Canadian Regulatory Guidance Might Put Crypto Custody Exchanges Under Security Law

Jan 17 2020

Authorities in Canada Released New Guidance for Crypto Exchanges

The Canadian Securities Administrators (CSA) recently published a notice which noted that trading platforms that are dealing in cryptocurrencies that fall under the security tag would also have to adhere to the security laws of the country. The notice read,

“Platforms that facilitate the buying and selling of crypto assets, including crypto assets that are commodities, because the user’s contractual right to the crypto asset may itself constitute a derivative.”

The notice further clarifies that even those platforms which manage customer funds will be subjected to the same security laws even if they facilitate trading for non-security assets. Only those platforms which do not manage and control customer funds will be exempted from the security laws.

Published on January 16, the Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets was explained by the CSA. Mostly, the agency mentioned the difference between trading platforms that work to immediately deliver crypto assets and those that hold crypto-assets transactions until a later request is made by the user.

Exchanges to Which Securities Laws Apply

After analyzing the trading techniques of many platforms, the CSA concluded that some of these platforms only provide users a contractual claim or right to a crypto asset and don’t immediately transfer it. Therefore, these are the platforms for which securities legislation applies and that fall under the derivatives law. This is what’s being said in the guidance:

“Potentially, there will be ongoing reliance and dependence of the user on the Platform until the transfer to a user-controlled wallet is made. Until then, the user would not have ownership, possession and control of the crypto assets without reliance on the Platform. The user would be subject to ongoing exposure to insolvency risk (credit risk), fraud risk, performance risk and proficiency risk on the part of Platform.”

Securities laws won’t be applied to crypto exchanges that don’t have the underlying crypto asset as a derivative or security and that immediately deliver crypto assets to users.

Talking about the think tank behind formulating and extending these regulations for crypto asset trading platforms and exchanges, Robert Hockett, Cornell Law professor explained that whenever an exchange take control of user’s crypto funds instead of delivering it to user-controlled wallet, they put those users under risk of losing value on their investment given volatile nature of the crypto assets. Thus, these exchanges are offering “the right to something in the future”, and therefore must follow the security guidelines.

A Solid Move for Customer Protection

Many legal minds in Canada see the move by the CSA as a perfect way of ensuring security for the customer’s fund. Christine Duhaime, a crypto legal expert based in Canada noted that there are at least a dozen regulators tied to security law in the country and the move will end risky behavior exhibited by exchanges.

The update in regulations and security laws for crypto exchanges in the country is seen as a direct measure after the several unfortunate events and shutdowns of few exchanges. The most prominent being the recent shut down of  QuadrigaCX which was triggered due to the death of its owner. Another exchange that went by the name of Einstein also abruptly announce bankruptcy after owing $16 million to its customers.

Crypto Investment Products and Initial Coin Offerings Under Investigation in Canada

Both provincial and state securities regulators in Canada, United States also, have investigated potential fraudulent crypto investment programs in the Operation Cryptosweep from the North American Securities Administrators Association (NASAA). Hundreds of crypto investment products and initial coin offerings have been looked at. Back in December 2019, it has been said by the NASAA that crypto investments are in the top 5 threats for investors in 2020. This is what the President of NASAA commented on the matter:

“It is important for investors to understand what they are investing in and who they are investing with. Don’t fall for promises of guaranteed high returns with little to no risk or deals pitched with a false sense of urgency or limited availability.”

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