The Canadian Securities Administrator has announced that enhanced investor protection relating to unregistered cryptocurrency trading platforms operating in Canada will be implemented. This announcement came on February 22, 2023, and is called the “CSA Staff Notice 21-332 Crypto Asset Trading Platforms: Pre-Registration Undertakings – Changes to Enhance Canadian Investor Protection” (referred to as “CSA Staff Notice 21-332”). The CSA Staff Notice 21-332 can be read in full on the Ontario Securities Commission website.

Canadian Securities Administrators collaborate on cryptocurrency regulation

The Canadian Securities Administrators (also referred to as the “CSA”) brings together the provincial and territorial securities regulators, such as the Ontario Securities Commission (also referred to as the “OSC”). This allows the provincial and territorial administrators to collaborate on policies and regulations to ensure consistent application across the country.

A critical area of collaboration across securities administrators in Canada is cryptocurrency. Cryptocurrency or crypto assets are digital coins or tokens which are decentralized from any authority or government and are traded or redeemed without the use of financial institutions.

Bitcoin is just one example of a cryptocurrency. Crypto assets can act as money in certain situations (although not recognized as legal tender in Canada), and can be used for a host of other purposes such as being a security or utility token that allows a holder to access certain networks or services.

Cryptocurrency assets and trading platforms

Crypto assets can be traded through direct peer-to-peer transfers or a cryptocurrency asset trading platform. In Canada, cryptocurrency trading platforms must be registered with the applicable Canadian securities regulator. In Ontario, this regulator is the Ontario Securities Commission. However, unregistered cryptocurrency trading platforms can operate under certain rules while pursuing full registration in Canada.

A list of registered crypto asset trading platforms and banned trading crypto asset trading platforms are available on the Canadian Securities Administrators’ website. These lists are kept up to date and are an important resource for crypto asset investors.

For additional background, please see our blog post titled “Cryptocurrency Trading Platforms in Ontario” which introduces the cryptocurrency landscape in Ontario.

Changes motivated by recent insolvencies of cryptocurrency trading platforms

The Canadian Securities Administrators explained that these new requirements are motivated by recent insolvencies of major cryptocurrency trading platforms, which bring the risk of trading in these assets to the forefront.

As explained by the Canadian Securities Administrators, this risk is higher when using an unregistered trading platform that is not based within Canada.

Enhanced rules will apply to unregistered trading platforms that operate in Canada while pursuing registration

Within 30 days of the publication of this notice, the deadline being March 24, 2023, unregistered cryptocurrency trading platforms operating in Canada will need to provide enhanced pre-registration undertakings to their principal securities regulator.

New pre-registration undertakings are required within 30 days

Pre-registration undertakings are commitments made by unregistered cryptocurrency trading platforms that they will operate in a certain manner and according to certain rules while pursuing registration. These rules are very similar to those of registered cryptocurrency trading platforms.

The CSA Staff Notice 21-332 explains that these pre-registration undertakings aim to enhance protection for investors and level the playing field between registered and unregistered cryptocurrency trading platforms in Canada.

The new pre-registration undertakings are to address the following areas:

• Additional obligations about the custody and segregation of crypto assets held on behalf of Canadians;
• Protecting the pledging or use of crypto assets held on behalf of Canadians;
• Prohibiting the cryptocurrency trading platform from offering any kind of leverage to a client related to the trading of crypto assets on the platform;
• Enhanced commitments from controlling minds and affiliates that impact the cryptocurrency trading platform seeking registration in Canada;
• Constraining the cryptocurrency trading platform from relying on cryptocurrency assets to determine the excess working capital and capital cost of the platform;
• Enhanced disclosure of financial information to the Canada Securities Administrators;
• Requirements related to the employment of a qualified Chief Compliance Officer while the cryptocurrency trading platform is seeking registration in Canada;
• A ban on the purchase or deposit of Value-Reference Crypto Assets (known as “stablecoins”) through crypto contracts unless the prior written consent of the Canadian Securities Administrators has been obtained; and
• A ban on trading crypto contracts that are based on proprietary tokens unless the prior written consent of the Canadian Securities Administrators has been obtained.

These categories of undertakings are described in greater detail within the CSA Staff Notice 21-332.

Changes to be implemented within specific timelines

Unregistered cryptocurrency platforms are expected to implement whatever changes are necessary to comply with these new pre-registration undertakings within the timelines that are specified within the undertaking.

In addition to those listed above, numerous other pre-registration undertakings are required of cryptocurrency trading platforms operating in Canada and seeking registration in Canada. The existing pre-registration undertakings are called “core obligations.” They include, but are not limited to:

• Commitments to act honestly and in good faith;
• Avoid and manage conflicts of interest;
• Refrain from giving investment advice;
• Restrictions on leverage and margins;
• Constraints on advertising;
• Communication of risks of using the platform; and
• Maintaining confidentiality as well as insurance and proper records.

Information on filed pre-registration undertakings can be found on the Canadian Securities Administrators’ website.

Canadian Securities Administrator may take enforcement action

The Canadian Securities Administrators may consider compliance and enforcement action against a cryptocurrency trading platform that does not submit or comply with the required pre-registration undertakings. Possible actions can include, but are not limited to, the following:

• Naming the platform on a Canadian Securities Administrators Investor Alert and/or Investor Warning List,
• Directing the platform to identify Canadian users and to implement off-boarding of existing Canadian users and implement access restrictions to prevent Canadians from accessing their products and services in the future,
• Ordering that the platform and its principals stop trading,
• Ordering denying exemptions under securities law to the platform and its principals, or
• Other penalties as determined appropriate by Canadian authorities.

Contact the Lawyers at Bader Law in Mississauga for Advice and Guidance Regarding Fintech and Crypto

The business lawyers at Bader Law have decades of experience assisting clients throughout Mississauga and the Greater Toronto Area with corporate structuring, financing, and secured lending. Our comprehensive legal guidance also includes helping crypto start-ups with business structure and licensing matters. We provide dynamic business law advice and solutions for companies working within the crypto and fintech sectors. To speak with a member of our talented business law group, contact us online or at 289-652-9092.