Canadian Securities Administrators to strengthen rules for crypto trading platforms

On December 12, 2022, the Canadian Securities Administrators (CSA) announced the expansion of existing requirements for crypto trading platforms operating in Canada (CTPs) in an effort to strengthen its approach to oversight of such platforms, which changes are said to be in response to recent events in the crypto market. It is important to note that CTPs located outside of Canada but which are accessible by Canadians are regarded as operating in Canada for the purposes of securities regulation.

Previously, on August 15, 2022, the CSA announced that CTPs operating in Canada and pursuing registration are required to provide a pre-registration undertaking (PRU) in favour of their principal regulator, in which they agree to comply with terms and conditions that address investor protection concerns and are consistent with requirements applicable to registered CTPs.

The CSA has announced that deadlines will soon be introduced with respect to the delivery of a PRU by a CTP and that if a CTP does not deliver a PRU to its principal regulator prior to such deadline or otherwise cease operating in Canada, then the CTP may face enforcement action.

It was also announced that the terms and conditions covered by PRUs are to be expanded to include, without limitation:

• requirements to hold Canadian clients’ assets with an appropriate custodian and segregate these assets from the CTP’s proprietary business; and
• a prohibition on offering margin or leverage for any Canadian client.

The CSA indicated that custodians will generally be considered qualified if they are regulated by a financial regulator in Canada, the U.S., or a similar jurisdiction with a supervisory regime for conduct and financial regulation.

The CSA reminded registered CTPs and CTPs with a PRU that they are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative, and that they are expected to have established policies and procedures to make such determination.

Notwithstanding the adoption of the foregoing measures, crypto assets or financial products relating ‎to crypto assets remain high-risk investments. The CSA urges Canadian investors are advised to ‎exercise caution and consider seeking advice from a registered investment advisor before investing in ‎crypto. Furthermore, if, despite the risks, Canadian investors choose to pursue such an investment in ‎crypto, the CSA recommends using a platform that is registered with CSA members, which can be ‎found here. ‎

The CSA indicated that CTPs in the process of registration can expect to receive the deadline by which their PRUs must be delivered. In addition, registered CTPs will be contacted by their principal regulator to discuss the application of the expanded terms and conditions to those firms.