On August 15, 2022, the Canadian Securities Administrators (CSA) announced a new requirement for crypto asset trading platforms (CTPs) that are working toward registration under securities laws to provide a publicly available undertaking in order to continue to provide services in Canada while pursuing registration.

These Undertakings are intended to provide clarity to Canadian users regarding the regulatory status of various CTPs, and address level playing field concerns raised by registered CTPs regarding their unregulated competitors.

The OSC also published the first two undertakings given by Coinsquare Capital Markets Ltd. (“Coinsquare”) and Foris Dax Inc. (“Crypto.com”) for which it acts as principal regulator. The undertakings impose registration deadlines of 180 days for Coinsquare and 12 months for Crypto.com.

Coinsquare’s undertaking confirms that it has applied to the CSA for registration as an investment dealer, approval as an alternative trading system (ATS) and membership with the Investment Industry Regulatory Organization of Canada (IIROC), that its registration process is at an advanced stage and is expected to be on terms consistent with its undertaking. Shortly after the CSA announcement, Coinsquare issued its own press release commenting on the undertaking and confirming its intention to revoke the undertaking upon receipt of final regulatory approval from IIROC and the CSA.

Crypto.com’s undertaking indicates that its business model, trade flow processes and service provider relationships are novel, and that CSA review is still ongoing.

The CSA announcement also mentioned that regulators are currently in discussions with other CTPs offering services to Canadian clients and are not yet registered regarding the new undertaking requirement, and therefore we expect to see more undertakings published in the coming months. As jurisdictions other than Ontario publish undertakings, regional differences in their use and content may become apparent.

The undertakings given by Coinsquare and Crypto.com prescribe many of the same terms and conditions that apply to the nine CTPs that are currently registered with the CSA (the “Registered CTPs”) under exemption orders issued by the CSA (the “CTP Orders”), with the following differences:

  • Coinsquare and Crypto.com are permitted to offer margin, credit or other forms of leverage to clients that qualify as “permitted clients” (e.g. institutional investors and individuals with over $5 million of net financial assets) in connection with the trading of crypto assets on their platforms. In contrast, Registered CTPs are prohibited from offering margin or leverage of any kind, including to permitted clients.
  • Coinsquare and Crypto.com agree to adopt policies and procedures to ensure that their advertising and social media use is fair, balanced and not misleading, having regard to CSA guidance and federal government guidance under the Competition Act. Registered CTPs are subject to such CSA and federal government guidance by virtue of their registrations.
  • Coinsquare and Crypto.com are prohibited from offering staking or lending services to Canadian clients without regulatory consent. Registered CTPs are not expressly prohibited from offering staking, but all registrants other than IIROC members are prohibited from lending money, extending credit or providing margin to clients, subject to certain limited exceptions. In addition, the CTP Orders include conditions which restrict each CTP’s business activities to spot crypto asset trading and custody services, and oblige the CTP to obtain regulatory approval for any expansion in the scope of its business activities.
  • Coinsquare and Crypto.com agree to act, and take reasonable steps to cause their personnel to act, fairly, honestly and in good faith with their clients. Outside of Ontario, registered CTPs are not subject to an express duty of care or loyalty to their clients. However, the CSA may consider this issue to be addressed by the obligation for registered firms to manage conflicts of interest in the best interests of their clients, as well as the CSA’s review of the compliance policies and procedures and client disclosures filed by Registered CTPs as part of the application process.
  • Coinsquare and Crypto.com must report to the CSA any regulatory proceedings, judgment, bankruptcy or insolvency event relating to the firm in any other jurisdiction. Registered CTPs report this information to the CSA as part of their ongoing obligations to update registrant information, and the CSA conducts an initial review of civil, criminal and bankruptcy disclosure made by the firm and its directors, senior officers and dealing representatives as part of the registration application process.
  • Coinsquare and Crypto.com must include in their risk statements delivered to Canadian clients clear and prominent disclosure that they have applied for registration and exemptive relief under securities laws in certain jurisdictions, but there is no guarantee that these applications with be granted and the CTP is not currently registered or exempt from registration under securities or derivatives laws in any jurisdiction of Canada.
  • Coinsquare and Crypto.com are not required to de-list a crypto asset based on a determination made by a court or securities regulator in Canada or the foreign jurisdiction with which the crypto asset has the most significant connection that the crypto asset is a security or derivative, or upon becoming aware of the view of a regulator that the crypto asset is a security or derivative. Registered CTPs have accepted this requirement as a condition of registration. However, like Registered CTPs, Coinsquare and Crypto.com may not list a crypto asset that is a security or derivative based on an internal review by the platform, or a crypto asset which is issued by or on behalf of a person or company that has been subject to an order, sanction, or administrative penalty relating to fraud, violation of anti-money laundering laws, violation of securities laws, or similar conduct in specified jurisdictions, including the United States, the United Kingdom and the member states of the European Union.
  • The definition of “Specified Crypto Assets” in the undertakings includes Bitcoin, Ether, Litecoin, Bitcoin Cash and any other Crypto Asset that has been designated in writing by the CSA as a Specific Crypto Asset for the purposes of the undertaking [paraphrase]. The CTP Orders do not contemplate that the CSA will designate Specified Crypto Assets other than Bitcoin, Ether, Litecoin and Bitcoin Cash. In all jurisdictions other than Alberta, British Columbia, Manitoba and Quebec (the “Investment Limit Jurisdictions”), Registered CTPs that are exempt from the suitability obligation may sell a maximum of C$30,000 worth of crypto assets other than Specified Crypto Assets to a client in any 12 month period. The expanded definition of Specified Crypto Assets in the undertakings sends a positive signal that the Investment Limit Jurisdictions may be willing to exempt other mature, large market cap, highly liquid crypto assets from the investment limits prescribed in the CTP Orders and undertakings.
  • In the Investment Limit Jurisdictions, Coinsquare’s undertaking limits a client’s investments in crypto assets other than Specified Crypto Assets in any 12 month period to C$30,000 for clients that do not qualify as “eligible crypto investors”, C$100,000 for clients that qualify as “eligible crypto investors” and unlimited for clients that qualify as “accredited crypto investors”. It is likely that this more flexible approach toward investment limits reflects the fact that Coinsquare is expected to be regulated as an order-execution-only platform under the IIROC Rules.

CTPs which have provided undertakings are generally subject to the same requirements as Registered CTPs relating to “know your client” and “know your product” due diligence, custody of client assets, insurance, risk disclosure, confidentiality of order and trade information, books and records, conflicts of interest management and regulatory reporting.

The new undertaking requirement signals that the CSA is taking a firmer approach toward regulating CTPs offering services to Canadian clients as securities dealers and marketplaces. Platforms that are asked to provide undertakings and decline to can face enforcement action. However, it remains to be seen how aggressively regulators will pursue undertakings from unregistered platforms operating in Canada that have not yet filed dealer applications, and the extent to which undertakings may restrict the broader range of services offered by some unregistered CTPs. The CSA’s escalation of its regulatory approach to CTPs is consistent with the global trend of applying and enforcing regulatory requirements on crypto asset market intermediaries.