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 XLM. 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.
Stellar is an open-source payments network that serves as a distributed intermediary blockchain for global financial systems and circulates a native asset, Stellar Lumens (XLM). The Stellar blockchain allows anyone to issue new assets in the network and exchange them for other assets via built-in asset exchange features.
Coinberry has performed due diligence with respect to Stellar Lumens (XLM) 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 XLM has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which XLM has the most significant connection
Risks Associated with Investing in XLM
Underlying Value Risk
XLM 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 XLM 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 XLM priced by the supply and demand of global markets for its own utility within remittances, B2B payments, timestamping, etc. If these means of valuing XLM prove to be fundamentally flawed, then the market may undergo a repricing of XLM, which could have an adverse impact on its price.
Top XLM Holders Control a Significant Percentage of the Outstanding XLM
Certain addresses on the Stellar blockchain networks hold a significant amount of the currently outstanding Crypto Assets. The Stellar Development Foundation announced their ownership stands at 60% of all XLM in existence, creating a central point of failure and a strong degree of centralization risk for the project writ large.
Regulation of XLM
The regulation of XLM continues to evolve in North America and within foreign jurisdictions, which may restrict the use of XLM or otherwise impact the demand for XLM.
Volatility of XLM
The risks of trading XLM 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 XLM 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 XLM) could prevent Coinberry from accessing its XLM. 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.
Competitors to Stellar
To the extent a competitor to XLM gains popularity and greater market share, the use and price of XLM could be negatively impacted, which may adversely affect its price. Similarly, XLM and the price of XLM could be negatively impacted by competition from incumbents in the credit card and payments industries.
Your Holdings May Become Illiquid
You may not always be able to liquidate your XLM 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 Stellar’s trading platforms. Unexpected market illiquidity may cause major losses to the holders of XLM. The large size of XLM that Coinberry may hold increases the risks of illiquidity by both making the XLM difficult to liquidate and in liquidating, Coinberry may affect XLM’s price significantly.
Strong Competition in the Space
There are several other Crypto Assets in the space that could take a substantial part of the market and may impact the price of XLM.
Susceptible to Error and Loss
There is no way to prevent all technical glitches and human error. XLM transfers are irreversible. An improper transfer (whereby XLM is accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the XLM agreeing to send the XLM 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 XLM, whether accidental or otherwise, in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the XLM, leading to its loss.
Risks Associated with the Stellar Network
Dependence on Stellar Developers
While many contributors to Stellar’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 Stellar’s software.
Disputes on the Development of the Stellar 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 Stellar’s software. Furthermore, the miners supporting the network and companies using it can disagree with the contributors as well, creating greater debate. Therefore, the Stellar community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation.
Significant Increase in Stellar Interest Could Affect the Ability of the Stellar Network to Accommodate Demand
One of the most contentious issues within the Stellar community has been around how to scale the network as user demand continues to rise. The debate goes back to the earliest days of Stellar. There are many possible solutions, and most of them boil down to different ideologies on how Stellar 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 XLM, otherwise, users may become frustrated and lose faith in the network.
Possible Increase in Transaction Fees
Stellar uses a different model to compute transactional fees compared to other coins. Stellar’s transaction fees have remained fixed at 0.00001 XLM per transaction. The transaction fee will depend on the value of each XLM, with an increased price of XLM, transaction fees on the Stellar Network will increase as well.
Attacks on the Stellar Network
The Stellar 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. Thus far these scenarios have not plagued the network for long or in a systemic manner.
Decrease in Block Reward
The Stellar Network does not have a mining-based currency. At the network's genesis, 100 billion XLMs were created. The only other XLM creation mechanism is inflation. To account for both economic growth and lost XLMs, there is a fixed 1% annual rate of new XLM creation. These new XLMs will be generated on a weekly basis and distributed via a direct voting method. No financial incentive (like a mining reward in the Bitcoin protocol) could lead to a dearth of nodes and node centralization.
Competitors to Stellar
To the extent a competitor to Stellar gains popularity and greater market share, the use and price of XLM could be negatively impacted, which may adversely affect its price. Similarly, XLM and the price of XLM could be negatively impacted by competition from incumbents in the credit card and payments industries.
Risks Associated with XLM Trading Platforms
Regulation of Stellar Trading Platforms
XLM trading platforms are spot markets in which XLM can be exchanged for fiat currencies (CAD, USD, etc). Coinberry seeks to ensure that the XLM trading platforms on which it transacts are reputable, stable and operating in compliance with applicable laws.
Limited Operating History of XLM Trading Platforms
XLM trading platforms have a limited operating history. Since 2017 several XLM 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 XLM trading platforms. The potential for instability of XLM 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 XLM, which may adversely affect its price.
Hacking of XLM Trading Platforms May Have a Negative Impact on Perception of the Security of the Stellar Network
XLM 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 XLM 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. XLM’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 XLM and the Stellar Network.
Different Prices of XLM on the Stellar Trading Platforms
Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for XLM 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 XLM Trading Platform(s)
Between 2013 and 2021, several XLM trading platforms have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such XLM trading platforms were not compensated or made whole for the partial or complete losses of their account balances in such XLM trading platforms. While smaller XLM trading platforms are less likely to have the infrastructure and capitalization that make larger XLM trading platforms more stable, larger XLM 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 XLM Markets
While the liquidity and traded volume of XLM 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 an XLM 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 XLM. The large position in XLM that we may acquire increases the risks of illiquidity by making our XLM difficult to liquidate. In addition, liquidation of significant amounts of XLM by Coinberry may impact the market price of XLM.
Risk of Manipulation on XLM Trading Platforms
Some XLM trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. XLM 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, XLM 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 Stellar Network
There is no central clearing house for cash-to-XLM transactions. Current practice is for the purchaser of XLM to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of XLM to the purchaser’s public Stellar 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 XLM from an XLM trading platform, there is a risk that the XLM trading platform will not initiate the transfer on the Stellar Network upon receipt of cash from Coinberry, or that the bank where the XLM trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the XLM 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 Aug 18, 2021