Crypto Asset Statement

Crypto Asset Statement - Solana

About this Statement

Coinsquare Capital Markets Inc. (“Coinsquare”) is offering crypto contracts to purchase and sell Solana in reliance on a prospectus exemption granted by the Canadian Securities Administrators (CSA) in the exemptive relief decision dated July 22, 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 Solana

In late 2017, founder Anatoly Yakovenko published a whitepaper draft detailing a new timekeeping technique for distributed systems called Proof of History (PoH). In blockchains like Bitcoin and Ethereum, the time required to reach a consensus on the order of transactions is a limitation for scalability. Anatoly believed his new technique could automate the transaction ordering process for blockchains, leading to the origin of the scale-friendly Solana. The founding team included former Apple engineers in addition to some Qualcomm veterans. They initially named the project Loom but later rebranded it to Solana to avoid confusion with the Ethereum Layer-2 scaling solution, Loom Network.

Risks

As with all assets, investing in Solana 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 Solana 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 Solana.

Centralization of Solana Network

Solana appears to be far more centralized in comparison to other networks and blockchains, as all governance and decision-making on the Solana ecosystem appears to be controlled by the Solana Foundation and Labs. Typically, most networks employ community or token voting (governance) systems. This could lead to risks in the decisions made solely by the foundation working against the best interest of some individuals. However, Solana insiders own over 48%, and the Solana Foundation owns 13% of the entire supply of Solana, giving it complete majority control over voting or network validation.^{1, 2}

Additionally, in July 2022, an American investor filed a class action lawsuit claiming that the Solana Foundation, Anatoly Yakovenko, Solana Labs, Multicoin Capital, and FalconX profited from the sale of an unregistered security, in reference to SOL token. The lawsuit claims that insiders were able to dump their holdings to retail investors for a profit and also explains that the centralized nature of the Solana network was hidden to mislead investors.² Investors should consider the centralization of the Solana network, and the pending lawsuit, when evaluating SOL.

Solana Network’s History of Outages and Issues

Over the past two years, Solana’s network has experienced numerous instances of network outages. From January to June 2022, the network saw five separate instances of outages with varying durations. Numerous outages have had notable negative effect on market sentiment toward Solana, which has been reflected in declines in SOL token price following some outages.³

Additionally, in 2022, Solana was evaluated and ranked as the second worst DeFi protocol out of over 240 different protocols analyzed by DeFi Safety. The report claimed that Solana’s poor node infrastructure contributes to its frequent outages, and that improper handling of archival node information, poorly designed block explorers, and unaudited node clients (software) with less diversity than competing blockchains also contributed to Solana’s abysmal ranking.⁴ Investors should consider the propensity for and history of network outages when evaluating Solana.

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:

Timothy Craig. “How Decentralized is Solana?” Crypto Briefing. October 16, 2021. https://cryptobriefing.com/how-decentralized-is-solana/
Oluwapelumi Adejumo. “Solana sued for being ‘centralized,’ ‘security’.” Crypto Slate. July 13, 2022. https://cryptoslate.com/solana-sued-for-being-centralized-security/
Martin Young. “Reliably unreliable: Solana price dives after latest network outage.” Coin Telegraph. June 2, 2022. https://cointelegraph.com/news/reliably-unreliable-solana-price-dives-after-latest-network-outage
Sujith Somraaj. “Solana Challenges Poor Safety Rating From DeFi Watchdog.” Decrypt. June 9, 2022. https://decrypt.co/102416/crypto-ratings-project-defi-safety-downgrades-solana-infrastructure-concerns

Published Date: July 22, 2022

FINTRAC Registered

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.