Crypto-Asset Trading Platforms

Crypto-Asset Trading Platforms (CTPs), also known as cryptocurrency exchanges, are online platforms trading in crypto assets. One example of a cryptocurrency exchange is Binance. These platforms are a place for people to sell and purchase crypto assets such as bitcoin, or contracts involving crypto assets.

There are important Canadian securities legislation involved in CTPs as they are not recognized as exchanges. Canadian securities laws will apply to both Canadian CTPs and those operating outside Canada that serve Canadian clients, according to the Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada Staff Notice 21-329.

CTPs will be subject to Canadian securities legislation if the crypto assets that are being traded are contracts, securities (Security Tokens), or other derivatives involving crypto assets. The Notice also refers to the buying and selling of crypto assets and how CTPs facilitating such may be subject to securities legislation due to contractual rights of those assets.[1] CTPSs that operate similarly to marketplaces are referred to as “Marketplace Platforms” whereas CTPs that are not marketplaces and facilitate the trading of Security Tokens or Crypto Contracts are categorized as “Dealer Platforms”.[2] The Ontario Securities Commission (“OSC”) urges CTPs to contact them to reach a compliance with the existing securities law, otherwise requirements will be enforced upon them.

Note: Information on Dealer and Marketplace Platforms are outlined below, but further details can be found within Staff Notice 21-329.

What is a Dealer Platform?

A CTP would be categorized as a “dealer” if it obtains the following characteristics:

• It only facilitates the primary distribution of Security Tokens [3], and
• It is a counterparty in the trading of Security Tokens and/or Crypto Contracts, and there are no interactions on the CTP between client orders.

Dealer Platforms may also engage in the onboarding of retail clients onto the CTP, offer custody of the assets through them or a third-party, and act as agent for their clients during trading.

Registration Options for Dealer Platforms

The registration options outlined below are dependent on the activities performed by the platform.

1. A Dealer Platform can register as an exempt market dealer or restricted dealer if they only facilitate trading or distribution of Security Tokens and do not offer margin or leverage.
2. To offer margin or leverage for Security Tokens, Dealer Platforms must register as an investment dealer and be a member of the Investment Industry Regulatory Organization of Canada (IIROC).
3. Trading or soliciting trades for retail investors come with the expectation of registering as an investment dealer and IIROC membership (subject to interim approach outlined below). Trading of Crypto Contracts should also prompt the platform to register in an appropriate category.

In addition to the application for the appropriate registration, Dealer Platforms may also need discretionary exemptive relief from the prospectus requirement to be able to distribute Crypto Contracts or for other over-the-counter trade reporting requirements if compliance concerns arise.

What to do if registration is causing delays

Registering as an investment dealer and obtaining IIROC membership can be timely and impact the development of business operations.

A Dealer Platform that facilitates the trading of crypto contracts should register as a restricted dealer as long as leverage or margin trading is not offered. This interim approach is time limited and may be subject to terms and conditions and certain limitations on the activities of the business.

This approach allows for a two-year transition period where Dealer Platforms (as a restricted dealer) can work towards their registration as an investment dealer and become a member of IIROC.

What is a Marketplace Platform?

Even if the platform performs certain dealer functions, a CTP would be categorized as a “marketplace” if it obtains the following characteristics:

• Provides or maintains a market or facility for gathering individuals (buyers, sellers, etc.) to engage in the trading of Crypto Contracts and/or Security Tokens.[4]
• Brings together party orders of Crypto Contracts and/or Security Tokens.
• The interaction of Crypto Contracts and/or Security Tokens orders are under non-discretionary methods with agreement of the trading terms provided by the parties entering the orders.

Marketplace Registration Options

1. If the Marketplace Platform is not an exchange, it is expected that the platform register as an investment dealer and obtain IIROC membership (unless in pursuant the interim approach)
2. May be required to register as an investment dealer and obtain IIROC membership if similar activities to that of “dealers” are performed.
3. Prospectus exemptions may be required when offering Crypto Contract or Security Token services such as distribution.
4. An exchange marketplace (one that trades Security Tokens and regulates issuers/trading participants) would need to apply for recognition as an exchange and apply for recognition so long as the criteria is met.

If appropriate, the registration application (or recognition for exchange marketplace platforms) should also be accompanied by any regulatory requirement discretionary exemptive relief.

Interim Approach for Marketplace Platforms

If the Marketplace Platform is not offering leverage or margin and it is not an exchange marketplace, it can register as a restricted dealer or exempt market dealer during the interim period (2-years).[5] During this time, the Marketplace Platform should be working towards their registration as an investment dealer and IIROC membership. If it is an exchange market dealer, the process of recognition or exemption from recognition should be started

CTPs and cryptocurrency industry participants should consult with a lawyer to ensure the appropriate steps are taken to comply with IIROC rules and securities legislation.

A special thank you to Maria Kavanagh for her help and contributions to this article!

The content of this article is written for general information purposes only and does not constitute specific legal advice. This article should not be used as a substitute for competent legal advice from a licensed lawyer. Please contact us at 416-238-5527 if you’d like to speak to an Emerge Law lawyer.

Sources Reviewed:

[1] Canadian Securities Administrators. “Staff Notice 21-329 – Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.” Canadian Securities Administrators, January 16, 2020, 1.  https://www.osc.ca/sites/default/files/pdfs/irps/csa_20200116_21-327_trading-crypto-assets.pdf

[2] Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada. “CSA Staff Notice 21-327 – Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements.” Canadian Securities Administrators, March 29, 2021, 1. https://www.securities-administrators.ca/uploadedFiles/Industry_Resources/JointCSAIIROCNotice21-329(March29_2021).pdf

[3] Ibid, page 3.

[4] Ibid, page 6.

[5] Ibid, page 8.