Written By Andrew Bozzato, Simon Grant, Christopher Doucet and Daniel Baum
Newly-released regulatory guidelines give crypto asset trading platforms (CTPs) operating in Ontario just a few weeks—until April 19, 2021—to contact the Ontario Securities Commission (OSC) to discuss how to ensure compliance with Ontario securities law. Failing to contact the OSC by this date could result in enforcement steps being taken.
What Does the OSC Want to Talk to CTPs About?
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) published Joint Staff Notice 21-329 – Guidance for Crypto-Asset Trading Platforms: Compliance and Regulatory Requirements (the "Notice") on March 29, 2021, providing detailed guidance relating to the regulation of CTPs and related businesses. The guidance covers CTPs that facilitate or propose to facilitate the trading of crypto assets that are securities ("security tokens") or certain instruments or contracts involving crypto assets ("crypto contracts"), as previously discussed in CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto-Assets ("CSA Staff Notice 21-327").
The Notice supplements the prior CSA and IIROC guidance on these issues, beginning with the Joint CSA/IIROC Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms, which laid out a proposed regulatory framework for regulating CTPs. More recently, the CSA issued CSA Staff Notice 21-327 to provide guidance on factors the CSA considers when determining whether securities legislation applies to a CTP. The Notice should be considered alongside the prior guidance.
The Notice does not introduce new rules—CTPs are already subject to existing securities regulatory requirements—but instead provides guidance on how existing requirements apply to CTP business models and how CTPs currently operating in Canadian jurisdictions may or may not be in compliance with such regulations. The Notice also specifically highlights that Canadian securities laws apply to CTPs serving Canadian clients, even if the CTP is operating from outside Canada.
The CSA is urging all CTPs to discuss the registration process with their provincial securities regulator and address applicable securities law requirements. And, as noted above, the OSC has separately announced that CTPs serving clients in Ontario must contact OSC staff by April 19, 2021, to discuss how to bring their operations into compliance with Ontario law—or risk enforcement steps.
Marketplace versus Dealer
While recognizing that each individual CTP business model may have unique attributes that may require tailored regulatory application, the Notice describes two broad categories of CTPs for the purposes of the new guidance: (1) Marketplace Platforms, which provide a market for bringing together multiple buyers and sellers of crypto assets; and (2) Dealer Platforms, which are in the business of trading crypto tokens or crypto contracts and may offer custody of crypto assets to clients. The first step is to assess whether a CTP is a Marketplace Platform, a Dealer Platform, or some combination of the two, as the regulatory requirements will vary. The analysis is complex and fact-specific.
Near-term Regulatory Outlook
In addition to describing the applicability of existing securities laws, the Notice outlines new tailored regulatory requirements for CTPs for an interim period—likely to be two years.
The Notice describes a willingness on the part of provincial regulators to work with CTPs to provide temporary registrations during this interim period, including registration as a restricted dealer or exempt market dealer for a limited time. Furthermore, the CSA Regulatory Sandbox provides companies with an opportunity to test their products, services and applications under a flexible regulatory process. While the tailored application of the regulations is expected to be flexible, CTPs will nonetheless be required to submit one or more exemptive relief applications to the applicable regulatory authority supported by robust submissions explaining why flexibility or relief in respect of the specific requirements should be provided.
This interim period is an opportunity for CTPs to work with provincial regulators to develop tailored regulatory approaches. Superficially, it is also an opportunity to test the CSA’s assertion that regulation and innovation in the crypto-asset space can more than coexist; they can support and better each other.
Notwithstanding the proposed temporary approach to regulatory compliance during the interim period described above and that there are some differences in approach among provincial regulators, CTPs will generally be expected to ultimately apply for registration as an investment dealer and seek IIROC membership, regardless of the specific business model or activities proposed to be conducted. Marketplace Platforms may also need to address whether recognition and regulation as an exchange is required.
Has the CSA Engaged with CTPs So Far?
Securities regulators have indicated their desire to strike a balance between maintaining flexibility to foster innovation, while protecting investors and facilitating fair, efficient markets. In our experience, regulators seem receptive to tailoring securities regulatory requirements to emerging business models and technologies, and we are aware of cases where exemptive relief from certain requirements and use of the CSA Regulatory Sandbox have been successful. As such, there are several avenues for approaching the securities regulators to discuss how to take appropriate steps to comply with the guidance in this area. The Bennett Jones Fintech and Blockchain group can advise and assist in navigating these and other changes to the crypto-regulation regime.