The Canadian Securities Administrators (the "CSA") have published Staff Notice 21-327 - Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets (the "Notice"), to provide guidance on certain factors the CSA considers to determine whether securities legislation applies to any entity that facilitates transactions relating to crypto assets, including buying and selling crypto assets (collectively, "Platforms").
On March 14, 2019, in Joint CSA/Investment Industry Regulatory Organization of Canada Consultation Paper 21-402 - Proposed Framework for Crypto-Asset Trading Platforms (the "Consultation Paper"), the CSA stated that if crypto assets that are securities or derivatives are traded on a Platform, such Platform would be subject to securities legislation. In addition, if a Platform trades contracts or instruments that are derivatives based on crypto assets, the Platform would also be subject to securities legislation. In some cases, the crypto asset is clearly a security, for example, a tokenized security that carries rights traditionally attached to common shares such as voting rights and rights to receive dividends. In other cases, the crypto asset is a derivative, for example a token that provides an option to acquire an asset in the future.
The Notice further describes situations where securities legislation will and will not apply. For example, securities legislation may also apply to Platforms that facilitate the buying and selling of crypto assets, including crypto assets that are commodities, because the user’s contractual right to the crypto asset may itself constitute a derivative. In some jurisdictions, this right may be considered a security, such as an investment contract or evidence of indebtedness or an evidence of title to or interest in the assets or property of another person. The relevant determination will depend on the facts and circumstances, including the obligations and intention to provide immediate delivery of the crypto asset. The Notice provides guidance on what constitutes immediate delivery, together with a detailed example of a situation where securities legislation does not apply.
The CSA and the Investment Industry Regulatory Organization of Canada ( IIROC) continue to review the comments and responses to the Consultation Paper and anticipate publishing a summary of comments and responses along with guidance on the regulatory framework applicable to crypto-asset trading platforms that are subject to securities legislation later this year.
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