With cryptocurrencies, such as Bitcoin and Ethereum, hitting all-time highs last year, cryptocurrency trading has been a hot topic with companies of all sizes seeking ways to enter the increasingly competitive space.
In the last 12 months, securities regulators in Canada have taken proactive steps to regulate crypto trading platforms to protect Canadian investors. In light of this, we will be writing a series of blogs exploring the status of cryptocurrencies in Canada and Ontario, looking at everything from platform registration requirements to marketing requirements and recent regulatory trends.
In our first series, we focus on Crypto Trading Platforms. In March of 2021, the Canadian Securities Administrators (CSA) made a splash in the global crypto community by announcing their intention to bring crypto trading platforms under the direct oversight of securities regulators in Canada by using the “Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements”.
The CSA Guidance included an overview of how existing regulatory requirements may apply to Crypto Trading Platforms and areas where there may be flexibility in how the requirements apply to Crypto Trading Platforms, provided the key risks are addressed.
The CSA Guidance also noted that as the crypto industry in Canada is still developing, a wide variety of Crypto Trading Platforms models are emerging. The CSA stated that depending on the business model and activities conducted by a Crypto Trading Platform and the risks it creates, the regulatory treatment of one Crypto Trading Platform may differ from another.
Finally, the CSA Guidance established an interim process that would allow Crypto Trading Platforms to operate as they fully integrated into the Canadian regulatory structure. The interim process outlined involved a two-year interim transition period between an initial application to CSA provincial members and formal registration under the appropriate Crypto Trading Platforms category.
In addition to the above, the Ontario Securities Commission (OSC) has issued its notice stipulating that any Crypto Trading Platforms operating in Ontario or offering services or products to Ontario residents, must apply to the OSC immediately and begin the registration process in Ontario or withdraw from Ontario. This has led to an immediate exodus of CTP providers from Ontario and has led the OSC to pursue regulatory actions against a handful of unregistered platforms that did not initiate regulatory conversations with the OSC. The OSC has issued investor warnings against numerous unregistered platforms. You can view the warnings here.
The CSA defines a Crypto Trading Platform, or Crypto Trading Platforms, as a platform that facilitates or proposes to facilitate the trading of:
- crypto-assets that are securities (Security Tokens), or
- instruments or contracts involving crypto assets.
The CSA’s notice distinguishes between two categories of CTPs, Marketplace Platforms and Dealer Platforms. These categories also have subcategories depending on the CTPs’ structure and service and product offerings.
One of the key distinguishing features of a Marketplace Platform is connecting multiple buyers and sellers. Therefore, when you trade on a Marketplace Platform, you potentially interact with other individual traders.
The formal CSA Guidance for what makes a CTP a Marketplace Platform is as follows:
- 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.
If a Marketplace Platform also regulates its members, it may be considered an Exchange Marketplace Platform. This would be akin to a traditional stock exchange model, where dealers represent the individual traders and the dealers are the actual members of the Exchange. This is how most international exchanges operate. Retail traders go through an intermediary and the Exchange sets the rules for how the intermediary must operate to obtain access to the Exchange.
One of the key distinguishing features of a Dealer Platform is that it does not connect buyers and sellers but rather is the counterpart for every trade. So, on a Dealer Platform, any trade you place is with the CTP itself, and your orders never interact with another trader’s orders.
The formal CSA Guidance for what makes a CTP a Dealer Platform and not a Marketplace Platform is as follows: 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.
The CSA Guidance does acknowledge that CTPs that are Dealer Platforms may also be engaged in other activities or perform other functions that marketplaces typically do not undertake, such as:
- onboarding of retail clients onto the CTP
- acting as agent for clients for trades in Security Tokens or Crypto Contracts, and
- offering custody of assets, either directly or through a third-party provider.
In Canada, trading surveillance is handled by the Investment Industry Regulatory Organisation of Canada (“IIROC”), which regulates broker-dealers. CSA Members regulate marketplaces and oversee the activity of IIROC. Dealer Platforms are expected to seek registration with IIROC either immediately, if operating or interacting with clients in Ontario, or within the interim 2 year period from April 2021.
There are currently six CTPs that are registered in Ontario. A list of current registrants can be found here. These include CoinBerry, Netcoins, and Wealthsimple. All the CTPs currently registered are Dealer Platforms, and to date, no Marketplace Crypto Trading Platforms have yet obtained registration in Ontario.
Our business lawyers assist crypto start-ups with business structure and licensing matters. The business law team has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.