General Risks Associated with Crypto Assets
(a) Volatility and Liquidity. Price and liquidity of crypto assets has been, and may be, subject to large fluctuations on any given day and you may lose any and all value in your crypto assets at any time.
(b) Not Legal Tender. Crypto assets are not part of a central bank that can take corrective measures to protect the value of crypto assets in a crisis. Crypto assets are not legal tender and are not backed by a government (i.e. crypto assets do not have the same protection as the money deposited into a bank account)
(c) Value Dependent on Market Participants. Crypto assets have value from the continued willingness of market participants to use crypto assets. Crypto assets are susceptible to loss of confidence, which could collapse demand relative to supply and may result in permanent and total loss of value of a particular crypto asset if the market for such crypto assets disappears.
(d) Short History Risk. As a relatively new open source technology, it is expected that there will continue to be technical developments in blockchain technology, which could impact the value of a crypto asset. Due to this short history, it is not certain whether the economic value, governance, or functional elements of crypto assets will persist over time. The crypto asset community has successfully navigated a considerable number of technical and political challenges since the genesis of the Bitcoin blockchain, which Newton believes is a strong indicator that it will continue to engineer its way around future challenges. That said, the continuation of a vibrant crypto asset community is not guaranteed, and insufficient software development, contribution rates, community disputes regarding the development of the network and scaling options, or any other unforeseen challenges that the community is not able to navigate could have an adverse impact on the price of a crypto asset.
Tokens with their functions tied to applications that are built on an underlying blockchain network, such as Bitcoin or Ethereum, are operating within a relatively new, competitive market of crypto assets. Demand for said tokens can fluctuate rapidly; much like a technology start-up, such tokens are often still proving value to the broader community and establishing a reliable business model. Similar to the risks noted above, crypto assets of this nature can be impacted by changes made to their code, design, or community governance, and most provide updates and relevant information via forums and social channels to help stakeholders continually re-assess their interest in holding the asset.
Open source developers of various blockchain technology have signaled that they will continue to make efforts to improve the scalability and security of public blockchains. For example, in respect of the Ethereum blockchain, developers are planning to replace the current hash-based mining consensus mechanism of proof- of-work with a proof-of-stake mechanism. Changes may also occur to the Bitcoin blockchain; for example with the continued development of scalability protocols like the Lightning Network, which operates on top of the Bitcoin blockchain. The expected timing and impacts of this change are uncertain. Similar risks apply to other forks of Bitcoin source code like Litecoin or Bitcoin Cash.
(e) Blockchain Forks. Blockchain networks are powered by open source software. When a modification to that software is released by developers, and a substantial majority of miners consent to the modification, a change is implemented and the blockchain network continues uninterrupted. However, if a change were to be introduced with less than a substantial majority consenting to the proposed modification, and the modification is not compatible with the software in operation prior to its modification, the consequence would be what is known as a “fork” (i.e. a split) of the blockchain. One blockchain would be maintained by the pre- modification software and the other by the post-modification software. The effect is that both blockchains would operate in parallel, but independently. There are examples of such forks occurring in the past on both the Bitcoin and Ethereum blockchain networks, in some cases creating new popular and valuable assets of their own such as Bitcoin Cash. In the future, such a fork could occur again, and affect the viability or value of a crypto asset. Newton may choose not to support any future fork of the underlying blockchain of the crypto assets available on the Newton Platform, in which case you may not have any rights to the new crypto assets that may be created as a result of that fork. Similar to the blockchain networks themselves, crypto assets built on top of Ethereum or that integrate with Ethereum decentralized applications (DApps) are self-governed and subject to frequent upgrades by the open-source community. As new versions are released, the value of the crypto asset might be impacted and material changes to functionality could trigger changes in demand, supply or price. Newton reserves the right to decide how it will continue to support the resulting assets of a fork or protocol upgrade, if applicable, and will inform impacted clients of their trading or liquidation options at that time.
(f) Code Defects. In the past, flaws in the source code for crypto assets have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. Although the Bitcoin and Ethereum blockchains have demonstrated resiliency and integrity over time, the cryptography underlying either one could, in the future, prove to be flawed or ineffective. For example, developments in mathematics and/or technology, including advances in digital computing, algebraic geometry, and quantum computing, could result in the cryptography of the blockchain network being vulnerable to attack. Generally, any reduction in public confidence on the security or source code of a core blockchain network could negatively affect the broader sector, and this could negatively affect the value of crypto assets traded on the Newton Platform.
(g) Cybersecurity Risk. The nature of crypto assets may lead to an increased risk of fraud or cyber-attack. A breach in cyber security refers to both intentional and unintentional events that may cause Newton to lose proprietary information or other information subject to privacy laws, suﬀer data corruption, or lose operational capacity. This in turn could cause Newton to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or ﬁnancial loss. Cyber security breaches may involve unauthorized access to Newton’s digital information systems (e.g. through “hacking” or malicious software coding), but may also result from outside attacks such as denial-of-service attacks (i.e. eﬀorts to make network services unavailable to intended users). In addition, cyber security breaches of Newton’s third-party service providers can also give rise to many of the same risks associated with direct cyber security breaches. As with operational risk in general, Newton has established risk management systems designed to reduce the risks associated with cyber security.
(h) Stablecoin Risks. Some of the crypto assets available on the Newton Platform are “stablecoins”, which are pegged to the value of a fiat currency or other asset and may be redeemable for a specified amount of such fiat currency or asset. Newton conducts due diligence on all stablecoins listed on the Newton Platform, including by reviewing the sufficiency, segregation and independent verification of the stablecoin’s reserves, whether the assets backing the stablecoin are held at a regulated financial institution, any limitations on the ability of a holder to redeem on demand any conflicts of interest between the stablecoin issuer and any intermediaries and the risk that the stablecoin may be considered a security or derivative under applicable securities legislation.
(i) Concentration Risks. Certain addresses on the Bitcoin and Ethereum blockchain networks hold a significant amount of the currently outstanding Bitcoin and Ether, respectively. If one of these addresses were to exit their Bitcoin or Ether positions, it could cause volatility that may adversely affect the price of each respective crypto asset. Further, if anyone gains control over 51% of the computing power (hash rate) used by the blockchain network, they could use their majority share to double spend their crypto assets. If such a “51% attack” were to be successful, this would significantly erode trust in public blockchain networks like Bitcoin and Ethereum to store value and serve as a means of exchange, which may significantly decrease the value of crypto assets.