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Canadian Securities Administrators (the “CSA”) and the Canadian Investment Regulatory Organization (now “CIRO”) are reminding crypto trading platforms (a “CTP”) to ensure their operations comply with Canadian securities laws by prioritizing their applications for registration as investment dealers and membership with CIRO.
On March 29, 2021, the CSA and the Investment Industry Regulatory Organization of Canada (now “CIRO”) published Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements, providing guidance on the securities law requirements that apply to CTPs.
In Canada, CTPs that facilitate trading in either: (a) crypto assets that are securities and/or derivatives; or (b) instruments or contracts, based on crypto assets, that are securities or derivatives, are expected to register as investment dealers and become members of CIRO, the regulatory body intended to oversee this type of activity. The CSA recognized that there may be platforms that facilitate the trading of other products or contracts that are structured as “traditional” derivatives and that also provide exposure to crypto assets (including commodity futures contracts, contracts for difference or swaps) and reminded these particular platforms that they are subject to oversight by provincial securities regulators and to existing regulatory requirements and suggested that they contact their local securities regulatory authority to discuss possible approaches to comply with securities legislation.
The Staff Notice discussed CTPs that operate in a manner similar to marketplaces (an entity that brings together the orders of multiple buyers and sellers of securities, and in some jurisdictions, parties to certain types of derivatives, using established, non‐discretionary methods through which buyers and sellers agree to the terms of a trade - referred to as “Marketplace Platforms”) and other CTPs that are in the business of trading security tokens or crypto contracts that are not marketplaces (referred to as “Dealer Platforms”) while recognizing that in some situations, a CTP may be carrying out activities that have elements of both Marketplace Platforms and Dealer Platforms.
The two most common characteristics of a CTP that suggest it would be a Dealer Platform and not a Marketplace Platform are as follows:
it only facilitates the primary distribution of security tokens; and
it is the counterparty to each trade in security tokens and/or crypto contracts, and client orders do not otherwise interact with one another on the CTP.
CTPs that are Dealer Platforms may also be engaged in other activities or perform other functions that marketplaces typically do not undertake. These include, but are not limited to:
onboarding of retail clients onto the CTP;
acting as agent for clients for trades in security tokens or crypto contracts;
offering custody of assets, either directly or through a third-party provider.
A CTP is a Marketplace Platform if it:
constitutes, maintains or provides a market or facility for bringing together multiple buyers and sellers or parties to trade in security tokens and/or crypto contracts;
brings together orders of security tokens and/or crypto contracts of multiple buyers and sellers or parties of the contracts; and
uses established, non-discretionary methods under which orders for security tokens and/or crypto contracts interact with each other and the buyers and sellers or parties entering the orders agree to the terms of a trade.
A Marketplace Platform may also perform traditional dealer functions, including holding assets and other functions like those mentioned in the preceding section on Dealer Platforms.
The requirements that will be applicable to a CTP will depend on how it operates and what activities it undertakes. Generally, this will depend on whether the CTP operates as a Dealer Platform or a Marketplace Platform. Concerned parties (and particularly any potential CTP serving Canadian residents) should review the detailed regulatory requirements set out in the Staff Notice.
As outlined in the Staff Notice, the CSA contemplated an interim approach, which allowed CTPs to operate as restricted dealers in an appropriately regulated environment for a time-limited period while working toward obtaining CIRO membership. CSA members expected CTPs to actively and diligently seek registration as investment dealers and membership with CIRO (as applicable in relation to determination of operating as a Dealer Platform or a Marketplace Platform) by the end of the time-limited period, which was generally expected to be two years.
Given the time that has passed, CSA members now expect CTPs to have carefully reviewed and understood the requirements to become investment dealers and CIRO members, and that all CTPs have been actively engaged with CIRO on their applications. Moving forward, the CSA has now put CTPs on notice that they do not intend to continue with the interim approach for time-limited restricted dealer registration for CTPs as described in the Staff Notice. CTPs that have been working actively and diligently with CSA members to complete their registration should contact the CSA member that is their principal regulator to discuss whether time-limited registration as a restricted dealer is appropriate for the CTP.
The CSA urges investors to consult the the list of CTPs that are authorized to do business with Canadians (see here).
CTPs and other similar businesses should (if not already attended to) immediately consider, in detail and in consultation with their legal advisors, the requirements of the Staff Notice and any steps necessary to ensure their operations comply with Canadian securities laws.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.
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