On December 12, 2022, Canadian Securities Administrators (CSA) announced a series of changes to make the existing Canadian regulatory framework for crypto asset trading platforms (CTPs) stricter. The changes, which have so far only been presented in general, high level language, are said to be a reaction to “recent events in the crypto market”. The wording of today’s announcement is likely to provoke questions about the intended scope and meaning of the changes.

Firstly, the CSA announced that deadlines will soon be set for CTPs offering services in Canada to deliver a prescribed form of Pre-Registration Undertaking (PRU) to the CSA or cease operating in Canada, or else risk enforcement action. The PRU requirement was first announced in August 2022 to obtain commitments from platforms that were working toward registration. Though a number of PRUs are understood to be under discussion, so far, only two CTPs have delivered PRUs that apply across Canada, one of which is no longer in effect because the platform is now registered. A standard form of PRU was not announced by regulators today, but future filed PRUs are expected to be very uniform in language.

Secondly, the CSA announced an expansion of the terms and conditions which will apply under the PRU, including:requirements to hold client assets with an “appropriate” custodian, segregated from proprietary assets, andprohibitions against offering margin or leverage to any client.

In contrast, existing PRUs, as well as the terms and conditions of registration of CTPs that are already regulated by the CSA (Registered CTPs) provide flexibility for the CTP to:hold client crypto assets representing up to 20% of the total value of client crypto assets outside of the custodial account; and offer “margin, credit or other forms of leverage” to clients that qualify as “permitted clients” under securities laws.

Today’s announcement specified that “for a custodian to be considered qualified, it must be regulated by a financial regulator in Canada, the U.S. or a similar jurisdiction with a supervisory regime for conduct and financial regulation”. Although the terms and conditions applicable to Registered CTPs already effectively impose a requirement for the custodian to be regulated, the change announced today implies that the CSA may have tolerated lower standards up to now and that custodial qualification will become more exacting, without explaining how the new regime will be different. In particular, it is not clear whether CTPs will continue to be permitted to hold up to 20% of client assets in hot wallets for trading and settlement purposes.

Finally, the CSA publicly announced for the first time its view that “stablecoins, or stablecoin arrangements, may constitute securities or derivatives”. Many Registered CTPs offer Canadian clients the ability to trade in USD Coin, a stablecoin backed by U.S. dollar reserves, and some offer a small selection of other fiat-backed and crypto asset-backed stablecoins. Registered CTPs, as well as CTPs that provide PRUs, are already prohibited from offering Canadian clients the ability to trade in or obtain exposure to crypto assets that are themselves securities or derivatives. The CSA reminded Registered CTPs of their obligation to have policies and procedures in place to make this determination.

The CSA concluded by reminding Canadians that crypto assets are high-risk investments, urging them to exercise caution and seek advice before investing in crypto assets and to use a platform that is a Registered CTP.

Unregistered platforms that are currently negotiating or contemplating PRUs can expect to receive the CSA’s proposed expanded PRU language in the coming weeks. Registered CTPs will also be contacted by their Principal Regulator to discuss the application of the expanded terms and conditions to their business.