Regulators seek to clarify when trading platforms are subject to legislation governing securities and derivatives
The Canadian Securities Administrators (CSA) have issued Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets, which lays out situations and factors to help determine when securities legislation will apply to crypto platforms.
“The evolving landscape of the industry prompts us to clarify our regulatory framework so as to better support fintech businesses seeking to offer innovative products, services and applications in Canada ,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers.
Referring to the consultation paper issued jointly with the Investment Industry Regulatory Organization of Canada (IIROC) last year, the notice said that a platform would be subject to securities legislation if it hosts trading of crypto assets that are securities or derivatives, or if it trades contracts or instruments that are derivatives based on crypto assets.
Platforms that facilitate the buying and selling of crypto assets, including crypto assets that are commodities, may also be subject to securities legislation. “[T]he user’s contractual right to the crypto asset may itself constitute a derivative,” the notice said. “In some jurisdictions, this right may be considered a security.”
Some platform operators maintain that because they only allow for transactions that are not in and of themselves derivatives or securities, they are not subject to securities legislation. But according to the CSA, platforms that merely provide users with a contractual right or claim to an underlying crypto asset, rather than immediately delivering the crypto asset to users following a transaction, are generally subject to securities legislation.
“[A] transaction involving a crypto asset may be subject to securities legislation if the transaction does not result in an obligation to make and take delivery of the crypto asset … immediately following the transaction,” the CSA said, noting that there is no bright-line test to determine whether a contract or instrument results in an obligation or reflects an intention to make and take immediate delivery of a crypto asset.
“Staff will consider the terms of the contractual arrangements governing the relationship between the Platform and the user, including whether the contract or instrument creates an obligation to make immediate delivery of the crypto asset,” it added.
The notice laid out some general situations where the CSA generally will consider immediate delivery to have occurred, including if:
- A platform immediately transfers ownership, possession, and control of a crypto asset to the user, who as a result is free to use or otherwise deal with the crypto asset; and
- Following the transaction involving the crypto asset, the platform user is not exposed to insolvency risk (credit risk), fraud risk, performance risk or proficiency risk on the part of the platform.
“We encourage Platforms to consult with their legal counsel on the application of securities legislation and to contact their local securities regulatory authority to discuss whether securities legislation applies to their activities and, if so, the appropriate steps to comply with the requirements,” the notice said, adding that platforms operating outside Canada should consider such legislation if they have Canadian users.
