Crypto-Asset Trading Platforms (CPTs), also called “cryptocurrency exchanges”, are online platforms that allow individuals to buy and sell crypto assets, like bitcoin, or contracts involving crypto assets. There are many different CTPs available to use in Canada such as Binance, Coinbase, and Shakepay, as well as over 300 worldwide. It is important to keep in mind, however, that although CTPs are often called cryptocurrency exchanges, they are not generally recognized as exchanges or authorized to operate as marketplaces in Canada.
The Canadian Securities Administrators (CSA) recently published a Joint Notice (the “Notice”) with the Investment Industry Regulatory Organization of Canada (IIROC) providing guidance on how securities legislation applies to CTPs. The goal of the guidelines outlined in the Notice is to ensure that fostering innovation in the Canadian capital markets is balanced with promoting investor protection and fair and efficient capital markets. In the Notice, the CSA encourages all CTPs to seek legal advice and contact their local securities regulatory authority for more guidance on complying with securities legislation and IIROC rules.
CTPs are generally subject to Canadian securities legislation where they facilitate the trading of crypto assets that are securities, such as certain tokens (“Security Tokens”), and contracts or instruments involving crypto assets (“Crypto Contracts”). The Notice makes it clear that Canadian securities laws apply to both Canadian CTPs and CTPs operating outside Canada that have Canadian clients. The Notice categorizes CTPs which are used to trade Security Tokens or Crypto Contracts as either Dealer Platforms or Marketplace Platforms, based on their business activities, explains how each type will be regulated under existing securities laws, and outlines areas where there may be flexibility in how the existing requirements apply to CTPs.
CTPs as Dealer Platforms
CTPs would likely be characterized as Dealer Platforms where they only facilitate the primary distribution of Security Tokens or they are the counterparty to trading Security Tokens or Crypto Contracts. CTPs that act as Dealer Platforms may also engage in other activities such as offering custody of crypto assets to clients. If the Dealer Platform only facilitates the distribution or trading of Security Tokens in reliance on prospectus exemptions and does not offer margin or leverage for Security Tokens, it can be registered as an exempt market dealer or restricted dealer. If Dealer Platforms offer margin or leverage for Security Tokens, they must be registered as investment dealers and become IIROC members. Similarly, Dealer Platforms that trade or solicit trades for retail investors that are individuals will generally be expected to be registered as investment dealers and as IIROC members.
The CSA offers an interim approach for Dealer Platforms trading Crypto Contracts, because registering to become an investment dealer and obtaining IIROC membership is a time-consuming process. The interim approach allows CTPs to register and operate as a restricted dealer for a limited time, provided that they do not offer leverage or margin trading, while taking steps to transition to a long-term regulatory framework. Under the interim approach, Dealer Platforms will be subject to terms and conditions tailored to their business model, and may also be subject to certain limitations on their activities. During the interim period, Dealer Platforms operating in New Brunswick, Nova Scotia, Ontario, and Quebec must submit applications to register as an investment dealer and IIROC member.
CTPs as Marketplace Platforms
CTPs are characterized as Marketplace Platforms if they bring together multiple buyers, sellers, and other parties to trade in Security Tokens or Crypto Contracts, and use established, non-discretionary methods under which orders for Security Tokens or Crypto Contracts interact with each other and the buyers and sellers or other parties agree to the terms of a trade. Marketplace Platforms, regulated by National Instrument 21-101 Marketplace Operation, among others, will be subject to the oversight of the CSA and the IIROC, and will have to follow market integrity requirements. If the Marketplace Platform operates as an exchange, it must become recognized as an exchange (or become exempt from requiring recognition as an exchange). A Marketplace Platform operating as an exchange will be subject to a public interest mandate and will be required to have rules requiring compliance with securities legislation by its participants.
The Notice recognizes that some Marketplace Platforms may also conduct Dealer Platform activities such as trading as a counterparty to their clients or providing custody of assets. The Notice explains that by conducting dealer activities, Marketplace Platforms may also be subject to dealer requirements and may have to conduct the dealer activities through a separate entity.
The Notice’s proposed interim approach to regulate Marketplace Platforms is to allow them to seek registration as an exempt market dealer or restricted dealer for a two-year period, provided that they are not offering margin or leverage and are not exchanges. Some restrictions may be imposed on Marketplace Platforms such as limiting the number and types of products traded or the number and types of participants.
During the interim period, similarly to Dealer Platforms, Marketplace Platforms operating in New Brunswick, Nova Scotia, Ontario, and Quebec must begin the process for registering as an investment dealer and IIROC member.
Why must CTPs be regulated?
The Notice explains that the regulatory requirements imposed on CTPs are needed to manage the risks CTPs introduce to both the market and investors. For example, under the regulations, CTPs are expected to manage investors’ risk of loss by securing investor assets where Dealer Platforms or Marketplace Platforms have custody of the investors’ crypto assets. To secure investor assets, CTPs must separate investors’ assets from their own, keep adequate records of participants’ holdings, have sufficient financial resources and insurance, and follow other requirements. Another example cited in the Notice is the regulations impose transparency requirements for Marketplace Platform access to ensure that they do not unreasonably limit platform access.
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