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By Richard Stobbe

In February 2019, we reviewed the story of QuadrigaCX, and raised the question of how this would impact the adoption of cryptocurrencies or other tokens that are powered by the same blockchain or distributed ledger technologies (DLT) that underpin BitCoin. In particular we suggested that some regulatory oversight might be warranted. See: QuadrigaCX and the Missing Millions: A Crypto Cautionary Tale .

In March 2019 the Joint Canadian Securities Administrators (CSA) and IIROC (Investment Industry Regulatory Organization of Canada) issued a Proposed Framework for Crypto-Asset Trading Platforms (PDF). From a regulator’s perspective, many of these crypto-questions fall into the crack between CSA and IIROC.

Setting the stage to close that gap with regulatory engagement in Canada, the report notes that there are over 2,000 “crypto assets” in the wild, some trading for fiat currencies and others for various types of crypto-tokens, using over 200 different platforms. “Many of these Platforms,” say the report’s authors, “operate globally and without any regulatory oversight.”

There are a variety of crypto assets but currently they can generally be categorized from a regulatory perspective in one of two ways:

1. Either they are akin to a commodity or currency, often referred to as “utility tokens”, which are created to allow holders to access or purchase goods or services on a DLT network. Crypto assets that are a “form of payment or means of exchange on a decentralized network, such as bitcoin”, says the report, “are not currently in and of themselves, securities or derivatives. Instead, they have certain features that are analogous to existing commodities such as currencies and precious metals”;
2. Alternatively, crypto assets can be more akin to tokenized versions of traditional securities, derivatives or investment contracts, in the sense that they operate like shares in a company, or an interest in assets. If the crypto assets mimic the features of securities or derivatives, and are traded on an exchange platform, then that platform should be subject to existing securities regulatory requirements.

One of the regulatory problems is that the feature-sets of many crypto assets continually blur the lines between “currency” and “security”. Existing securities legislation may still apply to exchange platforms that offer trading of crypto assets even if those are tokens more like commodities, particularly where the investor’s contractual right to the cryptocurrency asset behaves like a security or derivative. Among the challenges that are unique to crypto exchange platforms is that these tokens and coins trade on a global basis, both on exchange platforms and off, both inside and outside regular trading hours, without any central source for pricing or reliable reference data. The values are “illiquid and highly volatile”. From a market surveillance point of view, this makes the regulatory enforcement uniquely challenging.

Essentially, the CSA/IIROC proposed platform framework would apply to “Crypto-Asset Trading Platforms” that are subject to securities legislation and that may not otherwise fit into other existing regulatory categories. Among the recommendations in the paper, crypto-trading platforms may have to become registered as investment dealers and meet compliance requirements for IIROC dealer and marketplace members.

Notably, this regulatory scheme would apply both to Platforms that operate in Canada and to those that have Canadian participants.

Enforcement is not really addressed here, but that’s another debate altogether.

The comment period is open until May 15, 2019.

Additional Reading: CSA Staff Notice 46-307 Cryptocurrency Offerings and CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens, NI 21-101 Marketplace Operation, NI 23-101 Trading Rules and NI 23-103 Electronic Trading and Direct Access to Marketplaces.

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