The supervisory authority for securities in Canada – Canadian Securities Administrators (CSA) has provided specific guidelines regarding the trading and issuance of stablecoins. CSA provided further instructions to cryptocurrency trading platforms regarding its “interim approach” for dealing with the trading of crypto assets that are tied to a specific value (including those commonly known as “stablecoins”).

On February 22, 2023, CSA restated its perspective that crypto assets, which are structured and promoted with the intention of maintaining a consistent value over time relative to a reference asset, could be considered as securities and/or derivatives. Although crypto asset trading platforms in Canada are restricted from trading crypto assets categorized as securities and/or derivatives, the CSA recognizes that value-referenced crypto assets might have specific utility for Canadian clients using these platforms.

In line with this, the CSA has suggested that it might consider permitting, with certain stipulations, the ongoing trading of specific value-referenced crypto assets that are linked to the value of a sole fiat currency (referred to as fiat-backed crypto assets). The notice released on October 5, 2023 outlines provisional terms and conditions that would be in effect for cryptocurrency trading platforms and the creators of fiat-backed crypto assets if they intend to enable Canadian clients to continue buying or depositing these assets.

Stan Magidson, the Chair of the CSA and the Chair and CEO of the Alberta Securities Commission, emphasized the importance of transparency regarding the makeup and sufficiency of reserves, as well as the governance of value-referenced crypto assets. These aspects are crucial to safeguard Canadian investors and maintain the integrity of our financial markets. The interim framework, which serves as a foundation for future developments, establishes specific standards aimed at ensuring that investors are provided with the necessary information about the assets they are acquiring, including associated risks.

The interim terms and conditions have been shaped, in part, by feedback from participants in the Canadian cryptocurrency market, as well as the evolving global standards and regulations. Their purpose is to tackle concerns related to investor protection associated with value-referenced crypto assets. These provisions encompass various elements, including the following:

• The entity issuing the value-referenced crypto asset is required to uphold an adequate reserve of assets, safeguarded by a qualified custodian, for the benefit of the holders of the crypto asset. 
• Both the issuer of the value-referenced crypto asset and the cryptocurrency trading platforms that provide them must disclose specific information pertaining to their governance, operations, and asset reserves for public access.

The comprehensive set of terms and conditions, along with guidance for cryptocurrency trading platforms that intend to permit clients to purchase or deposit value-referenced crypto assets, can be found in CSA Staff Notice 21-333 titled “Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients.” This information is accessible on the websites of CSA members.

The CSA wants to alert Canadian investors to the fact that value-referenced crypto assets, even those fiat-backed crypto assets that meet the provisional terms and conditions, carry several risks and should not be equated with traditional fiat currency. The mere fact that an asset complies with these interim terms and conditions should not be interpreted as an endorsement or certification of the asset, nor should it imply that the asset is devoid of risks.

The CSA is open to receiving input on the suitable long-term regulatory framework for value-referenced crypto assets, including potential criteria for trading various types of value-referenced crypto assets. Crypto asset trading platforms and issuers of such assets are encouraged to reach out to their Principal Regulator for inquiries or to engage in further discussions.The CSA plays a role in coordinating and aligning regulations within the Canadian capital markets. 

Key takeaways for the businesses

After conducting thorough due diligence, the regulator requires investment funds to determine whether the crypto assets they intend to invest in qualify as securities or derivatives. Additionally, it reminds investment managers that they are not permitted to lend assets that do not fall under the category of securities.

The document also outlines the “minimum expectations” for the custody of crypto assets. These expectations encompass practices such as primary storage in cold wallets, segregation of assets, transparency through blockchain visibility, obtaining insurance coverage for corporate crime, and providing reports to fund auditors.

The issue of crypto staking is addressed as well. Should issuers uphold an adequate asset reserve with a qualified custodian and should cryptocurrency exchanges that provide stablecoins disclose “specific details concerning governance, operations, and asset reserves for public access,” the CSA may consider permitting the trading of such assets. The CSA confirms that staking is not explicitly prohibited, but it expects fund managers to exercise caution to prevent liquid crypto assets from becoming illiquid during staking. Compliance with illiquidity restrictions is emphasized.

In conclusion, the recent regulatory developments in the Canadian cryptocurrency landscape have introduced both challenges and opportunities for investors, investment funds, and cryptocurrency-related businesses. The guidance provided by the Canadian Securities Administrators (CSA) underscores the importance of comprehensive due diligence, compliance, and risk management in this evolving field.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.

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