On Dec. 12, 2022, the Canadian Securities Administrators (CSA) announced that a deadline would soon be set for unregistered cryptocurrency asset trading platforms (CTPs) to deliver a pre-registration undertaking (PRU) to their principal regulator while they pursue registration. The CSA also outlined the expanded terms and conditions such CTPs would be required to respect (our article on the previous announcement is available here). In that announcement, the CSA reminded unregistered CTPs that the delivery of the PRU was a necessary condition before they could continue operating in Canada while they pursue their applications for registration and related relief.
The CSA has now published Staff Notice 21-332 - Crypto Asset Trading Platforms: Pre-Registration Undertakings (the "Notice") confirming that CTPs are expected to submit their PRU (including enhanced terms and conditions) within the next 30 days. The CSA has also outlined new commitments unregistered CTPs are expected to respect while they pursue registration, and provided more details on the CSA's position regarding stablecoins.
Deadline to submit the pre-registration undertaking: March 24, 2023
The Notice makes it clear that if you are operating as an unregistered CTP in Canada while pursuing applications for registration and related relief, you are expected to:
- deliver an enhanced PRU based on the template set out by CSA staff to your principal regulator on or before March 24, 2023; and
- implement such systems changes as may be necessary to give effect to the provisions of the PRU within timeframes set out in the PRU.
If an unregistered CTP is unable or unwilling to meet these requirements within the required timelines, the CSA expects the unregistered CTP to take appropriate actions to identify and off-board existing Canadian users and impose restrictions to prevent Canadian users from accessing its products or services. In such cases, the CSA expects the unregistered CTP to provide notice and timelines to its principal regulator and other members of the CSA for the implementation of such steps and restrictions.
1. Enhanced pre-registration undertakings
On Dec. 12, 2022, the CSA outlined certain expanded terms and conditions unregistered CTPs would be expected to respect while they pursue registration (our article on the previous announcement is available here). In light of recent insolvencies involving a number of CTPs, the CSA announced in the Notice that they are now requesting additional commitments from unregistered CTPs relating to the following areas:
- enhanced commitments in relation to the custody and segregation of crypto assets held on behalf of Canadian clients;
- enhanced commitments to preclude the unregistered CTP from pledging, re-hypothecating or otherwise using crypto assets held on behalf of Canadian clients;
- a prohibition on the part of the CTP offering margin, credit or other forms of leverage to any type of client in connection with the trading of crypto contracts or crypto assets on the CTP's platform;
- new commitments from controlling mind(s) and global affiliates that affect the CTP entity seeking registration and relief;
- restrictions on the part of the CTP relying on crypto assets, including proprietary tokens issued by the CTP or an affiliate of the CTP, in determining the capital of the CTP for excess working capital purposes and in determining the capital base of the CTP;
- enhanced commitments in relation to the filing by the CTP of financial information with the CSA on a regular basis;
- enhanced commitments in relation to the retention of a qualified Chief Compliance Officer (CCO) during the pre-registration process;
- a prohibition on the part of the CTP in respect of clients buying or depositing Value- Referenced Crypto Assets (commonly referred to as stablecoins) through crypto contracts without the prior written consent of the CSA (see more details on this below); and
- a prohibition on the part of the CTP in respect of trades in crypto contracts based on proprietary tokens, except with the prior written consent of the CSA.
A second article detailing these new commitments will be published in due course.
2. Stablecoins / Value-Referenced Crypto Assets (VRCAs): Need for prior written consent of the Canadian Securities Administrators
In the Notice, the CSA states that whether a particular Value-Referenced Crypto Asset (VRCA) constitutes a security and/or derivative will depend on the specific facts and circumstances, adding that it will generally consider VRCAs that are pegged to and backed by fiat currencies (and/or other assets) to be a security and/or derivative. The CSA uses the term VCRA rather than stablecoins to refer to any cryptocurrency asset that is designed to maintain a stable value over time by referencing the value of a fiat currency or any other value or right, or a combination thereof.
As such and as mentioned above, the enhanced PRU mentioned in the Notice includes a prohibition on CTPs allowing their clients entering into crypto contracts to buy or deposit VRCAs without the CTP obtaining the prior written consent of the CSA. Such consent may be subject to terms and conditions imposed on the CTP and the issuer of the VRCA.
Unregistered CTPs must therefore obtain written consent from the CSA before allowing their clients to buy or deposit a particular VRCA and are expected to conduct sufficient due diligence to ensure that the applicable risks with respect to the VRCA are addressed (such as ensuring that sufficient reserves are maintained to back the VRCA, that the reserves comprise highly liquid assets, that the reserves are held by a qualified custodian, etc.). The CSA highlights that it would not expect to provide consent in respect of VRCAs that are not fully backed by an appropriate reserve.
Registered CTPs that wish to allow clients to enter into crypto contracts to buy or deposit a particular VRCA should contact their principal regulator.
Issuers of VRCAs that would like a VRCA for which they are the issuer to be distributed in Canada or are seeking consent for a VRCA for which they are the issuer to be bought or deposited on a CTP through crypto contracts, are invited by the CSA to contact a member of the CSA.
Should you have any questions or require assistance in connection with the matters covered by this article, please feel free to reach out to a member of our Capital Markets or Blockchain & Smart Contracts groups.
 Template should be available online shortly.