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 Crypto 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 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 risk of trading in Crypto Assets. Trading in Crypto Assets may not be suitable for certain 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.

Introduction

WDA believes that its customers should be aware of the risks involved in the purchase, sale 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.

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, and they are traditionally more volatile than fiat currencies. 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 in North America is still developing. Crypto Assets differ in their functions, structures, governance and rights. Wealthsimple permits the trading of well established Crypto Assets that function as a form of payment or means of exchange on a decentralized network, such as bitcoin and ether. 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.

Risks in Trading Crypto Assets

The following is a brief summary of some of the risks connected with trading Crypto Assets.

(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 Asset 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 like bitcoin and ethereum. 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.

(2) Volatility in the Price of Crypto Asset 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.

(3) Potential Decrease in Global Demand for Crypto Assets

Crypto Assets represent a new form of digital value that is still being digested by society. Their underlying value is driven by their utility as a store of value, means of exchange, or unit of account. Just as oil is priced by the supply and demand of global markets, as a function of its utility to, for instance, power machines and create plastics, so too is a Crypto Asset priced by the supply and demand of global markets for its own utility within remittances, B2B payments, time-stamping, etc. Speculators and investors using Crypto Asset as a store of value then layer on top of means of exchange users, creating further demand. If consumers stop using Crypto Asset as a means of exchange, or its adoption therein slows, then the price may suffer. Investors should be aware that there is no assurance that Crypto Assets will maintain their long-term value in terms of purchasing power in the future or that the acceptance of Crypto Asset for payments by mainstream retail merchants and commercial businesses will continue to grow. While the value of bitcoin may be derived primarily from its capitalization and position as first mover, the value of ether relies far more on its underlying blockchain technology. 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.

(4) The Blockchains on which Crypto Assets operate may Temporarily or Permanently Fork

Both the bitcoin and ethereum 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 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 a Crypto Asset available on our platform, in which case you may not have any rights to a new Crypto Asset that may be created as a result of that fork.

(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. This could negatively affect the value of Crypto Assets traded with Wealthsimple Crypto.

(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 or influence the enforcement of rules that apply to Crypto Asset activities that occur in other jurisdictions. 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.

(7) Concentration Risks

Certain addresses on the bitcoin and ethereum blockchain networks hold a significant amount of the currently outstanding bitcoin and ether, respectively. If one of these addresses were to exit their bitcoin or ether positions, it could cause volatility that may adversely affect the price. Further, if anyone gains controls over 51% of the computing power (hash rate) used by the blockchain network, they could use their majority share to double spend their Crypto Assets. If such a “51% attack” were to be successful, this would significantly erode trust in public blockchain networks like bitcoin and ethereum to store value and serve as a means of exchange, which may significantly decrease the value of Crypto Assets.

(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 transaction 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 your order is either not executed according to your instructions, or 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 the 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 the 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. Like with operational risk in general, WDA has established risk management systems designed to reduce the risks associated with cyber security.

(10) Closed Loop 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 pursuant to the contract, may constitute a security or derivative. In particular, the contract you sign with WDA enables you to buy, sell and hold Crypto Assets without the need for you to receive and custody your Crypto Assets in your own private wallet. We refer to this as a “closed loop” system. We believe that a closed loop system significantly reduces the likelihood of user error in sending or receiving Crypto Assets to incorrect wallet addresses. However, a closed loop system may also expose you to insolvency risk (credit risk), fraud risk or proficiency risk on the part of WDA or the custodian designated to custody your Crypto Assets.

(11) Lack of Investor Protection Insurance

Crypto Assets purchased and held in an account with Wealthsimple Crypto are not protected by the Canadian Investor Protection Fund, the Canadian Deposit Insurance Corporation or any other investor protection insurance scheme.

(12) 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 set in part by the fees charged to us by our third-party liquidity providers and custodian, which are subject to change.

Last updated August 4, 2020.