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Risks of investing in cryptoassets

1.       Risks

There are many risks involved with a token, some of which are listed below, and there may be others as well. These risks may result in the complete loss of the tokens, or their value. The token holder assumes and fully understands all the risks involved with a token. In no event, if the token loses value or anything else happens, will the token issuer compensate the token holder in any manner.

1.1          Risks of changes in Spanish or European legislation
The tokens will be issued in accordance with the Spanish legislation in force at the date of this white paper. The impact of any possible judicial, administrative decision or any possible change in legislation or administrative practices after the date of this white paper cannot be guaranteed, and any of these changes may significantly impair the price or the ability to use the tokens affected by these circumstances.
However, it should be noted that, as of the date of this white paper, despite the fact that both the National Securities Market Commission (CNMV) and the different European regulatory bodies have issued opinions and / or various recommendations regarding the legal concept of token, as well as on a potential regulation of them and initial coin offerings (Initial Coin Offerings), there is no national regulation or specific and coordinated regulatory framework at European level on tokens, their different typology, or Initial Coin Offerings.

From the point of view of the main legal risks in relation to tokens and the ICO, some of the warnings or recommendations made by different Spanish and European regulatory and/or supervisory entities in this regard are briefly collected below:

  • CNMV press release: ESMA warns of the risks of the so-called “ICO” (“Initial Coin Offerings”) (February 8, 2018) (https://www.cnmv.es/portal/verDoc.axd?t=%7bd1d37c47-84fd-4a9b-8251-3186085e0c86%7d).
  • The European Securities and Markets Authority (ESMA) issued two statements on Initial Coin Offerings, including risks for investors and recommendations and rules addressed to entities considering participating in them, such as:
    • “ESMA warns investors of the high risk of losing the capital invested in this type of offer, as they are generally very speculative and high-risk investments”.
  • “The price of the coin or token could be very volatile, and investors may not have the possibility to recoup their investment in an extended period.”
  • Joint statement of the CNMV and the Bank of Spain on “cryptocurrencies” and “initial cryptocurrency offerings” (ICOs) (February 8, 2018) (https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/18/presbe2018_07.pdf).
    • “Cryptocurrencies” are not backed by a central bank or other public authorities, although they are sometimes presented as an alternative to legal tender money, although they have very different characteristics.
    • “The CNMV and the Bank of Spain warn that, to date, no issuance of “cryptocurrency” or any ICO has been registered, authorized, or verified by any supervisory body in Spain. This implies that there are no “cryptocurrencies” or “tokens” issued in ICOs whose acquisition or holding in Spain can benefit from any of the guarantees or protections provided for in the regulations relating to banking or investment products.
    • “In this type of investment there is a high risk of loss or fraud.”
  • “Cryptocurrencies” lack intrinsic value, becoming highly speculative investments. Likewise, its strong dependence on poorly established technologies does not exclude the possibility of operational failures and cyber threats that could mean temporary unavailability, or, in extreme cases, total loss of the amounts invested.”
  • “Whether it’s because of how they’re structured or where their issuers’ residence is located, tokens issued in an ICO, or financial products referenced to cryptocurrencies might not be subject to regulation. Therefore, buyers or investors would lack the protections offered by Spanish legislation and, in general, by the European Union to regulated investments.”
  • “For the most part, ICOs are associated with business projects in very early stages of development, whether there is a consolidated business model or with uncertain cash flows. These initiatives can have a high probability of failure.”
  • “The absence of markets comparable to organized securities markets subject to regulation may make it difficult to sell “cryptocurrencies” or “tokens” issued in ICOs for conventional effect.”
  • CNMV considerations on “cryptocurrencies” and “ICOs” aimed at professionals in the financial sector (February 8, 2018) (https://www.cnmv.es/portal/verDoc.axd?t=%7b9c76eef8-839a-4c19-937f-cfde6443e4bc%7d).
    • “The CNMV considers that a good part of the operations articulated as ICOs should be treated as issues or public offerings of negotiable securities.”
    • “In the case of ICOs that, based on criteria such as those just mentioned, can be considered negotiable securities or financial instruments, it is recalled that the corresponding national or European rules will be applicable to them, fundamentally, those contained, related or derived from MiFID II, the Prospectus Directive and the Directive on Alternative Investment Fund Managers”.

Likewise, “MiCA” (proposal for a Regulation of the European Parliament and of the Council on crypto-asset markets, amending Directive (EU) 2019/1937, currently pending approval) expressly recognises that Crypto-assets are digital representations of value or rights with the potential to bring significant benefits to consumers and market participants.

It also expressly acknowledges that there is a varied typology of crypto assets; some of them may be assimilated to financial instruments and, therefore, included in the scope of the rules on securities markets or electronic money and, therefore, included in the scope of application of the Community legislation on electronic money.

These two types of digital assets would be excluded from the scope and purpose of MiCA once this regulation is adopted.

However, MiCA recognizes the existence of other types of digital assets that are precisely those that this Regulation aims to regulate. MICA refers to:

  1. Crypto-assets or digital assets that have a payment functionality and are intended to serve as a means of payment to acquire goods and services and as a store of value, and.
  2. Utility tokens whose main functionality is to digitally give access to their holders to an application to services or resources available and offered in a DLT and whose issuers only issue and accept them precisely to allow the use of such services, applications, or resources. This is the definition of utility token that is precisely included in article 3.1 (g) of MiCA.

If we consider the characteristics of the K2Z token by virtue of the information provided, it can be concluded that the utility token definition established by MiCA corresponds to the characteristics of the K2Z token. Therefore, it is considered that the token can be qualified as a utility token for the purposes of the definition currently contemplated by the draft MiCA.

However, the subscriber must consider the final version and entry into force of MiCA, since this new Regulation of the European Union imposes legal obligations on those companies whose activities are related to the issuance, negotiation and custody of utility tokens and establishes a complete regulation of this type of tokens in the European legal framework.

In accordance with the above, investors should be aware that at the time of issuance of the tokens the legal nature of the rights derived from them cannot be guaranteed, as well as the rights that can be derived from the tokens for investors after issuance.

Specifically, the investment in tokens derived from the issue planned by KeyZell is subject to the risk inherent in the impact that may be caused by any judicial, administrative, regulatory change or new regulation that, both at national and European level, occurs after the date of this white paper, in relation to the tokens or the issue.

Therefore, the investor in K2Z tokens should be aware that any of the regulatory, administrative, or legal changes cited could significantly harm the price, the rights derived from, or the ability to use the tokens.

1.2          Risks associated with the offer and trading

  • Liquidity risk

It is possible that the token in question may not be listed on a secondary market or that there is a lack of liquidity in OTC (over the counter) markets.

The Company is not responsible for any fluctuations in the price of the token in question in any type of market, or whether such market types allow the token to be traded, which may entail illiquidity risks. Even if the token is listed on a third-party platform, such platforms may not have sufficient liquidity or may be subject to regulatory or compliance risks and may be susceptible to failure, crash, or manipulation.

In addition, to the extent that a third-party platform lists the token in question, giving an exchange value to the token (whether in cryptocurrencies or fiat money), such value may experience volatility. As a buyer of such assets, you assume all the risks associated with speculation and the risks mentioned above.

1.3          Risks associated with the implementation of the project and/or with the Issuer

Futture information risk

Certain information contained in this document is forward-looking in nature, including financial projections and business growth projections. Such forward-looking information is based on what the Company’s management believes to be reasonable assumptions, and there can be no assurance that such results will become real. Future events could differ materially from those anticipated.

  • Unanticipated risks

Cryptographic tokens are a newly developed technology that is still in the testing phase. In addition to the risks mentioned above, there are other risks associated with their acquisition, storage, transmission, and use, including some that can hardly be anticipated.  Such risks may further materialize with unforeseen variations or may derive from combinations of the above risks.

  • Regulatory risk

Blockchain technology enables new forms of interaction, and it is possible that certain jurisdictions will apply existing regulations or introduce new regulations addressing Blockchain-based applications, which may be contrary to the current configuration of smart contracts and may, among other things, result in substantial modifications to smart contracts, including their termination and the loss of tokens for the buyer.

  • Risk of project failure or abandonment

The implementation of the project proposed by the Issuer hereunder may be prevented by and cease for various reasons, including lack of market interest, lack of funding, lack of commercial success or lack of regulatory approval or prospects (e.g., caused by competing projects). This token issuance does not guarantee that the objectives set out herein will be achieved in whole or in part, or that it will bring benefits to the holder of tokens offered by the Issuer.

  • Risk of competing companies

It is possible that other companies could obtain approval for similar treatments.  The company could compete with other regulated solutions, and this could have a negative impact on the bottom line.

1.4          Risks associated with tokens and the technology used

  • High-risk product

These types of products have high implicit risk, as both the Bank of Spain and the CNMV have publicly communicated. The value of tokens can experience upward, and downward variations and a buyer may not recover the capital initially used.

There may also be changes in taxation and/or potential tax allowances. Such taxation and tax allowances always refer to those currently in force, and their value will depend on the circumstances of the individual purchaser. Participation in this type of projects must always be made based on all information provided by the issuer.

  • Software risk

The computer code (smart contract) by which the tokens are marketed are based on the BEP-20 protocol. Any malfunction, crash, or abandonment of the Binance Smart Chain Blockchain project can cause adverse effects on the operation of the tokens in question.

On the other hand, technological developments in general and in cryptography, such as the development of quantum computing, may bring with them risks resulting in the malfunctioning of these tokens.

Smart Contracts and the software on which they are based are at an early stage of development. There is no guarantee or assurance that the issuance of tokens and their subsequent trading may be interrupted or otherwise subject to error, and there is therefore an inherent risk of defects, flaws and vulnerabilities that may result in the loss of funds contributed or tokens obtained.

There is a risk of hacker attacks on the technological infrastructure used by the Issuer and on critical networks and technologies. As a result, the Issuer may be partially, temporarily, or even permanently prevented from carrying out its business activities.

In the case of proof-of-work consensus mechanisms in Binance Smart Chain, it could be the case that someone could control more than 50% of the computational power of the Blockchain miners in a so-called 51% attack and therefore takes control of the network (the Blockchain). By using more than 50% of the mining power (hash power), the attacker will always represent the majority, which means they can impose his version of the Blockchain.

In principle, this is also possible with less than 51% of the mining power. Once the attacker has gained control of the network, they could reverse or redirect the transactions he initiated, so that “double-spending” (i.e., multiple transactions of the same token) would be possible. The attacker can also block third-party transactions by refusing confirmation.

There may also be other cyber-attacks on the Binance Smart Chain Blockchain, software and/or hardware used by the Issuer. In addition to attacks by hackers, there is a risk that the Issuer’s employees or any third party may sabotage the technology systems, which may lead to the failure of the Issuer’s hardware and/or software systems. This could also have a negative impact on the Issuer’s business activities.

  • Custody risk / loss of private keys

Tokens issued by Issuer can only be acquired using a decentralized digital wallet metamask (or other similar ones) that can connect directly with the Binance Smart Chain Blockchain from which the token acquirer has his respective private key and password. The private key, as a rule, is usually encrypted by a password.

The purchaser of Issuer Tokens acknowledges, understands, and agrees that, if their private key or password, of the tokens obtained and associated with your metamask (or similar) digital wallet from Binance Smart Chain, it may permanently lose access to its tokens. Moreover, any third party who has access to such private key could misappropriate the tokens contained in the digital wallet in question.  Any error or malfunction caused by or related in any way to the digital wallet or token storage system in which the purchaser wishes to receive their tokens could also result in a loss of tokens.

  • Risk of theft

The Smart Contracts concept and the software platform on which they operate (i.e., Binance Smart Chain) may be exposed to cyber-attacks or hacking by third parties, whether through malware attacks, denial of service attacks, consensus attacks, Sybil attacks, smurfing, and spoofing.  Any such attacks may result in the theft or loss of invested capital or purchased tokens and may in turn result in the failure to achieve the Issuer’s objectives set out herein.

  • Risk of incompatible wallet services

The digital wallet or digital wallet service provider used to receive tokens must comply with the BEP-20 token standard to be technically compliant with such tokens. Failure to ensure such compliance may result in investors not gaining access to their tokens.

1.5          Other factors

  • The following important factors and those described elsewhere in this White Paper, including those described in this section 7, could affect KeyZell’s actual results and could cause such results to differ materially from the anticipated estimates: The tokens will not entitle to the payment of any dividend or share in KeyZell’s profits.
  • The trading platform that, where appropriate, uses K2Z may be subject to malicious cyberattacks or may contain exploitable flaws in its underlying code, and if the security of the token trading platform is compromised, or if the token trading platform is subject to attacks that frustrate or frustrate the ability of the company’s users to access the token trading platform, users can reduce or stop using the token trading platform altogether.
  • The tax treatment of cryptocurrencies is uncertain in some countries.
  • Token transactions may be irreversible and losses due to fraudulent or accidental transactions may not be recoverable.
  • KeyZell may be forced to cease its activities.
  • The project that is intended to be financed with the ICO may not develop as planned for reasons beyond the control of KeyZell.
  • There is no guarantee that the company can continue in the future as a running company.
  • KeyZell’s business is subject to complex and changing laws and regulations in healthcare, pharmaceuticals, privacy, technology, data protection and other matters.
  • A violation of privacy or data protection laws could have a material adverse effect on KeyZell and the value of the token.
  • The company may face substantial competition, as well as the risk that one or more competitors will obtain patents or other protections affecting the drug LZ-167 or any future drug developed by KeyZell.
  • All statements contained in this White Paper refer only to the date of this White Paper. KeyZell expressly disclaims any obligation or undertaking to disseminate any update or revision of any statement contained herein to reflect any change in your expectations with respect thereto or any change in the events, conditions, or circumstances on which such statement is based.