Coinbase Crypto and Staking Risk Statement
Last updated: June 28, 2023
The parties have agreed that this document and all related documents be drafted in English. Les parties aux présentes ont demandé et convenu que le présent document et tout document y afférent soient rédigés en anglais.
This Coinbase Crypto Risk Statement (“Statement”) is presented to you, as a Coinbase customer residing in Canada and receiving services from Coinbase Canada, Inc. (“Coinbase”), either (i) at the time of opening your Coinbase account, or (ii) if you already had a Coinbase account before September 2022, when you next log into your account. The Statement can be accessed in the future on the Coinbase website at https://www.coinbase.com/legal/crypto_risk_statement/canada.
This Statement provides you with a summary of certain risks you should take into account when deciding whether to trade crypto assets.
You must acknowledge having received, read and understood this Statement before you can proceed with opening your Coinbase account.
Cryptocurrencies are a highly speculative investment – and you may lose some or all of your money. If you are new to crypto, consider investing only a small amount of money. And before you invest, do your research to understand the risks. Coinbase maintains a section of its website dedicated to helping people educate themselves about crypto - please refer to https://www.coinbase.com/learn to learn more.
Coinbase 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the registration or requested exemptive relief is not granted, the services provided by Coinbase may be modified or withdrawn. Coinbase is not currently registered under the securities or derivatives laws of any jurisdiction of Canada and has not been granted an exemption from any requirements of securities or derivatives laws of any jurisdiction of Canada.
The Statement does not disclose all of the risks or relevant considerations of opening a Coinbase account (which is provided to you by Coinbase Canada) to buy, sell, trade, store, send and receive crypto assets.
While your crypto assets are held on the Coinbase platform, Coinbase outsources the operation of the custodial wallet infrastructure to its affiliate, Coinbase, Inc. Your crypto assets, however, will be kept separate and apart from assets held by any entity in the Coinbase group. Unlike a non-custodial wallet, where you have sole control of your private keys, your assets are held on a custodial basis with Coinbase, meaning that Coinbase controls the private keys to your crypto assets. A custodial wallet means that you do not have sole control of your funds, but it lessens your personal responsibility to keep your private keys safe. To learn more about how Coinbase handles crypto assets, please refer to your User Agreement with Coinbase. For more information relating to the differences between custodial and non-custodial wallets, see here.
Coinbase believes that its customers should be aware of the risks involved in the purchase, sale and custody of crypto assets. Trading in crypto assets may not be suitable for everyone. 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, student loans, 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. The following is a brief, non-exhaustive summary of certain factors and special risks you should take into account when deciding whether to trade crypto assets.
Overview of Crypto Assets
Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but do not have legal tender status in Canada. Crypto assets are traditionally more volatile than fiat currencies. The current value of crypto assets is derived by market forces of supply and demand, which creates the potential for permanent and total loss of value should the market for a crypto asset disappear entirely. Federal, provincial, territorial or foreign governments may restrict the use and exchange of crypto assets, and regulation in North America is still developing.
While the crypto assets traded or custodied on Coinbase do not (and will not), of themselves, constitute securities or derivatives for purposes of applicable legislation, the trading of crypto on Coinbase is consistent with activities described in the Canadian Securities Administrators Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets and, accordingly, will be considered in Canada to constitute the trading of securities. No securities regulatory authority has expressed a formal opinion that the crypto assets made available through Coinbase constitute securities.
Coinbase has prepared summaries of assets that are available for trading on the Coinbase platform (which may or may not be available to you, based on your location), which you can access here: https://www.coinbase.com/browse.
Assessing Crypto Assets
Before a crypto asset is offered for trading on the Coinbase platform it is undergoes a review, which includes analysis of both (i) the technology relating to the asset (including its reliability and security) and (ii) relevant legal and compliance considerations (including whether the asset is developed primarily to facilitate illegal activity and whether the asset is itself likely to be considered a security).
In the event Coinbase ceases to make a crypto asset available on the Coinbase platform, it has established policies and procedures to halt the trading of that crypto asset and allow customers an appropriate amount of time to liquidate their positions on Coinbase in respect of that underlying crypto asset or transfer the underlying crypto asset off Coinbase whenever possible.
See here for more information relating to our asset review process.
General Risks of Trading Crypto Assets
The following is a brief summary of some of the risks involved in trading crypto assets.
(1) Blockchain Technology is Novel - 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. It is not certain whether the economic value, governance or functional elements of crypto assets will persist over time.
(2) Price Volatility, Liquidity and Global Demand Concerns - the crypto asset markets are sensitive to new developments. Since trading volumes are still maturing, any significant changes in market sentiment (e.g. adverse media or tweets from high profile individuals) can induce large swings in volume and subsequent price changes. Crypto asset prices on trading platforms have been volatile and subject to influence by many factors, including the levels of liquidity, public speculation on future appreciation in value, swings in investor confidence, operational interruptions at exchanges and the future growth of alternative crypto assets that may gain market share.
Additionally, the price of crypto assets is driven by the supply and demand of global markets and so if demand is reduced, then the price of a given crypto asset will also reduce. Investors should be aware that there is no assurance that crypto assets will maintain their long-term value in terms of purchasing power in the future or that the acceptance of crypto assets for payments by mainstream retail merchants and commercial businesses will continue to grow. The trading of crypto assets on public trading platforms has a limited history.
In addition, certain addresses on the various blockchain networks hold a significant amount of the currently outstanding asset on that network. If one of these addresses were to exit their positions, it could cause volatility that may adversely affect the price.
(3) Blockchains may Temporarily or Permanently Fork - when a modification to that software (i.e. the software that powers certain crypto blockchains) 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. A fork may occur, and affect the viability or value of a crypto asset. Coinbase may choose not to support any future fork of the underlying blockchain of the crypto assets available on our 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.
For further detail on “forks”, please refer to clause 5.14 (Operation of Digital Currency Protocols) of your User Agreement with Coinbase.
(4) The Cryptography Underlying the Crypto-networks is Imperfect - flaws in the source code for digital 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. Over time, the cryptography underlying a crypto asset could prove to be flawed or ineffective. This could negatively affect the value of crypto assets traded with Coinbase.
(5) 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. 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 which you are unable to convert into fiat currency to use.
(6) Systemic Risk - if anyone gains control over 51% of the computing power (hash rate) used by a 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.
(7) Electronic Trading and Network Connectivity - there are risks associated with using an internet-based trade execution software application including, but not limited to, the failure of hardware and software. For example, if your internet connection or equipment failed, you may be unable to place an order, your order might not be executed according to your instructions, or your order might not be executed at all. This might cause a financial loss when the market for a particular crypto asset suddenly drops. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. In addition to normal market risks, you may experience losses due to one or more of the following: system failures, hardware failures, software failures, network connectivity disruptions, and data corruption.
(8) Cyber Security Threats - 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 Coinbase to lose proprietary information or other information subject to privacy laws, suffer data corruption, or lose operational capacity or suffer a loss of customer crypto assets which are custodied with the Coinbase group. This in turn could cause Coinbase to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of Coinbase's third-party service providers can also give rise to many of the same risks associated with direct cyber security breaches.
Coinbase has established and maintains robust policies and procedures to manage and mitigate risks associated with cyber security threats.
Coinbase has no access to your crypto assets and will not in any way deal in your crypto assets unless specifically instructed by you.
(9) No Investor Protection Insurance - crypto assets purchased and held in an account with Coinbase are not protected by the Canadian Investor Protection Fund, the Canadian Deposit Insurance Corporation or any other investor protection insurance scheme.
(10) No Right of Action - Canadian securities legislation prohibits a person or company from distributing a security unless a preliminary prospectus and prospectus for the security has been filed. Coinbase has been granted an exemption from these prospectus requirements (within the meaning given to that term under National Instrument 14-101 Definitions) in relation to Coinbase providing you with an account in order to purchase, sell, send, receive and hold crypto assets. To the extent that crypto assets are “distributed” to you in your use of the Coinbase platform, no statutory right of action for damages or rescission prescribed by any securities legislation will be available to you.
(11) Fees - Coinbase generates substantially all its revenue from transaction fees in connection with the purchase, sale, and trading of crypto assets by its customers. Transaction fees are either a flat fee or a percentage of the value of each transaction.
Risks Specific to Accessing Staking Services
As part of your use of the services provided by Coinbase, you may be able to “stake” assets. Staking is the process of actively participating in transaction validation (i.e. confirming transactions) on a proof-of-stake (“PoS”) blockchain. As a reward for participating in the validation process, participants can earn staking rewards. For more details, please see our Learn article here.
Staking involves additional blockchain operations beyond those for simply custodying or sending assets. You are not required to stake with Coinbase and can request to unstake at any time. If you choose to stake, Coinbase will perform blockchain operations involving your digital assets as described below. Your instruction to stake your digital assets does not affect the ownership of your digital assets in any way.
Staking is not available for all assets on Coinbase. Before making a staking service available to customers, Coinbase undertakes a security and regulatory assessment of the relevant protocol / network to ensure that staking can be offered safely, reliably, and appropriately for our customers. Notwithstanding this review, staking involves risks beyond those of holding crypto assets in general, as will be explained in more detail below.
To be eligible for staking, you must be a Coinbase customer with an account in good standing. Some staking assets may have additional eligibility criteria. Aside from any balance you have already staked with Coinbase, your crypto will not be staked unless you specifically instruct us to do so. Staking rewards, however, will be automatically restaked to enable compounding rewards. Provided you remain eligible, your initial staked balance and any rewards will remain staked until you instruct us to unstake.
You will need to request for your staked assets to be unstaked before they can be sold or transferred. When you request to unstake, Coinbase will take blockchain operations on your behalf to wind-down your assets’ participation in the validation process of the relevant protocol. These blockchain operations may take up to 48 hours to complete, in addition to any applicable unstaking period imposed by the underlying protocol. The unstaking time for each asset can be found in the Help Center. Because crypto can be highly volatile, there is a risk that the market price could be significantly higher or lower by the time the unstaking process is complete.
For Ethereum staking, in addition to Coinbase-operated validators, we may also use external, third party validators to help provide your staking services. At the time of publishing this Risk Statement, we use Coinbase affiliates, Attestant Limited, ConsenSys Software Inc, and Stakefish, Inc. to provide staking services to Canadian customers. Where we use a third party validator, that provider is subject to a stringent due diligence review, including of their infrastructure, security programs and business practices. The third party is also subject to ongoing diligence and periodic review of their security policies, business continuity plans, and risk management systems. In all cases, your staked assets remain in Coinbase custody.
Some protocols provide for penalties (“slashing”) for validators that fail to follow protocol rules or otherwise operate incorrectly. Coinbase will reimburse your lost principal for slashing where Coinbase is at fault, but you will bear the risk of losses due to acts of third parties, protocol errors, hackers, events beyond Coinbase’s reasonable control, and other causes listed in the User Agreement. Additional information about the risk of slashing can be found in the Help Center.
There is no guarantee that you will receive any reward from participating in staking. You have no right to a reward until it is received by Coinbase. Rewards will be distributed to your account promptly after they are received by Coinbase, minus our fee. The amount of rewards you will receive depends on the relevant network and can change over time.
There is no fee to stake or unstake your assets. Coinbase takes a percentage fee of any rewards you receive from the applicable network. This fee may vary by asset and can change in the future. The current fees are published in the Help Center.