This risk statement is presented to you at the time of opening your account, is incorporated by reference into terms and conditions of use (the “Terms”) for the crypto trading platform (the “Platform”) operated by Bitbuy Technologies Inc. (“Bitbuy” or “we”) and is available to you on our website and mobile application. This risk statement provides a summary of certain risks you should take into account when deciding whether to trade or stake crypto assets. In doing so, it provides a broad description of what is meant by the terms “crypto assets”, “crypto contracts” and “staking”. Pursuant to the Terms, users are also required to acknowledge that they have read and understood the individual crypto asset statements published on Bitbuy’s website, which describe each crypto asset that Bitbuy makes available for trading on the Platform.
By opening an account on the Platform, you are acknowledging having received, read and understood this risk statement. Although this risk statement highlights a number of material risks associated with the purchase and sale of crypto assets, it does not purport to capture all of the risks associated with this asset class. The crypto assets that you purchase will be held for you in a pooled account that is in the name of Bitbuy at a third-party custodian. As such, there is a risk you will not be able to successfully obtain direct possession of the crypto assets and a risk that the assets in this pooled account will not be sufficient to ensure that you receive the value of your interest in the crypto assets. Please refer to the Terms (including the other schedules attached thereto) for a more detailed description of your relationship with Bitbuy and the Platform.
Trading in crypto assets may not be suitable for certain members of the public. You should carefully consider whether trading in crypto assets is appropriate for you in light of your knowledge, experience, financial objectives, financial resources and other relevant circumstances.
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 the Platform, including an opinion that the crypto assets are not themselves securities and/or derivatives.
Bitbuy is offering crypto contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Bitbuy Technologies Inc. dated November 30, 2021 (the “Decision”). 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 provinces and territories of Canada would not apply in respect of a misrepresentation in this statement or any of the descriptions of the crypto assets made available on the Platform published on Bitbuy’s website.
In broad terms, crypto assets are decentralized digital currencies that enable instant transfers of value to anyone, anywhere in the world. Transactions occur via an open source, cryptographic protocol platform which uses peer-to-peer technology intended to operate with no central authority. The associated network is generally comprised of an online, peer-to-peer network that hosts the public transaction ledger, known as the blockchain; and each crypto asset with a source code that comprises the basis for the cryptographic and algorithmic protocols governing the blockchain. No single entity owns or operates the network, the infrastructure of which is collectively maintained by a decentralized user base. As the network is decentralized, it does not rely on either governmental authorities or financial institutions to create, transmit or determine the value of the crypto assets transmitted through the network. Rather, the value of a crypto asset is determined by the market supply of and demand for the crypto asset, the prices set in transfers by mutual agreement or barter as well as the number of merchants that accept the crypto asset. Crypto assets can be used to pay for goods and services or can be converted to fiat currencies, such as the Canadian dollar, at rates determined by various crypto asset trading platforms.
The Canadian Securities Administrators (“CSA”) has provided guidance that the contractual relationships entered into by Bitbuy and its users in connection with their purchase and sale of crypto assets using the Platform constitute “crypto contracts.”
Pursuant to the Joint Canadian Securities Administrators and Investment Industry Regulatory Organization of Canada Notice 21-329 – Guidance for Crypto Asset Trading Platforms: Compliance with Regulatory Requirements (“CSA SN 21-329”), the term “crypto contract” is used by the CSA to refer to “a contractual right or claim to an underlying crypto asset” in situations where a crypto trading platform “only requires users to transfer ownership, control and possession from the Platform’s wallet to the user’s private wallet upon the user’s later request.”
Based on Bitbuy’s understanding of CSA SN 21-329, the contractual relationships entered into by Bitbuy and its users in connection with their purchase and sale of crypto assets using the Platform may constitute “crypto contracts.”
Bitbuy allows and encourages users to withdraw crypto assets purchased on the Platform to their own private wallets. However, Bitbuy recognizes that certain users may desire the convenience of relying on Bitbuy’s third party custodial solutions. If at any time a user decides that it no longer wishes to rely on these solutions, the user may request that Bitbuy transfer the user’s crypto assets to the user’s private wallet.
The following is a summary of some of the risks connected with trading on the Platform.
Investing in crypto assets is speculative, prices are volatile and market movements are difficult to predict. Supply and demand for crypto assets can change rapidly and is affected by a variety of factors, including regulation and general economic trends. The markets for crypto assets have experienced much larger fluctuations than other markets, and there can be no assurances that erratic swings in price will slow in the future. Several factors may affect the price and volatility of crypto assets, including, but not limited to: (i) global demand for crypto assets, depending on the acceptance of crypto assets by retail merchants and commercial businesses; (ii) the perception that the use, holding and trading of crypto assets is safe and secure, and the related lack of or inconsistency in regulatory restrictions, particularly across various jurisdictions; (iii) conversely, heightened regulatory measures restricting the use of crypto assets as a form of payment or the purchase of crypto assets; (iv) investor’s expectations with respect to the rate of inflation; (v) interest rates; (vi) currency exchange rates, including exchange rates between crypto assets and fiat currency; (vii) fiat currency withdrawal and deposit policies on crypto asset trading platforms and liquidity on such crypto asset trading platforms; (viii) interruption of services or failures of major crypto asset trading platforms; (ix) general governmental monetary policies, including trade restrictions and currency revaluations; and (x) global or regional political, economic or financial events and situations, including increased threat or terrorist activities. The value of the crypto assets held by users could decline rapidly in future periods, including to zero.
Bitbuy allows and encourages users to withdraw crypto assets purchased on the Platform to their own private wallets. However, Bitbuy recognizes that certain customers may desire the convenience of relying on Bitbuy’s third party custodial arrangements. If you do not withdraw your crypto assets to a personal wallet, Bitbuy stores the crypto assets that you own with BitGo Trust Company (“BitGo”), a third-party custodian, or in online (or “hot”) wallets secured by software provided by Fireblocks Inc. BitGo is regulated as a trust company under the Division of Banking in South Dakota.
The holding of your crypto assets with a third-party custodian may increase certain risks when compared to you holding your assets on a private wallet. In particular, you may be exposed to insolvency risk (credit risk), fraud risk or proficiency risk on the part of Bitbuy. You may also face risk in permitting Bitbuy to have access to crypto assets owned by you that are held with BitGo, in the event that crypto assets could be accessed improperly and misused.
Access, loss or theft
There is a risk that some or all of your holdings of crypto assets could be lost, stolen, destroyed or rendered inaccessible, potentially by the loss or theft of the private keys held by the custodian associated with the public addresses that hold users’ crypto assets and/or the destruction of storage hardware. Because of the decentralized process for transferring crypto assets, thefts can be difficult to trace, which may make crypto assets a particularly attractive target for theft. The Platform has adopted security procedures intended to protect users’ assets, but there can be no assurance that those procedures will be successful in preventing such loss, theft or restriction on access. Access to users’ crypto assets could be restricted by natural events (such as an earthquake or flood) or human actions (such as a terrorist attack). Users’ crypto assets held in custody accounts will likely be an appealing target for hackers or malware distributors seeking to destroy, damage or steal crypto assets or private keys.
No storage system is impenetrable, and storage systems employed by the Platform and its custodian may not be free from defect or immune to force majeure events. Storage systems and operational infrastructure may be breached due to the actions of outside parties, error or insider malfeasance of an employee of Bitbuy or its custodians, or otherwise, and, as a result, an unauthorized party may obtain access to Bitbuy’s or its custodian’s storage systems or private keys, data or users’ crypto assets. Additionally, outside parties may attempt to fraudulently induce employees of Bitbuy and its custodian to disclose sensitive information in order to gain access to the Platform’s infrastructure. Bitbuy and its custodians or any technological consultant engaged by them may periodically examine and propose modifications to storage systems, protocols and internal controls to address the use of new devices and technologies to safeguard the Platform’s systems and users’ crypto assets. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, Bitbuy may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of a storage system occurs, a loss of confidence in crypto asset networks may decrease the market price of such crypto assets.
If users’ crypto asset holdings are lost, stolen or destroyed under circumstances rendering a party liable to Bitbuy, the responsible party may not have the financial resources sufficient to satisfy Bitbuy’s claim. For example, as to a particular event of loss, the only source of recovery for Bitbuy may be limited to the relevant custodian or, to the extent identifiable, other responsible third parties (for example, a thief or terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim of Bitbuy.
Control of processing power
Some crypto asset networks, such as the Bitcoin network, are secured by a proof-of-work algorithm, whereby the collective strength of network participants’ processing power protects the network. If a malicious actor or botnet (i.e., a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining on such crypto asset networks (which occurrence is commonly known as a “51% attack”), it may be able to construct fraudulent blocks or prevent certain transactions from completing, either in a timely manner or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions. While a malicious actor would not be able to generate new interests or transactions using such control, it could “double-spend” its own interests (i.e., spend the same crypto asset interests in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintained control. To the extent that such malicious actor or botnet did not yield its control of the processing power on the crypto asset network or the network community did not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Further, a malicious actor or botnet could create a flood of transactions in order to slow down confirmations of transactions on the crypto asset network.
Settlement of transactions on crypto asset networks
There is no central clearing house for cash-to-crypto asset transactions. Current practice is generally for the purchaser of a crypto asset to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of the crypto asset to the purchaser’s public wallet address upon receipt of the cash. The purchaser and seller monitor the transfer with a transaction identification number that is available immediately upon transfer and is expected to be included in the next block confirmation. When the Platform facilitates purchases of crypto assets from a crypto asset source, there is a risk that the crypto asset source will not initiate the transfer on the crypto asset network upon receipt of cash from the user, or that the bank where the crypto asset source’s account is located will not credit the incoming cash from the user for the account of the crypto asset source. Bitbuy will only allow its users to purchase crypto assets once the Platform can confirm that fiat currency has been successfully received in a Bitbuy settlement account. Bitbuy also maintains inventory of crypto assets in the event that the source does not initiate the transfer on the crypto asset network.
The market value of crypto assets may be affected by momentum pricing. Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the investing public, is impacted by anticipated future appreciation in value. Momentum pricing may result in speculation regarding future appreciation in the value of crypto assets, which inflates prices and may lead to increased volatility.
Crypto asset private keys are stored in two different forms: “hot wallet” storage, whereby the private keys are connected to the internet; and “cold” storage, where crypto asset private keys are stored completely offline. The crypto assets that the custodian will hold for users will primarily be stored offline in cold storage, with a limited percentage of users’ holdings being stored in hot storage at any given time. Private keys must be safeguarded and kept private in order to prevent a third-party from accessing the crypto asset while held in such wallet. To the extent a private key is lost, destroyed or otherwise compromised and no backup of the private key is accessible, users will be unable to access, and will effectively lose, the crypto asset held in the related digital wallet.
A significant disruption in Internet connectivity could disrupt the operation of crypto asset networks until the disruption is resolved, and such disruption could have an adverse effect on the price of crypto assets and the ability of the Platform to operate. In the past, some crypto assets have experienced a number of denial-of-service attacks, which have led to temporary delays in block creation and crypto asset transfers. While in certain cases in response to an attack, an additional “hard fork” has been introduced to increase the cost of certain network functions, the relevant network has continued to be the subject of additional attacks.
In the past, flaws in the source code for crypto assets have been exposed and exploited, including those that exposed users’ personal information and/or resulted in the theft of users’ crypto assets. Several errors and defects have been publicly found and corrected, including those that disabled some functionality for users and exposed users’ personal information. Discovery of flaws in, or exploitations of, the source code that allow malicious actors to take or create money in contravention of known network rules have occurred. In addition, the cryptography underlying certain crypto assets could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective. Even if a user is not personally victimized by such activities, any reduction in confidence in the source code or cryptography underlying crypto assets generally could negatively impact the demand for and price of crypto assets.
Network development and support
Many crypto asset networks operate based on open-source protocol maintained by groups of core developers. As such crypto asset network protocols are not sold and their use does not generate revenues for development teams, core developers may not be directly compensated for maintaining and updating network protocols. Consequently, developers may lack a financial incentive to maintain or develop networks, and the core developers may lack the resources to adequately address emerging issues with networks. There can be no guarantee that developer support will continue or be sufficient in the future.
Inadequate due diligence
Bitbuy has established and applies policies and procedures to review crypto assets before making them available for trading on the Platform. Such review includes, but is not limited to, publicly-available information concerning: (i) the creation, governance, usage and design of the crypto asset, including the source code, security and roadmap for growth in the developer community and, if applicable and available, the background of the developer(s) that created the crypto asset; (ii) the supply, demand, maturity, utility and liquidity of the crypto asset; (iii) material technical risks associated with the crypto asset, including any code defects, security breaches and other threats concerning the crypto asset and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and (iv) the legal and regulatory risks associated with the crypto asset, including any pending, potential, or prior civil, regulatory, criminal or enforcement action relating to the issuance, distribution or use of the crypto asset. To date, Bitbuy has only made crypto assets which have significant supply, demand, maturity and liquidity available for trading on the Platform. In Bitbuy’s experience, crypto assets with these qualities tend to also satisfy the other criteria it evaluates as part of its review. Nevertheless, Bitbuy’s review process is fulsome and flexible in nature and does not prioritize any one factor over another.
Should new facts come to light which demonstrate that our initial review of a crypto asset did not account for an unacceptable risk to our users, we may determine that it is advisable to discontinue support for trading the crypto asset on the Platform. While Bitbuy cannot predetermine with certainty what risks may constitute such unacceptable risks to our users, Bitbuy anticipates that those risks would be so severe such that Bitbuy will have determined that the relevant crypto asset is very likely to decrease in value over the long-term; provided, however, that under no circumstances shall Bitbuy be liable if such a determination proves incorrect. Upon Bitbuy making such a determination, Bitbuy may further determine to remove other crypto assets that have similar characteristics to the relevant crypto asset. For more information on the steps Bitbuy undertakes when discontinuing support for a crypto asset on the Platform, please see Bitbuy’s Crypto Asset Delisting Policy. Bitbuy’s undertaking of these steps may occur concurrently with a rapid decline in the value of the crypto asset(s) in question and may also be a contributing factor to such decline. Users are subject to the risk that there may be very little liquidity in the crypto asset(s) while Bitbuy is undertaking these steps and, as a result, users may be unable to liquidate their positions in the crypto asset(s) or may only be able to liquidate their positions in the crypto asset(s) for very little value.
A particular crypto asset’s status as a “security” and/or “derivative” in Canada is subject to a degree of uncertainty
Bitbuy is only permitted to make crypto assets available for trading on the Platform if they are not themselves securities and/or derivatives. Based on guidance provided by the CSA, certain crypto assets may fall within the definition of a “security” and/or a “derivative” under provincial securities laws. The legal test for determining whether any given crypto asset is a security and/or a derivative is a highly complex, fact-driven analysis that evolves over time, and which outcome is difficult to predict. The CSA (and each of the individual securities regulatory authorities and regulators in Canada) do not generally provide advance guidance or confirmation on the status of any particular crypto asset as a security and/or a derivative. Furthermore, the views of Canadian securities regulatory authorities and regulators in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. These views may also be influenced by the decision of foreign regulatory authorities and Canadian and foreign courts.
Bitbuy will make a determination as to whether or not a crypto asset constitutes a security and/or a derivative under Canadian securities law before making it available for trading on the Platform. If Bitbuy comes to the conclusion that a crypto asset constitutes a security and/or a derivative under Canadian securities law or is unable to come to the conclusion that a crypto asset does not constitute a security and/or a derivative under Canadian securities law, Bitbuy will not make that crypto asset available for trading on the Platform unless it is able to do so in full compliance with securities laws and regulations in effect in the jurisdictions in which it operates at that time. A determination by a Canadian securities regulatory authority or regulator, a foreign regulatory authority or a court that a crypto asset that we currently support for trading on the Platform constitutes a security and/or a derivative may also result in us determining that it is advisable to remove crypto assets from the Platform that have similar characteristics to the crypto asset that was determined to be a security.
Should it be determined by relevant securities regulatory authorities and/or regulators that a crypto asset currently listed on the Platform constitutes a “security” and/or a “derivative” under provincial or territorial securities legislation, we may be forced to discontinue support for trading in such crypto asset or otherwise adapt our operations in order to satisfy regulatory requirements. For more information on the steps Bitbuy undertakes when discontinuing support for a crypto asset on the Platform, please see Bitbuy’s Crypto Asset Delisting Policy. Bitbuy’s undertaking of these steps may occur concurrently with a rapid decline in the value of the crypto asset(s) in question and may also be a contributing factor to such decline. Users are subject to the risk that there may be very little liquidity in the crypto asset(s) while Bitbuy is undertaking these steps and, as a result, users may be unable to liquidate their positions in the crypto asset(s) or may only be able to liquidate their positions in the crypto asset(s) for very little value.
Crypto asset software is generally open source, meaning that any user can download the software, modify it and then propose that the users and miners of such crypto assets adopt the modification. When a modification is introduced and a substantial majority of users and miners consent to the modification, the change is implemented and the crypto asset network remains uninterrupted. However, if less than a substantial majority of users and miners consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the result is a so-called “fork” of the network. In other words, two incompatible networks would then exist: (i) one network running the pre-modified software and (ii) another network running the modified software. The effect of such a fork would be the existence of two versions of a crypto asset running in parallel, yet lacking interchangeability.
If any of the crypto assets offered by the Platform were to fork into two crypto assets, the Platform would be expected to facilitate its users’ holding of an equivalent amount of such crypto asset and its new alternative following the hard fork. However, the Platform may not be able, or it may not be practical, to secure or realize the economic benefit of the new asset for various reasons. For instance, Bitbuy or its custodian may determine that there is no safe or practical way to custody the new asset, or that trying to do so may pose an unacceptable risk to Bitbuy or its users, or that the costs of facilitating the holding and trading of the new crypto asset exceed the benefits thereof. Additionally, laws, regulation or other factors may prevent Bitbuy from benefitting from the new asset even if there is a safe and practical way to custody and secure the new asset. For example, it may be illegal for the Platform to facilitate the holding of and trading in the new asset, or there may not be a suitable market for the new asset (either immediately after the fork or ever). The timing of any such occurrence is uncertain, and Bitbuy has sole discretion whether to facilitate the holding and trading of a new asset created through a fork of a crypto asset network, subject to certain restrictions that may be put in place by service providers to Bitbuy. Forks in crypto asset networks could adversely affect users insofar as Bitbuy is unable or unwilling to accommodate the trading and holding of new alternatives to crypto assets resulting from forks in crypto asset networks.
Crypto assets may become subject to an occurrence similar to a fork, which is known as an “air drop.” In an air drop, the promoters of a new crypto asset announce to holders of another crypto asset that they will be entitled to claim a certain amount of the new crypto asset for free. For the same reasons as described above with respect to hard forks, Bitbuy may or may not choose, or be able, to allow its users to participate in an air drop or may or may not be able to realize the economic benefits of holding the new crypto asset. The timing of any such occurrence is uncertain, and Bitbuy has sole discretion whether to claim a new crypto asset created through an air drop.
Certain crypto assets confer a right on their holders to vote on topics that may directly or indirectly affect the functionality and economics of such crypto assets (e.g., changes to block reward amounts, inflation percentages, consensus modelling or governance models). Bitbuy may or may not choose, or be able, to allow its users to exercise such voting rights in respect of a crypto asset held through the Platform. Bitbuy has sole discretion whether to allow its users to exercise such voting rights. Bitbuy does not currently allow its users to exercising voting rights in respect of crypto assets held through the Platform.
Technical issues in connection with the integration of supported crypto assets
In order to make a crypto asset available for trading on the Platform, a variety of front and back-end technical and development work is required to implement our custody, trading, staking and other solutions for our users, and to integrate such crypto asset with our existing technical infrastructure. For certain crypto assets, a significant amount of development work is required and there is no guarantee that we will be able to integrate successfully with any existing or future crypto asset. In addition, such integration may introduce software errors or weaknesses into the Platform, including our existing infrastructure. Even if such integration is initially successful, any number of technical changes, software upgrades, soft or hard forks, cybersecurity incidents or other changes to the underlying blockchain network may occur from time to time, causing incompatibility, technical issues, disruptions or security weaknesses to the Platform. If we are unable to identify, troubleshoot and resolve any such issues, we may no longer be able to support such crypto asset, users’ assets may be frozen or lost, the security of our hot or cold wallets may be compromised and the Platform and our technical infrastructure may be affected, all of which could adversely impact users.
Cybersecurity incidents and other systems and technology problems
Cybersecurity incidents and cyber-attacks have been occurring globally at a more frequent and severe level and will likely continue to increase in frequency in the future. The crypto assets industry is a particular target for cybersecurity incidents, which may occur through intentional or unintentional acts by individuals or groups having authorized or unauthorized access to Bitbuy’s systems or Bitbuy’s users’ or counterparties’ information, all of which may include confidential, personal information. These individuals or groups include employees, third-party service providers, users and hackers. The information and technology systems used by Bitbuy and its service providers are vulnerable to unauthorized access, damage or interruption from, among other things: hacking, ransomware, malware and other computer viruses; denial of service attacks; network failures; computer and telecommunication failures; phishing attacks; infiltration by unauthorized persons; fraud; security breaches; usage errors by their respective professionals; power outages; terrorism; and catastrophic events such as fires, tornadoes, floods, hurricanes and earthquakes. Recently, crypto asset trading platforms have become a significant target for fraud.
While Bitbuy will deploy a range of defenses, it is possible the Platform could suffer an impact or disruption. The security of the information and technology systems used by Bitbuy and its service providers may continue to be subjected to cybersecurity threats that could result in material failures or disruptions in Bitbuy’s business. Bitbuy has and will continue to have access to sensitive, confidential, personal information of users and counterparties and access to such users and counterparties’ assets, which makes the cybersecurity risks identified above more important than they may be to other non-financial services companies.
Bitbuy’s reliance on vendors and third-party service providers
Bitbuy’s operations could be interrupted or disrupted if Bitbuy’s vendors and third-party service providers, or even the vendors and third-party service providers of such vendors and third-party service providers, experience operational or other systems difficulties, terminate their service, fail to comply with regulations, raise their prices or dispute key intellectual property rights sold or licensed to, or developed for, Bitbuy. Bitbuy may also suffer the consequences of such vendors and third-party providers’ mistakes. Bitbuy outsources some of its operational activities and accordingly depends on relationships with many vendors and third-party service providers. For example, Bitbuy relies on vendors and third parties for certain services, including know-your-client and anti-money-laundering background checks, and systems development and maintenance. The failure or capacity restraints of vendors and third-party services, a cybersecurity breach involving any third-party service providers or the termination or change in terms or price of a vendors and third-party software license or service agreement on which Bitbuy relies could interrupt Bitbuy’s operations. Replacing vendors and third-party service providers or addressing other issues with Bitbuy’s vendors and third-party service providers could entail significant delay, expense and disruption of service. As a result, if these vendors and third-party service providers experience difficulties, are subject to cybersecurity breaches, terminate their services, dispute the terms of intellectual property agreements or raise their prices, and Bitbuy is unable to replace them with other vendors and service providers, particularly on a timely basis, Bitbuy’s operations could be interrupted. Finally, notwithstanding Bitbuy’s efforts to implement and enforce strong policies and practices regarding third-party service providers, Bitbuy may not successfully detect and prevent fraud, incompetence or theft by its third-party service providers.
While the liquidity and traded volume of crypto assets have generally seen continuous growth, crypto assets are still maturing assets. The Platform may not always be able to facilitate the trading of crypto assets at prevailing market prices. It may become difficult for users to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in the Platform’s order book. The Platform may face competition for liquidity with other crypto asset trading platforms. Unexpected market illiquidity and other conditions beyond Bitbuy’s control may cause major losses to users. While the Platform has implemented procedures to ensure sufficient liquidity for its users, there is no guarantee that such procedures will be effective.
Lack of investor protection insurance
Bitbuy is not a member of the Canadian Investor Protection Fund. Crypto contracts and crypto assets purchased and held through the Platform are not protected by the Canadian Investor Protection Fund, the Canadian Deposit Insurance Corporation or any other investor protection insurance scheme.
Crypto assets have gained commercial acceptance only within recent years and, as a result, there is little data on their long-term investment potential. Additionally, due to the rapidly evolving nature of the crypto assets market, including advancements in the underlying technology, changes to crypto assets may expose users to additional risks which are impossible to predict.
The blockchain networks associated with certain crypto assets made available for trading on the Platform enable holders to earn rewards by participating in transaction confirmation activities through processes known as “staking” and “delegating”. While each blockchain network that allows for staking and delegating has unique processes, we provide a high-level explanation of what these terms generally refer to below.
Staking refers to proof-of-stake (“PoS”) consensus protocols, which are mechanisms for ensuring that transactions are properly recorded on the blockchain. Owners who stake the blockchain’s native currency validate the block transactions, and those with the most holdings are able to validate at a higher rate, proportional to their amount staked. Blockchain networks that employ PoS protocols generally rely on “validators”. Validators are network node operators that serve to verify the accuracy of data being recorded on the blockchain. Validators are typically rewarded in crypto assets for their transaction confirmation activities. In order to become a validator, a node operator is required to “stake” crypto assets, which is generally accomplished by locking crypto assets on the relevant blockchain network. Staked crypto assets essentially function as a form of collateral. If validators act maliciously or incompetently, they may lose their staked crypto assets and their access to the blockchain network through processes known as “slashing” and “jailing”. Slashing and jailing are designed to ensure that validators act with integrity while validating transactions. On certain blockchains, rather than the crypto assets being burned, they can be redistributed to other participants on the network.
Delegating refers to delegated proof-of-stake (“DPoS”) consensus protocols. DPoS protocols are similar to PoS protocols, but they also allow for holders to earn rewards without having to operate a network node. Staking requires validators to run their own hardware, software and maintain close to 100% uptime, which can be difficult and costly for regular holders to accomplish. Instead, these holders can commit (or “delegate”) their crypto assets to a validator, who will complete the transaction confirmation activities on the delegator’s behalf. In exchange for delegating their crypto assets to the validator, the delegator is entitled to a portion of the reward earned by the validator.
When a validator or a delegator wants to stop staking their crypto assets, a request needs to be sent to the blockchain network. Generally, these requests are only processed after a period of time known as an “unbonding period”, which may last up to 30 days (or, in some cases, much longer). The length of the unbonding period is specific to each blockchain network, and the unbonding period for each crypto asset for which Bitbuy offers staking services is set out in the relevant crypto asset statement.
Blockchain networks employing PoS or DPoS protocols generally allow validators (and sometimes delegators) to vote on network upgrades and other matters relating to the blockchain network based on the amount of staked crypto assets. See “Voting rights” above for more information.
We provide staking services for certain supported crypto assets in order to enable our users to earn rewards based on crypto assets that we hold on their behalf. Upon receiving instructions from a user, we may delegate the user’s crypto assets to a third-party service provider that is unaffiliated with Bitbuy. Currently, the third-party service provider we use is our custodian, BitGo. Pursuant to Bitbuy’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. The validator for each crypto asset for which Bitbuy offers staking services is set out in the relevant crypto asset statement.
In order to receive the staking services offered by Bitbuy, each user will be required to enter into an addendum to the Terms (the “Staking Addendum”), which will outline the contractual obligations of Bitbuy and the user with respect to the staking services. Because of the unique nature of each blockchain network, the Addendum will incorporate by reference certain additional terms in respect of the delegation of crypto assets of each supported blockchain network https://bitbuy.ca/staking-additional-terms (the “Additional Terms”), which the user must also agree to if it wishes to access the staking services.
At a high level, staking transactions will occur as follows:
- a user will direct Bitbuy to stake its crypto assets;
- Bitbuy will direct BitGo to delegate the crypto assets to a validator;
- either BitGo or a third-party service provider will act as validator in respect of the crypto assets;
- rewards, which would be paid in crypto assets subject to any bonding or lock-up period, may be earned in connection with the staking of the crypto assets;
- BitGo will be entitled to a fee in respect of the rewards and may pay a portion of that fee to any third-party service provider it selects to act as validator;
- any remaining portion of the rewards (the “Net Rewards”) will be delivered to one of Bitbuy’s custodial wallets with BitGo;
- Bitbuy will be entitled to a fee in respect of the rewards (the “Bitbuy Service Fee”);
- after Bitbuy’s fee has been paid, the user’s account will be credited with any remaining portion of the rewards (the “User Rewards”), and, subject to any unbonding or lock-up period, the user will be able to hold, sell or withdraw their rewards; and
- the user may request that Bitbuy stop staking their crypto assets, and, after the passage of any relevant unbonding or lock-up period, the user may sell or withdraw their crypto assets.
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 Bitbuy’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. The validator for each ach crypto asset for which Bitbuy offers staking services is set out in the relevant crypto asset statement.
Before Bitbuy allows BitGo to stake users’ assets with a third-party service provider, Bitbuy will conduct due diligence on the validators, including but not limited to considering the following:
- the persons that manage and direct the operations of the validator;
- the validator’s reputation and use by others;
- the amount of crypto assets the validator has staked on its own nodes;
- the measures in place by the validator to operate the nodes securely and reliably;
- the financial status of the validator;
- the performance history of the validator, including but not limited to the amount of downtime of the validator, past history of “double signing” and “double attestation/voting”;
- any losses of crypto assets related to the validator’s actions or inactions, including losses resulting from slashing, jailing or other penalties incurred by the validator; and
- any guarantees offered by the validator against losses including losses resulting from slashing or other penalties and any insurance obtained by the validator that may cover this risk.
Bitbuy is not required to transfer crypto assets out of its custodial accounts with BitGo to provide the staking services. As a result, all staked assets will remain in the possession, custody and control of BitGo. For the risks associated with Bitbuy’s use of BitGo as a custodian of users’ crypto assets, see “Custodial risks” above.
Bitbuy may, at its sole discretion, transfer reimbursements for slashing penalties it receives from BitGo to its users less any administrative costs or expenses Bitbuy incurs in reimbursing users.
Bonding and Unbonding periods
Each crypto asset for which Bitbuy provides staking services may be subject to specific bonding and unbonding periods because of the unique nature of each blockchain network. For more information on the length of the bonding and unbonding periods for each supported crypto asset, please see the Additional Terms and the relevant crypto asset statements.
The user is entitled to all rewards earned in connection with the staking of their crypto assets less any fees paid in connection with the staking services. Bitbuy 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 more information on the fees associated with each supported crypto asset, please see the Additional Terms and the relevant crypto asset statements.
Each crypto asset for which Bitbuy 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. The Bitbuy Service Fee may be up to 30% of Net Rewards earned by a user. For more information on the fees associated with each supported crypto asset, please see the Additional Terms and the relevant crypto asset statements.
The following is a summary of some of the risks connected with the staking services Bitbuy provides to its users. Risks specific to a particular crypto asset for which staking services are available are disclosed in the relevant crypto asset statements.
Reliance on third party vendors
Bitbuy’s staking services could be interrupted or disrupted if BitGo or any third-party service providers selected by BitGo to act as a validator, or even the vendors and third-party service providers of BitGo or any third-party service providers selected by BitGo to act as a validator, experience operational or other systems difficulties, terminate their service, fail to comply with regulations, raise their prices or dispute key intellectual property rights sold or licensed to, or developed for, Bitbuy. Bitbuy may also suffer the consequences of such vendors and third-party providers’ mistakes. For example, if BitGo or any third-party service providers selected by BitGo to act as a validator fail to behave as expected, suffer cybersecurity attacks, experience security issues or encounter other problems, users’ crypto assets may be irretrievably lost. The failure or capacity restraints of vendors and third-party services, a cybersecurity breach involving any third-party service providers or the termination or change in terms or price of a vendors and third-party software license or service agreement on which Bitbuy relies could interrupt Bitbuy’s provision of the staking services. Replacing vendors and third-party service providers or addressing other issues with Bitbuy’s vendors and third-party service providers could entail significant delay, expense and disruption of service. As a result, if these vendors and third-party service providers experience difficulties, are subject to cybersecurity breaches, terminate their services, dispute the terms of intellectual property agreements or raise their prices, and Bitbuy is unable to replace them with other vendors and service providers, particularly on a timely basis, Bitbuy’s provision of the staking services could be interrupted or disrupted.
Slashing, jailing and missed rewards
Certain blockchain networks dictate requirements for participation in the relevant decentralized governance activity and may impose slashing penalties if the relevant activities are not performed correctly, such as if the validator or delegator acts maliciously on the network, “double signs” any transactions or experiences extended downtime. If we or any of our service providers are slashed by the underlying blockchain network, users’ crypto assets may be confiscated, withdrawn or burnt by the network. Even if the validator does not incur slashing penalties as a result of extended downtime, Bitbuy and its users would not be able to benefit from any rewards missed by the validator on account of its inactivity.
Certain blockchain networks may also impose jailing penalties where a validator fails to comply with protocol rules. If a validator is jailed, it will not be selected to participate in transaction validation either temporarily or permanently and crypto assets delegated to the jailed validator will not be eligible to earn staking rewards.
To mitigate the risk of slashing or jailing, Bitbuy:
- as set out below, conducts due diligence on selected validators regarding their security and reliability; and
- as set out below, conducts due diligence on the crypto assets that it offers for staking.
Some blockchain networks may also impose “bonding” periods on newly staked crypto assets during which staked crypto assets are ineligible for rewards. Users that stake crypto assets onto blockchain networks imposing bonding periods may not be immediately eligible to receive any staking rewards until any such periods elapse.
Due diligence on validators may be insufficient
As noted in “Slashing and missed rewards” immediately above, Bitbuy and its users will be exposed to the risk of loss of staked crypto assets if BitGo or any third-party service providers selected by BitGo to act as a validator fails to operate their network nodes in accordance with applicable protocol rules, as crypto assets may be “slashed” or inactivity penalties may be applied if the validator node “double signs” or experiences extended downtime. Bitbuy and its users may also be prevented from obtaining rewards in respect of periods during which the validator is inactive on the blockchain network. Bitbuy intends to mitigate these risks by relying on the due diligence it has conducted in respect of BitGo and by carefully monitoring the staking activities performed by the validator. In particular, Bitbuy has obtained the following information regarding BitGo and will obtain information regarding the due diligence conducted by BitGo on third-party validators that includes (but is not limited to):
- the persons that manage and direct the operations of the validator;
- the reputation of the validator and use by others;
- the amount of crypto assets the validator has staked on its own nodes;
- the measures in place by the validator to operate the nodes securely and reliably;
- the financial status of the validator;
- the quality of the validator’s work (i.e., the amount of downtime of the validator, past history of “double signing” and “double attestation/voting”); and
- any slashing or jailing penalties incurred by the validator.
Notwithstanding these efforts to mitigate risks related to malicious or incompetent validators, new facts may come to light which demonstrate that our initial assessment of a validator was flawed. In such instances, Bitbuy and its users may be subject to the risks identified in “Slashing and missed rewards”, and Bitbuy’s provision of the staking services could be interrupted or disrupted. If Bitbuy believes that its initial assessment of a validator was flawed, it will likely seek out new vendors and third-party service providers to assist it in providing the staking services, which could cause significant interruptions, disruptions or delays. In addition, notwithstanding the occurrence of an event that demonstrates that Bitbuy’s initial assessment of a validator was flawed, the crypto assets staked with that validator may still be subject to an unbonding period during which Bitbuy will continue to have to rely on the services provided by such validator.
Illiquidity during unbonding periods
When a user wants to stop staking their crypto assets, a request needs to be sent to the blockchain network. Generally, these requests are only processed after a period of time known as an “unbonding period”. The length of the unbonding period is specific to each blockchain network and may take up to 30 days depending on the time of withdrawal and the validator. In addition, several crypto assets require validators to commit to securing the network and staking their crypto assets for an extended period of time (see, for example, the crypto asset statement for ether. During the unbonding period, BitGo will generally continue to control the crypto assets, but users will not be able to withdraw or liquidate the crypto assets being staked. Due to the volatile nature of crypto assets, users may not be able to liquidate their crypto asset holdings because of an unbonding period even where the price of a crypto asset is experiencing an extreme decline. As a result, the illiquidity of crypto assets during unbonding periods may significantly and adversely impact a user’s ability to realize the fiat value of staked crypto assets and rewards earned on staked crypto assets. Given the volatility of crypto assets, the value of a user’s staked crypto assets at the time of withdrawal may be significantly less than the value of its crypto assets at the time of staking.
Due diligence on crypto assets may be insufficient
In addition to the review described in “Inadequate due diligence” above, Bitbuy conducts due diligence on the crypto assets that it offers for staking, including a review of how the blockchain for that crypto asset operates and the staking protocols for that crypto asset. Bitbuy’s review will focus on, among other things, publicly available information concerning: (i) material technical risks associated with the crypto asset’s staking protocol, including any code defects, security breaches and other threats concerning the staking protocol; (ii) the scope and applicability of slashing and other penalties; (iii) whether the staking protocols of the crypto asset can be simply and efficiently integrated into its existing staking infrastructure; (iv) the legal and regulatory risks associated with its staking protocol, including any pending, potential, or prior civil, regulatory, criminal or enforcement action relating to the issuance, distribution or use of the crypto asset; (v) bonding and unbonding periods; (vi) any limits on the number of active validators; (vii) the mechanism for selecting validators; and (viii) token inflation.
Should new facts come to light which demonstrate that our initial review of a crypto asset’s staking protocol did not account for an unacceptable risk to our users, we may determine that it is advisable to discontinue support for staking the crypto asset through the Platform. While Bitbuy cannot predetermine with certainty what risks may constitute such unacceptable risks to our users, Bitbuy anticipates that those risks would be so severe such that they would put users’ crypto assets at significant risk of loss. Upon Bitbuy making such a determination, Bitbuy may further determine to discontinue staking services for other crypto assets that have similar characteristics to the relevant crypto asset. Bitbuy’s undertaking of these steps may occur concurrently with a rapid decline in the value of the crypto asset(s) in question and may also be a contributing factor to such decline. Users are subject to the risk that there may be very little liquidity in the crypto asset(s) while Bitbuy is undertaking these steps – especially if the crypto asset continues to be staked or subject to an unbonding period – and, as a result, users may be unable to liquidate their positions in the crypto asset(s) or may only be able to liquidate their positions in the crypto asset(s) for very little value.
Short history risk
PoS blockchain networks are newer and generally not as widely used as proof-of-work blockchain networks and may be untested at scale. As a result, PoS blockchain networks may not work as intended. If PoS blockchain networks do not function as intended or fail to gain adoption, the value of crypto assets relying on PoS consensus protocols may be negatively affected, which could adversely affect the value of staked crypto assets and any rewards earned by users.
Uncertain Tax Consequences
The application of sales or income taxes to staking rewards earned through our staking services is currently unclear as Canadian tax authorities have not yet published any guidance relating to this matter. We encourage our users to consult a qualified tax professional for advice regarding the tax implications of using our staking services.
No guarantee of receiving rewards
There is no guarantee that users will receive any rewards in respect of staked crypto assets. Past rewards are not indicative of expected future returns. The staking rewards users may receive through our staking services, if any, may be affected by, among other factors:
- fluctuations in the inflation rate of the blockchain network on which a user’s crypto assets are staked;
- the total amount of crypto assets staked by users of the blockchain protocol on which a user’s crypto assets are staked;
- the total amount of crypto assets staked by Bitbuy clients using our staking services;
- changes to the blockchain protocol on which a user’s crypto assets are staked as a result of protocol governance decisions;
- changes to validator fees set by approved validators;
- anticipated or unanticipated downtime by approved validators;
- halts, outages or other anticipated or unanticipated interruptions affecting the blockchain network on which a user’s crypto assets are staked;
- temporary outages or other anticipated or unanticipated interruptions affecting services provided by Bitbuy’s custodians;
- “slashing” of a user’s delegated crypto assets as a result of a violation of protocol rules by approved validators;
- “jailing” of a user’s delegated crypto assets as a result of a violation of protocol rules by approved validators;
- validators ceasing to be eligible to participate in consensus and earn rewards;
- “bonding,” “unbonding” or other lock-up periods specified by the blockchain protocol on which a user’s crypto assets are staked;
- whether staking rewards are re-staked, either automatically by the blockchain protocol, as part of the operational processes by Bitbuy or manually by Bitbuy users;
- re-delegation of a user’s crypto assets to different validators; and
- delays or other operational factors when delegating a user’s crypto assets.