Monero (XMR)

About this Statement

Coinut Canada Ltd. (“Coinut” or “we”) believes that our users should understand the crypto assets that they are able to trade using our crypto trading platform (the “Platform”). One of the crypto assets we offer on the Platform is Monero (“XMR”). We created this summary to help you understand the basics of XMR as well as some of the risks involved in trading it. While we tried to describe the key features of XMR here, this summary isn’t meant to tell you everything you’d want to know before investing in XMR. You should also do your own research on XMR to make sure you are comfortable investing in it.

Description of XMR

XMR is the native coin of the open-source Monero Protocol. The Monero Protocol was created as a result of a hard fork from the Bytecoin Protocol in 2014. Both the Monero Protocol and the Bytecoin Protocol are based on CryptoNote, an application layer protocol that underlies various decentralized currencies. While a large group of anonymous developers maintain the Monero Protocol, developers initially involved in the project include David Latapie and Riccardo Spagni.

XMR belongs to a class of crypto assets commonly known as “privacy coins” that attempt to provide users with enhanced anonymity. Popular crypto assets such as bitcoin or ether can operate on transparent blockchains because they obscure user identities with pseudonyms. However,  pseudonymity is not the same as anonymity – a user’s identity is shielded, but that does not guarantee that it is unidentifiable. For example, if you made a bitcoin account, your identity would be obscured by a pseudonymized public address, such as: “1EjqMGa5j6JNQDMNXkrRZq7WSmqLRzn9fU.” This pseudonymization prevents your personal information from being publicly linked to you. However, all components of a bitcoin transaction will be permanently and publicly recorded on the Bitcoin blockchain. The entire Bitcoin Network can see that funds were sent from you to another public address, and they can see how much was sent. Although your personal information is not explicitly linked to you, advances in data science and blockchain forensics may allow a motivated party to figure out the identity behind a public address. If learned, this may give someone access to your entire transaction history on the blockchain. Additionally, sending or receiving bitcoin requires sharing your public address with the other transacting parties. Sharing a public address is not like sharing your bank account number; the other transacting parties will be able to see how much you have saved at your public address. If the transacting parties happen to know your identity, then this would be the equivalent of sharing how much you have in your bank account.

Privacy coins try to mitigate these concerns by limiting transparency. Privacy coin transactions still appear on a public blockchain, meaning that a third party would be able to see that a transaction had occurred. However, a third party would not know transaction details such as the origin or the destination of their funds, or the amount transacted. XMR makes its privacy features automatic, unlike other privacy coins such as Zcash, so there is no need to request and verify if other parties have enabled their privacy features.

XMR uses three key features to ensure privacy: (i) stealth addresses, (ii) ring signatures, and (iii) ring confidential transactions (“Ring CT”). Each XMR account comes with a public address, a private view key and a private spend key. XMR holders can send payments with a spend key, find incoming private payments with the view key and receive payments with their private address.

Stealth addresses are one-time addresses that are generated to protect the identity of parties to a transaction. The sender of XMR will create a newly generated random address to send funds to for every transaction, even if they are repeatedly transacting with the same recipient. These randomly generated addresses are made using the recipient’s public view key and public spend key. When the transaction is recorded on the blockchain’s public record, the reported receiver will be the stealth address, not the recipient’s true public address. Third parties can see that a transaction occurred, but only the transacting parties will know where the money was sent. Stealth addresses break the public linkage between the sender and recipient, granting transactional privacy for both parties. The recipient, knowing that they are expecting funds from the sender, can use their private view key to scan the blockchain to find and collect the funds meant for them.

A ring signature is a cryptographic technique where a digital signature is created by a group of individuals. Only one individual in the group sends XMR, while the other members of the group merely exist as decoys to protect the sender’s identity. The number of decoys (“ring size”) is up to the sender’s discretion but adding more decoys incurs a larger transaction fee. For example, a ring size of five would involve one sender and four randomly selected decoys pulled from the blockchain (collectively, the “ring members”). With ring signatures, a third party looking at the transaction would have no way of knowing who authorized the transaction, because each ring member has an equal chance of being the original sender. 

The RingCT feature improves ring signatures and allows senders to hide the amount of funds being sent in a transaction.

Despite these differences, Bitcoin (“BTC”) and XMR share many similarities. Both rely on underlying networks which have associated blockchains, utilize “private keys” and “wallets” to enable transfers, facilitate the creation of new supply via “mining”, include software source code that governs the cryptographic operations that verify and secure transactions and allow participants in the network to modify the open-source software and persuade other users and miners to adopt the proposed modification.

Risks

Like other crypto assets, there are some general risks associated with investing in XMR. We describe many of these general risks in the risk statement we publish on our website, including risks relating to: (i) volatility; (ii) access, loss or theft, (iii) control of processing power; (iv) settlement of transactions on crypto asset networks; (v) momentum pricing; (vi) private keys; (vii) internet disruptions; (viii) faulty code; (ix) network development and support; (x) regulatory risk; (xi) network forks; (xii) air drops; (xiii) voting rights; (xiv) cybersecurity incidents and other systems and technology problems; and (xv) unforeseeable risks. In addition to these risks, we also point out some risks that are specific to XMR below. While we tried to describe the key risks associated with XMR here and in our risk statement, these are not all of the risks associated with trading in XMR. You should also do your own research on XMR to make sure you are comfortable investing in it.

Increased Regulatory Scrutiny

Government regulation has the potential to disrupt the market for privacy coins such as XMR. The privacy-focused features of XMR have led governments to be concerned about the crypto asset’s potential use for illicit activities like money laundering, the purchase of contraband and tax evasion. The price and use case for XMR may be negatively affected should government policies be implemented which limit or ban the usage of privacy coins like XMR.

Concentration of XMR Holdings

The largest XMR addresses hold a large portion of the XMR currently outstanding. Market volatility may result when large holders of XMR decide to sell significant amounts of their XMR positions.

Scalability

Due to the privacy features associated with the Monero Protocol, settlement times can be significantly longer than with other crypto assets. The longer transaction times for XMR transactions may preclude certain use cases for the Monero Protocol and may result in a reduced demand for and price of XMR over the long-term.

How Coinut Decides to List Crypto Assets

Coinut reviews crypto assets before making them available for trading on the Platform. In making our decision to list a new crypto asset, we consider publicly available information about the crypto asset, including (among other things) its creation, design, governance, usage, supply, demand, maturity, utility, liquidity, material technical risks and legal and regulatory risks. Our review process is fulsome and flexible, and we don’t prioritize any one factor over another. You should review the risk statement published on our website for more information about our procedures for determining whether to make a crypto asset available for trading on the Platform.

Regulatory Information

Coinut is offering crypto contracts to purchase and sell bitcoin in reliance on a prospectus exemption contained in the exemptive relief decision Re Coinut Canada Ltd. The statutory rights of action for damages and the right of rescission in section 130.1 of the Securities Act (Ontario) and similar legislation in the other provinces and territories of Canada would not apply in respect of a misrepresentation in this statement.

No Canadian securities regulatory authority has expressed an opinion about bitcoin, including an opinion that bitcoin is not itself a security and/or derivative.