High stakes: things to consider before you agree to “stake” your crypto assets

Special Guest Blog from Doug Harris, General Counsel, Director of Market Regulation and Policy, and Secretary to the Commission

We have previously written about crypto asset trading platforms (CTPs), and that they must be registered with securities regulators to legally offer crypto asset trading services to investors in Nova Scotia.

To make it easier for Nova Scotia investors to determine if a CTP is registered, we have a page on our website that lists all CTPs registered in Nova Scotia and provides links to their exemptive relief documents which outlines their terms and conditions. We update this page as more CTPs become registered.

A new wrinkle for registered CTPs is permission to allow “staking” of crypto assets that are held on the CTP. To date, only Wealthsimple Digital Assets Inc. and Bitbuy Technologies have received this permission, but others are expected to follow.

Staking is the act of committing or locking crypto assets in smart contracts to permit the owner (or, more likely, a third party acting on behalf of the owner) to function as a validator for a particular blockchain that operates on a “proof-of-stake” basis. Unlike “proof-of-work” blockchains, which reward participants (called “miners”) for devoting costly computing resources to validate transactions on the blockchain, a proof-of-stake blockchain rewards validators for staking crypto assets to validate transactions. The well-known crypto currency Ethereum recently switched from proof-of-work to proof-of-stake.

While staking presents the opportunity to earn “passive income” (like dividends from an equity security or interest on a bond) from your crypto assets, it also presents unique risks to investors, including the following:

  • the amount you stake may be forfeited (“slashed”), or subject to other penalties, if the validator performs its function incorrectly;

  • the crypto assets that are staked may be locked up for a period of time, meaning you cannot do anything with the staked assets (such as sell them) during this time, no matter what happens to the price of the crypto asset; and

  • there may be delays in being able to deal freely with your crypto assets after you decide to “unstake” them.

You therefore need to consider these risks carefully before you commit a volatile crypto asset to staking.

Wealthsimple Digital Assets Inc. and Bitbuy Technologies agreed to a number of terms and conditions in connection with offering staking services to investors; among other things, the firm must:

  • assess whether participating in staking is appropriate for each client that wishes to do so;

  • provide clients with a plain language risk statement that describes the risks associated with staking, including whether the firm will reimburse clients for any staked crypto assets lost due to slashing or other penalties imposed due to validator error, action or inactivity, or how any losses will be allocated to clients;

  • immediately before each time a client buys or deposits crypto assets that will be automatically staked pursuant to an existing agreement by the client, provide prominent disclosure to the client that the crypto assets will be automatically staked;

  • monitor its validators for downtime and slashing events and take any appropriate action to protect crypto assets staked by clients; and

  • clearly disclose the fees charged by the firm for staking services and provide a clear calculation of the rewards earned by each client that participates in staking.

If you are a client of a registered CTP that has received permission to allow staking, before deciding to stake your crypto assets you should carefully review the information you receive from the firm and the risks it describes.