Wealthsimple started as a safe haven for investors — now it’s a major player in crypto

The neon-blue coin hovered above a lunar landscape, five words etched along its perimeter: “financial power for the people.”

Wealthsimple, a Toronto-based financial services company, circulated the animation in an email to its members in February alongside an exciting announcement: a buzzy cryptocurrency called TerraUSD was officially available to buy through Wealthsimple’s trading app.

“Earth to crypto explorers: Terra (LUNA) has landed,” the company wrote.

Since August 2020, when Wealthsimple launched Canada’s first regulated cryptocurrency exchange, this kind of announcement has become routine for the company.

Wealthsimple has been steadily expanding the number of cryptocurrencies its users can buy and sell, from popular offerings like bitcoin and ethereum to more obscure options like Dogecoin, ApeCoin, Shiba Inu — even one called SushiSwap.

Some of those digital assets are prone to collapse, erasing investors’ money in the blink of an eye.

In May, four months after Wealthsimple introduced its users to TerraUSD, the so-called “stablecoin” wiped out nearly $60 billion of investor funds in a sudden crash.

Though TerraUSD promoted itself as an asset that hedged against the high volatility of cryptocurrencies, investors saw the value of the coin plummet from $86 to $0.00031 (U.S.) in the span of a week, a nearly 100 per cent drop.

Judging by Wealthsimple’s astronomical growth over the COVID-19 pandemic, the company’s foray into the cryptosphere has been great for business. But it also marks a significant shift from the company’s foundational objective — namely, to help millennials grow their wealth safely over the long haul.

What began as a place for early-stage investors to save for the future has since embraced a nascent form of easy-access trading that critics say has “gamified” the process of investing.

While Wealthsimple actively warns its users of crypto’s volatility and encourages them to research assets carefully before buying, the company has simultaneously embarked on an aggressive advertising blitz to attract new members, circulating promotional discounts and emails with subject lines like, “100 Dogecoin are waiting for you,” “Ethereum just got way better,” or “Psst — SHIB is here.”

In written responses to the Star, Wealthsimple said that its approach is designed to help clients learn the ins and outs of smart investing.

“We know for a lot of our clients, we’re their first introduction to investing, which is why we are regularly communicating with them — via email, in app, on social media and through our magazine,” a spokesperson for the company said.

On its blog, the company says it sees value in making digital assets accessible to early-stage investors.

“They have the potential to create tremendous value and upside for people who believe in and invest in them,” wrote Danish Ajmeri, head of Wealthsimple Crypto, in a post last November.

“Especially younger investors who have the benefit of time, so they can wait for the crypto space to mature and grow in value. Providing access to these investments for everyone, not just the people who have historically had access to innovative investments — as well as educating people to the very real downside risks — is essential.”

But critics of crypto-friendly brokerages worry that the intermixing of cryptocurrency and traditional securities is destined to conflate two very different assets and push speculative, risky bets onto clients.

“We’ve seen too many investors get sucked into this casino-like game, trading things that have no underlying value whatsoever,” said Jim Stanford, an economist and the director of the Centre for Future Work.

“When institutions come out and say that these coins are the way of the future, or that they’re a hedge against inflation … they’re engaging in practices that are very misleading, and even private companies shouldn’t be able to do that.”

Cryptocurrencies have lost nearly $1 trillion in value in 2022, alarming regulators and renewing calls for tougher restrictions on exchanges and dealers.

Last month, European Central Bank President Christine Lagarde pressed European countries to broaden regulatory measures, citing concern for crypto investors “who have no understanding of the risks, who will lose it all and who will be terribly disappointed.”

When he launched Wealthsimple in 2014 at age 27, CEO Michael Katchen sought to make “smart investing easy, low-cost and transparent” for young people.

Through robo-advisers and self-directed accounts, the millennial’s startup let clients stash their money in a safe portfolio of ETFs and index funds that could passively accumulate wealth over decades.

But as Wealthsimple grew, so did its ambitions. By 2019, the company had launched Wealthsimple Trade, an app that allows investors to buy and sell stocks at the press of a button. One year later, the company added Wealthsimple Crypto, becoming the only major financial institution in Canada to let its clients trade cryptocurrency.

Since then, Wealthsimple’s membership has exploded.

The company is privately owned by Power Corporation of Canada and does not release quarterly financial results, but filings from Power Corp. shed light on Wealthsimple’s growth.

Between 2019 and 2022, the company grew its user base to 2.5 million clients from 175,000 — a stratospheric increase of 1,329 per cent. By December 2021, after a year of “meme stocks” and crypto fads, Wealthsimple had $18.8 billion assets under management (the amount of client money that the company manages) compared with $9.5 billion the year before.

“A fair question is: Why are we doing all this? And some think the fair answer would be, ‘Oh, crypto is trendy, it’s basically this year’s meme stocks and (Wealthsimple) wants to make a bunch of money,’ ” wrote Ajmeri on Wealthsimple’s website.

“And sure, we’re a business that makes money when people use our platforms. But the reason we’ve gone big on crypto is that we think it’s incredibly promising.”

In recent years, a wave of fintech disrupters have embraced low-fee stock- and crypto-trading as a way to stay competitive in a market dominated by old-guard financial institutions.

In the U.S., Silicon Valley bigwigs like Robinhood and Cash App have invested heavily in their trading platforms, getting ahead of the big banks while biting into the business offered through sole-purpose crypto exchanges like Coinbase and Binance.

With the introduction of Wealthsimple Crypto, Wealthsimple gave its clients access to cryptocurrencies that, to this day, are not available to trade through deep-pocketed brokerages owned by Canada’s Big Five banks like Scotia iTrade and CIBC’s Investor’s Edge.

The business model for Wealthsimple Crypto hinges on its transaction fees. Each time a user buys or sells cryptocurrency, the company collects a 1.5 to two per cent commission from the exchange. (If a client buys $1,000 worth of bitcoin, for example, Wealthsimple earns between $15 and $20.)

To operate in Canada, the platform is run through a subsidiary called Wealthsimple Digital Assets Inc. and first had to register with the Canadian Securities Administrators’ Regulatory Sandbox — an initiative that temporarily exempts fintech companies from securities laws to help green light innovative products faster.

The company is one of eight crypto-trading platforms registered with the Ontario Securities Commission, which permits the exchanges to operate like typical investment dealers but with some notable exceptions.

Clients of Wealthsimple Crypto, for instance, cannot invest more than $30,000 in crypto assets per year in coins other than bitcoin.

And the traditional insurance mechanisms that are typically available to regular investors do not cover crypto-traders.

The Canadian Investor Protection Fund (CIPF), which insures investors if their financial institution goes bankrupt, does not reimburse investors for crypto assets lost in insolvencies or security breaches. Often when investors lose crypto assets because their investment service went bust or was hacked, that money is gone forever.

In its risk disclosure summary, which is distributed to all Wealthsimple Crypto clients, the company cautions its members that crypto assets held in a Wealthsimple Crypto account are not protected by the CIPF, the Canadian Deposit Insurance Corporation, “or any other investor protection insurance scheme.”

In an email to the Star, Wealthsimple said that it has its own insurance in place for most client assets, though it did not specify whether that insurance covers crypto assets.

The ever-evolving nature of crypto regulation suggests that platforms like Wealthsimple Crypto could face new rules and greater scrutiny in the future.

Over the past year, Canadian regulators have introduced new rules that require crypto exchanges to register with FinTRAC (the Financial Transactions and Reports Analysis Centre of Canada), register as investment dealers and become members of self-regulatory group the IIROC (Investment Industry Regulatory Organization of Canada).

In a statement to the Star, an OSC spokesperson said the agency will continue “to focus on bringing into compliance crypto asset trading platforms that offer trading in derivatives or securities to Ontario investors.”

When the OSC approved Wealthsimple’s bid to register its crypto platform, the regulator offered guidelines for how the platform should operate, including directives to contact clients to “discuss their trading behaviour if it indicates a lack of knowledge” and provide “additional education” where needed.

For Wealthsimple’s part, the company says it has “doubled-down” on investor education, encouraging clients with limited crypto knowledge to make sound choices.

“We’ve published an ongoing glossary of crypto terms, explainers and articles about crypto gaming, and podcast episodes about…