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 Dogecoin. 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. As with any investment the risks with Crypto Assets are high and it is important that you understand the risks before you invest.
Dogecoin is a parody Crypto Asset created by Australian entrepreneur Jackson Palmer and software engineer Billy Markus in 2013. In 2014, Litecoin creator Charlie Lee proposed the idea of merge-mining Dogecoin and Litecoin. This resulted in Dogecoin producing faster blocks than Bitcoin (1 minute vs. 10 minutes), meaning transactions on the Dogecoin network are significantly faster than transactions on the Bitcoin network. Dogecoin has seen resurgence in part due to its support by South African entrepreneur Elon Musk.
Coinberry has performed due diligence with respect to Dogecoin 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 Dogecoin has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Dogecoin has the most significant connection
Risks Associated with Investing in Dogecoin
Underlying Value Risk
Dogecoin 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 Dogecoin within those use cases. Just as oil is priced by the supply and demand of global markets, as a function of its utility to, for instance, power machines and create plastics, so too is Dogecoin priced by the supply and demand of global markets for its own utility within remittances, B2B payments, timestamping, etc. If these means of valuing Dogecoin prove to be fundamentally flawed, then the market may undergo a repricing of Dogecoin, which could have an adverse impact on its price. Dogecoin, however, is especially risky because it doesn't have as much utility as its competitors.
Top Dogecoin Holders Control a Significant Percentage of the Outstanding Dogecoin
Certain addresses on the Dogecoin network hold a significant amount of the currently outstanding Crypto Assets. There are nine wallets that collectively hold more than 40% of all dogecoin, with one wallet holding 28%.
Regulation of Dogecoin
The regulation of Dogecoin continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Dogecoin or otherwise impact the demand for Dogecoin.
Volatility of Dogecoin
The risks of trading Dogecoin is high due to the volatility which can lead to sharp and sudden movement in prices. As with all investments it is not uncommon for the value of Dogecoin to quickly drop when there shift in the demand and supply which will ultimately impact the price.
Loss of “Private Keys”
The loss or destruction of certain “private keys” (numerical codes required by Coinberry to access its Dogecoin) could prevent Coinberry from accessing its Dogecoin. 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 Dogecoin 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 Dogecoin trading platforms. Unexpected market illiquidity may cause major losses to the holders of Dogecoin. The large size of Dogecoin that Coinberry may hold increases the risks of illiquidity by both making the Dogecoin difficult to liquidate and in liquidating, Coinberry may affect Dogecoin’s price significantly.
Dogecoin transfers are irreversible. An improper transfer (whereby Dogecoin is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Dogecoin agreeing to send the Dogecoin back to the original sender in a separate subsequent transaction. To the extent Coinberry erroneously transfers, whether accidental or otherwise, Dogecoin in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Dogecoin, leading to its loss.
Risks Associated with the Dogecoin Network
Dependence on Dogecoin Developers
While many contributors to Dogecoin’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 Dogecoin’s software. The dependency on the open-source developers is very high and the use cases of Dogecoin are also very important to the survival of the Crypto Asset.
Disputes on the Development of the Dogecoin Network may lead to Delays in the Development of the Network
There can be disputes between contributors on the best paths forward in building and maintaining Dogecoin’s software. Furthermore, the miners supporting the network and companies using it can disagree with the contributors as well, creating greater debate. Therefore, the Dogecoin community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation.
Significant Increase in Dogecoin Interest Could Affect the Ability of the Dogecoin Network to Accommodate Demand
One of the most contentious issues within the blockchain community has been around how to scale the network as user demand continues to rise. Dogecoin does not seem to suffer from the scaling issues facing many other blockchains due to its block times, which could allow the Dogecoin network to handle 10 times the volume of other networks. However, it will be important for the community to continue to develop at a pace that meets the demand for transacting in Dogecoin, otherwise users may become frustrated and lose faith in the network.
Concentration of Transaction Confirmation Processing Power in China
Due to preferential electricity discounts, there are large mining pools operating in China which have significant sway over the Dogecoin Network. The Chinese government could affect the operations of these miners in a number of ways. First, all traffic to the mining pools must pass through the Great Firewall of China, which means the Chinese government could cut off their connection to the Dogecoin network. Second, the Chinese government has previously partially banned Crypto Assets, and there is no guarantee that it won’t attempt to do so in full. If it were to ban Dogecoin, it may make mining Dogecoin an unpalatable activity to most Chinese miners, which could be detrimental to the Dogecoin network.
Possible Increase in Transaction Fees
Between December 2020 and January 2021, the fee for a transaction involving Dogecoin increased by over 1,500 percent. Transaction fees refer to the money paid to the Crypto Asset miners to get transactions accepted, and cost increases can occur when user numbers increase as the blockchain has limited space available to process all the transactions, it effectively becomes congested. Growing transaction fees therefore represent the number of Dogecoin transactions that are waiting in line to be processed but are also meant as an incentive to miners to process the especially large transactions - as they are more profitable for them. The increase in fees for the Crypto Asset coincide with both an increase in Dogecoin transactions as well as a price surge for Dogecoin after tweets from influencers with a very large number of followers.
Decrease in Block Reward
Dogecoin’s network employs the same system for adding new blocks to its decentralized ledger and reaching agreement among its network participants as Bitcoin, Litecoin, and many other networks. Known as a “Proof-of-Work” mechanism, this process involves “mining” where individuals or organizations compete for the right to add new blocks containing pending transactions to the blockchain ledger using specialized computer equipment. Over time the block reward is reduced which impacts the profitability of the miners.
Competitors to Dogecoin
To the extent a competitor to Dogecoin gains popularity and greater market share, the use and price of Dogecoin could be negatively impacted, which may adversely affect its price. Similarly, Dogecoin and the price of Dogecoin could be negatively impacted by competition from incumbents in the credit card and payments industries.
Significant Energy Consumption to run the Dogecoin Network
Because of the significant computing power required to mine Dogecoin, the network’s energy consumption as a whole may ultimately be deemed to be or indeed become unsustainable (barring improvements in efficiency which could be designed for the protocol). This could pose a risk to broader and sustained acceptance of the network as a peer-to-peer transactional platform.
Risks Associated with Dogecoin Trading Platforms
Regulation of Dogecoin Trading Platforms
Dogecoin trading platforms are spot markets in which Dogecoin can be exchanged for fiat currencies (CAD, USD, etc.). Coinberry seeks to ensure that the Dogecoin trading platforms on which it transacts are reputable, stable, and operating in compliance with applicable laws.
Limited Operating History of Dogecoin Trading Platforms
Dogecoin trading platforms have a limited operating history. Since 2013 several Dogecoin 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 Dogecoin trading platforms. The potential for instability of Dogecoin 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 Dogecoin, which may adversely affect its price.
Hacking of Dogecoin Trading Platforms May Have a Negative Impact on Perception of the Security of the Dogecoin Network
Trading platforms that adhere to best practices are insured, and most of these have not been hacked, or if they have the loss has been minimal. Although there is ample evidence which indicates that almost all of the economic trading volumes in Dogecoin occur on the top ten global trading platforms, many of which are regulated by the New York State Department of Financial Services, carry insurance for their hot wallet assets, such exchanges, or other, smaller, or less reputable exchanges, may get hacked. Dogecoin’s price is at risk if a platform is hacked as it can shake consumer confidence for those that do not understand the difference between a weakness in the platform versus a weakness in Dogecoin and its network.
Different Prices of Dogecoin on the Dogecoin Trading Platforms
Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Dogecoin 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 Dogecoin Trading Platform(s)
Between 2013 and 2020, a number of Dogecoin trading platforms have been closed due to fraud, failure, or security breaches. In many of these instances, the customers of such Dogecoin trading platforms were not compensated or made whole for the partial or complete losses of their account balances in such Dogecoin trading platforms. While smaller Dogecoin trading platforms are less likely to have the infrastructure and capitalization that make larger Dogecoin trading platforms more stable, larger Dogecoin trading platforms are more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information, or gain access to private computer systems).
Liquidity Constraints on Dogecoin Markets
While the liquidity and traded volume of Dogecoin 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 Dogecoin 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 Dogecoin. The large position in Dogecoin that we may acquire increases the risks of illiquidity by making our Dogecoin difficult to liquidate. In addition, the liquidation of significant amounts of Dogecoin by Coinberry may impact the market price of Dogecoin.
Risk of Manipulation on Dogecoin Trading Platforms
Some Dogecoin trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Dogecoin 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, Dogecoin 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 Dogecoin Network
There is no central clearing house for cash-to-Dogecoin transactions. Current practice is for the purchaser of Dogecoin to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Dogecoin to the purchaser’s public Dogecoin 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 Dogecoin from a Dogecoin trading platform, there is a risk that the Dogecoin trading platform will not initiate the transfer on the Dogecoin network upon receipt of cash from Coinberry, or that the bank where the Dogecoin trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Dogecoin 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