Fidelity Ethereum Fund (FETH) risk factors, FY2025 10-K

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1. 01Risk Factors Related to Digital Assets
2. 02Digital assets such as ether are a relatively new asset class, and the medium-to-long term value of the Shares is subject to a number of factors relating to the capabilities and development of blockchain technologies and to the fundamental investment characteristics of digital assets
3. 03Blockchains are dependent upon the internet. A disruption of the internet or a digital asset network, such as the Ethereum network, could affect the ability to transfer digital assets, including ether, and, consequently, their value
4. 04Digital assets represent a new and rapidly evolving industry, and the value of the Shares depends on the acceptance of ether
5. 05Recent developments in the digital asset economy have led to extreme volatility and disruption in digital asset markets, a loss of confidence in participants of the digital asset ecosystem, significant negative publicity surrounding digital assets broadly and market-wide declines in liquidity
6. 06These events are continuing to develop at a rapid pace and it is not possible to predict at this time all of the risks that they may pose to the Sponsor, the Trust, their affiliates and/or the Trust’s third-party service providers, or to the digital asset industry as a whole
7. 07Digital assets may have concentrated ownership and large sales or distributions by holders of such digital assets could have an adverse effect on the market price of such digital assets
8. 08It may be illegal now, or in the future, to acquire, own, hold, sell or use digital assets in one or more countries
9. 09The Ethereum network and its native digital asset, ether, are a relatively new technological innovation with a limited operating history
10. 10Changes in the governance of a digital asset network may not receive sufficient support from users and validators, which may negatively affect that digital asset network’s ability to grow and respond to challenges
11. 11Digital asset networks face significant scaling challenges and efforts to increase the volume and speed of transactions may not be successful
12. 12“>66% attack” where, if a validator or group of validators acting in concert were to gain control of more than 66% of the staked ether, a malicious actor could permanently and irreversibly manipulate the blockchain
13. 13Any name change and any associated rebranding initiative by the core developers of ether may not be favorably received by the digital asset community, which could negatively impact the value of ether and the value of the Shares
14. 14Validators may suffer losses due to staking, which could make the Ethereum network less attractive
15. 15Proof-of-stake blockchains are a relatively recent innovation and have not been subject to as widespread use or adoption over as long of a period of time as proof-of-work blockchains
16. 16Centralization concerns around a single person or entity controlling a large percentage of the validating stake
17. 17Irrevocable nature of blockchain-recorded transactions
18. 18The loss or destruction of a private key required to access ether may be irreversible
19. 19A disruption of the internet may affect Ethereum network operations, which may adversely affect the ether industry and an investment in the Trust
20. 20Potential amendments to the Ethereum network’s protocols and software could, if accepted and authorized by the Ethereum network community, adversely affect an investment in the Trust
21. 21Decentralized governance of the Ethereum network could have a negative impact on the performance of the Trust
22. 22A temporary or permanent “fork” could adversely affect the value of the Shares
23. 23Malicious actors may “double spend” ether by altering the formation of the blockchain
24. 24Flaws in source code for digital asset networks could adversely affect the value of ether and other digital assets
25. 25Mathematical or technological advances could undermine the Ethereum network’s consensus mechanism
26. 26Competition from central bank digital currencies (“CBDCs”) could adversely affect the value of ether and other digital assets
27. 27Prices of ether may be affected by stablecoins, the activities of stablecoin issuers and their regulatory treatment
28. 28Competition from the emergence or growth of other digital assets or methods of investing in ether could have a negative impact on the price of ether and adversely affect the value of the Shares
29. 29Large-scale sales or distributions could significantly reduce the price of ether and adversely affect the value of the Shares
30. 30Congestion or delay in the Ethereum network may delay purchases, sales or transfers of ether by the Trust
31. 31If the digital asset award or transaction fees for recording transactions on the Ethereum network are not sufficiently high to incentivize validators may demand high transaction fees, which could negatively impact the value of ether and the value of the Shares
32. 32If the Ethereum network is used to facilitate illicit activities or evade sanctions, businesses that facilitate transactions in ether could be at increased risk of criminal or civil lawsuits, or of having services cut off, which could negatively affect the price of ether and the value of the Shares
33. 33The Trust and the Sponsor, acting on behalf of the Trust, directly interact with (i) parties that are themselves subject to AML program requirements under the Bank Secrecy Act or similar laws (i.e., Authorized Participants and/or financial institution counterparties) and/or (ii) Authorized Participant Designees
34. 34Investment-Related Risks
35. 35The NAV may not always correspond to the market price of ether
36. 36Different from directly owning ether
37. 37The value of the Shares may be influenced by a variety of factors unrelated to the value of ether
38. 38An Authorized Participant’s, or its Authorized Participant Designee’s, buying and selling activity associated with the creation and redemption of Baskets may adversely affect an investment in the Shares
39. 39The inability of Authorized Participants and market makers to hedge their ether exposure may adversely affect the liquidity of Shares and the value of an investment in the Shares
40. 40Arbitrage transactions intended to keep the price of Shares closely linked to the price of ether may be problematic if the process for the creation and redemption of Baskets encounters difficulties, which may adversely affect an investment in the Shares
41. 41The Authorized Participants serve in such capacity for several competing exchange-traded ether products, which could adversely affect the Trust’s operations and the secondary market for the Shares
42. 42Security threats and cyber-attacks could result in the halting of Trust operations and a loss of Trust assets or damage to the reputation of the Trust, each of which could result in a reduction in the price of the Shares
43. 43The Trust’s risk management processes and policies may prove to not be adequate to prevent any loss of the Trust’s ether
44. 44The Trust’s Custodian could become insolvent or become subject to a receivership or bankruptcy proceeding, which may result in a loss of or delay in access to Trust assets
45. 45Loss of a critical banking relationship for, or the failure of a bank used by, the Trust could adversely impact the Trust’s ability to create or redeem Baskets, or could cause losses to the Trust
46. 46The Trust is subject to risks due to its concentration of investments in a single asset class
47. 47The lack of active trading markets for the Shares may result in losses on Shareholders’ investments at the time of disposition of Shares
48. 48Several factors may affect the Trust’s ability to achieve its investment objective on a consistent basis
49. 49The amount of ether represented by the Shares will decline over time
50. 50Shareholders should be aware that the gradual decline in the amount of ether represented by the Shares will occur regardless of whether the trading price of the Shares rises or falls in response to changes in the price of ether
51. 51The Sponsor may need to find and appoint a replacement custodian quickly, which could pose a challenge to the safekeeping of the Trust’s ether
52. 52The value of the Shares will be adversely affected if the Trust is required to indemnify the Sponsor, the Trustee, the Transfer Agent or the Custodian
53. 53Intellectual property rights claims may adversely affect the Trust and the value of the Shares
54. 54The Sponsor’s policies and procedures may not fully mitigate the risk of conflicts of interest
55. 55Risks Associated with the Index and Index Pricing

Risks related to pricing

1. 56As set forth under “Item 1. Business — Calculation of Net Asset Value”, the Trust’s portfolio will be priced, including for purposes of determining the NAV, based upon the VWMP of ether used for the calculation of the Index as of the time of such valuation
2. 57Shareholders also should note that the size of the Trust in terms of total ether held may change substantially over time and as Baskets are created and redeemed

Regulatory Risk

1. 58Shareholders do not have the protections associated with ownership of shares in an investment company registered under the 1940 Act or commodity pools under the Commodity Exchange Act
2. 59The Trust is not registered as an investment company under the 1940 Act, and the Sponsor believes that the Trust is not permitted or required to register under such act. Consequently, Shareholders do not have the regulatory protections provided to investors in investment companies
3. 60Future and current regulations by a United States or foreign government or quasi-governmental agencies could have an adverse effect on an investment in the Trust
4. 61Future regulations may require the Trust or the Sponsor to become registered, which may cause the Trust to liquidate

Tax Risk

1. 62The ongoing activities of the Trust may generate tax liabilities for Shareholders
2. 63The tax treatment of ether and transactions involving ether for United States federal income tax purposes may change
3. 64The tax treatment of ether and transactions involving ether for state and local tax purposes is not settled
4. 65A hard “fork” of the Ethereum Blockchain could result in Shareholders incurring a tax liability
5. 66The intended tax treatment of the Trust will limit the flexibility of the Trust’s investment decisions

Other Risks

1. 67The Exchange on which the Shares are listed may halt trading in the Trust’s Shares, which would adversely impact a Shareholder’s ability to sell Shares
2. 68The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants, which could adversely affect the market price of the Shares
3. 69The market infrastructure of the ether spot market could result in the absence of active Authorized Participants able to support the trading activity of the Trust
4. 70Shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect Shareholders’ investment in the Shares
5. 71The Sponsor relies heavily on key personnel
6. 72Shareholders have no right or power to take part in the management of the Trust. Accordingly, no investor should purchase Shares unless such investor is willing to entrust all aspects of the management of the Trust to the Trustee and the Sponsor
7. 73The Trust is new, and if it is not profitable, the Trust may terminate and liquidate at a time that is disadvantageous to Shareholders
8. 74Shareholders do not have the rights enjoyed by investors in certain other vehicles and may be adversely affected by a lack of statutory rights and by limited voting and distribution rights
9. 75Shareholders may be adversely affected by creation or redemption orders that are subject to postponement, suspension or rejection under certain circumstances
10. 76Shareholders may be adversely affected by an overstatement or understatement of the NAV calculation of the Trust due to the valuation methodology employed on the date of the NAV calculation
11. 77The Trust Agreement includes provisions that limit Shareholders’ voting rights and restrict Shareholders’ right to bring a derivative action