The Canadian Securities Administrators (CSA) published a set of guidelines on Thursday that are meant to help organizations determine when securities regulation applies to crypto assets.
“The evolving landscape of the industry prompts us to clarify our regulatory framework.”
The document is meant to provide further context in an area that has been plagued by uncertainty as FinTech startups and crypto trading platforms become more prolific. The guidelines follow a consultation paper that was released by the CSA in March with a proposed framework for crypto-asset trading platforms. At the time, the regulator sought input from the FinTech community.
“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, the organization responsible for financial regulation in Québec.
“As we continue to consider the comments and responses to the consultation we launched last year, the staff notice published today will help platform operators to determine whether their activities are subject to securities legislation,” Morisset added.
The CSA document outlines when securities regulation would apply to crypto platforms and describes examples of situations where securities legislation would and would not apply. CSA stated that securities regulation generally applies to platforms as long as the crypto asset itself is a security or derivative and the contract for the asset does not result in the immediate delivery of the crypto asset to the purchaser or user.
Securities legislation does not apply if each of the following criteria are met:
- a crypto platform offers services for users to buy or sell bitcoin and does not offer margin or leveraged trading;
- users send money to the platform to purchase bitcoin at a given price;
- the entire quantity of bitcoin purchased is immediately transferred to a wallet that is in the sole control of the user, and the transfer is immediately reflected on the Bitcoin blockchain;
- there is no agreement that would allow the transaction to be settled other than by immediate transfer of bitcoin;
- the platform’s typical commercial practice is to make immediate delivery possession or control of the user’s bitcoin following the transaction;
- the sale or purchase of bitcoin is not merely evidenced by an internal ledger within the platform, but rather, is transfered to the user’s own wallet; and
- the platform or seller retains no ownership, possession or control over
the transferred bitcoin.
The lack of clarity on how securities regulation applies to crypto has affected FinTech startups in Canada, as well as the US. Waterloo-based Kik, for example, was acquired in October following a public battle with the US Securities and Exchange Commission (SEC) over whether selling Kin tokens to US investors in 2017 constituted a security. Kik chose not to sell its tokens in Canada specifically because regulations were unclear.
Canada is notably the only developed federal democracy that does not have a securities regulatory authority at the federal government level. The CSA is not a federal body, but a coalition of existing securities regulators from Canada’s provinces and territories, which each have their own regulatory framework.
The guidelines are a preliminary result of ongoing research being conducted by the CSA and the Investment Industry Regulatory Organization of Canada. The organization noted that it is continuing to review comments and responses to its March consultation paper. It plans to publish a summary along with further guidance for crypto asset trading platforms later this year.
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