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.
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.
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.
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 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.
Note that CCML only supports MATIC as an ERC20 token on the Ethereum Mainnet (Layer 1). 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.
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.
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
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.
As with staking any crypto asset, staking MATIC is not without risk. Many of the risks of staking MATIC 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 MATIC below.
As Polygon is a layer-2 scaling solution for the Ethereum Network, MATIC is staked as an ERC20 token within Polygon’s infrastructure on the Ethereum mainnet. The Polygon network’s proof-of-stake (PoS) system allows the creation of new validators or for MATIC holders to delegate their tokens to be staked with an exisiting validator. When you stake your MATIC tokens with Coinsquare, they are delegated to validator(s) that are operated by Figment, via our custodian BitGo.
Staking rewards are computed and distributed after each successful checkpoint submission. If a reward is accrued after a checkpoint submission, it will be issued in the first block of the following checkpoint. 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 MATIC rewards is proportionate to the amount of MATIC that you had staked when the checkpoint 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. Coinsquare’s service fee may be up to 30% of net rewards earned by a user (as more fully described in our fee schedule https://coinsquare.com/en-ca/ccml-fs/).
Coinsquare receives MATIC rewards from its Custodian, BitGo, with a portion of the rewards (7-8%) already removed on-chain. This means that a portion of BitGo’s fees are not removed on-chain from the total amount earned by the validator before the net amount is distributed to CCML, which is unlike most of the other assets offered for staking through the Coinsquare platform. CCML removes the remaining fee (1-2%) as per our agreement with BitGo, then also removes the CCML fee as explained below, and distributes the remaining amount proportionally to each user that had assets staked for the entirety of the period in which the rewards were earned. BitGo’s fees equate to 9% of the gross rewards.
With respect to any rewards earned on your staked MATIC: (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 Services Fees”); 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.
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.
Validators miss out on MATIC rewards if they fail to participate when called upon, and their existing stake can be destroyed if they behave dishonestly.
Coinsquare may, at its sole discretion, transfer reimbursements for slashing penalties it receives from BitGo to its users less any administrative costs or expenses Coinsquare incurs in reimbursing users. In the event a supported Polygon validator is slashed, Coinsquare has no obligation to replace any lost MATIC or otherwise provide any compensation for any losses. Negative impacts of slashing will be allocated to all clients using the staking service in proportion to the amount of MATIC they had staked.
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.
