Risk Factors

Investment in the Account involves a high degree of risk and is therefore suitable only for sophisticated investors for whom such an investment is not a complete investment program. Additional or new risks not addressed below may affect the Account. There can be no assurance that the Account will be able to achieve its investment objectives or that the Client will receive a return on its capital; investment results may vary substantially. The Client should carefully review this Agreement, including the investment programs and the following risk factors, and consult with their own advisors, before making a decision to invest in the Account. The following list of risk factors cannot be and is not intended to be exhaustive. The following risk factors and other relevant risks could have a material adverse effect on the Account and the Client’s investments therein.

Systemic Risk

Systemic risk is the risk of broad financial system stress or collapse triggered by the default of one or more financial institutions, which results in a series of defaults by other interdependent financial institutions. Financial intermediaries, such as banks and Digital Asset exchanges with which the Account may interact, are all subject to systemic risk. For example, the March 2023 failures of Silicon Valley Bank and Signature Bank created a significant amount of market uncertainty for those entities, banks and nonbanks alike, who interacted with those institutions.

A systemic failure could have material adverse consequences on the Account and on the markets for the Digital Assets in which the Account may seek to invest. 

Risks Relating to Management

Loss of Capital

All investments in the Account involve a risk of a complete loss of capital. No guarantee or representation is made that the Account will achieve its investment objectives. Investments in Digital Assets should be considered substantially more speculative and significantly more likely to result in a total loss of capital than most other investments. Consequently, an investment in the Account could result in the total loss of the Client’s capital.

Reliance on Key Management Personnel

The success of the Account will depend, in large part, upon the skill and expertise of the management of Investment Adviser. There is no assurance that the principals, investment professionals or other key members of the management of Investment Adviser will continue to be employed by Investment Adviser for any period. In the event of the death, disability or departure of any such individuals, the business and the performance of the Account may be adversely affected.

Dependence on Counterparties and Service Providers

The Account is also dependent upon service providers (including Digital Asset custodians, platforms and exchanges) and the businesses that are not controlled by Investment Adviser that provide services to the Account (the “Service Providers”). Errors are inherent in the business and operations of any business, and although Investment Adviser will adopt measures to prevent and detect errors by and misconduct of counterparties and Service Providers and transact with counterparties and Service Providers it believes to be reliable, such measures may not be effective in all cases. In particular, Investment Adviser’s due diligence on certain Service Providers may not identify all security vulnerabilities and risks, which is especially pertinent given the limited (but growing) number of viable Digital Asset Service Providers. Errors by or misconduct of Service Providers could have a material adverse effect on the Account and the Client’s investments therein. 

Digital Assets and companies transacting in Digital Assets are currently the subject of significant legislative and regulatory scrutiny, and the regulatory requirements applicable to firms operating in the Digital Asset markets are evolving. In the U.S. and other jurisdictions, the evolving status of Digital Assets under applicable securities and banking laws may require certain counterparties and Service Providers to obtain additional licenses or become subject to greater regulatory oversight or interventions. If this occurs, certain counterparties and/or Service Providers may need to limit their product offerings and/or ability to enter into certain transactions, and in some cases may withdraw from certain business lines upon which the Account depends. The Account could be adversely impacted by such developments.

Retention and Motivation of Employees

The success of the Account is dependent upon the talents and efforts of highly skilled individuals employed by Investment Adviser and Investment Adviser’s ability to identify and willingness to provide acceptable compensation to attract, retain and motivate talented investment professionals and other employees. There can be no assurance that Investment Adviser’s investment professionals will continue to be associated with Investment Adviser throughout the life of the Account, and the failure to attract or retain such investment professionals could have a material adverse effect on the Account and the Client’s investments therein. Competition in the financial services industry for qualified employees (especially in the intersection of technology and finance) is intense and there is no guarantee that, if lost, the talents of Investment Adviser’s investment professionals could be replaced.

Increased Regulatory Oversight

Increased regulation (whether promulgated under securities laws or any other applicable law) and regulatory oversight of, and changes in law applicable to, private investments and investment advisers, especially with respect to private investments in Digital Assets or business arrangements associated with Digital Assets (such as the Account) and their advisers (such as Investment Adviser), may impose administrative burdens on Investment Adviser, including, without limitation, responding to examinations and other regulatory inquiries and implementing policies and procedures. Such administrative burdens may divert Investment Adviser’s time, attention and resources from portfolio management activities to responding to inquiries, examinations and enforcement actions (or threats thereof) and could potentially impact the investment objectives of the Account. Regulatory inquiries often are confidential in nature, may involve a review of an individual’s or a firm’s activities or may involve studies of the industry or industry practices, business arrangements that occur frequently in the industry, as well as the practices of a particular institution.

Compliance with Laws and Regulations  

In response to increased regulatory concerns with respect to the sources of funds used in investments and other activities, Investment Adviser may request the Client to provide additional documentation verifying, among other things, the Client’s identity, including the identity of the Client’s owners, stockholders and/or stakeholders, and the source and type of funds used to purchase its interest. Investment Adviser may decline to open the Account if this information is not provided or on the basis of such information that is provided. Requests for documentation may be made at any time during the term of this Agreement. Investment Adviser may be required to provide this information, or report the failure to comply with such requests, to governmental authorities, in certain circumstances without notifying the Client that the information has been provided. Investment Adviser will take such steps as it determines may be necessary to comply with applicable laws, rules, regulations, orders, directives, special measures that may be required by government regulators or interpretation thereof by the appropriate regulatory authority having jurisdiction, and to which the Account or Investment Adviser is subject, including requiring the Client to stop making additional deposits into the Account, prohibiting the Client from making withdrawals from the Account or requiring the Account to be closed. 

Effect of Substantial Losses or Withdrawals

If, due to extraordinary market conditions or other reasons, the Account or other accounts managed by Investment Adviser were to incur substantial losses or were subject to an unusually high level of withdrawals, the revenues of Investment Adviser may decline substantially. Such losses and/or withdrawals may hamper Investment Adviser’s ability to (i) retain employees, (ii) provide the same level of service to the Account as it has in the past and (iii) continue operations.

Substantial withdrawals could be triggered by a number of events, including unsatisfactory performance, events in the markets, certain developments relating to Digital Assets, a significant change in personnel or management of Investment Adviser, legal or regulatory issues that the Client perceives to have a bearing on the Account or Investment Adviser, or other events. Actions taken to meet substantial withdrawal requests from the Account could result in expenses increasing (e.g., transaction costs and the costs of terminating agreements). The overall value of the Account also may decrease because the liquidation value of certain assets may be materially less than their cost or mark-to-market value. The Account may be forced to sell its more liquid positions, which may cause an imbalance in a particular strategy that could have a material adverse effect on the Client. Investment Adviser generally will not disclose to the Client the amount of pending withdrawals or withdrawal requests and is under no obligation to make any such disclosure.

Risks Relating to the Operations and Investment Activities of the Account

Systems and Operational Risks Generally

Investment Adviser relies heavily on certain financial, accounting, data processing and other operational systems and services that are employed by Investment Adviser and/or by third-party service providers to execute Digital Assets transactions, evaluate investments and monitor the Account’s activities. The Account’s and Investment Adviser’s activities will be dependent upon systems operated by third parties, including Digital Asset exchanges and custodians, and Investment Adviser may not be in a position to verify the risks or reliability of such third-party systems. In addition, the Account relies on information systems to store sensitive information about the Account, Investment Adviser, their affiliates and the Client. Such systems may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Failures in the systems employed by the Account, Investment Adviser, custodians, counterparties (including Abra Subsidiaries), Digital Asset exchanges, similar facilities and other parties could result in mistakes made in the execution of Digital Asset transactions or in failure to properly evaluate or account for the lending transactions of the Account. Disruptions in the Account’s operations or breach of the Account’s information systems may cause the Account to suffer, among other things, financial loss, the disruption of its investment activities, liability to third parties, legal or regulatory intervention or reputational damage. Any of the foregoing failures or disruptions could have a material adverse effect on the Account and the Client’s investments therein.

Cybersecurity Risk

As part of its business, Investment Adviser processes, stores and transmits large amounts of electronic information, including information relating to the transactions of the Account and personally identifiable information of the Client. Similarly, Service Providers of Investment Adviser and the Account may process, store and transmit such information. Investment Adviser has procedures and systems in place that it believes are reasonably designed to protect such information and prevent data loss and security breaches. However, such measures cannot provide absolute security. The techniques used to obtain unauthorized access to data, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time. Hardware or software acquired from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Network-connected services provided by third parties to Investment Adviser may be susceptible to compromise, leading to a breach of Investment Adviser’s network. Investment Adviser’s systems or facilities may be susceptible to employee error or malfeasance, government surveillance, or other security threats. Online services provided by Investment Adviser to the Client may also be susceptible to compromise. A breach of Investment Adviser’s information systems may cause information relating to the transactions of the Account and personally identifiable information of the Client to be lost or improperly accessed, used or disclosed. 

The Service Providers of Investment Adviser and the Account are subject to the same electronic information security threats as Investment Adviser. If Service Providers fail to adopt or adhere to adequate data security policies, or in the event of a breach of its networks, information relating to the transactions of the Account and personally identifiable information of the Client may be lost or improperly accessed, used or disclosed. 

The loss or improper access, use or disclosure of Investment Adviser’s or the Account’s proprietary information may cause Investment Adviser or the Account to suffer, among other things, financial loss, the interruption of investment activities, liability to third parties, regulatory intervention or reputational damage. Any of the foregoing events could have a material adverse effect on the Account and the Client’s investments therein.

Valuation of Assets and Liabilities

The assets and liabilities of the Account are valued in accordance with the Valuation Policy. The valuation of any asset or liability involves inherent uncertainty. There can be no assurance that Investment Adviser will correctly evaluate the nature and magnitude of the various factors that could affect the value of the assets and liabilities. Valuation of investments in Digital Asset-denominated loans may require the exercise of substantial discretion by Investment Adviser. Such investments are subject to the risk of a borrower’s inability to meet principal and interest payment obligations (i.e., credit risk) and price volatility due to unpredictable factors impacting market liquidity (i.e., market risk). Market disruptions may result in adverse adjustments to the applicable interest rate of an investment as well as fluctuations in the value of any in-kind payment of interest. Investments for which no market prices are available will be valued at fair market value as reasonably determined by Investment Adviser in accordance with the Valuation Policy. Uncertainties as to the valuation of the investments of the Account could have an impact on the value of the Account if the judgments of Investment Adviser regarding the appropriate valuation should prove to be incorrect.

Risks Relating to Investment Strategies

Access to Information and Effect on Withdrawals

Because of the range of potential investments, potentially rapid shifts in the concentration of investments, the inherent complexity of certain investment strategies and other factors, the Client will not have sufficient information to analyze or evaluate in detail the specific risks and potential returns of certain investment programs prospectively. Investment Adviser generally will not provide detailed information about certain investment programs or any advance notice of anticipated changes in the composition of specific strategies. The Client is responsible for asking such questions as it believes are necessary in order to make its own investment decisions, must decide for itself whether the limited information provided by Investment Adviser is sufficient for its needs and must accept the foregoing risks.

Liquidity Risk

There is a risk that under extreme market conditions, the Investment Manager may have to impose withdrawal restrictions in periods of market stress, illiquidity, or exceptional circumstances that may affect the Investment Manager’s ability to liquidate assets without significant impact on remaining investors.

Interest Rate Risk

Certain yield strategies accessible to the Clients are subject to interest rate risk in connection with the interest rates earned on the Account’s Assets. Interest rates are variable and will fluctuate. Accordingly, the Account’s interest income earned on a deposit may decline due to an adverse adjustment of the applicable interest rate. 

Lack of Diversification  

The Account may concentrate all of its investments in transactions denominated in one type of Digital Asset. Such concentration will expose the Account to a greater risk of loss than if it were more diversified. Furthermore, such concentrated Digital Asset investments will become disproportionately susceptible to fluctuations in value resulting from adverse economic or business conditions with respect thereto. As a result, the aggregate returns of the Account may be volatile. 

Risk of Loss

No guarantee or representation is made that the Account’s investment programs will be successful. Investment results may vary substantially over time.

No assurance can be made that profits will be achieved or that substantial or complete losses will not be incurred. Past investment results of Investment Adviser (or investments otherwise made by the investment professionals of Investment Adviser) are not necessarily indicative of their future performance. 

Digital Asset Key Person Risk

Although blockchain technology emphasizes decentralization and transparency, certain cryptocurrency protocols, including certain Digital Assets, are headed by one or more creators who remain active in the ongoing development and leadership of such protocol or Digital Assets. If a creator or leader of a Digital Asset network is unwilling or unable to continue supporting and developing the Digital Asset, the price of the Digital Asset, as well as other Digital Assets, could be negatively affected.

Risks of Uninsured Losses

Though Investment Adviser will maintain general cybersecurity insurance and certain custodians maintain insurance with respect to the Account’s Digital Assets, Investment Adviser may not obtain insurance of the type that would cover losses associated with the Account’s Digital Assets. If an uninsured loss occurs or a loss exceeds policy limits, the Account could lose a portion or all of its assets.

DeFi; DAPPs

Investment Adviser offers several investment strategies that are executed in DeFi. DeFi generally refers to blockchain-based financial products and services grounded in Digital Assets and offered through DAPPs and smart contracts without the oversight or control of a centralized party. DeFi projects are generally built upon existing public decentralized blockchains, such as the Ethereum blockchain, and others. DeFi and DAPPs are relatively new and rapidly growing. Consequently, the industry is currently subject to scrutiny by the government and other regulatory bodies. The legal status of DAPPs has not yet been determined, as multiple federal and state authorities have jurisdiction over aspects of DeFi, including the Department of Justice, FinCEN, the Service, the CFTC and the SEC, and OFAC, depending upon the services offered by and provided through the DAPP. For example, to the extent the DAPP enables participants to engage in regulated money transmission services, the DAPP, or its owners or operators (which in the case of DeFi or DAPPs may be determined by those persons with significant ownership of Digital Assets on the DAPP, with the ability to control the protocol used by the DAPP, or that are profiting from the DAPP) would be required to register with FinCEN as a money services business. Similarly, to the extent that the DAPP enables purchase or sale of securities the DAPP may be required to register with the SEC. Given the evolving nature of the DeFi industry, there is no guarantee that legal, tax, or regulatory changes that materially affect the DeFi industry and the Account’s investment strategies will not occur. Further, failure by these DAPPs to comply with all applicable current and future laws may adversely affect their ability to operate and, consequently, the ability of the Account to achieve its investment objective. 

The decentralized nature of a DAPP also presents compliance risk to participants. DAPPs that allow anonymous peer-to-peer exchange of Digital Assets without the use of an intermediary are particularly vulnerable to financial crime and can be used by persons that have been designated as prohibited under applicable sanctions laws. Unlike centralized cryptocurrency exchanges and other financial institutions that are required to adopt and implement AML controls, such as customer identity verification and suspicious activity reporting, DAPPs, by design, lack a centralized governing body. This makes the implementation of any AML controls or sanctions compliance measures challenging because there is no governing body requiring the implementation of such controls and any party with an internet connection can participate in the DAPP. 

Front ends (such as websites or interfaces with which users interact) of certain DeFi platforms have implemented certain restrictions, either due to regulatory concerns or as a market practice. Such restrictions may include IP blocking from certain countries or territories as well as wallet addresses sanctioned by OFAC. However, sophisticated actors may still access DAPPs without using a front end. Therefore, it is possible for sophisticated users to access certain DAPPs without undergoing any identity verification process, such as know-your-customer due diligence, or sanctions screening to assess whether participants are listed on various sanctions lists or located in a country or territory subject to comprehensive sanctions. Engaging with DAPPs carries inherent risks. Users can be exposed, either directly or indirectly, to all other participants transacting within the DAPP, including potential bad actors. Because participants in a DAPP cannot select their counterparty within the DAPP, participants run the risk of engaging in financial transactions with persons engaged in criminal conduct or that are persons prohibited under applicable sanctions laws.

Accordingly, this lack of transparency increases the risk that the Account may be deemed to have transacted with criminals and/or persons that are operationally based or domiciled in a country or territory subject to comprehensive sanctions that have been issued by the United States, United Nations, the European Union, the United Kingdom or the Cayman Islands or a person or wallet address listed on a sanctions listed administered by OFAC or any other similar economic and trade sanctions program (collectively, “Prohibited Persons”), potentially exposing Account to violations of law, including anti-money laundering and/or sanctions laws. Violations of U.S. sanctions laws are subject to strict liability. 

Investment Adviser intends to take certain measures to mitigate the risk of dealing with Prohibited Persons. However, particularly given the challenges in conducting due diligence on DAPPs participants, there can be no assurance that such measures will prove effective. To the extent a DAPP, a DAPP owner, operator or participant, or a digital wallet associated with the DAPP, is a Prohibited Person, the Account may be in violation of the sanctions laws and unable to have dealings with the DAPP, or required to cease any further dealings with the DAPP until such sanctions are lifted or a license is sought under applicable law to continue dealings, and the Account may not be able to fulfill its investment objective.

For these and other reasons specific to the DeFi industry, investments through DAPPs, particularly those that operate using blockchain technology, pose greater risks than investments made in other sectors.

DeFi and Smart Contract Risk

DeFi strategies are executed by depositing assets into smart contracts provided by a DAPP, which autonomously execute in accordance with the logic of the DAPP. While this design can reduce counterparty risks, there is a risk that the smart contracts have bugs whereby the code may not act as intended resulting in loss of funds. There may also be vulnerabilities in the smart contract code that may be exploited by hackers looking to steal user funds from DeFi smart contracts. Because DAPPs are decentralized and Digital Assets are bearer instruments, hacks can result in total loss of funds with no recourse against a company. 

Liquidity Provisioning Risks 

Some of the strategies offered by Investment Adviser may involve providing liquidity in DAPPs to various pools of Digital Assets in exchange for fees and/or interest by acting as a liquidity provider for decentralized exchanges. These systems and new technology may have risks that are not yet fully understood, including when there is volatility in the underlying Digital Assets which comprise the liquidity pool. Volatility within such liquidity pools could lead to loss of committed Digital Assets or other unexpected adverse behaviors, thereby lowering the value of the Account’s returns of Digital Assets from such liquidity pools. Additionally, such liquidity pools are open market systems that may be subject to a variety of economic/volatility attacks by other market participants. Such adverse action by other market participants may further increase the volatility of the underlying Digital Assets in the liquidity pools thereby compounding any losses.

To the extent the Account engages in liquidity provisioning, it would be exposed to risks generally associated with Digital Assets (including, but not limited to, smart contracts hacks and failures, liquidity risk, price volatility, regulatory risks, etc.).

Staking of Digital Assets 

Digital Assets that are “staked” will earn rewards in the form of additional Digital Assets, which will accrue to the validator address, but neither the rewards nor the principal allocation of Digital Assets can be withdrawn for a predetermined period of time, and as a result, the liquidity of such Digital Assets will be limited. To the extent the Account engages in staking, such limitations on liquidity could prevent the Account from transacting in certain Digital Assets during certain periods, and the amounts earned through staking may be less than gains from trading equivalent amounts of certain Digital Assets that had not been staked. Further, staked Digital Assets may be subject to the risk of forfeiture or “slashing” resulted by any malicious activity (as discussed above).

Staking will expose the Account’s Assets to smart contracts. Smart contracts are subject to certain risks and may result in losses stemming from errors, bugs or other failures. Staking provides no guarantee of return nor are there currently efficient ways to insure against such risks. 

Stablecoin Counterparty Risks

The Account will have exposure to certain Stablecoins that are backed 1:1 by U.S. Dollars. The U.S. Dollars or U.S. Dollar equivalents that provide the backing for the Stablecoins are held in trust by third-party banks and custodians. While many Stablecoin issuers provide monthly or annual attestations by independent third-party auditors that detail their reserves and banking partners, the value of any given Stablecoin is tied to the financial viability of the Stablecoin issuers’ banking partners and the U.S. government (in the case of U.S. treasuries). 

Depegging Risks

Stablecoins may become depegged if the market no longer believes the Stablecoin is fully backed. This may happen for a variety of reasons. For example, if the assets held by the issuer of a Stablecoin were devalued, illiquid or unavailable due to the insolvency or failure of a bank custodian, then such Stablecoin could “depeg” either temporarily or permanently. In addition, regulatory or legal issues related to the use or issuance of Stablecoins could also pose a risk factor for potential depegging of Stablecoins. If there were to be significant regulatory changes or legal challenges to the issuance or use of Stablecoins, it could impact the ability of issuers to maintain the peg, potentially leading to a depegging event.

 Liquidation and Borrowing Risks

The Account may deposit collateral into DAPPs (“Lending DAPPs”) that allow users to borrow stablecoins against their Digital Asset collateral. Such deposit would make the Account subject to liquidation risks with respect to transactions relating to the lending and borrowing of Digital Assets. The Digital Asset exchanges and DAPPs utilized by the Account may force the liquidation of the Digital Assets offered by the account as collateral for loans. Generally, liquidation will be forced if the loan is defaulted on or if the value of the posted collateral falls below a specific collateral ratio in comparison to the value of the amount borrowed. If liquidation is forced, a loan may be required to pay a liquidation penalty in addition to a separate discount on the price of the amount of collateral sold, resulting in greater losses to the Account. Liquidation risk may further occur due to the volatility of pricing Digital Assets. If the Account engages Lending DAPPs it risks losing some or all of its collateral while still needing to repay the loan and interest. 

Risks Relating to Government Oversight

Regulatory schemes and regulatory investigation and enforcement efforts—both foreign and domestic—possibly affecting Digital Asset networks may not be fully developed as of the Account’s inception and may experience ongoing changes. It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, policies, rules, or investigation and enforcement priorities that directly or indirectly affect the Digital Assets generally or restrict the right to acquire, own, hold, sell, convert, trade, lend or use Digital Assets, to exchange Digital Assets for either fiat currency or other virtual currency, or to operate or participate or transact with a DAPP. It is also possible that government authorities may claim ownership over or ban certain types of Digital Assets or that law enforcement agencies (of any or all jurisdictions, foreign or domestic) may take direct or indirect investigative, enforcement, or prosecutorial action related to, among other things, the use, ownership or transfer of Digital Assets or business arrangements associated with Digital Assets, resulting in a change to the value of a Digital Asset or to the development of such asset.

Federal Regulatory Authorities

CFTC

The CFTC has not to date promulgated any regulations specifically addressing Digital Assets or the activities of participants in Digital Asset networks. However, as the primary regulator of derivatives (i.e., futures, options and swaps), the CFTC also has jurisdiction over all such digital currency-linked derivatives, including the platforms that list them and the clearinghouses that clear them. The CFTC has asserted its regulatory authority over Digital Assets, stating that both Bitcoin and Ether are Digital Asset commodities. See “In Case You Missed It: Chairman Tarbert Comments on Cryptocurrency Regulation” at Yahoo! Finance All Markets Summit, Release Number 8051-19 (Oct. 10, 2019). 

In addition, the CFTC has brought close to fifty enforcement actions involving the Digital Asset space. See Testimony of Chairman Rostin Behnam, “Examining Digital Assets: Risks, Regulation, and Innovation” (Feb. 09, 2022). For example, the CFTC fined the stablecoin issuer Tether Holdings Limited (“Tether”) for making misleading statements regarding Stablecoin USDT in October 2021. Tether was fined $41 million for misrepresenting to customers and the market that Tether maintained sufficient U.S. dollar reserves to back each Tether token in circulation. See “CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million,” Release Number 8450-21 (Oct. 15, 2021). Similarly, in a case involving BitMEX cryptocurrency derivatives trading platform in August 2021, the CFTC found BitMEX in violation of the Commodity Exchange Act by operating a facility to trade or process swaps without proper approvals, fining BitMEX $100 million. It should be noted that FinCEN separately assessed a civil money penalty of $100 million, deemed satisfied by payment of the CFTC’s fine, for significant AML program failures. See In the Matter of HDR Global Trading Limited et al., Assessment of Civil Money Penalty Number 2021-02 (Aug. 10, 2021).

In addition, the CFTC has engaged in an enforcement action against a DeFi platform, Blockratize, Inc. d/b/a Polymarket, for offering off-exchange event-based binary options contracts and failing to register as a swap execution facility (“SEF”) or obtain designation as a designated contract market (“DCM”). See Blockratize, Inc. d/b/a Polymarket.com, CFTC Docket No. 22-09 (Jan. 3, 2022). According to the CFTC, Polymarket had been using blockchain-hosted smart contracts to operate an illegally unregistered or non-designated facility for event-based binary options trading contracts, and those event-based binary options contracts constituted swaps under the CFTC’s jurisdiction. In September 2023, the CFTC issued orders simultaneously filing and settling charges against Opyn, Inc. (“Opyn”), ZeroEx, Inc. (“0x”) and Deridex, Inc. (“Deridex”). Deridex and Opyn were charged with failing to register as a SEF or DCM, failing to register as a futures commission merchant (“FCM”) and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program (as such compliance is required of FCMs). 0x, Opyn and Deridex were also charged with illegally offering leveraged and margined retail commodity transactions in Digital Assets. See Opyn, Inc., CFTC Docket No. 23-40 (Sep. 7, 2023), ZeroEx, Inc., CFTC Docket No. 23-41 (Sep. 7, 2023) and Deridex, Inc., CFTC Docket No. 23-42 (Sep. 7, 2023). 

To the extent the Account’s activities are viewed as holding or offering Digital Asset derivatives (including futures, options and swaps), the Account, Investment Adviser or one or more companies in which it invests, may be required to register and comply with additional regulation under the Commodity Exchange Act, such as Investment Adviser registering as a commodity pool operator (when holding Digital Asset derivatives) or one of the companies in which the Account invests, registering as an SEF or swap dealer (when offering certain Digital Asset derivatives) or by being subject to the CFTC requirements with respect to such instruments, such as reporting, recordkeeping, mandatory clearing or minimum margin requirements. Such registration and associated compliance costs could adversely affect an investment in the Account.

SEC

The SEC has asserted jurisdiction with respect to transactions in certain Digital Assets; however, the status of the SEC’s regulatory authority is still the subject of proceedings in the federal courts.

Whether certain Digital Assets are deemed securities, or not, the SEC or other government entities may investigate or examine circumstances associated with transacting in those Digital Assets. Other government entities with different enforcement options may also pursue investigations or actions involving transactions in Digital Assets that are not deemed securities.

On April 3, 2019, the SEC published a framework aimed at assisting in determining whether a cryptocurrency is a security (the “Framework”). Alongside the Framework, the SEC also published a no-action letter for TurnKey Jet, Inc. (the “TurnKey Letter”), which marks the first ever no-action letter regarding cryptocurrencies. Per the Framework and the TurnKey Letter, cryptocurrencies cannot be used to raise capital without implicating U.S. securities laws.

In recent years, members of the SEC and certain other regulatory authorities have stated that certain Digital Assets or Digital Asset products are, or may be, classified as securities under U.S. federal and state securities laws. While U.S. federal courts have in certain instances found initial distributions of tokens to be an offering of securities, such assertions and their implications for secondary market trading of Digital Assets remain a topic of significant disagreement and litigation. In September 2022, as well as in other instances, current SEC Chairman Gary Gensler has stated his opinion that “many crypto tokens are securities” and that “many crypto intermediaries are transacting in securities and have to register with the SEC in some capacity”. Mr. Gensler suggested in June 2022 that Bitcoin is a commodity, but did not opine on whether other specific Digital Assets would fit that classification. This approach contrasts with earlier, but recent statements by former SEC Commissioners, including former Chairman Clayton who, in 2018, stated that Digital Assets, such as Bitcoin (but not necessarily limited to Bitcoin), “are replacements for sovereign currencies” and that such type of currency “is not a security”. In 2018, SEC Director of Corporation Finance William Hinman stated that, based on his understanding of the present state of ether and the Ethereum network, “current offers and sales of ether are not securities transactions.”

The SEC has recently brought enforcement actions relating to Digital Assets that assert the SEC’s jurisdiction due to the SEC’s classification of such instruments as securities. These risk factors do not contain a comprehensive description of all such actions, but provide certain examples and key cases:

• In 2020, the SEC brought a lawsuit against Ripple Labs, Inc. (“Ripple”) and two of its executives in the U.S. District Court for the Southern District of New York, alleging that Ripple and its executives illegally sold XRP, a Digital Asset token, without a valid registration or exemption. On July 13, 2023, U.S. District Judge Analisa Torres granted in part and denied in part an SEC motion for summary judgment. In that ruling, Judge Torres distinguished between Ripple’s sale of XRP tokens directly to sophisticated institutional investors, which the court ruled are “investment contracts” subject to the SEC’s jurisdiction, and “programmatic” sales to investors on digital asset exchanges, which the court ruled do not satisfy the third prong of the Howey Test because those buyers did not have “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”. On October 3, 2023, Judge Torres denied the SEC’s motion for an interlocutory appeal of her denial of the SEC’s motion for summary judgment with respect to the sales of XRP on exchanges. On October 19, 2023, the SEC voluntarily dismissed the claims against the two executives. This litigation is still proceeding in the federal courts as of January 2024.
• Further underscoring the continuing uncertainty around which Digital Assets are securities, just weeks after the Ripple decision in July 2023, a different judge in the Southern District of New York rejected the approach taken in the Ripple decision in a proceeding related to an SEC enforcement action against TerraForm Labs. The judge rejected the distinction relied upon in the Ripple decision between issuance to institutional investors and secondary transactions involving retail investors, indicating that the Howey test did not differentiate between purchasers. In December 2023, the judge ruled that TerraForm Labs violated U.S. law by failing to register TerraUSD and Luna.
• In July 2022, the SEC filed securities fraud charges against a former employee of Coinbase, Inc. (“Coinbase”) and two other individuals related to misuse of confidential information, alleging that the defendants engaged in illegal insider trading in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, with respect to transactions in several Digital Assets, which the SEC asserted are securities, by trading in those Digital Assets prior to such assets being made available for trading on the Coinbase platform. The former Coinbase employee and two other persons were also indicted on two counts of wire fraud and conspiracy to commit wire fraud in connection with this alleged insider trading. In February 2023, the former Coinbase employee pleaded guilty to two counts of conspiracy to commit wire fraud, and in May 2023 he was sentenced to two years in prison. In May 2023, the SEC and the former Coinbase employee settled the securities fraud claims referenced above, pursuant to which the former Coinbase employee and his co-defendant agreed to be permanently enjoined from violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 and to pay disgorgement of ill-gotten gains, plus prejudgment interest. These orders were deemed satisfied by the forfeiture orders issued pursuant to the criminal action. 
• In February 2023, the SEC entered into a settlement agreement with Payward Ventures, Inc. and Payward Trading Ltd. (collectively, “Kraken”), a Digital Asset exchange, after alleging that Kraken’s “staking-as-a-service” program constituted an offering and sale of securities. The settlement agreement provides that Kraken will cease offering or selling securities through Digital Asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties.
• In February 2023, the SEC also issued a Wells notice to the Paxos Trust Company, LLC (“Paxos”). Based on news reports, this Wells notice relates to the assertion that Paxos issued a stablecoin, BUSD, without first registering it as a security.
• In June 2023, the SEC charged Binance Holdings Ltd. and its affiliates, the largest Digital Asset exchange by volume, with a variety of securities laws violations, including operating an unregistered exchange. The SEC also charged Coinbase with operating as an unregistered securities exchange, broker and clearing agency and for the unregistered offer and sale of securities in connection with its staking-as-a-service program. These matters are still being litigated in the federal courts.

The SEC has also engaged in an enforcement action involving DeFi, charging two individuals, along with their Cayman Islands company, for (1) the unregistered sale of more than $30 million of securities via smart contracts and DAPP technology, and (2) misleading investors regarding the operations and profitability of their business, DeFi Money Market. See “SEC Charges Decentralized Finance Lender and Top Executives for Raising $30 Million Through Fraudulent Offerings,” SEC Press Release No. 2021-145 (Aug. 6, 2021).

The SEC has continued to bring enforcement actions in the virtual currency space and has doubled the size of its digital assets enforcement unit. See Press Release, SEC Nearly Doubles Size of Enforcement’s Crypto Assets and Cyber Unit (May 3, 2022). 

To the extent that certain Digital Assets could in the future be deemed by regulators, legislation, or courts (including by the SEC) to fall within the definition of a security for purposes of U.S. laws and regulations, the Account may be required to comply. Such change in law and associated compliance costs could adversely affect an investment in the Account. Investment Adviser, however, actively monitors the regulatory landscape. The Account may treat certain Digital Assets as securities for various purposes (e.g., custody, secondary transactions and material nonpublic information) to the extent appropriate to comply with U.S. laws and regulations.

If Digital Assets held by the Account are deemed to be securities and were not anticipated to be such, such Digital Assets may decline in value and/or be burdensome or costly to transmit (or the Account may be restricted from selling such Digital Assets).

FinCEN

To the extent that the Investment Adviser engages in “money services business activity”, including money transmission, as defined by FinCEN, the Investment Adviser may be deemed to fall within the Bank Secrecy Act’s definition of a financial institution and therefore be subject to the Bank Secrecy Act, 31 U.S.C. §§ 5311-5314; 5316-5336 and its implementing regulations, and, as such, be required to register as a money services business with FinCEN. Investment Adviser would also be required to develop an AML program and adhere to U.S. federal reporting and recordkeeping requirements. Owners, operators, participants and others who assist in the operation of an unregistered money services business may be subject to civil money penalties under 31 U.S.C. § 5321 and/or criminal liability under 31 U.S.C. § 5322 and 18 U.S.C. § 1960. Such additional legal and regulatory obligations may cause the Investment Adviser to incur extraordinary expenses and ongoing expenses, possibly affecting an investment in the Account in a material and adverse manner. To the extent that the Investment Adviser limits or reduces the scope of certain activities of the Account, the Client’s rights, or the Account’s investment initiatives in order to ensure compliance with laws or to limit the applicability of government regulation and supervision over the Account and not register with FinCEN, investments in the Account may be adversely affected. Alternatively, the Investment Adviser may elect to exercise its discretion to terminate the Investment Management Agreement.

In addition, on October 19, 2023, FinCEN issued a proposed rule (“Proposed Rule”) to apply the authorities of Section 311 of the USA PATRIOT Act to require covered financial institutions to implement recordkeeping and reporting requirements for transactions involving mixing of convertible virtual currency (“CVC”) within or involving a jurisdiction outside the United States and to designate mixing of CVC as a class of transactions of “primary money laundering concern.” The definition of CVC mixing in the Proposed Rule is drafted broadly such that if the Proposed Rule is finalized without modification, U.S. covered financial institutions may cease offering services to or engaging in transactions involving DeFi or DAPPs, which could cause Digital Assets to decline in value and adversely affect the ability of the Account to achieve its investment objective or operate in compliance with laws and regulations. Moreover, covered financial institutions and the Account could face substantial costs to comply with any regulations requiring recordkeeping and reporting for transactions related to CVC mixing, which could adversely affect the ability of the Account to achieve its investment objective. 

 

Further, FinCEN and the DOJ (and other government authorities) continue to take an active and focused role in prosecuting violations of anti-money laundering and sanctions laws involving virtual currency activities. For example, on November 21, 2023, FinCEN assessed a civil money penalty of $3.4 billion and OFAC assessed a penalty of $968 million against Binance Holdings Ltd. and its affiliates (collectively, “Binance”), a virtual currency exchange platform, for violations of the Bank Secrecy Act and multiple sanctions programs, including failure to implement programs to prevent and report suspicious transactions. The founder of Binance was also later sentenced to prison for four months. Such increased scrutiny by government authorities could affect the ability for a DAPP or DeFi protocol to operate, as government authorities investigate or examine circumstances associated with transacting in Digital Assets, mandate additional compliance controls, and impose transaction restrictions, which could adversely affect the ability of the Account to achieve its investment objective.

State Regulatory Authorities

Whether certain Digital Assets are deemed securities, or not, state securities regulators may investigate or examine circumstances associated with transacting in those Digital Assets. State securities regulators may also pursue investigations or actions involving transactions in Digital Assets that are not deemed securities.

In addition, state money services business regulators may investigate or examine circumstances associated with transacting in Digital Assets. To the extent such regulators deem the activities of the Account (or the Investment Adviser with respect to the Account) to cause the Investment Adviser to be deemed a “money transmitter” (and/or any other type of regulated financial services provider, for example, a “virtual currency business” in New York) under state statutes or regulations, the Investment Adviser may incur significant fees in becoming licensed in each state in which it does business, and may also be required to adhere to state statutes, regulations and guidance. For example, the New York Department of Financial Services requires that custodians of virtual currency that are either BitLicensees or entities chartered by New York as limited purpose trust companies take measures to adequately protect, segregate and separate customer virtual currency from their own, engage in adequate due diligence of sub-custodians, and have clear customer-facing disclosures regarding the general terms and conditions associated with their products and services. Similarly, California, in October 2023, passed the California Digital Financial Assets Law, which prohibits a person from engaging in digital financial asset business activity or holding out as being able to engage in such activity without meeting certain criteria and being licensed by the California Department of Financial Protection and Innovation. States may also impose fines or penalties with respect to any unlicensed activity or activity that violates applicable regulations and guidance. Further, owners, operators, participants and others who assist in the operation of an unlicensed money transmission or virtual currency business may be subject to fines or penalties, and/or criminal liability under state laws or 18 U.S.C. § 1960, if applicable.

In the event that the Investment Adviser is required to adhere to state statutes, regulations and guidance applicable to money transmitters or virtual currency businesses, such additional legal and regulatory obligations may cause the Investment Adviser to incur extraordinary expenses and ongoing expenses, possibly affecting an investment in the Account in a material and adverse manner. To the extent that the Investment Adviser limits or reduces the scope of certain investment activities of the account, the Client’s rights, or the Account’s investment initiatives in order to limit the applicability of government regulation and supervision over the Account and not obtain licensing in each state in which it does business, the value of investments held in the Account may be adversely affected.  Alternatively, the Investment Adviser may elect to exercise its discretion to terminate the Investment Management Agreement.

Foreign Jurisdictions

Various foreign jurisdictions may adopt policies, laws, regulations or directives that affect Digital Assets and cryptocurrency networks generally. Such additional foreign regulatory obligations may cause the Account to incur extraordinary expenses and ongoing expenses, possibly affecting an investment in the Account in a material and adverse manner.

To the extent that a Digital Asset that is not recognized as legal currency is determined to be a security, commodity interest or other regulated asset or a U.S. or foreign government or quasi-governmental agency exerts regulatory authority over a Digital Asset’s use, exchange, trading and ownership, the value of the Account may be adversely affected. Any additional regulatory obligations may cause the Account to incur extraordinary, non-recurring expenses, and/or ongoing compliance expense, possibly affecting an investment in such account in an adverse manner. If Investment Adviser or the Account determines not to comply with such regulatory requirements, investments in the Account may be liquidated at a time that is disadvantageous to the Client. 

     Regulatory Risks Relating to Abra

The Client should consider the impact of the regulatory risks relating to Abra. Since certain employees, officers and principals of Abra control Investment Adviser, and therefore, the Account’s operations and investments, Abra’s risks have a significant bearing on the Account’s risks and may have a material adverse effect on the Account.

State Regulatory Risks

On April 28, 2023, Abra entered into a consent order before the Department of Financial Protection and Innovation of the State of California (the “DFPI”) in connection with ceasing the sale and distribution of the Abra Earn product in California (the “Consent Order”). The Consent Order found that the Abra Earn product was a securities offering sold by means of omissions of material facts necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading. Abra neither admitted, nor denied these findings. Pursuant to the Consent Order, by letter dated June 2, 2023, the DFPI noted that an obligation of the Consent Order requiring the in-kind equivalent of digital assets of California Abra Earn customers be placed in a digital wallet controlled by a third-party had not been satisfied, but noted that Abra had a stated plan to return customer assets and that it “[i]f Abra effectively returns California customer assets through this plan, DFPI may use its discretion and not take further legal action to enforce the Consent Order,” including the enforcement of a suspended penalty of $1 million for non-performance of the Consent Order.

Starting on June 15, 2023, and continuing June 16, June 20, July 18 and July 27 state securities regulators from Alabama, Kentucky, Maryland, Mississippi, Montana, New Jersey, South Carolina, Texas, Vermont, Washington, and Wisconsin and on July 18, 2023, the Connecticut Banking Commissioner (the “Connecticut Action”) filed actions (“State Actions”) against Plutus Financial Holdings Inc. and Plutus Financial Inc.( “Abra OpCo”), (referred to for the purposes of the Connecticut Action as Abra Trade), Plutus Lending LLC, Abra Boost LLC, and CEO William Barhydt (collectively, “Respondents”), or some combination thereof. It is anticipated that additional state securities or banking regulators may file similar actions. The State Actions alleged violations of various state securities or banking laws requiring registration of securities, registration of agents, fraud and licensing for money transmission. The State Actions seek findings that the Abra Earn products were securities, that Abra employed unregistered agents, and that certain statements made related to the Abra Earn and Abra Boost products were fraudulent, materially misleading or false, or omitted material information, including failing to disclose that one or more of Respondents were or are insolvent at the time securities were offered and sold. In addition, the Connecticut Action seeks a finding that Abra Trade was offered by Abra OpCo without the required money transmission license. Respondents dispute and anticipate defending the allegations in the State Actions. There can be no assurance that these defenses will be successful. If one or more of the State Actions are successful, Respondents, individually and potentially collectively, may be subject to a judgment that includes civil monetary penalties, orders of restitution, refund, or rescission, orders to cease and desist certain conduct, and findings that may include sale of unregistered securities, employing unregistered agents, and fraud. Depending on the amount of any restitution, refund, rescission, or civil penalties awarded, Respondents may be unable to pay the award and may experience a material adverse impact to Respondents’ solvency. 

Furthermore, if one or more of the State Actions are successful and become a “final order” based on a violation that prohibits fraudulent, manipulative, or deceptive conduct, Respondents, and other related entities may become subject to the “bad actor” disqualification from exemptions available under SEC Regulation D and will be precluded from offering securities pursuant to SEC Regulation D. 

Abra has successfully negotiated with state securities and money transmission working groups to resolve the State Actions in a manner that will neither require (i) restitution or a finding that subjects Abra to a “bad actor” disqualification and is in the process of negotiating and executing term sheets and orders superseding the State Actions. 

Risks Relating to Digital Assets and Digital Asset Networks

Digital Assets Generally

The investment characteristics of Digital Assets generally differ from those of traditional currencies, commodities or securities. Importantly, Digital Assets are not typically backed by a central bank or a national, supra-national or quasi-national organization, any hard assets, human capital or any other form of credit. Rather, Digital Assets are market-based: a Digital Asset’s value is determined by (and often fluctuates according to) supply and demand factors, the number of persons that accept it, and the value that various market participants place on it through their mutual agreement, barter or transactions, taking into consideration the Digital Asset’s in-network utility where applicable.

The risks and background related to Bitcoin, an early and prominent Digital Asset, are set forth below. 

Overview of Bitcoin, the Bitcoin Network and the Bitcoin Market. Presently, Bitcoin is a type of decentralized, virtual “Digital Asset,” that functions without the intermediation of any central authority. Each individual Bitcoin unit exists as a digital file, based upon a mathematical proof, and is comprised of two numbers, or “keys”: the public key that encrypts a transaction value and the private key that decrypts it. Bitcoin allows users to send payments within a decentralized, peer-to-peer network, and does not require a central clearinghouse or financial institution clearing transactions. The smallest unit into which a Bitcoin can be divided is called the Satoshi: 1 Bitcoin contains 100 million Satoshi. 

Bitcoin Network. The “Bitcoin network” refers to the online platform through which Bitcoin is mined, validated and transmitted. Understanding the Bitcoin network requires an understanding of the terms “cryptography”, “blockchain” and “mining”.

Cryptography. In the Bitcoin context, cryptography refers to the mathematical proofs on which any given Bitcoin is based. The cryptography basis is intended to provide the Bitcoin network with a high level of security. Such security, in turn, is designed to permit network users to control transactions and prevent double-spending (i.e., when a unit of Bitcoin would be concurrently sent to and accepted by two different recipients). The Bitcoin network hosts (i.e., provides a forum for) the blockchain. As explained below, the blockchain and “mining” concepts are necessary to create a consensus on the network about which transactions will be confirmed and considered valid.

Blockchain. The blockchain is a chronologically ordered, public record of all validated Bitcoin transactions across the Bitcoin network. It is shared among all Bitcoin users. Each “block” in the “chain” (or entry in the record) contains and confirms many waiting transactions.

The blockchain works as follows: Engaging in Bitcoin transactions requires a user to install or access on its computer or mobile device a Bitcoin software program that will allow the user to generate a digital Bitcoin account—commonly known as a “digital wallet” or “wallet”—in which to store Bitcoin, connect to the Bitcoin network and purchase or sell, own, transfer, or receive Bitcoin. Users that have installed available Bitcoin-Qt must also make periodic software upgrades. Each Bitcoin wallet includes a unique address and verification system consisting of a “public key” and a “private key” which are linked mathematically to each other. A public key serves as an address for the digital wallet—similar to a bank account number. A user must provide its public key to the party initiating the transfer. The private key is a secret piece of data that proves the user is authorized to spend Bitcoin from a specific wallet—similar to a personal pin to confirm a transaction. It authorizes access to, and transfer of, the funds in the digital wallet to other users. Private key(s) may be stored on a user’s computer or on remote servers. If a user fails to secure or make a backup of the public and private key relating to a digital wallet, or loses its private key, or the digital wallet containing the keys is deleted or hacked into, the user permanently loses access to the Bitcoin contained in the associated digital wallet, without any recourse to a centralized group or agency to assist in its recovery. 

Each Bitcoin user must “sign” transactions with a data code derived from entering the applicable private key into a “hashtag algorithm”. The hashtag algorithm produces a hash (or timestamp) which serves as a signature validation that the transaction has been authorized by the Bitcoin owner. Each timestamp includes the previous timestamp hash as input for its own hash. This dependency of one hash on another is what forms a chain, with each additional timestamp providing evidence that each of the previous timestamp hashes existed. Presently, each block on the blockchain contains a record of hundreds of validated transactions. Each validated transaction contains a unique identifier (i.e., a Bitcoin address/public key) that can be searched and located on the blockchain through Web sites like www.blockchain.com. It takes approximately ten minutes for each Bitcoin transaction to be confirmed by the network through the efforts of miners and a new block in the blockchain to be created. Each block that is added to the blockchain reduces the risk that a previous transaction will not be reversed or that double spending has not occurred. 

Mining. Bitcoin mining is the process of validating and adding transaction records to Bitcoin’s public ledger of past transactions (i.e., the blockchain). Each block is an independent mathematical proof which depends on the previous block. As an incentive to update the blockchain, Bitcoin miners may collect transaction fees for the transactions they confirm, along with newly created Bitcoin (i.e., rewards). Only the first miner to compute the proof is rewarded with Bitcoin, while the rest of the miners have to start over on a new block. Bitcoin supply is increased with every new block of transactions that is added to the blockchain. Currently, the reward is six and a quarter (6.25) Bitcoin for each block that is added to the blockchain. The reward for solving a block is automatically adjusted—reduced by half for every 210,000 blocks mined—so that roughly every four years of operation of the Bitcoin network, half the amount of Bitcoin created in the prior four years are created. It is understood (but not guaranteed) that the total number of Bitcoin in existence will never exceed 21 million. Mining is currently very expensive and time consuming, and miners must dedicate substantial resources to continuously power and cool devices. The mining reward system is designed to ensure miners are compensated for their efforts and new Bitcoin enters into public circulation. The Bitcoin network’s mining protocol is intended to make it more difficult to solve for new blocks in the blockchain as the processing power dedicated to mining increases. Therefore, the Bitcoin mining process is designed to incentivize people to be efficient and use as little power as possible to create blocks and validate the transactions. Given the time and resources that must be dedicated to mining, miners may “pool” their efforts and act cohesively to combine their processing power to solve blocks. These efforts are called mining “pools”—and pool members generally split any resulting rewards based on the processing power they each contributed to solve for such blocks.

Digital Asset Exchanges. Digital Asset exchanges are third-party service providers that convert a Bitcoin to fiat currencies (i.e., currency a government considers to be legal tender) or other cryptocurrencies. Bitcoin are bought, sold and traded with publicly disclosed (but often-changing) valuations on Digital Asset exchanges, where the majority of buying and selling activity occurs. Digital Asset exchanges provide the most data with respect to prevailing valuations of Bitcoin. Market participants can choose which exchange on which to buy or sell Bitcoin, although these exchanges may charge significant fees for processing transactions. A Digital Asset exchange is subject to U.S. federal and state regulatory requirements.

Digital Asset Service Providers. Several companies and financial institutions provide services related to the buying, selling, payment processing and storing of Bitcoin (i.e., banks, accountants, exchanges, digital wallet providers and payment processors). Investment Adviser expects the number of service providers to increase as the network for Bitcoin continues to grow. However, there is no assurance that the Bitcoin market, or the service providers necessary to accommodate it, will continue to support Bitcoin, continue in existence or grow. Further, there is no assurance that the availability of and access to Bitcoin service providers will not be negatively affected by government regulation or supply and demand of Bitcoin. Accordingly, companies or financial institutions that currently support Bitcoin may not do so in the future.

Bitcoin Investment Market. Private and professional investors and speculators invest and trade in Bitcoin. These market participants may range from exchange-traded-funds, private investment funds, brokers and day-traders. Certain activity involving Bitcoin may require approvals, licenses or registration, which may serve as a barrier to entry of investors, thereby limiting the market for Bitcoin. There is no assurance that the investment market for Bitcoin will continue to grow.

Ethereum Risk

The risks and background related to Ethereum and Ether are set forth below. 

Overview of Ethereum. Ethereum is a decentralized, open-source “computer” that relies on a distributed virtual computer, cryptographic protocols and a general-purpose blockchain (the Ethereum blockchain) to effect transactions (including transactions effected through smart contracts). To measure and constrain transaction costs in the Ethereum network, Ethereum uses its native cryptocurrency, ether (“Ether” or “ETH”), which is acting as virtual currency for “gas payment”. Transactions in Ethereum, which may include a transfer of Ether and other tokens from one end user account to another, or the creation of a smart contract, are processed by the virtual computer and are added to the Ethereum network using a proof-of-stake consensus algorithm.

One of the principal components of Ethereum—a general-purpose blockchain—was originally formulated by Vitalik Buterin in a 2013 white paper. While Vitalik’s idea was refined with the help of others, the formal development of the Ethereum network began through a Swiss firm called Ethereum Switzerland GmbH in conjunction with several other entities. Subsequently, the Ethereum Foundation, a Swiss non-profit organization, was set up to oversee the protocol’s development. The launch of Ethereum, and the mining of the first Ethereum block on the Ethereum network, occurred on July 30, 2015.

Overview of Ether. Presently, Ether is a type of decentralized, virtual “cryptocurrency,” that functions without the intermediation of any central authority. Unlike Bitcoin, Ether was not designed to serve as a store of value. Instead, it was meant to pay for specific transactions on the Ethereum network. As of August 2022, Ether was the second largest digital asset, as measured by market capitalization. While Ether has several denominations of units, Ether is quoted in its smallest denomination, the wei, when transacting on the Ethereum network. 

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. Following the launch of the Ethereum network and prior to the Merge, Ether was created and allocated by the Ethereum network protocol through a “mining” process that rewarded miners 2.0 Ether per block, and imposed no aggregate cap on the total number of Ether outstanding. After the Merge, Ether is created and allocated by the Ethereum network protocol through a “proof-of-stake” process.

Ethereum’s Merge to Proof-of-Stake. The Ethereum network was upgraded from the original proof-of-work mechanism to proof-of-stake with the original Ethereum Mainnet merging with a separate proof-of-stake blockchain called the Beacon Chain on September 15, 2022 ( the “Merge”). Any Ether “staked” before the Merge that was locked in validator addresses is currently unlocked. All validators now have the right to relinquish their duties and withdraw their funds on a pre-determined schedule. Unlike proof-of-work, in which miners 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 creating 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. Additionally, a proof of stake consensus algorithm is viewed as being more energy efficient, and is expected to make the Ethereum network more scalable to accommodate larger applications.

Summary of an Ethereum Transaction and the Role of Gas. In Ethereum, a transaction is a signed message that is originated by an externally owned account, and contains several pieces of information, including (i) the price of “gas” (measured in wei / gas units) the transaction originator is willing to pay, (ii) the maximum amount of gas the originator is willing to buy to execute the message, (iii)  the recipient Ethereum address (which may be the address of a contract), (iv) the data being sent and (v) an encrypted digital signature of the originating account.

Gas is a unit describing the amount of computational power needed to execute specific operations on the Ethereum network. Before the Ethereum’s fee mechanism was upgraded to Ethereum Improvement Proposal 1599 (“EIP-1599”), a transaction originator could select (i) the price (in Ether) per unit of gas to originate the transaction (e.g., 70 gigawei / unit of gas) and (ii) a “gas limit” (which limit represents the maximum units of gas the originator is willing to purchase to effect the transaction) in order to accomplish this transaction. If the originator tried to execute a transaction with too low of a gas limit, the attempted transaction would fail, without any impact to the blockchain. With EIP-1599, a transaction originator pays an algorithmically determined “base fee” for each transaction with an option to also include a “tip” if it wants such transaction to be prioritized.

Smart Contracts. A smart contract is a collection of code that resides at a specific address on the Ethereum blockchain. While smart contracts can share information with and use information from other contracts, store data, and send ether to other accounts, smart contracts will only execute if an end user account executes a transaction that initiates the contract. When a contract is deployed, the relevant amount of Ether that must be paid in gas is deducted from the contract originator’s account balance. In a successful deployment, the Ether that was used to pay for gas is then added to the block reward of the current block and distributed to the miner who successfully wins the block. This is considered part of the miner’s compensation for securing the network. 

After the deployment of a smart contract on the Ethereum network, the smart contract becomes a permanent part of the blockchain. Whenever a node wants to call any of the methods defined by the contract, it can send a message to the address for the contract, specifying data as input and the method that must be called. The contract will run as part of the creation of newer blocks up to the gas limit or completion. While smart contracts cannot be altered, they can be deleted, resulting in no code being executed when a transaction is sent to the address corresponding to the smart contract.

Stablecoin Risks

The Account may engage in Stablecoin lending and accept Stablecoin as collateral for certain loans. Stablecoins are distinct from other Digital Assets in that their value is backed by the value of an underlying asset, such as U.S. dollars or other fiat currencies, commodities or other cryptocurrencies. Stablecoins are subject to the same risks as other Digital Assets as set forth herein but are also subject to unique risks. While Stablecoins are intended to be less volatile than other Digital Assets, they are inherently subject to the volatility of the underlying assets to which they are pegged. Fiat-based Stablecoins are centralized, which exposes the holder of such Stablecoins to counterparty risk, including but not limited to a centralized entity that issues the applicable Stablecoin and manages the fiat conversion. Specifically, fiat-based Stablecoins require the holder of such Stablecoins to rely on the issuer to have sufficient reserve to back up all of the issued Stablecoins, and there is significant risk that issuers of fiat-based Stablecoins do not, and may not in the future, retain sufficient reserves. Further, fiat-based Stablecoins may be subject to greater oversight and regulation and may be further dependent on actions taken by the banking industry to support such Stablecoins and other geopolitical factors that may influence government support of such Stablecoins, all of which could affect the value of such Stablecoins.

Algorithmically-managed Stablecoins (“Algorithmic Stablecoins”) pose additional risks by comparison to fiat and Digital Asset-backed Stablecoins. Notably, Algorithmic Stablecoins do not typically rely on reserve backing assets or overcollateralization, meaning that Algorithmic Stablecoin are inherently more volatile than Stablecoins backed by fiat or traditional commodities, and potentially more volatile than Digital Asset-backed Stablecoins given the lack of overcollateralization. Instead, Algorithmic Stablecoins generally rely on two separate Digital Assets—a Stablecoin and another Digital Asset which backs the Stablecoin—with an algorithm (i.e., a smart contract) regulating the relationship between the Stablecoin and backing Digital Asset. The smart contract that governs the relationship between the two assets is generally programmed to automatically generate more units of a Stablecoin, or destroy already existing units of the backing Digital Asset, in response to swings in each Digital Asset’s relative supply and demand. For example, TerraUSD—an Algorithmic Stablecoin backed by its sister token, LUNA—lost its peg in May 2022 due to market factors outpacing the algorithms ability to burn/mint tokens to maintain stability. See Ekin Genç, Algorithmic Stablecoins: What They Are and How They Can Go Terribly Wrong, CoinDesk (May 16, 2022). As such, the use of Algorithmic Stablecoins may expose the Account to relatively high-volatility risks by comparison to fiat-based Stablecoins and Digital Asset-backed Stablecoins.

Separately, smart contract vulnerabilities may expose Stablecoins to potential losses or breaches. Furthermore, regulatory actions or changes can impact the operation and acceptance of Stablecoins. A Stablecoin’s stability largely depends on market trust and the efficacy of its underlying mechanisms.

Recent Developments in the Digital Asset Industry  

In 2022, several prominent Digital Asset-related firms, including trading venues, exchanges and lending platforms, experienced financial distress and/or declared bankruptcy (the “2022 Developments”). These failures included firms such as Celsius Network LLC (“Celsius”), Three Arrows Capital, FTX and Voyager Digital. The impact of the 2022 Developments on the Digital Asset markets, including on other institutions or critical infrastructure for such markets, is not yet fully known and may evolve. Such impacts may include, but are not limited to: loss of confidence in the Digital Asset markets, reduced participation in the Digital Asset markets, closer scrutiny by governmental authorities of firms transacting in Digital Assets, or servicing Digital Asset market participants, new legislation and/or regulation of the Digital Asset markets. 

The 2022 Developments resulted in price changes and volatility in the Digital Asset markets, as well as increased negative scrutiny of the Digital Asset markets by governmental authorities and the press. Selling of Digital Assets by companies experiencing bankruptcy and/or financial distress could depress the prices of such assets. It is possible that such effects could cause systemic risks to the Digital Asset markets. If the 2022 Developments cause sustained adverse impacts on the Digital Asset markets, the effectiveness and outlook for the Account’s investment strategies may be impacted in a materially adverse manner. 

Forced selling by distressed companies may also depress the prices of assets used as collateral by other firms. If this market condition becomes widespread in the cryptoeconomy, including as a result of the 2022 Developments, the Account may suffer from increased counterparty risk, including defaults or bankruptcies of major customers or counterparties, which could lead to significantly reduced activity and fewer available Digital Asset market opportunities. Further, forced selling of Digital Assets by distressed companies could lead to lower Digital Asset prices and a consequent reduction in the value of the Account’s investments. To the extent that conditions in the general economic and Digital Assets markets materially deteriorate, Investment Adviser’s ability to find investment opportunities for the Account may suffer.

Development and Acceptance of Digital Assets 

As a relatively new product and technology, Digital Assets are not yet widely adopted as a means of payment for goods and services. Banks and other established financial institutions may refuse to process funds for Digital Asset transactions, process wire transfers to or from Digital Asset exchanges, Digital Asset-related companies or service providers, or maintain accounts for persons or entities transacting in Digital Assets. Market capitalization for Digital Assets as a medium of exchange and payment method may always be low. Further, a Digital Asset’s use as an international currency may be hindered by the fact that it may not be considered as a legitimate means of payment or legal tender in some jurisdictions. To date, speculators and investors seeking to profit from either short- or long-term holding of Digital Assets drive much of the demand for it, and competitive products may develop which compete for market share. Further, certain Digital Assets or payment systems may be the subject of a U.S. or foreign patent application (e.g., JP Morgan Chase Bank’s patent application for “Alt-Coin” with the United States Patent & Trademark Office), successfully patented, or, alternatively, mathematical Digital Asset network source codes and protocols may be patented or owned or controlled by a public or private entity. The Account could be adversely impacted if Digital Assets fail to expand into retail and commercial markets. 

Development and Acceptance of Digital Asset Networks

The growth and use of Digital Assets generally is subject to a high degree of uncertainty. Indeed, the future of the industry likely depends on several factors, including, but not limited to: (a) economic and regulatory conditions relating to both fiat currencies and Digital Assets; (b) government regulation of the use of and access to Digital Assets; (c) government regulation of Digital Asset service providers, administrators or exchanges; and (d) the domestic and global market demand for—and availability of—other forms of Digital Assets or payment methods. Any slowing or stopping of the development or acceptance of Digital Assets or a Digital Asset network may adversely affect an investment in the Account.

Price Volatility

A principal risk in transacting in Digital Assets is the rapid fluctuation of their market price. High price volatility undermines Digital Assets’ role as a medium of exchange as retailers are much less likely to accept it as a form of payment. High price volatility can also result in counterparty risks, specifically where a significant drop in the price of Digital Assets results in various industry bankruptcies. See David Yaffe-Bellany & Erin Griffith, ‘The Music Has Stopped’: Crypto Firms Quake as Prices Fall, N.Y. Times (June 14, 2022). The price of Digital Assets may be affected generally by a wide variety of complex and difficult to predict factors such as Digital Asset supply and demand; rewards and transaction fees for the recording of transactions on a blockchain; availability and access to Digital Asset service providers (such as payment processors), exchanges, miners or Digital Asset users and market participants; perceived or actual Digital Asset network security vulnerability; inflation levels; fiscal policy; interest rates; and political, natural and economic events. 

Further, if the supply of Digital Assets available to the public were to increase or decrease suddenly due to, for example, a change in a Digital Asset source code, the dissolution of a Digital Asset exchange, or seizure of Digital Assets by government authorities, then the price of Digital Assets could fluctuate rapidly. For example, in the first half of 2022, Digital Asset lenders Celsius and Voyager Digital Ltd. and Digital Asset hedge fund Three Arrows Capital each declared bankruptcy followed by FTX in November 2022. Such disruptions eroded the confidence of participants in the Digital Asset ecosystem and resulted in increased negative publicity surrounding Digital Assets more broadly and market-wide declines in Digital Asset trading prices and liquidity. Such changes in demand and supply of Digital Assets could adversely affect the value of an investment in the Account. In addition, governments may intervene, directly and by regulation, in the Digital Asset market, with the specific effect, or intention, of influencing Digital Asset prices and valuation (e.g., releasing previously seized Digital Assets). Similarly, any government action or regulation may indirectly affect the Digital Asset market or Digital Asset network, influencing Digital Asset use or prices. 

Further, if future regulatory actions or policies limit the ability to own or exchange certain Digital Assets in the retail and commercial marketplace, or use them for payments, or own them generally, the price and demand for such Digital Assets may decrease.

Risks of Buying or Selling Digital Assets

The Account may transact with Digital Asset exchanges. The Account will take on credit risk every time it purchases or sells Digital Assets, and its contractual rights with respect to such transactions may be limited. Although the Account’s transfers of Digital Assets will be made to or from a counterparty that Investment Adviser believes is trustworthy and utilizing reasonable policies and procedures designed to decrease errors, it is possible that, through computer or human error, or through theft or criminal action, the Account’s Digital Assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent that the Account is unable to seek a corrective transaction with such third party or is incapable of identifying the third party that has received the Account’s Digital Assets (through error or theft), the Account will be unable to recover incorrectly transferred Digital Assets, and such losses will negatively impact the Account.

Certain Digital Asset exchanges may place limits on the Account’s transactions, or the Account may be unable to find a willing buyer or seller of Digital Assets. To the extent the Account experiences difficulty in buying or selling Digital Assets, the Client may be unable to withdraw from the Account, or there may be delays in liquidation of the Account’s Digital Assets—adversely affecting the value of the Account. 

Forks and Airdrops

To the extent a Digital Asset held by the Account undergoes a hard fork or an airdrop, the Digital Assets resulting from the hard fork or airdrop (collectively, “New Digital Assets”) are provided involuntarily and without consideration. A hard fork or airdrop may affect the value of the original Digital Asset held by the account (the “Original Digital Asset”). If the relevant exchange, custodian, or other storage solution where the Account holds the Original Digital Asset (collectively, the “Storage Solution”) accommodates the New Digital Asset, Investment Adviser, in its sole discretion (for discretionary accounts), may elect to claim the New Digital Asset. Nevertheless, various Storage Solutions may (i) not accommodate the New Digital Asset; (ii) may only accommodate the New Digital Asset after a significant period; or (iii) may have a contractual right to claim the New Digital Asset for their own account. Additionally, Investment Adviser may not have any systems in place to monitor or participate in hard forks or airdrops. As a result of the foregoing, the Account may not receive any New Digital Assets, thus losing any potential value from such Digital Assets. Further, it is likely that the New Digital Assets claimed by Investment Adviser on behalf of the Account will be illiquid and difficult to value. Moreover, tax liability for unwanted assets gained involuntarily from forks and airdrops could adversely affect the Account. 

Risk of Loss Due to Failure of Custodial Systems

Investment Adviser seeks to manage the custody of the Account’s Digital Assets in a manner that seeks to mitigate risk from any single malicious individual or security threat, however there are a variety of risks that could lead to a system failure, resulting in the loss of the Account’s Digital Assets. Investment Adviser will endeavor to keep in place procedures to reduce risk of loss or theft of digital assets. Investment Adviser is focused on maintaining a high level of security, and closely monitors the advances and best practices within the cryptocurrency ecosystem regarding Digital Asset custody and security.

Custodial arrangements for Digital Assets may differ significantly from traditional exchange-listed securities. Investment Adviser has entered into an agreement with its custodian to secure the Account’s Digital Assets, but, should the custodian’s safeguarding controls fail, such failure could have adverse impacts on the Account. Moreover, because Digital Assets held with custodians may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, such assets could be subject to bankruptcy proceedings and the Account could be treated as a general unsecured creditor of such custodians.

Risk of Loss of Private Key

Digital Assets are controllable only by the possessor of unique private keys relating to the addresses in which the Digital Assets are held. The theft, loss or destruction of a private key required to access a Digital Asset is irreversible, and such private keys would not be capable of being restored by the Account. Any loss of private keys relating to digital wallets used to store the Account’s Digital Assets could result in the loss of the Digital Assets and the Account could incur substantial, or even total, loss of capital.

Stolen or Incorrectly Transferred Digital Assets May be Irretrievable

Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of Digital Assets or a theft of Digital Assets generally will not be reversible, and the Account may not be capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error or through theft or criminal action, the Account’s Digital Assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent that the Account is unable to seek a corrective transaction with such third party or is incapable of identifying the third party that has received the Account’s Digital Assets through error or theft, the Account will be unable to revert or otherwise recover incorrectly transferred Digital Assets. To the extent that the Account is unable to seek redress for such error or theft, such loss could adversely affect an investment in the Account.

Technology and Security

The Account relies on third-party providers for security accounts and information and based on their inputs adapts to technological change in order to secure and safeguard the Account. As technological change occurs, the security threats to the Account’s Digital Assets will likely adapt and previously unknown threats may emerge. Furthermore, Investment Adviser believes that the Account may become a more appealing target of security threats as the size of the Account’s Assets grows. To the extent that the Account is unable to identify and mitigate or stop new security threats, the Account may be subject to theft, loss, destruction or other attacks, which could have a negative impact on the value of the Account or result in loss of the Account’s Assets.

Security of Digital Asset Networks

Hackers or malicious actors may launch attacks to steal, compromise or secure Digital Assets, such as by attacking the network source code, exchange servers, third-party platforms, cold and hot storage locations or software, Digital Asset transaction history, or by other means. Digital Asset exchanges are further appealing targets for cybercrime, hackers and malware. It is possible that while engaging in transactions with various Digital Asset exchanges or DAPPs located throughout the world, any such exchange or DAPP may cease operations due to theft, fraud, security breach, liquidity issues, or government investigation. Techniques to secure the blockchains of Digital Asset networks are recent inventions and may fail. For example, the incentives that keep a blockchain decentralized may prove insufficient, thus impacting the value or security of investment indirectly or directly held by the Account. Exploits in various blockchains may occur, which may result in losses for the Account.

Trading on the Digital Asset Networks

Many Digital Assets networks are online, end-user-to-end-user networks that host a public transaction ledger, known as the blockchain, and the source code that comprises the basis for the cryptographic and algorithmic protocols governing such networks is open source. In many Digital Asset transactions, the recipient of the Digital Asset must provide its public key, which serves as an address for the digital wallet, to the party initiating the transfer. In the data packets distributed from Digital Assets’ software programs to confirm transaction activity, each Digital Assets user must “sign” transactions with a data code derived from entering the private key, whose signature serves as validation that the transaction has been authorized by the owner of such Digital Asset. This process is vulnerable to hacking, malware, and implementer or operator error, and could lead to the theft or loss of the Account’s Digital Assets. Many Digital Assets exchanges have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Digital Assets exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Digital Assets exchanges.

Amendments to a Digital Asset Network’s Protocols and Software Could Adversely Affect the Account’s Investment and Trading Activities

Digital Asset networks (“Networks”) are typically based on protocols that govern peer-to-peer interactions between the computers that are connected to a Network. Generally, the code that sets forth a Digital Asset’s protocol is informally managed by a development team known as the core developers. A Digital Asset’s core developers, miners and/or users (each such core group in respect of a particular Digital Asset, the “Community”) can propose amendments to a Network’s source code through one or more software upgrades that alter such Digital Asset’s protocols, the software that governs its Network and the properties of the Digital Asset itself, including but not limited to the irreversibility of transactions and limitations on the mining/creation of new Digital Asset units. To the extent that a majority of the Community installs such software upgrade(s), such Network could be subject to new protocols and software that may adversely affect the Account’s investment and trading activities. If less than a majority of the Community installs such software upgrade(s), such Network could “fork.”

Many digital currencies and Digital Assets are open-source projects and, although there may be an influential group of leaders in a specific Community, there may be no official developers or group of developers that formally control the applicable Network. For many digital currencies and Digital Assets, any individual can download the applicable Network software and make any desired modifications that are proposed to the relevant Community through software downloads and upgrades. However, the Community must usually consent to those software modifications by downloading the altered software or upgrade that implements the changes; otherwise, the changes do not become a part of that Network. A developer or group of developers could potentially propose a modification to a Network that is not accepted by the applicable Community, but that is nonetheless accepted by a substantial portion of such Community. In such a case, a “fork” in the blockchain could develop and two separate Networks could result, one running the pre-modification software program and the other running the modified version (i.e., a second such Network in respect of the same Digital Asset). Such a fork in the blockchain would typically be addressed by Community-led efforts to merge the forked blockchains. This kind of split in a Network could materially and adversely affect the value of the Account’s investments and, in the worst-case scenario, harm the sustainability of the applicable Digital Asset’s economy.

Risk to Digital Assets Networks from Malicious Actors

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 processing power dedicated to mining on certain Network, it may be able to alter the blockchain on which the Digital Assets’ transaction relies by constructing alternate blocks if it is able to solve for such blocks faster than the remainder of the miners on the Network can add valid blocks. In such alternate blocks, the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new Digital Assets or transactions using such control. Using alternate blocks, the malicious actor could double-spend its own Digital Assets and prevent the confirmation of other users’ transactions for as long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of the processing power on various Networks or Digital Assets Communities do not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Such changes could adversely affect an investment in the Account or the ability of the account to transact.

Digital Assets Miners May Cease to Solve Blocks

If the award of new Digital Assets for solving blocks declines and transaction fees are not sufficiently high, miners may not have an adequate incentive to continue mining and may cease their mining operations. Miners ceasing operations would reduce the collective processing power on a Network, as applicable, which would adversely affect the confirmation process for transactions (i.e., decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty for block solutions) and make such Network more vulnerable to a malicious actor or botnet obtaining control in excess of 50% of the processing power on such Network. Any reduction in confidence in the confirmation process or processing power of such Network may adversely impact an investment in the Account.

Intellectual Property Rights Claims May Adversely Affect the Operation of the Digital Assets Network

Third parties may assert intellectual property claims relating to the operation of Digital Assets and their source code relating to the holding and transfer of such assets. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the Digital Asset’s long-term viability or the ability of end users to hold and transfer Digital Assets may adversely affect an investment in the Account. Additionally, a meritorious intellectual property claim could prevent the Account and other end users from accessing the Network, or holding or transferring their Digital Assets, which could force the Account to terminate and liquidate the Account’s Digital Assets (if such liquidation of the Account’s Digital Assets is possible). As a result, an intellectual property claim against the Account could adversely affect an investment in the Account.

Risks Related to Digital Asset Exchanges

The exchanges on which Digital Assets trade are relatively new and generally unregulated and may therefore be more exposed to theft, fraud and failure than established, regulated exchanges for other products. Digital Asset exchanges may be startup businesses with no institutional backing, limited operating history and no publicly available financial information. Exchanges generally require fiat currency funds to be deposited in advance in order to purchase Digital Assets, and no assurance can be given that those deposit funds can be recovered. Additionally, upon sale of Digital Assets, fiat currency proceeds may not be received from the exchange for several business days. The participation in exchanges requires users to take on credit risk by transferring Digital Assets from a personal account to a third party’s account. The Account will take credit risk of an exchange every time it transacts.

Digital Asset exchanges may impose daily, weekly, monthly or customer-specific transaction or distribution limits or suspend withdrawals entirely, rendering the exchange of Digital Assets for fiat currency difficult or impossible. Additionally, Digital Asset prices and valuations on Digital Asset exchanges have been volatile and subject to influence by many factors, including the levels of liquidity on exchanges and operational interruptions and disruptions. The prices and valuation of Digital Assets remain subject to any volatility experienced by Digital Asset exchanges, and any such volatility can adversely affect an investment in the Account.

Digital Asset exchanges are appealing targets for cybercrime, hackers and malware. It is possible that while engaging in transactions with various Digital Asset exchanges located throughout the world, any such exchange may cease operations due to theft, fraud, security breach, liquidity issues or governmental investigation. In addition, banks may refuse to process wire transfers to or from exchanges. Over the past several years, many exchanges have, indeed, closed due to fraud or theft. By way of example, in 2018 alone, Digital Asset exchanges based in Japan (Coincheck), Italy (Bitgrail), India (Coinsecure) and South Korea (Coinrail) were reported to have experienced major hacks resulting in total losses of approximately $650,000,000. In addition, significant hacks occurred in 2019, including the theft of approximately 7,000 Bitcoin (equivalent to more than $40,000,000) from Binance and in 2020, including a hack on a Singapore-based cryptocurrency exchange (KuCoin) resulting in the loss of more than $150,000,000. In 2021, cryptocurrency platform Poly Network suffered a hack of tokens worth more than $600,000,000. Overall, more than 150 blockchain hacking incidents took place in 2021, with nearly $7 billion in funds lost. In February 2022, Wormhole, one of the most popular bridges linking the Ethereum and Solana blockchains, lost about $320,000,000 in a hack, and each of FTX, Binance and Coincheck suffered attacks costing each more than $500,000,000.

Exchanges may even shut down or go offline voluntarily, without any recourse to investors. In many of these instances, the customers of such exchanges have not been compensated or made whole for the partial or complete loss of their account balances. Consequently, an exchange may be unable to replace missing Digital Assets or seek reimbursement for any theft of Digital Assets, adversely affecting the Client and an investment in the Account.

Moreover, Digital Asset exchanges are subject to the risk of their own insolvency as well as of insolvency of exchanges, service providers and other companies with which they work in the Digital Asset space. In the first half of 2022, Luna (and related stablecoin TerraUSD) collapsed leading to widespread flow-on-distress for some of the biggest participants in the Digital Asset markets. Shortly after Luna’s collapse, each of Celsius Networks, Voyager Digital and Three Arrows Capital declared bankruptcy, resulting in a loss of confidence in participants of the cryptoeconomy and negative publicity surrounding crypto more broadly. 

By late 2022, FTX, the third largest Digital Asset exchange 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 several affiliates of FTX filed for bankruptcy. Several other entities in the Digital Asset industry filed for bankruptcy following FTX’s bankruptcy filing, such as BlockFi Lending LLC (“BlockFi”) and Genesis Global Holdco, LLC, both of which are Digital Asset lenders. In response to these events, the Digital Asset markets have experienced extreme price volatility and several other entities in the Digital Asset industry have been, and may continue to be, negatively affected, further undermining confidence in Digital Asset markets. 

Any financial, security or operational difficulties experienced by such exchanges may result in an inability of the Account to recover fiat currency or Digital Assets being held by the exchange. Further, the Account may be unable to recover Digital Assets awaiting transmission into or out of the Account, all of which could adversely affect an investment in the Account. Additionally, to the extent that the Digital Asset exchanges representing a substantial portion of the volume in Digital Assets trading are involved in fraud or experience security failures or other operational issues, such Digital Assets exchanges’ failures may result in loss or less favorable prices of Digital Assets or may adversely affect the Account’s investments. These disruptions in the Digital Asset markets have also negatively impacted the liquidity of Digital Assets because certain entities affiliated with defunct exchanges historically engaged in significant trading activity but have now curtailed operations. A lack of stability in the Digital Asset exchange market and the closure or temporary shutdown of Digital Asset exchanges due to insolvency, business failure, hackers or malware, government-mandated regulation, or fraud, undermines confidence in Digital Asset networks and may result in continued significant volatility in Digital Asset prices. 

In any insolvency proceeding involving Digital Assets, courts and/or administrators as applicable, will face numerous questions of first impression regarding how to treat various portfolio investments in the Digital Asset exchanges. There are numerous Digital Asset exchanges, and each is formed and set up under different legal regimes and with different contractual custodial commitments and obligations to their customers. Depending on the precise nature of such customer relationships, Digital Assets held in a Digital Asset exchange may or may not be considered to be the property of a bankruptcy estate. Even if Digital Asset exchanges are required by applicable law or contractual obligations to keep customer assets isolated and segregated, due to limited oversight, even with diligence, it is often hard to confirm a specific Digital Asset exchange’s level of compliance and there is significant risk those exchanges will not comply with these contractual or legal custodial commitments. Accordingly, customers who have Digital Assets purportedly held in custody by a Digital Asset exchange could be treated as general unsecured creditors and ultimately recover little or nothing after more senior creditors are satisfied in a subsequent insolvency proceeding. Even if Digital Assets held in custody by Digital Asset exchanges are deemed to be customer property and not property of the bankruptcy estate, there may be a significant delay in a Digital Asset exchange returning investors’ property whereby the passage of time and decline in value of the Digital Asset prevents the Account from properly exiting an investment position. Such Digital Assets, even if deemed customer property, could have also been improperly commingled with other assets and diminished during such commingling, which could lead to a reduced recovery for customers.

There are no clear laws on how Digital Assets should be treated in bankruptcy. In addition to the threshold question of whether an exchange’s holdings of Digital Assets could be deemed property of the estate, novel issues of whether to classify Digital Assets as securities, commodities, currencies or something else could have a material effect on the applicability of safe harbor defenses to protect against potential avoidance actions by debtors. Relatedly, Digital Asset transactions involving smart contracts create complications for determining the applicable transfer date for clawback actions because they are self-executing. The applicable transfer date can change how Digital Assets are valued for purposes of avoidance actions, which is of critical importance given how rapidly such Digital Assets can fluctuate in value.

Additionally, to the extent that the Digital Asset exchanges representing a substantial portion of the volume in Digital Asset trading are involved in fraud or experience security failures or other operational issues, such Digital Asset exchanges’ failures may result in losses or less favorable prices of Digital Assets and/or may adversely affect the Account, its operations and investments, or the Client.

The SEC has asserted that certain Digital Asset platforms and products are subject to federal securities laws; however, their status is still the subject of proceedings in the federal courts. As mentioned above, the SEC has charged Binance Holdings Ltd. and its affiliates, with a variety of securities laws violations, including operating an unregistered exchange, and charged Coinbase with operating as an unregistered securities exchange, broker and clearing agency and for the unregistered offer and sale of securities in connection with its staking-as-a-service program.

If additional crypto lending platforms and products are deemed subject to the federal securities laws and regulations, the Account or the Digital Assets exchanges or platforms on which they trade may be required to comply with certain relevant federal securities laws and regulations and associated compliance costs could adversely affect an investment in the Account. To the extent Abra’s trading or lending platform is required to register and be regulated like a traditional regulated exchange, such registration and compliance costs could adversely affect its operations and indirectly, the Account.

Limited Exchanges on Which to Trade Digital Assets

The Account may trade on a limited number of exchanges due to a reduction in the number of exchanges given the increasingly difficult operating and regulatory environment or the actual or perceived counterparty or other risks related to a particular exchange. The SEC’s increased regulatory focus on Digital Asset trading platforms may also adversely impact existing trading platforms, including by further reducing the number of trading platforms if they are forced to shut down. Trading on a limited number of exchanges may result in less favorable prices and decreased liquidity with respect to a particular Digital Asset that the Account expects to trade on exchange. Such limitations could have an adverse effect on the Account and the value of its investments.

Furthermore, the risks relating to the increasingly difficult operating and regulatory environment for Digital Asset trading platforms could similarly have a material adverse impact on the Account’s loans by decreasing the value and liquidity of the Digital Asset collateral securing such loan.

Non-U.S. Operations

Digital Asset exchanges may operate outside of the United States. The Account may have difficulty in successfully pursuing claims in the courts of such countries or enforcing in the courts of such countries a judgment obtained by the Account in another country. In general, certain less developed countries lack fully developed legal systems and bodies of commercial law and practices normally found in countries with more developed market economies. These legal and regulatory risks may adversely affect the Account and its operations and investments.

Risks Related to Digital Asset Service Providers

Several companies and financial institutions provide services related to the buying, selling, payment processing and storing of Digital Assets (i.e., banks, accountants, exchanges, digital wallet providers and payment processors) and the due diligence of exchanges, DAPPs and digital wallet addresses. The Investment Advisor expects the number of service providers to increase as the Networks continue to grow. However, there is no assurance that the Digital Asset market, or the service providers necessary to accommodate it, will continue to support Digital Assets or continue in existence or grow. Further, there is no assurance that the availability of and access to Digital Asset service providers will not be negatively affected by government regulation or supply and demand of Digital Assets. Accordingly, companies or financial institutions that currently support Digital Assets may not do so in the future. In addition, to the extent that a Digital Asset service provider offering due diligence services provides faulty or incomplete information to Investment Adviser, and Investment Adviser relies on such faulty or incomplete information to the Account’s detriment, an investment in the Account may be adversely affected.

Risks Relating to Availability of Banking Services and Other Service Providers 

Due to the regulatory uncertainty and other risks involving Digital Assets, many existing service providers that advise on or facilitate Digital Asset transactions, including banks, could decide not to provide such services to the detriment of existing users (including Investment Adviser) as well as potential new entrants into the market which may face a high entry barrier. Due to substantial uncertainties surrounding compliance with anti-money laundering and other rules, many banks and other established financial institutions do not (or have stopped) processing fiat currencies for Digital Asset transactions, processing wire transfers to or from Digital Asset exchanges, blockchain companies or service providers, or maintaining accounts for persons or entities (including investment funds) that transact or invest in Digital Assets. Several companies that provide Digital Asset-related services have been unable to find banks that are willing to provide bank accounts and banking services. Similarly, several such companies have had their existing bank accounts closed by their banks. Investment advisers including Investment Adviser, or investment funds such as those managed by Investment Adviser, could similarly face such closures. The ability for these companies and investment advisers and funds to find banking partners in the future may be severely limited. All these may negatively affect public perception of Digital Assets or decrease their usefulness.

Anonymity and Illicit Use  

Although Bitcoin transaction details are logged on the Bitcoin blockchain, a buyer or seller of Bitcoin may never know to whom the public key belongs or the true identity of the party with whom it is transacting. Public key addresses are randomized sequences of 27-34 alphanumeric characters that, standing alone, do not provide sufficient information to identify users. 

Transacting with a counterparty making illicit use of Bitcoin could have a material adverse effect on the Fund. On October 2, 2013, the Federal Bureau of Investigation (the “FBI”) seized the domain name for the infamous “Silk Road” website—an online black marketplace for illicit goods and services—and arrested its alleged founder, Ross William Ulbricht. The website operated through multiple systems of strict anonymity and secrecy, using Bitcoin as the exclusive means of payment for illicit goods and services. As part of the raid, the FBI also seized over 26,000 Bitcoin from accounts on Silk Road, which were worth approximately $3.6 million at the time. In November 2020, the U.S. Department of Justice seized more than $1 billion in Bitcoin from an account linked to the Silk Road website.

On January 27, 2014, the CEO of BitInstant (the New York-based Bitcoin exchange service) was arrested on charges of money laundering and operating an unlicensed money transmitting business. On July 24, 2017, FinCEN assessed a $110 million civil money penalty against BTC-e, a/k/a Canton Business Corporation (“BTC-e”), an internet-based and foreign-located digital currency exchange founded in 2011, for failing to register as a Money Services Business and facilitating crimes like drug sales and ransomware attacks. FinCEN also assessed a separate $12 million fine against BTC-e’s owner, Alexander Vinnik. Further, on October 19, 2020, FinCEN assessed a civil money penalty against Larry Dean Harmon, as the primary operator of Helix, for AML program failures, including its facilitation of transactions with darknet marketplaces, ransomware, child exploitation websites, and unregistered money services businesses. See In the Matter of Larry Dean Harmon, Assessment of Civil Money Penalty Number 2020-2 (Oct. 19, 2020).

Further, identifying users can be made even more difficult where a user utilizes a tumbling or mixing services (e.g., Tornado Cash) to further obfuscate transaction details. On August 8, 2022, Tornado Cash—a mixing service operated on the Ethereum blockchain—was added to the Specially Designated Nationals (“SDN”) list because Tornado Cash was deemed to provide services to persons located in North Korea, a sanctioned jurisdiction. See U.S. Dep’t of Treasury, Press Release, U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash (Aug. 8, 2022). In addition, FinCEN has previously notified financial institutions on the importance of practicing constant vigilance in preventing illicit actors from using Digital Assets to evade sanctions. See U.S. Dep’t of Treasury, FinCEN FIN-2022-Alert001, FinCEN Advises Increased Vigilance for Potential Russian Sanctions Evasion Attempts (Mar. 7, 2022).

Counterparty Due Diligence

Given that Digital Assets can be transferred peer-to-peer directly from one individual or entity to another pseudonymously, absent the use of a regulated third party, such as through non-custodial wallets or self-hosted wallets, and that digital wallets can be created almost instantaneously, it is difficult to accurately and effectively conduct transaction counterparty due diligence, transaction monitoring, and sanctions screening related to Digital Asset transactions without the use of blockchain analytics tools, the use of which are being increasingly encouraged or expected by regulators and government authorities. For example, the New York Department of Financial Services issued guidance in April 2022 to all virtual currency business entities that are either licensed under 23 NYCRR Part 200 or charted as a limited purpose trust company under the New York Banking Law on the importance of blockchain analytics to effective policies, processes, and procedures. To the extent such tools identify and/or classify a Digital Asset, a digital wallet, transaction or counterparty as higher risk, or as having direct or indirect exposure to criminal activity or sanctions, either correctly or incorrectly (based on erroneous information or an absence of information), the Account, and/or the Digital Assets invested in by the Account, may be negatively impacted, the Client may be adversely affected and the Account may be unable to pursue its investment objectives.

Regulatory Oversight 

It is possible that government authorities may claim ownership over or ban certain types of DAPPs or that law enforcement agencies (of any or all jurisdictions, foreign or domestic) may take direct or indirect investigative or prosecutorial action related to, among other things, the operation, participation or transacting with DAPPs, resulting in a change to the value of a DAPP (e.g., the closure and seizure of Silk Road and the closure and seizure of www.libertyreserve.com—the domain name for Liberty Reserve—an online, virtual currency payment processor and money transfer system that the U.S. government alleges acted as a financial hub of the cybercrime world). 

In the event that DAPPs were deemed to be “issuers” within the meaning of the Securities Exchange Act 1934, as amended, with respect to any additional yield provided by a DAPP to the Account in the form of such DAPP’s native token, such native tokens could be considered unregistered securities. Such a determination could adversely affect the liquidity and valuation of the Account’s Digital Assets.

There is also a possibility that the activities of a DAPP could be determined to be “investment contracts” under the SEC’s Framework for “Investment Contract” Analysis of Digital Assets. As a result, the DAPP could be forced to shut down, thereby substantially decreasing or eliminating the value of any native tokens generated by the DAPP and held by the Account. Such a determination could have wide-ranging implications for other DAPPs, making it difficult or impossible for the Account to pursue its DeFi-related investment program. The Account does not control the activities of a DAPPs through which it invests. If a DAPP ceases operations or is subject to fines by a regulator, it could materially affect the value of investments in the Account.

Access to Digital Asset Exchanges and DAPPs; Non-U.S. Exchanges

The Account’s DeFi investment strategy may depend on its ability to access Digital Asset exchanges and/or DAPPs, and there are currently very few exchanges and DAPPs through and with which the Account may invest. If exchanges and DAPPs representing any significant portion of the DeFi market were to dissolve, liquidate, become bankrupt or otherwise cease operations or change their business, the Account may be materially impacted.

DeFi models are fairly new, and their compliance with various aspects of regulatory regimes applicable to consumer credit transactions is untested. A federal or state regulator could take a position that a DAPP’s activities (and perhaps the activities of the lenders, borrowers and/or members of such DAPPs) do not comply with applicable law. Further, there is a risk that DAPPs are mandated to comply with AML regulations applicable to money services businesses, as well as jurisdiction-specific lending laws. Any such regulatory action could adversely affect the Account.

In response to increased regulatory oversight, certain Digital Asset exchanges and/or DAPPs have imposed (and may continue to impose) more stringent requirements for investors, in order to qualify to trade on such exchanges. In particular, certain non-U.S. exchanges have recently restricted, or wholly precluded access to U.S.-based investors. To the extent that the Account does not qualify to trade on an exchange and/or DAPP, or in the event an exchange or DAPP through which the Account initially gains access subsequently changes policy and thereby the Account loses access to such exchange or DAPP, the Account’s ability to execute its investment strategy may be compromised. Monitoring and responding to evolving legal and regulatory regimes and exchanges and DAPP access rules will impose administrative burdens on the Account. Detrimental changes to the Account’s ability to access exchanges and DAPPs may impose additional costs on the Account and may delay the acquisition or disposition of investments or Account’s ability to respond in a timely manner to changes in the markets with respect to such investment.

Decrease in DAPP Fees

The Account may earn native tokens through its DeFi strategy as an incentive for it to participate in new DAPPs when demand for the DAPP’s services may be low. However, if the DAPPs through which the Account invests grow and attract more users and trading activity, the yield reward indirectly provided to the Account will decrease. As such, the Account will earn fewer native tokens over time and the overall profitability of the Account’s activities may decrease the longer it continues to provide liquidity to a certain DAPP.

DAPPs Dependent on New Technology

DAPPs are in the rapidly changing fields of blockchain technology and the Digital Assets markets and face special risks. The Account has no control over and limited visibility into future technological developments. The rapid pace of technological development creates the risk that a DAPP’s products and services become obsolete, fail to gain meaningful market share or fall out of favor as more appealing and advanced technologies and products emerge. A DAPP’s intellectual property rights may be subject to legal challenge. Many DAPPs in the DeFi industry, and many companies in the blockchain technology and digital assets space, have limited operating histories. Such DAPPs or companies may be unable to engage and retain sufficient skilled engineering, marketing and management personnel to allow it to maintain its technological edge and develop the corporate infrastructure required to sustain and grow its business and operations. For these and other reasons specific to the decentralized finance and blockchain technology industry, including as related to lending, investments through DAPPs that operate in the blockchain technology industries pose greater risks than those in certain other sectors.

Limited Supply of Investments

The Account will compete with other investors for investment opportunities on DAPPs. Competition for investment opportunities may adversely affect the terms of the investments and may prevent the Account from finding a sufficient number of attractive opportunities to meet its investment objectives.

Lack of Transparency

Although Digital Asset transaction details are logged on the blockchain, a buyer or seller of a certain Digital Asset may never know to whom the public key belongs or the true identity of the party with whom it is transacting. Public key addresses are randomized sequences of 27–34 alphanumeric characters that, standing alone, do not provide sufficient information to identify users. This lack of transparency regarding the true owner of the Digital Asset creates a vulnerability with regard to illicit use of the Digital Asset, including by the DAPP (e.g., to engage in money laundering or in transactions with prohibited persons under applicable sanctions laws). The Account may not be able to confirm the completeness, genuineness or accuracy of such information and data, or the identity or location of counterparties or other DAPP participants, and, in some cases, complete and accurate information is not readily available. 

Scalability Risk

There is a possibility that as additional capital enters any DAPP, the interest rates and potential for returns will diminish, in turn negatively affecting the Account’s returns.

Technology Risk

The software and technology of DAPPs is experimental and new and may, now or in the future, contain undetected bugs or security vulnerabilities. In addition, like digital exchanges, DAPPs are appealing targets for cybercrime, hackers and malware. All of these risks could result in the loss of some or all of the assets held by the Account. 

Oracle Risks and Flash Loan Attacks 

The Account is subject to various risks associated with the oracles upon which DAPPs rely. DAPPs utilize smart contracts to take information in as an input, process that information through the rules defined in the computer code, and then execute certain actions, such as Digital Asset transactions, which are programmed into smart contracts. Oracles send external data to smart contracts (e.g., the price of a given Digital Asset at a point in time), and they are generally used by DAPPs that rely on outside data to function. If one can manipulate the price of a Digital Asset for the oracle upon which a lending DAPP depends, one can exploit that flaw and generate a profit at the direct expense of other users. This phenomenon is often seen in combination with “flash loan attacks”—attacks in which a user abuses the ability to open an uncollateralized loan on the condition that the loan be repaid within the same transaction—and can negatively affect the Account’s returns.

Computer Malware, Viruses, Bugs, Etc.

Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in the industries in which the DAPPs operate, and may occur on DAPPs’ systems or technologies. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of DAPPs’ products and technical infrastructure may harm such DAPPs’ reputations, their ability to retain existing users and attract new users and their results of operations.

DAPPs’ products and internal systems generally rely on software that is highly technical and complex, and DAPPs’ internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. Such software may now or in the future contain undetected errors, bugs or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within such software may result in a negative experience for users and marketers that use DAPPs’ products, delay product introductions or enhancements or result in measurement or billing errors. Any errors, bugs or defects discovered in DAPPs’ software could result in damage to such DAPPs’ reputations, loss of users, loss of revenue or liability for damages, any of which could adversely affect such DAPPs’ business and financial results and could result in significant losses for the Account

Digital Asset Tax Implications

The tax consequences of transactions in Digital Assets could have a substantial impact on the value of the investments of the Account. On March 25, 2014, the Internal Revenue Service (the “Service”) issued a notice regarding the U.S. federal tax implications of transactions in, or transactions that use, virtual currency (the “Notice”). According to the Notice, virtual currency is treated as property, not currency, for U.S. federal tax purposes, and “[g]eneral tax principles applicable to property transactions apply to transactions using virtual currency.”  In part, the Notice provides that the character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. Accordingly, in the U.S., certain transactions in virtual currency are taxable events and subject to information reporting to the Service to the same extent as any other payment made in property.

Additionally, the Service issued revenue rulings regarding certain tax consequences of (i) “hard forks” and “airdrops” of a virtual currency and (ii) “staking” rewards (together, the “Revenue Rulings”). The first Revenue Ruling provides that a taxpayer does not have gross income as a result of a hard fork of a virtual currency the taxpayer owns if the taxpayer does not receive units of a new virtual currency. However, an airdrop of a new virtual currency following a hard fork generally results in ordinary income to the taxpayer if the taxpayer receives units of new virtual currency. Furthermore, under the second Revenue Ruling, additional units of virtual currency received as validation rewards from “staking” activities generally are also included as ordinary income to the taxpayer at the time such rewards are received.

Although the Service has issued the Notice and Revenue Rulings, the U.S. Department of Treasury and the Service may publish future guidance that provides for adverse tax consequences to the Account and the Client. The Client should be aware that tax laws and Regulations change on an ongoing basis, and that they may be changed with retroactive effect. Moreover, the interpretation and application of tax laws and Regulations by certain tax authorities may not be clear, consistent or transparent. As a result, the U.S. federal tax consequences of investing in the Account are uncertain including on any historical realized or unrealized gains (including those tax liabilities that are imposed with retroactive effect). Accounting standards may also change, creating an obligation for the Account and the Client to accrue for a tax liability that was not previously required to be accrued for or in situations where it is not expected that the Account will directly or indirectly be ultimately subject to such tax liability.

Additionally, application of tax laws and Regulations may result in increased, ongoing costs, or accounting related expenses, adversely affecting an investment in the Account. Also, outside the U.S. the tax rules applicable to Digital Assets are uncertain. Accordingly, the costs or tax consequences to the Client or the Account could differ from the Client’s expectations.

Risks Relating to Market Conditions Generally

General Economic and Market Conditions

The success of the Account’s activities will be affected by general economic and market conditions such as interest rates, availability of credit, credit defaults, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation of the Account’s investments), trade barriers, currency exchange controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect the level and volatility of the prices and the liquidity of the Account’s investments. Volatility or illiquidity could impair the value of investments or result in losses. The Account may maintain substantial trading positions that can be adversely affected by the level of volatility in the financial markets.

Governmental Interventions

Extreme volatility and illiquidity in markets has in the past led to, and may in the future lead to, extensive governmental interventions in equity, credit and currency markets, and it is possible that similar interventions may occur in the market(s) for cryptocurrency. Generally, such interventions are intended to reduce volatility and precipitous drops in value. In certain cases, governments have intervened on an “emergency” basis, suddenly and substantially eliminating market participants’ ability to continue to implement certain strategies or manage the risk of their outstanding positions. In addition, typically these interventions have been unclear in scope and application, resulting in uncertainty. It is impossible to predict when these restrictions will be imposed, what the interim or permanent restrictions will be and/or the effect of such restrictions on the Account’s strategies.

MiFID II 

The package of European Union market infrastructure reforms known as “MiFID II” increased regulation of trading platforms and firms providing investment services in the European Union. Among its many market infrastructure reforms, MiFID II brought in: (i) significant changes to pre- and post-trade transparency obligations applicable to financial instruments admitted to trading on EU trading venues (including a new transparency regime for non-equity financial instruments); (ii) an obligation to execute transactions in shares and derivatives on an EU-regulated trading venue and (iii) a new focus on regulation of algorithmic and high-frequency trading. These reforms may lead to a reduction in liquidity in certain financial instruments over time, as some of the sources of liquidity exit European markets, and may result in significant increases in transaction costs.

Sanctions

The Account may become subject to economic sanctions laws and regulations of various jurisdictions. At any given time, whether under applicable law, by contractual commitment or as a voluntary risk management measure, the Account may be required or elect to comply with various sanctions programs, including the Specially Designated Nationals and Blocked Persons List and Sectoral Sanctions programs administered by OFAC, the sanctions regimes administered by subsidiary organs of the United Nations Security Council, the Sanctions Orders of the Cayman Islands (including as extended to the Cayman Islands by Order of the government of the United Kingdom from time to time) and the Restrictive Measures adopted by the European Union. Some sanctions that may apply to the Account prohibit or restrict dealings with identified persons. Other potentially applicable sanctions programs broadly prohibit or restrict dealings in certain countries or territories or with individuals and entities located in such countries or territories. In addition to such current sanctions, additional sanctions may be imposed in the future. Such sanctions may be imposed with little or no advance warning or “safe harbor” for compliance and may be ambiguous, including as to the scope of financial activities that regulators may ultimately deem to be covered by the sanctions. 

Sanctions may negatively impact the Account’s ability to effectively implement its investment strategy and have a material adverse impact on the Account’s investment program. Sanctions may adversely affect the Account in various ways, including by preventing or inhibiting the Account or Investment Adviser on the Account’s behalf, from making certain investments, forcing the Account to divest from investments previously made and leading to substantial reductions in the revenues, profits and value of companies in which such account has invested. Investment Adviser and the Account may be subject to heightened or targeted regulatory scrutiny and information requests as a result of such sanctions. In addition, if the Account or Investment Adviser were to violate or be deemed in violation of any such sanction, it could face significant legal and monetary penalties. Depending on the scope and duration of a particular sanctions program, compliance by the Account may result in a material adverse effect on the Account and the Client’s investment therein. 

Assumption of Catastrophe Risks

The Account may be subject to the risk of loss arising from direct or indirect exposure to various catastrophic events, including the following: hurricanes, earthquakes and other natural disasters; war, terrorism and other armed conflicts; cyberterrorism; major or prolonged power outages or network interruptions; and public health crises, including infectious disease outbreaks, epidemics and pandemics. To the extent that any such event occurs and has a material effect on global financial markets or specific markets or issuers in which the Account invests (or has a material negative impact on the operations of Investment Adviser or the Service Providers), the risks of loss can be substantial and could have a material adverse effect on the Account and the Client’s investments therein. 

The foregoing list of risk factors does not purport to be a complete enumeration or explanation of the risks involved in an investment in the Account.  The Client should read this entire Investment Manager Agreement and Investment Adviser’s Form ADV, Part 2 (https://adviserinfo.sec.gov/firm/summary/323353), and consult with their own advisors before deciding whether to invest in the Account. In addition, an investment in the Account may be subject to additional and different risk factors over time. No assurance can be made that profits will be achieved or that substantial losses will not be incurred.