Overview
The statement does not cover all the potential risks or important factors involved in borrowing fiat funds using crypto assets as collateral with APX Lending. Given the associated risks, you should engage in such transactions only if you fully grasp the nature of the contractual relationship you are entering into with APX Lending. Using crypto assets as collateral to borrow fiat funds may not be appropriate for everyone. It is crucial that you carefully assess whether this type of activity suits your circumstances and ensure you completely understand your obligations as a borrower throughout the loan period, including critical steps and actions required while you have outstanding loans with APX Lending.
Introduction
APX Lending emphasizes the importance of its customers understanding the risks and responsibilities associated with borrowing fiat funds using crypto assets as collateral. This type of financial activity may not be suitable for you, especially if you are not in a position to provide additional crypto assets as collateral in the event your loan approaches margin call or liquidation levels. The inherent volatility and unpredictability of crypto asset prices compared to fiat currency can lead to substantial fluctuations in the loan-to-value percentage of your loan in a short time frame. Below is a concise, non-exhaustive summary of key factors and special risks to consider before deciding to borrow fiat funds using crypto assets as collateral. What are Crypto Assets? Crypto Assets are digital forms of value that act as a medium of exchange, a unit of account, or a store of value, yet they do not hold legal tender status. While Crypto Assets can be exchanged for traditional currencies, they are not commonly backed or supported by any government or central bank. Their value is primarily influenced by market supply and demand dynamics and tends to be much more volatile than fiat currencies. The worth of Crypto Assets hinges on the ongoing readiness of market participants to trade fiat currency for Crypto Assets, which could lead to the risk of permanent and total value loss if the market fora Crypto Asset completely vanishes. Additionally, the use and exchange of Crypto Assets may be restricted by federal, provincial, territorial, or foreign governments, and regulations in North America are still evolving.
Crypto Assets vary in their functionalities, structures, governance, and rights. APX Lending allows the use of established Crypto Assets that serve as a form of payment or means of exchange within decentralized networks, such as Bitcoin and Ether, as collateral for loans in fiat. These Crypto Assets share some properties similar to traditional commodities like currencies and precious metals, yet they also differ significantly in several critical ways, as outlined in this disclosure statement.
Risks in Using Crypto Assets as Collateral
Here is a concise overview of the risks associated with using Crypto Assets as collateral.
1. Short History Risk
As a relatively new open-source technology, blockchain is anticipated to undergo continual technical advancements, which could influence the value of Crypto Assets. Given its brief history, the long-term sustainability of the economic value, governance, and functional elements of Crypto Assets remains uncertain. The Crypto Asset community has overcome numerous technical and political hurdles since the inception of the bitcoin blockchain, which APX Lending views as a strong indicator of its ability to address future challenges. However, the sustained vibrancy of the Crypto Asset community is not assured. Factors such as insufficient software development, low contribution rates, community disagreements over network development and scaling solutions, or other unexpected challenges that the community fails to overcome could negatively impact the price of a Crypto Asset. Blockchain developers have indicated ongoing efforts to enhance the scalability and security of public blockchains like bitcoin and ethereum. For instance, the ethereum blockchain recently transitioned from a proof-of-work consensus mechanism to a proof-of-stake mechanism. There may also be further developments on the bitcoin blockchain, such as advances in scalability protocols like the Lightning Network, which builds on the existing bitcoin infrastructure. The timing and effects of these developments remain uncertain.
2. Volatility in the Price of Crypto Asset and Liquidation Trigger
Crypto Asset markets are highly reactive to new information, and as these markets are still developing, significant shifts in market sentiment—whether driven by media sensationalism or other factors—can cause substantial fluctuations in trading volumes and prices. The prices of Crypto Assets on trading platforms have been volatile and are influenced by various elements including liquidity levels, public speculation about future value increases, changes in investor confidence, and the emergence of competing Crypto Assets that might capture market share. Under certain conditions, it may become challenging or even impossible to determine the value of your Crypto Asset collateral. Trading history for Crypto Assets on public platforms is relatively short, and prices on these platforms have been extremely volatile and influenced by factors beyond the intrinsic value of the Crypto Assets, such as liquidity levels and operational disruptions. Such disruptions can affect the liquidity of Crypto Assets on a trading platform, leading to volatile prices and diminishing confidence in the traded Crypto Assets. APX Lending utilizes multiple brokers and trading platforms, referred to as liquidity providers, to liquidate collateral for loans that default. Employing a variety of liquidity providers and trading platforms is intended to mitigate liquidity and operational risks associated with any single platform. Nonetheless, there exists a risk that the sources of liquidity and the prices of Crypto Assets accessed by APX Lending may cause your loan to enter a liquidation state and consequently trigger the liquidation of your collateral. This risk can be exacerbated during periods of high market volatility or operational interruptions at a major trading platform.
3. Potential Decrease in Global Demand for Crypto Assets
Crypto Assets are a novel type of digital value that society is still coming to terms with. Their inherent value stems from their utility as a store of value, a means of exchange, or a unit of account. Similar to how oil's price is determined by global supply and demand based on its utility for powering machines and producing plastics, the price of a Crypto Asset is shaped by global market forces based on its utility for purposes such as remittances, B2B payments, and time-stamping. Speculators and investors who see Crypto Assets as a store of value add another layer of demand atop those using it as a means of exchange, which further drives demand. If the use of Crypto Assets as a means of exchange diminishes, or if their adoption slows, their price could decline. Investors should be aware that there is no guarantee that Crypto Assets used as loan collateral will preserve their long-term purchasing power or that their acceptance for payments by mainstream retail and commercial businesses will continue to expand. While the value of Bitcoin largely derives from its market capitalization and status as a pioneer, the value of Ether is more deeply linked to the underlying technology of its blockchain. The Ethereum blockchain is designed to support the operation of decentralized applications without relying on centralized intermediaries. Ether, the primary currency of the Ethereum blockchain, is used to compensate those who contribute to the operation of these decentralized applications and ensure that transactions on these platforms are recorded on the blockchain. Consequently, the long-term value of Ether may be closely connected to the success or failure of the Ethereum blockchain technology and the decentralized applications that are built on it.
4. Risk of Liquidation of Collateral
While you, as a borrower, are not obligated to top up your collateral if the LTV (Loan-to-Value), or the value of your loan divided by the value of your collateral rises, it is imperative to understand the associated risks of not maintaining a sufficiently low LTV ratio. Crypto asset prices are highly volatile, and a significant increase in the LTV ratio could occur swiftly due to a drop in the market value of the collateralized assets. In such events, if the LTV ratio approaches or exceeds the liquidation threshold (communicated to you in your loan agreement), APX Lending reserves the right to initiate a liquidation of your collateral to mitigate the risk of loan default. This liquidation process is an automated system response designed to protect the financial integrity of both you, as the borrower and of APX Lending. The aim is to prevent scenarios where the outstanding loan value surpasses the recoverable value of the collateral, potentially leading to losses for both parties. It is crucial for you as the borrower to be vigilant and proactive in monitoring your loan's LTV ratio, especially during periods of high volatility in the crypto markets. You should be aware that failing to address a rising LTV by either adding more collateral or repaying part of the loan could result in the liquidation of your collateral assets without further notice. This action is taken as a last resort and can be avoided by maintaining and managing the LTV ratio effectively. We strongly advise you to thoroughly review your loan agreement and to constantly monitor the health of your loan and collateral to ensure you are fully aware of your loan LTV at all times and have ample time to take steps to mitigate any loan liquidation scenarios.
5. The Blockchains on which your crypto asset collateral operates may Temporarily or Permanently Fork
Certain Crypto Assets accepted by APX Lending as collateral are based on open-source software. When developers release a software update and a substantial majority of miners approve the update, the blockchain network continues seamlessly. However, if an update is introduced without significant consensus and is incompatible with the existing software, this leads to what is known as a "fork" (i.e., a split) in the blockchain. As a result, one blockchain would continue under the old software, while another would operate under the new software, both running parallel but independently. This scenario has occurred in the past with both the Bitcoin and Ethereum blockchains. Such a fork could happen again in the future, potentially impacting the viability or value of a Crypto Asset used as collateral. In such cases, APX Lending might choose not to, or may be unable to, return the forked Crypto Assets to you, the borrower. Consequently, you may lose any entitlement to new Crypto Assets that emerge as a result of the fork.
6. Issues with the Cryptography in Crypto-networks
Historically, vulnerabilities in the source code of digital assets have been identified and exploited, leading to issues like disabled functionalities, exposure of personal information, and theft of Crypto Assets. Although the Bitcoin and Ethereum blockchains have shown resilience and integrity over time, the cryptography supporting these networks could potentially become flawed or ineffective in the future. For instance, advancements in fields such as digital computing, algebraic geometry, and quantum computing could make the cryptographic security of blockchain networks susceptible to breaches. This would negatively impact the value of Crypto Assets pledged as collateral to APX Lending.
7. Regulatory Uncertainty and Financial Institution Support
The regulatory landscape for Crypto Assets is continually evolving both in Canada and abroad, potentially limiting the use of Crypto Assets or affecting their demand. There may also be challenges in enforcing regulations on Crypto Asset activities that occur outside Canadian jurisdiction. Additionally, banks and other financial institutions might refuse to handle funds associated with Crypto-Asset backed loans or to execute wire transfers to or from Crypto Asset-backed lending platforms, companies, or service providers, or to maintain accounts for individuals or entities involved with Crypto-Asset backed loans.
8. Concentration Risks
A significant portion of the existing Crypto Assets is held in a few addresses within the Bitcoin, Ethereum, and other blockchain networks. Should any of these addresses liquidate their holdings, it could lead to market volatility adversely affecting Crypto Asset prices. Moreover, if someone were to control over 51% of a blockchain network's computing power (hash rate), they could potentially orchestrate a "51% attack" to double-spend their Crypto Assets. A successful 51% attack would severely undermine trust in public blockchain networks like Bitcoin and Ethereum as reliable stores of value and mediums of exchange, significantly reducing the value of Crypto Assets.
9. Electronic Trading and Internet Dependence
Utilizing an internet-based lending platform like APX Lending comes with several risks, including hardware and software failures. While APX Lending maintains an independent and secure ledger for all loans and collateral to minimize losses and has contingency plans to limit system failures, it does not control factors such as signal strength, internet reception, routing, or the configuration and reliability of your personal equipment. Consequently, there may be delays or failures in processing collateral you send to reduce the Loan-to-Value of your loans. Such delays could lead to the unintended liquidation of your loan if the value of the collateral drops simultaneously. Losses could occur due to system malfunctions, hardware or software failures, connectivity issues, cybersecurity incidents, hacks, or data corruption, in addition to typical market risks.
10. Cyber Security Risk
The digital nature of Crypto Assets potentially heightens the risk of fraud or cyber attacks. Cybersecurity breaches can result from intentional or accidental actions leading to the loss of sensitive information, data corruption, or operational impairments. Such breaches might not only result in regulatory fines and reputational damage for APX Lending but could also increase compliance costs due to necessary corrective measures and financial losses. Cyber attacks could involve unauthorized intrusions into APX Lending’s systems through hacking or malware and external assaults like denial-of-service attacks, which aim to disrupt network services. Additionally, cybersecurity risks can extend to third-party service providers, potentially causing similar adverse effects as direct breaches. APX Lending actively develops its risk management strategies to mitigate the risks linked to cybersecurity, similar to its overall approach to managing operational risks.
11. Open Loop System
Engaging in a loan agreement with APX Lending grants you specific rights and assigns certain duties; your loan agreement, and the rights to the crypto assets you may pledge as collateral, might be considered a security or derivative. Notably, the loan agreement permits you to receive a loan in fiat funds directly into your private wallet or bank account, a process we describe as an "open loop" system.
12. Lack of Investor Protection Insurance
Crypto Assets that are pledged and retained with APX Lending do not fall under the protection of the Canadian Investor Protection Fund, the Canadian Deposit Insurance Corporation, or any other type of investor protection insurance.
13. Interest and Other Charges
While APX Lending does not currently impose loan origination fees or commissions on the sale of collateral during loan liquidation events, there are specific charges that are applied, including interest on loans and fees for collateral liquidation. These estimated fees are clearly outlined in your loan agreement before your loan is issued.
14. Custody Risk and Insurance
In certain cases, APX Lending may temporarily be the primary custodian of the Crypto Asset Collateral that you pledge to acquire a loan. APX Lending has implemented rigorous policies and procedures for both cold and hot wallet management to protect these assets. However, despite these measures, the inherent risks associated with an open loop system could potentially expose vulnerabilities leading to the loss of some or all of the custodied Crypto Assets, without any possibility of recovery. APX Lending has secured insurance coverage against losses resulting from dishonest or fraudulent acts by employees, as well as from robbery, burglary, theft, and other criminal actions. Additionally, the Qualified Custodians employed by APX Lending for the safekeeping of crypto collateral also provide their own insurance coverage. However, it's crucial to recognize that the insurance amounts may not fully compensate for all possible losses that APX Lending might incur, and losses of Crypto Assets held in custody might only be partially covered by these insurance policies.
When APX Lending is not the primary custodian, and the Crypto Asset Collateral is maintained with a Qualified Custodian, the custody risks described may remain significant.
You are advised to secure access to your APX Lending account, to reduce the risk of unauthorized access and potential theft of your Crypto Asset collateral. APX Lending will not assume responsibility for any loss of Crypto Asset Collateral, whether due to negligence, fraud, or other factors, held under its custody or that of associated custodians.
15. Potential Threats to APX Lending’s Physical Assets and Personnel
APX Lending’s physical assets, including its personnel, hardware, facilities, and data processing infrastructure, are susceptible to various threats such as fires, floods, natural disasters, theft, vandalism, or acts of terrorism. These risks could significantly impact APX Lending's operations and ability to service loans effectively.
