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 Ethereum. 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.
Coinberry has performed due diligence with respect to Ethereum 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 Ethereum has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Ethereum has the most significant connection
Risks Associated with Investing in Ethereum
Underlying Value Risk
Ethereum 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 Ethereum within those use cases. The price of Ethereum fluctuates with the Gas fee or transactional fee, which has a strong relation to the demand and supply of Ethereum as a coin and network. If these means of valuing Ethereum prove to be fundamentally flawed, then the market may undergo a repricing of Ethereum, which could have an adverse impact on its price.
Top Ethereum Holders Control a Significant Percentage of the Outstanding Ethereum
Certain addresses on the Ethereum blockchain networks hold a significant amount of the currently outstanding Crypto Assets. The ownership by Concentration model shows that there are five Ethereum addresses holding 9.33% of its circulating supply. Approximately, 72.65% of the tokens in circulation are concentrated in the hands of a few wallets.
Regulation of Ethereum
The regulation of Ethereum continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Ethereum or otherwise impact the demand for Ethereum.
Volatility of Ethereum
The risks of trading Ethereum 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 Ethereum 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 Ethereum) could prevent Coinberry from accessing its Ethereum. Loss of these private keys may be irreversible and could result in the loss of all or substantially all crypto assets held in trust by Coinberry.
Your Holdings May Become Illiquid
You may not always be able to liquidate your Ethereum 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 Ethereum trading platforms. Unexpected market illiquidity may cause major losses to the holders of Ethereum. The large size of Ethereum that Coinberry may hold increases the risks of illiquidity by both making the Ethereum difficult to liquidate and in liquidating, Coinberry may affect Ethereum’s price significantly.
Ethereum transfers are irreversible. An improper transfer (whereby Ethereum is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Ethereum agreeing to send the Ethereum back to the original sender in a separate subsequent transaction. To the extent Coinberry erroneously transfers, whether accidental or otherwise, Ethereum in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Ethereum, leading to its loss.
Risks Associated with the Ethereum Network
Dependence on Ethereum Developers
While many contributors to Ethereum’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 Ethereum’s software.
Disputes on the Development of the Ethereum 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 Ethereum’s software. Furthermore, the miners supporting the network and companies using it can disagree with the contributors as well, creating greater debate. Therefore, the Ethereum community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation.
Significant Increase in Ethereum Interest Could Affect the Ability of the Ethereum Network to Accommodate Demand
One of the most contentious issues within the Ethereum community has been the transition from Proof of Work to Proof of Stake which still has no clear roadmap and or the impact on the Ethereum 1.0 project remains unclear. This delay and lack of clarity may have an adverse effect on the price of Ethereum in the long term.
Attacks on the Ethereum Network
The Ethereum 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 many 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 October 17, 2017, the block reward was reduced from 5 to 3 Ethereum. On February 28, 2019, the block reward was reduced from 3 to 2 Ethereum. The block reward is expected to reduce to 0.5 Ethereum in the long term. The more usage the chain has the slower the supply will increase and, over time, it is expected that more Ethereum will be burnt than issued leading to a decrease in the supply.
Competitors to Ethereum
To the extent a competitor to Ethereum gains popularity and greater market share, the use and price of Ethereum could be negatively impacted, which may adversely affect its price. Similarly, Ethereum and the price of Ethereum could be negatively impacted by competition from incumbents in the credit card and payments industries.
Significant Energy Consumption to run the Ethereum Network
Because of the significant computing power required to mine Ethereum, the network’s energy consumption 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 Ethereum Trading Platforms
Regulation of Ethereum Trading Platforms
Ethereum trading platforms are spot markets in which Ethereum can be exchanged for fiat currencies (CAD, USD, etc.). Coinberry seeks to ensure that the Ethereum trading platforms on which it transacts are reputable, stable, and operating in compliance with applicable laws.
Limited Operating History of Ethereum Trading Platforms
Ethereum trading platforms have a limited operating history. Since 2009 several Ethereum 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 Ethereum trading platforms. The potential for instability of Ethereum 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 Ethereum, which may adversely affect its price.
Hacking of Ethereum Trading Platforms May Have a Negative Impact on Perception of the Security of the Ethereum Network
While Ethereum’s blockchain has never been compromised by hackers, exchanges frequently have. Ethereum 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 the economic trading volumes in Ethereum 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. Ethereum’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 Ethereum and its blockchain.
Different Prices of Ethereum on Ethereum Trading Platforms
Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Ethereum 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 Ethereum Trading Platform(s)
Between 2013 and 2021, several Ethereum trading platforms have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Ethereum trading platforms were not compensated or made whole for the partial or complete losses of their account balances in such Ethereum trading platforms. While smaller Ethereum trading platforms are less likely to have the infrastructure and capitalization that make larger Ethereum trading platforms more stable, larger Ethereum 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 Ethereum Markets
While the liquidity and traded volume of Ethereum 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 the Ethereum 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 Ethereum. The large position in Ethereum that we may acquire increases the risks of illiquidity by making our Ethereum difficult to liquidate. In addition, the liquidation of significant amounts of Ethereum by Coinberry may impact the market price of Ethereum.
Risk of Manipulation on Ethereum Trading Platforms
Some Ethereum trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Ethereum 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, Ethereum 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 Ethereum Network
There is no central clearing house for cash-to-Ethereum transactions. Current practice is for the purchaser of Ethereum to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Ethereum to the purchaser’s public Ethereum 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 Ethereum from an Ethereum trading platform, there is a risk that the Ethereum trading platform will not initiate the transfer on the Ethereum network upon receipt of cash from Coinberry, or that the bank where the Ethereum trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Ethereum 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