We at Digital Asset Management Limited (DAM) are happy and proud to be able to serve the growing and changing industries of digital currencies, virtual currencies and tokenised assets (“Digital Assets”). Ultimately we are committed to setting high standards of governance in managing Digital Assets as one of the world’s first few providers of Digital Asset management and wish to provide all of our clients and anyone with whom we engage with with as much education on Digital Assets as possible. As a result we wish to remind you of the risks associated with investing and trading in Digital Assets.
Investing and trading Digital Assets are volatile and the prices can go up and down. Like real goods and products, the price of Digital Assets are volatile and are subject to large swings in value and at any time may lose a majority or all of their value. As such, there is an inherent risk that gains or losses will occur as a result of buying, selling or trading anything on any market.
Digital Asset trading also has special risks not generally shared with official nation issued currencies, goods or commodities in a market. Unlike most recognised currencies or commodities and financial instruments, Digital Assets are backed by technology and decentralised systems of trust. Typically with Digital Assets offered by DAM will not have a central bank or authority that can take corrective measures, such as creating or issuing more Digital Assets, in order to protect the Digital Assets value in periods of crises.
Digital Assets may be autonomous or issued by particular legal entities that may be based and domiciled in any jurisdiction in the world. Distributed Ledger Technologies are technology applications and software which by and large share information throughout a number of different jurisdictions and locations using protocols, many of which are open source. As a result such open source protocols are subject to change in their architecture, composition and make-up. As a result, changes may occur and the the underlying protocols are subject to sudden changes in operating rules (also known as “forks”), and that such forks may materially affect the value, function, and/or even the name of any Digital Asset.
In Gibraltar, if a person is carrying on by way of business any activity in storing or transferring value for others using distributed ledger technologies (such as blockchain), this is a regulated activity. Digital Assets are largely unregulated systems and assets in a number of other jurisdictions. However, some jurisdictions ban and impose criminal penalties on the use, creation and/or the legal or beneficial ownership of Digital Assets and individuals should always be alive to the jurisdictions which they may have connections with and how those jurisdictions regulate Digital Assets may involve criminal liabilities, taxation or other penalties.
Digital Assets are susceptible to irrational (or rational) ‘bubbles’ or loss of confidence (usually referred to as ‘FUD’ – Fear, Uncertainty and Doubt), which could collapse demand relative to supply. In particular Digital Asset markets are largely susceptible to consumer sentiment and swings in confidence are particularly volatile. For example, confidence in particular Digital Assets may collapse due to unexpected changes imposed by software developers or others, a change of regulatory position, creation of superior competing alternative Digital Assets, or a deflationary or inflationary spiral. Confidence might collapse because of technical problems such as where Digital Assets are lost or stolen, if hackers or governments are able to affect transactions or compromise and affect the settling and processing of other elements of any particular Digital Asset protocol (for example, a 51% attack). Changes in confidence for any particular Digital Asset are also inherent due to ongoing reputational and public relation events where principals of any particular creator or entity responsible for aspects of any particular Digital Asset may be involved in litigation, fraudulent activity or other reputational questioning.
Our view at DAM is that individuals should look to Digital Assets to complement their existing investment strategies and lifestyle choices on digital mediums. Ultimately acquiring and holding Digital Assets should not simply be done with a view to consider the financial appreciation or depreciation as the sole metric of the use of Digital Assets. Digital Assets by and large are created with a utility and ultimate use for individuals and therefore acquiring and holding Digital Assets is not simply an investment decision; it is a lifestyle choice as to how individuals may wish to carry out their dealings on digital mediums in the expectation of growing adoption of distributed ledger technologies. Individuals should always carefully assess whether their financial situation and risk appetite is suitable for buying, selling or trading Digital Assets. DAM carries out its own risk assessments and may choose to not accept the new business of individuals, or indeed may choose to discontinue servicing existing clients, whose financial position is not one that may accommodate tolerance for the highly risky nature of trading or holding Digital Assets.
Individuals should be aware of the risks associated with any market maker, platforms or any other process whereby individuals are purchasing Digital Assets using fiat currencies. These may include but are not limited to the risks of disclosing personal information such as identity and bank account information and considering that this information may be compromised. Individuals may also wish to consider the reputational risks associated with using any particular provider for facilitating the purchasing of Digital Assets from fiat as such providers may be involved in ‘mixers’ whereby the true ownership and transaction history of any given Digital Asset wallet is obfuscated by processing payments through a network of wallet addresses. Similarly individuals should consider the risks associated with the technical elements of owning Digital Asset wallets and also the risks associated in holding any Digital Assets in a ‘hot wallet’ (i.e. on a device connected to the internet) and the risks that they may be susceptible to hacks.
Clients should be reminded that whilst DAM may recommend various exchanges, DAM is not responsible for the actions of these exchanges and clients should note that these exchanges frequently may experience problems in issuing Digital Assets or issuing fiat in exchange for Digital Assets due to technical issues, regulatory changes and/or decisions, market liquidity and extreme moments of market demand. Please note that given the somewhat experimental nature of some Digital Assets and affiliated technologies, liquidity on certain exchanges may be experienced during moments of high demand.
Ultimately we are committed to safety, security and transparency. We are excited and privileged to be servicing the Digital Asset management space at such an early stage in its development and we are committed to provide clients with the best service, support and education but we cannot always promise perfection during moments of extraordinary high demand. We will continue to update all our clients of any significant changes to risks by updating this page from time to time and we will also endeavour to also include updates on our website or other social media pages.
V0.03 May 2020