CSA Gets Tougher on Unregistered Crypto Trading Platforms and Takes Position on Stablecoins

The Canadian Securities Administrators (CSA) umbrella group has announced that it will take a tougher line with respect to preregistration undertakings (Undertakings) for crypto asset trading platforms (CTPs) that operate in Canada but are not yet registered to do so. The announcement follows the high-profile failures of CTPs that put a spotlight on investor protection concerns. The CSA will require Undertakings to include expanded terms, and regulators will shortly communicate to unregistered platforms a deadline by which Undertakings must be delivered.
 
The CSA also announced its view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives.

PREREGISTRATION UNDERTAKINGS UPDATE

The CSA previously announced that it will require Undertakings to be delivered by CTPs that operate in Canada but are not yet registered to do so, in an effort to level the playing field between such CTPs and those that are registered and operating under the conditions of exemption orders issued by the Canadian securities regulators. The CSA concurrently published the Undertakings delivered by two platforms that were not yet registered at that time: the entities operating as Crypto.com and Coinsquare. See our August 2022 Blakes Bulletin: Undertakings Now Expected for Crypto Asset Trading Platforms Operating in Canada While Seeking Registration.
 
However, since that announcement in August 2022, no further Undertakings have been made public. To speed up the delivery of Undertakings, the CSA announced that its members will shortly communicate to unregistered platforms that are currently subject to Canadian securities law a deadline by which Undertakings must be delivered — failing which the CSA will consider all regulatory options to bring the platform into compliance with securities law, including enforcement action.
 
Undertakings will now include expanded terms and conditions covering, among other things:

• a requirement to hold Canadian clients’ assets with an “appropriate” custodian, generally being one that is regulated by a financial regulator in Canada, the U.S. or a similar jurisdiction with a supervisory regime for conduct and financial regulation;

• a requirement to segregate Canadian clients’ assets from the platform’s proprietary assets; and

• a prohibition on offering margin or leverage for any Canadian client (previously, Undertakings had permitted leverage in certain circumstances, such as for sophisticated “permitted clients”).

STABLECOINS

The CSA also announced that it is taking the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives. This is significant, as crypto trading platforms that are registered or that have entered into a preregistration undertaking are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or derivative. CTPs are expected to have established policies and procedures to determine whether each crypto asset they provide exposure to is a security and/or derivative.
 
Additionally, in light of the CSA’s view respecting stablecoins, non-custodial CTPs that seek to avoid trading in “crypto contracts” and tokens that may be securities or derivatives should carefully evaluate their trading practices in respect of stablecoins.
 
For a more detailed discussion of “crypto contracts,” see our April 2021 Blakes Bulletin: Canadian Securities Regulators Deliver Bear Hug to Crypto Asset Trading Platforms Operating in Canada.
 
For further information, please contact:
 
Chris Barker                  +1-416-863-2710
Christopher Jones         +1-416-863-2704
Alex Moore                    +1-416-863-2754
 
or any other member of our Capital Markets group.