On December 12, 2022, the Canadian Securities Administrators (CSA) announced that "following recent events in the crypto market" they would strengthen their approach to crypto regulation by expanding the regulatory requirements imposed on crypto trading platforms (CTPs) operating in Canada. This announcement comes shortly after the CSA issued a warning to Canadian investors about what it said were the elevated risks of investing in digital assets.
New timelines for pre-registration undertakings
As we have previously reported, the CSA announced in August 2022 that pre-registration undertakings (PRUs) would be required from all CTPs seeking to offer services while awaiting the completion of their registration applications.
The CSA's latest announcement informs CTPs that if unregistered CTPs currently subject to securities legislation in Canada do not either (a) deliver a PRU to its principal regulator; or (b) cease operating in Canada, the CSA will consider "all applicable regulatory options to bring the platform into compliance with securities law, including enforcement action." (See our 2022 Legal Year in Review article for a summary of the CSA's evolving stance on crypto enforcement generally.) The CSA further indicates that its member regulators will "shortly" communicate to unregistered CTPs a deadline by which PRUs must be delivered.
Importantly, the requirement for PRUs applies to all CTPs offering services to Canadians regardless of whether they have any other presence in Canada.
'Expanded' requirements for all CTPs
The terms and conditions of the PRUs entered into to date are largely consistent with the terms and conditions that have been applied to registered CTPs.
The CSA's latest announcement states that CTPs giving PRUs will agree to comply with "expanded" terms and conditions and indicates that the same expanded requirements may also be imposed on registered CTPs. These new requirements will include
- segregated client funds: CTPs will be required to segregate client funds from the platform's proprietary business and to hold client assets with an appropriate custodian regulated by a financial regulator in Canada, the U.S. or a jurisdiction with a similar supervisory regime.
- margin and leverage prohibition: CTPs will not be permitted to offer margin or leverage to any Canadian client.
The CSA announcement reiterates its position that CTPs (whether registered or subject to a PRU) are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative. While the characterization of stablecoins has not yet been determined by any Canadian judicial or tribunal decision, the CSA's announcement explains that "the CSA is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives."
Takeaways
Though certain particulars of the CSA's "expanded" requirements are currently unclear (the CSA indicates that it will publish further details in the future), the impacts on the Canadian crypto market could be significant. CTPs offering services to Canadians should consider the operational impact of the CSA's "expanded" requirements on their business models, and whether they will need to offer a more limited slate of services to Canadians or exit the Canadian market.
As this latest announcement makes obvious, developments in the digital assets markets and regulators' corresponding expectations are evolving at a rapid pace. We will keep an eye on these developments and continue to report on this space.
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