Platform Risk Statement - Canada

• French version

This Uphold Canada – Platform Risk Statement (Risk Statement) is for our customers (or Users) who are residents of Canada and is incorporated by reference into the online Terms of Service (Terms) that you understand and accept upon the opening of your Uphold account (Account).

This Risk Statement includes important disclosures about your use of Uphold's crypto asset trading platform (the Uphold Platform).

Uphold is, as required by regulation, applying for registration and for certain exemptive relief under securities laws of certain jurisdictions of Canada, and those applications are ongoing. There is no guarantee that registration and the requested exemptive relief will be granted.  In the event the registration or requested exemptive relief is not granted, the services provided by Uphold may be modified or withdrawn. Uphold is not currently registered under the securities or derivatives legislation of any jurisdiction of Canada and has not been granted an exemption from any requirements of securities or derivatives legislation of any jurisdiction of Canada.

No Canadian securities regulatory authority or regulator has assessed or endorsed the Crypto Contracts (as defined below) or any of the crypto assets made available on the Uphold Platform, including providing any opinion that a crypto asset is not a security and/or derivative.

By using the Uphold Platform or any other services related thereto (collectively, the Services), you understand that there are substantial risks associated with the purchase, sale and use of crypto assets through us, and you are agreeing to familiarize yourself and assume any and all such risks, including those discussed herein.

Introduction

Digital assets (also referred to as cryptocurrency) are a digital representation of value that function as a medium of exchange, a unit of account, or a store of value. Their value is derived from market dynamics and has historically been more volatile relative to fiat currency and other assets. The unpredictability of the price of cryptocurrency relative to fiat currency may result in significant loss over a short period of time. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. In certain cases, it may be difficult or impossible to liquidate a position quickly at a reasonable price due to various market factors, including illiquidity or actions by trading facilities.

Uphold has prepared summaries of each asset that is available for trading on the Uphold platform (which may or may not be available to you, based on your location) (Crypto Asset Statements), which you can access here.

Risks in Trading Crypto Assets

The following is a brief summary of some of the risks connected with trading crypto assets. Uphold has prepared this summary based on its assessment of the crypto assets made available through the platform. Uphold's analysis includes reviewing publicly available information on the following:

• The creation, governance, usage, and design of each crypto asset, including ensuring the source code is open-source and peer reviewed, security, and roadmap for growth in the developer community.
• The supply, demand, maturity, utility, and liquidity of the crypto asset.
• 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.
• 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, including as it may relate to an assessment of whether a crypto asset is a security and/or derivative under the securities and derivatives legislation of a jurisdiction of Canada.

The summary below is not an exhaustive discussion of all risks nor does it contemplate an individual’s unique risk tolerance. As detailed within this Risk Statement, there are many factors to consider when investing in the crypto sector in general and these factors are likely to evolve over time.

Risks Associated with your Account

(a)   Trading in crypto assets may not be suitable for all members of the public. You should carefully consider whether trading is appropriate for you in light of your knowledge, experience, financial objectives, financial resources, and other relevant circumstances. Crypto asset trading may not be appropriate for you, particularly if you use funds drawn from retirement savings, loans or lines of credit, mortgages, emergency funds, or funds set aside for other purposes. The volatility and unpredictability of the price of crypto assets relative to fiat currency may result in significant loss over a short period of time.

(b)   Your Account is a contract with Uphold that provides you with certain rights and imposes certain responsibilities. The contract, and your contractual right to the crypto assets that you may buy, sell and hold pursuant the contract, constitutes a security or derivative (a Crypto Contract). The Crypto Contract under which we agree to provide the Services includes holding the crypto assets in your Account on your behalf in accordance with our custody policies and procedures. This arrangement may expose you to insolvency risk (credit risk), fraud risk or proficiency risk on the part of Uphold or a custody service provider (as discussed in section 3) designated to safeguard the crypto assets.

(c)   An Account is not a bank account and funds or crypto assets received or held by us or by you, and transacted through us, do not earn interest.

(d)   The fiat currency and crypto assets in your Account are not insured in any way by us or by any government agency. Uphold is not a member of the Canadian Investor Protection Fund (CIPF) and the crypto assets held by Uphold (directly or indirectly through third parties) do not qualify for CIPF protection.

(e)   The value of the crypto assets you hold or acquire through the Services are attached to your crypto asset wallets that are accessible only by logging in to your Account. Uphold encourages the use of strong passwords and two factor authentication in order to safeguard access to your Account and the fiat currency and crypto assets in it. 

(f)    Certain crypto assets confer a right to vote on topics that may directly or indirectly affect functionality and economics of a particular crypto asset, including, but not limited to: changes to block reward amounts, inflation percentages, consensus modelling, or governance models. Your Crypto Contract with Uphold does not enable any voting functionality in respect of the crypto assets held in your account.

(g)   We cannot reverse a crypto asset transaction which has been broadcast to a crypto asset network, and losses due to fraudulent or accidental transactions are not recoverable. 

(h)   Some crypto asset platforms have been subject to cyberattacks and other technical issues that have resulted in the loss or theft of crypto assets to their users, and there is a risk that a similar cyberattack could affect the Services and result in the theft or loss of your fiat currency or crypto assets for which you cannot recover.

(i)    There are risks associated with utilizing an Internet-based trading system including, but not limited to: the failure of hardware, software, and Internet connections. Uphold is not responsible for any communication failures, disruptions, errors, distortions, or delays you may experience when trading via the Services, however caused.

(j)    Uphold, pursuant to intercompany arrangements with its affiliates, sources its liquidity for the Uphold Platform from multiple leading global crypto asset trading platforms and OTC counterparties (Liquidity Providers). Service outages at Liquidity Providers may disrupt Uphold’s ability to continue providing liquidity to the Uphold Platform.

(k)   The statutory rights in section 130.1 of the Securities Act (Ontario) and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of this Risk Statement or a Crypto Asset Statement to the extent a Crypto Contract is distributed in accordance with the PRU.

General Risks Associated with Crypto Assets

(a)   Volatility and Liquidity. Price and liquidity of crypto assets has been, and may be, subject to large fluctuations on any given day and you may lose any and all value in your crypto assets at any time. The risk of loss in crypto assets may be substantial and losses may occur over a short period of time. Crypto assets may become worthless at any time.

(b)   Not Legal Tender. Crypto assets are not part of a central bank that can take corrective measures to protect the value of crypto assets in a crisis. Crypto assets are not legal tender and are not backed by a government (i.e., crypto assets do not have the same protection as the money deposited into a bank account). Cryptocurrencies generally have no underlying assets, revenue stream, or other sources of value tied to fiat currency or other assets.

(c)   Value Dependent on Market Participants. Crypto assets have value from the continued willingness of market participants to use crypto assets. Crypto assets are susceptible to loss of confidence, which could collapse demand relative to supply and may result in permanent and total loss of value of a particular crypto asset if the market for such crypto assets disappears.

(d)   Regulatory Uncertainty. The regulation of crypto assets continues to evolve in Canada and in foreign jurisdictions.  Regulation may develop that restricts the use of crypto assets or otherwise influences the demand for crypto assets, which may affect the price of crypto assets. Such changes may be sudden and without notice. Furthermore, banks and other financial institutions may refuse to process funds for crypto asset transactions, process wire transfers to or from crypto asset trading platforms, crypto asset-related companies or service providers, or maintain accounts for persons or entities transacting in crypto assets.  This might result in you holding crypto assets that you are unable to convert into fiat currency to use. Uphold, in accordance with its internal policies and procedures, may delist a crypto asset if a regulator or court of competent jurisdiction determines that a crypto asset listed on the Uphold Platform is a security or derivative, or if legal, regulatory, business, or security risks exceed Uphold’s risk appetite.

(e)   Short History Risk. As a relatively new open-source technology, it is expected that there will continue to be technical developments in blockchain technology, which could impact the value of a crypto asset. Due to this short history, it is not certain whether the economic value, governance, or functional elements of crypto assets will persist over time. The crypto asset community has successfully navigated a considerable number of technical and political challenges since the genesis of the Bitcoin blockchain, which Uphold believes is a strong indicator that it will continue to engineer its way around future challenges. That said, the continuation of a vibrant crypto asset community is not guaranteed, and insufficient software development, contribution rates, community disputes regarding the development of the network and scaling options, or any other unforeseen challenges that the community is not able to navigate could have an adverse impact on the price of a crypto asset.

Tokens with their functions tied to applications that are built on an underlying blockchain network, such as Bitcoin or Ethereum, are operating within a relatively new, competitive market of crypto assets. Demand for said tokens can fluctuate rapidly; much like a technology start-up, such tokens are often still proving value to the broader community and establishing a reliable business model. Similar to the risks noted above, crypto assets of this nature can be impacted by changes made to their code, design, or community governance, and most provide updates and relevant information via forums and social channels to help stakeholders continually re-assess their interest in holding the asset. 

(f)    Blockchain Forks. Blockchain networks are powered by open-source software. When a modification to that software is released by developers, and a substantial majority of miners consent to the modification, a change is implemented and the blockchain network continues uninterrupted. However, if a change were to be introduced with less than a substantial majority consenting to the proposed modification, and the modification is not compatible with the software in operation prior to its modification, the consequence would be what is known as a “fork” (i.e., a split) of the blockchain. One blockchain would be maintained by the pre-modification software and the other by the post-modification software. The effect is that both blockchains would operate in parallel, but independently. There are examples of such forks occurring in the past on both the Bitcoin and Ethereum blockchain networks, in some cases creating new popular and valuable assets of their own such as Bitcoin Cash. In the future, such a fork could occur again, and affect the viability or value of a crypto asset. Uphold may choose not to support any future fork of the underlying blockchain of the crypto assets available on the Uphold Platform, in which case you may not have any rights to the new crypto assets that may be created as a result of that fork. Similar to the blockchain networks themselves, crypto assets built on top of Ethereum or that integrate with Ethereum decentralized applications are self-governed and subject to frequent upgrades by the open-source community. As new versions are released, the value of the crypto asset might be impacted and material changes to functionality could trigger changes in demand, supply or price. Uphold reserves the right to decide how it will continue to support the resulting assets of a fork or protocol upgrade, if applicable, and will inform impacted clients of their trading or liquidation options at that time.

(g)   Code Defects.  In the past, flaws in the source code for crypto assets have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. Although the Bitcoin and Ethereum blockchains have demonstrated resiliency and integrity over time, the cryptography underlying either one could, in the future, prove to be flawed or ineffective. For example, developments in mathematics and/or technology, including advances in digital computing, algebraic geometry, and quantum computing, could result in the cryptography of the blockchain network being vulnerable to attack. Generally, any reduction in public confidence on the security or source code of a core blockchain network could negatively affect the broader sector, and this could negatively affect the value of crypto assets traded on the Uphold Platform.

(h)   Cybersecurity Risk. The nature of crypto assets may lead to an increased risk of fraud or cyber-attack. A breach in cyber security refers to both intentional and unintentional events that may cause Uphold to lose proprietary information or other information subject to privacy laws, suffer data corruption, or lose operational capacity. This in turn could cause Uphold to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized access to Uphold’s digital information systems (e.g., through “hacking” or malicious software coding), but may also result from outside attacks such as denial-of-service attacks (i.e., efforts to make network services unavailable to intended users). In addition, cyber security breaches of Uphold’s third-party service providers can also give rise to many of the same risks associated with direct cyber security breaches. As with operational risk in general, Uphold has established risk management systems designed to reduce the risks associated with cyber security.

(i)    Stablecoin Risks. Some of the crypto assets available on the Uphold Platform are “stablecoins”, which are pegged to the value of a fiat currency or other asset and may be redeemable for a specified amount of such fiat currency or asset. Uphold conducts due diligence on all stablecoins listed on the Uphold Platform, including by reviewing the sufficiency, segregation and independent verification of the stablecoin’s reserves, whether the assets backing the stablecoin are held at a regulated financial institution, any limitations on the ability of a holder to redeem on demand any conflicts of interest between the stablecoin issuer and any intermediaries and the risk that the stablecoin may be considered a security or derivative under applicable securities legislation.

(j)    Concentration Risks. Certain addresses on the Bitcoin and Ethereum blockchain networks hold a significant amount of the currently outstanding Bitcoin and Ether, respectively. If one of these addresses were to exit their Bitcoin or Ether positions, it could cause volatility that may adversely affect the price of each respective crypto asset. Further, if anyone gains control over 51% of the computing power (hash rate) used by the blockchain network, they could use their majority share to double spend their crypto assets. If such a “51% attack” were to be successful, this would significantly erode trust in public blockchain networks like Bitcoin and Ethereum to store value and serve as a means of exchange, which may significantly decrease the value of crypto assets.

‍Safekeeping of Crypto Assets

(a)   Uphold holds crypto assets in an account clearly designated for the benefit of clients or in trust for clients and separate and apart from our own assets and from the assets of any custody service provider. However, client crypto assets may still be subject to risk of loss, for example:

• if a custody service provider becomes bankrupt or insolvent;
• if there is a breakdown in a custody service provider’s information technology systems; or
• due to the fraud, willful or reckless misconduct, negligence or error of a custody service provider or its personnel.

(b)   Generally, crypto assets of Canadian Users are held in: (i) cold storage wallets secured by Fireblocks Inc.; and/or (ii) hot wallets secured by proprietary software of Uphold or its affiliates.

(c)   Holding crypto assets online in hot wallets is riskier because the assets are online and therefore susceptible to hacks and theft. However, holding assets in the hot wallets is necessary because crypto assets need to be online to be traded and to be deposited or withdrawn from the Uphold Platform. As a result, Uphold may be exposed to an increased risk of fraud or cyber attack relating to the hot wallets and you may be exposed to fraud risk or proficiency risk on the part of Uphold in connection with its administration of the hot wallets. 

(d)   You can access your crypto assets by logging into your Account on the Uphold Platform. You are responsible for protecting your username and password, and if you lose that information you may not be able to access your Account.