The information contained in this Crypto Asset Statement was last updated on August 15, 2022.
No securities regulatory authority in Canada has expressed an opinion about DAI or any of the other Crypto Contracts or Crypto Assets made available through Newton Crypto Ltd. (Newton) on the Newton Platform, including an opinion that DAI itself is not a security and/or derivative. Changes to applicable law may adversely affect the use, transfer, exchange, or value of any of your crypto assets, and such changes may be sudden and without notice.
Newton is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Newton Crypto Ltd. dated August 15, 2022. The statutory rights of action for damages and the right of rescission in section 130.1 of the Securities Act (Ontario) and similar legislation in the other provinces and territories of Canada would not apply in respect of a misrepresentation in this Crypto Asset Statement or the Newton Platform Risk Statement.
This overview provides a summary of certain risks associated with DAI and is not an exhaustive description or summary of these risks and, in addition, does not take into account an individual’s particular situation or risk tolerance. Investors are encouraged to conduct their own research prior to trading any crypto asset.
Newton users should read the Newton Platform Risk Statement for additional discussion of general risks associated with crypto assets made available through the Newton platform. A copy of the Newton Platform Risk Statement acknowledged by you is available in your account in the “Statements & Reports” section.
Token Description & Project Background
DAI (DAI) is a decentralized, collateral-backed cryptocurrency on the Ethereum blockchain. It was created in December 2017 by MakerDAO, an open-source protocol that was founded in 2014 by Danish entrepreneur Rune Christensen. DAI is governed by the Maker protocol, which is a decentralized application (dApp) whose function is to collect collateral and make loans of DAI in an automated fashion. The Maker platform uses smart contracts to facilitate lending and borrowing and, through the use of smart contracts, users, or “borrowers,” are able to redeem DAI in exchange for depositing Ethereum-based tokens as collateral, similar to collateral in a loan. If a borrower wishes to later recover the locked tokens, they will need to return the DAI to the protocol and pay a small fee.
DAI is a decentralized, Ethereum-based stablecoin that strives to maintain a consistent value of $1.00 USD. Unlike centralized stablecoins, DAI isn't backed by US dollars in a bank account; rather, it is backed by numerous collateral assets on the MakerDAO platform.
* Currently, Newton does not provide its users with the ability to participate in the governance functions of DAI.
Risks of DAI
Like an investment in other crypto assets, an investment in DAI includes the following general risks: (i) volatility risk and liquidity risk, (ii) short history risk, (iii) demand risk, (iv) forking risk, (v) code defects, (vi) regulatory risk, (vii) electronic trading risk, and (viii) cyber security risk.
For additional information of general risks associated with crypto assets, you may refer to the Newton Platform Risk Statement. In terms of specific risks, as DAI is one of the longest-standing crypto assets and its community base is widely decentralized, there is no central working group or authority to disclose material information to the public regarding DAI.
Specific Risks of DAI
DAI is a multicollateral-backed stablecoin, which in theory is backed 1-to-1 with the equivalent value of collateral (in DAI’s case, by having a vault of crypto assets which can include assets such as ETH or other crypto assets) for each stablecoin token issued with the intent of making the token redeemable for the equivalent fiat value in crypto currency at the behest of the stablecoin holder. The crypto reserve underlying DAI is intended to mitigate against the potential of the stablecoin “depegging” from the crypto currency that it is pegged to, i.e. having one unit of the stablecoin being different in value from one unit of the target crypto currency.
Risk of Insufficient Reserves. Crypto-backed stablecoins such as DAI may become depegged in the scenario that the stablecoin does not have enough crypto cash or cash equivalents to redeem all of the coins that holders have requested to redeem. This is similar to what is called a “bank run” in the traditional finance space when more claims have been issued than the amount of cash the institution has on hand to fulfill those claims. To counter these concerns, the Maker DAO, the decentralized organization which runs DAI, requires that any loans borrowed in DAI be overcollateralized. Overcollateralization refers to the practice of requiring the borrower to put up more than 100% of the loan’s value as collateral. In the event that the borrower cannot pay back the loan, the collateral is forfeited by the borrower. However, in the event that crypto asset prices drop suddenly and substantially, the value of the collateral backing DAI will also drop, triggering margin calls on borrowers who have borrowed DAI. If enough margin calls are unable to be fulfilled, and the value of the collateral backing DAI keeps dropping, this could cause a depegging event.
Liquidity Risks of Reserves. There also exists some risk of the different types of assets used to back some stablecoins. Although some stablecoins label assets as “cash equivalents”, whether an asset should be considered a cash equivalent should be evaluated by those conducting due diligence on the token in question.
Regulatory Risks. For any stablecoin issued by a decentralized autonomous organization (DAO), there is the possibility that regulators may deem DAOs as unregulated entities that are conducting or providing financial services without the necessary regulatory approvals. Thus, it is a possibility that regulators may try to clamp down on DAOs, particularly ones that issue stablecoins which face extra regulatory scrutiny because of stablecoins’ use and similarity with the traditional fiat money and traditional financial services surrounding lending and borrowing.
Please note that these risks and the associated summaries or overviews provided for each herein are not intended to be an exhaustive discussion pertaining to all such risks and, in addition, there may be other risks that come with exposure to DAI. We encourage all Newton users to perform their own due diligence to assess the risks associated with DAI and to determine whether this level of risk is acceptable to them. Neither DAI nor Newton guarantees the value of DAI, and holders of DAI will not have any recourse to DAI or Newton if the value of DAI declines for any reason whatsoever.
Newton’s Evaluation Process
Newton has reviewed and assessed DAI prior to making it available on the Newton Platform and has concluded that DAI is not a security or derivative under Canadian securities legislation; however, there is a risk that this conclusion could change in the future and that, in such event, Newton will be required to halt, suspend, and then remove DAI from its platform as described in the Newton Platform Risk Statement.
Further, as indicated above, no Canadian securities regulatory authority has expressed an opinion about DAI, including an opinion that DAI is not itself a security and/or derivative.
Based on publicly available information Newton has reviewed DAI, including, but not limited to, a review of the following:
- The creation, governance, usage, and design of DAI, including the source code, security, and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that created DAI.
- The supply, demand, maturity, utility, and liquidity of DAI.
- Material technical risks associated with DAI, including any code defects, security breaches and other threats concerning DAI 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 DAI, including (i) any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of DAI, and (ii) statements made by any securities regulatory authorities in Canada, other regulators in IOSCO-member jurisdictions, or the regulator with the most significant connection to DAI about whether DAI, or generally about whether the type of crypto asset, is a security and/or derivative.
A link to the DAI White Paper is available at the following link.