Canadian securities regulators require crypto-asset trading platforms to provide pre-registration undertakings

The Canadian Securities Administrators (CSA) now expect each unregistered crypto-asset trading platform (CTP) that deals in crypto-assets constituting securities or in contracts involving crypto-assets, and that has applied to become a registered dealer, to provide a pre-registration undertaking to its principal regulator to continue operations while its application is reviewed.

Through the pre-registration undertakings, CTPs seeking to become registered dealers will be required to adhere to terms and conditions that are consistent with the requirements currently applicable to registered platforms. 

This is the most recent development in ongoing efforts by the CSA and the Investment Industry Regulatory Organization of Canada (IIROC) to develop a regulatory framework for CTPs that seeks to balance flexibility, innovation, and investor protection.

Regulatory framework background 

In March 2019, the CSA and IIROC published Consultation Paper 21-402 – Proposed Framework for Crypto-Asset Trading Platforms (CP 21-402) that, as the name suggests, proposed a regulatory framework for CTPs and invited comments from industry participants. In March 2021, following the CP 21-402 consultation period, the CSA and IIROC published Staff Notice 21-329 – Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (SN 21-329). 

SN 21-329 set out the steps CTPs must take to comply with applicable securities legislation and provided guidance on how the existing regulatory framework may be tailored through terms and conditions on the registration of CTPs. This approach was intended to ensure CTPs operate with appropriate regulatory oversight where there might otherwise be gaps. 

Pre-registration undertakings

Pre-registration undertakings are effectively an extension of the tactic of regulating through terms and conditions (as discussed in SN 21-329). Whereas registered CTPs have always had terms and conditions imposed on them in their registrations, unregistered CTPs will now be required to comply with similar terms and conditions through their undertakings. Pre-registration undertakings published to date appear to closely mirror the terms and conditions imposed on registered CTPs, as summarized below:

Pre-Registration Terms and Conditions

Commit to:

• act fairly, honestly and in good faith;
• identify and respond to conflicts of interest;
• adhere to restrictions on products and services;
• adhere to restrictions on margin and leverage;
• keep accurate books and records; 
• not provide recommendations or advice to clients;
• follow account opening processes, including performing know-your-client due diligence;
• ensure that investment limits are not exceeded;
• comply with requirements relating to advertising, marketing, and social media use (for additional details on such requirements, refer to our previous update on the topic); 
• establish, maintain, and apply account appropriateness assessments;
• disclose risks to prospective and current clients and obtain acknowledgement of disclosure;
• hold crypto-assets for the benefit of the client and safeguard those assets and retain the services of third-party custodians to hold not less than 80% of the crypto-assets held on behalf of clients;
• maintain and apply policies and procedures to ensure appropriate insurance coverage;
• establish and maintain policies and procedures to safeguard confidential information; and
• adhere to reporting requirements including notification of security breaches, investigations, and litigation.

Derivatives Data Trade Reporting Terms and Conditions

Deliver to the applicable regulatory authorities, as applicable:

• specified client, account and trading activity, in each case within 30 days of the end of each quarter;
• a report outlining anonymized account-level data for activity conducted during the applicable calendar quarter pursuant to a crypto-contract for each client within 30 days of the end of each quarter;
• a report of all accounts for which any "client limits" have been exceeded within seven days of the end of each month; 
• a report indicating that no changes have been made to the CTP's policies or procedures on the operations of its wallets in each quarter (or, alternatively, blackline copies highlighting any such changes) within 30 days of the end of each quarter; and
• any other data or policies that may be requested by the securities regulatory authorities.

Marketplace Terms and Conditions

In respect of marketplaces, maintain: 

• fair access and market integrity;
• transparency of operations and of order and trade information; 
• effective internal controls over systems, a business continuity plan (including emergency procedures), and appropriate risk management policies and procedures; and 
• conflicts of interest prevention and remediation mechanisms.

Conclusion

Pre-registration undertakings may be a practical way to help protect investors and level the regulatory playing field for registered and unregistered CTPs, without interrupting the operations of CTPs with pending dealer registration applications. 

CTPs seeking to become a registered dealer should be aware of the nature of the expected undertakings, and should ensure they are able to fulfill such undertakings to mitigate the risk of enforcement or other regulatory proceedings being taken against them. 

The full text of the CSA news update is available here. The full text of CP 21-402, including the comment letters received, is available here. The full text of SN 21-329 is available here.

The authors wish to thank Johanna Vanneste, articling student, for her help in preparing this legal update.