Canadian Securities Administrators Announce Guidance on Trading of Value-Referenced Crypto Assets for Crypto Trading Platforms

On October 5, 2023, the Canadian Securities Administrators (CSA) published Staff Notice 21-333 – Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (“SN 21-333”) to provide additional guidance to crypto asset trading platforms (CTPs) on the CSA’s interim approach in respect of “Value-Referenced Crypto Assets” (VRCAs).

VRCAs are crypto assets that are designed to maintain a stable value over time by referencing the value of a fiat currency or any other value or right, or combination thereof. The CSA’s broad definition is intended to encompass not only crypto assets commonly referred to as “stablecoins” (for example, cryptocurrencies like Tether or USDC), but also other types of crypto assets such as wrapped tokens. It is not clear, however, which additional crypto assets may fall within this broader definition. The CSA has expressed its view that VRCAs generally meet the definition of “security” and/or would meet the definition of “derivative” in several jurisdictions.

CTPs that offer VRCAs to their clients will be required to comply with the new terms and conditions imposed by SN 21-333 if they wish to continue allowing Canadian clients to purchase or deposit these assets while remaining in compliance with their regulatory obligations.

Background

The CSA’s guidance in SN 21-333 expands upon its previous Staff Notice 21-332 – Crypto Asset Trading Platforms: Pre-Registration Undertakings (“SN 21-332”), which addressed the CSA’s expectations for CTPs trading in securities in Canada. Further details about SN 21-332 can be found in our Update, Canadian Securities Administrators Announce Enhanced Pre-Registration Undertaking Requirements for Crypto Trading Platforms.

In SN 21-332, the CSA recognized there may be uses for VRCAs by clients of CTPs and that the risks associated with VRCAs may be mitigated by the provisions of the enhanced pre-registration undertakings (PRUs). Accordingly, the CSA allowed for trading of certain VRCAs to occur on an interim basis, subject to the CSA’s prior written consent and certain terms and conditions, including that the VRCAs be fiat-backed crypto assets (FBCAs) and that the issuer of the VRCA set aside an adequate reserve of assets denominated in the fiat currency.

In doing so, the CSA noted that the approach to VRCAs in SN 21-332 was intended as an interim approach only. The CSA’s latest guidance in SN 21-333 clarifies the terms and conditions by which such trading may occur.

Terms and Conditions for VRCA Trading

SN 21-333 outlines the terms and conditions under which the CSA would consent to a registered CTP, or a CTP that provided a PRU, to continue allowing their clients to buy or deposit VRCAs or enter into crypto contracts to buy or deposit VRCAs. Notably, SN 21-333 does not apply to VRCAs that are not FBCAs or to any new VRCA that a CTP may wish to offer after February 22, 2023.

The terms and conditions include a requirement that the issuer of the FBCA has filed an undertaking acceptable to the CSA, a form of which has been provided in Appendix B of SN 21-333. VRCA issuers should be mindful that filing an undertaking imposes a number of public disclosure requirements upon the issuer and affords the CSA examination rights in respect of the issuer.

The CSA cautions users of VRCAs and VRCA holders that VRCAs, including FBCAs that satisfy the terms and conditions of SN 21-333, are subject to various risks and are not the same as fiat currency. Notably, satisfying the terms and conditions of SN 21-333 does not necessarily mean that a VRCA has been distributed in accordance with Canadian securities legislation or that its issuer is otherwise in compliance with Canadian securities legislation.

The full list of terms and conditions can be found in Appendix A of SN 21-333 (“Appendix A”).

Implementation of SN 21-333

Registered CTPs

Registered CTPs that do not intend to allow clients to continue to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, are expected to prohibit such trading activities by December 29, 2023.

A registered CTP that would like to continue allowing clients to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, is expected to:

• as soon as possible, contact its principal regulator to discuss the process for implementing the terms and conditions in Appendix A;
• by December 29, 2023, no longer allow clients to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, that are not FBCAs that satisfy the conditions set out in paragraph (1) of Appendix A; and
• by April 30, 2024, no longer allow clients to buy or deposit FBCAs, or to enter into crypto contracts to buy or deposit FBCAs, that do not comply with the terms and conditions set out in Appendix A.

CTPs that provided a PRU

CTPs that provided a PRU and do not intend to allow clients to continue to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, are expected to prohibit such trading activities by December 29, 2023.

A CTP that provided a PRU and would like to continue allowing clients to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, must obtain a consent from its principal regulator to do so, subject to terms and conditions in substantially the same form as in Appendix A. The steps for obtaining consent include the following:

• as soon as possible, the CTP should contact its principal regulator to discuss the process for obtaining consent. The principal regulator may ask the CTP to provide an updated PRU with the terms and conditions in Appendix A;
• by December 29, 2023, the CTP will no longer allow clients either to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, that are not FBCAs that satisfy the conditions set out in paragraph (1) of Appendix A; and
• by April 30, 2024, the CTP will no longer allow clients either to buy or deposit FBCAs, or to enter into crypto contracts to buy or deposit FBCAs, that do not comply with the terms and conditions set out in Appendix A.

Issuers of Fiat-Backed Crypto Assets

The terms and conditions for CTPs include a requirement that the issuer of the FBCA has filed an undertaking acceptable to the CSA, in substantially the same form as in Appendix B of SN 21-333. The CSA expects issuers to provide the undertaking to the CSA by December 1, 2023.

If an issuer of a FBCA is interested in providing an undertaking, it should contact the CSA or a member of the Goodmans Capital Markets or Technology Group as soon as possible to discuss.

The December 1, 2023, deadline does not preclude an issuer of a VRCA from giving an undertaking at a later date; however, if the issuer has not provided an acceptable undertaking, registered CTPs and CTPs that provided a PRU must cease making the VRCA available to clients by December 29, 2023, or April 30, 2024, as outlined above. The VRCA may be made available once an acceptable undertaking is filed thereafter.

Alternative Regulatory Approaches

The CSA notes in SN 21-333 that it continues to work on the interim approach outlined above and is accepting submissions regarding the appropriate longer-term regulation of VRCAs that would address any of the investor protection concerns that the CSA identified in SN 21-332, as well as submissions regarding the regulation of VRCAs that are not FBCAs. The CSA also notes that it is receptive to considering alternative proposals if certain elements of the interim approach are impracticable for market participants.

Given that the terms and conditions in Appendix A were developed for FBCAs that reference the Canadian or United States dollar and are fully backed by a reserve of assets in the same currency, the CSA stated it is open to considering appropriate adjustments to the terms and conditions and form of undertaking for CTPs or VRCA issuers that wish to offer a VRCA that references a different currency and otherwise meets the substance of the terms and conditions.

For further information on this new guidance, please contact any member of our Capital Markets or Technology Groups.