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 USD Coin 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 USD Coin 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 USD Coin 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
USD Coin (USDC) was launched in late 2018 and created by a partnership between crypto asset exchange Coinbase and the financial services provider Circle known as the “CENTRE Consortium” (CENTRE) as a way of “tokenizing” US dollars on a blockchain. CENTRE develops and maintains the technology and governing framework of USDC. The rationale in creating USDC was that sending these tokenized dollars across a blockchain network was faster, cheaper and more efficient than sending US dollars through a traditional banking system.
USDC is a decentralized stablecoin running on Ethereum that attempts to maintain a value that is pegged 1:1 to the US dollar. USDC is also found on multiple public blockchains, including Ethereum, Solana, Algorand, Stellar and Tron. Each USDC is designed to be backed by one US dollar, or an asset with an equivalent value. Newton does not support or guarantee USDC’s peg to the US dollar. Changes in supply and demand of stablecoins may cause stablecoins (including USDC) to move off their peg. To assist with maintaining this peg, USDC is created when a user sends US dollars to the token issuer’s bank account and interacts with the smart contract on the blockchain that the user wants to use. When a holder of USDC redeems USDC, the process is reversed and the equivalent amount of USDC is “burned” and removed from circulation and the funds underlying USDC’s reserves are transferred to the holder’s external bank.
Risks of USD Coin
Like an investment in other crypto assets, an investment in USD Coin 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 USD Coin 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 USD Coin.
Specific Risks of USD Coin
USD Coin is a fiat-backed stablecoin, which in theory is backed 1-to-1 with cash or cash equivalents for each stablecoin token issued, with the intent of making the token redeemable for fiat currency at the behest of the stablecoin holder. The fiat reserve underlying USD Coin is intended to mitigate against the potential of the stablecoin “depegging” from the fiat currency that it is pegged to, i.e. having one unit of the stablecoin being different in value from one unit of the target fiat currency.
Risk of Insufficient Reserves. Fiat-backed stablecoins such as USD Coin may become depegged in the scenario that the stablecoin does not have enough fiat 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, some stablecoin issuers work directly with regulators and auditors and publish the results of their audit to show that they indeed hold enough cash and cash equivalents to fulfill all claims; however, due to the relatively new nature of stablecoin structures and reporting on these reserve, there can be no assurances that such publications are accurate or will be sufficient to satisfy the claims of holders of USD Coin in the face of significant redemptions.
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. For example, during times of financial distress, it is possible that “commercial paper” may become illiquid which would significantly impact the value of USD Coin.
Solvency Issues of Issuers of Reserve Assets. It is also worth noting that some stablecoins may release data about the proportion of commercial paper backing USD Coin, but not disclose the issuers of such commercial paper making it difficult to ascertain the solvency risk of those commercial papers. Solvency issues of issuers whose commercial paper (or any similar instruments) held by USD Coin could significantly impair the value of USD Coin.
Centralization and Regulatory Risks. Since fiat-backed stablecoins require a centralized issuer, there are financial and regulatory risks associated with the issuer. If the issuer of a stablecoin is found to be non-compliant with their local rules and/or regulations, this could cause the integrity or redeemability of the stablecoin to be called into question, thereby introducing the risk of a depegging event. Likewise, if a stablecoin issuer is to encounter difficulties from a financial or operational perspective such as becoming insolvent or having to slow or pause operations, this also introduces the risk of a depegging event for their issued stablecoin, which could significantly impact the value of the related stablecoin.
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 USD Coin. We encourage all Newton users to perform their own due diligence to assess the risks associated with USD Coin and to determine whether this level of risk is acceptable to them. Neither USD Coin nor Newton guarantees the value of USD Coin, and holders of USD Coin will not have any recourse to USD Coin or Newton if the value of USD Coin declines for any reason whatsoever.
Newton’s Evaluation Process
Newton has reviewed and assessed USD Coin prior to making it available on the Newton Platform and has concluded that USD Coin 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 USD Coin 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 USD Coin, including an opinion that USD Coin is not itself a security and/or derivative.
Based on publicly available information Newton has reviewed USD Coin, including, but not limited to, a review of the following:
- The creation, governance, usage, and design of USD Coin, including the source code, security, and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that created USD Coin.
- The supply, demand, maturity, utility, and liquidity of USD Coin.
- Material technical risks associated with USD Coin, including any code defects, security breaches and other threats concerning USD Coin 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 USD Coin, including (i) any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of USD Coin, 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 USD Coin about whether USD Coin, or generally about whether the type of crypto asset, is a security and/or derivative.
A link to the USD Coin White Paper is available at the following link.