Canadian Securities Administrators Issues New Guidance For 'Crypto-Asset Trading Platforms'

March 30, 2021 03:00 PM





Crypto was, for the most part, marginally higher this morning while Binance Coin (BNB) outperformed in the Top 10. Spot volumes are roughly in line with the 30-day average.

Crypto Story of the Day

The Canadian Securities Administrators (CSA) has issued new guidance for “crypto-asset trading platforms” that recognizes most instances of crypto trading as the trading of “crypto contracts.” The guidance formalizes previously-hinted-at views that crypto trading on exchanges is seen as more akin to derivatives and focuses on the nature of settlement vs. the nature of the traded asset.

The notice implies that purchases made of underlying crypto assets, which represent contractual obligations on the asset before physical settlement, constitute “Crypto Contracts.” The notice distinguishes these contracts from “‘traditional’ derivatives that also provide exposure to crypto assets (including commodity futures contracts, contracts for difference or swaps).”

In describing the trading of crypto as the purchase of “Crypto Contracts,” the CSA also distinguishes between 2 types of Crypto Asset Trading Platforms (CTPs): “Market Platforms” (presumably exchanges) and “Dealer Platforms” (presumably OTC desks). These platforms are described as facilitating Crypto Contracts and “Security Tokens,'' the latter which has seen limited practical uptake.

The notice also outlines registration requirements for these venues. Both are required to register as members of the Investment Industry Regulatory Organization of Canada (IIROC), while Marketplace Platforms are described as being regulated similarly to alternative trading systems (ATS). Both types of trading venues will receive “interim periods as the CSA acknowledges the time it takes to prepare for [and] obtain registration and IIROC membership.” 

Earlier this month, the CSA issued guidance for publicly listed crypto firms regarding disclosure requirements that are specific to the crypto industry, such as whether “crypto assets held by [a] custodian are insured.” The latest notice builds off of January 2020 guidance when the CSA described securities legislation as not applying to trading venues if a) the underlying crypto asset is not a security, or b) “is settled by the immediate delivery of the crypto asset.” The CSA defined “immediate delivery” as “an obligation to immediately deliver if the contract or instrument creates an obligation on the Platform to immediately transfer ownership…”

Considering the nature of trading on Market Platforms and Dealer Platforms, securities legislation would apply to trading on these venues, as described in the January 2020 guidance.

The CSA has taken a highly specific approach to regulating crypto trading by focusing less on the nature of the asset class and seemingly more on common trading processes. The CFTC, by contrast, claims oversight on cryptocurrency spot trading in the U.S. based on its jurisdiction over commodities in interstate commerce. The CFTC’s regulation does take into account the nature of contractual obligations related to the traded commodity on platforms, but focuses less on specifics around settlement or physical delivery of crypto. 

Considering the extent of nuance that exists in the settlement of commodities trading more broadly, which is largely virtualized and removed from the physical asset itself, the CSA has really pushed a new perspective on how to regulate and characterize cryptocurrency and arguably other assets. 

While the CSA does include some language around a grace period for IIROC and further registration, the organization has set tall orders for exchanges and OTC desks without existing and has clearly defined regulatory status.  

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