NO SECURITIES REGULATORY AUTHORITY IN CANADA OR ANY OTHER JURISDICTION HAS EXPRESSED AN OPINION ABOUT CRYPTO CONTRACTS OR ANY OF THE CRYPTO ASSETS MADE AVAILABLE THROUGH THE PLATFORM (as hereinafter defined), INCLUDING AN OPINION THAT THE CRYPTO ASSETS ARE NOT THEMSELVES SECURITIES AND/OR DERIVATIVES.
Coinberry is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Coinberry Limited dated August 19th 2021 [link]. The statutory rights of action for damages and the right of rescission in section 130.1 of the Securities Act (Ontario) and similar legislation in the other provinces and territories of Canada would not apply in respect of a misrepresentation in this Crypto Asset Statement or the Statement of Crypto Asset and Crypto Contract Risks.
Together with the Statement of Crypto Asset and Crypto Contract Risks, the provisions of which are incorporated herein, this Crypto Asset Statement, lists certain specified risks associated with Compound. The risks identified in this Crypto Asset Statement and in the Statement of Crypto Asset and Crypto Contract Risks may not be all of the risks related to the Crypto Assets and Crypto Contracts and there may be other additional unknown risks, that may exist.
Compound is an algorithmic autonomous interest rate protocol that lives on the Ethereum blockchain. COMP is the governance token for the Compound decentralized finance protocol which seeks to convert traditional financial systems over to decentralized versions. This way users gain a share of profits that was historically only available to financial intermediaries. Users lock their Crypto Assets into large farming pools and receive rewards based on the amount of Crypto Assets that is locked and the amount of time they participate in the pool.
Coinberry has performed due diligence with respect to Compound to satisfy itself as to the viability of offering it on the Platform. Our due diligence included, but was not limited to, a review of the following:
Liquidity of the market
Total market capitalization
Timeline since Crypto Asset inception
Crypto Asset available for custody with existing custodians
The current developer ecosystem
Whether Compound has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Compound has the most significant connection
Risks Associated with Investing in Compound
Underlying Value Risk
Compound represents a new form of digital value that is still being digested by society. Its underlying value is driven by its utility as a store of value, means of exchange, and unit of account, and the demand for Compound within those use cases. As Compound requires users to stake Crypto Assets in exchange for returns, the supply of Crypto Assets in the platform is a key factor for its survival. As long as there is a demand and supply in the platform, the value of the COMP Crypto Asset remains strong. If these means of valuing Compound prove to be fundamentally flawed, then the market may undergo a repricing of Compound, which could have an adverse impact on its price.
Top Compound Holders Control a Significant Percentage of the Outstanding Compound
The most current list of top holders can be found here: https://compound.finance/governance/leaderboard
Regulation of Compound
The regulation of Compound continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Compound or otherwise impact the demand for Compound.
Volatility of Compound
The risks of trading Compound are high due to the unexpected changes in market sentiments which can lead to sharp and sudden movements in prices. It is not uncommon for the value of Compound to quickly drop or rise thereby negatively or positively impacting your investment.
Loss of “Private Keys”
The loss or destruction of certain “private keys” (numerical codes required by Coinberry to access its Compound) could prevent Coinberry from accessing its Compound. Loss of these private keys may be irreversible and could result in the loss of all or substantially all of the crypto assets held in trust by Coinberry.
Your Holdings May Become Illiquid
You may not always be able to liquidate your Compound at a desired price. It may become difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in the marketplace, including on Compound trading platforms. Unexpected market illiquidity may cause major losses to the holders of Compound. The large size of Compound that Coinberry may hold increases the risks of illiquidity by both making the Compound difficult to liquidate and in liquidating, Coinberry may affect Compound’s price significantly.
Compound transfers are irreversible. An improper transfer (whereby Compound is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Compound agreeing to send the Compound back to the original sender in a separate subsequent transaction. To the extent Coinberry erroneously transfers, whether accidental or otherwise, Compound in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Compound, leading to its loss.
Risks Associated with the Compound Protocol
Dependence on Compound Developers
While many contributors to Compound’s software are employed by companies in the industry, most of them are not directly compensated for helping to maintain the protocol. As a result, there are no contracts or guarantees that they will continue to contribute to Compound’s software.
Disputes on the Development of the Compound Protocol may lead to Delays in the Development of the Protocol
There can be disputes between contributors on the best paths forward in building and maintaining Compound’s software. Therefore, the Compound community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation.
Decrease in Reward
Compound doesn’t have a block reward instead the protocol provides a return on the COMP Crypto Asset. To attract users to lock their Crypto Assets in the first place, Compound offers them a return on their Crypto Assets, as well as a proportion of the fee from trades. This return is generated when Compound lends the Crypto Assets out to users. Increased fees on the network will result in lower returns impacting the overall demand and supply.
Competitors to Compound
To the extent a competitor to Compound gains popularity and greater market share, the use and price of Compound could be negatively impacted, which may adversely affect its price. Similarly, Compound and the price of Compound could be negatively impacted by competition from incumbents.
Risks Associated with Compound Trading Platforms
Regulation of Compound Trading Platforms
Compound trading platforms are spot markets in which Compound can be exchanged for fiat currencies (CAD, USD, etc.). Coinberry seeks to ensure that the Compound trading platforms on which it transacts are reputable, stable, and operating in compliance with applicable laws.
Limited Operating History of Compound Trading Platforms
Given the newness of Crypto Assets in general, Compound trading platforms have a limited operating history. Since 2009 several Crypto Asset trading platforms have been closed or experienced disruptions due to fraud, failure, security breaches or distributed denial of service attacks. In many of these instances, the customers of such trading platforms were not compensated or made whole for the partial or complete loss of funds held at Compound trading platforms. The potential for instability of Crypto Asset trading platforms and the closure or temporary shutdown of exchanges due to fraud, business failure, hackers, distributed denial of service attacks or malware or government-mandated regulation may reduce confidence in Compound, which may adversely affect its price.
Different Prices of Compound on the Compound Trading Platforms
Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Compound on that platform can also spike, making it trade at a premium to other platforms. This tendency is common geographically, with Asian platforms frequently trading at a premium to platforms in Europe or America.
Closure of Compound Trading Platform(s)
Compound has been trading on multiple platforms as the scalability increases, with more and more platforms offering the Crypto Asset. In the long run, the Crypto Asset may be impacted if several platforms close due to fraud, failure, or security breaches.
Liquidity Constraints on Compound Markets
While the liquidity and traded volume of Compound are continually growing, they are still maturing assets. We may not always be able to acquire or liquidate crypto assets we hold in trust at a desired price. It may become difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in the marketplace, including on Compound trading platform. When transacting in the Crypto Asset markets, Coinberry will be competing for liquidity with other large investors, including speculators, miners and other investment funds and institutional investors. Unexpected market illiquidity, and other conditions beyond our control, may cause major losses to the holders of a Crypto Asset, including Compound. The large position in Compound that we may acquire increases the risks of illiquidity by making our Compound difficult to liquidate. In addition, liquidation of significant amounts of Compound by Coinberry may impact the market price of Compound.
Risk of Manipulation on Compound Trading Platforms
Some Compound trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Compound trading platforms are not required to adopt policies and procedures for the purpose of detecting and preventing manipulative and deceptive trading activities and, in the event that manipulative and deceptive trading activities are detected, Compound trading platforms may not have procedures for, or jurisdiction to, sanction or otherwise deter such activities and/or to detect, investigate and prosecute fraud.
Settlement of Transactions on the Compound Network
There is no central clearing house for cash-to-Compound transactions. Current practice is for the purchaser of Compound to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Compound to the purchaser’s public Compound address upon receipt of the cash. The purchaser and seller monitor the transfer with a transaction identification number that is available immediately upon transfer and is expected to be included in the next block confirmation. When Coinberry purchases Compound from a Compound trading platform, there is a risk that the Compound trading platform will not initiate the transfer on the network upon receipt of cash from Coinberry, or that the bank where the Compound trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Compound trading platform.
Please make sure to review the Statement of Crypto Asset and Crypto Contract Risks for additional discussion of general risks associated with the Crypto Contracts and Crypto Assets made available on Coinberry.
Last Updated Aug 17, 2021
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