What is Filecoin?
Filecoin is similar to other crypto protocols in that it takes a decentralized, permissionless approach, but it has a unique application. Filecoin is a decentralized storage network, allowing users to monetize their extra storage space by securely sharing it with other users. Filecoin is built on top of IPFS, the InterPlanetary File System, a cryptographic file-sharing system that uses blockchain. Filecoin’s innovation on top of this system is to introduce a system of incentives, so users are willing to rent out their space for the purpose of file sharing. These incentives are payments of Filecoin’s cryptocurrency, FIL.
Filecoin is one of the main projects created by Protocol Labs, an open-source research and development lab founded by CEO Juan Benet. This same team created IPFS, the file-sharing system mentioned above that underpins Filecoin’s storage network. Though the Protocol Labs team created Filecoin, they wanted to ensure decentralized governance of the protocol so an independent organization, the Filecoin Foundation, was established to facilitate governance and fund critical development of the protocol.
There are two main types of miners on the Filecoin network. The first, storage miners, provide storage on the Filecoin network using spare space on their computers. The second type are called retrieval miners who facilitate the retrieval of data from the storage miners, acting as a link between hosts and clients. Retrieval miners bid for storage contracts, are paid for performing services in FIL, and if a party fails to deliver on their commitments, the FIL is slashed to incentivize good and reliable services.
In contrast to other validation processes such as Proof-of-Work or Proof-of-Stake, Filecoin’s protocol performs something called Proof-of-Replication and Proof-of-Spacetime. These checks confirm that miners are fulfilling their hosting duties effectively. A miner must submit for these checks on their data or contracts will be deemed inactive and face a “fault fee.” Provided the validation checks are passed, a miner will be paid the agreed storage fee for hosting the files. This transfer occurs automatically via programmed execution.
What is the FIL token?
FIL is the native cryptoasset to the Filecoin blockchain and it is used both to pay service fees and participate in the Filecoin protocol community. Users pay miners in FIL for their storage and retrieval services, and storage providers post FIL as collateral for their storage contracts as a way of holding them accountable to service quality.
While the Filecoin Foundation, an independent organization dedicated to developing Filecoin, supports Filecoin Improvement Proposals (FIP) in a similar way to many other decentralized protocols—where community members propose and vote on improvements to the protocol’s functionality— the voting process is not powered by holders of FIL staking their tokens. FIL is currently only used to pay fees and collateralize contracts, but a future FIP could theoretically change that.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset.
No securities regulatory authority or regulator in Canada has evaluated or endorsed the Crypto Contracts or any of the crypto assets made available through the platform.
Wealthsimple has performed an assessment of whether FIL can be supported by Wealthsimple’s platform, including whether FIL is a security and/or a derivative and is being offered in compliance with securities and derivatives laws.
We evaluated FIL based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of FIL, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created FIL;
- The supply, demand, maturity, utility and liquidity of FIL;
- Material technical risks associated with FIL, including any code defects, security breaches and other threats concerning FIL 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 FIL, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of FIL; and
- Statements made by regulators or securities regulatory authorities in Canada and other jurisdictions regarding whether FIL, or generally about whether the type of crypto asset, is a security and/or a derivative.
Wealthsimple monitors ongoing developments related to crypto assets available on its platform for significant changes that may affect Wealthsimple’s original assessment of those assets, including Wealthsimple’s assessment of the application of securities and derivatives laws. Any significant changes relating to FIL may result in changes to this Crypto Asset Statement and/or Wealthsimple’s ability to support FIL.
Like all other crypto assets, there are some general risks to investing in FIL. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Please review the Wealthsimple Crypto Product Risk Disclosure for additional discussion of general risks associated with the crypto assets made available through the platform.
Additional Risks / Information
FIL has elevated regulatory risk. The United States Securities and Exchange Commission (SEC) has alleged that FIL is a security under U.S. federal securities laws in one or more enforcement proceedings pending before U.S. courts against crypto trading platforms. None of the Protocol Labs or Filecoin Foundation are parties to this proceeding, and the U.S. courts have not determined that FIL is a security. In the event that a U.S. court determines that FIL is a security or there are other material developments affecting the treatment of FIL under securities laws, Wealthsimple may cease to support FIL and/or the market for FIL may be adversely affected.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading FIL. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
Wealthsimple is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Investments Inc. dated December 18, 2023 (the Decision).
The statutory rights of action for damages and rescission in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under securities legislation of other jurisdictions of Canada, do not apply in respect of this Crypto Asset Statement to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
Last updated: January 1, 2024