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Canada – CSA Has Issued Guidance On The Application of Securities Legislation to Crypto-Related Platforms

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Feb 11, 2020

Cryptocurrency Regulation in Canada

The Canadian Securities Administrators ( CSA) has issued this guidance in a Staff notice named  Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets that was released by CSA on 16th January 2020.

Official Youtube CSA

As the title of the notice suggests, the guidance is related to the factors that CSA considers while determining the application of Canadian securities legislation to those entities that facilitates the trading of crypto assets including the buying or selling of the crypto assets.

Cryptocurrency Regulation – In “Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms” by CSA/Investment Industry Regulatory Organization of Canada, CSA stated that those platforms that support the trading of crypto assets that are securities or derivatives would be subjected to the securities legislation.

The followings are the main points of the CSA guidance:

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When Securities legislation is not applicable?

In the guidance paper, CSA sets some conditions or parameters according to which the securities legislation cannot be applied to platforms. So, platforms would not be subjected to securities legislation, if the following conditions apply:

  • the underlying crypto asset itself is not a security or derivative; and
  • the contract or instrument for the purchase, sale or delivery of a crypto asset:
    • results in an obligation to make immediate delivery of the crypto asset; and
    • is settled by the immediate delivery of the crypto asset to the Platform’s user according to the Platform’s typical commercial practice.

What about the immediate delivery of the crypto asset?

CSA then talks about the immediate delivery of the crypto asset and when there will be an obligation to the immediate delivery of a crypto asset. CSA says that there will be an obligation to the immediate delivery if a contract creates an obligation on the Platform to immediately transfer ownership and as a result, the delivery is done.

The Canadian Securities Administrators also say that the obligation and intention of the parties should also be revealed keeping in view all the necessary terms related to the contract.

When the immediate delivery of a crypto asset will occur?

Another important factor in determining whether a platform should be directed to securities legislation or not is that whether a crypto asset has been immediately delivered to the user.

CSA specifies the following points that will determine whether the immediate delivery of a crypto asset has occurred or not:

  • the Platform immediately transfers ownership, possession and control of the crypto asset to the Platform’s user and, as a result, the user is free to use or otherwise deal with, the crypto asset without
    • further involvement with, or reliance on, the Platform or its affiliates; and
    • the Platform or any affiliate retaining any security interest or any other legal right to the crypto asset; and
  • following the immediate delivery of the crypto asset, the Platform’s user is not exposed to insolvency risk (credit risk), fraud risk, performance risk or proficiency risk on the part of the Platform.

Examples of where the securities legislation apply and where does not

The Canadian Securities Administrators then presents examples of where the securities legislation applies and where it does not apply. You can check the detail of the characteristics that CSA has prescribed for this purpose by reading out the article Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.

From the CSA Website:

securities-administrators.ca/investortools.aspx?id=1696&terms=cryptocurrency
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