Wealthsimple Investment Inc.

Appendix A – Terms and Conditions relating to Staking Services

The Dealer Member operates, or intends to operate, a platform that facilitates the trading of crypto assets as defined by CSA Staff Notice 21-327 (Crypto Assets).

The Dealer Member has requested to offer staking services (Staking Services) to its customers, where staking is the act of committing or locking Crypto Assets in smart contracts or in the blockchain protocol to permit the owner or the owner’s agent to act as a validator for a particular proof of stake consensus algorithm blockchain.

In connection with the provision of Staking Services, the Dealer Member is subject to the following terms and conditions:

Scope

1. Unless CIRO has provided its prior written consent, the Dealer Member will offer clients the Staking Services only for:

  1. Crypto Assets of blockchains that use a proof of stake consensus mechanism; and
  2. the staked Crypto Assets that are used to guarantee the legitimacy of new transactions the validator adds to the blockchain.

Dealer Member proficiency

2. The Dealer Member is proficient and knowledgeable about staking Crypto Assets.

Validator due diligence and monitoring

3. The Dealer Member will not, without the prior written consent of CIRO:

  1. act as a validator; or
  2. contract with a staking services provider under terms requiring the Dealer Member to authorize the delegation of validator keys.

4. Before engaging a validator, the Dealer member will conduct due diligence on the validator, with consideration of, but not limited to:

  1. the persons or entities that manage and direct the operations of the validator,
  2. the validator’s reputation and use by others,
  3. the amount of Crypto Assets the validator has staked on its own nodes,
  4. the measures in place by the validator to operate the nodes securely and reliably,
  5. the financial status of the validator,
  6. the performance history of the validator, including but not limited to the amount of downtime of the validator, past history of “double signing” and “double attestation/voting,”
  7. any losses of Crypto Assets related to the validator’s actions or inactions, including losses resulting from slashing, jailing or other penalties incurred by the validator, and
  8. any guarantees offered by the validator against losses including losses resulting from slashing or other penalties and any insurance obtained by the validator that may cover this risk.

5. Before engaging a custodian to provide staking services, the Dealer Member will conduct due diligence on how the custodian provides the staking services and selects the validators.

6. The Dealer Member will monitor its validators for downtime, jailing and slashing events and take any appropriate action to protect Crypto Assets staked by clients.

Account appropriateness assessment

7. The Dealer Member has updated its product due diligence policies and procedures to review the Crypto Assets made available to clients for staking and staking protocols related to those Crypto Assets prior to offering those Crypto Assets as part of the Staking Services. The Dealer Member’s review will include, at a minimum, the following:

  1. the Crypto Assets that the Dealer Member proposes to offer for staking;
  2. the operation of the proof-of-stake blockchain for the Crypto Assets that the Dealer Member proposes to offer for staking;
  3. the staking protocols for the Crypto Assets that the Dealer Member proposes to offer for staking;
  4. the risks of loss of the staked Crypto Assets, including from software bugs and hacks of the protocol; and
  5. the validators engaged by the Dealer Member or the Dealer Member’s custodian.

8. The Dealer Member has updated its policies and procedures to conduct a staking appropriateness assessment for a client before making the Staking Services available to that client.

9. The Dealer Member will apply the updated account appropriateness policies and procedures to evaluate whether offering the Staking Services is appropriate for a client before providing access to an account that makes available the Staking Services and, on an ongoing basis, at least once in each 12-month period.

10. If, after completion of an account-level appropriateness assessment, the Dealer Member determines that providing the Staking Services is not appropriate for the client, the Dealer Member will notify the client that this is the case, and the Dealer Member will not make available the Staking Services to the client.

11. The Dealer Member will only stake the Crypto Assets of those clients who have agreed to the Staking Services and have allocated Crypto Assets to be staked. Where a client no longer wishes to stake all or a portion of the allocated Crypto Assets, subject to any Lock-Up Periods (as defined below) or any terms of the Staking Services that permit the client to remove Crypto Assets from the Staking Services prior to the expiry of any Lock-Up Periods, the Dealer Member will cease to stake those Crypto Assets.

12. As required under IDPC Rule 3300 and CIRO Notice GN-3300-21-001, the Dealer Member must keep records that document the product due diligence reviews conducted.

Disclosure

13. Before the first time a client allocates any Crypto Assets to be staked, the Dealer Member will deliver to the client a statement describing those risks with respect to staking and the Staking Services described in Paragraph 14 below (the Risk Statement) and will require the client to provide electronic acknowledgement of having received, read and understood the Risk Statement.

14. The Dealer Member will clearly explain in the Risk Statement the risks with respect to staking and the Staking Services in plain language, which will include, at a minimum:

  1. the details of the Staking Services and the role of all third parties involved;
  2. the due diligence performed by the Dealer Member with respect to the proof-of-stake consensus protocol for each Crypto Asset for which the Dealer Member provides the Staking Services;
  3. the details of the validators that will be used for the Staking Services and the due diligence performed by the Dealer Member with respect to the validators and their ongoing performance;
  4. the details of whether and how the custody of staked Crypto Assets differs from Crypto Assets held on behalf of the Dealer Member’s clients that are not engaged in staking;
  5. the general risks related to staking and any risks arising from the arrangements used by the Dealer Member to offer the Staking Services (e.g., reliance on third parties; risk of loss due to technical errors or bugs in the protocol; hacks or theft from the Crypto Assets being held in hot wallets, etc.) and how any losses will be allocated to clients;
  6. whether any of the staked Crypto Assets are subject to any lock-up, unbonding, unstaking, or similar periods imposed by the Crypto Asset protocol, custodian or validator, where such Crypto Assets will not be accessible to the client or will be accessible only after payment of additional fees or penalties or forfeiture of any rewards (Lock-up Periods); and
  7. how rewards are calculated on the staked Crypto Assets, including any fees charged by the Dealer Member or any third party, how rewards are paid out to clients, and any associated risks.

15. Immediately before each time that a client allocates Crypto Assets to be staked under the Staking Services, the Dealer Member will require the client to acknowledge the risks of staking Crypto Assets as may be applicable to the particular Staking Services or each particular Crypto Asset, including, but not limited to:

  1. that the staked Crypto Assets may be subject to a Lock-up Period and, consequently, the client may not be able to sell or withdraw their Crypto Assets for a predetermined or unknown period of time, with details of any known period, if applicable
  2. that given the volatility of Crypto Assets, the value of a client’s staked Crypto Assets when they are able to sell or withdraw, combined with the value of any Crypto Assets earned through staking, may be significantly less than their current value
  3. how rewards will be calculated and paid out to clients and any risks inherent in the calculation and payout of any rewards
  4. unless the Dealer Member has clearly indicated the reward yield is fixed and unconditional, that there is no guarantee that the client will receive any rewards on the staked Crypto Assets, and that past rewards are not indicative of expected future rewards
  5. whether rewards may be changed at the discretion of the Dealer Member
  6. that the client may lose all or a portion of the client’s staked Crypto Assets if the validator does not perform as required by the network
  7. that additional risks can be found in the Risk Statement and the statement where the Dealer Member has described the Crypto Asset and its risks (the Crypto Asset Statement), including the names and other information regarding the validators and information regarding Lock- up Periods and rewards, with a link to the Risk Statement and Crypto Asset Statement.

16. Immediately before each time a client buys or deposits Crypto Assets that will be automatically staked pursuant to an existing agreement by the client to the Staking Services, the Dealer Member will provide prominent disclosure to the client that the Crypto Assets it is about to buy or deposit will be automatically staked.

17. The Dealer Member will promptly update the Risk Statement and each Crypto Asset Statement to reflect any material changes to the disclosure or include any material risks that may develop with respect to the Staking Services and/or Crypto Assets.

18. In the event of any update to the Risk Statement, for each existing client that has agreed to the Staking Services, the Dealer Member will promptly notify the client of the update and deliver to them a copy of the updated Risk Statement.

19. In the event of any update to a Crypto Asset Statement, for each existing client that has agreed to the Staking Services in respect of the Crypto Asset for which the Crypto Asset Statement was updated, the Dealer Member will promptly notify the client of the update and deliver to the client a copy of the updated Crypto Asset Statement.

Custody of staked Crypto Assets

20. The Dealer Member or its custodians will remain in possession, custody and control of the staked Crypto Assets at all times.

21. The Dealer Member will establish and maintain policies and procedures that manage and mitigate custodial risks for staked Crypto Assets, including but not limited to an effective system of controls and supervision to safeguard the staked Crypto Assets. Where the Dealer Member contracts with a staking services provider as contemplated under Paragraph 3(b), such controls will include:

  1. Review and evaluation, before approval and at least annually thereafter:
    1. the staking service provider’s audited financial statements prepared by a qualified independent auditor
    2. the staking service provider’s business continuity and disaster recovery plans
    3. assurance reports prepared by a qualified independent auditor attesting to the staking service provider’s internal controls
    4. results of penetration testing performed on the staking service provider’s information technology systems; and
  2. procedures to terminate the delegation and ensure it retains control of the Crypto Assets as required under paragraph 20.

Segregation

22. The Dealer Member will hold the staked Crypto Assets for its clients in one or more omnibus Locations in the name of the Dealer Member separate and distinct from (i) the assets of the Dealer Member; and (ii) the Crypto Assets held for its clients that have not agreed to staking those specific Crypto Assets. A Location5  is an address or wallet (or group of addresses or wallets) that is (are) subject to a distinct pre-set governance policy within the private key management solution employed by the Dealer Member or its custodian. For greater certainty, the Dealer Member (or its custodian) will not stake customer Crypto Assets from the same Location in which it holds unstaked customer Crypto Assets.

23. Notwithstanding Paragraph 22, a Dealer Member may maintain a residual proprietary interest in the Locations holding customer staked Crypto Assets:

  1. to meet minimum quantity requirements established by a proof of stake network
  2. to maintain preferential validator selection criteria while managing turnover in customer staked positions, where this portion of the residual proprietary interest corresponds with historical turnover.
  3. to the extent that such Locations temporarily hold fees payable to the Dealer Member from staking rewards received for clients.

24. The Dealer Member will establish and apply procedures:

  1. to segregate customers Crypto Assets promptly upon acquisition, unless subject to prior instructions by the customer to stake them
  2. to, at least daily, detect, report, and correct deficiencies in all Locations holding customers’ Crypto Assets.

25. If the Dealer Member permits clients to remove Crypto Assets from the Staking Services prior to the expiry of any Lock-up Period,

  1. the Dealer Member will extend this permission only on a best-efforts basis, and this condition must be expressly disclosed to and acknowledged by the client
  2. the Dealer Member will establish and apply appropriate liquidity management policies and procedures to fulfill segregation and delivery obligations arising from such requests from the Dealer Member’s inventory.
  3. the Dealer Member acknowledges that it holds Crypto Assets in trust for its clients and will not use the Crypto Assets of its clients for fulfilling delivery obligations arising from such requests. The Dealer Member will establish and maintain internal controls to:
    1. promptly segregate positions from its inventory equal to the amount the Dealer Member has permitted to be unstaked; and
    2. prevent the Dealer Member from using client assets to settle delivery obligations related to positions it has permitted to be unstaked.

Guarantees

26. The Dealer Member will not provide any guarantee related to the risks of staking services.

Rewards, fees, and losses

27. The Dealer Member has established, and will maintain and apply, policies and procedures to address how staking rewards, fees and losses will be calculated and allocated to clients that have staked Crypto Assets.

28. Where the Dealer Member offers a fixed and unconditional reward, its policies and procedures must include those to accrue for reward obligations and maintain sufficient inventory to offset reward obligations at the time of accrual.

29. The Dealer Member will regularly and promptly determine the amount of staking rewards earned by each client that has staked Crypto Assets under the Staking Services and distribute each client’s staking rewards to the client promptly after they are made available to the Dealer Member.

30. The Dealer Member will estimate the rewards it has earned on behalf of its customers’ and proprietary positions in Crypto Assets, compare the estimate to rewards received, investigate significant discrepancies, and take appropriate corresponding actions.

31. The Dealer Member will clearly disclose the fees charged by the Dealer Member for the Staking Services and provide a clear calculation of the rewards earned by each client that agrees to the Staking Services.

32. The Member will engage its auditor to perform procedures, satisfactory to CIRO, designed to verify that the Member maintains books and records reflecting:

  1. rewards earned from all proof of stake networks on which it participates in staking
  2. the allocation of rewards to customers and the Dealer Member in a manner that is consistent with the Dealer Member’s policies and procedures.

Staking Services reporting

33. The Dealer Member will provide certain reporting in respect of the preceding calendar quarter to CIRO and its Principal Regulator within 30 days of the end of March, June, September and December in connection with the Staking Services, including, but not limited to:

  1. the total number of clients to which the Dealer Member provides the Staking Services;
  2. the Crypto Assets for which the Staking Services are offered;
  3. for each Crypto Asset that may be staked:
    1. the amount of Crypto Assets staked
    2. the amount of each such Crypto Assets staked that is subject to a Lock-up Period and the length of the Lock-up Period
    3. the amount of Crypto Assets that clients have requested to unstake
    4. the amount of rewards earned by the Dealer Member and the clients for the Crypto Assets staked under the Staking Services;
  4. the names of any third parties used to conduct the Staking Services;
  5. any instance of slashing, jailing or other penalties being imposed for validator error and the details of why these penalties were imposed;
  6. any reporting regarding the Dealer Member’s liquidity management as requested by the Principal Regulator; and
  7. the value, at the end of each period, of the Dealer Member’s residual proprietary interest in segregated staked Locations for each Crypto Asset staked.

These terms and conditions may be amended upon prior written notice to WSII.

Appendix B – Other Terms and Conditions

Trading Information

1. WSII at its cost, shall be responsible for providing CIRO, in the form and format specified by CIRO, with (i) access to information relating to trades executed utilizing WS trading platform and (ii) any other information reasonably required by CIRO to effectively monitor the conduct of trading.

2. At CIRO’s request, WSII shall, at WSII’s cost, provide CIRO with historic trade information and trading related activity on WSII trading platform. Such information shall be provided in such form and in such format as CIRO requests and within such time periods as CIRO shall reasonably direct.

Liquidity Providers

3. WSII will take reasonable steps to verify, before using a Liquidity Provider, that the Liquidity Provider is appropriately registered and/or licensed to trade in crypto assets in their home jurisdiction or that their activities do not require registration in their home jurisdiction and that they are not in default of securities legislation in Canada.

4. If WSII becomes aware that a Liquidity Provider is not appropriately registered or licensed to trade in crypto assets in their home jurisdiction as required or that the Liquidity Provider is in default of securities legislation in any jurisdiction in Canada, WSII will seek approval from CIRO to continue use of the Liquidity Provider, or, failing that approval, will follow established policies and procedures to promptly cease trading of any crypto assets with the Liquidity Provider except to allow clients to liquidate their positions.

Training for Approved Persons

5. WSII will provide training, as represented to CIRO, to all Approved Persons, including Executives, Investment Representatives and Supervisors, as well as compliance staff, upon approval of the business line change in order to ensure ongoing compliance with training and proficiency requirements in IDPC Rules 1407 and 2602(2).

6. WSII will provide CIRO staff with notice of any substantive changes to its internal training plan including detailed analysis and explanation of the change, no later than 30 days in advance of the change.

  • 5In recognition of evolving technologies, CIRO may consider other structures and/or further refinement to what meets the definition of “Location”, which are dependent on the CTP being able to demonstrate, to the satisfaction of CIRO, that the CTP’s infrastructure and procedures satisfy the principles of segregation in a manner consistent with the priority of investor protection.