Canadian Guidance to entities facilitating trading of Crypto

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It´s the CSA Staff Notice 21-327 on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.

 

We are a legal firm specialized in Blockchain, cryptocurrencies, smart contracts and tokenization.

 

Proposed Framework for Crypto-Asset Trading Platforms

A Joint CSA/Investment Industry Regulatory Organization of Canada Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms (On March 14, 2019).

 

They stated that if crypto assets that are securities or derivatives are traded on a Platform, such Platform would be subject to securities legislation.

 

In addition, if a Platform trades contracts or instruments that are derivatives based on crypto assets, the Platform would also be subject to securities legislation.

 

 

The crypto asset is clearly a security

Securities legislation may also apply to:

-A tokenized security that carries rights traditionally attached to common shares. Such as voting rights and rights to receive dividends.

-In other cases, the crypto asset is a derivative, for example a token that provides an option to acquire an asset in the future.

-Platforms that facilitate the buying and selling of crypto assets, including crypto assets that are commodities. That´s because the user’s contractual right to the crypto asset may itself constitute a derivative.

 

 

Platforms would not generally be subject to securities legislation

In these cases:

  • the underlying crypto asset itself 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.

 

 

Immediate delivery of a crypto asset 

There is no bright-line test as to whether a contract or instrument results in an obligation

and reflects an intention, to make and take immediate delivery of a crypto asset.

The securities legislation applies if the transaction does not result in an obligation to make and take delivery of the crypto asset referred to in the transaction immediately following the transaction.

 

 

The CSA will consider immediate delivery to have occurred if:

  • The Platform immediately transfers ownership, possession and control of the crypto asset to the Platform’s user.
  • And as a result, the user is free to use, or otherwise deal with, the crypto asset without
    • -further involvement with, or reliance on the Platform or its affiliates, and
    • -the Platform or any affiliate retaining any security interest or any other legal right to the crypto asset; and
  • -Following the immediate delivery of the crypto asset, the Platform’s user is not exposed to insolvency risk (credit risk), fraud risk, performance risk or proficiency risk on the part of the Platform.

 

 

Example of situation where securities legislation does not apply

Therefore securities legislation does not apply if each of the following criteria apply:

-a Platform offers services for users to buy or sell bitcoin and does not offer margin or leveraged trading.

-users send money to the Platform to purchase bitcoin at a given price.

-the terms of the transaction require that the entire quantity of bitcoin 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 Bitcoin blockchain.

-there is no agreement, arrangement or understanding between the parties that would allow the transaction to be settled other than by immediate transfer of bitcoin;

-the Platform’s typical commercial 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 bitcoin at any point following the transaction.

-the sale or purchase of bitcoin 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 bitcoin to the user’s wallet; and

-the Platform or counterparty seller retains no ownership, possession or control over the transferred bitcoin.

 

 

Example of situation where securities legislation does apply

Situations where the platforms retain ownership, control and possession of the crypto assets.

They only require the users to transfer ownership, control and possession from the Platform’s address to the user-controlled address upon the user’s later request.

In these circumstances, there is no obligation to immediately deliver the crypto assets.

Potentially, there will be ongoing reliance and dependence of the user on the Platform until the transfer to a user-controlled wallet is made. Until then, the user would not have ownership, possession and control of the crypto assets without reliance on the Platform.

 

The user would be subject to ongoing exposure to risk:

-insolvency risk (credit risk)

-fraud risk

-performance risk and

-proficiency risk on the part of Platform.

 

Complying with securities legislation

CSA encourage Platforms to consult with their legal counsel on the application of securities legislation. And to contact their local securities regulatory authority to discuss whether securities legislation applies to their activities.

And, if so, the appropriate steps to comply with the requirements.

CSA also remind Platforms operating from outside Canada who have Canadian users to consider the requirements under Canadian securities legislation.

 

CSA members intend to take enforcement action or continue existing enforcement action against Platforms that do not comply with securities legislation.

 

 

CSA Regulatory Sandbox

CSA welcome innovation and recognize that new fintech businesses may not fit neatly into the existing framework.

The CSA Regulatory Sandbox is an initiative of the CSA to support fintech businesses seeking to offer innovative products, services and applications in Canada.

It allows firms to register and/or obtain exemptive relief from securities law requirements, under a faster and more flexible process than through a standard application, in order to test their products, services and applications throughout the Canadian market, generally on a time-limited basis.

 

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