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 Bitcoin Cash. 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.
Bitcoin Cash is a Bitcoin hard fork advocating for and building towards a literal interpretation of Bitcoin as a "peer-to-peer electronic cash system". Bitcoin Cash, the protocol, is a distributed, time-stamped ledger of unspent transaction output (UTXO) transfers stored in an append-only chain of 32MB data blocks. A network of mining and economic nodes maintains this blockchain by validating, propagating, and competing to include pending transactions (mempool) in new blocks. Bitcoin Cash proponents pushed for a system that could scale to VISA level transaction throughput without second layers while maintaining affordable transaction fees.
Coinberry has performed due diligence with respect to Bitcoin Cash 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 Bitcoin Cash has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Bitcoin Cash has the most significant connection
Risks Associated with Investing in Bitcoin Cash
Underlying Value Risk
Bitcoin Cash 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, unit of account, and the demand for Bitcoin Cash within those use cases. A currency must have utility in order to be effective. Individuals must be able to reliably trade units of the currency for goods and services. This is a primary reason why currencies developed in the first place. Bitcoin cash is a fork of Bitcoin, have similar characteristics and often competes with Bitcoin. The demand for Bitcoin cash also depends on the scalability of the coin. If these means of valuing Bitcoin Cash prove to be fundamentally flawed, then the market may undergo a repricing of Bitcoin Cash, which could have an adverse impact on its price.
Top Bitcoin Cash Holders Control a Significant Percentage of the Outstanding Bitcoin Cash
During the launch of Bitcoin Cash, each holder of Bitcoin received one Bitcoin Cash, hence the concentration remains somewhat close to Bitcoin. Certain addresses on the Bitcoin Cash blockchain networks hold a significant amount of the currently outstanding Crypto Assets.
Regulation of Bitcoin Cash
The regulation of Bitcoin Cash continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Bitcoin Cash or otherwise impact the demand for Bitcoin Cash.
Volatility of Bitcoin Cash
The risks of trading Bitcoin Cash 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 Bitcoin Cash 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 Bitcoin Cash) could prevent Coinberry from accessing its Bitcoin Cash. 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 Bitcoin Cash 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 Bitcoin Cash trading platforms. Unexpected market illiquidity may cause major losses to the holders of Bitcoin Cash. The large size of Bitcoin Cash that Coinberry may hold increases the risks of illiquidity by both making the Bitcoin Cash difficult to liquidate and in liquidating, Coinberry may affect Bitcoin Cash’s price significantly.
Susceptible to Error and Loss
There is no way to prevent all technical glitches and human error. Bitcoin Cash transfers are irreversible. An improper transfer (whereby Bitcoin Cash is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Bitcoin Cash agreeing to send the Bitcoin Cash back to the original sender in a separate subsequent transaction. Coinberry receives transfer instructions from its clients and relies on the accuracy of the instructions provided by the client. To the extent Coinberry erroneously transfers, whether accidental or otherwise, Bitcoin Cash in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Bitcoin Cash, leading to its loss.
Risks Associated with the Bitcoin Cash Network
Dependence on Bitcoin Cash Developers
While many contributors to Bitcoin Cash’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 Bitcoin Cash’s software.
Disputes on the Development of the Bitcoin Cash 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 Bitcoin Cash’s software. Furthermore, the miners supporting the network and companies using it can disagree with the contributors as well, creating greater debate. Therefore, the Bitcoin Cash community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation.
Significant Increase in Bitcoin Cash Interest Could Affect the Ability of the Bitcoin Cash Network to Accommodate Demand
One of the most contentious issues within the Bitcoin Cash community has been around how to scale the network as user demand continues to rise. The debate goes back to the earliest days of Bitcoin Cash. There are many possible solutions, and most of them boil down to different ideologies on how Bitcoin Cash should be used. However, it will be important for the community to continue to develop at a pace that meets the demand for transacting in Bitcoin Cash, otherwise, users may become frustrated and lose faith in the network.
Possible Increase in Transaction Fees
Bitcoin Cash miners, functioning in their transaction confirmation capacity, collect fees for each transaction they confirm. Miners confirm transactions by adding previously unconfirmed transactions to new blocks in the blockchain. Miners are not forced to confirm any specific transaction, but they are economically incentivized to confirm valid transactions as a means of collecting fees. Miners have historically accepted relatively low transaction confirmation fees because miners have a very low marginal cost of validating unconfirmed transactions. If miners collude in an anti-competitive manner to reject low transaction fees, then Bitcoin Cash users could be forced to pay higher fees, thus reducing the attractiveness of the Bitcoin Cash Network. Bitcoin Cash mining occurs globally and it may be difficult for authorities to apply antitrust regulations across multiple jurisdictions. Any collusion among miners may adversely impact the price of Bitcoin Cash.
Attacks on the Bitcoin Cash Network
The Bitcoin Cash Network is periodically subject to distributed denial of service attacks to clog the list of transactions being tabulated by miners, which can slow the confirmation of authentic transactions. Another avenue of attack would be if a large number of miners were taken offline then it could take some time before the difficulty of the mining process algorithmically adjusts, which would stall block creation time and therefore transaction confirmation time. Thus far these scenarios have not plagued the network for long or in a systemic manner.
Decrease in Block Reward
The block reward will decrease over time. Most recently on April 8, 2020, the block reward reduced from 12.5 to 6.25 Bitcoin Cash. As the block reward continues to decrease over time, the mining incentive structure will transition to a higher reliance on transaction verification fees in order to incentivize miners to continue to dedicate processing power to the blockchain. If transaction verification fees become too high, the marketplace may be reluctant to use Bitcoin Cash. Decreased demand for Bitcoin Cash may adversely affect its price.
Competitors to Bitcoin Cash
To the extent, a competitor to Bitcoin Cash gains popularity and greater market share, the use and price of Bitcoin Cash could be negatively impacted, which may adversely affect its price. Similarly, Bitcoin Cash and the price of Bitcoin Cash could be negatively impacted by competition from incumbents in the credit card and payments industries.
Significant Energy Consumption to run the Bitcoin Cash Network
Because of the significant computing power required to mine Bitcoin Cash, 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 Bitcoin Cash Trading Platforms
Regulation of Bitcoin Cash Trading Platforms
Bitcoin Cash trading platforms are spot markets in which Bitcoin Cash can be exchanged for fiat currencies (CAD, USD, etc). Coinberry seeks to ensure that the Bitcoin Cash trading platforms on which it transacts are reputable, stable and operating in compliance with applicable laws.
Limited Operating History of Bitcoin Cash Trading Platforms
Bitcoin Cash trading platforms have a limited operating history. Since 2009 several Bitcoin Cash 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 Bitcoin Cash trading platforms. The potential for instability of Bitcoin Cash 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 Bitcoin Cash, which may adversely affect its price.
Hacking of Bitcoin Cash Trading Platforms May Have a Negative Impact on Perception of the Security of the Bitcoin Cash Network
While Bitcoin Cash’s blockchain has never been compromised by hackers, exchanges frequently have. Bitcoin Cash 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 Bitcoin Cash 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. Bitcoin Cash’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 Bitcoin Cash and its blockchain.
Different Prices of Bitcoin Cash on the Bitcoin Cash Trading Platforms
Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Bitcoin Cash 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 Bitcoin Cash Trading Platform(s)
Between 2013 and 2021, a number of Bitcoin Cash trading platforms have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Bitcoin Cash trading platforms were not compensated or made whole for the partial or complete losses of their account balances in such Bitcoin Cash trading platforms. While smaller Bitcoin Cash trading platforms are less likely to have the infrastructure and capitalization that make larger Bitcoin Cash trading platforms more stable, larger Bitcoin Cash 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 Bitcoin Cash Markets
While the liquidity and traded volume of Bitcoin Cash 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 Bitcoin Cash 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 Bitcoin Cash. The large position in Bitcoin Cash that we may acquire increases the risks of illiquidity by making our Bitcoin Cash difficult to liquidate. In addition, the liquidation of significant amounts of Bitcoin Cash by Coinberry may impact the market price of Bitcoin Cash.
Risk of Manipulation on Bitcoin Cash Trading Platforms
Some Bitcoin Cash trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Bitcoin Cash 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, Bitcoin Cash 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 Bitcoin Cash Network
There is no central clearing house for cash-to-Bitcoin Cash transactions. Current practice is for the purchaser of Bitcoin Cash to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Bitcoin Cash to the purchaser’s public Bitcoin Cash 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 Bitcoin Cash from a Bitcoin Cash trading platform, there is a risk that the Bitcoin Cash trading platform will not initiate the transfer on the Bitcoin Cash network upon receipt of cash from Coinberry, or that the bank where the Bitcoin Cash trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Bitcoin Cash 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 August 18, 2021
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