What is happening with stablecoins in Canada?

Canadian securities regulators have taken a pragmatic approach to the trading of crypto assets. Since at least 2019, staff of various securities regulators in Canada (collectively the CSA) have worked with the operators of crypto asset trading platforms (CTPs) to find ways to balance protection of the investing public against the desire of crypto participants to innovate in the capital markets. 

Rather than create a new regulatory regime to deal with crypto assets, the CSA has applied long-standing securities law principles to their analysis. While recognizing that underlying crypto assets, such as Bitcoin, may not themselves be securities or derivatives, the CSA has taken the position that the manner in which crypto assets are traded off the blockchain results in the creation of marketplaces with sellers and purchasers holding contractual rights to, rather than direct rights in, the underlying assets (Crypto Contracts). Crypto Contracts are either securities (investment contracts) and/or derivatives.

CTPs willing to work with the CSA were temporarily granted certain marketplace, trade reporting and prospectus relief but were subject to pre-registration undertakings (PRUs) as well as terms contained in exemption orders that imposed on them registrant-type obligations, tailored to reflect the nature of crypto assets. During this interim process, a number of those CTPs sought registration as dealers and membership in the Canadian Investment Regulatory Organization (CIRO), and now operate under a number of registered dealer categories. They continue to enjoy certain exemptions, but under their registration and exemptive relief decisions, they are subject to crypto-specific disclosure, “know-your-client” and custodial obligations.

Regulatory-compliant CTPs are generally limited to trading in Crypto Contracts based on crypto assets that are not in and of themselves securities or derivatives. “Stablecoins” or “Value-Referenced Crypto Assets” (VRCAs) are a type of crypto asset designed to maintain a stable value by referencing the value of an underlying asset, typically a fiat currency, a commodity or another crypto asset. 

The CSA has taken the view that VRCAs may constitute securities and/or derivatives in certain jurisdictions, which would make them ineligible to be the subject of a Crypto Contract. Nonetheless, the CSA has recognized there may be some value in the use of VRCAs and has allowed regulatory-compliant CTPs to trade Crypto Contracts where the underlying crypto asset is a VRCA, under limited circumstances. 

Underlying VRCAs may generally only reference the Canadian or US dollar on a one-for-one basis and the issuers of those VRCAs must back them with sufficient assets held by suitable custodians. As of December 31, 2023, CTPs authorized to deal with VRCAs were to have ceased allowing clients to buy, deposit or enter into Crypto Contracts referencing VRCAs  that did not comply with the foregoing. As of April 30, 2024, CTPs were to have ceased trading in Crypto Contracts in relation to VRCAs not also fully compliant with certain issuer disclosure, and audit and assurance obligations, and certain CTP risk management and disclosure obligations. That deadline was initially extended until October 31 and, by way of a press release issued on September 26, has been extended again to December 31, 2024. It is important to note that compliance obligations are being imposed on both the issuers of VRCAs and the CTPs trading Crypto Contracts with VRCAs as underlying assets.

This extension is intended, in relation to VRCAs, to allow CTPs to either comply with their terms of registration or propose alternatives that address investor protection concerns so long as those alternatives are in place or “substantially finalized” prior to December 31, 2024. After December 31, registered CTPs or CTPs that provided a PRU will only be allowed to offer VRCA products that comply with the conditions of their exemptive relief decisions or their PRUs, including obtaining the required undertakings from the issuers of the subject VRCAs.

We will continue to monitor developments in this area. Please contact us if you have any questions or would like to discuss this matter.