Crypto Asset Statement - Polygon

About this Statement

Coinsquare Capital Markets Inc. (“Coinsquare”) is offering crypto contracts to purchase and sell Polygon 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 Polygon

In February 2021, Ethereum layer 2 scaling solution Matic Network rebranded as Polygon – an interoperable blockchain scaling framework for building Ethereum-compatible blockchains. It seeks to address some of Ethereum’s major limitations, including its transaction speed, high gas fees, and lack of community governance – all using a novel sidechain solution. The MATIC token is used in the Polygon ecosystem, including participating in network governance by voting on Polygon Improvement Proposals (PIPs), contributing to security through staking, as well as paying gas fees.

Risks

As with all assets, investing in Polygon 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 Polygon 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 Polygon.

Polygon Network’s dependance on the Ethereum Network

The Polygon Network is a combination of multiple layer 2 scaling solutions, built on top of the Ethereum blockchain, for the purpose of increasing transaction throughput and decreasing transaction fees on Ethereum Mainnet, and is consequently highly dependent on the sustained health of the Ethereum network.¹ Any fundamental deficiencies in the Ethereum network could have downstream impacts on Polygon and its market capitalization.

MATIC token reliance on multiple networks

Although MATIC was initially offered only as an ERC20 token on Ethereum Mainnet, it was subsequently made available as a token on it’s own (Polygon) network, a BEP20 token on BNB Network, a token on Solana Network, and recently as a token on the Moonbeam network.² Consequently, the supply of MATIC is distributed among these various networks, meaning that the integrity of MATIC token is dependent on the stability and security of these different blockchain systems. Any fundamental issues in any of these networks could impact MATIC’s market sentiment, market cap, and token price.

Concentration of Polygon (MATIC) holdings

Most of the current MATIC supply is held by Polygon’s founders and developers, meaning they hold an unbalanced weight on voting power, which could lead to potentially biased voting. Research shows that 100 wallet addresses hold almost 90% of all MATIC in circulation, however it is unclear how many of those wallets belong to large exchanges or industry service providers (e.g. custodians).³

Unclear status of Ethereum 2.0 and the implications for layer 2 scaling solutions

Polygon’s purpose is to provide access to Ethereum Mainnet with increased speed, increased throughput, and reduced costs. Polygon has multiple projects that aim to provide scaling solutions through various techniques such as sidechains, and zero-knowledge rollups. Polygon, along with multiple other scaling solutions, are contributing to the vision of an “Upgraded Ethereum” (formerly known as Ethereum 2.0). In the current plan for Upgraded Ethereum, sharding (the phase that integrates layer 2 solutions) is planned for 2023. However, the timeline is dependent on the speed of work after the merge phase, which precedes sharding.⁴ The uncertainty around the timeline of sharding implementation may impact Polygon’s market capitalization and MATIC token price, as investors may lose patience with delays to Upgraded Ethereum.

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:

Sungyu Kwon. “What is Polygon?” Benzinga. March 14, 2022. https://www.benzinga.com/money/what-is-polygon/
CoinMarketCap. “Polygon (MATIC).” https://coinmarketcap.com/currencies/polygon/
Cryptorank.io. “Polygon Top Holders.” https://cryptorank.io/price/matic-network/holders
Ethereum. “Sharding.” June 22, 2022. https://ethereum.org/en/upgrades/sharding/

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.