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. 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 is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The cryptocurrency began in 2009 when its implementation was released as open-source software. Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
Coinberry has performed due diligence with respect to Bitcoin 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 token inception
Token available for custody with existing custodians
The current developer ecosystem
Whether Bitcoin has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Bitcoin has the most significant connection
Risks Associated with Investing in Bitcoin
Underlying Value Risk
Bitcoin 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 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 Bitcoin priced by the supply and demand of global markets for its own utility within remittances, B2B payments, time-stamping, etc. If these means of valuing Bitcoin prove to be fundamentally flawed, then the market may undergo a repricing of Bitcoin, which could have an adverse impact on its price.
Top Bitcoin Holders Control a Significant Percentage of the Outstanding Bitcoin
Certain addresses on the Bitcoin blockchain networks hold a significant amount of the currently outstanding Crypto Assets.
Regulation of Bitcoin
The regulation of Bitcoin continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Bitcoin or otherwise impact the demand for Bitcoin.
Loss of “Private Keys”
The loss or destruction of certain “private keys” (numerical codes required by Coinberry to access its Bitcoin) could prevent Coinberry from accessing its Bitcoin. 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 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 trading platforms. Unexpected market illiquidity may cause major losses to the holders of Bitcoin. The large size of Bitcoin that Coinberry may hold increases the risks of illiquidity by both making the Bitcoin difficult to liquidate and in liquidating, Coinberry may affect Bitcoin’s price significantly.
Susceptible to Error and Loss
There is no way to prevent all technical glitches and human error. Bitcoin transfers are irreversible. An improper transfer (whereby Bitcoin is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Bitcoin agreeing to send the Bitcoin back to the original sender in a separate subsequent transaction. To the extent Coinberry erroneously transfers, whether accidental or otherwise, Bitcoin in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Bitcoin, leading to its loss.
Risks Associated with the Bitcoin Network
Dependence on Bitcoin Developers
While many contributors to Bitcoin’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’s software.
Disputes on the Development of the Bitcoin 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’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 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 Interest Could Affect the Ability of the Bitcoin Network to Accommodate Demand
One of the most contentious issues within the Bitcoin 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. There are many possible solutions, and most of them boil down to different ideologies on how Bitcoin 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, 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 Bitcoin 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 Bitcoin Network. Second, the Chinese government has previously partially banned Bitcoin, and there is no guarantee that it won’t attempt to do so in full. If it were to ban Bitcoin, it may make mining Bitcoin an unpalatable activity to most Chinese miners, which could be detrimental to the Bitcoin Network.
Possible Increase in Transaction Fees
Bitcoin 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 users could be forced to pay higher fees, thus reducing the attractiveness of the Bitcoin Network. Bitcoin 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.
Attacks on the Bitcoin Network
The Bitcoin 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. On May 11, 2020, the block reward was reduced from 12.5 to 6.25 Bitcoin. The block reward will decrease to 3.125 Bitcoin in 2024. 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. Decreased demand for Bitcoin may adversely affect its price.
Competitors to Bitcoin
To the extent a competitor to Bitcoin gains popularity and greater market share, the use and price of Bitcoin could be negatively impacted, which may adversely affect its price. Similarly, Bitcoin and the price of Bitcoin could be negatively impacted by competition from incumbents in the credit card and payments industries.
Significant Energy Consumption to run the Bitcoin Network
Because of the significant computing power required to mine Bitcoin, 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 Trading Platforms
Regulation of Bitcoin Trading Platforms
Bitcoin trading platforms are spot markets in which Bitcoin can be exchanged for fiat currencies (CAD, USD, etc). Coinberry seeks to ensure that the Bitcoin trading platforms on which it transacts are reputable, stable and operating in compliance with applicable laws.
Limited Operating History of Bitcoin Trading Platforms
Bitcoin trading platforms have a limited operating history. Since 2009 several Bitcoin 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 trading platforms. The potential for instability of Bitcoin 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, which may adversely affect its price.
Hacking of Bitcoin Trading Platforms May Have a Negative Impact on Perception of the Security of the Bitcoin Network
While Bitcoin’s blockchain has never been compromised by hackers, exchanges frequently have. Bitcoin 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 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’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 and its blockchain.
Different Prices of Bitcoin on the Bitcoin Trading Platforms
Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Bitcoin on that platform can also spike, making it trade at a premium to other platforms. This tendency is common geographically, with Chinese platforms frequently trading at a premium to platforms in Europe or America.
Closure of Bitcoin Trading Platform(s)
Between 2013 and 2019, a number of Bitcoin trading platforms have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Bitcoin trading platforms were not compensated or made whole for the partial or complete losses of their account balances in such Bitcoin trading platforms. While smaller Bitcoin trading platforms are less likely to have the infrastructure and capitalization that make larger Bitcoin trading platforms more stable, larger Bitcoin 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 Markets
While the liquidity and traded volume of Bitcoin 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 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. The large position in Bitcoin that we may acquire increases the risks of illiquidity by making our Bitcoin difficult to liquidate. In addition, the liquidation of significant amounts of Bitcoin by Coinberry may impact the market price of Bitcoin.
Risk of Manipulation on Bitcoin Trading Platforms
Some Bitcoin trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Bitcoin 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 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 Network
There is no central clearing house for cash-to-Bitcoin transactions. Current practice is for the purchaser of Bitcoin to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Bitcoin to the purchaser’s public Bitcoin 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 from a Bitcoin trading platform, there is a risk that the Bitcoin trading platform will not initiate the transfer on the Bitcoin network upon receipt of cash from Coinberry, or that the bank where the Bitcoin trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Bitcoin 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 July 29, 2021