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 (WDA) to buy, sell, transfer and hold Crypto Assets. 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 or transferring Crypto Assets.
Please refer to WDA’s Client Relationship Disclosure for a more detailed description of this relationship. Until such time as WDA provides you with 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 in Crypto Assets may not be suitable for all members of the public. You should carefully consider whether trading is appropriate for you in light of your knowledge, experience, financial objectives, financial resources and other relevant circumstances.
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 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 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. This risk 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
Blockchain networks are powered by open source software. When a modification to that software is released by developers, and a substantial majority of miners 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 that integrate with Ethereum 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.
(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 to buy and sell 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 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
Although WDA does not charge a commission fee, there are certain costs built into the spread offered on 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 Help Centre 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. For example, certain blockchains use a consensus mechanism to achieve distributed consensus called Proof of Stake or Delegated Proof of Stake. In these blockchains, the associated token must be “staked” in connection with the ordering of transactions and creation of new blocks so that all nodes can agree on the state of the network. Token holders who stake tokens receive additional tokens created by the network. 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.
At such time as Wealthsimple Crypto provides you with functionality to transfer Crypto Assets to and from your Wealthsimple Crypto account, you will 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. 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. 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. Last Updated: September 13, 2021