Part 1 – Introduction
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC and, together with the CSA, we) are publishing this Notice to provide guidance on how securities legislation1 applies to platforms (Crypto Asset Trading Platforms, or CTPs) that facilitate or propose to facilitate the trading of:
crypto assets that are securities (Security Tokens), or
instruments or contracts involving crypto assets, as indicated in CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto-Assets (CSA SN 21-327) (Crypto Contracts).
This Notice also includes an overview of the applicable existing regulatory requirements and areas where there may be flexibility in how the requirements apply to CTPs, provided the key risks are addressed. Appendix A of this Notice includes a description of the key risks related to CTPs.
This Notice does not introduce new rules specifically applicable to CTPs, as CTPs are already subject to existing requirements under securities legislation in Canada. Rather, where appropriate, it provides guidance on how the existing requirements of securities legislation may be tailored through terms and conditions on the registration or recognition of CTPs and through discretionary exemptive relief with appropriate conditions. This approach allows CTPs to operate with appropriate regulatory oversight.
The overall goal of the approach outlined in this Notice is to ensure there is a balance between needing to be flexible in order to foster innovation in the Canadian capital markets and meeting our regulatory mandate of promoting investor protection and fair and efficient capital markets.
This Notice discusses CTPs that operate in a manner similar to marketplaces2 (referred to as “Marketplace Platforms”) and other CTPs that are in the business of trading Security Tokens or Crypto Contracts that are not marketplaces (referred to as “Dealer Platforms”). In some situations, a CTP may be carrying out activities that have elements of both Marketplace Platforms and Dealer Platforms, and this Notice describes how existing regulatory requirements could apply to these CTPs. We note that, as this industry is still developing, a wide variety of CTP models are emerging. Depending on the business model and activities conducted by a CTP and the risks it creates, the regulatory treatment of one CTP may differ from another.
The guidance in this Notice focuses on CTPs that facilitate the trading of Security Tokens and/or Crypto Contracts. There may be platforms that facilitate the trading of other products or contracts that are structured as “traditional” derivatives and that also provide exposure to crypto assets (including commodity futures contracts, contracts for difference or swaps). We remind these platforms that they are subject to our jurisdiction and to existing regulatory requirements and that they should contact their local securities regulatory authority to discuss possible approaches to comply with securities legislation.3
In the future, the CSA plans to examine the regulatory framework that applies to dealers and marketplaces that trade over-the-counter derivatives more generally. Any proposal will be subject to the normal course process for consultation (including publication for comment).
The guidance in this Notice is intended to provide clarity regarding the steps that a CTP needs to take to comply with securities legislation, including interim steps that will allow a CTP to operate as they prepare to fully integrate into the Canadian regulatory structure. The CSA welcomes innovation. We recognize the continued evolution of fintech businesses, the infrastructure that supports such businesses, and both Canadian and foreign regulatory structures. This continued evolution may result in the tailoring of requirements or providing exemptions to accommodate their novel business and any developments, or result in alternative regulatory frameworks from the one described in this Notice being suitable for CTP business models.
Part 2 – Background
Since the creation of Bitcoin in 2008, there has been growing investor interest in crypto assets and, in turn, a proliferation of CTPs that allow investors to trade these crypto assets. On March 14, 2019, the CSA and IIROC published Joint CSA/IIROC Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms (CP 21-402). In CP 21-402, we outlined a proposed regulatory framework for CTPs, with a focus on Marketplace Platforms, and solicited comments in a number of areas to better understand the industry, its risks, and how regulatory requirements may be tailored for CTPs operating as marketplaces in Canada.
We received 52 comments in response and thank all those that provided comments. A summary of comments and responses is attached at Appendix C of this Notice.
We also met with CTPs and consulted extensively with industry stakeholders on issues specific to CTPs.
After having considered this additional information, we are providing guidance for both Marketplace Platforms and Dealer Platforms that is generally consistent with CP 21-402, but also contemplates an interim regulatory approach.
Part 3 – Application of Securities Legislation to CTPs
The requirements that will be applicable to a CTP will depend on how it operates and what activities it undertakes. Generally, this will depend on whether the CTP operates as a Dealer Platform or a Marketplace Platform.
Below, we describe characteristics of Dealer Platforms and Marketplace Platforms and provide guidance on steps for CTPs to take in order to comply with securities legislation. We also provide guidance on the application process.
Dealer Platforms
The two most common characteristics of a CTP that suggest it would be a Dealer Platform and not a Marketplace Platform are as follows:
it only facilitates the primary distribution of Security Tokens, and
it is the counterparty to each trade in Security Tokens and/or Crypto Contracts, and client orders do not otherwise interact with one another on the CTP.
CTPs that are Dealer Platforms may also be engaged in other activities or perform other functions that marketplaces typically do not undertake. These include, but are not limited to:
onboarding of retail clients onto the CTP,
acting as agent for clients for trades in Security Tokens or Crypto Contracts, and
offering custody of assets, either directly or through a third-party provider.
Registration Categories for Dealer Platforms
Interim approach for Dealer Platforms trading Crypto Contracts
Application Process
may need discretionary exemptive relief in the applicable jurisdictions from the prospectus requirement to facilitate the distribution of Crypto Contracts since it will be subject to the prospectus requirement in most CSA jurisdictions, and
may need discretionary relief from the over-the-counter trade reporting requirements in the applicable CSA jurisdictions,8 on the basis that it provides alternative reporting, if it is unable to comply with existing requirements.
Marketplace Platforms
A CTP is a Marketplace Platform if it:
constitutes, maintains or provides a market or facility for bringing together multiple buyers and sellers or parties to trade in Security Tokens and/or Crypto Contracts;
brings together orders of Security Tokens and/or Crypto Contracts of multiple buyers and sellers or parties of the contracts; and
uses established, non-discretionary methods under which orders for Security Tokens and/or Crypto Contracts interact with each other and the buyers and sellers or parties entering the orders agree to the terms of a trade.
Some commenters have suggested that there is no centralized marketplace involved when a digital ledger (such as blockchain) is used to record “trades” agreed to between the parties. However, in many circumstances the individual trades on the CTP are not recorded on the digital ledger. Rather, the digital ledger is only used to record transactions where the customer delivers crypto assets to the CTP or takes delivery of crypto assets from the CTP. In our view, if the orders of multiple buyers and sellers or parties are brought together on a third-party facility, and the interaction of those orders results in a trade, that facility acts as a marketplace.
A Marketplace Platform may also perform traditional dealer functions, including holding assets and other functions like those mentioned in the preceding section on Dealer Platforms.
In any case, Marketplace Platforms are in the business of trading in securities and/or derivatives and, unless they are regulated as an exchange (as described below), should seek registration as described below.
Regulatory Requirements for Marketplace Platforms
Regulatory Requirements for Marketplace Platforms that also Conduct Dealer Activities
Marketplace Platform as an Exchange
Interim Approach for Marketplace Platforms
Application Process
whether the Marketplace Platform provides any advice to participants,
whether the Marketplace Platform trades on a proprietary basis, and
whether there is any differentiation between client types (e.g., the sophistication and experience of the participant).
Additional Considerations in the Context of Clearing and Settlement
A CTP may also perform clearing functions and may be a clearing agency or a clearing house under securities legislation. In some CSA jurisdictions:
a registered dealer or recognized exchange is exempt from clearing agency recognition as dealers and exchanges are excluded from the definition of clearing agency
the CTP is exempt from clearing agency recognition if the clearing functions are only an incidental component of its principal business, or
the CTP may require recognition or need to seek an exemption from recognition as a clearing agency or a clearing house.
IIROC Membership Process for Entities with Novel Business Models
As noted above, we expect it would be appropriate that some CTPs become IIROC members. IIROC recognizes the need to be flexible and foster innovation and has therefore established a path to membership for businesses or entities with novel business models, including Marketplace or Dealer Platforms that do not necessarily fit in the existing IIROC membership structure.
The process for reviewing a membership application from an entity with a novel business model would differ from the existing IIROC processes in that IIROC would review the new elements of a Marketplace or Dealer Platform’s business model and determine:
how best to apply current requirements; and
whether any exemptions from IIROC requirements and/or time-limited terms and conditions are appropriate.
IIROC expects that entities with novel business models would be granted membership with time-limited terms and conditions and exemptions that take into account the new aspects of the entity’s operations.19 This is in contrast with its approach to current Dealer Members, through which IIROC generally imposes all its applicable requirements without additional exceptions or terms and conditions on their membership.
IIROC will apply this application review process for novel business models to a Marketplace or Dealer Platform that demonstrates:
a new business model which presents unique features not consistent with current IIROC membership categories;
that it has a business plan or road map; and
potential investor benefits.
As part of the application review process for novel business models, IIROC will:
assess the applicable requirements for the Marketplace or Dealer Platform by reviewing their underlying policy objectives and determine whether the applicable requirements need to be modified in the context of a CTP’s new business model;
collaborate with the Marketplace or Dealer Platform to ensure it develops appropriate policies and procedures to comply with applicable IIROC requirements;
place limits on the activity, products and/or number of clients, as appropriate; and
conduct surveillance of trading activities as appropriate.
The review of these novel businesses will be conducted in partnership with the CSA, to ensure consistency of approach, coordination and agreement with respect to novel approaches to manage risks.
It is important that we continue to foster innovation but also promote investor protection and support fair and efficient markets. As CTPs and the environment within which they operate continue to evolve, we will continue to monitor this space and assess whether the approach described in this Notice for regulating CTPs remains appropriate and evolves with the industry.
Part 4 – Complying with Securities Legislation
We encourage CTPs to consult with their legal counsel and to contact staff of their local securities regulatory authority on the appropriate steps to comply with securities legislation and IIROC rules.
As the technology and operational models of CTPs continue to evolve, the CSA and IIROC welcome continued dialogue with CTPs and stakeholders on issues that are developing and possible ways of complying with requirements and additional areas where flexibility may be appropriate.
We remind CTPs operating from outside Canada that have Canadian clients that they are expected to comply with Canadian securities legislation. CSA members may take new enforcement actions or continue existing actions against CTPs that do not and/or have not complied with Canadian securities legislation.
Part 5 – Questions
Please refer your questions to any of the following CSA and IIROC staff:
Amanda RamkissoonSenior Regulatory Adviser, OSC LaunchPadOntario Securities Commissionaramkissoon@osc.gov.on.ca | Ruxandra SmithSenior Accountant, Market RegulationOntario Securities Commissionruxsmith@osc.gov.on.ca |
Gloria TsangSenior Legal Counsel, Compliance and Registrant RegulationOntario Securities Commissiongtsang@osc.gov.on.ca | Timothy BaikieSenior Legal Counsel, Market RegulationOntario Securities Commissiontbaikie@osc.gov.on.ca |
Lise Estelle BraultSenior Director, Data Value Creation, Fintech and InnovationAutorité des marchés financiersLise-estelle.brault@lautorite.qc.ca | Serge BoisvertSenior Policy AdvisorAutorité des marchés financiers Serge.boisvert@lautorite.qc.ca |
Nataly CarrilloSenior Policy AdvisorAutorité des marchés financiersnataly.carrillo@lautorite.qc.ca | Sophie JeanExecutive Advisor, Supervision of IntermediariesAutorité des marchés financiersSophie.Jean@lautorite.qc.ca |
Denise WeeresDirector, New EconomyAlberta Securities CommissionDenise.weeres@asc.ca | Katrina ProkopySenior Legal Counsel, Market RegulationAlberta Securities CommissionKatrina.prokopy@lautorite.qc.ca |
Cathy TearoeSenior Legal & Policy CounselNew EconomyAlberta Securities CommissionCathy.tearoe@asc.ca | Dean MurrisonExecutive Director, Securities DivisionFinancial and Consumer Affairs Authority of SaskatchewanDean.murrison@gov.sk.ca |
Michael BradyManager, DerivativesBritish Columbia Securities Commissionmbrady@bcsc.bc.ca | Rina JaswalSenior Legal Counsel, Capital Markets RegulationBritish Columbia Securities Commissionjaswal@bcsc.bc.ca |
Peter LameyLegal Analyst, Corporate Finance Nova Scotia Securities Commissionpeter.lamey@novascotia.ca | Chris BeskoDirector, General CounselThe Manitoba Securities Commission chris.besko@gov.mb.ca |
David ShoreLegal Counsel, Securities DivisionFinancial and Consumer Services Commission (New Brunswick)david.shore@fcnb.ca | Sonali GuptaBhayaDirector, Market Regulation PolicyIIROCsguptabhaya@iiroc.ca |
Victoria PinningtonSenior Vice President, Market Regulation IIROCvpinnington@iiroc.ca |
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1As defined in National Instrument 14-101 Definitions and includes legislation related to both securities and derivatives.
2A marketplace is defined in National Instrument 21-101 Marketplace Operation (NI 21-101). A marketplace is an entity that brings together the orders of multiple buyers and sellers of securities, and in some jurisdictions, parties to certain types of derivatives, using established, non-discretionary methods through which buyers and sellers agree to the terms of a trade.
3For example, certain dealers are in the business of trading contracts for difference and similar “over-the-counter” derivative products that are currently treated as both securities and derivatives for the purposes of securities legislation in certain jurisdictions, and therefore compliance with the registration and prospectus requirements is required (in certain jurisdictions, contracts for difference and other “over-the-counter” derivative products are exclusively derivatives and therefore compliance with registration and other applicable provisions is required). Another example relates to certain foreign marketplaces operating facilities or markets that trade derivatives (e.g., swap execution facilities) that currently operate their business locally under an exemption from the requirement to register as an exchange. Depending on the functions or operations of the platform that is in the business of trading derivatives, the platform may be operating as a dealer, a marketplace, a clearing agency or a combination of these categories, and therefore, registration or recognition requirements will apply.
4The marketing of each derivative must also be authorized by the AMF, and such Dealer Platforms can offer derivatives to the public only as a registered derivatives dealer, or through a registered derivatives dealer.
5Please note that Appendix C of CP 21-402 is not intended to be an exhaustive list of applicable requirements.
6The AMF may consider, under special circumstances, granting a discretionary time-limited exemption from the qualification requirement as a transition to allow the filing of a qualification application within a certain timeframe.
7A Dealer Platform trading Security Tokens may be required to operate with terms and conditions on registration that appropriately address the specific risks applicable to its business model. See Appendix A for a description of risks.
8See Ontario Securities Commission Rule 91-507 Trade Repositories and Derivatives Data Reporting; Manitoba Securities Commission Rule 91-507 Trade Repositories and Derivatives Data Reporting; Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting; Québec Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting.
9As defined in NI 21-101 and, in Ontario, in the Securities Act (Ontario).
10A self-regulatory entity is defined in NI 21-101 as a self-regulatory body or self-regulatory organization that (i) is not an exchange, and (b) is recognized as a self-regulatory body or self-regulatory organization by the securities regulatory authority.
11Certain jurisdictions intend to apply requirements that are comparable to the referenced marketplace rules and oversight structures as applicable in the circumstances to Marketplace Platforms trading over-the-counter derivatives because these rules do not extend to over-the-counter derivatives in these jurisdictions.
13“Discipline” involves more than just denying access, it may entail fines and reprimands and requires a disciplinary framework that offers the participant due process.
14An exchange may retain a regulation services provider to provide these functions. See section 7.1(2) of NI 23-101 To date, all of the equity exchanges have retained IIROC as their regulation services provider.
17The criteria and the process for becoming a recognized exchange are available here.
19IIROC will work with the CSA to determine whether any of the terms and conditions imposed by the CSA will continue to apply in the form granted by the CSA or in a modified form.
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