Blockchain and cryptocurrencies have grown significantly since first introduced over 10 years ago. The document discusses basic concepts like blocks, nodes, and forks in blockchain technology. It also outlines the developing ecosystem around cryptocurrencies including exchanges, service providers, and major cryptocurrencies. Finally, it identifies several risk factors for investors to be aware of such as loss of private keys, cybersecurity risks, regulatory issues, and volatility in currency values.

1. Blockchainand
cryptocurrencies
Basic concepts, current
developments and risk factors.

2. BasicConcepts
What is the difference between a
block, a node and a fork?
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3. It all started 10 years ago.
From 2008 until 2014-2015, the bitcoin movement went
relatively unnoticed. Massive interest in cryptocurrencies
really started in 2016-2017, as the evolution of the total
market capitalization shows. However, now that
cryptocurrencies and especially the Blockchain, the
technology behind bitcoin have drawn attention, a massive
growth is expected. Still, nobody knows who Satoshi
Nakamoto really is …
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4. What is the Blockchain?
Blockchain is a distributed ledger technology, based on
encryption, open-source code and peer-to-peer sharing.
• A Block is a permanent time-stamped record
of certain transactions on the Bitcoin
network, like a page of a ledger book.
• A Node is a computer connected to the
Blockchain network, which receives, verifies
and stores Blocks, in exchange for a reward
and/or transaction fees paid in Bitcoin.
• A transaction is permanently recorded and
non-alterable if verified by 50%+1 of the
Nodes. However, transactions after 3-4
confirmations are considered as definitely
confirmed.
• A Fork happens when the Blockchain diverges
into two potential paths forward. This
happened several times with Bitcoin and
Ethereum, the two main networks.
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Image credits: https://mlsdev.com/blog

5. Developing
Ecosystem
In addition to cryptocurrencies and
Blockchain technology companies, a
host of new service providers and
crypto-exchanges have appeared.
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6. Main cryptocurrencies
In addition to Bitcoin, major cryptocurrencies include
Ethereum, Ripple, Litecoin, EOS, etc. A list of the top 20
cryptocurrencies in terms of market capitalization from
https://coinmarketcap.com/
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7. Fun facts: PeriodicTable of Cryptocurrencies
according to their appearance
However, not all cryptocurrencies survive.
Since cryptocurrencies have no intrinsic value and are not
backed by any assets, their market value is determined
purely by offer and demand rules, which depend on
general sentiment, expectation of profits, and supporting
Blockchain networks and ecosystem, among others.
Because not all Blockchain networks are designed exactly
the same, some cryptocurrencies are considered more
secure or more reliable, others execute faster, or provide
more anonymity. Some cryptocurrencies can be used as
“fuel” to execute certain transactions. For example, the
Ethereum network has grown mainly because it supports
thousands of user-friendly build-your-own-token projects.
In summary, some cryptocurrencies may be even more
risky and volatile. Some exchanges do not accept
certain cryptocurrencies or tokens.
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8. Cryptocurrency Exchanges
Because of the development of cryptocurrencies, many
OTC exchanges and trading platforms have appeared in
recent years. Some are serious projects, with well-drafted
terms of use and compliance rules, others may be
incorporated in places such as Vanuatu or Belize.
Main factors to consider:
• Cryptocurrencies traded and volumes
• Liquidity issues
• Differences in pricing and exchange rates
• Conversion to fiat currencies
• Compliance efforts
• Some cryptocurrency exchanges are making efforts to get
regulated or licensed, in line with international AML/KYC
standards, while some have become known for being
less reputable. Many banks and service providers will
maintain their own lists.
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9. Custody, AML/KYC and other services
Specialized administrators, accountants, custodians and
AML/KYC compliance providers have started to appear over
the last two years.
Other trends:
• Tokenized funds.
• Shares or bonds issued on the Blockchain.
• Classic funds investing in cryptocurrencies and
Blockchain start-ups (either directly or via tokens
purchased in ICOs).
• Blockchain business incubators, VC investments, and big
companies investing in Blockchain technologies (AMEX,
Mizuho, Tencent, Alibaba, Prudential, Intesa Sanpaolo,
ING, Morgan Stanley, RBC, AXA, Santander, Walmart,
Allianz, BNP Paribas, Bank of China, Wells Fargo, BoA,
JPMorgan Chase, China Construction Bank Corporation
and ICBC).
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10. Official exchanges trading cryptocurrencies-based products
Some of the established capital markets exchanges have accepted to trade certain cryptocurrencies.
CME now has Bitcoin futures and
Cryptocurrency Indices
• standardized reference rates and
spot price indexes on bitcoin and
ether
• possible to hedge bitcoin exposure
with a futures contract
• reference rate and real-time index
for each cryptocurrency are
standardized and based on robust
methodology, with expert oversight
to bring confidence to bitcoin and
ether trading
• several exchanges and trading
platforms will provide pricing data,
including Bitstamp, Coinbase, itBit
and Kraken
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• SIX Swiss Exchange, based in Zurich,
Switzerland's principal stock
exchange
• Crypto Market Index 10 which aims
to reliably measure the
performance of the largest and
most liquid crypto assets and tokens
• prices for the crypto assets and
tokens are obtained from multiple
exchanges
• Crypto Market Index 10 was
standardized at 1000 points on 30
December 2016, and has been
calculated on an ongoing basis since
9 January 2018
• On 30 August 2018, Deutsche Börse
announced that it established a new
area “DLT, Crypto Assets and New
Market Structures” that will focus
on the further development of a
Group-wide approach to take
advantage for Blockchain-related
growth opportunities.
• The Australian Securities Exchange
(ASX) has announced that it will be
using Blockchain technology.
And many others …

11. RiskFactors
There are certain specific risk factors
which should be disclosed and
mitigated when investing in Bitcoin
or other cryptocurrencies.
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12. Risk Factors
Specific risk factors that investors should be aware of:
Loss or destruction of private keys
Bitcoins (or other cryptocurrencies)
are stored in a digital wallet and are
controllable only by the possessor of
both the public key and the private key
relating to the digital wallet, both of
which are unique.
If the private key is lost, destroyed or
otherwise compromised, an investor
may be unable to access the bitcoins
held in the related digital wallet which
will essentially be lost.
If the private key is acquired by a third
party, then this third party may be able
to gain access to the bitcoins.
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Other cyber-security risks including
malicious activity
Trading platforms and third-party
service providers may be vulnerable to
hacking or other malicious activities.
If one or more malicious actor(s)
obtain control of sufficient consensus
nodes on the Bitcoin Network or other
means of alteration, then a Blockchain
may be altered. While the Bitcoin
Network is decentralized, there is
increasing evidence of concentration
by creating of “mining pools” and
other techniques, which may increase
the risk that one or several actors
could control the Bitcoin Network or
other similar Blockchain.
Risks associated with peer-to-peer
transactions
Digital currencies can be traded on
numerous online platforms, through
third party service providers and as
peer-to-peer transactions between
parties.
Many marketplaces simply bring
together counterparties without
providing any clearing or intermediary
services and without being regulated.
In such a case, all risks (such as
double-selling) remain between the
parties directly involved in the
transaction.

13. Risk Factors (continued)
Specific risk factors that investors should be aware of:
Other risks related to trading platforms
and exchanges
Digital currency trading platforms,
largely unregulated and providing only
limited transparency with respect to
their operations, have come under
increasing scrutiny due to cases of
fraud, business failure or security
breaches, where investors could not be
compensated for losses suffered.
Although one does not need a trading
platform or an exchange to trade
bitcoins or other cryptocurrencies,
such platforms are often used to
convert fiat currency into
cryptocurrency, or to trade one
cryptocurrency for another.
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Loss of confidence in digital currencies
Digital currencies are part of a new
and rapidly evolving “digital assets
industry”, which itself is subject to a
high degree of uncertainty.
For a relatively small use of digital
currencies in the retail and commercial
marketplace, online platforms have
generated a large trading activity by
speculators seeking to profit from the
short-term or long-term holding of
digital currencies.
Most cryptocurrencies are not backed
by a central bank, a national or
international organization, or assets or
other credit, and their value is strictly
determined by the value that market
participants place on them.
Regulations preventing or restricting
trading of digital currencies
There are significant inconsistencies
among various regulators with respect
to the legal status of digital currencies.
Regulators are also concerned that
bitcoin and other cryptocurrencies
may be used by criminals and terrorist
organizations.
In the future, certain countries may
restrict the right to acquire, own, hold,
sell or use digital currencies. This
happened in China, but also in other
countries.

14. Risk Factors (continued)
Specific risk factors that investors should be aware of:
Currency-conversion risks
Policies or interruptions in the deposit
or withdrawal of fiat currency into or
out of the trading platforms may
impact the ability of certain investors
to convert.
For example, when two of the largest
trading platforms in China stopped
margin lending and withdrawals in
February 2017 and started
implementing stricter anti-money
laundering policies following
discussions with Chinese authorities,
this immediately triggered a decrease
in pricing and trading volume.
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Slow-down of network
For bitcoins, mining is the process by
which bitcoins are created and
transactions verified. Miners which are
successful in adding a block to the
Blockchain are automatically awarded
bitcoins (plus transaction fees for
transactions recorded).
However, if the rewards for solving
blocks and transaction fees are not
sufficiently high, or if a high volume of
transactions occur at the same time,
the Blockchain may experience a slow-
down. A slow-down is also possible for
other cryptocurrencies, if the number
of transactions on the Blockchain is
very high.
Dilution due to competition or “fork” in
the Blockchain
Dissent between users as to protocols
to be used may result in a “fork”,
opening two separate networks.
In 2016, Ethereum experienced a
permanent fork in its Blockchain that
resulted in two versions of its digital
currency, Ethereum (ETH) and
Ethereum Classic (ETC), which trade
very differently.

15. Risk Factors (continued)
Self-regulation efforts. Recommendations from the NFA (the U.S. National Futures Association):
The risks associated with the unique
features of virtual currencies should be
explained.
Certain virtual currencies have
experienced daily price volatility of
more than 20%. The risks associated
with the extreme price volatility and
the possibility of rapid and substantial
price movements, which could result
in significant losses, should be
explained.
The lack of a centralized pricing source
poses a variety of valuation challenges.
The valuation and liquidity risks and
the procedures used for valuing virtual
currencies and the related risks should
be explained.
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Unlike bank and brokerage accounts,
virtual currency exchanges and
custodians that hold virtual currencies
do not always identify the owner. The
opaque underlying or spot market
poses asset verification challenges for
market participants, regulators and
auditors and gives rise to an increased
risk of manipulation and fraud,
including the potential for Ponzi
schemes, bucket shops and pump and
dump schemes. The risks associated
with the opaque nature of the
underlying or spot virtual currency
market should be explained.
Virtual currency exchanges, as well as
other intermediaries, custodians and
vendors used to facilitate virtual
currency transactions, are relatively
new and largely unregulated.
Virtual currency exchanges generally
purchase virtual currencies for their
own account on the public ledger and
allocate positions to customers
through internal bookkeeping entries
while maintaining exclusive control of
the private keys. Virtual currency
exchanges collect large amounts of
customer funds for the purpose of
buying and holding virtual currencies on
behalf of their customers.
A virtual currency exchange may not
hold sufficient virtual currencies and
funds to satisfy its obligations and that
such deficiency may not be easily
identified or discovered. In addition,
many virtual currency exchanges have
experienced significant outages,
downtime and transaction processing
delays.

16. © Loeb Smith Attorneys, All rights reserved, 2020