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New Guidance on Regulation of Crypto-Trading Platforms in Canada

by Michael Byers and Joshua Shneer

The Investment Industry Regulatory Organization of Canada (“IIROC”) recently issued new guidance, together with the Canadian Securities Administrators (“CSA”), regarding crypto-trading platforms (“CTPs”). Notice 21-329 “Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements”[1] (the “Notice”), does not impose new rules but rather clarifies how industry should comply with the existing regime.[2]

The Notice contemplates different guidance for CTPs that operate similar to marketplaces (“Marketplaces”) and those CTPs that trade security tokens or crypto contracts (“Dealers”).[3] Importantly as well, the Notice confirms that Canadian securities laws apply to CTPs serving Canadian clients, even if the CTP is operating from outside Canada.[4]

At the same time, the Ontario Securities Commission (“OSC”) directed CTPs to contact OSC staff by April 19, 2021 to discuss how to bring their operations into compliance with Ontario securities law. The Notice states that if there is a failure to do so, “steps will be taken to enforce applicable requirements under securities law.”

Background and Regulatory Framework

Crypto assets are considered to a be form of digital currency created using computer algorithms, the most popular form of which is Bitcoin.[5]

On March 14, 2019, the CSA and IIROC published Joint Consultation Paper 21-402 entitled “Proposed Framework for CryptoAsset Trading Platforms”, which set out the regulatory framework for CTPs. Canadian securities regulators have explained that CTPs that deal with either (i) crypto assets that are securities or derivatives or (ii) crypto assets that, while not securities or derivatives themselves, are held on behalf of customers thereby creating a security are subject to securities laws.[6]

The Notice is one example of regulators keeping pace with and responding to marketplace developments. These regulators appear to recognize the balance between protecting market integrity and not stifling innovation: “The overall goal of the approach outlined in this Notice is to ensure there is a balance between needing to be flexible in order to foster innovation in the Canadian capital markets and meeting our regulatory mandate of promoting investor protection and fair and efficient capital markets”.[7]

Details of the Notice

Key provisions in the Notice include:

  1. Marketplaces:
    1. Marketplaces may be required to register as investment dealers and become members of IIROC if they conduct activities similar to those performed by Dealers or take custody of client assets.
    2. Marketplaces that offer security tokens or crypto contracts services may also require prospectus exemptions to facilitate the distribution of or trades in tokens and crypto contracts.
  2. Dealers
    1. Dealers that distribute or trade security tokens or enter into crypto contracts exclusively on a prospectus exempt basis and that do not offer margin or leverage may register as exempt market dealers or restricted dealers.
    2. Dealers that offer margin or leverage for security tokens, or services to retail investors in either security tokens or crypto contracts, are generally expected to be registered as investment dealers and become members of IIROC.
  3. Two-year “interim approach”: The Notice stipulates a two-year transition period (the interim period) in which a CTP can register as a restricted dealer with the CSA while working toward IIROC membership, provided that it does not offer leverage or margin trading. During the interim period, IIROC staff intends to work with CTPs to advance the twin goals of market integrity and investor protection.

Crypto at the Commission

As Marketplaces and Dealers become more pervasive and established, the regulators will take more of an interest in ensuring compliance with the regulatory regime. Crypto stakeholders should heed the OSC’s recent warning and appreciate that the oversight of this emerging industry is and will be intense:

[4]         …It must be clear to all who participate in the crypto asset industry that, where Ontario securities law applies to their activities, they are expected to meet the same high standards of honesty and responsible conduct that apply in the more traditional capital markets.  It must also be clear that, while the Commission encourages innovation in the capital markets, it will not do so at the expense of fair and efficient markets...[8]

Conclusion

The Notice gives a further glimpse into a new future of increased oversight of the cryptocurrency space. While IIROC and the OSC have recognized that a buffer period is required to permit participants in the industry to adopt to these more rigorous standards, increased regulation and oversight will soon become the norm. This guidance suggests that the cryptocurrency industry may, in the future, attract as much scrutiny as other more traditional securities. Cryptocurrency industry participants who are, or may find themselves, caught by the new regulation should endeavour to take appropriate steps as soon as possible.

 

[1] Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada, Staff Notice 21-329, Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements: https://www.osc.ca/sites/default/files/2021-03/csa_20210329_21-329_compliance-regulatory-requirements.pdf.

[2] Notice at page 2.

[3] Notice at page 3.

[4] Notice at page 12.

[5] Government of Canada, Digital Currency, online: https://www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html

[6] Canadian Securities Administrators, Staff Notice 21-327, Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets: https://www.osc.ca/sites/default/files/pdfs/irps/csa_20200116_21-327_trading-crypto-assets.pdf  The Notice should be read together with these prior notices.

[7] Notice at page 1.

[8] Coinsquare Ltd. (Re), 2020 ONSEC 19.

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