Glossary of Terms

accredited investor an investor meeting sec regulation d financial thresholds including $1 million net worth (excluding primary residence) or $200,000 annual income ($300,000 joint) administrator third party service provider responsible for fund accounting, nav calculation, investor reporting, and related middle office functions air gapped system computer or network physically isolated from unsecured networks including internet connection airdrop distribution of cryptocurrency tokens to wallet addresses, typically as a promotional mechanism or reward for protocol participation, which may trigger tax obligations and require operational procedures for receipt and disposition anti money laundering (aml) legal controls and procedures designed to prevent, detect, and report money laundering activities atomic swap direct peer to peer cryptocurrency exchange executed through smart contracts without intermediary audit committee board committee responsible for overseeing financial reporting, external audit coordination, internal control assessment, and compliance program review audit trail chronological record documenting sequence of activities affecting specific operation, procedure, or event automated market maker (amm) decentralized exchange protocol that uses algorithmic pricing based on liquidity pool reserves rather than traditional order books to facilitate token swaps basis risk risk that offsetting positions in a hedging strategy do not move in perfectly opposite directions, resulting in imperfect correlation between the hedge and underlying exposure beneficial ownership the natural persons who ultimately own or control a legal entity, typically those owning 25% or more equity interests or exercising significant control, as required under fincen customer due diligence rules best execution duty to seek most favorable terms reasonably available under the circumstances for client transactions considering price, speed, likelihood of execution, and total costs bitlicense new york state department of financial services license required for businesses engaged in virtual currency business activities involving new york residents, imposing capital, compliance, cybersecurity, and examination requirements blockchain distributed ledger technology recording transactions across multiple nodes in verifiable, permanent way blockchain analytics tools and techniques for analyzing blockchain transaction data to identify patterns, trace fund flows, screen for sanctions exposure, detect suspicious activity, and support aml compliance board of directors governing body responsible for overseeing management, providing strategic direction, and fulfilling fiduciary duties to the organization and its stakeholders break resolution process of identifying, investigating, and correcting discrepancies between internal records and external statements, including reconciliation differences with custodians, administrators, or counterparties bridge protocol enabling transfer of tokens or data between different blockchain networks business continuity plan (bcp) documented procedures for maintaining or recovering business operations following disruption centralized exchange (cex) cryptocurrency trading platform operated by centralized entity maintaining order books and custody chief compliance officer (cco) individual responsible for administering firm's compliance policies, procedures, and regulatory obligations chief operating officer (coo) executive responsible for firm's day to day operational activities and business execution chief risk officer (cro) executive responsible for enterprise risk management, including identification, measurement, monitoring, and mitigation of risks across the organization, with independent reporting to the board or ceo cold storage cryptocurrency storage method where private keys remain offline and disconnected from any network collateral assets pledged to secure borrowing, derivatives positions, or other obligations collateralization ratio the ratio of collateral value to borrowed amount or position exposure, used to determine margin adequacy and liquidation thresholds in lending and derivatives contexts commodity pool operator (cpo) entity registered with the cftc that operates pooled investment vehicles trading commodity futures, options, or swaps, subject to disclosure, reporting, and segregation requirements commodity trading advisor (cta) entity registered with the cftc that provides advice on commodity futures, options, or swaps trading, subject to series 3 examination, nfa membership, and disclosure document requirements compliance manual comprehensive document containing firm's policies and procedures for meeting regulatory obligations concentration risk risk arising from excessive exposure to single asset, sector, counterparty, or risk factor conflicts of interest situations where firm's or individual's interests may compromise duty of loyalty or impartiality to clients control person individual with authority to direct or cause direction of firm management or investment policy counterparty entity on opposite side of financial transaction including exchanges, broker dealers, lenders, or smart contracts counterparty risk risk that a counterparty will fail to meet its contractual obligations, including default, insolvency, or operational failure of exchanges, lenders, custodians, or other service providers credit risk risk that counterparty will fail to meet obligations when due currency transaction report (ctr) fincen required report filed by financial institutions for currency transactions exceeding $10,000, documenting the transaction details and customer identification custodian entity legally responsible for safeguarding client assets with operational control over access and disposition custody rule sec rule 206(4) 2 requiring registered investment advisers with custody of client assets to maintain funds with qualified custodians, provide account statements, and undergo annual surprise examinations customer identification program (cip) regulatory requirement under the bank secrecy act for financial institutions to verify the identity of customers opening accounts, including collection and verification of name, date of birth, address, and identification number decentralized autonomous organization (dao) organization governed by smart contract rules and token holder voting without centralized management decentralized exchange (dex) trading protocol enabling peer to peer cryptocurrency transactions through smart contracts without centralized intermediary decentralized finance (defi) financial applications built on blockchain networks executing functions through smart contracts without traditional intermediaries depeg event where a stablecoin's market price deviates significantly from its intended peg value, creating potential losses for holders and systemic risks for protocols relying on price stability digital asset cryptographically secured representation of value or rights recorded on distributed ledger or blockchain directors and officers (d\&o) insurance liability insurance protecting individuals serving in governance or executive positions from personal losses disaster recovery plan (drp) documented procedures for restoring technology systems, data, and operations following a disaster or major disruption, including recovery priorities, procedures, and testing requirements disclosure material information provided to clients or prospective clients regarding investment strategies, risks, fees, conflicts, or firm operations drawdown peak to trough decline in investment value during specific period exposure limit maximum permitted exposure to a particular asset, sector, counterparty, or risk factor, established to control concentration risk and enforce risk appetite boundaries failover process of automatically or manually switching operations to backup systems, locations, or service providers when primary resources become unavailable fair value the price at which an asset would change hands between willing buyer and seller, neither under compulsion, with reasonable knowledge of relevant facts, used as the basis for portfolio valuation fiat currency government issued currency not backed by physical commodity (usd, eur, gbp) fiduciary person or entity holding legal duty to act in another's best interests with highest standard of care financial industry regulatory authority (finra) self regulatory organization overseeing broker dealers and registered representatives flash loan uncollateralized loan borrowed and repaid within single blockchain transaction form adv sec registration form and disclosure document required of registered investment advisers front running prohibited practice of executing trades ahead of client orders to benefit from anticipated price movement funding rate periodic payment exchanged between long and short position holders in perpetual swap contracts to keep the contract price aligned with the underlying spot price futures commission merchant (fcm) entity registered with cftc to solicit or accept orders for futures contracts gas fee transaction cost paid to blockchain network validators for processing operations general counsel senior legal officer responsible for firm's legal affairs and compliance governance token cryptocurrency token that grants holders voting rights on protocol decisions, parameter changes, treasury allocations, and other governance matters gross exposure sum of absolute values of all long and short positions without netting hard fork blockchain protocol change creating permanent divergence from previous version, potentially resulting in two separate chains hardware security module (hsm) physical computing device that safeguards and manages cryptographic keys, performs encryption and decryption, and provides tamper resistant key storage for high security applications hardware wallet physical device storing cryptocurrency private keys offline hedge investment position intended to offset potential losses in another position hot wallet cryptocurrency storage where private keys remain connected to internet enabled systems for operational accessibility impermanent loss temporary reduction in value when providing liquidity to automated market maker relative to holding underlying assets incident response plan documented procedures for detecting, responding to, containing, and recovering from security incidents or operational disruptions, including escalation protocols and communication procedures independent director board member without material relationship to firm beyond directorship insider trading illegal practice of trading securities based on material nonpublic information institutional investor organization investing substantial assets including pension funds, endowments, foundations, insurance companies, and sovereign wealth funds investment adviser person or entity compensated for providing investment advice or managing client assets investment committee governing body responsible for reviewing and approving investment decisions, monitoring portfolio performance, ensuring adherence to investment policy, and providing oversight of the investment process investment policy statement (ips) document defining investment objectives, constraints, strategies, and guidelines for portfolio management key management processes and controls for generating, storing, backing up, and controlling access to cryptographic private keys key person risk operational risk arising from excessive dependence on specific individuals whose departure, incapacity, or unavailability would materially disrupt firm operations, investment management, or regulatory compliance know your customer (kyc) regulatory requirement to verify client identity and understand client circumstances before establishing relationship layer 2 (l2) secondary protocol built on top of a base blockchain (layer 1) designed to improve scalability, reduce transaction costs, and increase throughput while inheriting security from the underlying chain leverage use of borrowed capital or derivatives to amplify investment exposure beyond available equity limit order instruction to execute transaction at specified price or better liquid staking providing cryptocurrency to staking protocol while receiving liquid token representing staked position liquidation forced closing of leveraged positions when collateral becomes insufficient to support obligations liquidity ability to convert asset to cash quickly without significant price impact liquidity pool smart contract holding reserves of two or more tokens that enables automated trading through algorithmic pricing, with liquidity provided by users who earn fees in exchange for their deposits liquidity provider entity supplying assets to trading venue or protocol to facilitate transactions management fee ongoing fee charged by investment managers for portfolio management services, typically expressed as an annual percentage of assets under management margin collateral deposited to support leveraged position or derivative contract margin call demand for additional collateral when position losses reduce margin below required minimum mark to market valuation method that prices assets at current market prices based on observable transactions or executable quotes market maker entity providing continuous bid and offer quotes to facilitate trading and provide liquidity markets in crypto assets (mica) european union regulatory framework for crypto asset service providers establishing licensing, capital, governance, and consumer protection requirements across eu member states material information information that reasonable investor would consider important in making investment decision miner extractable value (mev) profit blockchain validators can extract by including, excluding, or reordering transactions within blocks multi party computation (mpc) cryptographic technique distributing private key generation and signing across multiple parties without reconstructing complete key multi signature (multisig) wallet configuration requiring multiple private key approvals before executing transactions net asset value (nav) per share value calculated by dividing total net assets by outstanding shares net exposure the difference between long and short positions, representing directional market exposure after accounting for offsetting positions netting offsetting long and short positions to calculate net exposure non disclosure agreement (nda) contract prohibiting sharing confidential information with unauthorized parties off chain activities, data, or transactions occurring outside blockchain network office of foreign assets control (ofac) u s treasury department office administering and enforcing economic sanctions programs, requiring screening of transactions and counterparties against sanctions lists omnibus wallet single wallet address holding assets for multiple clients or accounts, requiring robust internal accounting and reconciliation to track individual ownership on chain activities, data, or transactions recorded directly on blockchain network operational risk risk of loss resulting from inadequate or failed internal processes, people, systems, or external events, including technology failures, human error, fraud, and business disruption oracle service providing external data to smart contracts executing on blockchain networks over the counter (otc) trading conducted directly between parties rather than through centralized exchange performance attribution analysis decomposing portfolio returns into components attributable to different factors, decisions, or exposures to understand sources of performance relative to benchmarks performance fee compensation based on investment returns, typically calculated as percentage of profits above specified threshold perpetual swap derivative contract similar to futures but without expiration date, using funding rate mechanisms to maintain price alignment with the underlying spot market politically exposed person (pep) individual holding prominent public position or function, or their close associates, requiring enhanced due diligence due to elevated corruption and money laundering risks position limit maximum size of position permitted in a particular asset, instrument, or strategy, established to control concentration risk and ensure portfolio diversification pricing source data provider or methodology used to determine asset valuations, including exchanges, data aggregators, index providers, or valuation models for illiquid assets prime broker financial institution providing comprehensive services to investment managers including custody, financing, securities lending, and execution private key cryptographic credential providing control over blockchain address and authority to authorize transactions proof of reserves cryptographic verification demonstrating custodian controls assets claimed without revealing sensitive information protocol governance decision making processes and mechanisms through which decentralized protocols are managed, upgraded, and operated, typically involving token holder voting on proposals protocol risk risk specific to blockchain protocols including smart contract vulnerabilities, governance attacks, oracle manipulation, economic exploits, and consensus mechanism failures qualified custodian custodian meeting sec rule 206(4) 2 requirements including banks, registered broker dealers, registered futures commission merchants, or qualifying foreign financial institutions re entrancy attack smart contract vulnerability where an external contract can repeatedly call back into the vulnerable contract before the first execution completes, potentially draining funds reconciliation process of comparing internal records against external statements from custodians, administrators, exchanges, or counterparties to identify and resolve discrepancies recovery point objective (rpo) maximum acceptable amount of data loss measured in time, defining how frequently data must be backed up to meet business continuity requirements recovery time objective (rto) maximum acceptable duration for restoring systems or operations after a disruption, defining the target time for resuming critical functions redemption process by which investor withdraws capital from fund or separately managed account registered investment adviser (ria) investment adviser registered with sec or state securities authorities regulatory risk risk that changes in laws, regulations, or regulatory interpretation materially impact business operations, investment strategies, or asset valuations risk appetite the level and types of risk an organization is willing to accept in pursuit of its objectives, typically documented in a board approved risk appetite statement risk committee board or management committee responsible for overseeing risk management framework, monitoring risk exposures, reviewing limit breaches, and ensuring alignment with risk appetite risk register comprehensive inventory of identified risks including assessment of likelihood, impact, existing controls, and mitigation strategies for each risk sanctions screening process of checking customers, counterparties, and transactions against ofac and other sanctions lists to identify prohibited parties or jurisdictions scenario analysis risk assessment technique examining portfolio impact under specific hypothetical events or market conditions, complementing statistical measures like var securities and exchange commission (sec) federal agency regulating securities markets, investment advisers, and investment companies segregated wallet dedicated wallet address holding assets for a single client or account, providing clear ownership separation and simplified reconciliation segregation separation of client assets from firm assets to prevent commingling and ensure client protection segregation of duties internal control principle requiring different individuals to perform incompatible functions such as transaction initiation, approval, execution, and reconciliation to prevent fraud and errors self custody arrangement where client maintains direct control over private keys rather than delegating custody to third party service level agreement (sla) contract defining expected service standards, performance metrics, and remediation rights shamir's secret sharing cryptographic technique that divides a secret (such as a private key) into multiple shares, requiring a threshold number of shares to reconstruct the original secret slashing penalty mechanism in proof of stake networks where validators lose staked assets for protocol violations smart contract self executing computer program deployed on blockchain network that automatically enforces agreement terms when specified conditions occur smart contract audit independent review of smart contract code to identify security vulnerabilities, logic errors, and potential exploits before or after deployment smart contract risk risk of loss from vulnerabilities, bugs, or exploits in smart contract code, including logic errors, re entrancy attacks, and upgrade mechanism failures stablecoin cryptocurrency designed to maintain stable value relative to reference asset, typically u s dollar staking locking cryptocurrency in proof of stake network to support operations and earn rewards stress testing analysis assessing portfolio resilience under extreme but plausible scenarios, including market crashes, liquidity crises, counterparty failures, and operational disruptions sub custodian third party entity to which a primary custodian delegates physical custody or safekeeping of certain assets, creating additional counterparty relationships requiring due diligence suitability requirement that investment recommendations align with client's investment objectives, risk tolerance, and financial situation suspicious activity report (sar) fincen required report filed by financial institutions when transactions appear to involve funds derived from illegal activity, lack business purpose, or otherwise suggest money laundering or other financial crimes systematic monitoring regular, documented review process occurring at defined intervals without requiring triggering event tail risk risk of rare but severe events occurring in the tails of probability distributions, representing losses significantly beyond normal market volatility technology risk risk arising from technology systems including cybersecurity threats, system failures, data breaches, software vulnerabilities, and technology obsolescence time lock smart contract mechanism that delays execution of certain functions for a specified period, providing time for review and potential intervention before irreversible actions occur total value locked (tvl) aggregate value of cryptocurrency assets deposited in a defi protocol, used as a metric for protocol adoption, liquidity depth, and potential systemic importance travel rule regulatory requirement for financial institutions to transmit originator and beneficiary information with fund transfers exceeding certain thresholds, extended to cryptocurrency transactions by fincen and fatf guidance validator network participant in proof of stake blockchain responsible for verifying transactions and creating new blocks valuation committee governance body responsible for overseeing asset valuation policies, reviewing pricing methodologies, resolving valuation disputes, and approving fair value determinations for complex or illiquid assets value at risk (var) statistical measure estimating maximum potential loss over specified time period at given confidence level wallet software or hardware interface for storing private keys and interacting with blockchain networks warm wallet cryptocurrency storage where private keys remain online but behind additional security layers including multi signature requirements or hardware security modules waterfall sequence defining priority of distributions from fund or investment structure whitelisting security control restricting transactions or access to pre approved addresses, accounts, or entities yield farming strategy of deploying cryptocurrency across defi protocols to maximize returns through lending, liquidity provision, staking rewards, and token incentives