This Digital Assets Risks Disclosure has been prepared for the purpose of giving flov technologies AG's (here after "flovtec")clients insights on some of the risks linked to trading and holding of digital assets. The Leaflet has been drafted for informational purposes only and shall not be taken as an exhaustive list of risks. The client is hereby made fullyaware, acknowledges, understands and accepts that the risks associated with the trading and holding of digital assets and the use of flovtec services cannot befully covered by the present leaflet. It is the sole responsibility of the client, and flovtec highly advises him/her, to seek for external professionaladvice before defining and agreeing on an investment strategy involving exposure to digital assets.
The following sections outline the major identified risks associatedwith the trading and holding of digital assets:
2. Technology Risks
2.1 Distributed Ledger Technology, Blockchain, Smart Contracts and Decentralized Applications
Distributed LedgerTechnology such as Blockchain and the applications derived from are in their early days. The companies are in the research and development phase. In this regard, no technical standards and no best practices have been agreed and established in this field by stakeholders. This may lead to material changes and/or technology/product abandonment in a foreseeable future. This may increase the overall financial risk of holding digital assets.
2.2 New Technology
The advent of new technologies (such as Quantum computing) could threaten or even wipe out Distributed Ledger Technology. More specifically cryptocurrencies and tokens could suffer from severe devaluation, illiquidity up to total loss of their value.
2.3 Fraud, theft and cyber attacks
Given their specificity and current value, digital assets are an attractive target for hackers and criminals. Trading and holding digital assets thus increase significantly the likelihood of fraud, theft and cyber-attacks. Pseudonymity, anonymity and irreversibility of the transactions on distributed ledgers and complexity of the processes are amongst the factors that increase the above-mentioned risks. flovtec's client understands, acknowledges and accepts that he/she is solely responsible for and shall bear any losses resulting from one of the above-mentioned risks.
Digital assets are being developed based on open-source software. No entity (and specifically not flovtec) controls and/or employs the persons in charge of developing the software. As a result, it is materially impossible for flovtec to assess whether the software can be relied upon and if it functions correctly. This could result in exposing the client's digital assets to threats, theft, cyber-attacks and devaluation. flovtec shall by no means be held liable for any weaknesses, back-doors or programming-errors the software may contain. The client understands, acknowledges and accepts that flovtec does not commit to conduct in-depth due diligence on the digital assets prior to making an investment decision, in particular with regard to their technical specifications.
2.5 Transaction processing and cost
Transactions on a distributed ledger and their processing are dependent on various factors such as, but not limited to, processing time, volume of transactions, variation of the fees paid to the miners and efficiency of the protocol. These factors may result in adverse consequences such as affecting flovtec services ability to perform transactions and/or increase the fees paid for processing the transactions and thus impact negatively the client's portfolio overall performance.
2.6 Hard forks
Distributed ledgers operate through consensus of the network (i.e. the miners processing the transactions and the developers of the open-source software). The network might disagree on some software updates proposals and this may result in a so called "hard-fork".When a hard-fork happens, it can lead to the shift from the previous ledger to the updated (forked) one and therefore decrease the value of the digital asset based on the former ledger. The transactions processing of digital assets based on such ledger can be made more difficult and result in fee increases.
3. Product risk
3.1 Nature of the rights/claims
Digital assets incorporate and/or represent a wide range of different rights, from financial, non-financial rights to claims against a counterparty. Amongst the different rights and claims incorporated in digital assets, some of them do not resemble to traditional financial instruments. It is the sole responsibility of flovtec's client to conduct his/her own due diligence over the specifics of each digital assets (such as identifying the rights, obligations and/or claims incorporated in a given digital asset) before taking any investment decisions.
3.2 Ability to use the rights/claims
The digital asset value is directly correlated to the ability of its owner to make use of the right/claim incorporated therein. The client understands, acknowledges and accepts that his ability to exercise the right and/or the claim incorporated in a digital asset can be restrained by using flovtec's services. Furthermore, the client understands, acknowledges and accepts that the value of the digital asset may be lower for him/her given his/her inability to directly exercise the right/claim contained therein.
3.3 Valuation metrics
Given the wide range of different rights, obligations and/or claims incorporated in digital assets, their valuation is challenging. This might result in a distortion between their valuation and their actual fair value.
Digital assets secondary market is mostly unregulated or lightly regulated. There are no international standards for the reporting of digital asset exchanges daily volume rates and investors behaviour is unpredictable. This might lead to periods of decreased liquidity and/or illiquidity. Investors might face temporary order freezes due to lack of liquidity, negative price development, strong price movements, wider spreads and high rejection rates. The client understands, acknowledges and accepts that he might not be able to liquidate a position and face major loss to total loss of the value of the digital assets held.
Digital asset price information that flovtec discloses to the client may be based on the average exchange rate of several liquidity providers or a single liquidity provider.Depending on the digital asset at hand, a single liquidity provider may offer liquidity and thus price information. This may result in a higher risk of illiquidity and spread fluctuation. The client understands, acknowledges and accepts that flovtec’s services/software may not be able to purchase or liquidate a position on a given digital asset.
Digital assets price is subject to high fluctuation and may change drastically within a few hours.Digital asset price is highly unpredictable and volatile.
Digital assets are subject to bubbles and high volatility due to investors irrational behaviour, market manipulation schemes and external factors. Amongst other factors, adverse changes in the regulatory environment and the development of the software, reputational damage done by hacking episodes, the rise of a competing new technology or currencies (such as central bank digital currency) and macroeconomic development such as inflation may be the cause of the digital asset volatility. This may lead to loss of confidence, collapsing of the demand and therefore a crash of the digital assets market value.
The client understands, acknowledges and accepts that digital assets are a very speculative asset class which exposure may result in significative losses and/or total loss of the client's assets.
3.6 Design Complexity
Digital assets are incorporated in smart contracts. Their functionalities and specificities are dependent of the operability of the smart contract. A smart contract is a complex set of line of codes that is designed on a specific distributed ledger. Its ability to function correctly is directly correlated to the functioning of the distributed ledger on which it is built. The client understands, acknowledges and accepts that it is his sole responsibility to understand and to conduct his own assessment over the quality of the design of a given smart contract and its operability with the distributed ledger on which it is built.
No guarantee can be given as to the proper functioning of a distributed ledger, a smart contract and/or a digital asset. More specifically, it cannot be guaranteed that they are hack-proof and/or bug-free. The client is made aware that issuers of digital assets might reserve the absolute and unilateral right to modify the digital asset and/or smart contract design at any time. In this regard they might decide to substantially modify the features of a digital asset and this might lead to a devaluation of it. The client understands, acknowledges and accepts that flovtec cannot be held responsible for any losses resulting from the devaluation of a digital asset in connection with the above.
3.7 Track record
Digital assets have been around less than a decade. Changes in valuation may happen for different reasons (see below section 3.5). These changes in valuation are mostly unpredictable and due to the lack of track record it may be difficult or even impossible to assess whether these changes in valuation are within the standard range or conversely atypical.
3.8 Loss of trust
Digital assets are intangible and non-physical assets and thus difficult to valuate with traditional financial metrics. Their value is highly correlated with the investors expectation that the digital asset might be used in the future and gain mass adoption, hence increasing its value. Loss of trust in the digital assets from investors may lead to decrease of their value and liquidity up to total loss and illiquidity. The client understands, acknowledges and accepts that exposure to digital assets may lead a total loss of his investment.
4. Legal risk
Legislative authorities and regulators across the globe are still catching-up on distributed ledger technologies and the emerging of digital assets. The regulatory landscape surrounding the digital assets is uncertain and it cannot be excluded that digital assets may be out banned by certain countries. The client understands, acknowledges and accepts that he solely bears the risks related to the legal and regulatory uncertainties regarding digital assets.
4.2 Investor protection – Market manipulation and insider trading
Digital assets may not be listed on regulated security exchanges. Issuers of digital assets may not be subject to investor protection regulations. Furthermore, they may not be subject to accounting standards such as regularly publishing their financial statements, inform the public of adverse events that may affect the digital asset price or the duty to disclose insider transactions. Digital assets investors may not be properly protected from criminal behaviours such as market manipulation and insider trading.
The client understands, acknowledges and accepts that digital assets may not be subject to market manipulation regulations and hence be more prone to financial criminal activities from market participants.
4.3 Data protection
Public distributed ledgers are transparent by design. Anyone can read through a distributed ledger and hence draw transaction patterns and profiles. The distributed ledgers on which the digital assets are designed and issued are not controlled by flovtec. The client understands, acknowledges and accepts that transaction information maybe open to the public, misused and/or exploited by third parties.
This leaflet is an integral part of the Service Liquidity Agreement. flovtec may freely update, amend or replace it from time to time and without prior notice. It is the sole client's responsibility to ensure he is up to date with the latest version of this digital assets risk disclosure leaflet.