In reaction to recent events in the crypto market, the Canadian Securities Administrators (CSA) have announced their intention to strengthen their oversight of cryptocurrency asset trading platforms (CTPs) operating in Canada (or which are accessible by Canadians).
If you are operating an unregistered crypto-asset trading platform that is accessible to Canadians, the CSA remind that you will be required to deliver a pre-registration undertaking (PRU) to your principal regulator prior to the deadline (which will be announced shortly) while pursuing registration. The CSA have also announced that unregistered CTPs must now agree to expanded terms and conditions which include requirements to:
- Hold Canadian clients' assets with an appropriate custodian (i.e., that is regulated by a financial regulator in Canada, the U.S., or a similar jurisdiction with a supervisory regime for conduct and financial regulation);
- Segregate these assets from the platform's proprietary business; and
- Prohibit Canadian clients from using margins or leverage.
The CSA are reminding CTPs that they are prohibited from permitting Canadian clients to trade and/or obtain exposure to any crypto asset that is itself a security and/or a derivative, all while highlighting, for the first time, that stable coins and stable coin arrangements may constitute securities and/or derivatives.
Background
On August 15, 2022, the CSA first announced that it expected commitments from unregistered CTPs operating in Canada while they pursue registration. These commitments were to be made to their principal regulator in the form of a pre-registration undertaking (PRU), which included terms and conditions consistent with requirements currently applicable to registered platforms. At that time, only two (2) unregistered CTPs had delivered a PRU (Crypto.com and Coinsquare) and since then, no further PRUs have been delivered to regulators despite the fact that there are many CTPs operating in Canada.
On December 12, 2022, the CSA announced that a deadline would soon be set for unregistered CTPs to deliver a PRU to their principal regulator while they pursue registration or cease operating. Following the deadline, if an unregistered CTP does not deliver a PRU or cease operating, the CSA will consider all regulatory options to bring the platform into compliance with securities law, including enforcement actions.
Although the PRU requirement was first announced by the CSA on August 15, 2022, the undertakings have now been expanded to include requirements to hold Canadian clients' assets with an appropriate custodian, separating those assets from the platform's proprietary business, and prohibiting Canadian clients on the platform to use margin or leverage.
Finally, the CSA, for the first time stated that they are of the view that stable coins, or stable coin arrangements, may constitute securities and/or derivatives. While the CSA seems to have not taken a definitive position on the characterization of stable coins and stable coin arrangements, the CSA took the occasion to remind CTPs that "they are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative." The CSA expects CTPs to have established policies and procedures in place to determine whether each crypto asset they provide exposure to is a security and/or derivative.
Through their announcement, the CSA make it clear that time is running out for unregistered CTPs to get in line with Canadian securities laws. CTPs can therefore expect further details on the PRU requirement from the CSA in the near future and should prepare for the same.
Should you have any questions or require assistance regarding this article, please feel free to reach out to a member of our Capital Markets team or Blockchain & Smart Contracts team.