Crypto Asset Statement - Ethereum

About this Statement

Coinsquare Capital Markets Inc. (“Coinsquare”) is offering crypto contracts to purchase and sell Ethereum in reliance on a prospectus exemption granted by the Canadian Securities Administrators (CSA) in the exemptive relief decision dated October 12, 2022. The statutory rights of action for damages and the right of rescission in section 130.1 of the Securities Act (Ontario) and similar legislation in the other CSA jurisdictions do not apply in respect of a misrepresentation in this statement to the extent that a crypto contract is distributed under the above-noted prospectus relief.

No securities regulatory authority in Canada or any other jurisdiction has expressed an opinion about any of the crypto assets (or crypto contracts) that are available through Coinsquare’s platform, including an opinion that the crypto assets are not themselves securities and/or derivatives.

Coinsquare has compiled the information contained in this Crypto Asset Statement to the best of its ability based on publicly available information. Coinsquare is providing this Crypto Asset Statement on an “as is” basis and makes no representation or warranty as to accuracy or completeness of the contents.

About Ethereum

Ethereum is a blockchain platform, which is open-source, that has its own cryptocurrency, called ETH (or Ether). The Ethereum Network is often used for the creation and transaction of ERC20 tokens, controlled by parties outside of the Ethereum development team. ERC20 refers to a scripting standard that dictates a number of rules and actions that an Ethereum token or smart contract must follow and steps to be able to implement it. Additional standards exist for NFTs and other token types on the Ethereum network. Ethereum’s cryptocurrency Ether is currently second in value to Bitcoin.

Vitalik Buterin created Ethereum after developers weakened his beloved World of Warcraft character. “On that day I realized what horrors centralized services can bring,” he wrote on his tell-all blog. He eventually launched ethereum at 21 years old in 2015. The platform was created to allow developers to build and publish smart contracts and decentralized applications, which may be used without the risk of any fraud, downtime, or interference by a third party due to its decentralized nature.

Risks

As with all assets, investing in Ethereum is not without some general risks. Many of these risks are identified and explained in our Risk Statement. In addition to the general risks, we outline some risks that are specific to Ethereum below. While we make an effort to identify every source of risk, we encourage you to do your own research and ensure you are comfortable investing in Ethereum.

Vitalik Buterin’s Influence on the Ethereum Network

As the creator of Ethereum, Vitalik Buterin had significant control of Ethereum in its early stages. Even as the network grew and became increasingly decentralized through distributed token ownership, node dispersion, and distributed development, Vitalik’s vision typically remained influential and guided most changes to the network. Recently, Vitalik has claimed that his influence on the network is diminishing, indicating increased decentralization. However, the diminishing influence also means that changes to the Ethereum network are slower and take more persuasion of various parties.¹ Slower changes could lead to delays in important developments in the Ethereum network. Conversely, significant influence from a single entity shows signs of centralization and could be harmful to the network if that entity ever acts in a way that is not in the best interests of the network. Both scenarios have impacts for the network and ETH’s token value, and should be considered by investors.

Planned Ethereum Upgrades (Ethereum 2.0)

Part of Vitalik Buterin’s vision for Ethereum is a phased upgrade to proof-of-stake consensus, increasing throughput and scalability of the network. This plan was originally named Ethereum 2.0, but has recently been rebranded as Ethereum Upgrades by the Ethereum Foundation.² These upgrades are very complex and require considerable development from contributors to the Ethereum ecosystem. Additionally, different layer 2 solutions are being developed by organizations like Polygon, Loopring, Arbitrum, Optimism, and others, to provide solutions to increase the throughput of Ethereum and reduced fees through sidechains, zero-knowledge rollups, and optimistic rollups. Eventually, some of these layer 2 solutions will be adopted and integrated into the Ethereum network through sharding, which will break the Ethereum chain into multiple shards. However, the planned upgrades have experienced significant delays. Originally, the upgrades were expected to complete in June 2022, however the network is still in the early stages of upgrading the network and has revised completion to sometime in 2023 or 2024.^{2, 3} These significant delays may impact market sentiment and ETH token price as other networks with superior throughput and lower fees continue to consume market share from Ethereum. Investors should be mindful of the timeline and roadmap for Ethereum Upgrades when evaluating ETH.

Additionally, as described, the planned upgrades to the Ethereum are significant and extensive. The introduction of proof-of-stake consensus, protocol changes to enhance security, and eventual sharding to integrate scaling solutions introduces multiple sources of complexity to the Ethereum network and its code. To combat this, Ethereum developers have been actively working to de-complexify these concepts and develop solutions that allow upgrades with the least amount of technical complexity possible.4 However, investors should consider that all of the upgrades to Ethereum, and the forks that will be necessary to implement them, will introduce more complexity to the Ethereum network which could have an effect on it’s usability, it’s market sentiment, and ultimately its token price.

Coinsquare’s Due Diligence for Digital Assets

To be made available for trading on Coinsquare’s platform, a digital asset must pass the following due diligence reviews:

Coinsquare Securities Law Assessment
Coinsquare Digital Asset Security Audit
New Digital Asset Business Case

Coinsquare undertakes these three levels of due diligence in order to determine whether the digital asset is compliant with our legal and regulatory obligations, is secure, and has historical data supporting a beneficial business case. Coinsquare’s New Product Committee must provide final approval for a new digital asset to be made available on the platform.

References:

Fredrik Vold. “Vitalik Buterin Says His Influence Over Ethereum Diminishing, Harder to Make Things Happen.” Cryptonews. April 20, 2022. https://cryptonews.com/news/vitalik-buterin-says-his-influence-over-ethereum-diminishing-harder-to-make-things-happen.htm
Ethereum. “Upgrading Ethereum to radical new heights” https://ethereum.org/en/upgrades/
Jon Southurst. “Ethereum Forever: New protocol launch delayed once again.” Coingeek. April 14, 2022. https://coingeek.com/ethereum-forever-new-protocol-launch-delayed-once-again/
Vitalik Buterin. “The roads not taken.” Vitalik. March 29, 2022. https://vitalik.ca/general/2022/03/29/road.html

Published Date: July 22, 2022

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Property as prescribed in the Coverage Policy of the Canadian Investor Protection Fund (CIPF) that is held in customers’ accounts, including cash balances but not crypto assets, is protected by CIPF within specified limits. A brochure describing the nature and limits of coverage is available upon request or at https://www.cipf.ca.