On March 29, 2021, the Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) jointly published Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (“Notice 21-329”). Notice 21-329 provides guidance on how securities legislation will be applied to crypto-asset trading platforms (“CTPs”) and in doing so expands on the regulatory guidance previously set out in CSA Staff Notice 21-327 and joint CSA/IIROC Consultation Paper 21-402.
On the same day, the Ontario Securities Commission (“OSC”) issued a news release imposing a deadline of April 19, 2021 for CTPs to contact OSC regarding bringing their operations into compliance. The OSC intends to take enforcement actions towards those CTPs who fails to do so by the deadline, including CTPs located outside of Ontario that allow access to Ontarians.
Notice 21-329 delineates CTPs into three principal categories:
- CTPs that operate in a similar manner to securities dealers, such as facilitating the primary distribution of Security Tokens, or trading Security Tokens on behalf of clients (the “Dealer CTPs”);
- CTPs that operate in a similar manner to “marketplaces”, such as providing a facility that enables multiple buyers and sellers to trade in Security Tokens (the “Marketplace CTPs”); and
- CTPs that operate in a similar manner to a stock exchange, such as regulating participants and overseeing their continuing compliance obligation, standards of practice and business conducts (the “Exchange CTPs”).
Notice 21-329 re-states the position taken in Notice 21-327 and Consultation Paper 21-402, namely that CTPs will be subject to securities legislation if they deal with either crypto assets that are securities or derivatives (defined as “Security Tokens”), or crypto assets that, while not securities or derivatives themselves, are held on behalf of customers, thereby creating a security (defined as a “Crypto Contract”).
Requirements for Dealer CTPs
Notice 21-329 provides that Dealer CTPs are required to be register as some form of securities dealer, depending on the precise nature of the Dealer CTP’s business.
Dealer CTPs that distribute or trade Security Tokens or enter into Crypto Contracts exclusively on a prospectus exempt basis and that do not offer margin or leverage can register as exempt market dealers or restricted dealers.
Dealer CTPs that offer margin or leverage for Security Tokens, or that offer services to retail investors in either Security Tokens or Crypto Contracts, are generally expected to be registered as investment dealers and become members of IIROC. In addition, such Dealer CTPs may require discretionary exemptive relief from the prospectus requirement and the over-the-counter trade reporting requirements in order to conduct their business.
Requirements for Marketplace CTPs
Notice 21-329 provides that Marketplace CTPs are required to comply with National Instrument 21-101 Marketplace Operation, 23-101 Trading Rules, and 23-103 Electronic Trading and Direct Electronic Access to Marketplaces, as well as IIROC’s Universal Market Integrity Rules. Marketplace CTPs may also be required to register as investment dealers and become members of IIROC if they conduct activities similar to those performed by Dealer Platforms or take custody of client assets.
Similar to Dealer CTPs, Marketplace CTPs that offer services in respect of Security Tokens or Crypto Contracts may also need exemptive relief from the prospectus requirement to facilitate the distribution of or trades in the Security Tokens or Crypto Contracts and from the over-the-counter trade reporting requirements.
Requirements for Exchange CTPs
While Notice 21-329 does not discuss Exchange CTPs in great detail, it notes that where a CTP regulates participants and disciplines them, it would be an Exchange CTP and be expected to apply for recognition as an exchange. This would be the case even if the Exchange CTP’s business also included elements of a Dealer CTP or a Marketplace CTP.
Interim Approach and limitations on business operation
In an effort to ensure CTPs are operated within regulated environment while providing flexibility in the meantime, CSA introduced a two-year “interim approach”.
Under the interim approach, a Dealer CTP that trades Crypto Contracts may operate by seeking registration as a restricted dealer, provided it does not offer leverage or margin trading. Such Dealer CTPs would be expected to work with regulators and complete its investment dealer registration and IIROC membership within the two-year interim period.
The same “interim approach” also applies to Marketplace CTPs. Within the interim period, Marketplace CTPs could seek registration as an exempt market dealer or restricted dealer, as long as they are not offering leverage or margin.
CSA will evaluate Exchange CTPs on a case-by-case to determined whether certain exemptions are appropriate.
Certain limitation may be imposed on any CTP’s businesses during the interim period, such as limitations on the investment amount, number and types of products and participants.
IIROC may also modify its existing membership requirements based on the novel business models presented by CTPs. In exchange for any such relaxed requirements, IIROC may impose limitations and surveillance on a CTP’s activities.
IIROC’s Crypto-asset working group
Following the joint publication of Notice 21-329, IIROC announced a list of new members to its Crypto-asset working group. New members include industry practitioners, legal and compliance experts, academics, and other professionals. According to IIROC, this working group is tasked to address issues around market integrity and investor protection, as well as assess how the regulatory requirements might be best tailored for crypto-assets.
Prior to Notice 21-329, Canadian securities regulators had offered little concrete guidance on the applicability of securities laws to the cryptocurrency industry, preferring to simply remind participants that securities laws may apply and to let those participants make their own determinations regarding compliance. Notice 21-329, however, provides some clarity as to how regulators would like CTPs to proceed to become compliant, including setting out specific paths forward for different types of companies. Another helpful point is that Notice 21-329 acknowledges that securities registrations are time-consuming to obtain and that interim solutions, and exemptions, should be considered.
We encourage all cryptocurrency industry participants to carefully read Notice 21-329 and consider how it might apply to their business and to come to us with any questions.
 Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements: https://www.osc.ca/sites/default/files/2021-03/csa_20210329_21-329_compliance-regulatory-requirements.pdf
 CSA Staff Notice 21-327 – Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets (“Notice 21-327”): https://www.osc.ca/sites/default/files/pdfs/irps/csa_20200116_21-327_trading-crypto-assets.pdf
 Joint CSA/IIROC Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms: https://www.securities-administrators.ca/uploadedFiles/Industry_Resources/2019mars14-21-402-doc-cons-en.pdf
 News Release by IIROC dated March 29, 2021: https://www.iiroc.ca/Documents/2021/c05f0606-51ec-41ce-a536-27705baed9ce_en.pdf