Overview

On January 16th, 2020, the Canadian Securities Administration (CSA) released new regulatory guidance targeting digital asset and cryptocurrency exchanges (the “Guidance”).  The Guidance would bring the exchanges under derivatives laws, something thought to be necessary in light of recent high-profile issues involving exchanges such as QuadrigaCX.

With the Guidance, the CSA is attempting to differentiate between exchanges which immediately deliver digital assets or crypto coins to the user and those which hold them in a “custody-like arrangement” for the user.  If the exchange holds it for the user, the Guidance suggests that these cryptocurrencies or assets would be considered derivatives and securities laws would apply.

What You Need to Know

  • If crypto assets that are securities or derivatives are traded on a platform, that platform would be subject to securities legislation.
  • If a platform trades contracts or instruments that are derivatives based on crypto assets, that platform would be subject to securities legislation.
  • Securities legislation may also apply to platforms that facilitate the buying and selling of crypto assets, since the user’s contractual right to the crypto asset could by itself constitute a derivative.
  • Many platform operators think that the platforms they operate are not subject to securities legislation because they only allow for transactions involving crypto assets that are not explicitly derivatives or securities. However, some platforms are simply giving their users a contractual right or claim to an underlying crypto asset, not immediately delivering the crypto asset to them. The Guidance suggests that these platforms are subject to securities legislation.
  • There is no bright-line test for determining whether a contract or instrument results in an obligation to make or take immediate delivery of a crypto asset.
  • The broad consideration will be the terms of the contractual arrangements governing the relationship between the platform and the user. This includes:
    • whether the contract or instrument creates an obligation to make immediate delivery of the crypto asset; and
    • whether the platform and the user intend, at the time the contract or instrument is entered into, to make and take delivery of the crypto asset on which the contract or instrument is based.
  • Of note is that a contract or instrument would be considered a derivative or a security even if the written contract had an obligation to make immediate delivery, if it was not the typical practice of the given platform to deliver on that obligation.

Securities Legislation May Apply:

  • if leverage or financing is used to make a purchase;
  • if there is no agreement, arrangement or understanding between the parties that would allow the transaction to be settled other than by immediate transfer of cryptocurrency;
  • if the platform’s typical practice is to make immediate delivery in accordance with the terms of the transaction, and for the platform or its affiliates not to have ownership, possession or control of the user’s cryptocurrency at any point following the transaction;
  • if the sale or purchase of cryptocurrency is not merely evidenced by an internal ledger or book entry that debits the seller’s account with the platform and credits the crypto assets to the user’s account with the platform, but rather, there is a transfer of the cryptocurrency to the user’s wallet; and
  • if the platform or counterparty seller retains no ownership, possession or control over the transferred cryptocurrency.

Securities Legislation May Not Apply:

  • if a platform offers services for users to buy or sell cryptocurrency and does not offer margin or leveraged trading;
  • if users send money to the platform to purchase cryptocurrency at a given price; and
  • if the terms of the transaction require that the entire quantity of cryptocurrency purchased from the platform or counterparty seller be immediately transferred to a wallet that is in the sole control of the user, and the transfer is immediately reflected on the applicable blockchain.

More specifically, platforms would not be subject to securities legislation if each of the following criterion are satisfied:

  • the underlying crypto asset is not a security or derivative; and
  • the contract or instrument for the purchase, sale or delivery of a crypto asset:
    • results in an obligation to make immediate delivery of the crypto asset, and
    • is settled by the immediate delivery of the crypto asset to the platform’s user according to the platform’s typical commercial practice.

For more information or advice, please feel free to contact the author Ron Segev directly at [email protected] or at 604-629-5402.

Disclaimer

The above information is provided for informational purposes only and has not been tailored to your specific circumstances.  This post does not constitute legal advice or other professional advice and may not be relied upon as such.