The ASC and CSA have issued various guidance on the application of securities legislation to crypto assets, including the following:
| Date | Title | Description |
|---|---|---|
| 2022/12/12 | CSA News Release Canadian securities regulators expand existing requirements for crypto trading platforms operating in Canada |
Further to the August 15, 2022 CSA News Release, crypto trading platforms that are not yet registered must provide a pre-registration undertaking (PRU) to their principal regulator or cease operating. CSA members will shortly communicate a deadline by which PRUs must be delivered. Crypto trading platforms must agree to comply with expanded terms and conditions that will include, among other things, requirements to hold Canadian client assets with an appropriate custodian and segregate these assets from the platforms proprietary business, as well as a prohibition on offering margin or leverage for any Canadian client. |
| 2022/08/15 | CSA News Release Canadian securities regulators expect commitments from crypto trading platforms pursuing registration |
To ensure a level playing field, crypto asset trading platforms that are not yet registered must provide an undertaking to comply with various conditions similar to those that would apply if registered. |
|
2021/09/23 |
Joint CSA/IIROC Staff Notice 21-330 Guidance for Crypto-Trading Platforms: Requirements relating to Advertising, Marketing and Social Media Use |
Guidance for crypto asset trading platforms on how requirements of securities legislation and IIROC rules allow them to advertise, market and use social media. |
| 2021/03/29 | Joint CSA/IIROC Staff Notice 21-329 Guidance for Crypto Asset Trading Platforms: Compliance with Regulatory Requirements |
Guidance on the application of dealer registration and marketplace requirements to crypto asset trading platforms. |
| 2021/03/11 | CSA Staff Notice 51-363 Observations on Disclosure by Crypto Assets Reporting Issuers |
Guidance on disclosure expectations of publicly traded issuers dealing in crypto assets. |
| 2020/01/16 | CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets |
Guidance on how securities legislation may apply to crypto asset trading platforms even where the crypto asset is not itself a security or derivative but the platform offers a custodial solution with clients having a right to delivery. |
| 2019/03/14 | Joint CSA-IIROC Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms |
Consultation paper seeking feedback on the proposed regulatory framework for crypto asset trading platforms. |
| 2018/06/11 | CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens |
Guidance on when a token offering would constitute an investment contract and therefore a security. |
| 2017/08/24 | CSA Staff Notice 46-307 Cryptocurrency Offerings |
Overview of the application of securities laws to crypto asset offerings and other circumstances. |
Alberta securities laws will apply to crypto assets in many cases, but not all.
Crypto-assets are sometimes referred to by names such as “utility token", “payment token”, “virtual asset”, “digital currency” or “stablecoin”. The name given to the crypto asset does not determine whether or not it is subject to Alberta securities laws.
Generally, Alberta securities laws will apply to a crypto-asset if any of the following circumstances apply:
- The crypto-asset itself meets the definition of “security” as set out in the Securities Act (Alberta). For example:
- It has the characteristics of a commonly known security, such as a share or a unit of an investment fund.
- It is a document constituting evidence of title to or interests in the capital, assets, property, profits, earnings, or royalties of a person or company.
- It is a bond, debenture, note or other evidence of indebtedness (other than a deposit issued by a financial institution).
- It is a profit sharing agreement.
- It is an evidence of an option, subscription or other interest in or to a security.
- The crypto-asset is offered or sold in a manner that creates an “investment contract” as that term has been interpreted by the courts.
- CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens provides guidance respecting when a crypto-asset offered in an initial token offering or initial coin offering will be considered an investment contract and therefore a security. Although they may be labelled ‘utility tokens’ the offering of tokens under an initial coin offering or an initial token offering has generally appeared to constitute a sale of securities.
- The crypto-asset is one of the assets in an investment pool offered to investors.
- The crypto-asset itself meets the definition of “derivative”, as set out in the Securities Act (Alberta) for example, as an option, swap, forward contract or other financial instrument whose market price is derived from an underlying price, value or thing.
In addition, even if the crypto asset is not a security or a derivative, Alberta securities law will apply if the crypto-asset is traded in a manner that creates a derivative or a security, for example, by a platform that holds custody of the crypto-asset such that the client only has a contractual right or claim to the underlying crypto asset. See CSA Staff Notice 21-327 Guidance on the application of Securities Legislation to Entities Facilitating the Trading of Crypto Assts.
General
CSA Staff Notice 46-307 Cryptocurrency Offerings provides guidance on some of the many ways Alberta securities law can apply to crypto-assets.
Prospectus requirement
If a crypto asset is a security, the distribution or offering of that security for sale triggers the prospectus requirement. The crypto asset can then be sold either with a prospectus or relying on one of the available prospectus exemptions or discretionary exemptive relief.
Although securities sold under a prospectus are generally freely tradeable in a secondary market, resale restrictions apply to securities sold under prospectus exemptions. So unless discretionary exemptive relief is sought and obtained, crypto assets sold under prospectus exemptions would not be available for secondary trading.
Dealer registration requirement
Alberta securities laws require that persons or companies that are “in the business” of trading securities or derivatives be registered as dealers. Online platforms that offer for sale crypto assets that are securities or derivatives or facilitate the trading of securities or derivatives would generally be required to register as a dealer and, in some circumstances, would be subject to the requirements applicable to marketplaces.
Even if a particular crypto asset is not itself a security or a derivative, in some circumstances a security or derivative may be created and require the platform to comply with securities law requirements e.g., those applicable to dealers and marketplaces. This will typically be the case where a platform holds custody of the crypto-asset on behalf of a client and does not immediately deliver it to the client such that the client only has a contractual right or claim to the underlying crypto asset. See CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets for further details.
Crypto asset trading platforms
On March 29, 2021, the CSA and IIROC published CSA/IIROC Staff Notice 21-329 Guidance for Crypto Asset Trading Platforms: Compliance with Regulatory Requirements outlining how existing provisions of securities legislation and IIROC rules apply and might be adapted to crypto asset trading platforms.
Reporting issuers
On March 11, 2021 the published Staff Notice 51-363 Observations on Disclosure by Crypto Assets Reporting Issuers providing guidance on disclosure expectations of reporting issuers dealing in crypto assets.
Fraud and market manipulation
In addition, the fraud and market manipulation prohibitions of Alberta securities law may be engaged in respect of a crypto asset that is the underlying to a derivative.
Although a number of crypto asset trading platforms have applied or are in the process of applying to be registered under securities legislation, at present, most crypto asset trading platforms are not registered.
Many crypto asset trading platforms are required to be registered. See “When do Alberta securities laws apply to crypto assets?” However, not all crypto asset trading platforms will be required to be registered.
Registered crypto asset trading platforms
You can check the National Registration Search to see whether a person or company is registered.
If a crypto asset trading platform is not registered there is no assurance that some of the typical protections that may exist when using a registered dealer are present. For example, with respect to
- secure handling of client funds, including the use of a bank account with a regulated financial institution;
- appropriate safekeeping and protection of client assets;
- protection from the platform’s creditors in the event of insolvency;
- confidentiality safeguards for personal information;
- reliable record-keeping;
- reliable processes for pricing and trading in crypto assets;
- appropriate investor pre-trade disclosures;
- information on the nature of the legal relationship with the platform;
- risk warnings related to trading;
- an assessment of the risks and appropriateness of the crypto assets offered to trade for clients;
- best execution or fair pricing;
- proficiency or qualifications to provide investment advice;
- disclosure of fees;
- client reporting;
- mitigation and disclosure of conflicts of interest;
- procedures to mitigate cyber-security and business continuity risks;
- internal controls and procedures; and,
- measures intended to prevent market manipulation, front running and other harmful practices.
You should determine whether the crypto-assets involved would be considered to be a security or a derivative under Canadian securities laws and the laws of any foreign jurisdiction where you intend to do business or have clients, or whether a derivative or security might be created. See “When do Alberta securities laws apply to crypto-assets” above.
In Canada, if securities or derivatives are being traded, registration as a dealer or advisor will typically be required. You should seek the advice of a securities lawyer to assist you in determining the application of any legal requirements, and how you would be able to meet those legal requirements.
You should determine whether the coin or token you intend to offer would be considered to be a security or a derivative under Alberta securities laws and the laws of any other jurisdiction where you intend to offer the coin or token.
In Canada, if the coin or token is a security, you will need to consider and comply with the prospectus requirement or rely on a prospectus exemption. CSA Staff Notice 46-307 Cryptocurrency Offerings and CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens provide guidance in determining whether or not the coin or token is a security by virtue of being an “investment contract”. See also “When do Alberta securities laws apply to crypto-assets” above.
If a security is being distributed, National Instrument 45-106 Prospectus Exemptions sets out most of the available prospectus exemptions. To date, most such offerings appear to be conducted under the "accredited investor" and "offering memorandum" prospectus exemptions in National Instrument 45-106 Prospectus Exemptions.
See “Raising Money by Selling Securities” for further details on prospectus exemptions.
If the coins or tokens are securities or derivatives and are being offered through a website or portal, e.g. a crypto-asset trading platform (cryptocurrency exchange), the dealer and/or adviser registration requirements, discussed above, will typically apply to the platform/exchange.
Note that the tokens that are securities and issued under prospectus exemptions will typically be subject to resale restrictions and, in the absence of discretionary exemptive relief, cannot be freely traded in a secondary market such as that typically provided by crypto-asset trading platforms.
You should seek the advice of a securities lawyer to assist you in determining the application of any legal requirements, and how you would be able to meet those legal requirements.
Crypto assets remain speculative, high-risk investments. The trading of crypto assets has been very volatile. There is a risk that an investor could lose the entire value of their investment. It is important to only invest amounts that you can afford to lose.
Some of the factors to consider when investing in crypto assets include:
- What is the intended purpose of the token or coin?
- Is it used significantly for illegal or illicit activities?
- Who created it and how do they profit from the use or trading of the token or coin?
- Is it a security? Was it issued in compliance with securities legislation?
- What is the risk of law enforcement or regulatory action?
- Is there any significant litigation in respect of the token or coin?
- What are the risks with the coding or underlying distributed ledger technology e.g., bugs or loopholes in a smart contract that can be exploited?
- Is anyone or any group controlling or potentially able to control the network?
- How liquid is it, how much does it trade? Is the information about trading volumes from a reliable source?
- How volatile is the price? What is the trading history?
- Is there a risk that the crypto asset is being promoted as part of a “pump and dump” scheme e.g., a group of parties hyping and promoting buying and/or creating a false impression of demand to inflate the price so that the initial group can sell and profit before the price collapses?
- Does it trade on regulated platforms? What are the risks associated with the platform? See “What are the risks if a crypto asset trading platform is not registered?”
- How many coins or tokens are in circulation? How many can be created, minted or mined? When?
- Are there any planned forks, air drops, or other events that can be anticipated to affect the investment?
- Is there an active developer community in respect of the coin or token?
- What is the consensus mechanism e.g., proof of work or proof of stake?
- If it is a stablecoin, what independent assurance is there with respect to the existence of the backing or reserve? Is the issuer a regulated financial institution? Is the reserve independently audited? What risks are there that a holder will not be able to redeem on demand? What limitations or conditions are there to redemption?