Crypto Asset Statement - Polkadot (DOT) – Coinberry

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 Polkadot. 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.

Background

Polkadot is a blockchain network designed to support various interconnected, application-specific sub-chains called parachains. Polkadot is the brainchild of Dr. Gavin Wood, who is one of the co-founders of Ethereum and the inventor of the Solidity smart contract language. Dr. Wood started working on his idea to “design a sharded version of Ethereum” in mid-2016 and released the first draft of the Polkadot whitepaper in Oct. 2016.

Due diligence

Coinberry has performed due diligence with respect to Polkadot 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 Polkadot has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Polkadot has the most significant connection

Risks Associated with Investing in Polkadot

Underlying Value Risk

Polkadot 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 Polkadot within those use cases. In terms of risks Polkadot is competing with many other general-purpose, smart contracting, Proof of Stake blockchains like Tezos, Cosmos, and Cardano, to name a few, with industry-leading Ethereum already showing entrenched network effects.

Regulation of Polkadot

The regulation of Polkadot continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Polkadot or otherwise impact the demand for Polkadot.

Volatility of Polkadot

The risks of trading Polkadot 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 Polkadot 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 Polkadot) could prevent Coinberry from accessing its Polkadot. 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 Polkadot 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 Polkadot trading platforms. Unexpected market illiquidity may cause major losses to the holders of Polkadot. The large size of Polkadot that Coinberry may hold increases the risks of illiquidity by both making the Polkadot difficult to liquidate and in liquidating, Coinberry may affect Polkadot’s price significantly.

Improper Transfers

Polkadot transfers are irreversible. An improper transfer (whereby Polkadot is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Polkadot agreeing to send the Polkadot back to the original sender in a separate subsequent transaction. To the extent Coinberry erroneously transfers, whether accidental or otherwise, Polkadot in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Polkadot, leading to its loss.

Risks Associated with the Polkadot Network

Dependence on Polkadot Developers

While many contributors to the Polkadot network 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 the Polkadot network.

Disputes on the Development of the Polkadot 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 the Polkadot network. Furthermore, the node operators supporting the network and companies using it can disagree with the contributors as well, creating greater debate. Therefore, the Polkadot community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation.

Possible Increase in Transaction Fees

Several resources in a blockchain network are limited, for example, storage and computation. Transaction fees prevent individual users from consuming too many resources. Polkadot uses a weight-based fee model as opposed to a gas-metering model. As such, fees are charged prior to transaction execution; once the fee is paid, nodes will execute the transaction. To consider short-term spikes, Polkadot uses tips on top of the length and weight fees. Users can optionally add a tip to the fee to give the transaction a higher priority. This system can increase fees for transactions during high volumes of traffic in the network.

Competitors to Polkadot

To the extent a competitor to Polkadot gains popularity and greater market share, the use and price of Polkadot could be negatively impacted, which may adversely affect its price. Similarly, Polkadot and the price of Polkadot could be negatively impacted by competition from incumbents in the credit card and payments industries.

Risks Associated with Polkadot Trading Platforms

Regulation of Polkadot Trading Platforms

Polkadot trading platforms are spot markets in which Polkadot can be exchanged for fiat currencies (CAD, USD, etc). Coinberry seeks to ensure that the Polkadot trading platforms on which it transacts are reputable, stable and operating in compliance with applicable laws.

Limited Operating History of Polkadot Trading Platforms

Polkadot trading platforms have a limited operating history. The potential for instability of Polkadot 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 Polkadot, which may adversely affect its price.

Hacking of Polkadot Trading Platforms May Have a Negative Impact on Perception of the Security of the Polkadot Network

While Polkadot’s blockchain has never been compromised by hackers, exchanges frequently have. Polkadot 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. Polkadot’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 Polkadot and its blockchain.

Different Prices of Polkadot on the Polkadot Trading Platforms

Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Polkadot 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 Polkadot Trading Platform(s)

As a decentralized network, Polkadot has been trading on multiple platforms as the scalability increases, with more and more platforms offering the coin. In the long run, the coin may be impacted if several platforms close due to fraud, failure, or security breaches.

Liquidity Constraints on Polkadot Markets

While the liquidity and traded volume of Polkadot 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 Polkadot trading platform. When transacting in the Crypto Asset markets, Coinberry will be competing for liquidity with other large investors, including speculators, node operators 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 Polkadot. The large position in Polkadot that we may acquire increases the risks of illiquidity by making our Polkadot difficult to liquidate. In addition, the liquidation of significant amounts of Polkadot by Coinberry may impact the market price of Polkadot.

Risk of Manipulation on Polkadot Trading Platforms

Some Polkadot trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Polkadot 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, Polkadot 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 Polkadot Network

There is no central clearing house for cash-to-Polkadot transactions. Current practice is for the purchaser of Polkadot to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Polkadot to the purchaser’s public Polkadot 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 Polkadot from a Polkadot trading platform, there is a risk that the Polkadot trading platform will not initiate the transfer on the Polkadot network upon receipt of cash from Coinberry, or that the bank where the Polkadot trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Polkadot trading platform.

Risk Statement

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