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In Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (“SN 21-329”), the Canadian Securities Administrators (CSA) issued an ultimatum to crypto asset platforms operating within Canada or with Canadian users: Register, or else. Published on March 11, 2021 jointly with IIROC1, SN 21-329 attempts to fully integrate these crypto asset trading platforms2 (“Crypto-Platforms”) into the Canadian regulatory regime3.

SN 21-329 identifies activities which may require Crypto Platforms to register as either investment dealers or marketplaces. It does not introduce a new set of rules applicable to Crypto-Platforms, but rather provides an overview of the applicability of existing rules, which as the CSA notes, is consistent with the approach taken by foreign regulators.

SN 21-329 distinguishes the registration requirements depending on whether the Crypto-Platform operates in a manner similar to Dealer Platforms or Marketplace Platforms. Some Crypto-Platforms may also operate as both dealers and marketplaces.

The SN 21-329 states that Crypto-Platforms may qualify as “Dealer Platforms” if they commonly perform two types of functions: They (1) facilitate the primary distribution of tokens; and (2) trade as a counterparty to their users in tokens and/or Crypto Contracts. In the crypto asset world, this would include entities which complete Initial Coin Offerings (ICOs) or Initial Token Offerings (ITOs) in order to raise a significant amount of capital from a broad pool of investors. According to SN 21-329, such Dealer Platforms would generally need to complete dealer registration (including membership in IIROC) or receive an exemption from the dealer registration requirement.4

According to SN 21-329, Marketplace Platforms include Crypto-Platforms where (1) orders of multiple buyers and sellers of tokens and/or Crypto Contracts are brought together and (2) the interaction of those orders results in a trade. Most of the world’s biggest “cryptocurrency exchanges” (as they call themselves) match orders of buyers and sellers and would likely fall within this definition. Such Marketplace Platforms would need to comply with marketplace requirements or obtain an exemption.5

The transition period for both Dealer Platforms and Marketplace Platforms is expected to be two years.

SN 21-329 has a broad reach. It is a truism that the securities laws regulates offers and sales of securities. Certain types of crypto assets are generally accepted as securities, for example, offerings of tokens that operate as “investment contracts” and satisfy the Pacific Coast test (which adopts the U.S. Supreme Court’s famous Howey test).6 Other types of crypto assets – most notably, bitcoin – have generally not been considered securities but have been treated as commodities. However, as SN 21-329 notes, the definition of security is “broad and inclusive”. The CSA has adopted an expansive view which considers even transactions involving bitcoin subject to securities laws if the Crypto-Platform does not immediately deliver the bitcoin to the user.7 The user’s contractual right to the crypto asset may itself constitute a security or derivative. As most Crypto-Platform users tend to leave their assets on the platform rather than immediately withdraw to their personal wallets, this broad interpretation captures a large amount of Crypto-Platform activity.8 More information on Crypto Contracts is available in this Siskinds post.

Investors following the past few years of Canadian crypto guidance would not be surprised by SN 21-329. In 2019, Canadian regulators published CSA Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms, stating that “[Crypto] Platforms, depending on how they operate and the crypto assets they make available for trading may be subject to securities regulation.” As the CSA investigated Crypto-Platforms further, it became concerned that some Crypto-Platform operators wrongly believed they were exempt from securities legislation. It published CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets warning that if crypto assets were held by the platforms and not immediately delivered to investors, then securities laws applied to that Crypto Platform. Considering the regulatory history, SN 21-329 is the culmination of years of warnings and encouragement to unregistered Crypto Platforms to engage with regulators.

Some Crypto-Platforms took a negative view of the guidance, predicting that it would lead to foreign Crypto-Platforms blocking Canadian users, or Canadian Crypto-Platforms shutting down due to high compliance costs.

For crypto asset investors, however, SN 21-329 offers at least three reasons to stay positive.

First, SN 21-329 does not recommend banning Crypto-Platforms, crypto asset possession or crypto asset investment products (as some countries have attempted to do), clearing stating: “we are not considering an outright ban on crypto assets.” This is a huge victory for the crypto community as it reflects a recognition by Canadian regulators that crypto assets and Crypto-Platforms are here to stay and that the preferable approach is to that regulate rather than ban.

Second, SN 21-329 brings regulatory clarity to the crypto community, which up to now has seen regulators adopting a “wait and see” approach. As the crypto asset world evolved at a rapid pace, the regulatory pause encouraged non-compliant Crypto Platforms to boldly solicit Canadian clients or develop a Canadian presence with little interest in basic investor protection measures. That has changed with SN 21-329 as Canadian regulators are no longer encouraging registration, but actively requiring it. For example, on the heels of SN 21-329, the OSC announced in a press release that Crypto-Platforms operating in Ontario or with Ontario investors must initiate compliance discussions by April 19, 2021.9

Finally, SN 21-329 may mitigate the financial fallout of a collapsed exchange as the CSA is of the view that Crypto-Platforms require some type of insurance to cover risks such as fraud, theft and cyber-attacks. The guidance notes that Crypto-Platforms that are IIROC dealer members will also be Canadian Investor Protection Fund (CIPF) members. This suggests that some CIPF coverage may be available to clients of registered Crypto Platforms.10 While SN 21-329 does not guarantee such coverage and states “CIPF will assess the coverage it offers on a case by case basis”, it shows regulatory recognition that insurance coverage of some type is important for investor protection.

As crypto assets prices reach all-time highs and investment interest in crypto assets explodes, regulators have been grappling with the spectre of another catastrophic collapse of unregulated Crypto-Platforms like Quadriga or Mt. Gox. While even regulated entities can fail, SN 21-329 shows a recognition that the risks and impact of such failures can be mitigated with a proper regulatory framework.

1 IIROC is the national self-regulatory organization for investment dealers.

2 Crypto asset trading platforms are online platforms that facilitate the trading of crypto assets such as cryptocurrencies (e.g., bitcoin) or tokens.

3 Crypto assets include both cryptocurrencies and tokens/security tokens. The difference is that while a cryptocurrency (often described as a “coin”) has its own native blockchain, tokens are generally run on top of another blockchain such as deploying smart contracts. Cryptocurrencies are often used as currency-substitutes, while tokens are more similar to investment securities.

4 There are some differences based on jurisdiction. For example, Alberta, British Columbia, Manitoba and Saskatchewan may have more regulatory approaches available. Quebec may also require registration as a derivatives dealer depending on the crypto assets traded.

5 Again, there are differences in regulatory approaches for certain jurisdictions, such as, Alberta, British Columbia, Manitoba and Saskatchewan.

6 Pacific Coast Coin Exchange v. Ontario (Securities Commission), [1978] 2 SCR 112.

7 CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.

8 It appears that the only type of Crypto-Platform that may be exempted from registration would be one where the underlying crypto asset is not a security or derivative (e.g., bitcoin) and which immediately delivers such crypto assets to the client’s personal control.

9 The OSC’s stricter approach may also be motivated that despite years of regulatory encouragement for Crypto Platforms to register, only a single Crypto-Platform – WealthSimple – did the hard work and received approval from the OSC to launch a registered cryptocurrency trading platform.

10 CIPF coverage limits are generally $1 million for individuals holding accounts with a member firm.

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