This VirgoCX Platform Risk Statement (Risk Statement) is being delivered to you in connection with the opening of an account (Account) with VirgoCX Inc. (VirgoCX) to buy, sell and hold crypto assets on VirgoCX’s crypto asset trading platform (the VirgoCX Platform) and is incorporated by reference into the online terms of service (the VirgoCX TOS) that you will accept at the time of account opening. Capitalized terms used and not defined in this Risk Statement have the meanings given to them in the VirgoCX TOS.
No securities regulatory authority has expressed an opinion about the Crypto Contracts (as defined below) or any of the crypto assets made available on the VirgoCX Platform, including any opinion that a crypto asset is not a security and/or derivative.
By using the VirgoCX Platform or any other services related thereto (collectively, the Services), you understand that there are substantial risks associated with the purchase, sale and use of crypto assets through us, and you are agreeing to familiarize yourself and assume any and all such risks, including:
- Risks Associated with your Account
- Trading in crypto assets may not be suitable for all members of the public. You should carefully consider whether trading is appropriate for you in light of your knowledge, experience, financial objectives, financial resources and other relevant circumstances. Crypto asset trading may not be appropriate for you, particularly if you use funds drawn from retirement savings, loans or lines of credit, mortgages, emergency funds, or funds set aside for other purposes. The volatility and unpredictability of the price of crypto assets relative to fiat currency may result in significant loss over a short period of time.
- Your Account is a contract with VirgoCX that provides you with certain rights and imposes certain responsibilities; the contract, and your contractual right to the crypto assets that you may buy, sell and hold pursuant the contract, constitutes a security or derivative (a Crypto Contract). The Crypto Contract under which we agree to provide the Services, includes holding the crypto assets in your Account on your behalf in accordance with our custody policies and procedures, and you have the right to withdraw your crypto assets from the VirgoCX Platform at any time subject to payment of the withdrawal fee set out in the VirgoCX TOS. This arrangement may expose you to insolvency risk (credit risk), fraud risk or proficiency risk on the part of VirgoCX or the Custodian (as discussed in section 4) designated to safeguard the crypto assets.
- An Account is not a bank account and funds or crypto assets received or held by us or by you, and transacted through us, do not earn interest and are not insured by the Canada Deposit Insurance Corporation or any other government agency.
- The funds, crypto assets or value in your Account are not insured in any way by us. VirgoCX is not a member of the Canadian Investor Protection Fund (CIPF) and the crypto assets held by VirgoCX (directly or indirectly through third parties) do not qualify for CIPF protection.
- The value of the crypto assets you hold or acquire through the Services are attached to your crypto asset wallets that are accessible only by logging in to your Account. VirgoCX encourages the use of strong passwords and also uses two factor authentication in order to safeguard access to your Account and the funds, crypto assets or other value in it.
- Certain crypto assets confer a right to vote on topics that may directly or indirectly affect functionality and economics of a particular crypto asset, including, but not limited to: changes to block reward amounts, inflation percentages, consensus modelling or governance models. Your Crypto Contract with VirgoCX does not enable any voting functionality in respect of the crypto assets held in your account.
- We cannot reverse a crypto asset transaction which has been broadcast to a crypto asset network, and losses due to fraudulent or accidental transactions are not recoverable.
- Some crypto asset exchanges have been subject to cyberattacks and other technical issues that have resulted in the loss or theft of crypto assets to their users and there is a risk that a similar cyberattack could affect the Services and result in the theft or loss of your fiat currency or crypto assets for which you cannot recover.
- There are risks associated with utilizing an Internet-based trading system including, but not limited to, the failure of hardware, software, and Internet connections. VirgoCX is not responsible for any communication failures, disruptions, errors, distortions or delays you may experience when trading via the Services, however caused.
- VirgoCX provides liquidity to its trading platform by serving as the sole market maker. VirgoCX sources its liquidity from reputable liquidity providers that are regulated to the extent required to conduct their business in their home jurisdiction. (Liquidity Providers). Service outages at Liquidity Providers may disrupt VirgoCX’s ability to continue providing liquidity to the VirgoCX Platform.
- General Risks Associated with Crypto Assets
- 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. The risk of loss in crypto assets may be substantial and losses may occur over a short period of time. Crypto assets may become worthless at any time.
- 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. With the exception of the country of El Salvador in which Bitcoin is accepted as legal tender, 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 in your bank account).
- 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.
- 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 VirgoCX 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, and much like a technology start-up, they 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 operate 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.
- 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. VirgoCX may choose not to support any future fork of the underlying blockchain of the crypto assets available on the VirgoCX 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. VirgoCX 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 liquidating options at that time.
- 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 VirgoCX Platform.
- 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 VirgoCX to lose proprietary information or other information subject to privacy laws, suﬀer data corruption, or lose operational capacity. This in turn could cause VirgoCX 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 VirgoCX’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 VirgoCX’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, VirgoCX has established risk management systems designed to reduce the risks associated with cyber security.
- Stablecoin Risks. Some of the crypto assets available on the VirgoCX 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. VirgoCX conducts due diligence on all stablecoins listed on the VirgoCX 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. Specific risks associated with each stablecoin are set out in the plain language description of each crypto asset listed on the VirgoCX Platform (each, a Crypto Asset Statement).
- 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.
- Regulatory Risk associated with Crypto Assets
- Legislative or regulatory changes or actions at the federal, provincial or international level may adversely affect the use, transfer, exchange or value of your crypto assets and such changes may be sudden and without notice.
- Prior to listing a crypto asset on the VirgoCX Platform, VirgoCX conducts due diligence to determine whether the crypto asset is a security and/or derivative under the securities and derivatives laws of each of the jurisdictions of Canada and the jurisdiction with which the crypto asset has the most significant connection, including by reviewing publicly-available information concerning:
- the creation, governance, usage and design of the crypto asset, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that created the crypto asset;
- the supply, demand, maturity, utility and liquidity of the crypto asset;
- material technical risks associated with the crypto asset, including any code defects, security breaches and other threats concerning the crypto asset and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- legal and regulatory risks associated with the crypto asset, including:
- any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of the crypto asset; and
- statements made by any securities regulatory authorities in Canada, other regulators in IOSCO-member jurisdictions, or the regulator with the most significant connection to a crypto asset about whether the crypto asset, or generally about whether the type of crypto asset, is a security and/or derivative.
- If a regulator or court of competent jurisdiction determines that a crypto asset listed on the VirgoCX Platform is a security or derivative, or upon discovery that the conditions described under 3(b) for a crypto asset has deteriorated to the point where the legal, regulatory, business, or security risks exceed VirgoCX’s risk appetite, then the crypto asset will be delisted. All existing holders of the crypto asset will be notified by electronic message and have the opportunity to transfer the crypto asset to another blockchain address under the control of the holder and outside of the VirgoCX Platform (“Transfer Instructions”) within 30 days of receipt of the notification. Crypto assets in respect of which Transfer Instructions have not been received within 30 days will be liquidated by VirgoCX on your behalf, and the cash proceeds will be delivered to your Account.
- The Crypto Asset Statement for each crypto asset listed on the VirgoCX Platform is available at https://virgocx.zendesk.com/hc/en-us/categories/4416859311508-Crypto-Asset-Statement.
- Safekeeping of Crypto Assets
- VirgoCX holds crypto assets for the benefit of clients (Client Assets) separate and apart from our own assets and from the assets of any custody service provider.
- Approximately 80% of VirgoCX’s total Client Assets are held in cold storage in its custody account with Coinbase Custody Trust Company LLC (the Custodian), and approximately 20% of VirgoCX’s total Client Assets are held in VirgoCX’s hot wallets.
- The Custodian is licensed as a trust company with the New York Department of Financial Services and maintains US$320 million of insurance (per incident and overall), through its commercial crime and cyber crime insurance policy, which covers losses of assets held by the Custodian. The commercial crime insurance program covers both cold and hot storage assets held by Coinbase Global Inc. and all its subsidiaries, including the Custodian. The commercial crime policy has a standard “officers and directors” exclusion that carves out coverage for fraud perpetuated by members of the board or corporate officers under certain circumstances. Other exclusions include, among others, catastrophic breakdown of a cryptocurrency or protocol; terrorism; and force majeure. The policy also does not cover losses resulting from unauthorised access to VirgoCX’s custody account holding the Client Assets (e.g., VirgoCX’s failure to protect login credentials and devices). Holding crypto assets at the Custodian benefits you because the Custodian is prudentially regulated, maintains insurance and, in the event the Custodian becomes insolvent, your assets are better protected.
- The Custodian holds all Client Assets in trust for clients of VirgoCX in an omnibus account in the name of VirgoCX and separate and distinct from the assets of VirgoCX, affiliates and all of the Custodian’s other clients. However, Client Assets may still be subject to risk of loss: (i) if the Custodian becomes bankrupt or insolvent; (ii) if there is a breakdown in a Custodian’s information technology systems; or (iii) due to the fraud, willful or reckless misconduct, negligence or error of a Custodian or its personnel. VirgoCX has reviewed the Custodian’s reputation, financial stability, relevant internal controls and ability to deliver custodial services and has concluded that the Custodian’s system of controls and supervision is sufficient to manage risks of loss to Client Assets in accordance with prudent business practice.
- Holding crypto assets online in hot wallets is riskier than holding assets with the Custodian because the assets are online and therefore susceptible to hacks and theft. However, holding assets in the hot wallets is necessary because crypto assets need to be online to be traded and to be deposited or withdrawn from the VirgoCX Platform. Because VirgoCX controls the online hot wallets, you are at risk that VirgoCX or our personnel may lose or steal your assets. VirgoCX would be liable to you under the VirgoCX TOS for any loss caused by our fraud, negligence or wilful default, and we have adopted robust internal controls to detect and prevent this type of behaviour by our personnel. VirgoCX is required under applicable securities laws to insure against the additional risk of loss which arises due to its access to Client Assets.
- VirgoCX seeks to mitigate the risks associated with the online hot wallets by securing a portion of these crypto assets using licensed software from Fireblocks Inc. (Fireblocks). Fireblocks includes a crypto asset wallet that stores private and public keys and interacts with various blockchains to send and receive crypto assets and monitor balances. Fireblocks uses secure multiparty computation to share signing responsibility for a particular blockchain address among a group of otherwise non-trusting entities.
- VirgoCX has also licensed software from Digital Assets Services Limited (trading as Coincover) (Coincover) to provide additional security for keys to crypto assets held by VirgoCX using Fireblocks, including key pair creation, key pair storage, device access recovery and account access recovery. Crypto asset key material secured by Coincover is 100% guaranteed against loss or theft by a leading global insurance provider. Coincover is based in the United Kingdom and is regulated by the U.K. Financial Conduct Authority.
- You can access your crypto assets by logging into your Account on the VirgoCX Platform. You are responsible for protecting your username and password, and if you lose that information you may not be able to access your Account. You may withdraw your crypto assets from the VirgoCX Platform. We endeavour to honour all withdrawal requests in a timely manner, however, in periods of market volatility or other unusual market activity you may experience delays in withdrawing your assets. In addition, we are not responsible for any delays caused by circumstances beyond our control, including Internet service failures or delays.
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated ● 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario) and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of this Risk Statement or a Crypto Asset Statement to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.