Onramp Bitcoin – Risk Disclosures

 

1. Risks Inherent to Bitcoin

 

1.1 Introduction

YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN THIS INVESTMENT. BITCOIN INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT. IN ADDITION, RESTRICTIONS ON WITHDRAWALS AND TRANSFERABILITY OF CLIENT ASSETS MAY AFFECT THE CLIENT’S ABILITY TO RECOVER ANY LOSSES.

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS TRUST. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN A BITCOIN INVESTMENT OR OTHER BITCOIN SERVICES PROVIDED BY ONRAMP, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DISCUSSION OF POTENTIAL RISKS RELATED TO THIS INVESTMENT, IN ADDITION TO ALL RELEVANT TERMS AND DISCUSSIONS IN OTHER ONRAMP AGREEMENTS, DOCUMENTS, AND NOTICES.

1.2 Valuation Risk of Bitcoin

As an alternative to fiat currencies that are backed by governments, digital assets such as Bitcoin, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of Bitcoin either globally or locally. Large-scale purchases or sales of Bitcoin could result in movements in the price of Bitcoin and could negatively or positively impact the value of investments in Bitcoin. Because Bitcoin is not backed by a government, it is not subject to the protections that apply to other currencies. For instance, no government can be expected to bolster the value of Bitcoin in case of a crash in its value. Fluctuations in the price of Bitcoin could adversely affect an investment in Bitcoin. The price of Bitcoin has fluctuated widely over the course of its history, and many factors may affect the value of Bitcoin, including, but not limited to: 

  • Global Bitcoin supply; 
  • Global Bitcoin demand, which is influenced by the growth of retail merchants’ and commercial businesses’ acceptance of Bitcoin as payment for goods and services, the security of online Bitcoin exchanges and public keys associated with Bitcoin, the perception that the use and holding of Bitcoin is safe and secure, and the lack of regulatory restrictions on their use; 
  • Investors’ expectations with respect to the rate of inflation; 
  • Interest rates; 
  • Currency exchange rates, including the rates at which Bitcoin may be exchanged for fiat currencies; 
  • Fiat currency withdrawal and deposit policies of the Bitcoin exchange market; 
  • Interruptions in service from or failures of the Bitcoin exchange market; 
  • Investment and trading activities of large investors, including private and registered funds, that may directly or indirectly invest in Bitcoin; 
  • Monetary policies of governments, trade restrictions, currency devaluations and revaluations; 
  • Regulatory measures, if any, that restrict the use of Bitcoin as a form of payment or the purchase of Bitcoin on the Bitcoin exchange market; 
  • The maintenance and development of the open source software protocol of the Bitcoin network; 
  • Global or regional political, economic or financial events and situations; and 
  • Expectations among Bitcoin market participants that the value of Bitcoin will soon change.

1.3 Digital Asset Competition

Bitcoin is not the only available decentralized digital asset. Other digital assets have been developed since the inception of Bitcoin, including, but not limited to, Ethereum, Litecoin, Monero, and Zcash. Although a competitive digital asset could displace the market share Bitcoin currently occupies, it would face significant headwinds due to the network effect and financial and intellectual investments currently enjoyed by the market leader. As of November 9, 2020, the Bitcoin network market share of the total digital market capitalization was estimated to be approximately 64.2%. Further, many Bitcoin exchanges use Bitcoin as the exchange comparison for other cryptocurrencies. For example, to purchase certain cryptocurrencies you first need to purchase Bitcoin on an exchange and then use the Bitcoin to purchase other cryptocurrencies.

1.4 Holding of Client Bitcoin

Client bitcoin held in Onramp products shall be uncertified and ownership shall be recorded in bookkeeping  maintained by Onramp. Onramp will hold and record the ownership of Client assets in a manner such that it will be subject to and limited by the terms and conditions set forth in Client Agreements. Onramp has not created, incurred or assumed, and will not create, incur or assume, any indebtedness and it has not borrowed, and will not borrow, money from or loan money to any person. Onramp may employ agents, attorneys, accountants, auditors and nominees and will not be answerable for the conduct or misconduct of any such custodians, agents, attorneys or nominees if such custodians, agents, attorney and nominees have been selected with reasonable care.

1.5 Books and Records

Onramp will keep proper books and records of Client accounts at its office located in Dripping Springs, Texas or such office as it may subsequently designate. These records may be prepared with the assistance of third-party administrators, accountants, data providers, or other contractors and Onramp will not be answerable for the conduct or misconduct of any such parties selected with reasonable care.

1.6 Reports to Clients

Onramp will make available to Clients the appropriate statements reflecting Client account balances at a regular interval.  This reporting will reflect the accounting records for Onramp as documented by Onramp or its third-party administrators, accountants, or data providers, in accordance with U.S. generally accepted accounting principles.  Onramp observes a fiscal year ending December 31st of each year. 

1.7 Forward Looking Information

Some of the statements contained in Onramp documents, marketing material, and published media, including information incorporated by reference, discuss future expectations, or state other forward looking information. The presentation of future aspects of investment in Bitcoin, other cryptocurrencies, and other asset classes found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Those statements are subject to known and unknown risks, uncertainties and other factors, several of which are beyond Onramp’s control, which could cause the actual results to differ materially from those contemplated by the statements. The forward looking information is based on various factors and was derived using numerous assumptions. In light of the risks, assumptions, and uncertainties involved, there can be no assurance that the forward looking information contained in Onramp materials will in fact transpire or prove to be accurate. Important factors that may cause the actual results to differ from those expressed within may include, but are not limited to:

  • The success or failure of Onramp’s efforts to successfully execute its bitcoin products as scheduled;
  • Changes in laws or regulations, including those concerning taxes, made by governmental authorities or regulatory bodies;
  • The relative performance of bitcoin as an asset class;
  • Onramp’s ability to attract and retain quality employees;
  • The effect of changing economic conditions;
  • The reliance of Onramp on certain key members of management

These along with other risks, which are described in this document may be described in future communications to Clients and contacts. Onramp makes no representation and undertakes no obligation to update the forward looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.

1.8 Regulatory Risk for Bitcoin

To the extent that future regulatory actions or policies limit or enhance the ability to exchange Bitcoin or utilize them for payments, the demand for Bitcoin may be reduced or increased. Furthermore, regulatory actions may limit the ability of end-users to convert Bitcoin into fiat currency (e.g., U.S. dollars) or use Bitcoin to pay for goods and services. Bitcoin currently faces an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as the European Union, China and Russia. Some foreign jurisdictions have banned Bitcoin as a means of payment. Most regulatory bodies have not yet issued official statements regarding intention to regulate or determinations on regulation of Bitcoin, the Bitcoin network and Bitcoin users. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that affect the Bitcoin network and its users, particularly Bitcoin exchanges and service providers that fall within such jurisdictions’ regulatory scope. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance of Bitcoin by users, merchants and service providers outside of the United States and may therefore impede the growth of the Bitcoin economy. The effect of any future regulatory change on Bitcoin is impossible to predict, but such change could be substantial and adverse to the value of Bitcoin investments. Current and future legislation, CFTC and SEC rulemaking and other regulatory developments may affect how Bitcoin is classified (e.g., as a security, property, commodity, currency, etc.) and regulated. Current IRS guidance indicates that digital assets such as Bitcoin should be treated and taxed as property, and that transactions involving the payment of Bitcoin for goods and services should be treated as barter transactions. This treatment may create a potential tax reporting requirement in any circumstance where the ownership of a Bitcoin passes from one person to another, usually by means of Bitcoin transactions. Foreign jurisdictions may also elect to treat digital assets such as Bitcoin differently for tax purposes. To the extent a foreign jurisdiction with a significant share of the market of Bitcoin users imposes onerous tax burdens on Bitcoin users, or imposes sales or value added tax on purchases and sales of Bitcoin for fiat currency, such actions could result in decreased demand for Bitcoin in such jurisdiction, which could impact the price of Bitcoin and negatively impact the value of Bitcoin investments. Accounting standards may also change, creating an obligation to accrue for a tax liability that was not previously required to be accrued for or in situations where it is not expected that will directly or indirectly be ultimately subject to such tax liability. These regulatory changes have the potential to increase or decrease interest in Bitcoin, which could impact the price of Bitcoin and the value of Bitcoin investments.

2. Custodial Risk Disclosures

 

2.1 General Custodian Risks

Custodians are companies that engage in the safekeeping of assets on behalf of clients.  These businesses are inherently subject to a wide range of risks.  Operating risks can impair the ability of custodians to fulfill their function as a result of bankruptcy, insolvency, mismanagement, regulatory changes, errors, competitors’ activities, market conditions, and the overall business environment.  The primary role of custodians is the safekeeping of assets, which are constantly under threat of theft or attack by opportunistic and malicious third parties.  Custodians must maintain best practices in the accounting and administrative practices necessary to appropriately track and guard the assets under their control, and lapses in these efforts can result in the loss or misappropriation of assets.  Part of the role of custodians is to vigilantly guard access to assets under custody in order to ensure that only the rightful owners with the appropriate authorization to access the assets can withdraw assets from the custodian.  Lapses in these security measures can result in the unauthorized access of assets by hackers, imposters, employees, and clients.  

2.2 Bitcoin Custody Risks

The risks inherent to custodians in general are heightened for Bitcoin custodians.  The volatility of Bitcoin’s value can exacerbate the operating risks that custodians are subject to, particularly if their balance sheet is exposed to Bitcoin as a treasury asset or liabilities due from Bitcoin companies.  In addition, the digital nature of Bitcoin makes custody of this asset more challenging and best practices and operating procedures are less well-established for the safeguarding of Bitcoin and other digital assets.  In addition, hackers and other would-be thieves are a greater threat for digital assets whose security can be compromised if a malicious actor obtains access to a simple private key, which is effectively the password to control the address storing certain Bitcoin.  Finally, Bitcoin custodians are subject to greater regulatory uncertainty and the probability of change into the future as a result of the rapidly-evolving legislative picture with regard to digital assets.

2.3 Multi-Institution Custody Risks

Multi-Institution Custody is a form of Bitcoin custody that leverages the multisig capabilities of the Bitcoin protocol to distribute custody among multiple custodians.  Multisig vaults are Bitcoin addresses that are controlled by multiple private keys and require the agreement of multiple keys in order to control the assets in the multisig vault, most commonly requiring 2 of 3 keys used to build the vault to provide signatures in order to effect control.  Multi-Institution Custody is an implementation of multisig Bitcoin custody that utilizes private keys held by multiple institutions in order to construct and control a multisig Bitcoin vault where client Bitcoin is held.

While multisig bitcoin custody mitigates many of the risks identified for Bitcoin custody in general, it also introduces new risks, including potential mismanagement of private keys by key holding service provider of technology infrastructure partner, greater regulatory ambiguity with regard to this type of custody model, and less established best practices for operating a multisig and multi-institution bitcoin custody model.  In addition, Multi-Institution Custody involves the operational collaboration and coordination of several business entities who must agree on standard operating procedures and uphold their stated responsibilities in the ongoing operation of this type of custody arrangement.  This also introduces the possibility of collusion between a sufficient number of the keyholding entities to collude to control funds, at the direct expense of clients and the remaining keyholding entities.