On December 12, 2022, in the aftermath of recent developments in the crypto market and in the wake of the FTX exchange collapse, the Canadian Securities Administrators (CSA) announced a number of changes to strengthen its approach to oversight for crypto trading platforms operating in Canada (“CTPs“). On August 15, 2022, the CSA announced that all CTPs operating in Canada while taking steps to seek registration are required to sign undertakings which included terms and conditions consistent with requirements currently applicable to registered platforms. The CSA’s December 12, 2022 update is designed to further enhance its previous commitment made on August 15, 2022 relating to the regulation of CTPs.
TIMELINES FOR PRE-REGISTRATION UNDERTAKINGS
Firstly, the CSA announced that deadlines will be forthcoming for CTPs offering services in Canada to deliver a prescribed form of Pre-Registration Undertaking (“PRUs“) to the applicable CSA member and that if a CTP does not deliver a PRU prior to such deadline, the CSA will consider all applicable regulatory options to bring the CTP into compliance with securities law, including enforcement action. The CSA also confirmed that CTPs located outside of Canada but which are accessible by Canadian investors are regarded as operating in Canada for the purposes of securities regulation.
NEW REQUIREMENTS FOR ALL CTPS
Secondly, the CSA announced that terms and conditions covered by PRUs are to be expanded, including:
- segregated client funds: CTPs will be required to hold Canadian clients’ assets with an appropriate custodian and segregate the assets from the CTP’s proprietary assets; and
- margin and leverage prohibition: CTPs will be prohibited from offer margin or leverage to any Canadian client.
The CSA indicated that custodians will generally be considered qualified if they are regulated by a financial regulator in Canada, the U.S., or a jurisdiction with a similar supervisory regime for conduct and financial regulation. The CSA has also reminded Canadian investors that if they choose to pursue an investment in crypto assets or financial products relating to crypto assets, they should use a CTP that is registered with CSA members. Notwithstanding the foregoing, the CSA notes that, despite the investor protections introduced by the CSA, crypto assets and related financial products remain high-risk investments and that Canadian investors must be aware of the risks that could result from, among other things, crypto trading platform non-compliance with registration terms and conditions or undertakings, interconnectedness wi thin the crypto sector, insolvency, hacks, price volatility and uncertain value propositions for individual assets.
Finally, the CSA notes that Canadian regulators are of the view that stablecoins, or stablecoin arrangements, may be securities and/or derivatives and as such the CSA reminded registered CTPs and those CTPs with a PRU of their obligation to have policies and procedures in place to determine whether each crypto asset they provide exposure to is a security and/or derivative and 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.
In light of the CSA’s expanded requirements which are still not yet finalized, the impacts on the Canadian crypto market could be significant. Whether you are dealing with an unregistered or registered CTP, the principal regulator will contact them to discuss the application of the expanded terms and conditions to their business. As such, CTPs offering those services to Canadian investors should consider the operational impact of those requirements on their business models, and whether a more customized approach will be needed for Canadians investors or whether an exit from the Canadian market is appropriate.
Developments in the crypto space and the securities regulators’ expectations and requirements are evolving rapidly. Our Securities Group will keep up to date on these developments and continue to report on this space.