On the road to greater regulatory clarity: The CSA provides further guidance on its expectations for crypto asset platforms and the trading of stablecoins in Canada
The Canadian Securities Administrators (CSA) have recently introduced new Pre-Registration Undertakings (PRUs) that will apply to crypto asset trading platforms (CTPs) awaiting registration under securities legislation. In doing so, it has provided greater clarity as to the expectations of Canadian capital markets regulators in the digital asset space.
CSA Staff Notice 21-332 Crypto Asset Trading Platforms: Pre-Registration Undertakings Changes to Enhance Canadian Investor Protection (the Notice), published February 22, 2023, sets out additional requirements for the enhanced PRUs, which include, among others, a new definition of an acceptable third-party custodian permitted to hold client assets, a prohibition on offering margin, credit or other forms of leverage, restrictions on trading proprietary tokens, and new restrictions on trading stablecoins.
As we have previously reported, the CSA announced in December 2022 that they would strengthen their approach to crypto regulation by expanding the regulatory requirements imposed on CTPs. This followed the CSA’s August 2022 announcement that PRUs would be required from all CTPs seeking to offer services while awaiting the completion of their dealer registration applications.
The Notice is of significant importance to CTPs, as it offers greater regulatory clarity on two crucial issues: Stablecoins (referred to in the Notice and enhanced PRUs as “Value-Referenced Crypto Assets” or “VRCAS”) and custodial arrangements (including a new restriction on the use of foreign custodians).
The CSA had previously expected participating CTPs to provide PRUs which included a number of commitments and undertakings, including, but not limited to, the following:,
- Core business conduct obligations, including:
- an undertaking to act fairly, honestly and in good faith.
- a commitment to implement a system of controls and supervision, including policies and procedures relating to material, non-public information and personal trading by employees and conflicts of interest.
- restrictions on products and services and margin and leverage for retail clients.
- Undertaking not to provide recommendations or advice.
- restrictions on advertising and social media use,
- undertakings on account opening procedures, investment limits and account appropriateness assessments.
- Reporting provisions and marketplace-related provisions.
Pursuant to the Notice, CTPs will be expected to comply with expanded commitments that will be added to the standard form of PRU. The Notice clearly frames the CSA’s regulatory approach around investor protection concerns, stating in introducing its content; “In light of recent insolvencies involving a number of CTPs, including Voyager Digital, Celsius Network, the FTX group of companies, BlockFi and Genesis Global (collectively recent CTP insolvency events), we are introducing important new investor protection provisions into the standard form of PRU.”
The Notice reaffirms CSA staff’s view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives. Specifically, the Notice sets out the CSA’s expectation that CTPs obtain the prior written consent from the CSA in order to trade stablecoins, which consent will be premised on a number of conditions, including, but not limited to, the following:
1) The stablecoin must be fiat-backed.
2) Distributions of stablecoins in Canada must be made in compliance with applicable Canadian securities laws, with the result that issuers of stablecoins will need to comply with the prospectus requirement, or find an applicable exemption. In Canada, reliance on a prospectus exemption means complying with indefinite resale restrictions and annual investment limits, amongst other requirements.
3) The Stablecoin issuer must maintain a reserve of assets with a market value at least equal to the value of outstanding units of the stablecoin at the end of each day.
4) The reserve of assets must be segregated from the assets of the issuer of the stablecoin, be held by a qualified custodian in favour of CTP customers, and must be comprised only of highly liquid assets, such as cash or cash equivalents.
The enhanced PRU includes additional commitments related to the custody of client assets. Notably, the CTP must hold client crypto assets in a designated trust account or in an account designated for the benefit of clients with an “Acceptable Third-party Custodian”, a concept defined in the Notice to include, among other things:
- A Canadian custodian or Canadian financial institution.
- A foreign custodian for which the CTP has obtained the prior written consent from its principal regulator (PR) (where prior consent in this case is a new requirement);
- An entity that does not meet the criteria for a qualified (Canadian or foreign) custodian and for which the CTP has obtained the prior written consent from its PR (which is also a new concept).
The CTP must also commit to providing an authorization and direction that allows CSA staff to obtain information about Canadian client accounts directly from the custodian.
Global affiliate accountability
Regulators will expect the filer’s global affiliates, parents entities, and/or their controlling minds to co-sign the enhanced PRU. In doing so, those entities will undertake not to interfere with the filer’s activities and its directors’ independent judgement. To the extent possible, enhanced PRUs will include a commitment that the filer’s board of directors will remain independent from that of its global affiliates, parent entities and/or their controlling minds.
The enhanced PRU will require CTPs to retain or employ a qualified Chief Compliance Officer (CCO) while they pursue registration. This individual must generally meet the requirements of a CCO for an exempt market dealer. The CCO, who must have direct access to the board of directors, will be responsible for monitoring and assessing the CTP’s compliance with securities legislation.
CTPs operating in Canada while pursuing registration must provide their principal regulator with an enhanced PRU within 30 days of publication of the Staff Notice.
The notice explicitly states “nothing in this Notice should be interpreted as limiting any enforcement recourse the CSA may take against any CTP”, and goes on to say that if a CTP currently operating in Canada:
- is not prepared to file a revised form of PRU or a form acceptable to CSA staff;
- that files the PRU, but does not abide by its provisions;
- does not make bona fide attempts to progress through the registration process as quickly as possible; or
- otherwise raise investor protection or public interest concerns,
It, “and its principals” may be subject to compliance and enforcement action, which could ultimately result in penalties and sanctions for the principals behind a CTP, or which could result in the CTP being named on investor alert or warning lists or being directed to off-board Canadian customers.
As always Osler will continue to monitor and report on developments in this area.