As we have previously written, financial regulators throughout the world continue to grapple with issues surrounding crypto assets and how best to regulate their distribution to investors. While the establishment of a comprehensive framework remains elusive, regulators continue to address the void through a series of pragmatic, if not piecemeal, initiatives, as well as enforcement activities (see our prior posts and updates Three week countdown for Canadian digital asset trading platforms, CSA/IIROC issue marketing and social media guidelines for crypto trading platforms, Decoding crypto – Providing regulatory clarity to cryptoasset businesses, and Canadian crypto update – Ontario enforcement up, regulatory stance hardens).
On August 15, 2022, the Canadian Securities Administrators (the CSA) announced that crypto asset trading platforms (CTPs) seeking to continue offering services prior to becoming registered must provide a public undertaking to their principal regulator (an Undertaking) aimed at satisfying certain regulatory concerns. All CTPs that have entered into an Undertaking with the securities regulators will be published on the following website maintained by the CSA.
As discussed in further detail below, the Undertakings are extensive in scope and require CTPs to adhere to numerous terms and conditions. The announcement also signals that if a CTP is not prepared to file an Undertaking, or is offside with any of the terms and conditions of its Undertaking, the CSA will initiate enforcement action against that CTP. While this may sound daunting, the Undertakings provide regulatory clarity to CTPs seeking to operate in Canada while awaiting the completion of their registration application and, in the future1, help investors navigate the digital asset landscape by identifying the CTPs that are actively taking steps to comply with Canadian securities laws. Finally, the Undertakings address level playing field concerns by applying comparable terms and conditions to unregistered CTPs that otherwise apply to registered CTPs.
As of the date of this blog, the Ontario Securities Commission (the OSC) has entered into Undertakings with two "marketplace"2 CTPs: Coinsquare Capital Markets Limited (Coinsquare) and Foris DAX, Inc. (known as Crypto.com). While we anticipate additional Undertakings to be published in the coming weeks, including those for non-marketplace CTPs, we have provided our initial thoughts below:
- Consistent with the Terms and Conditions for Registered CTPs: The terms and conditions in the Undertakings are mostly consistent with the "standardized" set of terms and conditions that have been applied to registered CTPs under the CSA's "interim" restricted dealer framework.3 These terms and conditions impose core registrant conduct requirements and address the unique investor protection concerns arising in this area. This includes requirements with respect to the custody of clients' crypto assets (i.e., 80% of client crypto assets must be maintained with a third-party custodian), insurance (i.e., obtaining third party-insurance over client crypto assets held in the CTP's hot and cold wallets), the crypto assets made available for trading (i.e., the CTP, after performing "know-your-product" due diligence, must only permit the trading of non-securities/derivatives crypto assets), account appropriateness assessments, investment and loss limits, disclosure obligation to clients, and ongoing reporting obligations to the securities regulator. We have previously discussed these requirements and the interim restricted dealer framework in greater detail in our prior blog post on osler.com.
While the terms and conditions of the Undertakings are largely consistent with the terms and conditions that have been applied to registered CTPs, there are some noteworthy developments:
- Crypto asset lending & staking services:
The Undertakings include a restriction on the offering of crypto
asset lending or staking services without the prior approval of the
securities regulator. This may be a signal to the industry that the
CSA does not consider such activities to fall outside the
regulatory perimeter of Canadian securities laws.
- Margin and leverage: Coinsquare and Crypto.com
will be permitted to offer margin, credit or other forms of
leverage to clients that are "permitted clients" (i.e.,
generally institutional investors or ultra-high net worth
individuals). Additionally, with the prior consent of the
securities regulator in jurisdictions (other than Ontario), a CTP
may be permitted to provide margin and leverage to retail clients.
This is a new development as existing registered CTPs, including
those that are registered as investment dealers4, have
not been permitted to offer similar services to retail clients. It
will be helpful to see the Undertakings published for other CTPs
prior to making any conclusions one way or another with respect to
the CSA's position on margin and leverage.
- Advertising & social media use: The
Undertakings specifically identify that the CTPs must establish and
implement policies and procedures governing the use of advertising,
marketing and social media use. Further, the CTPs are prohibited
from making any representations that suggest they are registered
and must include a statement in all advertising and social media
use that identifies they are not currently registered under
Canadian securities laws. This is not entirely surprising given the
staff notice issued by CSA and IIROC staff last year on problematic
advertising, marketing and social media practices by CTPs (and
previously covered in our prior blog post on osler.com). However,
the focus on the use of advertising and social media by the CSA in
the Undertakings appears to suggest that CSA staff are continuing
to identify problematic advertising by CTPs.
- Time limited: The Undertakings are time-limited and include a "sunset clause" by which date the CTP must obtain its registration or cease to carry on registrable activity in the applicable jurisdictions (this may be waived by the securities regulator). An interesting distinction between the Undertakings is the sunset clause for Coinsquare is 180 days as opposed to the 12 months for Crypto.com. This may suggest that the timeline for CTPs to become registered in an Undertaking may be impacted by the relative stage of engagement and development the CTP has been in with the securities regulator.
These Undertakings serve as an important reminder that the CSA does not consider CTPs to be operating in an unregulated space and there must be an active commitment by these entities to become appropriately registered. As suggested above, the demands for these Undertakings continue the trend we previously reported on reflecting attempts to standardize the regulatory framework for CTPs by Canadian securities regulators.
1. As noted below, there are currently only two Undertakings available on the CSA website despite there being a large number of CTPs actively engaged with the securities regulators and seeking registration. We anticipate in the coming months, as opposed to at the time of this article, that the Undertakings may function as a more useful tool for investors to identify CTPs actively engaged with securities regulators. The OSC has also indicated that unregistered and non-compliant CTPs may be included on the OSC Investor Warnings and Alert website.
2. A marketplace CTP is one where it is possible that a client's buy or sell order will be matched with another client of the platform. This is in contrast to a "dealer-only" platform where the counterparty for each client's buy or sell order is the CTP. As of the date of this article, there are only two registered marketplace CTPs: Bitbuy Technologies Inc. and Simply Digital Technologies Inc.
3. It should be noted that Coinsquare is seeking registration as an investment dealer and becoming a member of the Investment Industry Regulatory Organization of Canada (IIROC) and alternative trading system as opposed to becoming a restricted dealer.
4. Fidelity Clearing Canada ULC, an investment dealer that only offers crypto asset services to institutional clients, is not permitted to extend margin or credit to clients.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.