Risk Disclosure Statement
This Risk Disclosure Statement is important to understand. Please read it carefully.
This Risk Disclosure Statement is intended to be general in nature and may not disclose all of the risks or relevant considerations, including those specific to your circumstances, of opening a Ledn Account with Ledn Cayman SEZC Inc. (“Ledn”), entering into a contract with Ledn for the use of its products and services, or buying, holding, or trading digital assets. In light of all the risks, you should undertake such transactions only if you understand the nature of the contractual relationship which you are entering into with Ledn, and the extent of your exposure to the risks associated with owning, holding and trading in digital assets.
Buying, holding, or trading digital assets may not be suitable for everyone. You should carefully consider whether using any one of Ledn’s products or services is appropriate for you in light of your knowledge, experience, financial objectives, financial resources, and other relevant circumstances.
What are Digital Assets?
Digital assets, such as bitcoin, may be digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but do not necessarily have legal tender status (“Digital Assets”). Digital Assets are sometimes exchanged for currencies, but they are not generally backed or supported by any government or central bank. Their value is derived by market forces of supply and demand, and they are traditionally more volatile than fiat currencies. The value of Digital Assets may be derived from the continued willingness of market participants to exchange fiat currency for Digital Assets, which may result in the potential for permanent and total loss of value of a particular Digital Asset should the market for a Digital Asset disappear entirely. Governments may restrict the use and exchange of Digital Assets and the regulation thereof is still developing in most jurisdictions.
Digital Assets differ in their functions, structures, governance and rights. Ledn’s products and services support well established Digital Assets that function as a form of payment or means of exchange on a decentralized network, such as bitcoin and USD Coin. These Digital Assets have certain features that are analogous to existing commodities, such as currencies and precious metals, but are also different in many key respects, as described in this Risk Disclosure Statement.
Risks Associated with Digital Assets
The following is a brief summary of some of the risks associated with Digital Assets.
Short History
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 Digital Asset. Due to this short history, it is not certain whether the economic value, governance or functional elements of Digital Assets will persist over time. 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 Digital Asset. Open-source developers of blockchain technology have signalled 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 replaced the hash-based mining consensus mechanism of proof-of-work with a proof-of-stake mechanism. Changes may occur to the bitcoin blockchain, for example with the continued development of scalability protocols like the Lightning Network, which operate on top of the bitcoin blockchain. The expected timing and impacts of this change are uncertain.
Volatility and Liquidity
The value of Digital Assets can be extremely volatile and unpredictable, and holding any Digital Asset may result in significant loss in a short period of time. You should carefully assess your financial situation and determine if holding any Digital Asset is appropriate for you. Digital Asset markets are particularly sensitive to new developments, and since volumes are still maturing, any significant changes in market sentiment (including by way of sensationalism in the media, as a result of comments made by celebrities or certain companies or otherwise) may induce large swings in volume and subsequent price changes. Digital Asset prices on trading platforms have been volatile and subject to influence by many factors, including the levels of liquidity, public speculation on future appreciation in value, swings in investor confidence and the future growth of alternative Digital Assets that may gain market share. In certain circumstances, it may become difficult or impossible to assess the value of your Digital Assets. The trading of Digital Assets on public trading platforms has a limited history. The prices available on those platforms have, in some cases, been more volatile and subject to influence by additional factors not specific to the value of Digital Assets, including liquidity levels and operational interruptions. Operational interruptions may limit the liquidity of Digital Assets on the trading platform, which could result in volatile prices and reduced confidence in the Digital Assets traded on those platforms.
Ledn uses liquidity providers to buy and sell the Digital Assets that Ledn may trade for you. Such a liquidity providers connect to multiple trading platforms in order to ensure ongoing liquidity of Digital Assets. However, there is a risk that the liquidity sources accessed directly and indirectly by Ledn are unable to return the best possible prices or execution quality. This risk may be greater during periods of high market volatility or operational outages at a major trading platform.
A shift in regulatory characterization of a Digital Asset as a security or derivative could also impact its liquidity and transactability. If there is a change in the regulatory status or characterization of a Digital Asset available for trading, Ledn will re-assess the status and risks of the Digital Asset and update you accordingly.
Demand for Digital Assets
Digital Assets represent a new form of digital value that is still in the early adoption phase amongst the broader public. Investors should be aware that there is no assurance that Digital Assets will maintain their long-term value in terms of purchasing power or that the acceptance of Digital Assets for payments by mainstream retail merchants and commercial businesses will continue to grow. Their underlying value is driven by a number of factors, including their utility as a store of value, means of exchange, or unit of account. 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 a Digital Asset priced by the supply and demand of global markets for its own utility within remittances, B2B payments, time-stamping, etc. Speculators and investors use Digital Asset as a store of value, then layer on top means of exchange users, creating further demand. If consumers stop using Digital Assets as a means of exchange, or their adoption slows, then the price may suffer. Given that the value of bitcoin may be derived at least partially from its capitalization and position as first mover, the value of other Digital Assets relies far more on their underlying blockchain technology and there is a risk that a competitor may gain popularity and negatively impact the price of bitcoin.
The value of ether (and the assets built on top of the ethereum platform) relies primarily on its underlying blockchain technology, but also on its utility as a store of value, means of exchange, and the demand of newly designed use cases. The ethereum blockchain is intended to allow people to operate decentralized applications using blockchain technology that do not rely on the actions of a centralized intermediary. Ether, which is the primary currency of the ethereum blockchain, can then be used to compensate for the effort of others to power these decentralized applications and ensure that any transactions that occur on these applications are recorded in the blockchain. Accordingly, the long-term value of ether may be tied to the success or failure of the blockchain technology, and the decentralized applications built upon the ethereum blockchain.
Hard Forks
Blockchain networks are generally 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 "Hard 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 hard forks occurring in the past. In the future, such a hard fork could occur again. You acknowledge that Hard Forks may materially affect the value, function, and even the name of the Digital Assets associated with your Ledn Account. In the event of a Hard Fork, Ledn may temporarily suspend certain services on the Platform (with or without advance notice to you) while Ledn determines, in its sole discretion, which Digital Asset to support. Hard Forks are wholly outside of Ledn’s control, and Ledn’s ability to deliver forked Digital Assets resulting from a forked network may depend on third parties. Ledn is unlikely to support most forked networks and most forked Digital Assets will likely not be made available to you. Ledn may determine, in its sole discretion, not to support a forked network. You have no right, claim, or other privilege against Ledn to forked Digital Assets on such unsupported forked network. Ledn may, in its sole discretion, determine Ledn’s approach to such forked Digital Assets, which may include abandoning or otherwise electing not to support such forked Digital Assets as part of Ledn’s services.
Similar to the blockchain networks themselves, Digital Assets built on top of ethereum or that integrate with ethereum DApps are self-governed and subject to frequent upgrades by the open-source community. As new versions are released, the value of the asset might be impacted and material changes to functionality could trigger changes in demand, supply or price. Ledn reserves the right to decide how the Platform will continue to support the resulting assets of a fork or protocol upgrade, if at all.
Technical Issues
In the past, flaws in the source code for Digital 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 a certain level of 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 impact the broader sector, and this could negatively affect the value of Digital Assets.
Regulatory Uncertainty
The regulation of Digital Assets continues to evolve in many jurisdictions, which may restrict the use of Digital Assets or otherwise impact the demand for Digital Assets. Banks and other financial institutions may refuse to process funds for Digital Asset transactions, process wire transfers to or from Digital Asset trading platforms, Digital Asset-related companies or service providers, or maintain accounts for persons or entities transacting in Digital Assets.
Legislative and regulatory changes or actions by governments in different jurisdictions may adversely affect the use, transfer, exchange, and value of Digital Assets. You acknowledge that Digital Assets are new forms of assets, that the law regarding their ownership, custody, and transfer is developing and uncertain, including any potential taxation thereof, and that custody of Digital Assets poses certain risks that are not present in the case of more traditional asset classes; and you further acknowledge that you will bear such risks and the potential loss or diminution in value of such Digital Assets due to changes or developments in the law or conditions under existing law as a result of which your rights in and to such Digital Assets are not adequately protected.
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.
Whenever Ledn review a new Digital Asset, Ledn assess the ownership concentration of that particular asset. There are a number of ways in which a Digital Asset could be negatively impacted by a concentration of assets or power, including but not limited to: (i) if a participant or node operator gains control of a significant portion of a particular asset, (ii) if a 51% attack is successful, which means a mining entity gains control of enough hash power or stake in a proof-of-stake system to control which blocks are mined, which would significantly erode trust in the public blockchain networks, (iii) if a protocol’s decision-making power is concentrated to one or few holders which means consensus processes are threatened leading to poor or disruptive changes, or (iv) if applicable, if key actors make certain changes against the will of the broader community that could adversely impact the protocol or Digital Asset’s value. This is not an exhaustive list and new protocols can present unique concentration risks.
Dependence on the Internet
There are risks associated with using Ledn’s internet-based Platform including, but not limited to, the failure of hardware and software. Ledn maintains an independent and secure ledger of all transactions to minimize loss and maintain contingency plans to minimize the possibility of system failure. However, Ledn does not control signal power, reception, routing via the internet, configuration of your equipment or the reliability of your connection to the internet. The result of any failure of the foregoing may be that you are unable to conduct a transaction, your transaction is not executed according to your instructions, or your transaction is not executed at all. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a particular Digital Asset suddenly drops, or if trading is halted due to recent news events, unusual trading activity, or changes in the underlying Digital Asset system. The greater the volatility of a particular Digital Asset, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to one or more of the following: system failures, hardware failures, software failures, network connectivity disruptions, and data corruption.
Cyber Security Risk
The nature of Digital 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 Ledn to lose proprietary information or other information subject to privacy laws, suffer data corruption, or lose operational capacity. This in turn could cause Ledn 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 Ledn’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 Ledn’s third-party service providers (e.g. a liquidity provider or a custodian) can also give rise to many of the same risks associated with direct cyber security breaches.
Although Ledn has developed systems and processes designed to protect the data Ledn manages, prevent data loss and other security breaches, effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, there can be no assurance that these security measures will provide absolute security or prevent breaches or attacks. Ledn may experience cyber-attacks, extreme market conditions, or other operational or technical difficulties. Ledn is not and will not be responsible or liable for any loss or damage of any sort incurred by you as a result of such cyber-attacks, operational, market or technical difficulties.
No Government Deposit Insurance or Investor Protection Fund
Any Digital Assets held on the Platform are not protected by any government deposit insurer or investor protection funds. By holding your Digital Assets with Ledn you are exposed to insolvency risk (credit risk) on Ledn’s part or on the part of Ledn’s custodian designated to hold such Digital Assets.
No Voting Rights
Certain Digital Assets confer a right to vote on topics that may directly and indirectly affect functionality and economics of a particular crypto asset, including changes to block reward amounts, inflation percentages, consensus modelling or governance models. The Platform does not enable any voting functionality to users.
Commission and Fees
Although Ledn does not charge any commission fees, Ledn may earn a spread on your trade of Digital Assets. Any fees that Ledn may charge on any of its products or services may be based in part on the fees charged to Ledn by its third-party service providers (e.g. a liquidity provider or a custodian), which are subject to change.
Depreciation of Collateral and Liquidation
If you have posted Digital Assets as collateral for a Ledn Loan and the value of Digital Assets decreases, you may be required to deposit additional Digital Assets as collateral for the loan. Ledn may also liquidate Digital Assets posted as collateral if an event of default occurs on your Loan, in whole or in part, by selling such Digital Assets in accordance with your USD Loan Agreement, but you remain responsible for any deficiency which exists after the net proceeds of dispositions are credited against any amounts owing by you to Ledn.
Improper Transfers Risk
Transactions in Digital Assets may be irreversible, and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable. Some Digital Asset transactions are deemed to be made when recorded on a public ledger, which is not necessarily the date or time that you initiate the transaction.
An improper transfer (whereby Digital Assets are accidentally sent to the wrong recipient), whether accidental or resulting from theft, can only be undone by the receiver of the Digital Assets agreeing to send such Digital Assets back to the original sender in a separate subsequent transaction. If you or Ledn erroneously transfer, whether accidental or otherwise, Digital Assets in incorrect amounts or to the wrong recipients, such Digital Assets may become unrecoverable.
Loss of “Private Keys” Risk
The loss or destruction of certain “private keys” (numerical codes required by Ledn to access its Digital Assets) could prevent Ledn from accessing its Digital Assets. Loss of these private keys may be irreversible and could result in a loss to you.
Transfer Delays
At peak times, or during a period of instability in a blockchain network, it may not be possible to move your Digital Assets to private keys that are personal to you as fast as is typical. When you choose to conduct a transaction involving Digital Assets you may experience a delay caused by the blockchain that you are interacting with and/or delays caused by the technical systems that make up the Platform. Any Digital Asset transaction that you initiate will result in an immediate change in your Ledn Account but the transaction will take some time to become finalized on the applicable blockchain (i.e. incorporated into a block in a blockchain), and cannot be cancelled in the interim. It is possible that for technical or business reasons (e.g. network congestion on a blockchain), despite Ledn’s usual practice of rebroadcasting, a blockchain transaction may not become finalized (i.e incorporated into a block on the respective blockchain), and eventually your Ledn Account will reflect the failure of the transaction. In unusual circumstances it could take 48-72 hours for a failed transaction to be displayed properly within the Platform. If you experience unusual or frustrating delays, you should contact Ledn’s customer support for assistance.