Over the past year, eight crypto asset trading platforms (“CTP”) became regulated as investment dealers in Canada. These CTPs operate online platforms that allow Canadian residents to buy, sell, and hold crypto assets. In contrast, no crypto-asset service provider that offers savings or loan products is registered under securities laws or any other prudential regulatory framework in Canada.
Each CTP that is registered as a broker-dealer operates under the terms and conditions of a bespoke Exemption Order (each, a “PTC command”) granted by the Canadian Securities Administrators (CSA), including a condition that the CTP will not list crypto assets that are securities or derivatives. Crypto assets such as Bitcoin, Ether, and other large-cap, high-volume crypto assets that are generally accepted as commodities, are available on these CTPs.
You may wonder: if these CTPs are not allowed to list crypto assets that are themselves securities or derivatives, why did they have to register under securities laws in the first place? The answer is somewhat technical, but very important to understanding the regulatory framework for crypto-asset service providers in Canada and why there is ongoing regulatory uncertainty regarding crypto-asset lending activities.
CTP regulatory framework
In two staff notices published in January 2020 and March 2021 (there “Notice to staff”), CSA staff took the position that where a CTP does not immediately deliver the crypto assets it sells to its customers (so that ownership, possession and control of the crypto asset is passed on to the client upfront and later CTP intervention is not required), then the contract between the CTP and its clients is itself treated as a security or derivative, which staff describe as a “Crypto contract”.
Therefore, CTPs that provide custodial services to clients for crypto assets bought and sold on their platforms in accordance with staff notices must register as broker-dealers under securities laws and obtain an exemption from the prospectus requirement for the crypto contracts they issue to clients. The staff notices, along with the exemption orders issued to the eight custodial CTPs registered so far in Canada, represent an emerging regulatory framework for CTPs in Canada (the “CTP regulatory framework”).
In addition to spot crypto trading, Canadian residents can also access many other services related to crypto assets through online platforms, including loans secured by crypto assets, as well as savings accounts that offer holders the ability to earn interest or yield by depositing their crypto assets. with the platform. For the purposes of this article, these platforms are referred to as “Crypto lenders”. While some crypto lenders also offer crypto-asset trading services, many do not.
Staff reviews are entirely focused on platforms that offer both trading and custody; they do not mention savings accounts or loan products. Similarly, none of the registered CTPs offer savings and credit products. As a result, these businesses continue to operate in an environment of regulatory uncertainty in Canada.
For the ASC to exercise jurisdiction over crypto lenders, these firms would need to offer services that qualify as securities or derivatives in one or more ASC jurisdictions. To date, only one-off platforms that offer buy, sell, and hold services are considered issuers of crypto contracts under the CTP regulatory framework.
In some CSA jurisdictions, such as Ontario, the definition of collateral includes “evidence of indebtedness”, with specific exclusions for deposit accounts with regulated financial institutions and insurance contracts issued by insurance companies. regulated insurance. It is possible that a savings account offered by a Crypto lender could be considered proof of the lender’s indebtedness, however, this would depend on the specific contractual arrangements between the Crypto lender and its customers. Such contractual agreements could also be interpreted by regulators as analogous to “investment contracts” and eventually become regulated that way.
In other CSA jurisdictions, such as Quebec, the definition of collateral includes “an instrument evidencing a loan of money” and “a deposit of money”, with exclusions for various types of debt obligations and “a deposit money within the meaning of the Deposit Institutions and Deposit Protection Act”. Since crypto assets are not recognized as legal tender or currency in Canada, a strong argument can be made that evidence of crypto asset lending and crypto asset deposit is not covered by this part. of the definition of “title”. It is therefore unclear whether crypto lenders issue or trade products and services that are regulated as securities or derivatives across the CSA.
Additionally, deposit taking institutions have traditionally been prudentially regulated as banks, trust companies, credit unions or similar financial institutions under the supervision of the Federal Office of the Superintendent of Financial Institutions (OSFI) or prudential regulators in the provinces and territories of Canada. Generally, deposit-taking institutions are governed by laws and regulations and supervised by separate regulatory authorities from the capital markets regulatory regime that applies to securities and derivatives. This capital markets regime is regulated by CSA members.
As staff notices and CTP orders demonstrate, the CSA is striving for a harmonized approach to the regulation of crypto assets in Canada. We expect the CSA to be well aware of the activities of crypto lenders and to consider the extent to which they can or should be regulated under securities or derivatives laws. We expect the CSA to also be cognizant of the potential overlap in jurisdiction between OSFI and provincial prudential regulators, and the desirability of streamlined regulation to minimize burden and foster innovation in Canada.
Registration of money services businesses
Crypto-asset service providers may also be regulated as money services businesses (“ESM”) in the category of virtual currency brokers Canada, under the federal regime administered by the Financial Transactions and Reports Analysis Center of Canada (FINTRAC) and/or the Quebec regime administered by Revenue Canada.
For purposes of ESM registration, trading in virtual currency includes the provision of virtual currency exchange and/or virtual currency transfer services (e.g., remittances). While some crypto lenders may offer virtual currency exchange and/or funds transfer services, many do not. In addition, MSBs domiciled outside of Canada are only required to register with FINTRAC as foreign MSBs if they are service department to Canadian customers and to provide these services to customers in Canada.
FINTRAC offers specific advice on when a foreign MSB “offers services” to Canadians, such as marketing or advertising to individuals or entities located in Canada, operating a “.ca” domain name or listing the business in a Canadian business directory. FINTRAC provides a non-exhaustive list of additional clues on its website, including offering products or services in Canadian dollars and seeking feedback from Canadian customers.
Therefore, the extent to which a crypto lender domiciled outside of Canada may need to register as an ESM is very specific. Although Revenu Québec has not published any guidelines on this subject, the analysis also depends on the facts in Québec.
Ongoing regulatory uncertainty
While the CTP Registration Framework has helped clarify CTPs that offer buy, sell and custody (custody) services, and the MSB Virtual Currency Broker category has clarified trading activities crypto assets and funds transfer, the regulatory landscape for crypto lenders remains uncertain in Canada.
In addition, while eight CTP custodians have registered under the CTP Registration Framework, dozens of other CTPs domiciled in Canada and abroad continue to offer trading services in Canada without being registered as as stockbrokers.
Many CTPs and crypto lenders are actively engaged with the CSA regarding the application of securities and derivatives laws to crypto savings and loan products. As noted in the staff notices, the CSA seeks to balance investor protection concerns with the goal of supporting financial innovation in Canada.