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 Litecoin. 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.
Litecoin is a fork of Bitcoin's codebase with four times faster block times and a four times larger supply. Created in October 2011 by ex-Google and Coinbase engineer, Charlie Lee, Litecoin is a fork of Bitcoin's source code that posits itself as "a silver to Bitcoin's gold." Technically, Litecoin is nearly identical to Bitcoin with key differences relating to block time, supply, hashing algorithm, and initial distribution.
Coinberry has performed due diligence with respect to Litecoin 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 Litecoin has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Litecoin has the most significant connection
Risks Associated with Investing in Litecoin
Underlying Value Risk
Litecoin 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 Litecoin 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 Litecoin priced by the supply and demand of global markets for its own utility within remittances, B2B payments, time-stamping, etc. What initially made Litecoin valuable was the fact that it tried to improve upon Bitcoin in several ways. While it is still holding the fort in terms of efficiency and speed, it has lost its uniqueness as more and more blockchains launched over the years. If these means of valuing Litecoin prove to be fundamentally flawed, then the market may undergo a repricing of Litecoin, which could have an adverse impact on its price.
Top Litecoin Holders Control a Significant Percentage of the Outstanding Litecoin
Certain addresses on the Litecoin blockchain networks hold a significant amount of the currently outstanding Crypto Assets. More than half of all Litecoin is held in just 189 non-exchange addresses making the concentration very high.
Regulation of Litecoin
The regulation of Litecoin continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Litecoin or otherwise impact the demand for Litecoin.
Volatility of Litecoin
The risks of trading Litecoin 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 Litecoin 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 Litecoin) could prevent Coinberry from accessing its Litecoin. 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 Litecoin 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 Litecoin trading platforms. Unexpected market illiquidity may cause major losses to the holders of Litecoin. The large size of Litecoin that Coinberry may hold increases the risks of illiquidity by both making the Litecoin difficult to liquidate and in liquidating, Coinberry may affect Litecoin’s price significantly.
Susceptible to Error and Loss
There is no way to prevent all technical glitches and human error. Litecoin transfers are irreversible. An improper transfer (whereby Litecoin is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Litecoin agreeing to send the Litecoin 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, Litecoin in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Litecoin, leading to its loss.
Risks Associated with the Litecoin Network
Dependence on Litecoin Developers
While many contributors to Litecoin’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 Litecoin’s software.
Disputes on the Development of the Litecoin 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 Litecoin’s software. Furthermore, the miners supporting the network and companies using it can disagree with the contributors as well, creating greater debate. Therefore, the Litecoin community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation.
Significant Increase in Litecoin Interest Could Affect the Ability of the Litecoin Network to Accommodate Demand
One of the most contentious issues within the Litecoin community has been around how to scale the network as user demand continues to rise. The debate goes back to the earliest days of Litecoin. There are many possible solutions, and most of them boil down to different ideologies on how Litecoin 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 Litecoin, otherwise, users may become frustrated and lose faith in the network.
Possible Increase in Transaction Fees
Litecoin 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 Litecoin users could be forced to pay higher fees, thus reducing the attractiveness of the Litecoin Network. Litecoin 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 Litecoin.
Attacks on the Litecoin Network
The Litecoin 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
Litecoin's initial block reward was 50 LTC. The block reward splits every 4 years. This lowers the rate at which Litecoins are generated. The current Litecoin block reward is 12.5 LTC, after the next halving, which will take place around August 2023, the block reward will be 6.25 LTC. As the block reward continues to decrease over time, the mining incentive structure will transition to a higher reliance on transaction verification fees 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 Litecoin. Decreased demand for Litecoin may adversely affect its price.
Competitors to Litecoin
To the extent a competitor to Litecoin gains popularity and greater market share, the use and price of Litecoin could be negatively impacted, which may adversely affect its price. Similarly, Litecoin and the price of Litecoin could be negatively impacted by competition from incumbents in the credit card and payments industries.
Significant Energy Consumption to run the Litecoin Network
Because of the significant computing power required to mine Litecoin, 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 Litecoin Trading Platforms
Regulation of Litecoin Trading Platforms
Litecoin trading platforms are spot markets in which Litecoin can be exchanged for fiat currencies (CAD, USD, etc.). Coinberry seeks to ensure that the Litecoin trading platforms on which it transacts are reputable, stable, and operating in compliance with applicable laws.
Limited Operating History of Litecoin Trading Platforms
Litecoin trading platforms have a limited operating history. Since 2009 several Litecoin 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 Litecoin trading platforms. The potential for instability of Litecoin 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 Litecoin, which may adversely affect its price.
Hacking of Litecoin Trading Platforms May Have a Negative Impact on Perception of the Security of the Litecoin Network
While Litecoin’s blockchain has never been compromised by hackers, exchanges frequently have. Litecoin 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 Litecoin 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. Litecoin’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 Litecoin and its blockchain.
Different Prices of Litecoin on the Litecoin Trading Platforms
Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Litecoin 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 Litecoin Trading Platform(s)
Between 2013 and 2021, several Litecoin trading platforms have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Litecoin trading platforms were not compensated or made whole for the partial or complete losses of their account balances in such Litecoin trading platforms. While smaller Litecoin trading platforms are less likely to have the infrastructure and capitalization that make larger Litecoin trading platforms more stable, larger Litecoin 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 Litecoin Markets
While the liquidity and traded volume of Litecoin 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 Litecoin 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 Litecoin. The large position in Litecoin that we may acquire increases the risks of illiquidity by making our Litecoin difficult to liquidate. In addition, the liquidation of significant amounts of Litecoin by Coinberry may impact the market price of Litecoin.
Risk of Manipulation on Litecoin Trading Platforms
Some Litecoin trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Litecoin trading platforms are not required to adopt policies and procedures for the purpose of detecting and preventing manipulative and deceptive trading activities and, if manipulative and deceptive trading activities are detected, Litecoin 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 Litecoin Network
There is no central clearing house for cash-to-Litecoin transactions. Current practice is for the purchaser of Litecoin to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Litecoin to the purchaser’s public Litecoin 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 Litecoin from a Litecoin trading platform, there is a risk that the Litecoin trading platform will not initiate the transfer on the Litecoin network upon receipt of cash from Coinberry, or that the bank where the Litecoin trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Litecoin 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