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Canadian Securities Administrator to Consider Regulatory Framework for Crypto Assets

June-18-2019

Lawyer Allan Goodman, Andrew Schipper
Area Corporate Finance and Securities, Technology

Summary

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The Canadian Securities Administrator (CSA) recently released its 2019-2022 business plan (the “Plan”), which reveals the CSA is considering the development of a regulatory regime for crypto assets and crypto trading platforms over the next three years.

The Plan was released on the heels of Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms, issued by the CSA together with the Investment Industry Regulatory Organization of Canada on March 14, 2019, which proposed a framework of tailored regulatory requirements to address novel features and risks related to the trading of crypto assets. For more information on that paper, see our April 1, 2019 Update, Canadian Securities Regulators Propose to Regulate Crypto-Asset Platforms

The Plan

The Plan aims to consider the regulatory challenges of emerging technologies, including distributed ledger technology, of which blockchain is the most widely known and utilized. The Plan indicates the CSA will look to ways in which existing regulatory frameworks can be tailored to address risks associated with the trading of blockchain-based crypto assets that fall under the CSA’s jurisdiction.

The Plan’s objectives relating to the regulation of crypto assets are set out in three distinct initiatives:

  1. The CSA will consider developing a regulatory regime for crypto-asset trading platforms that are subject to securities or derivatives regulation. Currently, there are no platforms facilitating the secondary trading of crypto assets that are regulated as a marketplace in Canada. However, the CSA outlines that certain platforms, depending on how they operate and what crypto assets they offer, may be subject to existing securities legislation.
     
  2. The CSA will research and propose custodial requirements for registrants and investment funds that facilitate custody solutions for trading and holding regulated crypto-securities.
     
  3. The CSA will analyze whether there are specific characteristics that warrant a more tailored approach to capital raising and disclosure requirements when crypto assets such as tokens or coins are used to raise funds for various types of enterprises.

Implications

The release of the Plan comes at a time when several high profile events have highlighted the need for clearer regulation of crypto assets.

The 2018 incident involving the Vancouver-based crypto trading platform QuadrigaCX, exemplified the potential for crypto assets to be stolen or lost in today’s unregulated climate. In December 2018, QuadrigaCX lost access to approximately CAD$190 million when the CEO’s sudden death left the assets held by the platform inaccessible because only the CEO had access to the encrypted keys. A clear regulatory framework imposing standards and custodial requirements could help subvert similar incidents.

More recently, the Securities and Exchange Commission (SEC) launched a lawsuit against Kitchener-based Kik Interactive Inc (“Kik”), which has further underscored the importance of achieving regulatory clarity surrounding crypto assets. In the Kik case – the SEC’s first legal action applying securities law to digital tokens and coins - the regulator claims the company’s 2017 sale of approximately US$100 million of its “Kin” tokens under a simple agreement for future tokens, and an ensuing initial coin offering, amounted to an illegal securities offering. In the build-up to the lawsuit and since its launch, both sides have made opposing public statements about whether crypto assets should be exempted from securities regulations. For further background on the Kik lawsuit, see our June 5, 2019 Update, SEC Sues Canadian Company for Conducting Illegal Token Offering.

In the wake of the QuadrigaCX and Kik incidents, it is clear the need for improved guidance on the regulation of crypto assets is pressing. The CSA  hopes the Plan initiatives will balance regulatory imperatives and the goal of facilitating innovation and flexibility in the nascent crypto-asset industry, while providing enhanced clarity on this issue.

Goodmans Tech Group


To assist clients in the technology sector, Goodmans brings together our acknowledged expertise in corporate/commercial, private equity, corporate finance, mergers and acquisitions, outsourcing, licensing, intellectual property, privacy, regulatory and media, cleantech, tax, litigation, human resources, corporate restructuring and administrative law. We do so both for innovative businesses in their start-up phase and for well-established businesses of all types. Goodmans continues to lead in the technology sector and is partnered with the DMZ at Ryerson University. The DMZ is a leading business incubator (selected by UBI as the top-ranked university incubator in North America, and third in the world), which connects its start-ups with resources, customers, advisors, investors, and other entrepreneurs. Goodmans is also a proud partner of IDEABoost, an initiative of the Canadian Film Centre’s Media Lab; building the next generation of technology-based media entertainment products, services and brands. Through these partnerships, Goodmans provides legal advice, mentorship and networking opportunities to assist start-ups in maximizing their potential.

Goodmans is also an internationally recognized leader in other aspects of technology law and transactions. From our thought leadership, through participation on the Boards of associations such as CanTech (Canadian Technology Law Association), CORE (Centre for Outsourcing Research and Education), CIEG (Canadian Institute for Exponential Growth, which organized the Summit) and iTechLaw (International Technology Law Association), to our involvement in major technology procurement, joint venture and outsourcing transactions, to our representation, in court proceedings and in arbitrations, of major technology providers, and users of technology, in ground-breaking cases, our Technology Group is consistently at the forefront of leading technology transactions and cases.

Members of our Technology Group are recognized as leading technology lawyers in Chambers Global, Lexpert, Legal 500 Canada, Legal Media Group's The Best of the Best, The Best Lawyers in Canada, Law Business Research's The International Who's Who of Business Lawyers, and The Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada, teach internet and communications law at Canada’s largest law schools, are regular lecturers at technology industry events and legal conferences, and have published articles in the technology law field.
 

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