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Whitepaper

Open Investment Banking

BlockState is building a technological and legal bridge between financial markets and block-chain technology. Our products maximise efficiency, transparency and accessibility of crypto- and traditional financial markets.

CRYPTO ASSET MANAGEMENT | DLT BONDS & LOANS | DLT DERIVATIVES

Blockstate whitepaper — 2

THIS DOCUMENT IS NOT A PROSPECTUS


CONTENTS Executive summary ..................................................................................................................................................................................... 4

Background/industry .................................................................................................................................................................................. 5

Mission ................................................................................................................................................................................................... 5

The industry ........................................................................................................................................................................................... 5

Challenges .................................................................................................................................................................................................. 9

Inefficient, manual processes drive up costs ....................................................................................................................................... 9

Heavy reporting requirements increase costs ..................................................................................................................................... 9

Opaque and complex products increase risks .................................................................................................................................. 10

DLT: the biggest technological revolution of the last decade will disrupt the financial industry .................................................. 10

Solution ..................................................................................................................................................................................................... 13

Products .................................................................................................................................................................................................... 15

Digital asset management .................................................................................................................................................................. 15

DETI: Tokenized debt instrument....................................................................................................................................................... 17

DECEND: Smart contracts for illiquid derivatives ............................................................................................................................. 19

Business model ......................................................................................................................................................................................... 20

Technology facilitator .......................................................................................................................................................................... 20

Investment bank .................................................................................................................................................................................. 21

Business benefits ...................................................................................................................................................................................... 23

Marketing .................................................................................................................................................................................................. 24

Target market ...................................................................................................................................................................................... 24

Competitive landscape ....................................................................................................................................................................... 25

Go-to-market strategy ......................................................................................................................................................................... 26

Ongoing marketing plan .................................................................................................................................................................... 27

Organizational and legal considerations ................................................................................................................................................ 29

Regulatory considerations .................................................................................................................................................................. 29

Approach to legal issues ..................................................................................................................................................................... 29

Asset management products.............................................................................................................................................................. 30

Debt and derivatives products ........................................................................................................................................................... 30

Roadmap and milestones ........................................................................................................................................................................ 31

Management and advisory board ........................................................................................................................................................... 33

Executive team ..................................................................................................................................................................................... 33

Advisory board .................................................................................................................................................................................... 33

Financial projections ................................................................................................................................................................................ 34

List of abbreviations ................................................................................................................................................................................. 35

Disclaimer.................................................................................................................................................................................................. 36


EXECUTIVE SUMMARY BlockState is building a technological and legal bridge between financial markets and blockchain technology. Our products maximise efficiency, transparency and accessibility of crypto- and traditional financial markets. BlockState is currently building the technological and legal foundation to become the world’s leading blockchain investment bank, specializing in Distributed Ledger Technology (DLT) based products for asset management, debt markets (loans and bonds), and derivatives. BlockState’s products embody technological excellence, highest regulatory compliance, and over 70 years of combined experience in financial services.

TOKEN SALE

BlockState offers equity tokens with a respective €2 million funding equivalent - in exchange for 10% of tokenized equity in the company upon completion of token sale scheduled for Q4 2018. The proceeds will be used to complete the development of three products in key verticals: asset management, debt, and derivatives.

Our 3-year goal is to evolve BlockState from a technology facilitator of investment products to a fully-fledged digital investment bank focused on assets.

MARKET

Investment banks are an intermediary between capital providers and capital users / deployers/institutions have deep market expertise but run on legacy IT infrastructure developed in the 1970s. As a result, they are slow to adopt DLT products. Most investment banking verticals rely on manual work by highly paid professionals, resulting in products that are inefficient, slow, and expensive. The industry is facing the next step in evolution.

• Global investment banking fees reached a record high of $104 billion in 20171, according to Reuters. Bonds generated the biggest share of fees, rising 15% to $31 billion. Syndicated lending brought nearly $16 billion in fees, according to another estimate2.

• Banks spend up to three-quarters of IT budgets on legacy system maintenance. Only about 15-20% of IT budgets are invested in new systems and processes3. Smaller players have limited budgets and fewer opportunities to invest in innovation.

• Staff costs make up 50% to 75% of investment banking expenses4. Trade capture, settlement, reconciliation, collateral management and other middle and back office processes are highly manual and inefficient.

SOLUTION

BlockState uses distributed ledger technologies to replace antiquated parts of the existing infrastructure in asset management, debt, and derivatives. BlockState’s products bring efficiency gains that translate into direct cost savings by eliminating intermediaries and opaque processes. In the first three years, BlockState will provide technology services to existing asset managers and investment banks. After three years, BlockState will apply for a banking license to offer blockchain-based products as a platform directly to end users –, corporations, institutions and private investors.

1 Afanasieva, Dasha. "Investment Banking Fees at Record High in 2017 - Thomson Reuters Data." Reuters. January 04, 2018. Accessed June 28, 2018. https://www.reuters.com/article/banking-fees/investment-banking-fees-at-record-high-in-2017-thomson-reuters-data-idUSL8N1OZ27T. 2 "Investment Banking Scorecard." The Wall Street Journal. http://graphics.wsj.com/investment-banking-scorecard/. 3 "Transforming Investment Banks." EY. Accessed June 28, 2018. https://www.ey.com/gl/en/industries/financial-services/banking---capital-markets/ey-transforming-investment-banks. 4 Ibid


BACKGROUND/INDUSTRY

MISSION BlockState’s mission is to create a new generation of investment banking services with greater efficiency, increased transparency, and full regulatory compliancy. BlockState uses distributed ledger technology to democratize (? – not rather improve?) investment banking one vertical at a time, bringing advanced financial products to investors and businesses of all size.

THE INDUSTRY Investment banks differ substantially from regular banks. They don’t offer accounts and loans for private customers. Investment banks work exclusively with companies/public institutions and (primarily) institutional investors. They help companies raise and manage capital and advise/provide investors on/with capital allocation.

Investment banking is a global industry that generates annual revenues of over $100 billion. Investment banking on the primary market side5 includes an extensive range of products and services for every financial market. These services can be broadly divided into Equity Capital Markets, Mergers & Acquisitions, Debt Capital Markets, and Syndicated Lending. In 2017, these products were major fee earners for the industry6:

Product Revenue $m Top bank % share

Equity Capital Markets 7,060.1 Morgan Stanley 9.1

IPO 2,514.0 Morgan Stanley 9.2

Follow-On 3,717.8 JPMorgan 9.0

Mergers & Acquisitions 10,094.1 Goldman Sachs 10.0

Debt Capital Markets 9,281.4 JPMorgan 7.0

Corporate Bond-Investment-Grade

4,722.8 BofA Merrill Lynch 7.2

Corporate Bond-High Yield

2,103.0 JPMorgan 9.3

Syndicated Lending 6,171.1 JPMorgan 8.5

Investment Grade 904.1 JPMorgan 14.3

Leveraged 5,266.9 JPMorgan 7.6

5 Besides primary markets services investment banks also offer secondary market services, like sales, trading and research. 6 "Investment Banking Scorecard." The Wall Street Journal. Accessed June 28, 2018. http://graphics.wsj.com/investment-banking-scorecard/.


Source: FT.com7

Additionally, large banks include dedicated divisions for asset management advisory, commodities, currencies, credit, restructuring, and research.

Investment banks derive most fees from serving other financial service institutions, which is the biggest industry for all major verticals. Bonds for financials clients are by far the largest segment that brought in over $11 billion in fees in 2017.

7 "League Tables." Financial Times. Accessed June 28, 2018. https://markets.ft.com/data/league-tables/tables-and-trends.

Financials

Energy and Power

Industrials

High Technology

Healthcare

Materials

Government and Agencies

Real Estate

Consumer Products and Services

Consumer Staples

Retail

Media and Entertainment

0 5000 10000 15000 20000 25000 30000 35000

Fees $m

Fees from top industries by product in 2017

M&A Equity Loans Bonds


HOW INVESTMENT BANKS WORK Investment banking is a highly fragmented industry. Only the so-called bulge bracket banks have the full range of products, but still have less than 20% market share in any given vertical. This group usually includes Bank of America (Merrill Lynch), Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and UBS.

In addition to this exclusive group, there are about 100 smaller investment banks, including ‘boutique’ investment banks, which specialize in a narrow range of verticals and have about 1% market share each.

All investment banking activities are categorized as primary and secondary markets:

• The primary or traditional IB side sells securities and other services like M&A advisory to institutional investors/ corporates.

• The secondary or markets business provides advice to institutional investors who trade securities and need accompanying services.

Organizationally, investment banks are divided into front office, middle office, and back office:

• The front office includes revenue-generating roles. These professionals work directly with clients, advising them or executing trades on their behalf.

• The middle office works directly with the front office to keep accurate records, manage risks, and ensure regulatory compliance.

• The back office supports the entire organization, making sure that transactions are settled correctly and payments are executed on time.

CHANGING INDUSTRY: REGULATION, COMPETITION, TECHNOLOGY Since the financial crisis, investment banking is undergoing major changes due to greater regulation, intensified competition, and technology threats.

Since 2010, a slew of new regulations across the world has affected investment banks. In Europe, MiFID II aims to increase investor protection and transparency in investment services. In the US, the Dodd-Frank Reform, which attempts to end “too big to fail”, is the most significant and transformative act since the Great Depression and the repeal of the Glass-Steagal act.

Meanwhile, the competition is increasing as customers demand more efficient products amid the persistent low-yield environment. It is relatively easy for corporate clients to issue debt. Years of quantitative easing have compressed bond yields for all types of borrowers. Similarly, high stock valuations entice some companies to sell shares. At the same time, institutional investors can hardly generate the returns that their end-investors expect. In search for yield, long-term investors have to look outside of the traditional realm of bonds and equities or are increasingly taking more risk.


Fintech companies are going after investment banking. Until recently, fintech startups have focused on attacking the most attractive retail banking services such as payments and remittance. Now fintech innovators increasingly seek to create disruptive solutions for front-, middle-, and back-offices. Investment banks are responding by placing bets on startups and forming closed consortiums. Since 2012, the top 10 US banks have invested nearly $4.1bn in 81 startups. R3, a consortium that raised over $100mn, is reportedly already running out of funds.

Despite competitive pressure, so far investment banks have largely been spared by the digital disruption. Many banking executives realize that automation and other technologies can significantly change their business models. Yet only few large investment banks are investing in new technologies. Most mid-sized and smaller banks are left behind and need external technology partners.


CHALLENGES Today the investment banking industry faces several significant challenges due to legacy systems, high complexity, and increased compliance costs.

INEFFICIENT, MANUAL PROCESSES DRIVE UP COSTS Investment banks were technology pioneers in 1970s and 1980s, but today they are stuck with legacy systems. Large banks invest most of their IT budgets in maintaining existing infrastructure that requires manual processes. Only about 15-20% of IT budgets is invested in new systems and processes8.

A major investment bank with a fractured legacy systems architecture could have over 320 legacy and strategic components across several regional platforms and a core platform that is several decades old9. This leads to numerous duplicate applications, inefficient processes, manual workarounds, and short-term fixes.

HEAVY REPORTING REQUIREMENTS INCREASE COSTS New regulation has introduced additional reporting requirements. One survey found that financial institutions spend 4% of their revenue on compliance10. These costs could rise to 10% by 2022. This is partly driven by the necessity to manually update and combine inputs from several legacy databases to create the required reports.

• In Europe, MIFID II requires banks to report details of the trades they make to the market and regulators. Trade reports should be made public in near real time. Additional detailed transaction reports must be submitted to regulators.

• In the US, the Volker Rule, enacted in 2010, mandates that all trading desks should prepare complex risk reports. US regulators previously estimated that compliance with these requirements could cost the industry a one-time annual charge of up to $4.3 billion11.

• Globally, Basel III is phasing in additional reporting and monitoring requirements. Whole currently data on net stable funding ratio, liquidity coverage ratio and leverage

8 "Transforming Investment Banks." EY. Accessed June 28, 2018. https://www.ey.com/gl/en/industries/financial-services/banking---capital-markets/ey-transforming-investment-banks. 9 "Back-office Transformation of a Global Investment Bank." Cognizant. Accessed June 28, 2018. https://www.cognizant.com/whitepapers/back-office-transformation-of-a-global-investment-bank-codex2770.pdf. 10 McNulty, Lucy. "Compliance Costs to More than Double by 2022." April 27, 2017. Accessed June 28, 2018. https://www.fnlondon.com/articles/compliance-costs-to-more-than-double-by-2022-survey-finds-20170427. 11 Miedema, Douwe. "U.S. Regulator Estimates Volcker Rule's Cost for Banks." March 20, 2014. Accessed June 29, 2018. https://www.reuters.com/article/us-banks-volcker-costs-idUSBREA2J25O20140320.


ratio are introduced, additional reporting requirements will phase in until 2027 in line with BIS requirements12.

OPAQUE AND COMPLEX PRODUCTS INCREASE RISKS Investment banks are only a small part of the larger ecosystem of financial intermediaries that settle trades. For example, when an investment bank sells shares in a public company, the trade is recorded by a multitude of intermediaries involved in clearing and settlement:

• Exchanges • Central counterparties (like who? A clearing system? I would write that if so) • Central securities depositories • Brokers • Custodians, • Investment managers.

Each of these participants keep a separate record of all transactions. The complexity of this system is so high that mapping it would exceed the scope of this whitepaper. The networks supporting debt products and derivatives are even more complex. As a result, neither regulators, nor clients, nor investment banks have the full understanding of risks that are hidden in the architecture behind different products.

DLT: THE BIGGEST TECHNOLOGICAL REVOLUTION OF THE LAST DECADE

WILL DISRUPT THE FINANCIAL INDUSTRY By combining cryptography, game theory, and distributed networks, Bitcoin founder Satoshi Nakomoto created the first working distributed ledger technology also known as blockchain. The implications of this technology are even greater than digital cash. While early comments have concentrated on disrupting and replacing banks, blockchain technology can also dramatically change the way investment banks do business.

• Immutable records. Unlike traditional databases, transactions in the blockchain cannot be altered or removed. This eliminates the need for a trusted third-party to verify the accuracy of records.

• Full transparency of data. While the parties behind each transaction could be pseudonymous, a public blockchain keeps auditable history of all transactions. It’s very easy to confirm that a transaction has indeed happened.

12 Bank for International Settlement: https://www.bis.org/bcbs/basel3/b3_trans_arr_1727.pdf


• Cost reduction through smart contracts. Unlike legal agreements, smart contracts are truly set in stone. They are not open to renegotiation and do not require several lawyers to agree before they are executed. According to the Bank of International Settlements, complex financial transactions could be a major use case for self-executing smart contracts, which could add value by simplifying administrative processes13.

DLT will replace large parts of the existing financial infrastructure in many verticals, including asset management, debt products, and derivatives. DLT-native products and services will be faster, more transparent, and cheaper.

For example, the global banking system relies on a network of correspondent banks. To send a payment for a client, a remitter bank contacts its correspondent bank, which has established relationships with the beneficiary’s bank. It’s not uncommon for funds to pass through several correspondent banks before they reach the beneficiary. In a sense, this system is already decentralized. Yet without a single distributed ledger, each bank keeps its own records, only dealing with correspondent banks through bilateral agreements. Establishing a common distributed ledger would enable direct bank-to-bank payments and could save up to $10 billion in costs annually by streamlining front-to-back office processes of an investment bank14.

The traditional investment banking business, characterized by a large number of steps and intermediaries, is a perfect use case for DLT. Investment banks are also intermediaries, yet they add value by creatively connecting very different parties: investors and businesses. Even after investment banks arrange agreements between investors and businesses, the resulting securities have to pass through a long and complex chain of intermediaries:

• Global Custodians (e.g. The Bank of New York Mellon, $15 billion revenue in 2017),

• Sub-Custodians (e.g. BNP Paribas, $505 million revenue in 2017 from securities services in 2017).

• Clearing Houses (e.g. LCH Group, $492 million revenue in 2017),

• Registrars (e.g. Equiniti, £406.1 million revenue in 2017),

• Central Securities Depository (e.g. Euroclear SA/NV, €1,039 revenue in 2017),

• SWIFT Settlement Messages. (SWIFT’s revenue in 2017: €745 million).

13 "V. Cryptocurrencies: Looking beyond the Hype." The Bank for International Settlements. June 17, 2018. Accessed June 29, 2018. https://www.bis.org/publ/arpdf/ar2018e5.htm. 14 "Blockchain and the Decentralization Revolution." J.P. Morgan. Accessed June 28, 2018. https://www.jpmorgan.com/global/cfa/blockchain.


Unlike investment banks, which connect the supply and demand for capital, these intermediaries exist solely to facilitate trust between different market participants. A global distributed ledger could achieve this objective in a cheaper, safer, and faster fashion.

While a global interbank DLT will take years to form, we believe the primary opportunities for corporate finance and investment banking are around applications in financing, payments and settlements. DLT has the potential to deliver immediate benefits:

• Reduce costs for existing capital markets products through decentralization and smart contract execution;

• Reduce counter-party risks by validating transactions on the blockchain;

• Enhance security through cryptography-based immutable ledgers;

• Create new forms of capital with unique characteristics as well as lower costs and greater liquidity;

• View the entire transaction lifecycle and provide an auditable log;

• Reduce settlement time to T+0, i.e. the same day or even real time.

According to J.P. Morgan15, the year 2018 is likely to be a watershed year as proof of concepts move to production. Banks and other players are testing blockchain solutions with real products. At the same time, blockchain platforms and developer ecosystems are maturing to enable production market offerings.

15 Ibid


SOLUTION BlockState is building the next generation of market infrastructure that can be used by investment banks. The same technology is the building block of what will become the leading investment bank for digital assets. BlockState is exclusively focused on innovative products based on distributed ledger technology.

BlockState’s modular infrastructure will be sold through partner organizations, such as investment advisors and boutique investment banks. These organizations are under severe pressure to offer more cost-effective products.

At the same time, this modular infrastructure constitutes the building blocks for BlockState’s proprietary products: index products, bond and loan products, and a derivatives platform. These products will be distributed directly to end users including corporations, public institutions and institutional as well as private investors.

• Technological excellence. The founding team has deep expertise in developing crypto and blockchain products. The founders’ previous experience includes creating Goodcoin, a blockchain-powered loyalty solution for a socially conscious currency. The founders also developed Decentralized Information Asset (DIA), an open-source, crowd-driven, blockchain-based financial data platform.

• Bridging traditional distribution (e.g. crypto assets via ETN wrapper) and blockchain IT and distribution (token). Clients have the choice to add BlockState’s asset management products to either traditional portfolios or to crypto wallets.

• Market expertise. BlockState is rooted in deep market expertise. The team and the advisory board have a total of over 70 years of combined financial markets experience in asset management, debt capital markets, and derivatives. The founders previously worked at Bloomberg, BNP Paribas, AXA Private Equity Partners, and other leading financial institutions.

• Client relationships. The team has a rich contact list of corporate and institutional clients in the world’s major financial centers. The advisory board provides access to additional networks at institutions such as Perella Weinberg Partners, Houlihan Lokey, and Credit Suisse.

• Network of partners. The team behind BlockState has a network of partners in both traditional financial services and the blockchain space, including Neufund, the innovative blockchain-based platform for investors.


• Technological leadership. The founders recently filed a patent for an implementation of ‘submarine sends’ to prevent front-running while creating an auditable trail of transactions. In general applications, a submarine send embeds a real transaction among a collection of cover transactions to achieve a form of anonymity. The team improved this technology to apply it to safely recording market orders on the blockchain.

BlockState will focus on three verticals with a market size of trillions of euros.

Source: Bloomberg, Cryptocompare

Digital Asset Management i.e. CTF15 (Q3 2018)

€390 billion market

Bond and loans DETI

(Q1 2019) €390 billion market

Derivatives DECEND

(Q4 2019) €540 trillion market


PRODUCTS

DIGITAL ASSET MANAGEMENT As the combined market capitalization of cryptocurrencies reached a peak of more than $390 billion, both private and institutional investors have started to show rapidly growing interest in investing in this new asset class. • Problem. There is a lack of suitable investment products that offer exposure to crypto

assets. Most traditional investors can currently not directly hold crypto assets in their portfolio due to a lack of regulation, underdeveloped infrastructure and insufficient educational material to make informed asset allocation decisions. At the same time many illiquid assets could benefit from technological innovation that would make them more liquid and accessible (e.g. real estate funds).

• Solution. BlockState is creating the future of digital asset management by offering a holistic solution to tokenize illiquid assets, and by making digital assets accessible to investors through existing market infrastructure as Exchange Traded Products (ETPs). This dual approach will allow us to spearhead the creation of new investment products for the emerging asset class of crypto currencies, and at the same time we will disrupt an established sector of the asset management industry and provide investors with improved, more liquid investment solutions.

o The tokenization of illiquid assets (e.g. real estate funds) enables fund providers to offer liquidity to existing investors and access to new investors.

o In Q4 2018 BlockState will issue its first crypto asset investment product, the CTF15, which will be structured as a tracker certificate that provide investors with access to a diversified basket of the largest crypto assets. The product will initially be offered in our home markets Germany and Switzerland and will be offered across additional European jurisdictions over time.

o CTF15 provides qualified investors with a regulated, transparent and accessible investment solution to participate in the growth of the 15 largest crypto assets by market capitalization. The strategy will be fully rules based and follows the tried and tested principles of passive investing. This will allow us to launch future strategies in Exchange Traded Fund (ETF) format as soon as the regulatory environment evolved sufficiently. ETFs are one of the most popular investment vehicles in Europe and the US and will enable us to engage with a broad and deep investor base.

o The key benefits of CTF15 for investors are:.


§ Accessibility: Easy access for all traditional investors through an established investment vehicle.

§ Diversification: Exposure to 15 different crypto assets through a single investment, which is empirically proven to be beneficial compared to single crypto asset investment.

§ Transparency: The strategy is rules based and fully transparent to allow investors to monitor and evaluate their investment in real time.

§ Cost efficiency: 1.5% management fees. 0% performance, redemption or subscription fees.

§ 100% asset-backed: The CTF15 is fully backed by assets, reducing default risk to an absolute minimum.

§ Daily liquidity: Subscriptions and redemptions can be arranged through your personal bank.

§ Highest security: Decentralised storage with software and hardware protection measures.

• Distribution.

o The CTF15 tracker certificate is a regulatory compliant, liquid and transferrable security. It will be sold through brokers and banks directly to a broad range of qualified investors such as family offices wealth managers and asset managers.

o The CTF15 ETN is easily accessible to professional investors who cannot or don’t want to hold crypto assets directly.

• Opportunity. Blockstate anticipates net revenues in the digital asset management vertical of €22 million annually by 2022.


DETI: TOKENIZED DEBT INSTRUMENT The global bond market alone is a USD92.2 trillion16 market connecting corporates and governments with investors. . On top of that come the traditional bank lending and the rapidly growing direct lending channels (B2B and P2P). • Problem. Although the process of issuing debt instruments (like bonds and syndicated

loans) is relatively standardized in terms of the channels and the capital matching, it still requires a complex infrastructure (i.e. many intermediaries and third party services) to enable the issuance and trading of these securities and hence leads to unnecessarily high costs for both issuers and investors. Equally the more traditional loan markets heavily rely on analogue processes.

• Solution. Our DETI platform , initially focused on bonds, will enable issuers to create and sell bonds on the blockchain and enable investors to trade them directly on-chain. The platform will offer all the necessary elements needed through the life-cycle of a bond, such as automatic paying and calculation agency roles, investor communication, corporate action and LM exercise facilitation as well as on-demand data generation for parties with a need to know (such as regulators). The platform will be created openly so that issuers, underwriters (usually traditional IBs) and investors can easily access it for their purposes.

16 Page 55, https://www.sifma.org/wp-content/uploads/2016/10/US-Fact-Book-2017-SIFMA.pdf


• Benefits:

o Lower costs due to fewer parties involved in issuance, settlement and trading

o Reduced risks through instant settlement;

o Greater transparency through blockchain settlement;

o Further automatic and simplified services (e.g. corporate actions, LM exercises) at lower cost

o Instant accessibility for regulators.

• Distribution. The platform will be available for all (initially European) issuers, underwriters, lawyers and investors alike..

• Use cases. The first use case is planned in the form of a domestic Swiss corporate bond issuance together with a Swiss underwriter. Initially, projects will be focused on bond issuers (FIs, SSAs and corporates) in the European region

• Opportunity. Blockstate anticipates net revenues in the debt vertical of €225 million annually in 2022. Note this is primarily based on a bond focused product. Further monetization of the infrastructure in the loan space is planned.


DECEND: SMART CONTRACTS FOR ILLIQUID DERIVATIVES According to the Bank of International Settlements, the more important use cases for DLT will likely apply smart contracts to complex financial transactions: “Some decentralized cryptocurrency protocols such as Ethereum already allow for smart contracts that self-execute the payment flows for derivatives. At present, the efficacy of these products is limited by the low liquidity and intrinsic inefficiencies of permissionless cryptocurrencies. But the underlying technology can be adopted by registered exchanges in permissioned protocols that use sovereign money as backing, simplifying settlement execution. The added value of the technology will probably derive from the simplification of administrative processes related to complex financial transactions, such as trade finance.”17 Blockstate takes the first steps beyond the proof of concept stage by developing a smart contracts platform for illiquid derivates.

• Illiquid OTC derivatives are a EUR 540 trillion market. Derivatives help companies and

investors hedge different risks. They also help investors diversify portfolios by gaining exposure to new assets, such as rare metals.

• Problem. Illiquid OTC derivatives have high costs due to manual contracts and handling. A large number of intermediaries leads to high counter-party risk, i.e. the risk of one of the parties defaulting on its obligations.

• Solution. The DECEND platform enables buying and selling derivatives on the blockchain. Smart contracts automate clearing and collateral management.

• Benefits:

o Reduced costs

o Minimized counter-party risk

o Faster execution

• Use case. Blockstate will work with financial institutions to provide an OTC Lithium contract, which is created, settled, and managed on the blockchain.

• Opportunity. Blockstate anticipates net revenues for this vertical of €65 million annually by 2022.

17 "V. Cryptocurrencies: Looking beyond the Hype." The Bank for International Settlements. June 17, 2018. Accessed June 29, 2018. https://www.bis.org/publ/arpdf/ar2018e5.htm.


BUSINESS MODEL BlockState is building products on its market infrastructure modules. BlockState will offer the market infrastructure modules to different players in the financial ecosystem. At the same time BlockState is using the infrastructure to create proprietary products, i.e. the CTF 15.

TECHNOLOGY FACILITATOR BlockState will enter the market as a technology facilitator for smaller investment banks in Germany, Switzerland and the UK. Especially smaller institutions do not place significant effortfocus on tech innovation while at the same time they are being heavily exposed to pressure from clients for more cost-efficient solutions.

Blockstate’s investment products (i.e. CTF 15) and our debt infrastructure will be distributed and applied through partnerships. The team is already engaged in talks with several investment advisors to distribute CTF15 to qualified institutional and private investors.

Initially, there will be three primary sources of revenue:

• 1.5% asset management fee (for index products); • 0.5% management and underwriting fee for debt products; • 1.25% underwriting fee for derivatives.

Additional revenue sources will include advisory and consulting services to B2B clients.

As a technology facilitator, Blockstate’s key activities will include:

• Maintaining and rebalancing the portfolio of crypto assets that make up the asset-backed note;

• Providing custody and a secure storage of crypto assets; • Backward integration as a calculation agent in partnership with an open source, verified

financial data provider; • Monitoring, identifying, and reporting fraudulent activity; • Bridging and connecting traditional bank systems to DLT solutions via APIs.

Blockstate’s activities will be based on several key assets that can be summarized as modules and services:

• Modules:

o Issuance: Private and public asset digitization, tradability and exchange listing

o Asset management: Self-sustaining and tokenized financial instruments

o Calculation agent: Immutable, transparent price records and live calculation


o Trading, custodian and exchange: Minimizing counterparty risk

o Settlement and clearing: Instant settlement and clearing in seconds

o Risk and compliance: Automated risk triggers through smart contracts

• Services:

o Market making: Automated Beta / Gamma strategies that trade instantly

o Reporting: Immutable audit trails allow automated regulatory reporting

o Advisory: Legal and strategy advisory services

o Research and KYC/AML: Immutable data and audit trails

INVESTMENT BANK In the first three years of operations, Blockstate will build a track record to establish itself as an undisputed pioneer in blockchain-based investment banking technology services. As a next step, the team will expand its investment banking service portfolio.

As an investment bank with a presence in asset management, debt markets, and OTC derivatives, Blockstate can cover several peripheral activities:

• Facilitating traditional investment banking activities, including for example tender offers and financial advisory;

• Providing white-label DLT-based services and products to B2B financial market clients like calculation agents or crypto-custodian solutions;

• Monitoring the regulatory environment, fostering relationships with regulators, championing the interests of the crypto-asset industry and DLT in financial services;

• Facilitating trading on behalf of clients and for Blockstate’s own products. • Using DLT for new reporting solutions for such as for MiFID 2 reporting requirements; • Advising B2B clients on migration from traditional financial silo systems.

Acting as an investment bank, Blockstate will require additional resources and partnerships:

• Specialized personnel to cover Compliance, Data Protection (GDPR), B2B Sales and Business Development, Blockchain development;

• Traditional distribution partners (brokers, agents); • Additional legal framework to expand in new jurisdictions in Asia and the USA.


As a next step, Blockstate will aim to acquire a banking license. This will open up further opportunities such as:

• Treasury • Risk Management • Market Making

Blockstate will generate additional revenue from:

• Further exchange traded products (ETPs) in the asset management vertical; • Providing DLT as a service via B2B consultancy and implementation for small and

medium sized banks. • Creating targeted B2B products for the most lucrative front-, middle- and back-office

tasks that still rely on heavy centralization.

At a later stage, Blockstate will create additional products in verticals with high potential:

• Data analytics; • Wealth management; • Capital markets software; • Lending products; • Payments and settlements; • Regulatory technology.

As an investment bank, Blockstate will have additional cost centers:

• HR costs as outlined in ‘additional activities’; • Legal costs for compliance, risk management, regulatory monitoring, and lega cost for

product marketing; • Scalable IT costs and smart-contract hosting costs.

The exact lineup of Blockstate’s additional investment banking products, associated revenues and costs will depend on regulatory rulings on crypto assets and DLT in the various jurisdiction we are aiming to operate in.


BUSINESS BENEFITS

CTF15 TRACKER CERTIFICATE FOR PROFESSIONAL INVESTORS • Access to a new asset class • Regulatory compliance • • Diversification • Competitive pricing • Liquidity • Security

CTF15 TOKEN FOR PRIVATE INVESTORS • Diversification • Lowest achievable expense ratio • Banking-level security • Ease of use

DETI BONDS AND LOANS FOR CORPORATIONS • Lower structuring costs • Significantly lower infrastructure costs • Faster issuance and settlement • Reduced risks through automatized issuance and trading cycle • Reduced risks through transparent and reliable data

DECEND DERIVATIVES FOR FINANCIAL INSTITUTIONS • Reduced collateral exposure • Lower costs through automated margin management via smart contracts • Reduced risks through transparent and reliable data


MARKETING

TARGET MARKET Blockstate will focus on three key verticals with the greatest potential. The team will start with emerging crypto assets and moving to established asset classes that are ripe for disruption.

CRYPTO ASSETS FOR PROFESSIONAL INVESTORS • EUR 390 billion market

• Within this market, the team will initially target smaller institutions such as family offices, wealth managers and asset managers who already show interest in crypto assets and have quick decision making processes for new investments.

• BlockState will primarily reach this segment through the team’s and advisors’ professional network. Further details regarding the distribution strategy are detailed in later sections.

BONDS AND LOANS FOR THE EUROPEAN MARKET • EUR 82 trillion market.

• The team will initially focus on the European middle market (firms with revenues between EUR 10-100 million). Since the issuance of debt instruments have high initial fixed costs, these companies will benefit the most from lower costs.

• Blockstate will work in partnership with existing advisors and lenders seeking to allocate funds. These lenders and advisors will gain exposure to a different group of smaller borrowers.

DERIVATIVES FOR FINANCIAL INSTITUTIONS • EUR 540 trillion market

• Within this segment, the team will focus on illiquid derivatives with low trading volumes, for uncommon commodities and assets with unique risks. Derivatives for these assets have particularly high initial costs and high margins that Blockstate’s solutions will mitigate.

• Blockstate will provide a white-label structuring service for existing leaders in the space, who will distribute lower-cost derivatives to their end users.


COMPETITIVE LANDSCAPE There is currently no single player that offers a comparable range of products. In each vertical, BlockState will compete with several traditional and blockchain solutions.

CRYPTO ASSET MANAGEMENT BLOCKS

TATE CTF15

GRAYSCALE

DIGITAL LARGE

CAP FUND

VONTOBEL BTC

ETN

COINBASE

INDEX FUND

BITWISE HOLD

10

ICONOMI

BLOCKCHAIN

INDEX

CRYPTO 20

CRYPTO FUND

/CCI30

ETN Yes Yes Yes Yes Yes No No No

TOKEN Yes No No No No Yes Yes Yes

FEE 1.5% 3% 1,55% + 4,445%

2% 2,5% 3% 0,5% 0.99% + X

FEE TYPE Management only

(MGMT)

MGMT MGMT + Entry

MGMT MGMT MGMT MGMT MGMT

BONDS AND LOANS

BLOCKSTATE DETI

TRADITIONAL COMPETITORS: CREDIT SUISSE,

DEUTSCHE BANK

BLOCKCHAIN COMPETITORS: JPMORGAN’S QUORUM

BLOCKEX

SMART CONTRACT STRUCTURING

Yes No Yes

COMPLIANCE Yes Yes Unclear, focus on tech

TOKEN GOVERNANCE

Yes No No

OPEN ECOSYSTEM Yes No No

COSTS 0.5% fee for management and underwriting

0.25% - 5% underwriting fee,

$250-500k legal advice

n/a for Quorum; apx. $270-300k for Blockex18

18 BlockEx. "CORRECTION - BlockEx: BlockEx Partners With Winston & Strawn to Leverage Blockchain for Bond Issuance." May 16, 2017. Accessed June 29, 2018. https://www.prnewswire.com/news-releases/correction---blockex-blockex-partners-with-winston--strawn-to-leverage-blockchain-for-bond-issuance-622330313.html.


DERIVATIVES BLOCKSTATE

DECEND TRADITIONAL OTC: GOLDMAN SACHS,

MORGAN STANLEY, DEUTSCHE BANK

TRADITIONAL EXCHANGES: CBOE,

CME, LEDGERX

BLOCKCHAIN: VARIABL.IO FORTUNA

SMART CONTRACT STRUCTURING Yes No No Yes

REGULATORY COMPLIANCE Yes Yes Yes Currently unclear

TOKEN GOVERNANCE Yes No No Yes

COSTS 1.25% underwriting fee

n/a as platforms are under development

GO-TO-MARKET STRATEGY Generally speaking, strong interest and concrete demand in Blockstate’s first product category – crypto asset indices - can already be observed in the market directly as well as indirectly at an accelerating rate:

• BlackRock, the world’s largest asset manager,created a crypto working group (Link)

• Bloomberg and Galaxy Digital Capital Management launch crypto index (Link)

• Winklevoss Twins push for acceptance of ETP by SEC (Link)

• SEC under increasing pressure from ETF approval applicants and community (Link)

Asset Management is a relationship business. Direct business-to-business sales and meeting prospective clients are the main distribution channels for new investment products . The team and advisory board together have extensive experience in the industry and bring a large network of relationships throughout Europe that will be leveraged to secure investments.


Additionally, the first listings on major European stock exchanges which are early adopters of crypto-based financial products will generate direct exposure to relevant target groups. Moreover, the provision of an ISIN and the availability of the CTF15 through bank depots to a retail investor audience pushes further exposure.

Once a foothold in the market for crypto ETFs is secured and market validation for the blockchain-powered financial products is given, the existing client base will be leveraged to cross-sell the debt and derivatives infrastructure in addition to further increasing sales and business development among institutional investors.

ONGOING MARKETING PLAN Our goal is to be the first provider in Europe to offer a truly diversified and accessible crypto asset investment vehicle that can be distributed to investors across countries with the largest concentration of investable assets such as Germany, Switzerland and the United Kingdom, with additional jurisdictions being target over time. Being first to market will establish BlockState’s credibility in the industry and will allow us to benefit from an expected future increase in demand for crypto asset investments from the traditional financial community. For the launch of CTF15 we prepared a client engagement plan for our immediate home markets of Germany, Austria and Switzerland, which at the same time are major European private wealth markets and hence should provide us with a strong basis for our first product launch and to establish our brand. The following table provides details of our client segmentation by country and tier. The goal is to establish contact with all tier 1 and 2 clients by the end of 2018 in order to be positioned for potential asset allocation changes that these clients might make at the beginning of 2019 which could involve crypto asset allocations.

Number of clients Germany Switzerland Austria Liechtenstein Total Tier 1 425 409 52 42 928 Tier 2 392 894 182 32 1500 Tier 3 1023 874 269 37 2203 Total 1840 2177 503 111

To successfully execute our sales engagement plan, we made a strategic hire by signing one of our former Advisors, Andre Voinea, who will lead our distribution efforts in this space. Andre brings 10+ years of experience in sales across structured products and exchange traded products and brings a wide network of relevant client relationships to the company.

Additionally, we anticipate that the first deals in the debt and derivatives markets will generate significant publicity in the financial press. Beyond the likes of CNBC or the Wall Street Journal, Blockstate’s target audiences consume media via their Bloomberg terminals or niche financial trade publications, which will be a key focus of media outreach campaigns.


To further support the traditional sales strategy and media outreach, Blockstate will employ a strong emphasis on content marketing. Building thought leadership in the industry will be key in securing authority on blockchain innovation topics in the financial markets. Leveraging the team’s and its advisors’ deep expertise both on “traditional” finance topics and current developments in the market as well as the crypto space to produce high-quality relevant and reliable data and information will provide a clear signal in a space currently characterized by a lot of noise and hype.

Building on this expertise Blockstate’s executive team will actively seek speaker opportunities at major conferences for financial institutions. Cutting through the noise of ICO’s and currency developments and propagating actual use cases and showing adoption of blockchain technologies for real world applications will differentiate Blockstate’s positioning from the noise in the space. Conference attendees want to break past the hype and hear about real implementations that lead to specific and tangible business results. Blockstate will fill this demand by sharing its business cases.


ORGANIZATIONAL AND LEGAL CONSIDERATIONS In addition to creating technological solutions for investment banking, Blockstate has developed a legal stack and coordination with regulatory bodies in order to achieve forward-looking regulatory compliance.

Blockstate’s legal structure enables:

• Bridging smart contract financial instruments as well as Oracle-API/On-chain-Off-Chain in compliant asset management products

• Facilitating debt instrument structuring, settlement and trading on the blockchain; • Facilitating (OTC) derivatives structuring, pricing, calculation agent as well as close .-out

and clearing on the blockchain.

REGULATORY CONSIDERATIONS Blockstate is a brand under the Swiss holding corporation CTF Markets GmbH (pending conversion into the BlockState AG [Aktiengesellschaft]). It is incorporated in Switzerland and fully complies with all Swiss and EU regulatory requirements. Throughout this whitepaper, Blockstate has been used interchangeably with CTF Markets GmbH. The tokenized equity made available in the ETO will be that of BlockState AG (currently still CTF Markets GmbH).

BaFin, Germany’s Federal Financial Supervisory Authority, considers blockchain “a form of technology” that is not subject to any authorization requirements19. BaFin is paying close attention to blockchain development and has taken a careful approach that recognizes the high potential of blockchain for financial services.

In April 2018, Germany and 22 other European countries have established a Blockchain Partnership to prepare for the launch of EU-wide blockchain applications across the Digital Single Market20. The European Commission encourages other EU and EEA countries to join. Earlier in February, the EC also launched the EU Blockchain Observatory and Forum and has already invested over EUR 80 million in blockchain projects.

APPROACH TO LEGAL ISSUES From the onset, Blockstate was developed to apply the most innovative legal frameworks. Blockstate’s Equity Token Offering is governed by German law using Neufund’s innovative legal structure. From an investor perspective, the ETO is fully digital. From the legal

19 "Blockchain Technology." BaFin. Accessed June 29, 2018. https://www.bafin.de/EN/Aufsicht/FinTech/Blockchain/blockchain_node_en.html. 20 "European Countries Join Blockchain Partnership." Accessed June 29, 2018. https://ec.europa.eu/digital-single-market/en/news/european-countries-join-blockchain-partnership.


perspective, the Blockstate shares are transferred to Neufund’s Transparent Trustee, which acts as a legal holder of tokenized equity of companies.

Equity Tokens are deemed securities under German law. All applicable securities, KYC, and AML requirements are fully observed using Neufund’s platform.

ASSET MANAGEMENT PRODUCTS Blockstate will offer its digital asset management products in both traditional and token wrappers.

The Exchange Traded Note (ETN) will be offered using a safe single purpose vehicle (SPV). The structure will be regulatory compliant and also trade under its own ISIN similar to other securities. The SPV will be a Limited Company registered in Guernsey. Swiss regulators FINMA and GFSC have confirmed that this vehicle will not require special regulation. However, it will use a FINMA-regulated Payment Agent as well as applicable custodians and brokers.

Regardless of the wrapper, Blockstate will fully comply with all KYC and AML requirements for distributing its asset management products. Before selling any products, either Blockstate or its distribution partner will collect all required documents from investors.

DEBT AND DERIVATIVES PRODUCTS Before the acquisition of a banking license, Blockstate will act as a technology facilitator for other financial institutions. Effectively, debt and derivatives products will be created by Blockstate’s financial clients, using their legal frameworks. Blockstate will provide DLT infrastructure to enable on-chain structuring, settlement and trading.


ROADMAP AND MILESTONES Q2 2018 – Seed funding

Seed funding is raised from a group of HNW individuals to finance pilot projects.

Q2 2018 – CTF15 alpha product launch An alpha version of CTF15, the crypto-asset index product is launched.

Q2 2018 – Kick-off DETI Development of DETI is initiated, the blockchain platform for debt instruments. The first project will be done with a financial services client in Switzerland.

Q3 2018 – CTF15 issuance The first index products are offered as ETNs through brokers and advisers.

Q4 2018 – Kick-off DECEND The development of the derivatives platform starts. The first project will involve an OTC Lithium contract for financial institutions.

Q1 2019 – CTF15 listing The asset token products are offered as an ERC-20 token and listed on crypto exchanges.

H2 2019 – DECEND launch The derivatives platform launches, offering access to DLT-powered derivatives. Products are offered through partners among smaller financial institutions.

Q3 2019 – Profitability reached Blockstate becomes EBITDA-positive. Profits are reinvested to accelerate growth.

2021 – Banking license acquired, dividend policy introduced Blockstate acquires a banking license, enabling blockchain (white-label) offerings for ECM, M&A and loan verticals.

The board of directors devises an appropriate dividend strategy to distribute a share of profits back to equity token holders.

2021 – New business lines introduced Blockstate launches additional products in new verticals.


2022 – Target: EUR 330 million market valuation Blockstate brings in additional external investors, offering liquidity to equity token holders and raising funds for further expansion. The valuation is based on reaching a market share similar to boutique investment banks.


MANAGEMENT AND ADVISORY BOARD Blockstate’s team and advisors have over 70 years of combined experience in financial services with strong connectivity in all key verticals.

EXECUTIVE TEAM

ADVISORY BOARD


FINANCIAL PROJECTIONS

Financial Projections: Overview

in € Q4 2018 2019 2020 2021 2022

Total Revenues 211,245 3,613,856 10,737,531 43,504,467

188,781,366

Crypto Asset Management 211

245 1 880

331 5 036

195 11 526

932 25 510

530

Crypto Derivatives

- 567

078 3 931

008 15 362

268 54 714

339

Blockstate DCM IB

- 1 166

446 1 770

328 16 615

268 108 556

496

Total COGS (142 918) (474 224) (2 130 223) (6 610 558) (21 376 964)

Total Operating Expenses (1 138 094) (3 961 962) (6 384 313) (35 019 165) (91 461 367)

EBITDA (1 067 817) (811 340) 2 240 571 1 906 245 75 994 335

EBITDA Margin 21% 4% 40%

Net Income (1 077

365) (859 000) 2 044 095 164 474 50 632 794

Headcount 13 26 38 61 111

AUM 95 106 229 288 871 888 740 915 001 1 606 989 006 3 524 164 406

0%

20%

40%

60%

80%

100%

2018 2019 2020 2021 2022

Product Distribution

Crypto Asset Management Crypto Derivatives Blockstate DCM IB

0%

20%

40%

60%

80%

100%

2018 2019 2020 2021 2022

Cost Distribution

Sales & Marketing MGMT IT Staff

Other Salaries IT & Crypto Legal, Compliance, Insurance

Other, Rent etc


LIST OF ABBREVIATIONS AG Aktiengesellschaft AML Anti Money Laundering API Application Programming Interface Art. Article B2B business to business BKS BlockState BNP Banque Nationale Paris BTC Bitcoin CHF Swiss Franc CIS Collective Investment Scheme CISA Swiss Collective Investment Schemes Act CME Chicago Mercantile Exchange & Chicago Board of Trade CO Swiss Code of Obligations CP Commercial Paper CTF Crypto Traded Finance CTT Crypto Traded Finance DAO Decentralized Autonomous Organisation DIA Decentralized Information Asset ECB European Central Bank EM Emerging Markets ERC Ethereum Request for Comments ESOP Employee Stock Ownership Plan ETH Ethereum EUR EURO e.V. Eingetragener Verein (in English: Association registered with the Commercial Register) FINMA Swiss Financial Market Supervisory Authority FX Foreign Exchange G10 Group of 10 GmbH Gesellschaft mit beschränkter Haftung (in English: limited liability company) ICO Initial Coin Offering i.e. Id est (in English: for instance) Inc. Incorporation IOT Interent of Things

IP Internet Protocol, or Intellectual Property

KYC Know Your Customer Ltd. Limited Max. Maximum Para. Paragraph SEC Securities and Exchange Commission TGE Token Generation Event U.S. United Stated of America UTC Coordinated Universal Time


DISCLAIMER A. General Risk

The Blockstate (BKS) Tokens are long-term entrepreneurial risk participations. The Tokenholder shall be aware that the Purchase Price is used for entrepreneurial purposes of the Issuer and represents liable capital. Despite commercial diligence, it may occur that the development of the investments made with the Purchase Price is negative and that the business cannot be continued. Therefore, the purchase of the Tokens is related to substantial risks and may lead to a total loss of the invested capital. The Purchaser must bear this in mind at any time.

The Issuer does not warrant or guarantee a specific life time of the services offered by the Issuer and, therefore, not the profitability of the investment and the usefulness of the services for the Investor. The Purchaser does not become a member of BKS; there is also no option or conversion right embedded into the BKS.

The Issuer is free to use the Purchase Price in pursuit of his or her own entrepreneurial objectives

B. Start-up Risk

Investments in start-ups including the Issuer involve a high degree of risk, including a possible loss of the entire Purchase Price. Participation in token sales including the BKS Token sale may involve an even higher degree of risk. Financial and operating risks confronting start-ups are significant: the Issuer is not immune to these. The start-up market in which the Issuer competes is highly competitive and the percentage of companies that survive and prosper is small. In addition hereto, the Issuer is in direct competition with existing and yet to be developed companies.

Start-ups often experience unexpected problems in the areas of product development, marketing, financing, and general management, among others, which frequently cannot be solved. In addition, start-ups may require substantial amounts of financing, which may not be available through institutional private placements, the public markets or otherwise. The Issuer may be forced to cease operations or take actions that result in its dissolution (such as (a) a voluntary termination of operations of the Issuer, (b) a general assignment for the benefit of the Issuer’s creditors or (c) any other liquidation, dissolution or winding up of the Issuer, whether voluntary or involuntary). It is possible that, due to any number of reasons, including, but not limited to, an unfavourable fluctuation in the value of cryptographic and state currencies, the inability of the Issuer to procure the necessary information to be fed into the BKS Token and/or put these BKS Tokens in operation, the failure of commercial relationships, or intellectual property ownership challenges, the Issuer may no longer be viable to operate and the Issuer may dissolve or take actions that result in a dissolution event.

The Issuer has been founded in May 2018. Therefore, no annual accounts or semi-annual accounts have been prepared yet, which could give an indication on the financial condition of the Issuer.

C. Risk of Losing Access to Tokens Due to Loss of Private Key(s), Custodial Error or Purchaser Error

A private key, or a combination of private keys, is necessary to control and dispose of BKS Tokens stored in your digital wallet or vault. Accordingly, loss of requisite private key(s) associated with your digital wallet or vault storing BKS Tokens will result in a loss of such BKS Tokens. Moreover, any third party that gains access to such private key(s), including by gaining access to login credentials of a hosted wallet service you use, may be able to misappropriate your BKS Tokens. Any errors or malfunctions caused by or otherwise related to the digital wallet or vault you choose to receive and store BKS Tokens, including your own failure to properly maintain or use such digital wallet or vault, may also result in the loss of your BKS Tokens. Additionally, your failure to follow precisely the procedures set forth for buying and receiving BKS Tokens, including, for instance, if you provide the wrong address for the Purchaser Address, or provides an address that is not ERC-20 / ERC 223 compatible, may result in the loss of your BKS Tokens.

D. Risks Associated with the Ethereum Protocol

Because BKS Tokens and the Platform are based on the Ethereum protocol, any malfunction, breakdown or abandonment of the Ethereum protocol may have a materially adverse effect on the Platform and / or the BKS Tokens. Moreover, advances in cryptography, or technical advances such as the development of quantum computing, could present risks to the BKS Tokens and the Platform, including the utility of the Tokens for obtaining Services, by rendering ineffective the cryptographic consensus mechanism that underpins the Ethereum protocol.


E. Risk of Mining Attacks

As with other decentralized cryptographic tokens based on the Ethereum protocol, the BKS Tokens are susceptible to attacks by miners in the course of validating BKS Token transactions on the Ethereum blockchain, including, but not limited to, double-spend attacks, majority mining power attacks, and selfish mining attacks. Any successful attacks present a risk to the Platform and the BKS Tokens, including, but not limited to, accurate execution and recording of transactions involving BKS Tokens.

F. Risk of Hacking or Security Weaknesses

Hackers or other malicious groups or organizations may attempt to interfere with the Platform or the BKS Tokens in a variety of ways, including, but not limited to, malware attacks, denial of service attacks, consensus-based attacks, Sybil attacks, smurfing and spoofing. Furthermore, because the Platform is based on opensource software, there is a risk that a third party or a member of the Issuer’s team may intentionally or unintentionally introduce weaknesses into the core infrastructure of the Platform, which could negatively affect the Platform and the BKS Tokens, including the utility of the BKS Tokens for obtaining Services. Hackers or other malicious groups of organizations may also attempt to get access to private key(s) or other access credentials in the Wallet or any other wallet, vault, or other storage mechanism used to receive and hold BKS Tokens. As a result, the BKS Tokens may be lost forever.

G. Risks Associated with Uncertain Regulations and Enforcement Actions

The regulatory status of the BKS Tokens and distributed ledger technology is unclear or unsettled in many jurisdictions. It is difficult to predict how or whether regulatory agencies may apply existing regulation with respect to such technology and its applications, including the Platform and the BKS Tokens. It is likewise difficult to predict how or whether legislatures or regulatory agencies may implement changes to law and regulation affecting distributed ledger technology and its applications, including the Platform and the BKS Tokens. Regulatory actions could negatively impact the Platform and the BKS Tokens in various ways, including, for purposes of illustration only, through a determination that the purchase, sale and delivery of the BKS Tokens constitutes unlawful activity or that the BKS Tokens are a regulated instrument that requires registration or licensing of those instruments or some or all of the parties involved in the purchase, sale and delivery thereof. The Issuer may cease to offer its services to people in specific jurisdictions in the event that regulatory actions, or changes to law or regulation make it illegal to operate in such jurisdiction, or commercially undesirable to obtain the necessary regulatory approval(s) to operate in such jurisdiction.

H. Risks Arising from Taxation

The tax characterization of Tokens is partially uncertain. You must seek your own tax advice in connection with purchasing and holding BKS Tokens, which may result in adverse tax consequences to you, including withholding taxes, income taxes and tax reporting requirements.

I. Risk of Competing Platforms

It is possible that alternative Platforms could be established that utilize the same open source code and protocol underlying the Platform and attempt to facilitate services that are materially similar to the Services. The Platform may compete with these alternatives, which could negatively impact the Platform and Tokens, including the utility of the Tokens for obtaining Services.

J. Risk of Insufficient Interest in the Platform or Distributed Applications

It is possible that the Platform will not be used by a large number of individuals, companies and other entities or that there will be limited public interest in the creation and development of distributed Platforms (such as the Platform) more generally. Such a lack of use or interest could negatively impact the development of the Platform and therefore the potential utility of the Tokens, including the utility of the BKS Tokens for obtaining Services.

K. Risks Associated with the Development and Maintenance of the Platform

The Platform is still under development and may undergo significant changes over time. Although the Issuer intends for the BKS Tokens and Platform to function as described in the White Paper, and intends to take commercially reasonable steps toward those ends, the Issuer may have to make changes to the specifications of the BKS Tokens or Platform for any number of legitimate reasons. Moreover, the Issuer has no control over how other participants will use the Platform, what products or services will be offered through the Platform by third parties, or how third party products and services will utilize the BKS Tokens (if at all). This could create the risk that the BKS Tokens or the Platform, as further developed and maintained, may not meet your expectations at the time of purchase. Furthermore, despite the Issuer’s good faith efforts to develop and participate in the Platform, it is still possible that the Platform will experience malfunctions or otherwise fail to be adequately developed or maintained, which may


negatively impact the Platform and BKS Tokens, and the potential utility of the BKS Tokens, including the utility of the BKS Tokens for obtaining Services.

L. Risk of an Unfavourable Fluctuation of ETH, BKS, BTC or Other Coin Value

If the value of ETH, BKS, BTC or other coins fluctuates unfavourably during or after the BKS Token sale, the Issuer’s team may not be able to fund development, or may not be able to develop or maintain the Platform in the manner that it intended. In addition to the usual market forces, there are several potential events which could exacerbate the risk of unfavourable fluctuation in the value of ETH, BKS, BTC or other coins, including another DAO-like attack on the Ethereum network, or significant security incidents or market irregularities at one or more of the major cryptocurrency exchanges.

M. Risk of Dissolution of the Issuer or Platform

It is possible that, due to any number of reasons, including, but not limited to, an unfavourable fluctuation in the value of ETH, BTC or other cryptographic and fiat currencies, decrease in the Tokens’ utility (including their utility for obtaining Services), the failure of commercial relationships, or intellectual property ownership challenges, the Platform may no longer be viable to operate or the Issuer may dissolve.

N. Regulatory Risks

The Issuer, and by extension the Platform, is subject to a variety of laws and regulations, including those with respect to privacy and data protection, consumer protection, data security, and others. These laws and regulations, and the interpretation or application of these laws and regulations, could change. In addition, new laws or regulations affecting the Platform could be enacted, which could impact the utility of the BKS Tokens in the Platform. Additionally, the Platform participants are subject to industry specific laws and regulations or licensing requirements. If any of these parties fail to comply with any of these licensing requirements or other applicable laws or regulations, or if such laws and regulations or licensing requirements become more stringent or are otherwise expanded, it could adversely impact the Platform and the Tokens, including the Tokens’ utility for obtaining Services.

Also, changes in laws or regulations governing the Issuer's operations may adversely affect its business. Any change in the Issuer’s tax status, or in taxation legislation elsewhere, could affect the value of its financial holdings, its business or the Issuer's ability to achieve its business objective. Prospective Purchasers are urged to consult their tax advisers with respect to their particular tax situations and the tax effects of the purchase of Tokens from the Issuer.

O. Operational Risks

The Company is a young company and the growth of the team and its capabilities may take longer than expected to result in the intended usefulness of the Tokens. The Tokens are just one product in a highly competitive market, and broad adoption by other users and developments by technology partners may take longer than expected. The usefulness of the Tokens depends on the extent of widespread adoption of the offered technology by the marketplace.

P. Risk of Lack of Adoption

The success of the Platform, Services, and BKS Tokens is dependent in large part to the adoption of the Platform, Services, and underlying technology by users. It is possible that users do not adopt or use the Platform. Such lack of use or interest could negatively impact the development of the Platform and therefore the potential utility of the Tokens, including the utility of the Tokens for obtaining Services.

Q. Technology Risks

The BKS Tokens are intended to represent a new capability on emerging technology that is not fully proven in use. As the technology matures, new capabilities may dramatically alter the usefulness of the BKS Tokens or the ability to use or sell them. The functionality of the BKS Tokens is complex, will require enhancements and product support over time, and full functionality may take longer than expected. The full functionality of the BKS Tokens is not yet complete and no assurance can be provided of such completion.

R. Unanticipated Risks

Cryptographic tokens such as the BKS Tokens are a new and untested technology. In addition to the risks included in this document, there are other risks associated with your purchase, possession, and use of the Tokens, including unanticipated risks. Such risks may further materialize as unanticipated variations or combinations of the risks discussed in this document.

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