[Version: 1.0, Last updated: 09.10.2018]
Digital Assets and Products involve different levels of exposure to risk, and while deciding whether to trade in or purchase any Digital Asset, potential investors should take note of the following.
An investment in any Digital Asset involves risks. These risks may include, among others, market risk, liquidity risk, market volatility and economic, political and regulatory risks and any combination of these and other risks. Some of these risks are briefly discussed below.
Speculative nature of crypto assets
Digital Assets are issued by businesses that are at a very early stage of development. Those businesses have an inherent high risk of failure. Some of the Digital Assets and Tokens that are being issued have no intrinsic value other than the possibility to use them to access or use a service/product that is to be developed by the issuer. There is no guarantee that the services/products will be successfully developed, and any eventual benefit may be low relative to the invested capital. Depending on how Digital Assets and Tokens are structured they may not be captured by the existing rules and may fall outside of the regulated space. In the case where Digital Assets and Tokens do not fall under the scope of laws and regulations, Clients cannot benefit from the protection these laws and regulations provide.
Acquisition of Digital Assets & Tokens
Financial and operating risks confronting blockchain companies are significant. The blockchain market is highly competitive and the percentage of companies that survive and prosper is small. Blockchain companies often experience unexpected problems in the areas of product development, marketing, financing, and general management, among others, which frequently cannot be solved. In addition, blockchain companies may require substantial amounts of financing, which may not be available through private placements, public markets or otherwise.
Legal & Regulatory Risks
Legal and regulatory changes could adversely affect the Digital Assets market. Regulation of Digital Assets and Token offerings such as, cryptocurrencies, blockchain technologies, and cryptocurrency exchanges is undeveloped and likely to rapidly evolve. In addition, regulation of Digital Assets varies significantly among international, federal and local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies may in the future, adopt laws, regulations, guidance, or other actions, which may severely impact the development and growth of the Digital Asset markets. Failure by SMART VALOR or Clients of the VALOR Platform to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines. Exchanges to trade Digital Assets such as the VALOR Platform face an uncertain regulatory landscape in many jurisdictions such as the European Union, China and Russia. Various jurisdictions may, in the near future, adopt laws, regulations or directives that affect the VALOR Platform. In particular, authorities could prohibit the possibility to trade or redeem Digital Assets. The effect of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to the development and growth of the VALOR Platform. New or changing laws and regulations or interpretations of existing laws and regulations, may materially and adversely impact the value of Digital Assets and the rights of the holders of such assets.
The legal status of certain Digital Assets may be uncertain. This can mean that the legality of holding or trading them might be impacted. Whether and how one or more Digital Assets and Tokens constitute property, or assets, or rights of any kind may also seem unclear. Clients are responsible for knowing and understanding how Digital Assets and Tokens will be addressed, regulated, and taxed under applicable law.
Market risk is the possibility of Clients experiencing losses due to factors that affect the overall performance of the markets in which they are involved. The market for Digital Assets is still evolving and uncertain. Trading in Digital Assets bear the risk of total loss of the funds invested. The market for Digital Assets is highly volatile and unpredictable. If the value of Digital Assets will move up or down, or whether a certain Digital Assets will lose all or a substantial part of its value, is unknown. This applies both to long- and short-term investments.
Liquidity risk is the financial risk that for a certain period of time a given Digital Asset cannot be traded quickly enough in the market without impacting the recoverable price. Markets for Digital Assets have varying degrees of liquidity. Some are quite liquid while others may be illiquid. Illiquid markets can amplify volatility. An active market for Clients to sell, buy, or trade Digital Assets or products derived from or ancillary to them cannot be ensured. Furthermore, any market for Digital Assets may abruptly appear and/or vanish. SMART VALOR makes no representations or warranties about whether a Digital Asset that may be traded on the VALOR Platform may be tradeable any point in the future, if at all. Any Digital Asset is subject to delisting without notice or consent. Where possible SMART VALOR will apply best efforts to notify Clients of such cases in advance.
In addition to liquidity risks, values of Digital Assets traded on any marketplace are volatile and can shift quickly. Past performance of Digital Assets and Tokens is not an indication of the future performance of such investments. The prices of Digital Assets such as e.g. Ether have historically been subject to dramatic fluctuations and are highly volatile. Several factors may influence the pricing of Digital Assets, including, but not limited to:
- Global Digital Assets supply;
- Global blockchain assets demand, which can be influenced by the growth of retail merchants’ and commercial businesses’ acceptance of blockchain assets like cryptocurrencies as payment for goods and services, the security of online blockchain asset exchanges and digital wallets that hold blockchain assets, the perception that the use and holding of blockchain assets is safe and secure, and the regulatory restrictions on their use;
- Holders' expectations with respect to the rate of inflation;
- Changes in the software, software requirements or hardware requirements underlying the VALOR Platform;
- The maintenance and development of the open-source software part of the VALOR Platform;
- Changes in the rights, obligations, incentives, or rewards for the various participants in the VALOR Platform;
- Interest rates;
- Currency exchange rates, including the rates at which digital assets may be exchanged for fiat currencies;
- Monetary policies of governments, trade restrictions, currency devaluations and revaluations;
- Regulatory measures, if any, that affect the use of blockchain assets;
- Or global or regional political, economic or financial events and situations.
A decrease in the price of a single Digital Asset may cause volatility in the entire Digital Assets industry and may affect other blockchain assets. For example, a security breach that affects some Token holder or user confidence in Ethereum may affect the industry and may also cause the utility of other blockchain assets to be uncertain. Clients should closely monitor their positions and holdings to assess potential impacts from sudden and adverse shifts in trading and other market activities.
Investment Horizon risk
Investment horizon is the term used to describe the total length of time that an investor expects to hold a security or a portfolio. Investment horizons can range from short-term, just a few days long to much longer-term, potentially spanning decades. The length of an investment horizon will often determine how much risk an investor is exposed to and what their income needs are. Generally, investments in Digital Assets are not suitable for clients who depend on any income resulting from such investments.
Transaction risk is the exchange rate risk associated with the time delay between entering into a contract and settling it. The greater the time differential between the entrance and settlement of the contract, the higher the transaction risk, because there is more time for the exchange rates to fluctuate.
Execution risk is understood as the risk that a transaction will not be executed within the range of recent market prices or within the stop order limits that have been set by an investor.
A settlement risk occurs when the Client must pay the purchase price of a Digital Asset in advance but does not actually receive the Digital Asset until later. In this event, the risk is that the Client will pay the purchase price and receive the Digital Assets late or even not at all. Conversely, when one Client is obliged to deliver Digital Assets which have been sold, the Seller may not simultaneously receive the purchase price from the Buyer.
Acceptance of the VALOR Platform
The VALOR Platform may not be widely adopted and may have limited users. It is possible that the VALOR Platform will not be used by a large number of individuals, companies and other entities or that there will be limited public interest in the creation and development of distributed ecosystems. Such a lack of use or interest could negatively impact the VALOR Platform and the listed Digital Assets
If the VALOR Platform’s security is compromised or if the VALOR Platform is subjected to attacks that frustrate or thwart our users’ ability to access the VALOR Platform or the listed Digital Assets or the VALOR Platform services, users may cut back on or stop using the VALOR Platform altogether, which could seriously curtail the value of Digital Assets.
Lack of segregation of assets
Holding of Digital Assets and Tokens on the VALOR Platform has attendant risks. The Digital Assets traded on the VALOR Platform are generally maintained in wallets managed by SMART VALOR. This may result in Client’s assets being rehypothecated, pooled or placed in an omnibus account. In such cases the Client’s assets may not be segregated from those of SMART VALOR or other clients. Therefore, Client assets might not be segregable in case of bankruptcy of SMART VALOR. Digital Assets can be held either in SMART VALOR´s main country of operation or abroad. Generally, they are held where they are most often traded, and are governed by the regulations that apply there.
Primary and Secondary Trading
Clients may not be able to trade their Digital Assets and Token or to exchange them for Fiat currencies. Not all Digital Assets and Tokens are traded on crypto exchanges and when they are, like cryptocurrencies, their price may be extremely volatile. Some of the crypto exchanges are unregulated and vulnerable to market price manipulation and fraudulent activities. Clients may be exposed to the lack of exit options or not be able to redeem their Digital Assets and Tokens for a prolonged period.
Operational risk summarizes the risks a company undertakes when it attempts to operate within a given field or industry. Operational include risks resulting from breakdowns in internal procedures, people and systems.
A country risk can arise if a country restricts trading of or investing in Digital Assets, for instance by imposing economic sanctions or currency restrictions.
In addition to the security risk inherent to internet use for accessing to online services or for managing transactions, using blockchain technology involves different levels of exposure to risk and in deciding whether to use blockchain technology for investment purposes, potential investors should take note of the following.
Risk of blockchain weaknesses
Underlying software applications and software platforms (for instance the Bitcoin and Ethereum blockchains) are still in an early development stage and unproven. Therefore, an inherent risk that the software could contain weaknesses, vulnerabilities or bugs causing, inter alia, partial or the complete loss of Digital Assets and Tokens exists.
SMART VALOR does not provide any warranty that the services offered through the VALOR Platform will be uninterrupted or error-free.
Risk of loss of SMART VALOR Account information
The SMART VALOR account can only be accessed by signing in to the SMARTVALOR.io website by entering a user name and password, together with any other requested security information (for instance one-time password for second factor authentication.
Risk of Attacks
The VALOR Platform may be the target of malicious cyberattacks (e.g. phishing, man-in-the-middle, hijacking, deny of service, spoofing, injection, …) or may contain exploitable flaws in its underlying code or its software and hardware environment, which may result in inaccessibility of the VALOR Platform , in security breaches, in information disclosure, or in the loss or theft of the Digital Assets and Tokens.
The blockchain systems used by SMART VALOR are susceptible to mining attacks, including but not limited to double-spend attacks, majority mining power attacks, “selfish-mining” attacks, and race condition attacks. Any successful attacks present a risk to the services provided through the VALOR Platform.
Certain jurisdictions may apply existing regulations on, or introduce new regulations addressing, blockchain technology-based applications, which may be contrary to the current setup of the VALOR Platform and which may, inter alia, result in substantial modifications of the services provided through the VALOR Platform, including its cessation.
Erroneous Transactions risks
Direct or indirect damage may be incurred by the Client in connection with transmission errors, transmission cutouts, technical defects, overload, service interruptions (e.g. systems maintenance), disruptions, interference, illegal intervention (e.g. hacking) and willful blockage of telecommunication devices and networks (e.g. “mail bombing”, attacks intended to cripple services, etc.) or in connection with other malfunctions or deficiencies on the part of telecommunication and network operators.
Finality and Irrevocability of Transactions
Any transaction based on the Bitcoin or Ethereum blockchain is irrevocable and final as soon as the commitment transactions have been signed and exchanged. This applies to most of the other blockchain technologies on which Digital Assets may be traded.
In using the VALOR Platform data is transmitted over open, generally public networks (e.g. the Internet). Data is regularly transmitted in an unsupervised manner across borders, even if the sender and the recipient are both located in the same place. Even where the data itself is encrypted, the sender and recipient can sometimes remain unencrypted, such that third parties may be able to infer their identity. SMART VALOR accepts no liability and gives no guarantee that data transmitted and published via the Internet are correct, accurate and complete. In particular, account-related data (transaction confirmations, account statements, account balances, etc.) and information in the public domain, e.g. exchange prices or exchange rates, shall not be binding.