On September 23, 2021, the Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) jointly released Staff Notice 21-330 Guidance for Crypto-Trading Platforms: Requirements relating to Advertising, Marketing and Social Media Use (“Notice”). Crypto-Trading Platforms (“CTPs”) with clients resident in Canada are considered by Canadian securities regulators to be subject to securities law if, for example, the crypto assets are not immediately delivered to clients. Foreign-based CTPs with clients in Canada are also considered to be caught by Canadian securities laws.

The Notice addresses a number of considerations relevant to CTPs:

1. False or Misleading Advertising

This guidance will be relevant to the few platforms that are currently formally regulated and to many prospective CTP registrants and marketplaces. The CSA may evaluate a CTP’s advertising and marketing practices as part of a CTP’s registration application or a post registration compliance review.

Securities legislation and IIROC rules prohibit false or misleading statements in advertising or marketing materials including misleading statements about the CTP’s regulatory status.

The Notice provides in Appendix A various examples to illustrate potentially false or misleading statements, such as:

  • “Your crypto assets are safe with us because we meet all regulatory requirements as a fully licensed Money Services Business under Canadian legislation.” The Notice treats as misleading the statement that registration as a Money Services Business sufficiently protects the interest of clients or that it provides regulation comparable to securities regulatory requirements.
  • “Our Crypto Exchange is the leading global exchange for trading 16 of the most commonly traded crypto assets.” The terms “exchange” and “marketplace” refer to a particular type of regulated entity under Canadian securities legislation, and a CTP that facilitates trades in securities or derivatives must not refer to itself or hold itself out to investors as an exchange or as being authorized to operate as a marketplace under securities legislation. Furthermore, this statement and others, such as “Our platform is consistently rated the safest and most trusted platform by leading rating agencies, including Digital Bitcoin Rating Service and Triple A Crypto All Stars” and “We are your cheapest and best source for Bitcoin”, would require sufficient evidence to substantiate the claims.
  • “On our platform, you keep more of your money because we never charge any commissions!” If the platform instead charges a markup on the best price it obtains and keeps the difference on trades where it acts as a market maker, or if the CTP monetizes client order-flow and does not provide reasonable disclosure explaining the basis for these alternative forms of compensation, then this statement could potentially be false or misleading. If only certain products were offered on a commission-free basis, this could also potential mislead investors.
  • “We do not have suitability obligations. We make it clear to investors that trading crypto is risky but we are not required to tell clients whether crypto trading is suitable for them or not.” This could potentially mislead investors because CTPs, even those exempt from the obligation to make a suitability determination on a trade-by-trade basis, are required to take into account a client’s financial assets and income, risk tolerance, experience investing in crypto assets, and experience in using order execution only online brokerages.

2. “Gambling Style” Promotions and Schemes

The Notice says the duty to treat clients fairly, honestly, and in good faith may be violated by encouraging excessively risky trading through contests, promotions, bonuses, and time-limited offerings or rewards (e.g. offering a financial reward or a bonus interest in a particular type of crypto assets to the first 500 investors who take an action within the next 24 hours).

CTPs that rely on exemptions from suitability obligations must ensure that its advertising and marketing practices do not constitute actively soliciting trading in such a way that would be inconsistent with its exemption.

3. Social Media Use

CTPs must maintain records of business activities, financial affairs, and client transactions. The use of social media to communicate with clients and the general public for business purposes increases the risk that such records are not adequately maintained. Registered CTPs must therefore design systems that facilitate record retention and is capable of retrieving such records.

4. General Compliance with Securities Legislation

In addition to the examples of potential false or misleading advertising, the Notice provides in Appendix A examples of other statements that could be problematic:

  • “When I want to buy Bitcoin, I always use the BuyEasy Crypto Platform – it’s so easy to buy!” If made by a promoter, this statement could be considered form of recommendation or and could trigger obligations under securities legislation for the CTP and potentially the individual promoter. The “general advice” exemption may not apply to these activities if the advice is tailored to the needs of the person receiving the advice and the person providing the advice does not disclose any financial or other interest that the endorser has in the issuer.
  • “Important Update! BTC skyrockets! Don’t get left behind!” This statement could be considered a form of recommendation or advice, particularly where the statement is included in a tailored communication such as an e-mail push to investors. For further discussion on activities that could be considered a form of recommendation or advice, please refer to IIROC Guidance on Order Execution Only Services and Activities.

A CTP’s requirement to adopt policies and procedures for the review, supervision, retention and retrieval of advertising and marketing materials extends to those materials on social media. These policies and procedures should also designate an individual to be responsible for the supervision or approval of marketing communications, and they should provide for a system to monitor compliance with these policies and procedures.

This latest Notice should be considered in conjunction with Joint CSA-IIROC Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (see our insights into Staff Notice 21-329 here).