Risk disclosures for trading Virtual Assets and use of the services and services provided on the Backpack Exchange website and mobile application.
Last Updated: October 31, 2023Virtual Asset means any Virtual Asset (including any virtual currency or virtual commodity) which is a digital representation of value based on (or built on top of) a cryptographic protocol of a computer network. You should not trade or invest in Virtual Assets unless you fully understand the highly speculative nature, complexity, and risk inherent in the transactions you enter into, and your exposure to financial loss. Only persons with adequate understanding of the economic, legal, and other risks associated with Virtual Assets, and who are willing to assume such risks, should trade in Virtual Assets. We set out below the risks of trading Virtual Assets and of the use of the services provided by Trek Labs Ltd FZE dba Backpack Exchange (“Backpack Exchange”). Note that there may be additional risks that we have not foreseen or identified as part of this risk disclosure statement. You should carefully assess whether your financial situation and risk tolerance is suitable for trading in Virtual Assets. Backpack Exchange does not provide trade recommendations, investment advice or financial advisory services.The risks described below may result in the loss of Virtual Assets, a decrease in or loss of all value for Virtual Assets, an inability to access or transfer Virtual Assets, an inability to trade Virtual Assets, an inability to receive financial benefits available to other Virtual Asset holders, and other financial losses to you.1. General risks associated with Virtual Assets
- Total loss - A Virtual Asset may lose all of its value, and subsequently you may lose any fund invested in such Virtual Asset and losses may occur over a short period of time.
- Not a legal tender or backed by a government - Virtual Assets are not a legal tender and are not backed by any government.
- Complexity - The features, functions, characteristics, operation, use and other properties of any Virtual Asset and the software, networks, protocols, systems, and other technology (including, if applicable, any blockchain) used to administer, create, issue, transfer, cancel, use or transact in any Virtual Asset may be complex, technical or difficult to understand or evaluate.
- Valuation and market/price - The price of Virtual Assets traded on an exchange is derived based on the market data and price information on the exchange. Such market data and price information may be different from the information available on other exchanges given the fact that Virtual Assets can be traded on other exchange platforms. Prices can and do fluctuate at any given time. Due to such price fluctuations, the value of your investment in Virtual Assets may decrease at any given moment. Virtual Assets may be subject to large swings in value and may even become worthless. Trading activity in a particular Virtual Asset traded on another exchange could affect the price of that Virtual Asset on Backpack Exchange’s online trading platform.
- Volatility - The price of Virtual Assets can be subject to large fluctuations (whether in a Virtual Asset/fiat pairing or Virtual Asset/Virtual Asset pairing). The price of a Virtual Asset can be volatile, unpredictable, and inconsistent. Sudden shifts in prices are possible at any given moment and could result in significant loss.
- Liquidity - Markets for Virtual Assets can at times become “illiquid,” which means there can be a scarcity of persons who are willing to trade at any one time. Thinly traded or illiquid markets have potential increased risk of loss because Virtual Assets can experience high volatility of prices and in such markets market participants may find it impossible to liquidate market positions except at very unfavorable prices. There is no guarantee that the markets for any Virtual Asset will be liquid or permit you to establish or liquidate Virtual Assets positions when you want, or at favorable prices.
- Irrational market forces - Virtual Assets are probably susceptible to irrational loss of confidence or market forces (e.g. as a result of any misleading statements or rumors), which could cause a collapse in the demand relative to supply without a reason anchored in reality. Many Virtual Assets have no underlying value other than the trust the holder of such Virtual Assets places in them. References to ''market capitalisation'' in connection to Virtual Assets should not be confused with the intrinsic value of other assets, such as equities, which are valued and whose market capitalisation depends on the intrinsic value of the legal entity which they represent a share in i.e. the value of the underlying assets and liabilities of a corporation.
- Financial crime risk - Virtual Assets provide a higher degree of anonymity for their holders and makes it more difficult to trace them compared to conventional assets, which can lead to an increased risk of Virtual Assets being used for, or being connected to, financial crime (which includes (i) fraud or dishonesty; (ii) money laundering such as the handling of proceeds of crime; (iii) the financing of terrorism; or (iv) dealing with sanctioned persons or breaching economic sanctions).
- Cyber-attack risks - The intangible nature of Virtual Assets and their heavy reliance on technology may make them subject to an increased risk of cyber-attack and theft. Virtual Assets are susceptible to specific types of cyber-attacks as a result of their network architecture. For example, Bitcoin and Ethereum rely on a Proof-of-Work consensus mechanism, in which a distributed network of computers (known as miners) complete complex mathematical problems in order to validate and record transactions. Theoretically, a malicious actor could gain control of >50% of the network computing power (known as a 51% attack) to rewrite transactions or create fake ones in order to steal assets from exchanges and other service providers. Polkadot relies on a Proof of Stake consensus mechanism, in which a set number of node operators (known as validators) post collateral in order to validate and record transactions. A validator will lose some or all of its collateral if it behaves maliciously or carelessly. Theoretically, a validator or group of validators could post enough collateral to control the validation and recording of transactions. While these kinds of attacks are theoretically possible, they require significant capital to be carried out successfully.
- Technology risks - Trust and confidence may collapse in a Virtual Asset such as Bitcoin because of, but not limited to, unexpected changes imposed by the software developers or others, changes introduced by the relevant authority or regulator, the creation of superior competing alternative Virtual Assets, or a deflationary or inflationary spiral. Confidence may also collapse because of technical problems: if the anonymity of the system is compromised, if money is lost or stolen, or if hackers or governments are able to prevent any transactions from settling. There may be no mechanism for the recovery of lost or stolen Virtual Assets. Any Virtual Asset or technology may change or otherwise cease to operate as expected due to a change made to the underlying technology, a change made using features or functions built into the underlying technology or a change resulting from an attack. These changes may include, without limitation, a “fork” or “rollback” of a Virtual Asset or blockchain. Finally, due to their nature, technological difficulties experienced by Backpack Exchange may prevent access or use of Virtual Assets.
- Irreversible transactions - Each Virtual Asset has its unique deposit address. If an exchange user accidentally deposits any other Virtual Assets into the address, those Virtual Assets would be lost forever and cannot be recovered. Likewise, if an exchange user accidentally types in a wrong withdrawal address, once the withdrawal request is processed and the transaction is completed from the Exchange’s end (once the Virtual Asset leaves Backpack Exchange’s wallet system), the transaction is irreversible, and the withdrawn amount cannot be retrieved by the exchange user. Finally, and for the same reason, Virtual Assets which are stolen as a result of a cyber-attack, as well as Virtual Assets where the private keys are lost, destroyed or stolen, may not be recoverable.
- Acceptance as payment - There is no assurance that a counterparty who accepts a Virtual Asset as payment today will continue to do so in the future. Changes to laws and regulations might prevent a counterparty from accepting a Virtual Asset as payment. Virtual Assets not being a "legal tender", a counterparty could refuse to accept them as a means of payment.
- No central bank or other official support - There is no central bank that can take corrective measures to protect the value of Virtual Assets in a crisis. Virtual Assets are only backed by technology and mutual trust, and therefore rely heavily on the technology and economic model its community and developers have built. Any changes in the core logics of these could result in a collapse of its price and value.
- Regulatory risk - The regulation of Virtual Assets continues to evolve in various jurisdictions. Regulation may develop that restricts the use of Virtual Assets or otherwise influences the demand for Virtual Assets, which may affect the price of Virtual Assets. Furthermore, banks and other financial institutions may refuse to process funds for Virtual Asset transactions, process wire transfers to or from Virtual Asset trading platforms, Virtual Asset-related companies or service providers, or maintain accounts for persons or entities transacting in Virtual Assets. This might result in you holding Virtual Assets which you are unable to convert into fiat currency to use.
- Tax risk - Virtual Assets gains are typically subject to tax, depending on the user’s country of residence, and may impact a user’s tax footprint or optimization. If you have any further tax concerns pertaining to Virtual Assets you are best advised to visit the relevant country’s tax website or consult your own financial, investment, tax, or legal adviser.
- Stablecoin Risks. Stablecoins are often backed by reserves including fiat currencies, short term government and other bonds, as well as other assets. However, they are generally not subject to any form of deposit or government insurance. For some stablecoins, the underlying reserves may not be audited, and the types of reserves backing the stablecoin is unable to be confirmed. As a result, in addition to fees charged by the issuers, users and investors may face difficulties redeeming stablecoins for their underlying assets. In addition, if the collateral loses value, or are seen as unstable, non-redeemable, or not otherwise protected, whether in actuality or in perception, then the stablecoin may destabilize, resulting in a loss of the peg. The security and operational integrity of the custody and mint and redemption platforms associated with stablecoins are also critical. Any breach or failure can result in significant losses to stablecoin holders. Stablecoin issuers and operators also navigate complex and evolving regulatory landscapes across jurisdictions. Failure to comply with these financial laws and regulations can result in fines, restrictions or the shutdown of operations, affecting the value and liquidity of the stablecoin.
- Memecoin Risks. Memecoins often rely on social media buzz, hype and endorsements from influencers and opinion leaders for their valuation. Any negative shift in sentiment or fading interest can rapidly cause their value to depreciate, including to zero in a short amount of time. In addition, unlike traditional assets or some crypto assets with utility or underlying projects, meme coins often lack intrinsic value, making their long-term viability and price stability highly uncertain. In addition, the memecoins are susceptible to manipulation through pump-and-dump schemes, where prices are artificially inflated to attract buyers before the assets are sold off, leading to a sharp decline in value. Many meme coins are also launched with minimal planning or long-term vision, and the risk of developers abandoning the project is significant. The success of certain meme coins has led to a proliferation of similar tokens, many of which are created solely to scam unwary investors. Distinguishing legitimate projects from scams in a hype-driven market can be highly challenging.
2. Risks associated with Backpack Exchange products and services
- Trade execution risk - Backpack Exchange may perform additional reviews or monitoring of a user’s onboarding or any Virtual Asset trade and transaction request which might require, among other things, requesting additional documentation during such review or monitoring. This additional review or monitoring, which may be required for compliance reasons, may delay trading, and therefore could potentially cause a user to miss out on a trade opportunity or expected profit.
- Internet trading risks - There are risks associated with Backpack Exchange’s technology service providers which enable its users to trade on its exchange. Although Backpack Exchange carefully chooses its providers and the solutions it uses, Backpack Exchange’s users would still be exposed to risks which include, but are not limited to, the failure of hardware, software and hacking through internet connection. users may experience communication failures, disruptions, errors, distortions, or delays when trading due to network failure from the user’s end, which might result in losses.
- Risks of cyber-attack
- Website Phishing Risk: Attackers may host a similar website which has a similar domain name as the Backpack Exchange website. By sending phishing emails or chat messages, attackers may induce users to access the phishing website where they would input their password or disclose other sensitive information, which could then be used by the attackers.
- Official Account Phishing Risk: Attackers may create accounts with the same nickname and avatar as Backpack Exchange employees on websites, social media pages or chat rooms. With these fake accounts, attackers may induce users to disclose their passwords or other sensitive information.
- "Remote Hacking" Risk: users can expose their computer or mobile device to remote hacking by unconsciously downloading viruses from the internet or other connecting devices. Hackers can then access and control a user’s device without the user being aware. In this case, a hacker might login to and operate a user’s trading account. If a hacker has obtained enough information for him to pass all security measures on the Backpack Exchange online trading platform, and the system is tricked into considering the attacker as the legitimate user, the attacker would be able to transfer all funds or Virtual Assets in the user’s account to other addresses.
- Weak User Password/"Brute force" attack risk - Users sometimes use weak passwords to protect their Backpack Exchange accounts. Attackers may attempt to login to the Backpack Exchange online trading platform by attempting to guess a user’s password through trial and error, by enumerating weak or common passwords, or by using username password combinations leaked from other websites.
- "Hard Forking" risk - A "hard fork" results in a Virtual Asset forked from the original one. Accepting the original Virtual Asset does not mean Backpack Exchange automatically accepts any new Virtual Asset that is forked from the original accepted one. In case that Backpack Exchange does not support the forked Virtual Asset, users will not be able to trade the forked Virtual Asset and need to withdraw it to other addresses for further action. During this time the price of the forked Virtual Asset might decrease.
- Regulatory risk - Backpack Exchange may be subject to supervisory or enforcement action by certain regulators or government agencies, which may result in suspension of trading on the Backpack Exchange Platform or in users being unable to have control or access over their Virtual Assets for a period of time. This could eventually impact the value of Virtual Assets.
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