Coinsquare Capital Markets Inc. (“Coinsquare”) is offering crypto contracts to purchase and sell Cardano 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.
Cardano is a proof-of-stake blockchain built on the Ouroboros proof-of-stake consensus protocol, and developed using the Haskell programming language: a functional programming language that enables Cardano to pursue evidence-based development, for security and stability. Founded in 2015 by Ethereum co-founder Charles Hoskinson, Cardano is known for its high transactions-per-second and for its energy efficiency. ADA is the native token of Cardano.
As with all assets, investing in Cardano is not without some general risks. Many of these risks are identified and explained in our Risk Statement.
The relevant sections in the Risk Statement are as follows:
Platform Risk, Short History Risk, Price Volatility, Potential Decrease in Global Demand for Digital Assets, Potential for Illiquid Markets, Transfers of Digital Assets are Irreversible, Concentration Risks, Uncertainty in Regulation, Financial Institutions May Refuse to Support Transactions Involving Digital Assets, Digital Assets’ Blockchain May Temporarily or Permanently Fork and/or Split, Cyber-Security Risk, Airdrops, Issues with Cryptography Underlying Digital Asset Networks, Internet Risk, Open Loop System, Risk if Entity Gains a 51% Share of Digital Asset Network, Possible Increase in Transaction Fees, Possible Increase in Service Fees, Limited Canadian Investor Protection Fund Account, No Voting Rights, Custody of Digital Assets, Custody Risk Insurance, Threats to Coinsquare’s Physical Assets, Covid-19 Outbreak, Use of Leverage, Halting, Suspending, and Discontinuing Digital Assets.
In addition to the general risks, we outline some risks that are specific to Cardano 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 Cardano.
Cardano’s genesis block distributed over 5 billion ADA to three entities: IOHK, EMURGO, and Cardano Foundation. These 5 billion tokens amounted to approximately 16.7% of the initial supply. These three entities were identified as part of the Technical and Business Development Pool in the Cardano ecosystem.1
The Cardano development team has announced that the Vasil Hard Fork will occur in June 2022.2 Cardano’s founder, Charles Hoskinson, has described it as a major hard fork combinator event that will contain pipelining, which will be a massive performance improvement for Cardano. The Vasil Hard Fork will bring multiple scaling solutions to the network, such as new Plutus CIPs, Hydra, and UTXO on-disk storage.3 The team has said that these improvements will boost Cardano’s throughput and optimize the system to support an increasing range of decentralized finance (DeFi) apps, smart contracts, and DEXs. It is important that investors consider this hard fork when evaluating Cardano, as forks in other networks have sometimes affected asset price and potentially caused rifts in development teams and network nodes despite the improvements that they may bring.
As with staking any crypto asset, staking ADA is not without risk. Many of the risks of staking ADA are explained in our Risk Statement https://coinsquare.com/en-ca/ccml-rsa/
in the following sections:
What is Staking, How Does Coinsquare Help You Earn Staking Rewards?, Validators, Custody, Slashing, Unbonding Periods, Rewards, Fees, Risks Related to Staking, Reliance on third party vendors, Slashing and missed rewards, Due diligence on validators may be insufficient, Illiquidity during unbonding periods, Due diligence on Digital Assets may be insufficient, Short History risk.
In addition to these general staking risks, we outline some information and risks that are more specific to ADA below.
The Cardano Network uses stake pool delegation, which is essentially a voting and reputation system to secure the network and validate transactions. Stake pool delegation relies on stake pools to verify transactions included in each new block. Stake pools are incentivized with ADA rewards in exchange for verifying transactions. To ensure compliance with the protocol rules, validators must “stake” assets, thus risking the loss of staked rewards should the stake pool fail to comply with the rules of the blockchain.
Stake pool delegation allow for users to participate in staking without operating a node. Instead, holders may delegate the right to stake their assets to a stake pool. These staked assets do not leave the holder’s wallet as delegation only permits the stake pool to stake the owner’s assets on their behalf. As stake pools amass larger amounts of stake delegations from different token holders, this acts as “proof” to the network that the stake pools’ consensus votes are trustworthy. Once a stake pool verifies a block of transactions, subject to any fees charged by the stake pool, the stake pool and all of its delegators split the ADA reward proportionally to each delegator’s share of all assets delegated to the stake pool.
Coinsquare provides staking functionality for users in respect of ADA, allowing users to delegate their ADA to approved validators and earn the applicable staking rewards. However, there are various risks associated with staking and such risks are in addition to the generalized risks pertaining to ADA described below, all of which continue to apply to ADA staked through the Coinsquare platform.
Stake pools are node operators that verify the accuracy of data being recorded on the network. Stake pools are rewarded with newly issued ADA and the reward is based on the current inflation rate, the total number of ADA staked on the network and the blocks verified by the stake pool. Stake pools also charge a commission which is deducted before any rewards are distributed to the holders of staked ADA. Each time rewards are issued, the commission is deposited in the stake pools account and the remaining rewards are simultaneously deposited in all of the stake accounts that are delegated to that stake pool, proportionally to the amount of actively delegated stake in each account.
Currently, the third-party service provider we use is our custodian, BitGo. BitGo is regulated as a trust company under the Division of Banking in South Dakota. Pursuant to Coinsquare’s relationship with BitGo, BitGo may act as the validator in respect of staked crypto assets or may select a third-party service provider to act as the validator. BitGo currently has a contractual relationship with Figment, whereby Figment acts as validator for the crypto assets stored in Coinsquare’s custodial wallets with BitGo. Headquartered in Toronto, Figment is one of the world’s largest blockchain infrastructure and services providers.
Each epoch lasts roughly five days.
When you delegate ADA, the delegated ADA is not eligible to earn staking rewards until the completion of the 5 epoch bonding period. ADA is not subject to an unboding period.
The Cardano networks computes and distributes staking rewards once per epoch. If a reward is accrued in a given epoch, it will be issued in the first block of the following epoch. When rewards are received by Coinsquare, Coinsquare will provide statements to users indicating the amount of the rewards that the user is entitled to as well as the total rewards that were earned and any fees payable. For each epoch, your share of ADA rewards is proportionate to the amount of ADA that you had staked when the epoch began.
Coinsquare’s staking service is designed to automatically stake any rewards (“auto re-staking”) that are earned by clients through the staking service. This means that when rewards are distributed to any client account, those rewards immediately enter that network’s bonding period. Once the bonding period is complete, the rewarded amount joins the pre-existing staked balance to earn rewards through the staking service. Currently, Coinsquare does not offer the ability for clients to opt out of the reward auto re-staking mechanism. However, if a client withdraws enough of their staked balance, causing the total staked amount to fall below the minimum stake amount for that asset, no rewards earned from then onwards will be automatically staked and instead will be credited to the client’s unstated holdings. Any assets that were in the bonding period when the staked amount fell below the minimum amount will enter the unbonding period immediately upon completing the bonding period, after which it will be added to that client’s unstaked holdings.
The estimated rewards percentage that appears throughout the Coinsquare app is a calculated annual percentage yield (APY) rate, which is derived from an APY rate that reported to us from our Staking partner, BitGo. The reported rate is then reduced by Bitgo’s fee and Coinsquare’s fee, leaving the estimated rewards percentage that is displayed to in the app. The displayed rate is approximately what you can expect to earn by staking the asset, but is subject to fluctuations based on various factors for each network. Coinsquare evaluates the net rewards paid to clients against the calculated and displayed estimated rewards percentage on an ongoing basis, at least quarterly.
Each crypto asset for which Coinsquare provides staking services is subject to specific fees because of the unique nature of each blockchain network. These fees are calculated on a percentage basis in relation to the amount of rewards earned (as more fully described in our fee schedule https://coinsquare.com/en-ca/ccml-fs/).
Coinsquare receives net rewards from its Custodian, BitGo. This means that BitGo’s fees of 9% of gross rewards are removed on-chain from the total amount earned by the validator before the net amount is distributed to CCML. CCML then takes the amount received, removes the fee as explained below, and distributes the remaining amount proportionally to each user that had assets staked for the entirety of the epoch in which the rewards were earned.
With respect to any rewards earned on your staked ADA: (i) Coinsquare’s custodian, BitGo, will be entitled to a fee (as described above) and may pay a portion of that fee to any third-party service provider it selects to act as validator; (ii) any remaining portion of the rewards (the “Net Rewards”) will be delivered to one of Coinsquare’s custodial wallets with BitGo; (iii) Coinsquare will be entitled to a fee of up to 30% in respect of the Net Rewards (the “Coinsquare Service Fee”); and (iv) after the Coinsquare Service Fee has been paid, your account will be credited with any remaining portion of the rewards, and, subject to any unbonding, lock-up or cooling-down period, you will be able to hold, sell or withdraw your rewards.
ADA is staked from dedicated accounts held with BitGo, our custodian. BitGo will continue to hold the private keys required to control ADA held in these accounts.
To be made available for trading on Coinsquare’s platform, a digital asset must pass the following due diligence reviews:
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.
