
billion as of December 31, 2025. The change in the Trust's net assets resulted
primarily from an increase in outstanding Shares, which rose from 47,175,000 as
of December 31, 2024 to 74,550,000 as of December 31, 2025, as a result of
126,050,000 Shares (5,042 Baskets), being issued exceeding 98,675,000 Shares
(3,947 Baskets) being redeemed during the year ended December 31, 2025,
partially offset by a decrease in the price of ether, which fell 10.86% from
$3,333.60 as of December 31, 2024 to $2,971.55 as of December 31,
2025.
The
NAV per Share decreased 11.08% from $33.34 as of December 31, 2024 to $29.64 as
of December 31, 2025. The Trust’s NAV per Share decreased 11.60% from $33.44 as
of December 31, 2024 to $29.56 as of December 31, 2025.
The
Trust’s
NAV
per Share of $48.12 at August 22, 2025, was the highest during the year ended
December 31, 2025, compared with a low of $14.64 at April 8, 2025.
During
the year ended December 31, 2025, the quantity of ether owned by the Trust and
held by the ether custodian increased from 471,750 as of December 31, 2024, to
743,795 as of December 31, 2025. The increase in quantity is the result of the
net increase from capital share transactions.
The
net decrease in net assets resulting from operations for the year ended December
31, 2025, was $0.4 billion, resulting from a net unrealized appreciation on
investment in ether of $0.1 billion and a net realized loss of $0.5 billion from
the sale of the investment in ether for the redemption of Shares.
The
Period Ended December 31, 2024
The
Trust’s net assets increased from $4.4 million as of June 30, 2024, to $1.6
billion as of December 31, 2024. The change in the Trust’s net assets was driven
by an increase in outstanding Shares, which rose from 125,000 as of June 30,
2024 to 47,175,000 as of December 31, 2024 as a result of 54,575,000 Shares
(2,183 Baskets) being issued and 7,525,000 Shares (301 Baskets) being redeemed
during the period July 23, 2024 (commencement of operations) through December
31, 2024 offset by a decrease in the price of ether, which fell 3.34% from
$3,448.77 as of July 23, 2024 to $3,333.60 as of December 31,
2024.
The
NAV per Share decreased 4.39% from $34.87 as
of July
23, 2024 to $33.34 as
of December
31, 2024. The Trust’s NAV per Share decreased 3.88% from $34.79 as
of July
23, 2024 to $33.44 as
of December
31, 2024.
The
Trust’s NAV per Share of $40.75 at December 6, 2024, was the highest during the
period July 23, 2024, through December 31, 2024, compared with a low of $22.24
at September 6, 2024.
During
the period ended December 31, 2024, the quantity of ether owned by the Trust and
held by the ether custodian increased from 1,250 as of June 30, 2024, to 471,750
as of December 31, 2024. The increase in quantity is the result of the net
increase from capital share transactions.
The
net decrease in net assets resulting from operations for the period ended
December 31, 2024, was $9.1 million, resulting from a net unrealized
appreciation on investment in ether of $32.2 million and a net realized loss of
$41.3 million from the sale of the investment in ether for the redemption of
Shares.
Cash
Resources and Liquidity
The
Trust does not hold a cash balance except in connection with the issuance and
redemption of Baskets or to pay expenses not assumed by the Sponsor. To the
extent the Trust does not have available cash to facilitate redemptions or pay
expenses not assumed by the Sponsor, the Trust will sell ether. When selling
ether on behalf of the Trust, the Sponsor endeavors to minimize the Trust’s
holdings of assets other than ether. As a consequence, the Sponsor expects that
the Trust will have an immaterial amount of cash flow from its operations and
that its cash balance will be insignificant at the end of each reporting period.
The Trust’s only sources of cash are proceeds from the sale of Baskets and
ether.
In
exchange for the Sponsor Fee, the Sponsor has agreed to assume most of the
expenses incurred by the Trust. The Sponsor contractually waived the Sponsor Fee
until December 31, 2024. On January 1, 2025, the Sponsor Fee began accruing at
an annual rate of 0.25% of the Trust’s Ether Holdings.
Off
Balance Sheet Arrangements and Contractual Obligations
The
Trust has not used, nor does it expect to use in the future, special purpose
entities to facilitate off balance sheet financing arrangements and has no loan
guarantee arrangements or off balance sheet arrangements of any kind other than
agreements entered into in the normal course of business, which may include
indemnification provisions related to certain risks service providers undertake
in performing services for the Trust. While the Trust’s exposure under such
indemnification provisions cannot be estimated, these general business
indemnifications are not expected to have a material impact on a Trust’s
financial position.
Sponsor
Fee payments made to the Sponsor will be calculated as a fixed percentage of the
Trust’s Ether Holdings. As such, the Sponsor cannot anticipate the payment
amounts that will be required under these arrangements for future periods as the
Trust’s Ether Holdings are not known until a future date.
Selected
Operating Data
|
|
|
|
| |
|
|
|
December
31, 2025 |
|
|
Price of
ether on principal market (1) |
|
$ |
2,971.55 |
|
|
Index
price (2) |
|
$ |
2,963.88 |
|
|
|
|
|
| |
|
|
|
December
31, 2025 |
|
|
NAV per
Share (3) |
|
$ |
29.64 |
|
|
Adjustment
to NAV per Share |
|
$ |
(0.08 |
) |
|
Trust’s
NAV per Share (4) |
|
$ |
29.56 |
|
(1)
The
Trust performed an assessment of the principal market at 11:59:59 p.m., EST, on
December 31, 2025.
(2)
Index
Price as represented by the Index as of 4:00 p.m., EST, on the last business day
of the period. The ether spot markets included in the Index as of the last
business day of the period were Bitstamp, Coinbase, Crypto.com, Gemini, Kraken,
and LMAX Digital.
(3)
The
NAV per Share was calculated using the fair value of ether based on the
principal market price at 11:59:59 p.m., EST, on December 31,
2025.
(4)
The
Trust’s NAV per Share is derived from the Index Price as represented by the
Index as of 4:00 p.m., EST, on the last business day of the period. The Trust’s
NAV per Share is calculated using a non-GAAP methodology. Refer to the “Overview
of the Trust” and “Valuation of Ether and Computation of Net Asset Value”
sections of Item 7 herein for a description of the Index methodology and
calculation of the Trust’s NAV per Share.
|
|
|
|
| |
|
|
|
December
31, 2024 |
|
|
Price of
ether on principal market (1) |
|
$ |
3,333.60 |
|
|
Index
price (2) |
|
$ |
3,344.41 |
|
|
|
|
|
| |
|
|
|
December
31, 2024 |
|
|
NAV per
Share (3) |
|
$ |
33.34 |
|
|
Adjustment
to NAV per Share |
|
$ |
0.10 |
|
|
Trust’s
NAV per Share (4) |
|
$ |
33.44 |
|
(1)
The
Trust performed an assessment of the principal market at 11:59:59 p.m., EST, on
December 31, 2024.
(2)
Index
Price as represented by the Index as of 4:00 p.m., EST, on the last business day
of the period. The ether spot markets included in the Index as of the last
business day of the period were Bitstamp, Coinbase, Gemini, itBit, Kraken, and
LMAX Digital.
(3)
The
NAV per Share was calculated using the fair value of ether based on the
principal market price at 11:59:59 p.m., EST, on December 31,
2024.
(4)
The
Trust’s NAV per Share is derived from the Index Price as represented by the
Index as of 4:00 p.m., EST, on the last business day of the period. The Trust’s
NAV per Share is calculated using a non-GAAP methodology. Refer to the “Overview
of the Trust” and “Valuation of Ether and Computation of Net Asset Value”
sections of Item 7 herein for a description of the Index methodology and
calculation of the Trust’s NAV per Share
As
of 4:00 p.m., EST, on the last business day of the quarter ended December 31,
2025, the Trust’s total value of ether based on the Index Price (non-GAAP
methodology) was $2,204,520,518, a difference of $5,704,911 to the GAAP value,
which was $2,210,225,429, and the total market value of the Trust’s ether based
on the price of an ether at 4:00 p.m., EST, in the principal market (non-GAAP
methodology) was $2,210,515,510, a difference of $290,081 to the GAAP value,
which was $2,210,225,429.
Analysis
of Price Movements
Investors
should understand the relationship between the Index Price (non-GAAP measurement
of the price of ether), the Trust’s NAV per Share (non-GAAP measurement of the
price of ether affected by non-ether net assets, such as the Sponsor Fee), the
Trust’s market price per share, and ether’s principal market price. Investors
should also be aware that past movements are not indicators of future movements.
Movements may be influenced by various factors, including, but not limited to,
government regulation, security breaches experienced by service providers, as
well as political and economic uncertainties around the world.
The
following chart illustrates the movement in the Index Price, the principal
market price, and the Trust’s NAV per Share during the year ended December 31,
2025.
During
the year ended December 31, 2025, the Index Price has ranged from $1,465.30 on
April 8, 2025, to $4,822.31 on August 24, 2025. The Sponsor has not observed a
material difference between the Index Price and average prices from the
constituent ether spot markets individually or as a group.
During
the year ended December 31, 2025, the 11:59:59 p.m. EST market price of ether,
as reported on the Trust’s principal market, has ranged from 1,417.92 on April
8, 2025, to $4,787.51 on August 23, 2025.
Shares
trade in the secondary market on the Exchange. Shares may trade in the secondary
market at prices that are lower or higher relative to the Trust’s NAV per Share.
The amount of the discount or premium in the trading price relative to the
Trust’s NAV per Share may be influenced by various factors, including the number
of Shareholders who seek to purchase or sell Shares in the secondary market and
the liquidity of ether. The following chart sets out the historical closing
prices for the Shares as reported by the Exchange and the Trust’s NAV per Share
during the year ended December 31, 2025.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
The
Trust is passively managed. The Trust does not utilize leverage, long-term debt,
derivatives or any similar arrangements in seeking to meet its investment
objectives or pay its expenses. The Trust does not engage in transactions in
foreign currencies which could expose the Trust to foreign currency related
market risk. The NAV of the Trust will change as fluctuations occur in the
market price of the Trust’s ether holdings. The price of ether is volatile, and
market movements of ether are difficult to predict. For details of Trust's NAV
changes as a result of fluctuations in the market price of the Trust’s ether
holdings refer to "Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Analysis
of Price Movements".
Item
8. Financial Statements and Supplementary Data.
INDEX
TO FINANCIAL STATEMENTS
|
| |
|
|
Page |
|
|
|
|
Report
of Independent Registered Public Accounting Firm (PCAOB ID
238) |
76 |
|
|
|
|
Statements
of Assets and Liabilities as of December 31, 2025 and
2024 |
78 |
|
|
|
|
Statements
of Operations for the year ended December 31, 2025 and the period
May 24, 2024 (seeding date) through December 31, 2024 |
79 |
|
|
|
|
Statements
of Changes in Net Assets for the year ended December 31, 2025 and the
period May 24, 2024 (seeding date) through December 31,
2024 |
80 |
|
|
|
|
Statements
of Cash Flows for the year ended December 31, 2025 and the period May 24,
2024 (seeding date) through December 31, 2024 |
81 |
|
|
|
|
Schedules
of Investment as of December 31, 2025 and 2024 |
82 |
|
|
|
|
Notes to
the Financial Statements |
83 |
Report
of Independent Registered Public Accounting Firm
To
the
Sponsor
and Shareholders of Fidelity Ethereum Fund
Opinions
on the Financial Statements and Internal Control over Financial
Reporting
We
have audited the accompanying statements of assets and liabilities, including
the schedules of investment, of Fidelity Ethereum Fund (the "Trust") as of
December 31, 2025 and 2024, and the related statements of operations, of changes
in net assets and of cash flows for the year ended December 31, 2025 and for the
period May 24, 2024 (seeding date) through December 31, 2024 including the
related notes (collectively referred to as the "financial statements"). We also
have audited the Trust’s internal control over financial reporting as of
December 31, 2025, based on criteria established in Internal
Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Trust as of December 31, 2025
and 2024, and the results of its operations, the changes in its net assets and
its cash flows for the year ended December 31, 2025 and for the period May 24,
2024 (seeding date) through December 31, 2024 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the Trust maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2025, based on criteria
established in Internal
Control - Integrated Framework
(2013) issued by the COSO.
Basis
for Opinions
The
Trust’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in Management’s Annual Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on
the Trust’s financial statements and on the Trust’s internal control over
financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Trust in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material
respects.
Our
audits of the financial statements included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
Definition
and Limitations of Internal Control over Financial Reporting
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical
Audit Matters
The
critical audit matter communicated below is a matter arising from the current
period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the financial statements and (ii) involved our
especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Existence
of and Rights to the Investment in Ether
As
described in Note 2 to the financial statements, as of December 31, 2025, the
fair value of the Trust’s investment in ether was $2.2 billion, with a
respective cost basis of $2.1 billion. Due to the Trust’s classification as an
investment company, investments in ether are recorded at their estimated fair
value. As disclosed by management, digital assets, including ether, are
controllable only by the possessor of both the unique public key and private key
or keys relating to the “digital wallet” in which the digital asset is held. To
the extent a private key is lost, destroyed or otherwise compromised and no
backup of the private key is accessible, the Trust will be unable to access, and
will effectively lose, the ether held in the related digital wallet.
The
principal considerations for our determination that performing procedures
relating to the existence of, and the Trust’s rights to, the investment in ether
is a critical audit matter are (i) a high degree of auditor effort in performing
procedures and evaluating audit evidence related to the existence of, and the
Trust’s rights to, the investment in ether and (ii) the audit effort involved
the use of professionals with specialized skill and knowledge.
Addressing
the matter involved performing procedures and evaluating audit evidence in
connection with forming our overall opinion on the financial statements. These
procedures included the involvement of professionals with specialized skill and
knowledge to assist in evaluating evidence of the effectiveness of the
related-party custodian’s controls related to (i) reconciliation of the
investment in ether from the related-party custodian’s records to the public
blockchain and (ii) safeguarding of the investment in ether held by the related
party custodian, including the generation of the private cryptographic keys and
the storing of these keys. These procedures also included, among others (i)
confirming the Trust’s investment in ether with the related-party custodian as
of December 31, 2025 and comparing the information in the confirmation response
to the Trust’s records; (ii) testing purchases and sales executed by the Trust
related to the investment in ether for a sample of transactions by obtaining and
inspecting source documents, such as related-party custodian statements, and
bank statements, as well as whether the transactions were appropriately
authorized by the Trust by obtaining and inspecting approval records; and (iii)
the involvement of professionals with specialized skill and knowledge to assist
in (a) comparing the investment in ether from the related-party custodian’s
confirmation response to the public blockchain and (b) evaluating whether the
Trust had access to the private cryptographic keys held by the related-party
custodian by tracing certain withdrawal transactions to the public
blockchain.
/s/
PricewaterhouseCoopers
LLP
Boston,
Massachusetts
February
25, 2026
We
have served as the Trust's auditor since 2024.
Fidelity
Ethereum Fund
Statements
of Assets and Liabilities
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s of US$, except for share and per share data) |
|
December
31, 2025 |
|
|
December
31, 2024 |
|
|
Assets |
|
|
|
|
|
|
|
Investment
in ether, at fair value (cost $2,050,114 and
$1,540,471 as
of December 31, 2025 and December 31, 2024, respectively) |
|
$ |
2,210,226 |
|
|
$ |
1,572,626 |
|
|
Receivables
from sales of ether |
|
|
2,217 |
|
|
|
— |
|
|
Receivables
from issuance of capital shares |
|
|
— |
|
|
|
31,796 |
|
|
Total
Assets |
|
$ |
2,212,443 |
|
|
$ |
1,604,422 |
|
|
Liabilities |
|
|
|
|
|
|
|
Payable
for purchases of ether |
|
|
— |
|
|
|
31,796 |
|
|
Payable
for capital shares redeemed |
|
|
2,217 |
|
|
|
— |
|
|
Sponsor
fee payable |
|
|
457 |
|
|
|
— |
|
|
Total
Liabilities |
|
$ |
2,674 |
|
|
$ |
31,796 |
|
|
Commitments
and Contingencies (Note 6) |
|
|
|
|
|
|
|
Net
Assets |
|
|
|
|
|
|
|
Shares,
no par
value (unlimited shares
authorized) 74,550,000 and
47,175,000 shares
issued and outstanding as of December 31, 2025 and December 31, 2024,
respectively |
|
|
— |
|
|
|
— |
|
|
Paid-in-capital |
|
|
2,641,179 |
|
|
|
1,581,741 |
|
|
Total
distributable earnings (loss) |
|
|
(431,410 |
) |
|
|
(9,115 |
) |
|
Total
Net Assets |
|
$ |
2,209,769 |
|
|
$ |
1,572,626 |
|
|
Net
Asset Value per share (74,550,000 and
47,175,000 shares
issued and outstanding as of December 31, 2025 and December 31, 2024,
respectively) |
|
$ |
29.64 |
|
|
$ |
33.34 |
|
Values
shown as $— in the Statement of Assets and Liabilities may reflect amounts less
than $500.
The
accompanying notes are an integral part of these financial
statements
Fidelity
Ethereum Fund
Statements
of Operations
|
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s of US$) |
|
|
Year
Ended December 31, |
|
|
|
|
|
2025 |
|
|
2024
(1) |
|
|
Investment
Income: |
|
|
|
|
|
|
|
|
Investment
income |
|
|
$ |
— |
|
|
$ |
— |
|
|
Expenses: |
|
|
|
|
|
|
|
|
Sponsor
fee |
|
|
|
4,599 |
|
|
|
644 |
|
|
Total
Expenses Before Waiver |
|
|
|
4,599 |
|
|
|
644 |
|
|
Sponsor
fee waived |
|
|
|
— |
|
|
|
(644 |
) |
|
Net
Expenses |
|
|
|
4,599 |
|
|
|
— |
|
|
Net
Investment Income (Loss) |
|
|
$ |
(4,599 |
) |
|
$ |
— |
|
|
Net
Realized and Change in Unrealized Gain (Loss) from: |
|
|
|
|
|
|
|
|
Net
realized gain (loss) on investment in ether sold for
redemptions |
|
|
|
(544,867 |
) |
|
|
(41,270 |
) |
|
Net
realized gain (loss) on investment in ether transferred to pay the Sponsor
fee |
|
|
|
(786 |
) |
|
|
— |
|
|
Net
change in unrealized appreciation (depreciation) on investment in
ether |
|
|
|
127,957 |
|
|
|
32,155 |
|
|
Net
Realized and Change in Unrealized Gain (Loss) on Investment in
Ether |
|
|
$ |
(417,696 |
) |
|
$ |
(9,115 |
) |
|
Net
Increase (Decrease) in Net Assets Resulting from Operations |
|
|
$ |
(422,295 |
) |
|
$ |
(9,115 |
) |
(1)
The
period presented is from
May 24, 2024 (seeding date) through December 31, 2024.
Values
shown as $— in the Statement of Operations may reflect amounts less than
$500.
The
accompanying notes are an integral part of these financial
statements
Fidelity
Ethereum Fund
Statements
of Changes in Net Assets
|
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s of US$, except for shares)
|
|
|
Year
Ended December 31, |
|
|
|
|
|
2025 |
|
|
2024
(1) |
|
|
Net
Increase (Decrease) in Net Assets Resulting from Operations: |
|
|
|
|
|
|
|
|
Net
investment income (loss) |
|
|
$ |
(4,599 |
) |
|
$ |
— |
|
|
Net
realized gain (loss) on investment in ether sold for
redemptions |
|
|
|
(544,867 |
) |
|
|
(41,270 |
) |
|
Net
realized gain (loss) on investment in ether transferred to pay the Sponsor
fee |
|
|
|
(786 |
) |
|
|
— |
|
|
Net
change in unrealized appreciation (depreciation) on investment in
ether |
|
|
|
127,957 |
|
|
|
32,155 |
|
|
Net
Increase (Decrease) in Net Assets Resulting from Operations |
|
|
$ |
(422,295 |
) |
|
$ |
(9,115 |
) |
|
Capital
Share Transactions: |
|
|
|
|
|
|
|
|
Shares
issued |
|
|
|
4,455,489 |
|
|
|
1,799,841 |
|
|
Shares
redeemed |
|
|
|
(3,396,051 |
) |
|
|
(218,100 |
) |
|
Net
Increase (Decrease) in Net Assets Resulting from Capital Share
Transactions |
|
|
$ |
1,059,438 |
|
|
$ |
1,581,741 |
|
|
Total
Increase (Decrease) in Net Assets |
|
|
$ |
637,143 |
|
|
$ |
1,572,626 |
|
|
Net
Assets, beginning of period |
|
|
|
1,572,626 |
|
|
|
— |
|
|
Net
Assets, End of Period |
|
|
$ |
2,209,769 |
|
|
$ |
1,572,626 |
|
|
Changes
in Shares Outstanding: |
|
|
|
|
|
|
|
|
Shares
outstanding, beginning of period |
|
|
|
47,175,000 |
|
|
|
— |
|
|
Shares
issued |
|
|
|
126,050,000 |
|
|
|
54,700,001 |
|
|
Shares
redeemed |
|
|
|
(98,675,000 |
) |
|
|
(7,525,001 |
) |
|
Net
Increase (Decrease) in Shares |
|
|
|
27,375,000 |
|
|
|
47,175,000 |
|
|
Shares
Outstanding, End of Period |
|
|
|
74,550,000 |
|
|
|
47,175,000 |
|
(1)
The
period presented is from
May 24, 2024 (seeding date) through December 31, 2024.
Values
shown as $— in the Statement of Changes in Net Assets may reflect amounts less
than $500.
The
accompanying notes are an integral part of these financial
statements
Fidelity
Ethereum Fund
Statements
of Cash Flows
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s of US$) |
|
Year
Ended December 31, |
|
|
|
|
2025 |
|
|
2024
(1) |
|
|
Cash
Flows from Operating Activities: |
|
|
|
|
|
|
|
Net
increase (decrease) in net assets resulting from operations |
|
$ |
(422,295 |
) |
|
$ |
(9,115 |
) |
|
Adjustments
to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by (used in) operating
activities: |
|
|
|
|
|
|
|
Payments
for purchases of ether |
|
|
(4,301,756 |
) |
|
|
(1,737,370 |
) |
|
Proceeds
from ether sold |
|
|
3,263,255 |
|
|
|
187,425 |
|
|
Net
realized (gain) loss on investment in ether sold for
redemptions |
|
|
544,867 |
|
|
|
41,270 |
|
|
Net
realized (gain) loss on investment in ether transferred to pay the Sponsor
fee |
|
|
786 |
|
|
|
— |
|
|
Net
change in unrealized (appreciation) depreciation on investment in
ether |
|
|
(127,957 |
) |
|
|
(32,155 |
) |
|
Transfer
of ether to pay the Sponsor fee |
|
|
4,142 |
|
|
|
— |
|
|
Increase
(decrease) in Sponsor fee payable |
|
|
457 |
|
|
|
— |
|
|
Net
Cash Provided by (Used in) Operating Activities |
|
$ |
(1,038,501 |
) |
|
$ |
(1,549,945 |
) |
|
Cash
Flows from Financing Activities: |
|
|
|
|
|
|
|
Proceeds
from issuance of capital shares |
|
|
4,301,756 |
|
|
|
1,737,370 |
|
|
Cash
paid for redemption of capital shares |
|
|
(3,263,255 |
) |
|
|
(187,425 |
) |
|
Net
Cash Provided by (Used in) Financing Activities |
|
$ |
1,038,501 |
|
|
$ |
1,549,945 |
|
|
Cash |
|
|
|
|
|
|
|
Net
increase (decrease) in cash |
|
$ |
— |
|
|
$ |
— |
|
|
Cash,
beginning of the period |
|
$ |
— |
|
|
$ |
— |
|
|
Cash,
End of the Period |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Supplemental
Information and Non-Cash Financing Activities |
|
|
|
|
|
|
|
Ether
received for the issuance of capital shares |
|
$ |
54,950 |
|
|
$ |
— |
|
(1)
The
period presented is from
May 24, 2024 (seeding date) through December 31, 2024.
Values
shown as $— in the Statement of Cash Flows may reflect amounts less than
$500.
The
accompanying notes are an integral part of these financial
statements
Fidelity
Ethereum Fund
Schedules
of Investment
December
31, 2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s of US$, except for quantity of ether and
percentages) |
|
Investments
(a) |
|
Quantity
of Ether |
|
|
Cost |
|
|
Fair
Value |
|
|
Percentage
of Net Assets |
|
Investment
in ether |
|
|
|
|
|
|
|
|
|
|
|
|
Global |
|
|
|
|
|
|
|
|
|
|
|
|
Ether |
|
|
743,795 |
|
|
$ |
2,050,114 |
|
|
$ |
2,210,226 |
|
|
|
|
Total
Investment in ether |
|
|
|
|
$ |
2,050,114 |
|
|
$ |
2,210,226 |
|
|
100.02% |
|
Other
Assets Less Liabilities |
|
|
|
|
|
|
|
$ |
(457 |
) |
|
(0.02)% |
|
Total
Net Assets |
|
|
|
|
|
|
|
$ |
2,209,769 |
|
|
100.00% |
(a)
Non-income
producing investment
December
31, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s of US$, except for quantity of ether and
percentages) |
|
Investments
(a) |
|
Quantity
of Ether |
|
|
Cost |
|
|
Fair
Value |
|
|
Percentage
of Net Assets |
|
Investment
in ether |
|
|
|
|
|
|
|
|
|
|
|
|
Global |
|
|
|
|
|
|
|
|
|
|
|
|
Ether |
|
|
471,750 |
|
|
$ |
1,540,471 |
|
|
$ |
1,572,626 |
|
|
|
|
Total
Investment in ether |
|
|
|
|
$ |
1,540,471 |
|
|
$ |
1,572,626 |
|
|
100.00% |
|
Other
Assets Less Liabilities |
|
|
|
|
|
|
|
$ |
- |
|
|
0.00% |
|
Total
Net Assets |
|
|
|
|
|
|
|
$ |
1,572,626 |
|
|
100.00% |
(a)
Non-income
producing investment
The
accompanying notes are an integral part of these financial
statements
Fidelity
Ethereum Fund
Notes
to the Financial Statements
Note
1: Organization
Fidelity
Ethereum Fund (the “Trust”) is a Delaware Statutory Trust that was formed on
October 31, 2023, pursuant to the Delaware Statutory Trust Act. The Trust issues
common units of beneficial interest (“Shares”), which represent units of
fractional undivided beneficial interest in and ownership of the Trust. The
Trust’s investment objective is to seek to track the performance of ether, the
native token of the Ethereum blockchain, as measured by the performance of the
Index, adjusted for the Trust’s expenses and other liabilities. The Index is
designed to reflect the performance of ether in United States (“US”) dollars.
The Trust is sponsored by FD Funds Management LLC (the “Sponsor”), a
wholly-owned subsidiary of FMR LLC. CSC Delaware Trust Company is the trustee of
the Trust (the “Trustee”). The Trust will operate pursuant to a Trust Agreement,
as amended and/or restated from time to time (the “Trust Agreement”).
The
Trust is passively managed. The Shareholders of the Trust do not have control or
involvement in the management of the Trust. The Trust, the Sponsor, and the
Trust’s service providers do not loan or pledge the assets of the Trust or use
those assets as collateral for any loan or similar arrangement unless required
to facilitate transaction settlement.
Prior
to June 4, 2024, the Trust had no operations other than matters relating to the
sale and issuance of one
Share of the Trust to an affiliate at a per-Share price of $40
(the “Seed Share”) on May
24, 2024.
On June 4, 2024, the Seed Share was redeemed for cash and FMR Capital, Inc. (the
"Seed Capital Investor"), an affiliate of the Sponsor, purchased 125,000
Shares at a per-Share price of $38
(the “Seed Baskets”). On June 4, 2024, the Trust purchased 1,250
ether with the proceeds of the Seed Baskets. On July 22, 2024, the Trust was
declared effective. On July
23, 2024,
the Trust commenced operations and Shares commenced trading on Cboe BZX
Exchange, Inc. (the “Exchange”).
Note
2: Significant Accounting Policies
The
following is a summary of the significant accounting and reporting policies used
in preparing the financial statements.
Basis
of Presentation
The
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States (“GAAP”) and are stated in US
dollars. The Trust qualifies as an investment company for accounting purposes
pursuant to the accounting and reporting guidance under Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946,
Financial Services – Investment Companies (“ASC 946”). The Trust uses fair value
as its method of accounting for its investment in ether in accordance with its
classification as an investment company for accounting purposes. The Trust is
not a registered investment company under the Investment Company Act of 1940.
The Trust operates as a single operating segment. The Trust's profit or loss,
assets, and performance are regularly monitored and assessed as a whole by the
Sponsor of the Trust, using the information presented in the financial
statements and financial highlights.
Use
of Estimates
The
preparation of the financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Actual amounts may ultimately differ from
those estimates and the differences could be
material.
Ether
is an Ethereum-based token, which is a type of digital asset based on an
open‐source cryptographic protocol existing on an Ethereum network. The Ethereum
network supports ether and other Ethereum-based tokens. Digital assets are
defined broadly as digital records that are made using cryptography for
verification and security purposes, on a distributed ledger and may be
characterized by their ability to be used as a medium of exchange, a
representation to provide or access goods or services, or as a financing
vehicle, such as a security. The Trust identifies ether as an “other investment”
in accordance with ASC 946.
Investment
Valuation
Due
to the Trust’s classification as an investment company, investments in ether are
recorded on the financial statements at their estimated fair value in accordance
with ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 requires the
determination of the Trust’s principal market or, in the absence of a principal
market, the most advantageous market (principal market) and the assumption that
ether is sold in their principal market. The Trust determines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants using the principal market on
the measurement date and, therefore, the principal market used must be
accessible to the Trust on that date. The Trust determines its principal market
price for GAAP reporting and utilizes an exchange-traded price from that
principal market as of 11:59:59 p.m., EST, on the financial statement
measurement date.
GAAP
establishes the following fair value hierarchy that prioritizes inputs to
valuation techniques used to measure fair value. The inputs are categorized in
one of the following levels:
Level
1 – Unadjusted quoted prices in active markets for identical assets or
liabilities that the Trust is able to access at the measurement date.
Level
2 – Inputs, other than quoted prices included in Level 1, that are observable
either directly or indirectly. These inputs may include (a) quoted prices for
similar assets or liabilities in active markets, (b) quoted prices for identical
or similar assets or liabilities in markets that are not active, (c) inputs
other than quoted prices that are observable for the asset or liability, or (d)
inputs derived principally from or corroborated by observable market data by
correlation or other means.
Level
3 – Inputs that are unobservable (including the Trust’s own data and assumptions
based on the best information available) and significant to the entire fair
value measurement.
To
the extent that investments are actively traded and valuation adjustments are
not applied, they are categorized in Level 1 of the fair value hierarchy.
Investments traded on inactive markets or valued by reference to similar
instruments are generally categorized in Level 2 of the fair value
hierarchy.
The
availability of valuation techniques and observable inputs can vary across
investments and is affected by various factors, including the nature of the
investment, whether the investment is new or unestablished in the marketplace,
market liquidity and other investment specific characteristics. To the extent
that valuation is based on models or inputs that are less observable or
unobservable in the market, determining fair value requires more judgment.
Because of the uncertainty inherent in valuation, those estimated values may be
materially higher or lower than the values that would have been used had a ready
market for the investments existed. Therefore, the degree of judgment exercised
by management in determining fair value is greatest for investments categorized
in Level 3.
In
some circumstances, the inputs used to measure fair value might be categorized
within different levels of the fair value hierarchy. In those instances, the
fair value measurement is categorized in its entirety in the fair value
hierarchy based on the lowest level input that is significant to the fair value
measurement.
Investment
Transactions and Related Investment Income
The
Trust records investment transactions in ether on a trade date basis. For
financial reporting purposes, the Trust’s investment holdings and
Paid-In-Capital include trades executed through the end of the last business day
of the period. The Trust’s purchases are recorded at cost, including transaction
fees, and are subsequently fair valued in accordance with the Trust’s fair
valuation policy. Changes in fair value are reflected as the net change in
unrealized appreciation (depreciation) on investment in ether. Realized
gains and losses from investment transactions are determined on the basis of
identified cost and reflected as net realized gain (loss) on investment in ether
sold for redemptions and net realized gain (loss) on investment in ether
transferred to pay the sponsor fee. The following tables summarize ether
activity:
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s, except for quantity) |
|
Quantity |
|
|
Fair
Value |
|
|
Balance
as of December 31, 2024 |
|
|
471,750 |
|
|
$ |
1,572,626 |
|
|
Ether
purchased |
|
|
1,197,812 |
|
|
|
4,269,960 |
|
|
Ether
received for the issuance of capital shares |
|
|
18,458 |
|
|
|
54,950 |
|
|
Ether
sold |
|
|
(942,946 |
) |
|
|
(3,265,472 |
) |
|
Transfer
of ether to pay the Sponsor fee |
|
|
(1,279 |
) |
|
|
(4,142 |
) |
|
Net
realized gain (loss) |
|
|
|
|
|
(545,653 |
) |
|
Net
change in unrealized (appreciation) depreciation on investment in
ether |
|
|
|
|
|
127,957 |
|
|
Balance
as of December 31, 2025 |
|
|
743,795 |
|
|
$ |
2,210,226 |
|
|
|
|
|
|
|
|
|
| |
|
(Amounts
in 000’s, except for quantity) |
|
Quantity |
|
|
Fair
Value |
|
|
Balance
as of May 24, 2024 (Seeding date) |
|
|
— |
|
|
$ |
— |
|
|
Ether
purchased |
|
|
537,500 |
|
|
|
1,769,166 |
|
|
Ether
sold |
|
|
(65,750 |
) |
|
|
(187,425 |
) |
|
Net
realized gain (loss) |
|
|
|
|
|
(41,270 |
) |
|
Net
change in unrealized (appreciation) depreciation on investment in
ether |
|
|
|
|
|
32,155 |
|
|
Balance
as of December 31, 2024 |
|
|
471,750 |
|
|
$ |
1,572,626 |
|
Cash
Cash
consists of a demand deposit held with a financial institution. At times,
deposits may be in excess of federally insured limits. The Trust has not
experienced any losses and does not believe it is exposed to any significant
credit risk on such deposits.
Income
Taxes
The
Trust intends to be classified as a “grantor trust” for US federal income tax
purposes. As a result, the Trust itself should not be subject to US federal
income tax. Instead, the Trust’s income and expenses should “flow through” to
the Shareholders, and the Trustee will report to Shareholders and the Internal
Revenue Service on that basis.
The
Sponsor evaluates tax positions taken or expected to be taken in the course of
its tax treatment, and its tax reporting to its shareholders, of these positions
to determine whether the tax positions are “more-likely-than-not” to be
sustained by the applicable tax authority. Tax positions not deemed to meet that
threshold would be recorded as an expense in the current year. The Trust is
required to analyze all open tax years. Open tax years are those years that are
open for examination by the relevant income taxing authority. As
of December 31, 2025, the 2024 tax year remains open for examination. There were
no examinations in progress at period end.
Expenses
Expenses
are recorded as accrued. Expense estimates are accrued in the period to which
they relate. Expenses included in the accompanying financial statements reflect
the expenses of the Trust and do not include any expenses paid by the Sponsor or
related entities outside of the Trust.
Recently
Adopted Accounting Pronouncements
The
Trust adopted FASB issued Accounting Standards Update (“ASU”) No. 2023-08,
“Intangibles-Goodwill and Other-Crypto Assets (Subtopic 350-60): Accounting for
and Disclosure of Crypto Assets” (“ASU 2023-08”), effective for annual and
interim reporting periods beginning after December 15, 2024. ASU 2023-08
requires entities to subsequently measure certain crypto assets at fair value,
and changes in fair value must be recorded in net income in each reporting
period. The Trust’s accounting and reporting under ASC 946 is materially
consistent with these requirements. These financial statements include
additional disclosures about the holdings of certain crypto assets required by
ASU 2023-08 for annual reporting
periods.
Note
3: Related Party Agreements and Transactions
Administrator
Fidelity
Service Company, Inc., an affiliate of the Sponsor, serves as the Trust’s
administrator (the “Administrator”). Under the Administration Agreement, the
Administrator provides necessary administrative, tax and accounting services and
financial reporting for the maintenance and operations of the Trust, including
valuing the Trust’s ether and calculating the net asset value (“NAV”) per Share
of the Trust (“Trust’s NAV”) and supplying pricing information to the Sponsor
for the relevant website. In addition, the Administrator makes available the
office space, equipment, personnel and facilities required to provide such
services. All fees and expenses incurred by the Trust related to services
performed by the Administrator are borne by the Sponsor.
Custodian
Fidelity
Digital Assets, N.A., an affiliate of the Sponsor, serves as the Trust’s ether
custodian (the “Custodian”). Under the Custodial Services Agreement, the
Custodian is responsible for safekeeping all of the ether owned by the Trust.
The Custodian was selected by the Sponsor. The Sponsor is responsible for
opening an account with the Custodian that holds the Trust’s ether, as well as
facilitating the transfer or sale of ether required for the operation of the
Trust. All fees and expenses incurred by the Trust related to services performed
by the Custodian are borne by the
Sponsor.
Distributor
Fidelity
Distributors Company LLC, an affiliate of the Sponsor, (“FDC” or the
“Distributor”) is responsible for reviewing and approving the marketing
materials prepared by the Sponsor for compliance with applicable Securities and
Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority,
Inc. (“FINRA”) advertising laws, rules, and regulations pursuant to a marketing
agreement with the Trust. FDC is a broker-dealer registered under the Securities
Exchange Act of 1934 (the “1934 Act”) and a member of FINRA. All fees and
expenses incurred by the Trust related to services performed by the Distributor
are borne by the Sponsor.
Index
Services
Fidelity
Product Services LLC, an affiliate of the Sponsor, (the “Index Provider”) is
responsible for the methodology and oversight of the Index. Coin Metrics, Inc.
is the third-party, independent calculation agent for the Index. All fees and
expenses incurred by the Trust related to services performed by the Index
Provider are borne by the Sponsor.
Sponsor
Fee
On
June 3, 2024, the Trust contractually agreed to pay the Sponsor a unified fee of
0.25%
of the Trust’s Ether Holdings (the “Sponsor Fee”), effective as of the date of
the registration statement. The Trust’s “Ether Holdings” is the quantity of the
Trust’s ether plus any cash or other assets held by the Trust represented in
ether as calculated using the Index price, less its liabilities (which include
estimated accrued but unpaid fees and expenses) represented in ether as
calculated using the Index price. The Sponsor Fee is paid by the Trust to the
Sponsor as compensation for services performed under the Trust Agreement. The
Sponsor is obligated to assume and pay all fees and other expenses incurred by
the Trust in the ordinary course of its affairs, excluding taxes, but including:
(i) the fees of the Trust’s third-party service providers including, but not
limited to, the Distributor, the Administrator, any custodian, the Transfer
Agent, the Index Provider and the Trustee, (ii) the fees and expenses related to
the listing, quotation or trading of the Shares on the Exchange (including
customary legal, marketing and audit fees and expenses), (iii) legal fees and
expenses incurred in the ordinary course, (iv) audit fees, (v) regulatory fees,
including, if applicable, any fees relating to the registration of the Trust and
Shares, including any ongoing filings related to the offering of Shares, under
the Securities Act of 1933 (the “1933 Act”) or the 1934 Act, (vi) printing and
mailing costs, (vii) costs of maintaining the Trust’s website and (viii)
applicable license fees (each, a “Sponsor-paid Expense” and collectively, the
“Sponsor-paid Expenses”), provided that any expense that qualifies as an
Extraordinary Expense will be deemed to be an Extraordinary Expense and not a
Sponsor-paid Expense. There is no cap on the amount of Sponsor-paid Expenses.
The Sponsor has also assumed all fees and expenses related to the organization
and offering of the Trust and the Shares.
Effective
July 10, 2024, the Trust and the Sponsor entered into a Fee Waiver Agreement in
which the Sponsor agreed to waive the entirety of the Sponsor Fee (the “Waiver”)
through December 31, 2024. Effective December 31, 2024, the Waiver ended
pursuant to the terms of the Fee Waiver Agreement.
The
Trust may incur certain extraordinary, nonrecurring expenses that are not
Sponsor-paid Expenses, including, but not limited to, brokerage and transactions
costs associated with the sale or transfer of ether, 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, the Trust’s assets, or the interests of Shareholders, any indemnification
of the Custodian or other agents, service providers or counterparties of the
Trust, extraordinary legal fees and expenses, including any legal fees and
expenses incurred in connection with litigation, regulatory enforcement or
investigation matters (collectively, “Extraordinary Expenses”). To the extent
on-chain transaction fees are incurred in connection with transfers or sales of
ether to pay Extraordinary Expenses, the Trust will bear such fees.
The
Administrator calculates the Sponsor Fee in respect of each day based on the
prior day’s Ether Holdings. The Sponsor Fee accrues daily in ether and is
payable monthly in ether or cash. To the extent the Trust does not have cash
readily available, the Sponsor will cause the transfer or sale of ether in such
quantity as may be necessary to permit the payment of Trust expenses and
liabilities not assumed by the Sponsor. The amount of ether transferred or sold
may vary from time to time depending on the actual sales price of ether relative
to the Trust’s expenses and
liabilities.
Note
4: Fair Value Measurement
The
Trust’s assets recorded at fair value have been categorized based upon a fair
value hierarchy as described in the Trust’s significant accounting policies in
Note 2. The
following table presents information about the Trust’s assets measured at fair
value as of
December 31, 2025 and 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December
31, 2025 |
|
|
(Amounts
are in 000’s) |
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
|
Total |
|
|
Investment
in ether |
|
$ |
2,210,226 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,210,226 |
|
|
Total
Investments |
|
$ |
2,210,226 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,210,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December
31, 2024 |
|
|
(Amounts
are in 000’s) |
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
|
Total |
|
|
Investment
in ether |
|
$ |
1,572,626 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,572,626 |
|
|
Total
Investments |
|
$ |
1,572,626 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,572,626 |
|
Geographic
location for all investments is detailed in the accompanying Schedules of
Investment.
Note
5: Capital
The
Trust is an exchange-traded product. The Trust continuously offers Baskets
consisting of Shares to Authorized Participants. The number of outstanding
Shares is expected to increase and decrease from time to time as a result of the
issuance and redemption of Baskets. The issuance and redemption of Baskets
requires the delivery to the Trust or the distribution by the Trust of the
amount of ether or cash represented by the Trust’s NAV of the Baskets being
issued or redeemed. The total amount of ether or cash required for the issuance
or redemption of Baskets will be based on the combined net assets represented by
the number of Baskets being issued or redeemed.
Shares
represent fractional undivided beneficial interests in and ownership of the
Trust. Shares issued by the Trust are registered in a book entry system and held
in the name of Cede & Co. at the facilities of the Depository Trust Company
(“DTC”), and one or more global certificates issued by the Trust to DTC
evidences the Shares. Shareholders may hold their Shares through DTC if they are
direct participants in DTC (“DTC Participants”) or indirectly through entities
(such as broker-dealers) that are DTC
Participants.
Note
6: Commitments and Contingencies
In
the normal course of business, the Trust enters into certain contracts that
provide a variety of indemnities, including contracts with the Sponsor and
affiliates of the Sponsor, and its officers, directors, employees, subsidiaries
and affiliates, and the Custodian as well as others relating to services
provided to the Trust. The Trust’s maximum exposure under these and its other
indemnities is unknown. However, no liabilities have arisen under these
indemnities in the past and, while there can be no assurances in this regard,
there is no expectation that any will occur in the future. Therefore, the
Sponsor does not consider it necessary to record a liability in this regard. The
risk of material loss from such claims is considered
remote.
Note
7: Concentration Risk
Unlike
other funds that may invest in diversified assets, the Trust’s investment
strategy is concentrated in a single asset within a single asset class. This
concentration maximizes the degree of the Trust’s exposure to a variety of
market risks associated with ether and digital assets. By concentrating its
investment strategy solely in ether, any losses suffered as a result of a
decrease in the value of ether can be expected to reduce the value of an
interest in the Trust and will not be offset by other gains if the Trust were to
invest in underlying assets that were
diversified.
Note
8: Financial Highlights
The
Trust is presenting the following financial highlights related to investment
performance and operations of a Share outstanding for the year ended December
31, 2025 and for the period July 23, 2024 (commencement of operations) through
December 31, 2024. The total return, at net asset value is based on the change
in NAV of a Share during the period and the total return, at market value is
based on the change in market value of a Share on the Exchange during the
period. An individual investor’s return and ratios may vary based on the timing
of capital transactions.
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Year
Ended December 31, 2025 |
|
|
For
the Period July 23, 2024 (Commencement of Operations) Through December 31,
2024 |
|
|
Per
Share Activity |
|
|
|
|
|
|
|
|
Net
Asset Value, beginning of period |
|
|
$ |
33.34 |
|
|
$ |
34.87 |
|
|
Net
investment income (loss) (1) |
|
|
|
(0.08 |
) |
|
|
— |
|
|
Net
realized and change in unrealized gain (loss) |
|
|
|
(3.62 |
) |
|
|
(1.53 |
) |
|
Net
increase (decrease) in net assets resulting from operations |
|
|
|
(3.70 |
) |
|
|
(1.53 |
) |
|
Net
Asset Value, end of period |
|
|
$ |
29.64 |
|
|
$ |
33.34 |
|
|
Market
Value per Share, beginning of period |
|
|
|
33.41 |
|
|
|
34.87 |
|
|
Market
Value per Share, end of period |
|
|
$ |
29.61 |
|
|
$ |
33.41 |
|
|
Total
Return, at Net Asset Value (2) |
|
|
|
(11.08 |
)% |
|
|
(4.41 |
)% |
|
Total
Return, at Market Value (2) |
|
|
|
(11.37 |
)% |
|
|
(4.20 |
)% |
|
Ratios
to Average Net Assets |
|
|
|
|
|
|
|
|
Net
investment income (loss) (3) |
|
|
|
(0.25 |
)% |
|
|
0.00 |
% |
|
Expenses,
gross (3) |
|
|
|
0.25 |
% |
|
|
0.24 |
% |
|
Expenses,
net of waivers (3) |
|
|
|
0.25 |
% |
|
|
0.00 |
% |
(1)
Based
on average shares outstanding during the
period.
(2)
Percentages
are not annualized.
(3)
For
the period July 23, 2024 (Commencement of Operations) through December 31, 2024,
percentages are
annualized.
Note
9: Subsequent Events
In
preparation of the financial statements, management has evaluated the events and
transactions subsequent to December 31, 2025,
and determined that there are no subsequent events or transactions that would
require adjustments to or disclosures in the Trust’s financial
statements.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
There
are not and have not been disagreements between the Trust and its accountant on
matters of accounting principles, practices, or financial statement
disclosure.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
In
accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, as amended,
management of the Sponsor, under the supervision and with the participation of
the Sponsor’s President (principal executive officer) and Treasurer (principal
financial and accounting officer), carried out an evaluation of the
effectiveness of the Trust’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the
period covered by this Annual Report and determined that the Trust’s disclosure
controls and procedures are effective as of December 31, 2025, the end of the
period covered by the Annual Report.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
Sponsor’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined under Exchange Act
Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP.
The
Sponsor’s management, under the supervision and with the participation of the
Sponsor's President (principal executive officer) and Treasurer (principal
financial and accounting officer) assessed the effectiveness of the Trust’s
internal control over financial reporting as of December 31, 2025. In making
this assessment, the Sponsor's management used the criteria set forth in
Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 COSO Framework). Based
on this assessment, the Sponsor’s management concluded that the Trust's internal
control over financial reporting was effective as of December 31,
2025.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
ineffective because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
effectiveness of the Trust’s internal control over financial reporting as of
December 31, 2025 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
Changes
in Internal Control over Financial Reporting
There
have been no changes in the Trust’s internal control over financial reporting
that occurred during its most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, its internal
control over financial reporting.
Item
9B. Other Information.
Not
applicable.
Item
9C. Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections.
Not
applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The
Sponsor
The
Trust does not have any directors, officers or employees. The creation and
operation of the Trust has been arranged by the Sponsor. The Sponsor is a
wholly-owned subsidiary of FMR LLC.
Background
and Principals
The
President and Treasurer of the Sponsor are as follows:
Cynthia
Lo Bessette,
1969, serves as President of the Sponsor. She is Head of Fidelity’s Digital
Asset Management division since 2023, leading teams responsible for the
management and development of the investment framework and infrastructure for
crypto research, asset tokenization, digital asset/crypto trading, and
settlement and the development and implementation of new investment capabilities
and investment products and solutions, business development, and digital asset
education. Previously, in her role as Head of Fidelity’s Asset Management and
Digital Assets Legal, Ms. Lo Bessette led a team providing legal and regulatory
guidance across Asset Management and built a team providing legal and regulatory
guidance and support to the Fidelity Digital Assets business and
blockchain-related technology research and development in the Fidelity Center
for Applied Technology. Prior to joining Fidelity in August 2019, Ms. Lo
Bessette was Executive Vice President and General Counsel of OppenheimerFunds,
and a Director of OFI International, Ltd, the UK affiliate of OppenheimerFunds,
and OppenheimerFunds ICAV.
Craig
Brown,
1977, serves as Treasurer of the Sponsor. Mr. Brown is a Vice President in
Fidelity’s Asset Management Treasurer’s Office, where he is responsible for
oversight of regulatory matters as well as the financial reporting and
accounting policy for the Fidelity funds. He also serves as Deputy Treasurer of
the Fidelity Equity and High Income Funds. Previously, as Vice President, Mr.
Brown led oversight of the Fidelity funds’ financial reporting, fund service
providers, including custodian banks, and engagement with the funds’ independent
registered public accounting firms. Prior to joining Fidelity in January 2013,
Mr. Brown was an Assistant Treasurer with Sun Capital Advisors Trust and an
Assistant Vice President with J.P. Morgan Fund Services.
Family
Relationships
There
are no family relationships among our executive officers.
Indemnification
The
general fiduciary duties that would otherwise be imposed on the Sponsor (which
would make its operation of the Trust as described herein impracticable due to
the strict prohibition imposed by such duties on, for example, conflicts of
interest on behalf of a fiduciary in its dealings with its beneficiaries), will
be replaced entirely by the terms of the Trust Agreement (to which terms all
Shareholders, by subscribing to the Shares, are deemed to consent).
The
Trust Agreement provides that the Trust shall indemnify, defend and hold
harmless the Trustee (including in its individual capacity) and any of the
officers, directors, employees and agents of the Trustee (the “Indemnified
Persons”) from and against any and all losses, damages, liabilities, claims,
actions, suits, costs, expenses, disbursements (including the reasonable fees
and expenses of counsel and fees and expenses incurred in connection with
enforcement of its indemnification rights under the Trust Agreement), taxes and
penalties of any kind and nature whatsoever (collectively, “Expenses”), to the
extent that such Expenses arise out of or are imposed upon or asserted at any
time against such Indemnified Persons with respect to the performance of the
Trust Agreement, the creation, operation or termination of the Trust or the
transactions contemplated thereby; provided, however, that the Trust shall not
be required to indemnify any Indemnified Person for any Expenses which are a
result of the willful misconduct, bad faith or gross negligence of an
Indemnified Person. If the Trust shall have insufficient assets or improperly
refuses to pay an Indemnified Person within sixty (60) days of a request for
payment owed hereunder, the Sponsor shall, as secondary obligor, compensate or
reimburse the Trustee or indemnify, defend and hold harmless an Indemnified
Person as if it were the primary obligor under the Trust Agreement; provided,
however, that the Sponsor shall not be required to indemnify any Indemnified
Person for any Expenses which are a result of the willful misconduct, bad faith
or gross negligence of an Indemnified Person. To the fullest extent permitted by
law and by the requirement for treatment of the Trust as a grantor trust for tax
purposes, Expenses to be incurred by an Indemnified Person shall, from time to
time, be advanced by, or on behalf of, the Sponsor prior to the final
disposition of any matter upon receipt by the Sponsor of an undertaking by, or
on behalf of, such Indemnified Person to repay such amount if it shall be
determined that the Indemnified Person is not entitled to be indemnified under
this Trust Agreement.
Under
Delaware law, a beneficial owner of a statutory trust (such as a shareholder of
the Trust) may, under certain circumstances, institute legal action on behalf of
himself and all other similarly situated beneficial owners (a “class action”) to
recover damages for violations of fiduciary duties, or on behalf of a statutory
trust (a “derivative action”) to recover damages from a third party where there
has been a failure or refusal to institute proceedings to recover such damages.
In addition, beneficial owners may have the right, subject to certain legal
requirements, to bring class actions in federal court to enforce their rights
under the federal securities laws and the rules and regulations promulgated
thereunder by the SEC. Beneficial owners who have suffered losses in connection
with the purchase or sale of their beneficial interests may be able to recover
such losses from the Sponsor where the losses result from a violation by the
Sponsor of the anti-fraud provisions of the federal securities laws.
The
foregoing summary describing in general terms the remedies available to
shareholders under federal law is based on statutes, rules and decisions as of
the date of this Annual Report. As this is a rapidly developing and changing
area of the law, shareholders who believe that they may have a legal cause of
action against any of the foregoing parties should consult their own counsel as
to their evaluation of the status of the applicable law at such time.
Code
of Ethics
The
Sponsor has adopted a code of ethics (“Code of Ethics”) that applies to its
Principal Executive Officer and Principal Financial and Accounting Officer which
is filed as an exhibit to this Annual Report.
Insider
Trading Policies and Procedures
Because
the Trust does not have directors, officers, or
employees,
it has not
adopted
insider trading policies and procedures governing the purchase, sale and/or
disposition of Trust securities by such persons.
Item
11. Executive Compensation.
The
Trust has no employees or directors and is managed by the Sponsor. None of the
officers of the Trust, or the members or officers of the Sponsor receive
compensation from the Trust.
The
Sponsor receives a unified monthly Sponsor Fee from the Trust that accrues daily
at an annual rate of 0.25% of the Trust’s Ether Holdings.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Not
applicable.
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
See
Item 11 above.
Item
14. Principal Accounting Fees and Services.
Fees
for services performed by PricewaterhouseCoopers LLP (“PwC”) for the year ended
December 31, 2025 and the period May 24, 2024 (seeding date) through December
31, 2024 were as follows:
|
|
|
|
|
|
|
|
| |
|
|
|
Year
ended December 31, 2025 |
|
|
Year
ended December 31, 2024 |
|
|
Audit
Fees |
|
$ |
118,700 |
|
|
$ |
89,800 |
|
|
Audit-Related
Fees |
|
|
— |
|
|
|
— |
|
|
Tax
Fees |
|
|
1,000 |
|
|
|
— |
|
|
All
Other Fees |
|
|
— |
|
|
|
— |
|
|
Total: |
|
$ |
119,700 |
|
|
$ |
89,800 |
|
Audit
Fees
for the years ended December 31, 2025 and 2024, associated with the annual audit
and quarterly reports of the Trust’s financial statements and services that are
normally provided in connection with statutory and regulatory
filings.
Tax
Fees
for the year ended December 31, 2025 consist of all services performed by
professional staff in the independent registered public accountant’s tax
division except those services related to the audits.
Approval
of Independent Registered Public Accounting Firm Services and Fees
The
Sponsor approved all of the services provided by PwC described above. The
Sponsor pre-approves all audit and allowed non‑audit services of the Trust’s
independent registered public accounting firm, including all engagement fees and
terms.
PART
IV
Item
15. Exhibits, Financial Statement Schedules.
(1)
For
a list of the financial statements included herein, see Index to the Financial
Statements on page [75]
of this Annual Report on Form 10-K, incorporated into this Item by
reference.
(2)
Financial
statement schedules have been omitted because they are either not required or
not applicable or the information is included in the financial statements or the
notes thereto.
|
|
| |
|
Exhibit
Number |
|
Description |
|
|
|
|
|
3.1** |
|
Certificate
of Trust, incorporated by reference to Exhibit 3.2 of the Trust’s
Registration Statement on Form S-1 (File No. 333-278249) filed on May 31,
2024. |
|
|
|
|
|
4.1** |
|
First
Amended and Restated Trust Agreement, incorporated by reference to Exhibit
3.1 of the Trust’s Registration Statement on Form S-1 (File No.
333-278249) filed on June 21, 2024. |
|
|
|
|
|
4.2** |
|
Second
Amended and Restated Trust Agreement, incorporated by reference to Exhibit
4.1 of the Trust’s Registration Statement on Form S-1 (File No. 333-278249
) filed on July 21, 2025. |
|
|
|
|
|
4.3** |
|
Description
of Securities Registered Under Section 12 of the Securities Exchange Act
of 1934, incorporated by reference to Exhibit 4.2 of the Trust’s Annual
Report on Form 10-K (File No. 001-
42163)
filed on March 14, 2025. |
|
|
|
|
|
10.1** |
|
Form of
Initial Authorized Participant Agreement, incorporated by reference to
Exhibit 10.1 of the Trust’s Registration Statement on Form S-1 (File No.
333-278249) filed on May 31, 2024. |
|
|
|
|
|
10.2** |
|
Amended
and Restated Form of Initial Authorized Participant Agreement,
incorporated by reference to Exhibit 10.1 of the Trust’s Registration
Statement on Form S-1 (File No. 333-278249 ) filed on July 21,
2025. |
|
|
|
|
|
10.3** |
|
Distribution
Agreement, incorporated by reference to Exhibit 10.2 of the Trust’s
Registration Statement on Form S-1 (File No. 333-278249) filed on May 31,
2024. |
|
|
|
|
|
10.4** |
|
Custodial
Services Agreement, incorporated by reference to Exhibit 10.3 of the
Trust’s Registration Statement on Form S-1 (File No. 333-278249) filed on
May 31, 2024. |
|
|
|
|
|
10.5** |
|
Administration
Agreement, incorporated by reference to Exhibit 10.4 of the Trust’s
Registration Statement on Form S-1 (File No. 333-278249) filed on May 31,
2024. |
|
|
|
|
|
10.5.1** |
|
Amendment
to Administration Agreement, incorporated by reference to Exhibit 10.4.1
of the Trust's Registration Statement on Form S-1 (File No. 333-278249)
filed on June 21, 2024.
|
|
|
|
|
|
10.6** |
|
Transfer
Agency Agreement, incorporated by reference to Exhibit 10.5 of the Trust’s
Registration Statement on Form S-1 (File No. 333-278249) filed on May 31,
2024. |
|
|
|
|
|
10.6.1** |
|
Amendment
to Transfer Agency and Service Agreement, incorporated by reference to
Exhibit 10.5.1 of the Trust's Registration Statement on Form S-1(File No.
333-278249) filed on May 31, 2024. |
|
|
|
|
|
10.7** |
|
Sponsor
Agreement, incorporated by reference to Exhibit 10.6 of the Trust’s
Registration Statement on Form S-1 (File No. 333-278249) filed on June 21,
2024. |
|
|
|
|
|
10.8** |
|
Custodian
Agreement, incorporated by reference to Exhibit 10.7 of the Trust’s
Registration Statement on Form S-1 (File No. 333-278249) filed on May 31,
2024. |
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10.9** |
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Accession
Agreement, incorporated by reference to Exhibit 10.8 of the Trust’s
Registration Statement on Form S-1 (File No. 333-278249) filed on May 31,
2024. |
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14.1* |
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Fidelity
Digital Asset Management Funds’ Code of Ethics for Principal Executive
Officer and Principal Financial Officer. |
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23.1* |
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Consent
of Independent Registered Accounting Firm |
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31.1* |
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Certification
of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
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Certification
of Principal Financial and Accounting Officer Pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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32.1* |
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Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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*
Filed herewith.
**
Previously filed.
Item
16. Form 10-K Summary
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned in the capacities* indicated, thereunto duly
authorized.
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FIDELITY
ETHEREUM FUND |
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Date:
February 25, 2026 |
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By: |
/s/
Cynthia Lo Bessette |
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Name: |
Cynthia
Lo Bessette |
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Title: |
President
(Principal Executive Officer) |
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FIDELITY
ETHEREUM FUND |
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Date:
February 25, 2026 |
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By: |
/s/
Craig Brown |
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Name: |
Craig
Brown |
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Title: |
Treasurer
(Principal Financial and Accounting
Officer) |
*
The registrant is a trust and the persons are signing in their capacities as
officers of FD Funds Management LLC, the Sponsor of the
registrant.
95
1.9912509.101
ETH-10K-0226