The following is a disclosure of certain principal risk factors which are considered to be material by Hansecoin OÜ as the Developer and Issuer (hereinafter also referred to as ‘Developer’ or ‘Issuer’) in regard to the remittance of Ether (Ethereum) by Participants and subsequent issuance of Virtual Project Access Tokens (‘VPAT’) as well as future issuance and distribution of Project Participation Tokens (‘PPT) or the future issuance of Virtual Bonus Tokens (‘VBT’) and their future conversion into PPTs as part of the tokenisation approach of the Developer and the Issuer and such tokens as considered in this Information Memorandum (collectively hereinafter also referred to as ‘Token’ or ‘Tokens’). The Participants should consider these risk factors alongside all other information provided in this Information Memorandum and are advised to consult with their own professional advisers (including their financial, accounting, legal and tax advisers) before deciding to commit and contribute Ether in order to obtain an allocation to obtain the Tokens. In addition, the Participants should be aware that the risks described herein may be structurally interconnected and/or overlap time-wise, thus may compound and intensify one another with potentially materially adverse consequences for the Developers as well as directly or indirectly the Participants.
The Developer believes that the following risk factors may affect its own business and a future market value of the Tokens to the extent that they are traded on either a crypto exchange or potentially elsewhere. Most of these risk factors are contingencies which may or may not occur and the Developer is not in a position to predict the likelihood of such contingency occurring. If any of the following risks materializes, the potential market value of the Tokens could be negatively affected and decline, and a Participant despite the underlying assets could lose all or part of its contribution.
If a Participant were to decide to participate and seek an allocation of VPAT without proper consultation of tax, legal and financial advisors, taking into account personal circumstances, the Participant might not be able to fully assess the tax, legal and economic impact a participation could have.
Insufficient or faulty consultation can lead to unintended or unforeseen tax, legal and economic consequences. The absence of advice from experts such as financial advisors, lawyers and tax consultants can have detrimental consequences for a Participant. Prospective Participants should thus carefully consider the following risks together with their expert advisers before deciding whether a participation is suitable for them or not. The Developer is not liable for any loss of the Participant in connection with erroneous or insufficient consultation or advice provided by third parties.
The exchange of crypto assets, virtual currencies, and tokens of any sort (including coins, Ether or the Tokens) without taking into account the individual circumstances and the financial situation of the Participant might have negative consequences. The decision to obtain the Tokens should take into account the individual knowledge of the Participant. Only freely available capital should be used for a participation as the residual risk of a total loss, albeit unlikely, logically cannot be excluded.
The Tokens do not provide any shareholder-like or bond-like rights to the Participant or Token Holders. In particular, the Participant or Token Holder does not have the right to participate in the management of the Developer, in the distribution of profit and of remaining assets on dissolution of the Developer, to participate in the general meeting of shareholders, and other similar rights. The Tokens do not guarantee a Participant or Token Holder a right to receive payments from the Developer or a right to change the Tokens to a share of the Developer or any of its affiliates, there is no promise of future cash flows from the ongoing (or liquidated/sold) project. The Participants’ rights are limited to (a) a rescission right capped at 20% of the total global VPAT issuance amount and a maximum of 20% of their own nominal VPAT commitment after 9 months of the target closing of the VPAT issuance, and (b) warranty and other statutory rights; and notably any Token Holders not having participated by first seeking VPAT fail to have warranty rights against the Developer.
The Tokens are not securities under Estonian law and do not carry with them any rights as may be commonly associated with regulated securities (e.g., a share or other similar tradable right, a bond or other forms of securitised debt). In particular, the Tokens do not grant any rights with respect to corporate decision making. Also, the Tokens do not grant a right to payments of capital or dividends or any other sort of payment vis-à-vis the Developer. The VBT described in this Information Memorandum is not a right of a Participant vis-à-vis the Developer but a programmed feature of the respective smart contract of the tokenisation approach envisaged to be employed with the PPT on the basis of the standard ERC-223 token protocols, and payments are made based upon events in the future which may or may not occur.
Rights of the Participant are limited to contractual rights based on the effective and conclusive allocation of VPAT in proportion to Ether committed by the Participants, and statutory rights pursuant to Estonian law, in particular to warranty rights as provided for under the Estonian Law of Obligations Act. These rights are based on the effective and conclusive allocation pursuant to the Participant rendering Ether to the ETH address of the Developer’s custodial Wallet held with CoinMetro OÜ on the bitgo platform, but are not associated with the Tokens themselves. The Developer stresses that it assumes statutory warranty obligations only vis-à-vis a Participant in the VPAT and potentially the PPT, i.e., not vis-à-vis PPT Token Holders that may have obtained PPTs on any secondary market after PPT issuance and allocation.
The potential and effective market value of the Tokens is inter alia dependent on the continuing ability of the Developer to accurately take measures that will lead to the broadest possible adoption of tokenisation approach in the crypto market; any of the risks described herein may severely impede the future business of the Developer and therefore may negatively impact such market value of the Tokens.
As described in this Information Memorandum, the Developer plays a major role (a) in the process of further developing the tokenisation approach considered herein, and (b) regarding the future adoption of the Tokens by other asset holders, especially the real estate markets. A positive future development of a market value of the Tokens is dependent on the Developer's ability to precisely take such measures that will lead to the broadest possible adoption of the tokenisation approach in the market for asset backed tokens, real estate development, financing and management.
If the Developer fails to do so or if the Developer is required to reduce or cease its business efforts regarding the Tokens and its tokenisation approach, it is unclear whether the Tokens would be adopted by other asset holders at all. Any of the risks described herein has the potential to severely impede the Developer's ability to further the adoption of the Tokens in the market and may therefore have a severe negative influence on the market value of the Tokens.
The market has seen a number of new virtual and crypto currencies, crypto assets and tokens come into existence in the last years. The Tokens compete against these for wider use in asset backed tokenisation.
Currently, many different virtual and crypto currencies as well as crypto assets and tokens are coexisting alongside one another, and the creation of many new coins and tokens is expected for the future. Some of these virtual and crypto currencies, crypto assets and tokens are more successful than others and possess more market potential. There is a risk that a virtual currency, a crypto asset or token is under pressure because of the success of another popular virtual or crypto currency, crypto asset or token, and therefore loses some or all of its market value. This risk also applies to the Tokens. Despite the efforts the Developer will put into the furtherance of its tokenisation approach in the segment for asset backed tokens and especially real estate, it cannot be guaranteed that the Tokens can be established in this market. This, in turn, may have a severe negative influence on the market value of the Tokens.
As per the tokenisation the Participants render Ether and the Developer allocates the VPAT in Euro rate proportion to the Ether. Such amounts of Ether received as part of the Participants’ commitment to the VPAT will be a main source of income for the Developer's future business operations. In the past, Ether has experienced high market value fluctuations. The future exchange rates for Ether cannot reliably be predicted. Given that the underlying assets considered herein are Euro denominated, the Developer and Coinmetro OÜ as its custodian have implemented an intra-day immediate automatic conversion of Ether received into Euro to mitigate a possible drop in value. Whilst a residual risk remains that the automatic conversion may come within a second of a major loss in value of Ether prior to its conversion into Euro, the envisaged granular level and individual size of Participants’ Ether commitments renders the impact of a potential conversion loss on the total VPAT issuance to be less likely to be substantial. The Issuer will hold a EUR liquidity reserve of 20% of the nominal Euro value of the Ether received. The liquidity reserve mitigates the risk of rescission and potential depletion of liquidity at the end of the VPAT Vesting Period. Any and all rescission payments are made in the previously allocated Euro amount. Thus, if the market value for Ether drops, this shall have no significant negative influence on the Developers’ business and capacity to progress with the underlying transactions with the Asset Company.
Should the Developer decide at any time during the VPAT resale period to store certain portions of its capital as Ether in view of anticipated or notified rescission amounts and should the market value of Ether subsequently drop significantly, this could have a material negative impact on the financial situation of the Developer. This, in turn, could severely (a) impair the Developer's liquidity position albeit that in part the expected granularity of the Participant’s commitments to VPAT and the size of the liquidity reserve are expected to mitigate such negative impact at least in part and thus render it less likely, and (b) impede the Developer’s ability to further the adoption of the Tokens in the market and may therefore have a severe negative influence on the market value of the Tokens as a whole.
Future regulation on virtual and crypto currencies, crypto assets and tokenisation in Estonia or on the EU level may have a negative impact on the Developer and the Tokens. Burdensome regulation might have a significant negative impact on the ability of the Developer to further the adoption of the Tokens in the market and therefore also have a significant negative impact on the market value of the Tokens.
Currently, under Estonian law there are limited licensing, registration or concessionary requirements for the production, custody, trading and/or sale of virtual and crypto currencies, crypto assets and tokens such as the Token. However, on the EU level as well as in certain countries, legislators and regulators have already started to adapt existing legislation and to regulate virtual and crypto currencies, crypto assets and tokens. Even if virtual and crypto currencies, crypto assets and tokens are not subject to limiting regulation today, the legal regime in Estonia may change and in future Estonia may also regulate virtual and crypto currencies, crypto assets and tokens restrictively.
In this context, one should be aware of the recent developments on EU level to regulate virtual currencies - in particular the Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, which entered into force on July 9, 2018 (‘5AMLD’). Member States will have until January 10, 2020, to amend their national laws to implement 5AMLD, however Estonia pre-emptively implemented 5AMLD already in November 27, 2017. 5AMLD imposes stricter requirements for the trade with virtual currencies such as increased transparency, due diligence and more competencies for public authorities. Further discussions on EU and member state level continue with a variety of considerations and proposals under way. It is therefore likely that in the near future further legal clarifications and regulations for virtual and crypto currencies, crypto assets and tokens will enter into force, both on the EU level and in Estonia. However, in which form virtual and crypto currencies, crypto assets and tokens will be regulated is currently still unclear.
If an authorisation, licensing or registration requirement is imposed on the Developer, the Developer will strive to obtain such an authorisation, license or registration. However, it is possible that the Developer cannot fulfil certain requirements in time or may not receive the necessary approval at all. In this case, the Developer might have to limit or even cease its business operations regarding the furtherance of the Tokens in the market. Furthermore, legal or regulatory changes might lead to complaints, claims, obligations or other legal burdens that affect the financial situation of the Developer in a negative way.
There is a remote possibility that the Estonian legislator or the EU legislator might decide to declare illegal the trade of virtual or crypto currencies, crypto assets or tokens such as the Tokens. Also, to the best of the knowledge of the Developer, its asset backed tokenisation approach is the first or one of the first of its kind under the legal regime of Estonia. Consequently, it is unclear, how the Estonian relevant regulators or even legislator will react, if at all. The Developer has liaised closely and openly with the Estonian regulator and currently is not aware of any impediment to the tokenisation considered in this Information Memorandum.
All these risks may have a significant negative impact on the ability of the Developer to further the adoption of the Tokens in the market and therefore also have a significant negative impact on the market value of the Tokens.
If a potential Participant is a resident in a country or territory that has declared the trade with virtual and crypto currencies, crypto assets and tokens or the participation in any form of tokenisation or token offering to be illegal, the Participant might face administrative or criminal charges when seeking to participate or participating in the tokenisation.
The tokenisation is only made in such territories where the tokenisation as described in this Information Memorandum is not prohibited by law or other applicable regulation (Target Markets). The Developer has used its best efforts to inform you herein about certain restrictions that apply in certain jurisdictions such as Bangladesh, Bolivia, China, Ecuador, Japan, the Kyrgyz Republic, and the United States of America.
However, the Developer is not able to describe the legal situation of this tokenisation with regard to all possible global jurisdictions. It is therefore any potential Participant’s responsibility to consult with local legal, tax and other advisers to find out whether a participation in this tokenisation constitutes a breach of law or regulation under the Participant’s jurisdiction. Violation of applicable laws or regulation may result in administrative or even criminal charges. The Developer cannot accept any liability for a Participant’s failure to obtain sufficient clearance.
The Developer operates as a pioneer and first mover in a new field of asset backed tokenisation and moving the technical, legal, regulatory and financial frontier of tokenisation forward. Identifying and penetrating new asset classes and segments for tokenisation with a host of new parties, service providers, asset holders and issuers is inherently risky.
Whereas the underlying assets in focus are residential and mixed commercial real estate in development, construction or operation, in the future they may encompass assets from other sectors within the real estate sector such as pure logistics, industry or retail commercial, or other suitable hard assets, including industrial machinery and equipment, as underlying.
New legislative acts for the current and other relevant business sectors, either on national or on the EU level, prohibitions, either on the level of legislation, administrative acts or on the level of administrative or judicial decisions, could have a negative impact on the adoption of the Tokens and the market value of the Tokens.
As described in this Information Memorandum, the Developer plays a major role (a) in the process of developing the asset backed tokenisation approach, and (b) regarding the future adoption of the Tokens by real estate asset holders and possible issuers to whom white labelling the tokenisation approach in collaboration with the Developer and its co-operation partners such as Coinmetro OÜ as an exchange and platform may be suitable. Both, a positive future adoption of the Tokens and a positive future development of the market value of the Tokens is intrinsically dependent on the Developer's ability to precisely take such reasonable measures that will lead to the broadest possible acceptance and adoption of the Tokens and asset backed tokenisation approach in the market segments targeted, including residential and mixed commercial real estate. It lies within the discretionary scope of the Developer to work towards real estate asset holder and/or issuers in order to adopt the tokenisation approach.
Also, the Developer itself may consider creating and ultimately operating a platform offering such white labelled tokenisation or token issuance to asset holders or issuers in certain countries. The fact that the Developer not only acts as a developer of the Tokens and the asset backed tokenisation approach, but also as an issuer of a particular project, as referred to in this Information Memorandum, with access by the Participants from certain countries, may require the Developer in the future to reduce or cease its business efforts regarding the Tokens and asset backed tokenisation approach, whereas it is unclear whether the Tokens would be adopted and employed by other asset holders or issuers at all.
White labelling the tokenisation approach: Other asset holders or issuers who are willing to adopt the Tokens or asset backed tokenisation approach may be active in different countries and/or provide themselves for B2C offers on the basis of individual licenses.
However, possible offers by such asset holders and/or issuers of such operators may be reduced or ceased, by a decision of court or administrative order or injunction or any other ruling, order, decree, ordinance or law which should prevent an operator or provider from offering any of its products or services in a particular country or region. Any such action may also impact and impair the Developer and its business.
Furthermore, the Tokens or asset backed tokenisation approach may be considered by decision of court or administrative order or injunction or any other ruling, order, decree, ordinance or law in such particular country or region as being a supportive or ancillary service or product in order to support or enhance illicit gambling or betting, whereas the Tokens itself or asset backed tokenisation approach itself may be prohibited by decision of court or administrative order or injunction or any other ruling, order, decree, ordinance or law in such particular country or region. Such decision of court or administrative order or injunction or any other ruling, order, decree, ordinance or law may prohibit the adaption, acceptance or performance of the Tokens or asset backed tokenisation approach and may have a significant negative impact on the adoption of asset backed tokenisation approach or on the market value of the Tokens.
The Developer may, for such or similar reasons, be denounced or fined by a governmental or local authority or sued before a court or tribunal, under any law or regulation, practice or commercial use, or be prohibited, in part or in full, from undertaking to or continuing to promote or implement the adoption of the Tokens and asset backed tokenisation approach in a certain country or region, which may have a significant negative impact on the adoption of asset backed tokenisation approach or on the market value of the Tokens.
Though unlikely and not in line with the specific logic of the tokenisation approach via the CoinMetro platform, the Tokens may still be employed or abused in secondary markets and trading by providers offering alternative services to the Participants, third parties and unwitting consumers which may require licenses under certain jurisdictions. It cannot be foreseen, whether the Developer may be subjected to vicarious liability in connection with the potential support or furtherance of any such alternative services not in compliance with the tokenisation approach.
The Developer will strive to fully comply with any applicable law or regulation, including anti-money laundering rules, data privacy laws, KYC data and age verification requirements, and licensing conditions. The Developer will therefore, if and when white labelling its products and services, apply all possible diligence in order to select asset holder and/or issuers who, on their behalf, also fully comply with applicable laws and regulations, including without limitation anti-money laundering rules, data privacy laws, KYC data and age verification requirements, and licensing conditions.
However, even if applying the utmost diligence, it cannot be foreseen if a particular asset holder and/or issuers may be forced to reduce or cease its offer, by a decision of court or administrative order or injunction or any other ruling, order, decree, ordinance or law which should prevent an asset holder and/or issuers from offering its services in a particular country or region.
At the time of the VPAT issuance, the PPTs are neither defined, their code not audited, and thus not minted and not yet ready to be listed on a virtual or crypto currency exchange. Eventually, a low liquidity on such exchanges or legal restrictions imposed on the tradability of the PPTs could have a material negative impact on the market value of the PPTs and Participant’s ability to trade such PPTs.
This staged tokenisation is intended as the means for allowing the Participants to render Ether to the Developer, allocate VPAT and bring access to PPTs to the Participants with the possibility of future VBTs. As described above, the Tokens are not securities and do not carry with them any rights such as the right to a payment of dividends or capital. Also, the Tokens cannot be redeemed with the Developer prior to their end of (underlying asset development) term resale, migration or exchange opportunity. VPATs can only be used as vouchers for PPT allocation by the Developer through CoinMetro as a platform. The Developer also intends to have the PPTs listed on CoinMetro’s virtual or crypto currency exchange as well as possibly others if and when considered suitable. The code for the PPTs is envisaged to be based on Ethereum’s ERC-223 and its draft coding is set to be released for audit and public review in Q4, 2018, however, as technology development in the crypto sector is excessively incoherent and swift, other suitable protocols such as Rootstock for Bitcoin may reach a technically reliable and commercially viable stage to replace Ethereum’s ERC-223 smart contract and protocol approach. During the Vesting Period of nine months the Developer will consider all relevant options to optimize the issuance and use of the PPTs. As of the date of this Information Memorandum, however, the PPTs are not defined, coded, audited, minted or listed on any exchanges, yet.
Should legal restrictions be imposed on the tradability of the Tokens on such virtual or crypto exchanges or should the Developer fail to have the PPTs listed on such virtual or crypto exchange(s) at all, then the PPTs could only be used in directly project related activities on CoinMetro’s platform (or any of its successors) supporting the asset backed tokenisation approach. This may severely influence the ability of a Participant to trade the Tokens in any market and therefore also have a significant negative impact on the perception of and ultimately the market value of the PPTs.
Virtual or crypto currency exchange platforms are not capital markets, usually not state controlled or supervised and their continuous operation cannot be guaranteed by the Developer. The market value of the Tokens may not develop as expected. Also, the Tokens are not subject to any deposit guarantees.
The Developer intends to have PPTs listed on one or more virtual currency exchanges. However, the market of the Tokens might not develop and evolve as planned and supply and demand for the Tokens might be limited. In this case, the Participants might not be able to sell their Tokens to third parties.
Also, exchange platforms for virtual or crypto currencies, crypto assets or tokens might cease to operate. There is no legal protection, deposit guarantee or protection for the Participants when an exchange platform ceases its operation. If such exchange platform has managed the private keys of the Participant or Token Holder, there might be no way to retrieve the Tokens. Also, the Developer might directly or indirectly be subject to losses because of the bad performance of exchange platforms.
As there is yet no clear legal regulation and institution supervising virtual or crypto currencies, there is also no deposit guarantee as banks provide for savings deposits. The exchange platforms are not banks or financial institutions who need to be prepared for certain risks. Capital adequacy regulations such as the European Capital Requirements Directive IV (Directive 2013/36/EU) or the Capital Requirements Regulation (Regulation (EU) No 575/2013) are not applicable to virtual or crypto currency exchanges, increasing the risk of insolvency of a virtual or crypto currency exchange.
The volatility of virtual or crypto currencies makes it very difficult to provide a reliable forecast for the development of the pricing and value of the PPTs beyond the underlying asset performance which in itself is subject to standard market vagaries and risks. It is not possible to foresee the economic and technical development of virtual or crypto currencies in the future. Historic developments are not a sufficient indicator for forecasts. The Developer stresses that it does not provide any forecast of the development of any of the Tokens.
These risks may have a significant negative impact on the ability of the Developer to further the adoption of the Tokens in the market and therefore also have a significant negative impact on the market value of the Tokens.
Virtual and crypto currencies are very volatile and the market value of a given virtual currency can swing dramatically. Whereas the VPAT is pegged to a nominal Euro value, the aforementioned fluctuations may also be noticeable with regard to the PPTs or VBTs.
The Tokens have been designed, structured and developed by the Developer without the involvement of a bank or a financial institution, and are not issued by a central bank or another public authority. The supply of the Tokens is by design of the asset backing limited, and is not being monitored by any public authority. The PPTs and VBTs are not bound to a traditional (a fiat) currency, and market value and price stability are not secure. The market of virtual and crypto currencies is influenced by supply and demand. Fluctuations of the pricing and conversion rates quoted by virtual or crypto exchanges are interesting to sophisticated investors and speculators but may impede the acceptance of virtual and crypto currencies for other purposes. This is also one of the reasons, why virtual and crypto currencies are not considered a safe harbor investment in comparison to various other traditional investments. This insecurity needs to be taken into account when deciding to participate in this tokenisation.
Furthermore, the PPTs must be expected to from time to time, be it for reasons vested in underlying assets under development, external events or pure speculation, experience heavy exchange rate fluctuations. This might lead to losses or temporary loss positions for the Participants who have obtained PPTs at the fixed rate set by the Developer. Also, heavy exchange rate fluctuations may have a significant negative impact on the ability of the Developer to further the adoption of the Tokens in the market, and therefore also have a significant negative impact on the market value of the Tokens.
A low acceptance rate of the Tokens in the market for real estate asset holder and/or issuers could have a material negative impact on the market value of the Tokens.
In regard to white labelling, the acceptance of the Tokens by any other real estate asset holder and/or issuers as a token for their projects is not predictable. Every real estate asset holder and/or issuers may freely decide to pursue the Developer’s tokenisation approach or not. The acceptance of the Tokens in the market is dependent on a variety of circumstances that are out of the control of any individual market participant, including the Developer. Therefore, there is a certain risk that the business model of the Developer cannot in whole or part be put into effect which might negatively affect its financial situation. These risks may have a significant negative impact on the ability of the Developer to further the adoption of the Tokens in the market, and therefore also have a significant negative impact on the market value of the Tokens.
There are no institutions like central banks that back the system of virtual or crypto currencies and tokens in times of crises. In such events, the market value of virtual or crypto currencies and also the Tokens may therefore significantly decrease.
Whether desirable, market-efficient, detrimental or not, an institution supervising and controlling the economy for virtual or crypto currencies does not exist. Therefore, it is currently not possible for state institutions to influence the exchange rate of virtual and crypto currencies or tokens linked to them or based on related protocols in whatever form. Stability and control mechanisms which in capital markets tend to be at the disposal of central banks, are not available in this context. In the case of economic recession or a drop of the exchange rate of a virtual or crypto currency or crypto token such as the Tokens, there is no possibility to apply any effective counter measures. Therefore, in times of crises, the lack of institutional control may well result in additional turmoil and enormous economic damage as virtual or crypto currencies and tokens linked to them or based on related protocols in whatever form lose value, whether ultimately justified by the underlying assets or not. More often than not states and central banks have decided support and/or bail out banks and financial institutions in times of crises and attempt to thus prevent the monetary system from failing. This is not the case with respect to any virtual or crypto currencies and crypto tokens such as the Tokens or any issuers or platforms related to them. This may have a significant negative impact on the market value of the Tokens.
The Developer is exchanging only 97 percent of the total supply of VPAT for Participants’ contributions of Ether in this tokenisation, thus 3 percent of the total VPAT supply therefore remains with the Developer as vested team tokens. Should the Developer or the team members with allocations decide to release any of its or their portion of eventually allocated PPTs, this could have a negative, albeit it limited impact on the market value of the PPTs.
In total, subject to market development and the ultimate design of the PPT a fixed amount of PPTs (Total PPT Amount) will be created by the Developer on the Token Creation Date. The Developer intends only allocate 97% of the Total Token Amount in this tokenisation for the VPAT. The remaining 3% of the Total Token Amount will remain with the Developer to allocate to the team and may be exchanged for other virtual or crypto currencies or sold for Euro or any other fiat currency at a later point in time at any marketable price. Should the Developer decide to convert and sell large portions of its own holdings of such team PPTs, this could have a negative impact on the market value of the Tokens.
The Developer currently intends to employ the Ethereum blockchain technology for its asset backed tokenisation approach and the PPTs.
The PPTs are therefore dependent on the future continuation of the Ethereum blockchain. Furthermore, released in 2015, Ethereum is a rather young technology compared to e.g. Bitcoin which launched in 2009. A possible hacking attack cannot be ruled out. A discontinuation of the Ethereum after the issuance, allocation and listing of the PPTs could lead to a severe drop of the market value or even discontinuation of the Tokens as a whole.
The PPT is designed as an ERC-223 token on the Ethereum blockchain. The PPTs if so issued are therefore dependent on the future continuation of the Ethereum blockchain. The Ethereum blockchain has already come to certain limits in the past. It is unclear, whether the Ethereum blockchain will continue to be operated by the community in the future.
With the draft coding of the PPT set to be released for audit and public review in Q4, 2018, the Developer, thanks to the Vesting Period of the VPAT of nine months, may capitalise on the aforementioned rapid technology development in the crypto sector. As an alternative, other suitable protocols such as Rootstock for Bitcoin may reach a technically reliable and commercially viable stage to replace Ethereum’s ERC-223 smart contract and protocol approach. The Developer will consider all relevant options to optimize the issuance and use of the PPT to mitigate risks associated with the Ethereum blockchain or any alternate choice.
Hackers may target the Ethereum or any other blockchain employed by the Developer for the Tokens. The attacks of these hackers may be difficult to trace, and the damage of the individual Token Holder would likely have to be borne by themselves. Usually, insurance companies will not offer insurance for these risks. Furthermore, it is unclear if exchange platforms fulfil reasonable safety standards which are necessary to defend against attacks. Thieves may try to steal the private key associated with the Tokens and try to get user data by using malware or breaking and entering physically into a Participant’s computer infrastructure containing wallet access. It is it likely that more attacks will occur as virtual and crypto currencies, crypto assets and tokens gain popularity.
Virtual and crypto currencies, crypto assets and tokens and the blockchain technology are still in their initial stages. Software applications that may be used in connection with the Tokens may not have been developed for the mass market and, despite all efforts and mitigating steps including public and external third party audits, may technically still be not sufficiently well adapted. No superior institution is correcting errors that occur when trading with virtual or crypto currencies. If problems arise in this context, the Tokens might be lost for the Participant.
Further, it is unclear whether the asset backed tokenisation approach will function as intended. Despite diligent third party programming, review and auditing any residual bugs in the source code of the PPT could prevent the PPTs from working properly. Due to the design limitations of the Ethereum blockchain, or of any alternative which as the case may be chosen to be employed, the Developer may not be able to eradicate such bugs in the PPT. A discontinuation of the Ethereum blockchain, or the chosen alternative, or technical difficulties such as software bugs in the PPT could lead to a severe drop of the market value or discontinuation of the PPTs in specific and the Tokens as a whole.
Legally non-binding statements of governments and public authorities can have a strong influence on the market value of virtual and crypto currencies, crypto assets and tokens such as the PPTs.
Alarming or warning statements of governments and public authorities, including financial regulators or supervisory authorities, whether warranted, substantiated or not, can heavily influence the perception of the Participants as well as the pricing, quotes and exchange rates of any virtual or crypto currency, crypto asset or token. In this context, it is unclear how banks and financial institutions will react to the increasing popularity and use cases of any virtual or crypto currency, crypto asset or token. Banks, financial institutions and public authorities may be open to the concept, however, it is equally possible that banks, financial institutions and public authorities increasingly articulate that they are in favour of a strict, formal regulation, additional sets of rules and guidelines and supervision by an authority with capacity to monitor, police and enforce such regulation. Any such statements by governments and public authorities, even if they are only opinions, proposals, initial guidelines and not legally binding, have the potential to significantly influence the market value of virtual and crypto currencies, crypto assets and tokenisation, including the Tokens.
The PPTs are envisaged to be stored on the Ethereum blockchain (or a suitable alternative if so identified within the Vesting Period) which uses private keys to validate transactions. If a Participant or Token Holder loses their private keys, they might not be able to access PPTs or claim VBTs in the future. If a Participant or Token Holder makes a transfer by accident, they might not be able to get a refund.
An institution such as a bank or a public authority that is deemed to be responsible for the safekeeping of virtual or crypto currencies or crypto assets such as PPTs does not exist currently. The Tokens are stored on the Ethereum blockchain (or a suitable alternative if so identified within the Vesting Period) which uses private keys to validate transactions. If a Participant or Token Holder loses their private keys, they might not be able to access PPTs or claim VBTs in the future. In such a case, there may be no possibility to compensate for any damages. The Developer suggests to use best practices of token holders themselves in managing their private keys: using hardware wallets, multisig wallets and creating backups of the private keys, etc.
Further, across the various virtual and crypto currencies, there is no possibility to get a refund for transactions made by accident. This may lead to an increased risk of losses, when a transaction is sent to the wrong recipient. In many cases it will be impossible to undo a wrong transaction. The relative anonymity of the parties makes it very difficult to contact the counterparty with an amount of the Tokens that were transferred.
Furthermore, VPATs will be issued to the CoinMetro OÜ token holders’ dashboard which means that it is a centralised webpage application which can be attacked either internally or externally. Technically it can be taken down by an attacker or change the numbers in the database. Whilst no system devised by man is safe from attacks, physical or cyber, CoinMetro OÜ, as service provider to the Developer, has taken the specific risks associated with the dashboard and centralisation into account and uses a variety of comprehensive measurements to avoid such intrusions and hack-attacks.