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Digital asset statement: Bitcoin

This information relates to the Customer’s purchase, holding and sale of bitcoin and the Customer’s contractual right to bitcoin (“Crypto Contracts”). Please read this information statement in its entirety.

This information statement does not disclose all of the risks or relevant considerations of entering into a Crypto Contract with Fidelity Clearing Canada ULC (“FCC”) or in connection with the purchase, holding or sale of bitcoin. The bitcoin will be custodied at Fidelity Digital Asset Services, LLC (“FDAS”).  A summary of the risks applicable to all digital assets, including bitcoin, was previously provided to the Customer.

No securities regulatory authority has expressed an opinion about any of the Digital Assets made available through FCC’s platform, including an opinion that they are not themselves securities and/or derivatives.

While FCC is a member of the Canadian Investor Protection Fund (“CIPF”), bitcoin or the crypto contracts arising from the purchase or sale of bitcoin are not protected by CIPF at this time.

What is Bitcoin?

Bitcoin, often referred to as “virtual currency” or “digital currency”, operates as a decentralized, peer-to-peer financial exchange and value storage that is used like money. Bitcoin operates without the oversight of a central authority or bank and is not backed by any government.

Risks of Investing in Bitcoin

Short History Risk

The peer­to­peer computer network that creates the decentralized public transaction ledger, known as the “blockchain”, where bitcoin transactions are recorded (the “Network”) and bitcoin as a digital asset or token have a limited history. There is no assurance that the use of bitcoin and its Network will continue to grow. It is not clear how all elements of bitcoin will develop over time, including with respect to governance between miners, developers and users. The bitcoin community has successfully navigated technical and political challenges since its inception, and the history of open source software development indicates that a vibrant community is able to change the software under development at a pace sufficient to stay relevant. However, the continuation of such a community is not guaranteed.

Volatility in the Price of Bitcoin

The bitcoin market is sensitive to new developments, and any significant change in market sentiment can induce large swings in volume and price.

The price of bitcoin on public trading platforms has a limited history and is influenced by many factors, including the levels of liquidity on trading platforms. Even the largest trading platforms have been subject to operational interruption, limiting the liquidity of bitcoin on the trading platform market and resulting in volatile prices and a reduction in confidence in the network and in the trading platform market generally.

Momentum pricing of bitcoin results in speculation regarding future appreciation in the value of bitcoin, making it more volatile.

Despite the marked first-mover advantage over other digital assets, it is possible that another digital asset could become more popular and reduce bitcoin’s market share.

Potential Decrease in Global Demand for Bitcoin

As a currency, bitcoin must serve as a means of exchange, store of value and unit of account. For many people, it has become an international means of exchange. Speculators and investors use bitcoin as a store of value, creating further demand. If consumers stop using bitcoin as a means of exchange, or its adoption slows, then bitcoin’s price may suffer.

Bitcoin may not maintain its long-term value in terms of purchasing power in the future and its acceptance for payments by mainstream retail merchants and commercial businesses may not continue to grow.

Financial Institutions may Refuse to Support Transactions Involving Bitcoin

Banks and other financial institutions may refuse to process funds for bitcoin transactions, process wire transfers to or from trading platforms, bitcoin-related companies or service providers, or maintain accounts for persons transacting in bitcoin.

Lack of Insurance

Neither FCC nor FDAS will maintain insurance against risk of loss of bitcoin held for its customers, as such insurance is not currently available in Canada on economically reasonable terms.

FDAS holds most of the bitcoin that it custodies offline in “cold storage”. Digital assets held in cold storage are protected by FDAS’ security measures, which reflect best practices in the payment industry generally and in the cryptoasset space in particular. Bitcoin may also be temporarily held online in a “hot wallet” at FDAS. FDAS currently maintains insurance coverage for digital assets held by it, whether in a “hot wallet” or in its cold storage system. The amount and continuing availability of this coverage are subject to change at FDAS’ sole discretion.

Residency of FDAS

FDAS is resident outside Canada and all or a substantial portion of its assets are located outside Canada. As a result, anyone seeking to enforce legal rights against it in Canada may find it difficult to do so.

Top Bitcoin Holders control a Significant Percentage of the Outstanding Bitcoin

The top 100 bitcoin addresses are believed to hold over 10% of the bitcoin currently outstanding. While this percentage has decreased over the years, it is still significant. If one of these top holders were to exit its bitcoin position, it could cause volatility.

Regulation of Bitcoin

The regulation of bitcoin continues to evolve in North America and within foreign jurisdictions, which may restrict the use of, or otherwise impact the demand for, bitcoin.

Loss of “Private Keys”

The loss or destruction of FCC’s “private keys” could prevent FCC from accessing its customers’ bitcoin. Loss of these private keys may be irreversible and could result in the loss of all or substantially all of a customer’s bitcoin held with FDAS.

Holdings may Become Illiquid

A customer may not always be able to sell his/her/its bitcoin at a desired price. It may become difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in the marketplace, including on trading platforms, or where there is a shortage of bitcoin in the marketplace. Unexpected market illiquidity may cause major losses to the holders of bitcoin.

Improper Transfers

Bitcoin transfers are irreversible. An improper transfer where bitcoin is sent to the wrong person, whether accidentally or resulting from theft, can only be undone if the receiver agrees to send the bitcoin back to the original sender in a subsequent transaction.

Uncertain Regulatory Framework

Due to bitcoin’s short history and its emergence as a new asset class, regulation of bitcoin is still a work in progress. For example, in the United States the Commodity Futures Trading Commission has ruled bitcoin a commodity, while the Internal Revenue Service has ruled it a property. The U.S. Securities and Exchange Commission and the Canadian securities regulators generally take the view that bitcoin is a commodity; however, they have not made a formal statement regarding its classification.

The Department of Finance (Canada) introduced proposed amendments to the Excise Tax Act that, if enacted as proposed, would treat bitcoin as a “financial instrument”, analogous to shares, for purposes of the Excise Tax Act (Canada) and the application of the goods and services or harmonized sales tax. Meanwhile, other jurisdictions, like the European Union, Russia and Japan have moved to treat bitcoin like a currency for taxation purposes.

Because the cryptoasset markets are largely unregulated today, many marketplaces and counterparties that trade or facilitate trading exclusively in cryptoassets are not subject to registration or licensing requirements with any regulatory body and, therefore, are not directly subject to the requirements that apply to financial services firms. This regulatory uncertainty and any future introduction of, or change to, applicable regulation may impact you.

Risks Associated with the Network

Dependence on Bitcoin Developers

While many contributors to the Network’s software are employed by companies in the industry, most of them are not directly compensated for helping to maintain the protocol. As a result, there are no contracts or guarantees that they will continue to contribute to the Network.

Issues with the Cryptography Underlying the Network

Although the Network is an established digital asset network, it and other cryptographic and algorithmic protocols that govern the issuance of digital assets represent a new and rapidly evolving industry that is subject to many factors that are difficult to evaluate. In the past, flaws in the source code for digital assets have been exposed and exploited. The cryptography underlying bitcoin 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 this cryptography becoming ineffective. In any of these circumstances, a malicious actor could take the customer’s bitcoin. If the functionality of the Network is negatively affected, it may no longer be attractive to users.

Disputes on the Development of the Network may Lead to Delays

Contributors to the Network and miners supporting the Network may not agree on how to build and maintain the software. The community often moves slowly on contentious protocol issues.

Increase in Bitcoin Interest may Affect Ability of the Network to Accommodate Demand

One of the most contentious issues within the bitcoin community has been around how to scale the Network as user demand increases. It will be important for the community to continue to develop at a pace that meets the demand for transacting in bitcoin.

The Blockchain may Fork and/or Split

The Network’s software and protocol are open source. When a modification is released by the developers and a substantial majority of miners consent to the modification, the change is implemented and the Network continues uninterrupted. However, if a change is activated without this level of consent, and if the change is not compatible with the existing software, the consequence is known as a “hard fork” (i.e. a split) of the Network and the blockchain. One blockchain is maintained by the pre-modified software and a second by the post-modification software. The effect is that both blockchain algorithms run in parallel to one another, but each builds an independent blockchain with independent native assets.

Two bitcoin hard forks occurred in 2017. Following debate on how to scale the Network’s transaction capacity, on August 1, 2017 the digital currency forked into bitcoin classic and bitcoin cash. On October 24, 2017, bitcoin further forked to create bitcoin gold. All three forks continue to exist today, and though their combined value exceeds the value of the Network prior to the fork, future forking events could be detrimental to the value of the Network.

FCC shall determine which branch of the blockchain it will support, and it is under no obligation to support any other forks or versions.

How a customer deals with a fork in the blockchain is ultimately that customer’s decision. There will likely be many factors relevant to such decision, including the value and liquidity of the new/replacement asset and whether a disposition of such that asset would trigger a taxable event.

Air Drops

Bitcoin may become subject to an occurrence similar to a fork, known as an “air drop”. In an air drop, the promoters of a new digital asset announce to holders of another digital asset that they are entitled to claim a certain amount of the new digital asset for free. For example, in March 2017, the promoters of Stellar Lumens announced that anyone that owned bitcoin as of June 26, 2017 could claim, until August 27, 2017, a certain amount of Stellar Lumens. A customer may or may not participate in an air drop, and may or may not be able to realize the economic benefits of holding the new digital asset.

Dependence on the Internet

Miners relay transactions to one another via the internet, and when blocks are mined they are forwarded via the internet. Companies access blockchain via the internet, and most customers access these companies via the internet. Thus, the entire system is dependent upon the continued functioning of the internet.

Risk if Entity Gains 51% Share of the Network

If an entity gains controls over 51% of the compute power, that entity could use its majority share to double-spend bitcoin. Essentially, it would send bitcoin to one person, which is confirmed in the existing blockchain, while also creating a shadow blockchain that sends the same bitcoin to another person under its control. After a period of time, then it can release its hidden blockchain and reverse the previously confirmed transactions. Because of how mining works, that new blockchain will become the record of truth.

Possible Changes in Transaction Fees

Miners collect fees for each transaction they confirm. They do this by adding previously unconfirmed transactions to new blocks in the blockchain. Miners have historically accepted relatively low transaction confirmation fees because of their low marginal cost of validating unconfirmed transactions. If miners start to demand higher fees, this could reduce the attractiveness of the network.

Attacks on the Network

The Network is periodically subject to distributed denial of service attacks to clog the list of transactions being tabulated by miners, which can slow the confirmation of authentic transactions. Another avenue of attack would be to take a large number of miners offline. As it could take some time before the difficulty of the mining process algorithmically adjusts, block creation time could be stalled, as well as transaction confirmation time. To date, these scenarios have not plagued the Network for long or in a systemic manner.

Decrease in Block Reward

The block reward for the Network will decrease over time. On May 11, 2020, the block reward reduced from 12.5 to 6.25 bitcoin. The block reward will decrease to 3.125 bitcoin in 2024. As the block reward decreases, the mining incentive structure may move to higher transaction verification fees. If transaction verification fees become too high, the marketplace may be reluctant to use bitcoin.

Competitors to Bitcoin

To the extent that a competitor to bitcoin gains popularity and greater market share, the use and price of bitcoin may be negatively impacted. Bitcoin and the price of bitcoin may also be negatively impacted by competition from incumbents in the credit card and payments industries.

Concentration of Transaction Confirmation Processing Power in China

Due to preferential electricity discounts, there are large mining pools operating in China. The Chinese government could affect the operations of these miners in a number of ways. First, all traffic to the mining pools must pass through the Great Firewall of China, which means the Chinese government could cut off their connection to the network. Second, the Chinese government has previously partially banned bitcoin, and there is no guarantee that it will not attempt to do so in full. If the government bans bitcoin, it may make mining bitcoin an unattractive activity to most Chinese miners, which could be detrimental to the Network.

Significant Energy Consumption to Run the Network

Because of the significant computing power required to mine bitcoin, the network’s energy consumption may ultimately be deemed to be, or become, unsustainable, barring improvements in efficiency that could be designed for the protocol. This could pose a risk to the broader and more sustained acceptance of the network as a peer-to-peer transactional platform.

Application of Certain Securities Laws

The rights in section 130.1 of the Securities Act (Ontario), and similar rights under the securities legislation of the other provinces and territories of Canada, do not apply in respect of the Risk Statement or this Digital Asset Statement. For ease of reference, section 130.1 of the Securities Act (Ontario) is reproduced below:

Liability for misrepresentation in offering memorandum

130.1 (1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights:

1.  The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made.

2.  If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company.  If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company.

Digital Assets on FCC’s Platform Are Not Securities or Derivatives

Prior to offering a Crypto Contract on a particular Digital Asset, FCC assesses whether the Digital Asset is a security and/or derivative under the securities and derivatives laws of each of the provinces and territories of Canada and the province or territory with which the Digital Asset has the most significant connection. FCC’s assessment includes a review of the history of the Digital Asset (such as how was it created and its applicable governance structure), the characteristics of the Digital Asset, market capitalization and any regulatory concerns relating thereto.

If the Digital Asset is a security or a derivative under the securities or the derivatives laws of a province of territory of Canada, or it becomes characterized as such, then FCC is not permitted to offer that Digital Asset on its platform. Please refer to the Digital Asset Services Client Agreement for the steps that FCC will take to remove a Digital Asset from its platform if it is determined that the Digital Asset is a security or a derivative.

This information was prepared as of November 17, 2021.