Canada Provides Additional Guidance on Regulation of Crypto Exchanges

Canadian regulators have taken yet another leap forward in the regulation of Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw Read this Term exchanges today. Two Canadian regulatory groups have issued new guidance determining securities law requirements that apply to crypto-asset trading platforms (CTPs).

The document published by the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC), gives examples of situations where securities legislation may or may not apply to CTPs activities and how they may be tailored for their business model.

The agency notes that the relevant determination will depend on many specifics, including the type of offered products.

The proposed regulatory framework includes mandatory licensing for certain cryptocurrency trading platforms, particularly for those that maintain control of customer funds. Non-custodial exchanges appear more likely to benefit from a registration exemption, provided that they do not offer margin or leveraged trading.

While securities regulation in Canada is primarily a matter of provincial jurisdiction, the regulation of derivatives is divided between the federal and provincial governments.

“Dealer Platforms may not offer margin or Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term for Security Tokens unless they are registered as an investment dealer and are IIROC members. Similarly, Dealer Platforms that trade Crypto Contracts are expected to be registered in an appropriate dealer category, and where they trade or solicit trades for retail investors that are individuals, they will generally be expected to be registered as investment dealers and be IIROC members,” the document explains.

If an exchange qualifies as a marketplace, it must apply to the jurisdiction’s securities regulatory authority for an exemption from reporting requirements and obligations to settle its trades through a regulated clearing agency.

Securities Laws to Apply to Foreign Crypto Exchanges

Following the new guidance, most of the crypto exchanges, including those operating overseas, will have to apply and be licensed as securities dealers to work in Canada.

While ultimately no enforcement action has been taken so far, the regulator encourages these platform to reach out to discuss their business models, the appropriate registration category and how requirements may be tailored.

In this context, the CSA and IIROC staff will examine the terms of the contractual arrangements between crypto exchanges and their users. Based on this, the regulators may consider discretionary exemptions from existing rules provided that these applicants demonstrate they can “comply with the policy intent of the existing regulatory requirements in alternative ways.”

Finally, Canadian regulators have stated they want to take a tailored approach that considers the novel nature of cryptocurrencies trading platforms. As such, the CSA advises even those categorized as dealer platforms to seek registration as a restricted dealer, provided it does not offer leverage or margin trading.

However, this flexible approach highlights how difficult it is to produce clear definitions and apply the traditional securities rules to digital-asset platforms and other crypto-related activities.