Canadian Securities Administrators Provide Guidance on Platforms that Facilitate Crypto Asset Trading
On January 16, 2020, the Canadian Securities Administrators (“CSA”) provided guidance about platforms (“Platforms”) that facilitate the trading of crypto assets. Examples of the kinds of crypto assets addressed by the notice include tokens and crypto assets that are commodities, which may according to the notice be derivatives.
In a variety of other notices (see for example CSA Staff Notice 46-307 Cryptocurrency Offerings and CSA Staff Notice 46-308 – Securities Law Implications for Offerings of Tokens), the CSA and the individual provinces have warned parties interested in owning or trading crypto assets that they must properly address the requirements of securities and derivatives legislation. Securities regulators in Canada are generally not receptive to nuanced arguments about whether concepts like that of an “investment contract” apply to particular crypto assets or the Platforms that they trade on. Rather, the regulatory approach is to focus on features of crypto assets that resemble conventional securities offerings (e.g. voting or dividend rights) and then to assert that the crypto assets are therefore governed by securities law.
When it comes to Platforms that trade crypto assets, there is a distinction between Platforms where the parties to the trade take immediate delivery of the crypto assets and those where the parties do not and they rely on the operator of the Platform for various services. Where there is no immediate delivery, the regulators may argue that the Platform should be subject to securities or derivatives legislation because the crypto asset traded on it should be regarded as a derivative since it trades under a contract where there is no immediate delivery of the underlying crypto asset.
As a result of these approaches, Platforms not subject to regulation fall into very circumscribed categories where:
- the underlying crypto asset itself is not a security or a derivative; and
- the contract or instrument for the purchase, sale or delivery of a crypto asset results in an obligation to make immediate delivery of the crypto asset and is settled by immediate delivery according to the Platform’s typical commercial practice.
Platforms not fitting into this circumscribed space have to comply with securities law and address the rules governing the offering of securities by way of prospectus or a related exemption, the need for a license to operate the Platform under applicable dealer registration rules and the need to address whether and to what degree rules governing marketplaces apply to the Platform in question.
Even where a Platform offers immediate delivery of the crypto asset for cash, there can be other attributes of a Platform that make it subject to securities laws. For example, the Platform will be subject to securities regulation if it offers users margin or leverage trading or the ownership of the crypto asset is recorded on the ledger of the Platform rather than being delivered to a wallet that is in the sole control of the user.
If the Platform offers a way of storing the underlying crypto assets, it may still be subject to securities regulation even if the user has elected to use the Platform’s storage services as the user cannot safely take custody of the crypto assets directly or does not wish to find another satisfactory custodian for the crypto assets and the Platform has a contract with the user to deliver the crypto assets on request.
Though the notice acknowledges that it is possible to apply in the right circumstances for an exemption from securities or derivatives law and from the interpretive approach taken by the securities and derivatives regulators, the CSA makes it clear that they will pursue enforcement action or continue existing enforcement action against Platforms that do not comply with their interpretation of securities legislation.