Introduction
On September 26 2024, the Canadian Securities Administrators (the “CSA“) announced an extension to the compliance deadline for crypto asset trading platforms (“CTPs“) with respect to value-referenced crypto assets (“VRCAs“, commonly referred to as “stablecoins“).
As a result of the extension, registered CTPs or CTPs that provide pre-registration undertakings (“PRUs“) now have until December 31, 2024 (the “Extended Compliance Deadline“), to ensure they (i) no longer allow clients to buy or deposit fiat-backed crypto assets (“FBCAs“) nor (ii) allow clients to enter into crypto contracts to buy or deposit FBCAs that do not comply with the CSA’s required interim regulatory framework imposing enhanced terms and conditions published on October 5, 2023 in Staff Notice 21-333 – Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (collectively, the “CSA Trading Requirement“).
After December 31, 2024, registered CTPs or CTPs that provide PRUs must only offer VRCAs that comply with the CSA Trading Requirement.
Key Terms
“Crypto assets”, “crypto asset trading platforms”, and ” value-referenced crypto assets” are defined by the CSA as follows:
- “Crypto assets” are digital assets that use public ledgers over the internet to prove ownership.1 Common types of crypto assets include cryptocurrency, crypto-related funds (including cryptocurrency investment funds, cryptocurrency exchange traded funds and blockchain funds) and tokens (including utility tokens, security tokens and non-fungible tokens).
- Crypto asset trading platforms” (or “CTPs“) are online applications or systems that bring together buyers and sellers of crypto assets to facilitate transactions or trades.2
- “Value-referenced crypto assets” (or “VRCAs“) are crypto assets that are designed to maintain a stable value over time by referencing the value of a fiat currency or any other value, right, or combination thereof.3
Background
Transformative developments continue to reshape the regulatory landscape of Canada’s crypto markets. Over the past few years, the CSA has released various staff notices and updates to provide guidance on the regulation of crypto assets, including VRCAs, and CTPs. A summary of the two most relevant notices to the Extended Compliance Deadline are as follows:
i. Staff Notice 21-332 – Crypto Asset Trading Platforms: Pre Registration Undertakings – Changes to Enhance Canadian Investor Protection (the “First Notice“)
The CSA has grown increasingly concerned about the risks associated with CTPs, given their high volatility and liquidity challenges, particularly following the recent spate of insolvencies in the industry. Significant risks associated with VRCAs relate to the stabilization mechanism associated with maintaining VRCAs’ value over time, as well as the management and custodianship of their reserve of assets and their governance, among others.4 In response to these concerns, on February 22, 2023, the CSA issued the First Notice releasing stricter rules for CTPs in Canada. Per the First Notice, unregistered CTPs must file a PRU while their applications for registration and related relief are under review. These enhanced investor protection safeguards focus on how CTPs handle customer assets, prohibit offering margin or credit, and set limits on trading certain types of crypto, like stablecoins. CTPs that do not comply may face penalties or be required to cease trading. The CSA also reaffirms its view in the First Notice that some VRCAs may constitute securities and/or derivatives.5
ii. Staff Notice 21-333 – Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (the “Second Notice“)
In recognizing that VRCAs may fulfill particular needs for Canadian clients of CTPs, on October 5, 2023, the CSA published the Second Notice, demonstrating a willingness to allow the continued trading of certain VRCAs that rely on FBCAs. The Second Notice sets out an interim regulatory framework with terms and conditions for which the CSA would consent to a registered CTP, or a CTP that provided a PRU, to continue allowing their clients either to buy or deposit FBCAs or to enter into crypto contracts to buy or deposit FBCAs.
The Second Notice stipulates a deadline of April 30, 2024. By this date, the CSA expected that CTPs would no longer allow clients to buy, deposit, or enter into crypto contracts to buy or deposit FBCAs that do not comply with the interim terms and conditions.
Of particular importance, the CSA imposed the following to address investor protection concerns:
- CTPs must no longer allow clients to buy or deposit stablecoins, or enter into crypto contracts to buy or deposit stablecoins, that are not FBCAs by December 29, 2023;
- CTPs must no longer allow clients to buy or deposit FBCAs, or to enter into crypto contracts to buy or deposit FBCAs, that do not comply with CSA’s required terms and conditions by April 30, 2024, of which has now been extended as a result of the Extended Compliance Deadline;
- Issuers of stablecoins (specifically, FBCAs) are required to file an undertaking that is acceptable to the CSA and substantially in the form provided in appendix B of the Second Notice by December 1, 2023; and
- Issuers of stablecoins are to file a submission to jurisdiction and appointment of agent for service in the form provided in appendix C of the Second Notice.
If a CTP or an industry participant intends to propose an alternative way to address investor protection concerns, the proposed alternative must be in place, or at least substantially finalized, prior to December 31, 2024.
The Extended Compliance Deadline
Following ongoing discussions with Canadian crypto asset market participants, as well as complications with adherence to the April 30, 2024, deadline referenced in the Second Notice, the CSA extended the deadline to October 31, 2024, and subsequently to December 31, 2024.
The Extended Compliance Deadline is aimed at giving CTPs more time to comply with the terms and conditions of their registration and exemptive relief decisions, or PRUs, and to allow both industry participants and CTPs to propose alternative solutions to address investor protection concerns. The CSA has also stated that it remains open to considering exemptions relating to “specific use” cases for VRCAs that do not raise investor protection concerns.
Importantly, the CSA Trading Requirement only applies to those CTPs that:
(i) are regulated by a Canadian securities regulator; and
(ii) if not yet registered, have filed a PRU with the CSA to be allowed to continue to operate during the registration process.
Conclusion
Although the regulatory framework for crypto assets and CTPs is continually evolving, leaving some aspects of its future trajectory uncertain, we do know that CTPs are required to adhere to mandatory registration and pre-registration obligations under Canadian securities laws. Additionally, the decision to extend the deadline underscores the significance of CTPs adhering to the current regulatory framework governing crypto asset trading, which aims to strike a balance between flexibility, innovation, and investor protection.
While the Extended Compliance Deadline will allow CTPs more time to ensure compliance with the conditions of their registration and exemptive relief, or PRUs, CTPs should begin implementing appropriate procedures and system updates early on to ensure their business operations in Canada continue to comply with Canadian regulatory requirements once the deadline passes.
CTPs are also reminded that they were required to no longer allow clients to buy or deposit, or enter into crypto contracts to buy or deposit, VRCAs other than certain FBCAs by December 29, 2023. This requirement is not affected by the Extended Compliance Deadline. If you would like to discuss the CSA update on VRCAs or any further information, please contact any member of our Capital Markets and Securities Group.
1 Canadian Securities Administrators, Investor Tools: Crypto Assets (n.d.), online: Canadian Securities Administrators https://www.securities-administrators.ca/investor-tools/crypto-assets/.
2 Ibid.
3 Canadian Securities Administrators, Canadian securities regulators provide update on interim approach to value referenced crypto assets (n.d.), online: Canadian Securities Administrators https://www.securities-administrators.ca/news/canadian-securities-regulators-provide-update-on-interim-approach-to-value-referenced-crypto-assets/.
4 Canadian Securities Administrators,Staff-notice-21-333-crypto-asset-trading-platforms-terms-and-conditions-trading-value (n.d.), online: Ontario Securities Commission https://www.osc.ca/sites/default/files/2023-02/csa_20230222_21-332_crypto-trading-platforms-pre-reg-undertakings.pdf
5Ibid.
