Risk Disclosure

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Last Modified:  August 12, 2022      

This Newton Platform Risk Statement (Risk Statement) is being delivered to you in connection with the opening of an account (Account) with Newton Crypto Ltd. (Newton) to buy, sell and hold crypto assets on Newton’s crypto asset trading platform (the Newton Platform) and is incorporated by reference into the online terms of service (the Newton TOU) that you will accept at the time of account opening. Capitalized terms used and not defined in this Risk Statement have the meanings given to them in the Newton TOU.

No securities regulatory authority has expressed an opinion about the Crypto Contracts (as defined below) or any of the crypto assets made available on the Newton Platform, including any opinion that a crypto asset is not a security and/or derivative.

By using the Newton 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:

1. 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 Newton 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, and you have the right to withdraw your crypto assets from the Newton Platform at any time subject to payment of the withdrawal fee set out in the Newton TOU. This arrangement may expose you to insolvency risk (credit risk), fraud risk or proficiency risk on the part of Newton or the Custodian (as discussed in section 4) 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. Newton is not a member of the Canadian Investor Protection Fund (CIPF) and the crypto assets held by Newton (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. Newton 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 Newton 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. Newton is not responsible for any communication failures, disruptions, errors, distortions, or delays you may experience when trading via the Services, however caused.

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.

(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)

(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) 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 Newton 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.

Open source developers of various blockchain technology have signaled that they will continue to make efforts to improve the scalability and security of public blockchains. For example, in respect of the Ethereum blockchain, developers are planning to replace the current hash-based mining consensus mechanism of proof- of-work with a proof-of-stake mechanism. Changes may also occur to the Bitcoin blockchain; for example with the continued development of scalability protocols like the Lightning Network, which operates on top of the Bitcoin blockchain. The expected timing and impacts of this change are uncertain. Similar risks apply to other forks of Bitcoin source code like Litecoin or Bitcoin Cash.

(e) 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. Newton may choose not to support any future fork of the underlying blockchain of the crypto assets available on the Newton 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 (DApps) 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. Newton 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.

(f) 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 Newton Platform.

(g) 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 Newton to lose proprietary information or other information subject to privacy laws, suffer data corruption, or lose operational capacity. This in turn could cause Newton 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 Newton’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 Newton’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, Newton has established risk management systems designed to reduce the risks associated with cyber security.

(h) Stablecoin Risks. Some of the crypto assets available on the Newton 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. Newton conducts due diligence on all stablecoins listed on the Newton 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. Specific risks associated with each stablecoin are set out in the plain language description of each crypto asset listed on the Newton Platform (each, a Crypto Asset Statement).

(i) 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.

4. Safekeeping of Crypto 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 Crypto 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.

Newton is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re Newton Crypto Ltd. dated August 15, 2022 (the Decision). 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 Crypto Asset Statement to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.

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