Wealthsimple Crypto Product Risk Disclosure
Disclosure Statement for Crypto Assets
This Statement is presented to you at the time of opening your account and is available to you within your documents settings in the Wealthsimple Trade App. You must acknowledge having received, read and understood this Statement in order to open and operate a Wealthsimple Crypto account. Please read this Statement in its entirety. The Statement does not disclose all of the risks or relevant considerations of entering into a contract with Wealthsimple Digital Assets Inc. (WDA or Wealthsimple Crypto) to buy, sell, transfer, stake, and hold Crypto Assets (a “Crypto Contract”). In light of the risks, you should undertake such transactions only if you understand the nature of the contractual relationship with WDA into which you are entering, and the extent of your exposure to the risks associated with trading, staking or transferring Crypto Assets.
Please refer to WDA’s Client Relationship Disclosure for a more detailed description of this relationship. For Crypto Assets that do not yet have deposit and withdrawal functionality, there are limited circumstances in which you can obtain possession of the Crypto Assets you have purchased (see “Transfers” below). The Crypto Assets that you have purchased will be held in trust for you, in pooled accounts that are in the name of WDA at one or more third-party custodians independent of WDA or in a “hot wallet” administered by WDA. As such, there is a risk you will not be able to successfully obtain possession of the Crypto Assets, and a risk that the assets in these pooled accounts and hot wallet will not be sufficient to ensure that you receive the value of your interest in the Crypto Assets.
Trading and staking Crypto Assets may not be suitable for all members of the public. You should carefully consider whether trading or staking is appropriate for you in light of your knowledge, experience, financial objectives, financial resources and other relevant circumstances. In certain circumstances, your ability to buy or stake Crypto Assets may be limited, or restricted entirely, to comply with applicable regulatory requirements.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. (2021). Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement or Wealthsimple’s Crypto 101 pages with information on each Crypto Asset.
WDA believes that its customers should be aware of the risks involved in the purchase, sale, transfer, staking and custody of Crypto Assets. Crypto Asset trading may not be appropriate for you, particularly if you use funds drawn from retirement savings, student loans, mortgages, emergency funds, or funds set aside for other purposes. The volatility and unpredictability of the price of Crypto Assets relative to fiat currency may result in significant loss over a short period of time. The following is a brief non-exhaustive summary of certain more significant factors and special risks you should take into account when deciding whether to trade or stake Crypto Assets. Similar to trading stocks on traditional exchanges, you should always research individual Crypto Assets prior to making a purchase or investment so that you can appropriately gauge the risks against your personal circumstances.
What are Crypto Assets?
Crypto Assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but do not have legal tender status. Crypto Assets are sometimes exchanged for currencies, but they are not generally backed or supported by any government or central bank. Their value is derived by market forces of supply and demand, which may show low correlation to the value changes in other asset classes and are sensitive to market sentiment and technological developments, including developments in functionality. Crypto Assets are traditionally more volatile than fiat currencies or securities. The value of Crypto Assets may be derived from the continued willingness of market participants to exchange fiat currency for Crypto Assets, which may result in the potential for permanent and total loss of value of a particular Crypto Asset should the market for a Crypto Asset disappear entirely. Federal, provincial, territorial or foreign governments may restrict the use and exchange of Crypto Assets, and regulation across the globe is still developing. Crypto Assets differ in their functions, structures, governance and rights. Wealthsimple permits the trading of established Crypto Assets that function as a form of payment, utility or means of exchange on a decentralized network. These Crypto Assets have certain features that are analogous to existing commodities, such as currencies and precious metals, but are also different in many key respects, as described in this disclosure statement.
Please see Wealthsimple’s Crypto 101 pages for more information on each Crypto Asset supported by Wealthsimple Crypto.
Risks in Trading Crypto Assets
The following is a brief summary of some of the risks connected with trading Crypto Assets. Wealthsimple has prepared this summary based on its assessment of the Crypto Assets made available through the platform. This assessment includes a review of:
The creation, governance, usage and design of each Crypto Asset, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s)team that first created the Crypto Asset;
The supply, demand, maturity, utility and liquidity of the Crypto Asset;
Material technical risks associated with the Crypto Asset, including any code defects, security breaches and other threats concerning the Crypto Asset and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
Legal and regulatory risks associated with the Crypto Asset, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of the Crypto Asset.
The summary below is not an exhaustive discussion of all risks nor does it contemplate an individual’s unique risk tolerance. As detailed within this Disclosure, there are many factors to consider when investing in the crypto sector in general and these factors are likely to evolve over time.
(1) Short History Risk
As a relatively new open source technology, it is expected that there will continue to be technical developments in blockchain technology, which could impact the value of a Crypto Asset. Due to this short history, it is not certain whether the economic value, governance or functional elements of Crypto Assets will persist over time. The Crypto Asset community has successfully navigated a considerable number of technical and political challenges since the genesis of the Bitcoin blockchain, which WDA believes is a strong indicator that it will continue to engineer its way around future challenges. That said, the continuation of a vibrant Crypto Asset community is not guaranteed, and insufficient software development, contribution rates, community disputes regarding the development of the network and scaling options, or any other unforeseen challenges that the community is not able to navigate could have an adverse impact on the price of a Crypto Asset.
Open source developers of blockchain technology have signalled that they will continue to make efforts to improve the scaleability and security of public blockchains. For example, in respect of the Ethereum blockchain, developers are planning to replace the current hash-based mining consensus mechanism of proof-of-work with a proof-of-stake mechanism. Changes may also occur to the Bitcoin blockchain, for example with the continued development of scaleability protocols like the Lightning Network, which operate on top of the Bitcoin blockchain. The expected timing and impacts of this change are uncertain.
Similar risks apply to other forks of Bitcoin source code like Litecoin or Bitcoin Cash.
Tokens with their functions tied to applications of the Ethereum network are operating within a relatively new, competitive market of Crypto Assets. Demand for said tokens can fluctuate rapidly, and much like a technology startup, they are often still proving value to the broader community and establishing a reliable business model. Similar to the risks noted above, Crypto Assets of this nature can be impacted by changes made to their code, design, or community governance, and most provide updates and relevant information via forums and social channels to help stakeholders continually re-assess their interest in holding the asset.
(2) Volatility in the Price of Crypto Assets and Loss of Liquidity
The Crypto Asset markets are sensitive to new developments, and since volumes are still maturing, any significant changes in market sentiment (by way of sensationalism in the media or otherwise) can induce large swings in volume and subsequent price changes. Crypto Asset prices on trading platforms have been volatile and subject to influence by many factors, including the levels of liquidity, public speculation on future appreciation in value, swings in investor confidence and the future growth of alternative Crypto Assets that may gain market share. In certain circumstances, it may become difficult or impossible to assess the value of your Crypto Assets. The trading of Crypto Assets on public trading platforms has a limited history. The prices available on those platforms have, in some cases, been more volatile and subject to influence by additional factors not specific to the value of Crypto Assets, including liquidity levels and operational interruptions.
Operational interruptions can limit the liquidity of Crypto Assets on the trading platform, which could result in volatile prices and reduced confidence in the Crypto Assets traded on those platforms. Wealthsimple Crypto uses multiple brokers, which we refer to as liquidity providers, to buy and sell the Crypto Assets that we trade for you. These liquidity providers connect to multiple trading platforms in order to ensure ongoing liquidity of Crypto Assets. Use of multiple liquidity providers and multiple trading platforms is designed to reduce the liquidity risk and operational risk associated with any one trading platform. However, there is a risk that the liquidity sources accessed directly and indirectly by Wealthsimple Crypto are unable to return the best possible prices or execution quality on your behalf. Liquidity providers may also reject orders for a variety of reasons, including that the order exceeds size or rate limits imposed by them. These risks may be greater during periods of high market volatility or operational outages at a major trading platform.
A shift in regulatory characterization of a Crypto Asset as a security or derivative could also impact its liquidity and transactability. If there is a change in the regulatory status or characterization of a Crypto Asset available for trading, Wealthsimple Crypto will re-assess the status and risks of the Crypto Asset and update you accordingly. We monitor changes by participating in open governance forums and also by actively communicating with our regulators, Liquidity Providers and custodian(s), each of which is similarly engaged in crypto asset communities and regulatory decisions. See also section 6 below.
(3) Potential Decrease in Global Demand for Crypto Assets
Crypto Assets represent a new form of digital value that is still in the early adoption phase amongst the broader public. Investors should be aware that there is no assurance that Crypto Assets will maintain their long-term value in terms of purchasing power or that the acceptance of Crypto Assets for payments by mainstream retail merchants and commercial businesses will continue to grow. Their underlying value is driven by a number of factors, including their utility as a store of value, means of exchange, or unit of account. Similar to how commodities like oil are valued by global markets, Crypto Assets are priced by the global supply and demand for their unique utilities. Speculators and investors using Crypto Assets as a store of value then layer on top of means of exchange users, creating further demand. If consumers stop using Crypto Assets as a means of exchange, or their adoption slows, then the price may be impacted.
Given that the value of bitcoin may be derived at least partially from its capitalization and position as first mover, there is a risk that a competitor may gain popularity and negatively impact the price of bitcoin. Factors such as its broad base of holders and its proven resilience to security attacks may hedge against this.
The value of ether (and the assets built on top of the Ethereum platform) relies primarily on its underlying blockchain technology, but also on its utility as a store of value, means of exchange, and the demand of newly designed use cases. The Ethereum blockchain is intended to allow people to operate decentralized applications using blockchain technology that do not rely on the actions of a centralized intermediary. Ether, which is the primary currency of the Ethereum blockchain, can then be used to compensate for the effort of others to power these decentralized applications and ensure that any transactions that occur on these applications are recorded in the blockchain. Accordingly, the long term value of ether may be tied to the success or failure of the blockchain technology and the decentralized applications built upon the Ethereum blockchain.
Some Crypto Assets available for trading on Wealthsimple Crypto have shorter histories than bitcoin or the Ethereum blockchain, which can mean that long-term global demand and trends are harder to predict. The value of most ERC 20 tokens — i.e. tokens built on top of the Ethereum blockchain — are derived from the volume of engagement with the decentralized application (also known as DApp) that is accessed via use of its token. ERC 20 tokens, therefore, are also reliant on the continued value, maintenance, and adoption of the Ethereum blockchain. As mentioned above, the value of newer Crypto Assets is less certain, which can mean a higher potential for fluctuation in global demand and price. We have published summaries of Crypto Assets and their protocols on our Learn site. These pages are meant to be high level in nature and investors are, as always, encouraged to do their own research to ensure a strong appreciation for the risks of trading Crypto Assets.
(4) The Blockchains on which Crypto Assets operate may Temporarily or Permanently Fork or Halt; Airdrops
Blockchain networks are powered by open source software. When a modification to that software is released by developers, and a substantial majority of miners or validators consent to the modification, a change is implemented and the blockchain network continues uninterrupted. However, if a change were to be introduced with less than a substantial majority consenting to the proposed modification, and the modification is not compatible with the software in operation prior to its modification, the consequence would be what is known as a “fork” (i.e. a split) of the blockchain. One blockchain would be maintained by the pre-modification software and the other by the post-modification software. The effect is that both blockchains would operate in parallel, but independently. There are examples of such forks occurring in the past on both the Bitcoin and Ethereum blockchain networks, in some cases creating new popular and valuable assets of their own such as Bitcoin Cash. In the future, such a fork could occur again, and affect the viability or value of a Crypto Asset. Wealthsimple Crypto may choose not to support any future fork of the underlying blockchain of the Crypto Assets available on our platform, in which case you may not have any rights to the new crypto assets that may be created as a result of that fork.
Similar to the blockchain networks themselves, Crypto Assets built on top of Ethereum (or other blockchains) or that integrate with DApps are self-governed and subject to frequent upgrades by the open source community. As new versions are released, the value of the Asset might be impacted and material changes to functionality could trigger changes in demand, supply or price. Wealthsimple Crypto reserves the right to decide how it will continue to support the resulting assets of a fork or protocol upgrade, if applicable, and will inform impacted Clients of their trading or liquidating options at that time.
Miners, validators or other nodes that validate transactions on blockchains may halt processing of transactions in certain circumstances, which may delay or prevent the processing of transactions. Wealthsimple Crypto does not have control over decisions by nodes on blockchain networks and reserves the right to determine whether and how it will continue to support a blockchain in light of network interruptions or other changes that affect Wealthsimple Crypto’s ability to support a Crypto Asset.
In some circumstances, persons unrelated to Wealthsimple Crypto may transfer, or attempt to transfer, new crypto assets to existing holders of a Crypto Asset supported by Wealthsimple Crypto. This is commonly referred to as an airdrop. Due to technical limitations, Wealthsimple Crypto and its custodians may be unable to access airdropped crypto assets. In the event of an airdrop, Wealthsimple Crypto will consult with its custodians and other vendors to determine whether to support the airdropped assets. Wealthsimple Crypto reserves the right to determine, in its discretion, whether to support airdropped assets.
(5) Issues with the Cryptography Underlying the Crypto-networks
In the past, flaws in the source code for digital assets have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. Although the Bitcoin and Ethereum blockchains have demonstrated resiliency and integrity over time, the cryptography underlying either one could, in the future, prove to be flawed or ineffective. For example, developments in mathematics and/or technology, including advances in digital computing, algebraic geometry and quantum computing, could result in the cryptography of the blockchain network being vulnerable to attack. Generally, any reduction in public confidence on the security or source code of a core blockchain network could negatively the broader sector, and this could negatively affect the value of Crypto Assets traded with Wealthsimple Crypto.
Crypto Assets that are “minted” or issued by a public offering event, instead of by cryptographic mining, carry different risks associated with the distribution process. Tokens that are purchased or distributed via DApp follow a different model than Crypto Assets that are rewarded for mining effort. Each protocol involves its own rules and compensation structure, which Wealthsimple Crypto will assess prior to making a token available, but not all economic models will be the right fit for all investors so it is important for each individual to make their own assessment. In addition to unique economic model factors, all Crypto Assets are impacted by the underlying cryptography technology supporting the blockchain network to which they are associated.
(6) Uncertainty in Regulation and Future Financial Institution Support
The regulation of Crypto Assets continues to evolve in Canada and in foreign jurisdictions, which may restrict the use of Crypto Assets or otherwise impact the demand for Crypto Assets. There may be limitations on the ability of a securities regulator in Canada to enforce Canadian laws on foreign entities, and foreign rules that apply to Crypto Asset activities which occur in other jurisdictions may not necessarily be enforced in that jurisdiction. Furthermore, banks and other financial institutions may refuse to process funds for Crypto Asset transactions, process wire transfers to or from Crypto Asset trading platforms, Crypto Asset-related companies or service providers, or maintain accounts for persons or entities transacting in Crypto Assets.
Wealthsimple Crypto does not intend to offer Crypto Assets that are, or have the potential to be deemed, securities or derivatives by a regulator. However, our own policies and assessments do not have the force of law. Regulators (either in Canada or in foreign jurisdictions) could come to a different decision, or change the characterization of a Crypto Asset. Should this occur, Wealthsimple Crypto would re-assess and determine the status and risks of the Crypto Assets.
No Canadian securities regulatory authority has expressed an opinion about the Crypto Contracts or any of the Crypto Assets made available for trading, including an opinion that the Crypto Assets are not themselves securities and/or derivatives.
If a Crypto Asset is no longer supported by Wealthsimple Crypto for trading (because of our decision or because of a regulatory decision), WDA will offer you the option to hold, trade the asset off platform, or liquidate within a given timeframe, and the terms of this transition will be determined on a case-by-case basis based on our own assessment and the positions of our regulators, custodians and Liquidity Providers.
(7) Concentration Risks
Certain addresses on the Bitcoin and Ethereum blockchain networks hold a significant amount of the asset in circulation, theorized to be founder addresses. If one of these addresses were to exit their bitcoin or ether positions, it could cause volatility that may adversely affect the price.
Whenever Wealthsimple Crypto reviews a new Crypto Asset, we assess the ownership concentration of that particular asset. There are a number of ways in which a Crypto Asset could be negatively impacted by a concentration of assets or power, including but not limited to: (i) if a participant or node operator gains control of a significant portion of a particular asset, (ii) a 51% attack is successful which means a mining entity gains control of enough hash power or stake in a proof-of-stake system to control which blocks are mined which would significantly erode trust in the public blockchain networks, (iii) a protocol’s decision-making power is concentrated to one or few holders which means consensus processes are threatened leading to poor or disruptive changes, or (iv) if applicable, key actors make certain changes against the will of the broader community that could adversely impact the protocol or Crypto Asset’s value. This is not an exhaustive list and new protocols can present unique concentration risks.
(8) Electronic Trading and Dependence on the Internet
There are risks associated with using an internet-based trade execution software application including, but not limited to, the failure of hardware and software. WDA maintains an independent and secure ledger of all transactions to minimize loss, and maintains contingency plans to minimize the possibility of system failure. However, WDA does not control signal power, reception, routing via the internet, configuration of your equipment or the reliability of your connection to the internet. The result of any failure of the foregoing may be that you are unable to place an order, your order is not executed according to your instructions, or your order is not executed at all. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a particular Crypto Asset suddenly drops, or if trading is halted due to recent news events, unusual trading activity, or changes in the underlying Crypto Asset system. The greater the volatility of a particular Crypto Asset, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to one or more of the following: system failures, hardware failures, software failures, network connectivity disruptions, and data corruption.
(9) Cyber Security Risk
The nature of Crypto Assets may lead to an increased risk of fraud or cyber attack. A breach in cyber security refers to both intentional and unintentional events that may cause WDA to lose proprietary information or other information subject to privacy laws, suffer data corruption, or lose operational capacity. This in turn could cause WDA to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized access to WDA’s digital information systems (e.g. through “hacking” or malicious software coding), but may also result from outside attacks such as denial-of-service attacks (i.e. efforts to make network services unavailable to intended users). In addition, cyber security breaches of WDA’s third-party service providers (e.g. the liquidity providers and custodian) can also give rise to many of the same risks associated with direct cyber security breaches. As with operational risk in general, WDA has established risk management systems designed to reduce the risks associated with cyber security.
(10) Custodial Wallet System
When you enter into a contract with WDA in connection with buying and selling Crypto Assets, that contract provides you with certain rights and imposes certain responsibilities; the contract, and your contractual right to the crypto assets that you may buy, hold and sell, or transfer externally, pursuant to the contract, constitute a security or derivative. In particular, the contract you sign with WDA enables you to, among other things, buy, sell and hold, or transfer externally, Crypto Assets without the need for you to receive and hold your Crypto Assets in your own private wallet. We refer to this as a “custodial wallet” system. A custodial wallet system may also expose you to insolvency risk (credit risk), fraud risk or proficiency risk on the part of WDA or the custodians designated to hold your Crypto Assets.
(11) No Voting Rights
Certain Crypto Assets confer a right to vote on topics that may directly and indirectly affect functionality and economics of a particular Crypto Asset, including: changes to block reward amounts, inflation percentages, consensus modelling or governance models. WDA does not enable any voting functionality to Wealthsimple Crypto users.
(12) Lack of Investor Protection Insurance
WDA is not a member of the Canadian Investor Protection Fund. Crypto Assets purchased or held in an account with WDA are not protected by the Canadian Investor Protection Fund, the Canadian Deposit Insurance Corporation or any other investor protection insurance scheme.
(13) Commission and Other Charges for Trading
There are certain fees applicable to your purchase and sale of Crypto Assets, as disclosed to you within the Wealthsimple Trade App. Fees are based in part on the fees charged to us by our third-party liquidity providers and custodian, which are subject to change. See our Wealthsimple Crypto Fee Schedule for more information.
(14) Staking and other Protocol Uses; Supplemental Functionality
Certain Crypto Assets may be “staked” or otherwise used in connection with their associated blockchain network or protocols to increase the security or solvency of the network or protocol. As well, certain parties have developed supplemental functionality for certain blockchain tokens, such as metacoins, colored coins and side chains. Staking and other protocol uses or supplemental functionality associated with Crypto Assets may not be available to Wealthsimple Crypto users while those Crypto Assets are in WDA’s custody. For additional information regarding staking, please refer to the What is Staking? Section below.
Wealthsimple Crypto provides you with functionality to transfer Crypto Assets to and from your Wealthsimple Crypto account, meaning you have the ability to transfer your Crypto Assets to wallets outside the control of WDA, such as other trading platforms or personal wallets controlled by you, as well as transfer Crypto Assets from a wallet outside the control of WDA to Wealthsimple Crypto. Transfer functionality may not be available for all Crypto Assets. As blockchain transfers are practically irreversible, you may permanently lose your Crypto Assets in the event you provide Wealthsimple Crypto with incorrect information when withdrawing Crypto Assets, fail to follow Wealthsimple Crypto’s instructions when depositing Crypto Assets, attempt to transfer unsupported Crypto Assets to Wealthsimple Crypto, attempt to transfer Crypto Assets to a deposit address intended for deposits of a different type of Crypto Asset, fail to protect your login credentials or provide a third party with access to your Wealthsimple Crypto Account.
All blockchain transfers require the payment of fees (which may be referred to as miners’ fees, gas, network fees or otherwise) to entities unrelated to Wealthsimple Crypto. These fees are outside the control of Wealthsimple Crypto. The failure to pay a sufficient fee may delay your transfers indefinitely or result in the failure of your transfers. When you transfer Crypto Assets from the Wealthsimple Crypto platform, WDA will provide you with an estimate of the fee. For Crypto Assets based on the ERC-20 token standard, if you proceed with the transfer, you will pay only the amount of WDA’s estimate and WDA will absorb or retain any difference between the amount of WDA’s estimate and the amount actually charged by the network to effect the transfer. Otherwise, you will pay the amount actually charged by the network.
Wealthsimple Crypto does not cover nor record fees charged by, or paid while accessing the services of, an entity unrelated to Wealthsimple Crypto.
If you transfer your Crypto Assets to a personal wallet controlled by you, you may be at increased risk of loss or theft of your Crypto Assets and you may have no means of recovering access to your Crypto Assets if you lose or forget the pass phrase, private key or other credentials required to access your personal wallet.
To provide transfer functionality, Wealthsimple Crypto administers “hot wallets” holding limited amounts of Crypto Assets that will be used to facilitate client deposit and withdrawal requests. A hot wallet is administered using devices connected to the Internet. As a result, WDA may be exposed to an increased risk of fraud or cyber attack relating to the hot wallets and you may be exposed to fraud risk or proficiency risk on the part of WDA in connection with its administration of the hot wallets.
(16) Beta Features
From time to time, Wealthsimple Crypto may add new features and invite you to participate in a “beta phase” of the feature and provide feedback on the feature. These features will be identified by a “beta” label in the Wealthsimple Crypto application. You are not under any obligation to join a beta phase or use a beta feature, but if you do, there are additional risks that may apply while the product feature is still in the “beta phase”, including that the feature may not work correctly, may be changed and may be discontinued entirely. Wealthsimple Crypto makes best efforts to address and correct any issues that arise during beta phases and new product feature launches.
What is Staking?
Certain blockchains use a consensus mechanism to achieve distributed consensus called “Proof of Stake” or “Delegated Proof of Stake” to verify, append, and secure new data on the blockchain. These mechanisms rely on certain nodes, called validators, to verify transactions included in each new block. In exchange for verifying transactions, validators earn Crypto Asset rewards. To ensure validators follow the protocol rules, validators must put assets “at stake”, in the sense that if a validator fails to follow the rules, some or all of the “staked” assets will be lost, or “slashed”.
Delegated Proof of Stake networks allow other participants to participate in staking without operating a validator. Instead, other participants can delegate the right to stake their assets to a validator. Delegated Crypto Assets never leave the owner’s wallet; delegation only permits the validator to stake the owner’s Crypto Assets on their behalf. When a validator verifies a block of transactions, the rewards earned are split between the validator and all of its delegators, in proportion to each delegator’s share of all assets delegated to the validator.
Wealthsimple Crypto provides functionality (the “Staking Functionality”) to arrange for clients who have entered into Crypto Contracts with WDA in respect of crypto assets on certain Proof of Stake or Delegated Proof of Stake blockchain networks to stake or delegate their Crypto Assets to validators on those networks and earn the applicable staking rewards.
Risks in Staking Crypto Assets
The following is a brief summary of some of the risks connected with the Staking Functionality. These risks are in addition to the risks described above under “Risks in Trading Crypto Assets”, all of which continue to apply to Crypto Assets that are staked using the Staking Functionality.
Wealthsimple has prepared this summary based on its assessment of the Crypto Assets for which the Staking Functionality is available, including how the blockchain for those Crypto Assets operate and the staking protocols for those Crypto Assets.
As part of its assessment, Wealthsimple reviews:
the design and operation of the staking protocols, including:
bonding/unbonding or warm-up/cool-down periods;
any limits on the number of active validators;
the mechanism for selecting validators;
slashing or similar penalties; and
any publicly available security assessments of the staking protocols; and
where feasible, the number and identity of validators participating in staking.
The summary below is not an exhaustive discussion of all risks nor does it contemplate an individual’s unique risk tolerance. As detailed within this Disclosure, there are many factors to consider when staking in general and these factors are likely to evolve over time. Many risks in trading Crypto Assets described above also apply to staked Crypto Assets and staking rewards. Specific risks regarding the staking of different Crypto Assets are set out in the Crypto Asset Statements.
(1) Staking Depends on Third Parties
The staking functionality provided by Wealthsimple Crypto relies upon Wealthsimple Crypto’s third party custodians and third party operators of validator nodes.
Wealthsimple Crypto does not operate validator nodes and will not have an ownership interest in any approved third party validator nodes. Instead, Wealthsimple Crypto selects and approves third-party vendors (“validators”) that operate or supply validator nodes on various Proof of Stake blockchain networks. When you use the Staking Functionality, Wealthsimple Crypto will, on your behalf, arrange to stake or delegate your Crypto Assets held in trust by Wealthsimple Crypto to one or more approved validators and, if and as required, Wealthsimple Crypto may, as your agent, arrange for approved validators to operate validator nodes on your behalf.
Before approving a validator, Wealthsimple Crypto conducts due diligence on the validator, with consideration for the validator’s:
infrastructure and internal control documentation;
security measures and procedures;
reputation of operating validator nodes;
use by others;
measures to operate validator nodes securely and reliably;
amount of crypto assets staked by the validator on its own nodes;
quality of work, including any slashing incidents or penalties;
financial status and insurance; and
registration, licensing or other compliance under applicable laws, particularly securities laws.
Wealthsimple Crypto periodically reviews validators for any changes to the above. Wealthsimple Crypto also monitors approved validators for downtime or slashing events and will take appropriate actions required in the event of downtime, slashing or jailing, including arranging to re-stake your Crypto Assets with different validators, if required.
As the Staking Functionality relies on third party validators and Wealthsimple Crypto’s custodians, it is subject to various risks associated with the performance of those third parties, including:
validators may be subject to regulatory or legal action that prevent them from continuing to operate validator nodes;
nodes operated by validators may be subject to unscheduled downtime as a result of denial of service or other cyber attacks, system outages or other operational issues;
validators may cease to support certain blockchain protocols;
agreements between Wealthsimple Crypto and validators may be terminated;
custodians may limit the ability of Wealthsimple Crypto to stake or delegate due to outages or other reasons;
errors in data provided by validators or custodians; and
custodians may cease to support staking.
(2) Staking Rewards Are Subject to Various Risks
Wealthsimple Crypto does not promise or guarantee you a specific staking reward rate, and there is no guarantee or assurance that you will receive any staking rewards by using the Staking Functionality.
The actual rewards that you may receive through the Staking Functionality, if any, may be affected by, among other factors:
changes in the inflation rate of the blockchain on which Crypto Assets are staked;
the total amount of Crypto Assets staked by users of the protocol;
the total amount of Crypto Assets staked by Wealthsimple Crypto clients using the Staking Functionality;
changes to the blockchain protocol as a result of protocol governance decisions;
changes to “validator commissions” set by approved validators;
scheduled or unscheduled downtime by approved validators;
halts, outages or other interruptions affecting the blockchain on which Crypto Assets are staked;
temporary outages or other interruptions affecting services provided by Wealthsimple Crypto’s custodians;
“slashing” of delegated Crypto Assets or other penalties applied to delegated Crypto Assets or staking rewards as a result of a breach of protocol rules by approved validators;
“jailing” of validators in accordance with protocol rules, resulting in delegated Crypto Assets being temporarily or permanently ineligible for staking rewards;
approved validators to which which assets were delegated ceasing to be eligible to participate in consensus and earn rewards;
warm-up, cooldown, bonding, unbonding or other lock-up periods specified by the protocol;
whether staking rewards are re-staked, either automatically by the protocol, as part of operational processes by Wealthsimple Crypto or manually by you;
re-delegation of Crypto Assets to different validators;
delays or other operational factors when delegating Crypto Assets on your behalf.
Wealthsimple Crypto may calculate and show you a historical reward rate based on rewards actually received or an estimated future reward rate. These rates do not constitute a promise, representation or forecast by WDA regarding any rewards you may receive. Historic returns and return rates are not indicative of expected or estimated return rates.
Historic reward rates will be calculated as an annualized rate based on the quantity of rewards actually received by Wealthsimple Crypto clients during a period as a percentage of the quantity of Crypto Assets staked during the same period. Historic rate will be net of fees received by validators and Wealthsimple Crypto. Estimated future reward rates will be from reputable third party sources, which may include approved validators, with adjustments for estimated fees received by validators and Wealthsimple Crypto. All historic and estimated future reward rates are as at a point in time, are subject to change and may be different from the actual reward rate you receive.
Other than, as set out below, indemnifying you for slashing penalties, Wealthsimple Crypto is not responsible for any losses (including any lost profits, lost revenues or opportunity costs) arising from or relating to any of the factors listed above.
Due to price volatility of Crypto Assets and potential illiquidity of Crypto Assets when disposing of staking rewards, your realized staking return in fiat terms may be significantly different from historic or estimated future rates expressed in Crypto Asset terms.
Different blockchain protocols may calculate and distribute rewards on a daily, weekly, monthly or other periodic basis. When you unstake your Crypto Assets during one of these periods, you may be ineligible to receive any staking rewards for that period.
Some blockchain protocols have “warm-up” or “bonding” periods during which staked Crypto Assets are not eligible for rewards. When you stake your Crypto Assets, you may not be immediately eligible to receive any staking rewards until any such periods elapse.
Wealthsimple Crypto regularly and periodically determines, for each client using the Staking Functionality during a relevant “epoch” or other period, the amount of staking rewards earned by the client during that period. The amount earned will depend on whether your Crypto Assets were staked during a period during which staking rewards were received in connection with staking by Wealthsimple Crypto clients and whether your staked Crypto Assets were eligible to earn rewards under the rules of the underlying protocol. Wealthsimple Crypto distributes your staking rewards, once received, by crediting your account accordingly.
In addition, some blockchain protocols may not distribute rewards immediately after they are earned. As a result of the volatility of Crypto Asset prices, the fiat value of staking rewards may fluctuate between the time rewards are earned and the time they are distributed to you.
Staking rewards are received and distributed in the same Crypto Asset that is staked. As a result of the volatility of Crypto Asset prices, the fiat value of staking rewards may fluctuate and the reward rate in fiat terms may be different than the reward rate in Crypto Asset terms.
Depending on the protocol, staking rewards may, or may not, be staked automatically. Where staking rewards are not staking automatically, you may need to manually delegate or stake any staking rewards earned by you.
Wealthsimple Crypto arranges to stake Crypto Assets belonging to its clients on an aggregated, not individualized, basis. For operational reasons, Wealthsimple Crypto may not be able to immediately stake or unstake your Crypto Assets when you instruct Wealthsimple Crypto to do so. As a result, the amount of staking rewards you receive using the Staking Functionality may differ from staking rewards you would receive by staking Crypto Assets from your own wallet.
(3) Custody of Staked Crypto Assets
Crypto Assets staked using the Staking Functionality are staked with approved validators from dedicated wallets with one or more of Wealthsimple Crypto’s custodians. Wealthsimple Crypto’s custodians will continue to hold the private keys or other cryptographic key material required to control staked assets for so long as the assets are staked. Custody, possession and control of staked Crypto Assets will not be transferred to validators. Your staked Crypto Assets will not leave Wealthsimple Crypto’s omnibus accounts with custodians and your Crypto Assets will continue to be attributed to your account.
To the extent there are material differences or risks relating to the custody of staked crypto assets, this is described in the Crypto Asset Statement for the asset.
(4) Bonding, Unbonding and Other Lock-up Periods
Crypto Assets staked using the Staking Functionality may be subject to technical restrictions specified by the protocol of the underlying blockchain. These restrictions, which may be referred to as warm-up, cooldown, bonding, unbonding or lock-up periods, prevent Wealthsimple Crypto from transferring your Crypto Assets during and potentially after they are staked.
Specifically, some blockchain protocols impose lock-up periods upon staking, where the Crypto Assets cannot be withdrawn until the lock-up period has elapsed. Other blockchain protocols may also impose lock-up periods when Crypto Assets are unstaked. During these lock-up periods, previously staked Crypto Assets cannot be transferred and may not continue to accrue staking rewards.
Unless otherwise stated in the Crypto Asset Statement, notwithstanding any lock-up periods that may apply to a Proof of Stake blockchain network, Wealthsimple Crypto will make commercially reasonable efforts to allow you to sell or transfer Crypto Assets immediately after unstaking them. This is subject to Wealthsimple Crypto having sufficient liquid crypto assets necessary for it to fulfill client instructions to sell or transfer Crypto Assets. As a result, you may be unable to sell or transfer previously staked Crypto Assets until applicable lock-up periods elapse. Due to the volatility of Crypto Asset prices, staked Crypto Assets may decline in value while lock-up periods are in effect.
(5) Slashing and Jailing
Certain Proof of Stake protocols impose penalties where a validator fails to comply with protocol rules. This penalty is often referred to as “slashing”. If a validator is “slashed”, a percentage of the tokens staked with that validator is permanently lost. Accordingly, if a validator fails to comply with protocol rules, a percentage of the assets staked by you may be lost.
Validators may also be temporarily or permanently “jailed”, that is, they will not be selected to participate in transaction validation and will not be eligible to earn staking rewards.
To mitigate the risk of slashing or jailing, Wealthsimple Crypto:
as set out above, conducts due diligence on selected validators regarding their security and reliability;
stakes client assets with multiple validators, where feasible, so that a slashing penalty or jailing of a selected validator does not affect all staked assets and Wealthsimple can, if appropriate, re-stake client assets with alternative validators, and
secures indemnities from validators, where feasible, to compensate Wealthsimple Crypto clients for slashing losses.
In certain circumstances, Wealthsimple Crypto will indemnify you against slashing penalties, that is, a reduction of your staked Crypto Assets on account of slashing. Upon becoming aware of a slashing penalty affecting your assets, Wealthsimple Crypto will promptly replace your slashed Crypto Assets.
Wealthsimple Crypto will not indemnify you for any consequential losses or opportunity costs due to slashing or jailing, i.e., a loss of opportunity to earn staking rewards because staked assets were slashed or a selected validator was jailed.
Additional information regarding any protocol-imposed penalties, the availability and any restrictions or limits on Wealthsimple Crypto’s indemnification against slashing penalties and how slashing penalties will otherwise be allocated to your assets are disclosed in the relevant Crypto Asset Statement.
(6) Tax Matters
Canadian tax authorities have not published any guidance regarding the application of sales or income taxes to staking rewards. As a result, the tax treatment of staking rewards earned using the Staking Functionality may be unclear. You should consult a qualified tax professional or otherwise obtain advice regarding the tax implications of using the Staking Functionality.
(7) Conflicts of Interest
Please refer to Wealthsimple’s Conflicts of Interest Disclosure.
(8) Applicable Fees or Other Charges
Wealthsimple Crypto charges a fee for using the Staking Functionality based on the rewards earned by you. Please refer to Wealthsimple Crypto’s Fee Schedule for further details.
In addition, staking rewards may be subject to charges set by approved validators to which Crypto Assets are delegated. This charge is set by each approved validator and deducted automatically before rewards are received by Wealthsimple Crypto for distribution to you. These charges may vary by approved validator and Crypto Asset. For information on the amount of these charges, if any, refer to the Crypto Asset Statements.
Last Updated: September 7, 2022