BlackRock recently filed an updated S-1 form for its proposed Bitcoin exchange-traded fund (ETF), the iShares Bitcoin Trust, revealing seed funding of $100,000.
In total, the company made 21 notable amendments on Dec. 4 to address various factors related to the Trust’s structure, operations, risks, and disclosures. These changes reflect BlackRock’s efforts to enhance the robustness of its offering and provide clarity to potential investors on issues like security, valuation, regulatory compliance, and risk management.
The amendments span critical topics such as custody arrangements, valuation policies, principal market determinations, indicative pricing, fork handling procedures, liability limitations, risk disclosures, and cash management protocols. They aim to fortify security measures for private keys and Bitcoin holdings, ensure reliable and transparent valuations, streamline operational processes between key entities like the Bitcoin Custodian and Prime Broker, and delineate contingency plans for disruptive events.
Additionally, the filing provides more details on regulatory considerations in major jurisdictions like the UK and EU, underscoring the complex and shifting landscape that Bitcoin ETFs must navigate. It also includes illustrative examples of potential regulatory impacts, like the SEC’s action against Ripple’s XRP token, to demonstrate tangible consequences for the cryptocurrency space.
Through these targeted updates, BlackRock seeks to demonstrate its commitment to creating a robust, compliant, and investor-friendly Bitcoin ETF product. The additional disclosures offer clarity into the risk management philosophy and governance standards that would underpin the Trust. However, the unpredictability of new regulations and Bitcoin’s inherent volatility remain key variables for this pioneering ETF attempt.
Below is a breakdown of the 21 major changes to the BlackRock ETF filing made on Dec. 4:
| Amendment | Amendment Summary |
|---|---|
| 1 | Details filled in regarding Seed Capital Investor’s initial $100,000 purchase of 4,000 Shares at $25 per share. Seed Shares will be later redeemed for cash, followed by additional undisclosed purchases forming Seed Creation Baskets. |
| 2 | Sponsor’s Fee may currently not be waived, but BlackRock pledges to notify shareholders of any future fee waivers. |
| 3 | All private keys the Bitcoin Custodian holds will now be kept in cold storage rather than a mix of hot and cold. |
| 4 | Trust’s Prime Broker Trading Balance holdings represent proportional claims on aggregate assets, not specific bitcoins. The majority are kept in cold storage. |
| 5 | It expanded specifics on scenarios that could trigger the suspension of Trust share transactions, including issues with key service providers. |
| 6 | Market conditions could make other Bitcoin investments more appealing than Trust Shares, reducing demand/liquidity. |
| 7 | Defined “PB Mutually Capped Liabilities,” outlining Prime Broker liability limits in additional situations like negligence. |
| 8 | Expanded uncertainties around digital asset regulations to include timing and potential legislation changes. |
| 9 | Added SEC action against XRP issuer as an example of potential consequences of Bitcoin being classified as a security. |
| 10 | It highlighted emerging UK and EU regulations and unpredictable global events that could impact digital asset prices. |
| 11 | Enhanced AML and sanctions compliance procedures, but the risk remains of inaccuracy from Market Makers. |
| 12 | Streamlined Bitcoin custody to all cold storage with Bitcoin Custodian, clarified relationship with Prime Broker. |
| 13 | Adopted a new valuation policy aligned with accounting standards to identify the principal Bitcoin market. Will feature a range of new data on the website. |
| 14 | Formalized rigorous criteria for selecting Bitcoin exchanges included in the CF Benchmarks Index. |
| 15 | Introduced Intraday Indicative Value (IIV) calculation for shareholder transparency on timely trust value changes. |
| 16 | Clarified legal protections and succession planning for separate trustees. |
| 17 | Shift to exclusive use of cold storage for all private keys associated with Trust’s Bitcoin. |
| 18 | Streamlined explanation of cold storage protocols for private keys, focusing on security measures. |
| 19 | Detailed procedures around blockchain forks and termination policies for the Custodian Agreement. |
| 20 | Specified limited purposes for which Trust assets may be held with Prime Broker. Outlined storage methods and cash management. |
| 21 | Changes around Trade Credit Lender operations and risks, including Bitcoin sales protocol if Trade Credits are unavailable. |
Seed Capital Investor Purchase Details Disclosed
The changes made in the amendment to the S-1 form detail the specifics of BlackRock Financial Management’s (the Seed Capital Investor) initial purchase. The previously undisclosed details have now been filled in. On Oct. 27, the Seed Capital Investor bought $100,000 in Shares, receiving 4,000 Shares at a per-share price of $25.00. These are referred to as the “Seed Shares”.
The amendment then introduces a new process: the Seed Shares will be redeemed for cash on an unspecified date. After this redemption, the Seed Capital Investor will purchase an undisclosed number of Shares at an unknown per-share price. These will form the “Seed Creation Baskets.” The date of delivery for these Seed Creation Baskets, the Bitcoin price used for this transaction, the corresponding price per share, and the CF Benchmarks Index are yet to be provided.
As of the date of this prospectus, the number of Shares representing the Seed Creation Baskets also remains undisclosed. The amendment maintains that the Seed Capital Investor may offer all Shares that make up the Seed Creation Baskets to the public under this prospectus.
Sponsor Fee Waivers: Notification Commitment
BlackRock has now clarified the Sponsor’s Fee for the iShares Bitcoin Trust. Initially, the document stated that the fee, calculated daily as a percentage of the Trust’s net asset value, could be waived partially or entirely at the Sponsor’s discretion. However, the updated filing adds that BlackRock has not elected to waive any part of this fee as of the date of the prospectus. Moreover, it specifies that there are no predetermined conditions under which they would consider waiving the fee in the future.
Notably, the amendment introduces a commitment to transparency regarding any potential fee waivers. Should BlackRock decide to waive all or part of the Sponsor’s Fee, they pledge to notify shareholders through either a prospectus supplement or an announcement on the Trust’s website. This change underscores a commitment to clear and open communication with investors regarding fee structures, a crucial aspect for those considering investment in the iShares Bitcoin Trust.
Enhanced Security: All Private Keys Now Kept in Cold Storage
BlackRock made an amendment involving a change in how the Bitcoin Custodian will handle the private keys associated with the Trust’s Bitcoin holdings. Initially, the plan was to store a substantial portion of these keys in ‘cold storage’—an offline, more secure method—and keep the remainder in ‘hot storage,’ which is connected to the internet and less secure.
However, the revised plan now states that all of the private keys held by the Bitcoin Custodian will be kept in cold storage. This adjustment emphasizes a more substantial commitment to security, as cold storage is generally considered more resistant to hacking and cyberattacks than hot storage. This change reflects an effort to enhance the safety and integrity of the Trust’s Bitcoin holdings.
Nature of Trust’s Prime Broker Holdings Clarified
An amendment was made pertaining to the handling of the Trust’s Bitcoin and cash holdings by the Prime Broker. Initially, it was stated that a portion of the Trust’s Bitcoin and cash would be held with the Prime Broker in the Trading Balance for specific operational purposes. These holdings were described as having an omnibus claim on the Prime Broker’s Bitcoin, stored across various wallets or trading venue accounts.
The revised text modifies this arrangement by clarifying that the Trust’s holdings in the Trading Balance do not correspond to a claim on any specific Bitcoin or cash. Instead, the Trust’s holdings represent a right to a proportional share of the Bitcoin and cash that the Prime Broker holds for all customers with similar claims. This means the Trust has an omnibus claim on a pool of assets held by the Prime Broker, not on specific, identifiable assets.
Additionally, the amendment provides more detail on how the Prime Broker manages these assets. Most are kept in cold wallets for security, with the remainder in hot wallets to facilitate quick transactions. However, the exact distribution between cold and hot storage is not disclosed to the Trust for security reasons. The Prime Broker dynamically manages this distribution based on ongoing risk analysis and market conditions, balancing customer liquidity needs against the security benefits of cold storage. This change adds more transparency about the risk management and security protocols employed by the Prime Broker in handling the Trust’s assets.
Expanded Disclosures on Potential Transaction Suspensions
A further amendment addresses the conditions under which the Trustee may suspend transactions related to the Trust’s shares. Initially, the document stated that the Trustee, under the direction of the Sponsor, could suspend the acceptance of purchase orders, transfers of shares, or the right to surrender shares. This suspension could occur during periods when the transfer books are closed, when NASDAQ trading is suspended or restricted, or when the Sponsor deems it advisable for any reason, including if the delivery, disposal, or evaluation of Bitcoin is not reasonably practicable.
The revised text expands on the scenarios that could make the delivery, disposal, or evaluation of Bitcoin not reasonably practicable. It now includes specific examples of events that could trigger such a suspension. These events encompass a broad range of potential disruptions, such as service interruptions from key providers like the Prime Broker or Bitcoin Custodian, natural disasters, civil disturbances, government prohibitions, acts of war or terrorism, strikes, technical failures, significant network issues (including those related to the Bitcoin network), and cybersecurity breaches. This change adds clarity and specificity to the circumstances under which the Trust may pause operations, providing a more detailed understanding for investors about the risks and operational contingencies associated with the Trust.
Market Conditions Could Reduce Demand for Trust Shares
BlackRock amended its assessment of the various ways investors can invest in Bitcoin and the potential impact on the Trust’s Shares. Initially, the text acknowledged that apart from investing in the Trust’s Shares, investors have other options like direct Bitcoin investments, securities backed by or linked to Bitcoin, digital asset financial vehicles similar to the Trust, and Bitcoin futures-based products. It also mentioned that the existence and activities of other digital asset financial vehicles could impact the Trust’s performance.
The revised section adds a new consideration: market and financial conditions and other factors beyond the Sponsor’s control could make other investment vehicles or direct Bitcoin investments more appealing than the Trust’s Shares. This change highlights the potential for decreased market demand and reduced liquidity for the Trust’s Shares if investors find other investment options more attractive due to varying market conditions or other external factors. This addition provides a broader context for understanding the competitive environment in which the Trust operates and the potential risks to its market appeal and liquidity in light of the amendments made to how the Trust will handle network forks (outlined below.)
Outlining Additional Prime Broker Liability Limits
The Prime Broker’s liability limitations under the Prime Broker Agreement were also amended. Initially, the document outlined that, except for specific scenarios like claims and losses from spot trading of Bitcoin or due to fraud or willful misconduct, the Prime Broker’s liability was capped at the greater of $5 million or the fees paid by the Trust to the Prime Broker in the 12 months preceding the event causing liability, or the value of the affected cash or Bitcoin.
The revised text introduces the concept of “PB Mutually Capped Liabilities,” which extends the circumstances under which the Prime Broker’s liability is limited. This now includes situations involving the Prime Broker’s gross negligence, violation of confidentiality, data protection and/or information security obligations, and breach of laws, rules, or regulations related to service provision. The liability limit in these cases remains the same, as previously stated.
Additionally, the amendment clarifies that the Prime Broker’s liability in indemnifying the Trust and its affiliates against third-party claims and losses, specifically those arising from these newly defined PB Mutually Capped Liabilities, is also capped at the greater of $5 million or the aggregate fees paid by the Trust in the previous 12 months.
This change provides more specific details on the scope of the Prime Broker’s liability, particularly in cases of negligence, confidentiality breaches, and regulatory violations, thereby offering a clearer understanding of the risk mitigation measures for the Trust.
Broadened Scope of Regulatory Uncertainty Considerations
BlackRock has also revised the statement concerning potential regulatory changes and their impact on digital assets, including Bitcoin.
Initially, the document expressed uncertainty about if and how Congress might grant more authority to the SEC or other regulators, emphasizing the unpredictability of the nature of such potential authorities. It highlighted the potential impact on the functionality of digital asset markets and the value of digital assets, including those held by the Trust.
The revised statement expands on this uncertainty. It now includes considerations about the timing of potential regulatory changes and acknowledges the possibility of new legislation or increased regulatory oversight. This change underscores the possible effects of not just new regulations but also changes to existing ones on the digital asset markets’ functionality and the value of digital assets, specifically Bitcoin, held by the Trust. The statement maintains its original caution about the material adverse effects that increased federal regulation of digital assets and related activities could have on the Trust and its shares.
In summary, the amendment broadens the scope of regulatory uncertainties, encompassing the timing of potential changes, the introduction of new legislation or adjustments to existing regulations, and their broader impacts on the digital asset markets and the Trust’s holdings.
SEC v Ripple Example Highlights Regulatory Risks
BlackRock has updated the language regarding potential regulatory changes and their impact on the iShares Bitcoin Trust. Previously, the document stated that if the SEC or a federal court classified Bitcoin as a security, it could lead to a significant value decline in the Trust’s shares and possibly result in the termination and liquidation of the Trust.
The revised text now includes a specific reference to the SEC’s action against the XRP (Ripple) issuer as an illustrative example. This addition highlights how significant market participants reacted to the SEC’s allegation of XRP being a security, including delisting XRP from major digital asset trading platforms. It further notes that the Sponsor of the Grayscale XRP Trust responded by dissolving the Trust and liquidating its assets.
By incorporating this example, BlackRock aims to provide a clearer understanding of the potential consequences if Bitcoin were similarly classified as a security. This change emphasizes the practical implications of such regulatory decisions, demonstrating how they can directly affect digital asset trusts and their stakeholders.
Spotlight on Emerging UK, EU Rules and Global Events
There has been an update in the section detailing the global regulatory environment for digital assets. This update includes new developments in the United Kingdom and the European Union.
The amendment now mentions the Financial Services and Markets Bill (FSMB) in the United Kingdom. This bill, which has passed through the House of Commons and the filing states it is expected to become law in 2023, is set to bring digital asset activities under the existing legal framework governing financial institutions, markets, and assets. This move represents a significant step towards formalizing the status of digital assets within the UK’s financial system.
Furthermore, the amendment highlights the approval of the text of Markets in Crypto-Assets (MiCA) by the European Council of the European Union in Oct. 2022. MiCA is a comprehensive regulatory framework for digital asset services across the EU aimed at regulating the industry, protecting consumers, preventing market abuse, and maintaining the integrity of digital asset markets. The filing states that it is expected to pass the European Parliament in 2023 and come into effect in 2024. However, the bill has already been passed, according to the most recent data from the EU Parliament. MiCA underscores a significant regulatory development in the European Union’s approach to digital assets.
Additionally, the amendment includes a note on other events that could negatively impact the digital asset economy, such as cyber-related terrorist acts, civil disturbances, wars, or other catastrophic events. Specifically, it references the impact of Russia’s invasion of Ukraine on Feb. 24, 2022, on digital asset prices, which experienced a steep decline followed by a sharp rebound.
These updates in the amendment reflect the evolving and increasingly complex global regulatory landscape for digital assets, indicating potential impacts on the acceptance, growth, and sustainability of the digital asset economy worldwide. The amendment also acknowledges the unpredictability of future regulatory changes or events and their potential substantial and adverse effects on the Trust and the value of its Shares.
Stricter AML/Sanctions Compliance, Ongoing Data Risks
BlackRock has amended its approach to managing anonymity and illicit financing risks in its Bitcoin transactions. The amendments reflect a more comprehensive and stringent set of procedures to comply with anti-money laundering and sanctions laws.
Previously, the Trust relied on the Prime Broker to conduct sanctions screening on Bitcoin transactions. If any transaction were suspected of violating sanctions laws, the Prime Broker would block or reject the deposit and inform the Trust. However, the effectiveness of these measures was not guaranteed, and there was a risk that the Prime Broker might not always fulfill its obligations.
Under the new amendments, the Trust and BlackRock’s affiliates have adopted policies and procedures to ensure compliance with anti-money laundering and sanctions laws. This includes a thorough Know Your Customer (KYC) process. The Trust now mandates that BlackRock must onboard each Authorized Participant and Market Maker before they can place orders, ensuring a comprehensive due diligence process.
Authorized Participants and Market Makers are recognized as financial institutions under U.S. law, subjecting them to the Bank Secrecy Act and U.S. economic sanctions laws. They must represent to the Trust that their compliance programs align with these laws. Moreover, Market Makers are required to conduct due diligence on the origins of the Bitcoin they transfer to the Trust, ensuring they are not associated with unlawful activities.
The Prime Broker and Bitcoin Custodian have also implemented anti-money laundering and sanctions compliance programs. The Prime Broker uses blockchain analytics to screen Bitcoin transactions, identifying risks of transacting with unlawful actors. This screening process includes assessing the origins of the Bitcoin for illicit activities.
While these new procedures represent a significant enhancement in risk management, the Trust acknowledges that there’s no absolute guarantee of their effectiveness. There remains a risk that the Market Makers may not conduct sufficient due diligence, or their representations may be inaccurate. In such cases, the Trust could face regulatory liabilities, including fines, penalties, or cessation of services by the Prime Broker and its affiliates, which could negatively impact the Trust and its shareholders.
Streamlined Custody Arrangement with Bitcoin Custodian
BlackRock has made notable changes to how it handles the custody and security of its Bitcoin holdings.
Previously, the Trust’s Bitcoin was maintained in a mix of “Cold Vault Balance” and “Hot Vault Balance” by the Bitcoin Custodian, with a substantial portion kept in cold storage for security reasons. Additionally, some of the Trust’s Bitcoin and cash holdings were managed by the Prime Broker, an affiliate of the Bitcoin Custodian, for various operational purposes.
The revised filing introduces a more streamlined approach. Now, all of the private keys associated with the Trust’s Bitcoin held by the Bitcoin Custodian will be stored in cold storage. This change indicates a heightened focus on safeguarding assets against potential cyber threats.
Furthermore, the amendment clarifies the relationship with Coinbase, Inc., now explicitly named the “Prime Broker” in this section. This relationship is significant for handling in-kind creations and redemptions of Baskets and managing the Trust’s assets for operational expenses. The Trust’s holdings with the Prime Broker, known as the “Trading Balance,” do not correspond to specific Bitcoins or cash but represent a proportional claim on the aggregate Bitcoin and cash held by the Prime Broker for its clients.
In managing these assets, the Prime Broker utilizes a mix of cold and hot wallets, with a majority reportedly kept in cold storage to enhance security. The Prime Broker determines the exact distribution between cold and hot storage based on ongoing risk assessments and market dynamics, aiming to balance security with liquidity needs.
These changes indicate a strategic shift towards enhanced security and transparency in managing the Trust’s Bitcoin holdings, aligning with broader industry trends towards greater asset protection and clarity in operational processes.
New Valuation Policy Geared Towards Accounting Standards
BlackRock’s iShares Bitcoin Trust has made significant changes to how the net asset value (NAV) of the Trust is determined and reported. These changes enhance the robustness and reliability of the valuation process for the Trust’s Bitcoin holdings.
- Index Valuation and Fair Value Event: Previously, the Trust Administrator valued the Trust’s Bitcoin based on the CF Benchmarks Index, with the Sponsor’s discretion to change this if necessary. Now, the Sponsor can also intervene if the CF Benchmarks Index is deemed unreliable, a situation termed a “Fair Value Event.” In such events, the Trust’s Bitcoin holdings will be valued based on fair value policies approved by the Trustee, considering factors like Volume Weight Average Prices (VWAP) or Volume Weight Median Prices (VWMP) from secondary indexes. If these secondary indexes are also unreliable or unavailable, the valuation will be based on the price set by the Trust’s principal market as of 4:00 p.m. ET on the valuation date.
- Financial Reporting and Valuation Policy: The Trust has adopted a new valuation policy for financial reporting. This policy, compliant with ASC 820-10, outlines the methodology for determining the principal market for Bitcoin valuations. The Trustee will reassess the principal market at least quarterly. This change ensures that the valuation process aligns with the fair value measurement framework and reflects the market where the Trust typically transacts.
- Principal Market Determination: The Trust now employs a more structured approach to identifying its principal market for Bitcoin, considering factors like compliance with laws and regulations, volume, activity level, and price stability. This process involves a systematic review of various markets, ensuring that the chosen principal market has the highest relevant market-based volume and level of activity.
- Trust’s Website Information and NAV Calculation: The Trust’s website will now feature a range of new information, including the NAV, the Nasdaq official closing price, and the premium or discount of this price against the NAV. The Trust Administrator will also disseminate the Trust’s holdings daily on the website. The NAV calculation, done once a day, will be shared with all market participants simultaneously.
- Use of Third-Party Vendor for Price Information: A third-party vendor, aligned with the Trust’s valuation policies, will be engaged to obtain Bitcoin price information from the principal market. This vendor is expected to collect and analyze relevant volume and activity data to identify the most appropriate market for valuation purposes.
These changes aim to reflect BlackRock’s commitment to ensuring a transparent, reliable, and compliant valuation process for its iShares Bitcoin Trust, aligning with regulatory standards and market best practices.
Formalized Rigorous Bitcoin Exchange Selection Criteria
BlackRock has updated its approach to selecting exchanges for the CF Benchmarks Index, a crucial element in the Trust’s operation. Previously, the Trust based its selection of exchanges on accessible venues for executing transactions, with changes to the Constituent Exchanges being reported to shareholders via prospectus supplements and Form 8-K or in annual or quarterly reports. However, the new amendment brings a more structured and rigorous approach to this process.
Now, the Oversight Committee of the Index Administrator plays a crucial role in selecting exchanges for the CF Benchmarks Index. They assess trading platforms based on several stringent criteria: reliability and availability of trade and order data via an API, adherence to minimum trading volume thresholds, maintenance of fair and transparent market conditions, absence of undue market barriers or risks, compliance with applicable laws and regulations, and cooperation with regulatory inquiries and investigations. Particularly notable is the requirement for an average daily trading volume exceeding 3% for two consecutive quarters to be considered a Constituent Exchange.
Moreover, the amendment emphasizes ongoing compliance with these criteria, indicating that a Constituent Exchange must continually meet these standards to remain part of the Index. In case of any significant changes to the Constituent Exchanges, the Trust will now inform shareholders through a prospectus supplement and on its website.
The Trust reiterates its confidence in the CF Benchmarks Index’s methodology for reasonably valuing Bitcoin’s spot price, emphasizing its design to resist manipulation. The Index’s calculation method remains unchanged, focusing on preventing the undue influence of outlying prices or large, concentrated trades on the index value.
Enhancing the integrity and transparency of the Index, the Trust now specifies that its compliance with the UK BMR regulations has been audited under the ISAE 3000 standard, with the audit report available publicly. Furthermore, the CF Benchmarks Index operates under a comprehensive Control Framework, encompassing policies for input data, surveillance, conflict of interest, and governance and oversight. These measures collectively ensure the benchmarks’ integrity, addressing potential manipulation and conflicts of interest.
Lastly, while the domicile, regulation, and legal compliance of the Bitcoin exchanges included in the CF Benchmarks Index continue to vary, detailed information about each exchange remains accessible through their websites and public compliance registers.
Introducing Intraday Indicative Value for Timely Pricing
BlackRock introduced an important feature in the new filing: the Intraday Indicative Value (IIV). This development aims to enhance transparency and provide shareholders with more timely information about the Trust’s value. The IIV will not be a real-time update of the Net Asset Value (NAV) but will offer a close approximation, updated every 15 seconds during regular market hours.
To calculate the IIV, the Trust will use the prior day’s closing NAV as a starting point, adjusting it throughout the trading day to reflect changes in the Trust’s NAV. This calculation will be performed either by the exchange or an external financial data provider and then disseminated broadly by major market data vendors.
The methodology behind the IIV calculation involves using the CME CF Bitcoin Real Time Index (BRTI), a metric updated every second. The BRTI, in turn, is based on the order books of Bitcoin to U.S. dollar trading pairs across various exchanges. These order books, which list unmatched buy and sell orders with their respective prices and sizes, are aggregated into a single consolidated order book. The BRTI then calculates a weighted average of these orders, considering both the selling and buying prices relative to transaction volumes. The weighting is based on a statistical approach, using the exponential distribution and factoring in the spread between buy and sell prices up to a certain volume threshold.
This addition to the iShares Bitcoin Trust’s structure aims to provide shareholders with a more dynamic and responsive view of the Trust’s value, reflecting the inherent volatility and rapid price movements characteristic of the Bitcoin market.
Clarifying Protections for Separate Trustees
There has been a notable change concerning the role and provisions related to separate trustees. Initially, the document outlined the power of the Sponsor to appoint separate trustees for the Trust, highlighting their capabilities and the lack of necessity for these trustees to meet Delaware Trustee eligibility criteria. The amendment has expanded on this section by adding several new clauses that further define the rights and protections of these separate trustees.
Firstly, the amendment clarifies that no trustee under the Trust Agreement shall be held personally liable for actions or omissions made by another trustee. This addition is significant as it provides the trustees with a layer of legal protection, ensuring they are not personally accountable for each other’s decisions or mistakes.
Secondly, the Sponsor now has the explicit authority to accept the resignation of or remove any separate trustee at any time. This change gives the Sponsor greater control and flexibility in managing the composition and performance of the trustee board.
Lastly, the amendment addresses scenarios where a separate trustee might die, become incapable of acting, resign, or be removed. In such cases, all estates, properties, rights, remedies, and trusts of the outgoing trustee will vest in and may be exercised by the Sponsor without the need to appoint a new or successor separate trustee. This provision ensures that the Trust’s management and operations can continue seamlessly without interruption, even in the event of an unforeseen change in its trusteeship.
These updates to the iShares Bitcoin Trust S-1 form by BlackRock reflect a comprehensive approach to the governance and legal framework of the Trust, aiming to bolster its management and operational robustness in various scenarios.
Shift to Total Cold Storage of Private Keys
Previously, the Custodian maintained a mix of cold and hot storage methods for Bitcoin, with a substantial portion in cold storage and the remainder in hot storage. However, as stated above, the amended filing indicates a shift towards a more secure storage strategy.
The Bitcoin Custodian will exclusively use cold storage for all private keys associated with the Trust’s Bitcoin in the Vault Balance. This change eliminates the hot storage component, enhancing security measures. Cold storage, as detailed, involves generating and storing private keys offline, making them less susceptible to hacking.
Furthermore, the Trust’s Bitcoin will be held in segregated accounts, ensuring that these assets are not mixed with those of the Bitcoin Custodian, its affiliates, or other customers. This segregation provides an additional layer of security and clarity in asset management.
Overall, this amendment reflects a strategic move by BlackRock towards heightened security and risk management for the assets within the iShares Bitcoin Trust, prioritizing safeguarding investments against potential digital threats.
Streamlined Security Explanation for Private Keys
The original text detailed the process involved in sending Bitcoin when private keys are kept in cold storage. This included either retrieving the private keys from cold storage to sign a transaction or sending the unsigned transaction to the server where the private keys are held for signing. The amended text has removed these specific procedural details, focusing instead on the broader security measures in place.
Despite removing these specifics, the core information about the security and storage of private keys remains. The keys are still stored in undisclosed locations within the United States and Europe, with a limited number of custodian employees involved in their management. The text continues to emphasize that no single individual has access to full private keys. Additionally, the role of the Bitcoin Custodian’s internal audit team and the performance of Systems and Organizational Control (SOC) attestations by an external provider are still highlighted as key security measures.
These changes suggest a shift towards a more general and less technical explanation of the security measures, possibly aiming to make the document more accessible to a broader range of investors while emphasizing the rigorous security protocols in place.
Procedures Updated for Blockchain Forks, Custodian Termination
BlackRock also introduced changes in the policies regarding the handling of Bitcoin blockchain forks, as well as the termination provisions of the Custodian Agreement.
Regarding blockchain forks, the revised text provides more comprehensive details on the procedures and responsibilities of the Bitcoin Custodian in such events. It clarifies that in the event of a fork, the Custodian may temporarily suspend services and has the discretion to decide whether to support either branch of the forked protocol. The updated text emphasizes that the Custodian will try to keep at least one branch of the fork and the original digital asset. It also specifies that the Custodian, as per the Custodian Agreement, has no obligation or liability related to the operation of unsupported branches of a forked protocol. Importantly, the amendment includes a statement acknowledging that the Custodian generally does not support airdrops, ‘metacoins,’ or other derivative protocols unless communicated explicitly through a public statement.
The Sponsor of the Trust is also given the discretion to decide the Trust’s course of action in the event of a fork or airdrop, with each situation being evaluated on a case-by-case basis. The Trust and Sponsor are not obligated to claim or realize any economic benefit from forks or airdrops, including any incidental rights or virtual currencies derived from them.
Additionally, the amendment updates the termination provisions of the Custodian Agreement. The Custodian can now terminate the agreement for any reason, provided they give 180 days’ notice to the Trust. Immediate termination for ‘Cause’ remains an option, with ‘Cause’ defined in the Custodian Agreement. The amendment also clarifies that the Custodian Agreement is part of the Prime Broker Agreement and subject to its termination provisions, detailed further in the document.
These changes reflect a more detailed and structured approach to handling blockchain forks and the termination of the Custodian Agreement, aiming to provide more explicit guidelines and expectations for all parties involved.
Tightened Scope for Prime Broker Asset Holdings
There has been a change in how the Trust’s Bitcoin and cash holdings are managed. Whereas previously, these assets could be held with an affiliate of the Bitcoin Custodian, the Prime Broker, for various purposes, the amendment specifies that they may now only be temporarily held with the Prime Broker for specific limited purposes. This includes in-kind creations and redemptions of Baskets and the sale of Bitcoin to pay the Sponsor’s Fee and Trust expenses not undertaken by the Sponsor. The Sponsor still maintains the ability to add or terminate prime brokers at its sole discretion and can change the prime broker for the Trust, though there is no obligation to do so or to seek specific terms for the Trust from other prime brokers.
Additional details have been provided regarding the storage methods used by the Prime Broker. For security purposes, the majority of assets are kept in cold wallets, with the balance kept in hot wallets to facilitate quick withdrawals. The exact proportion of assets kept in these two types of wallets is not disclosed to the Sponsor. The Prime Broker is not required to hold the Bitcoin in the Trust’s Trading Balance in cold storage or in segregation.
Regarding cash management, the Prime Broker disclosed that customer cash, including the cash associated with the Trust’s Trading Balance, is held in one or more banks’ accounts to benefit the Prime Broker’s customers or in Money Market Funds. The Prime Broker has also outlined a policy for cash associated with the Trust’s Trading Balance, including an agreement to title the accounts designed to enable receipt of FDIC deposit insurance where applicable on a pass-through basis.
New information has been added about the process by which the Trust sells Bitcoin through the Prime Broker, with orders executed at approved venues. The Prime Broker conducts due diligence on these venues, including Bitstamp, LMAX, Kraken, and the exchange operated by the Prime Broker, along with four additional non-bank market makers.
Finally, information has been added about insurance policies held by the Prime Broker and the circumstances under which the Trust may terminate the Prime Broker Agreement. The Prime Broker does not guarantee uninterrupted access to the Trading Platform or the provision of its services. Under certain circumstances, the Prime Broker is permitted to halt or suspend trading on the platform or impose limits on or reject the Trust’s orders. The Prime Broker and any other Coinbase entity are not permitted to withdraw the Trust’s Bitcoin from the Trust’s Vault Balance or loan, hypothecate, pledge, or otherwise encumber the Trust’s Bitcoin without the consent of the Trust.
Changes Related to Trade Credit Lender Risks, Operations
Changes were made regarding lender risk, addressing the role and operations of the Trade Credit Lender within the iShares Bitcoin Trust and the potential impact on shareholders.
One significant modification is that there is no longer a maximum amount of Trade Credit that the Trade Financing Agreement permits to be outstanding at any time. Instead, the Trade Credit Lender’s obligation to extend Trade Credits to the Trust has been limited to the extent such Bitcoin or cash is available.
The newly added information delves into the specifics of how the financing fee for Trade Credits is calculated. The formula involves the Federal Funds Target rate, with an illustrative example offered based on a hypothetical rate.
Regarding managing the Trust’s Bitcoin holdings, a new protocol has been laid out for situations when Trade Credits are unavailable or exhausted. If such a scenario emerges, the Sponsor is now directed to instruct the Bitcoin Custodian to move Bitcoin from the Vault Balance into the Trading Balance to allow direct sales to cover fees and expenses.
Lastly, the amendment discusses potential risks to shareholders. It highlights that the inability to lock in the payment price on the payment date due to the unavailability of Trade Credits could lead to deviations in the execution price of Bitcoin trades. This, in turn, could negatively impact the remaining shareholders, especially if the execution price for Bitcoin sales deviates significantly from the Index price used to determine the Trust’s Net Asset Value (NAV).
