Safekeeping of ճԹϺ Assets
(a) Newton holds crypto assets for the benefit of clients (Client Assets) separate and apart from our own assets and from the assets of any custody service provider.
(b) Approximately 80% of Newton’s total Client Assets are held in cold storage in its custody account with Coinbase Custody Trust Company LLC (the Custodian), and approximately 20% of Newton’s total Client Assets are held online in hot wallets secured by Fireblocks Inc. (Fireblocks).
(c) The Custodian is licensed as a limited purpose trust company with the New York Department of Financial Services (NYDFS) and maintains US$320 million of insurance (per-incident and overall) which covers losses of assets held by the Custodian, on behalf of its customers due to third party hacks, copying or theft of private keys, insider theft, or dishonest acts by the Custodian’s employees or executives and loss of keys.
(d) The Custodian holds all Client Assets in trust for clients of Newton in a fully segregated account in the name of Newton and separate and distinct from the assets of Newton, affiliates and all of the Custodian’s other clients. However, Client Assets may still be subject to risk of loss: (i) if the Custodian becomes bankrupt or insolvent; (ii) if there is a breakdown in a Custodian’s information technology systems; or (iii) due to the fraud, willful or reckless misconduct, negligence or error of a Custodian or its personnel. Newton has reviewed the Custodian’s reputation, financial stability, relevant internal controls, and ability to deliver custodial services and has concluded that the Custodian’s system of controls and supervision is sufficient to manage risks of loss to Client Assets in accordance with prudent business practice.
(e) Holding crypto assets online in hot wallets is riskier than holding assets with the Custodian 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assets in the hot wallets is necessary because crypto assets need to be online to be traded and to be deposited or withdrawn from the Newton Platform. Because Newton controls the online hot wallets, you are at risk that Newton or our personnel may lose or steal your assets. Newton would be liable to you under the Newton TOU for any loss caused by our fraud, negligence or wilful default, and we have adopted robust internal controls to detect and prevent this type of behaviour by our personnel.
(f) Newton’s hot wallets are secured with software licensed by Fireblocks. Fireblocks has obtained a SOC report under the SOC 2 – Type 2 standard from a leading global audit firm and has insurance coverage in the amount of US$30 million in aggregate which, in the event of theft of crypto assets from hot wallets secured by Fireblocks, will be distributed among applicable Fireblocks customers (including the Newton Platform). Newton has also licensed software from Digital Assets Services Limited (trading as Coincover) (Coincover) to provide additional security for keys to ճԹϺ Assets held by the Filer using Fireblocks, including key pair creation, key pair storage, device access recovery and account access recovery to provide additional protection for Client Assets held in hot wallets. Backup key material for Newton’s hot wallets is secured by Coincover and 100% guaranteed against loss or theft by a leading global insurance provider, providing an additional layer of security and protection for Client Assets.
(g) You can access your crypto assets by logging into your Account on the Newton 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. You may withdraw your crypto assets from the Newton Platform and following the instructions as described in the Newton TOU under “Pushing Funds to an External Account”. We endeavour to honour all withdrawal requests in a timely manner, however, in periods of market volatility or other unusual market activity you may experience delays in withdrawing your assets. In addition, we are not responsible for any delays caused by circumstances beyond our control, including Internet service failures or delays.
Risks Associated with Staking
a) Staking services provided by Newton (Staking Functionality) are opt-in accessible services only and Newton bears no liability for any losses that may be incurred from use of these staking services. The following is a summary of some of the risks connected with staking ճԹϺ Assets. These risks are in addition to the risks described above under “General Risks
associated with ճԹϺ Assets”, all of which continue to be applicable to ճԹϺ Assets that are staked on Newton.
b) When considering which ճԹϺ Assets to enable for staking, Newton takes into consideration the design and operation of the staking protocols, which include the bonding/unbonding periods, limitations on the number of active validators, the mechanism for selecting validators and any slashing or similar penalties which may be incurred; any publicly available security assessments of the staking protocols, and; where available, the number and identity of validators participating in staking.
c) The Staking Functionality provided by Newton relies upon Newton’s Custodian and third party operators of validator nodes. Newton does not operate validator nodes and does not have an ownership interest in any approved third party operators of validator nodes. Instead, Newton selects and approves third party vendors (“validators”) that operate or supply validator nodes on various Proof of Stake (PoS) blockchain networks. When you stake your ճԹϺ Assets with Newton, Newton, or one of its affiliates, will facilitate the staking of those assets on your behalf by acting as a transaction validator on the applicable network for the supported crypto asset you stake.
d) When selecting a validator, Newton conducts due diligence on the validator, with consideration for the validator’s management; infrastructure and internal control documentation; security measures and protocols; track record of operating validator nodes; operational measures in managing validator nodes securely and reliably; overall quality of work, including previous slashing incidents or penalties; financial status and insurance coverage, and; registration, licensing or other compliance under applicable laws, particularly securities laws.
e) There is also a risk that validators may act dishonestly or fail to uphold their responsibilities, which could lead to a slashing penalty, where a portion of the staked ճԹϺ Asset is forfeited, or a jailing penalty, where no staking rewards will be earned for a set period of time, being imposed by the respective blockchain protocol.
f) Newton regularly reviews validators for any changes to the considerations above. Newton will also monitor selected validators for downtime or slashing events and will take the necessary actions required in the event of downtime, slashing or jailing; including arranging to switch to a different validator, if needed; however, there is a risk that slashing or jailing events may result in a loss of some or all staked ճԹϺ Assets.
g) As the Staking Functionality relies on third party validators and Newton’s Custodian, it is subjected to various risks associated with the performance of those third parties which include regulatory or legal action preventing validators from continuing to operate nodes; unscheduled downtime of nodes as a result of denial of service or other cyber attacks, system outages or other operational issues; cessation of validator support certain
blockchain protocols; termination of contracts between Newton and validators and; cessation of custodial support for staking due to outages or other reasons.
h) As mentioned in the Newton TOU, Newton does not guarantee or promise a specific staking reward rate, and there is no guarantee or assurance that you will receive any staking rewards by using the Staking Functionality. The actual staking rewards that you may receive, if any, may be affected by validator downtime; changes to validator commission; changes to the blockchain protocol due to protocol governance decisions;
the total amount of ճԹϺ Assets staked on the protocol; the total amount of ճԹϺ Assets staked on Newton; temporary outages or other interruptions affecting the blockchain or Custodian, and; delays or other operational factors when delegating ճԹϺ Assets on your behalf.
i) Newton is not responsible for any losses (including any lost profits, lost revenues or opportunity costs) arising from or relating to any of the factors listed above, including from any slashing penalties or jailing events.
j) Due to the price volatility of ճԹϺ Assets and potential illiquidity of ճԹϺ Assets when disposing of staking rewards, your realized staking return in fiat currency terms (i.e., relative to Canadian dollars) may be significantly different from historic or estimated future rates expressed in ճԹϺ Asset terms. In addition, some blockchain protocols may not distribute rewards immediately after they are earned. As a result of the volatility of ճԹϺ Asset prices, the fiat value of staking rewards may fluctuate between the time rewards are earned and the time the staking rewards are distributed to you by Newton.
k) Newton arranges to stake ճԹϺ Assets belonging to its clients on an aggregated, not individualized, basis. For operational reasons, Newton may not be able to immediately stake or unstake your ճԹϺ Assets when requested to do so. As a result, the amount of staking rewards you receive using the Staking Functionality may differ from staking rewards you would receive by staking ճԹϺ Assets on your own.
l) ճԹϺ assets staked through Newton are staked with approved validators from dedicated wallets with Newton’s Custodian. Newton’s Custodian will continue to hold the private keys or other cryptographic key material required to control staked assets for so long as the assets are staked. Custody, possession and control of staked crypto assets will not be transferred to validators. Your staked crypto assets will not leave Newton’s
omnibus accounts with the Custodian and your crypto assets will continue to be attributed to your account on the Platform.
m) ճԹϺ Assets staked using the Staking Functionality may be subject to technical restrictions specified by the respective blockchain protocol. As described in the Newton TOU, some blockchain protocols impose lock-up periods upon staking, where the staked ճԹϺ Assets cannot be withdrawn until the lock-up period has elapsed (also known as “bonding periods”. Other blockchain protocols may also impose lock-up periods when ճԹϺ Assets are unstaked (also known as “unbonding periods”). During these lock-up periods, previously staked ճԹϺ Assets cannot be transferred and may not accrue staking rewards.
n) As the reward yields, reward payout schedule and lock-up periods may vary significantly between ճԹϺ Assets, please refer to the ճԹϺ Asset Statement of each respective ճԹϺ Asset eligible for staking using the Staking Functionality.
o) Unless otherwise stated in the applicable ճԹϺ Asset Statement, notwithstanding any lock-up periods that may apply to a PoS blockchain network, Newton may make commercially reasonable efforts to allow you to sell or transfer ճԹϺ Assets immediately after unstaking them; however, this is subject to Newton having sufficient liquid ճԹϺ Assets necessary for it to fulfill client instructions to sell or transfer the ճԹϺ Assets. As a result, you may be unable to sell or transfer previously staked ճԹϺ Assets until the applicable lock-up period elapses. Due to the volatility of ճԹϺ Asset prices, staked ճԹϺ Assets may decline in value relative to fiat currency while lock-up periods are in effect.
p) Applicable laws, rules and interpretations and judicial and similar decisions may affect Newton’s ability to offer staking services, including the Staking Functionality, on the Platform and may adversely affect the value, use and transfer of your ճԹϺ Assets and the operations of the Staking Functionality on the Platform..
q) The tax treatment of certain crypto-asset transactions is uncertain and it is your responsibility to determine what taxes, if any, arise from all transactions with your crypto assets, including the staking of ճԹϺ Assets on the Platform. You are solely
responsible for reporting and paying all taxes arising from or related to your ճԹϺ Assets, including from the staking of ճԹϺ Assets. Newton does not provide any investment, legal, tax or other advice to you in connection with staking services, the Staking Functionality or otherwise. You should conduct your own due diligence and consult your own advisors before making any decision to participate in staking services of your ճԹϺ Assets using the Staking Functionality.
Newton is offering ճԹϺ Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re ճԹϺ. dated March 8, 2024(). Please be aware that 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 ճԹϺ Asset Statement to the extent a ճԹϺ Contract is distributed under the prospectus relief in the Decision.