Dentons US LLP

05/04/2021 | News release | Distributed by Public on 05/04/2021 14:43

Part 1: Securities Regulation of Crypto Asset Trading Platforms in Canada

May 4, 2021

In Canada, the regulation of trading in cryptocurrency and other crypto-assets continues to take shape. However, aside from developing a framework for the regulation of virtual currency dealers as a type of money services business, there has been little in the way of concrete regulatory development. Rather, Canadian securities regulators have released a series of publications over the years signaling a willingness to extend their oversight to certain crypto-assets and associated activities1. The regulators' approach reflects the long-standing pattern of broad and inclusive securities regulation followed by the implementation of prescribed and/or discretionary regulatory exemptions; a sequence designed to protect both investors and consumers while fostering innovation. Based on recent joint publications by the Canadian Securities Administration ('CSA') and Investment Industry Regulatory Organization of Canada2 ('IIROC') this article provides a brief overview of regulatory considerations for Crypto Asset Trading Platforms ('CTPs') seeking to enter the Canadian market. This article is to be read in conjunction with Part 2, which considers the regulation of CTPs under the Proceeds of Crime (Money-Laundering) and Terrorist Financing Act.

The Securities Regulation Roadmap for Crypto Asset Trading Platforms

Step 1: Determine Whether Securities Laws Apply

On January 16, 2020, the CSA/IIROC published a joint consultation paper reiterating that the Canadian regulatory approach to the definitions of 'security' and 'derivative' are broad and inclusive. While there are multiple ways to categorize crypto assets, regulatory requirements generally apply to Crypto Asset Trading Platforms ('CTPs') when the CTP facilitates or proposes to facilitate the trading of:

  • crypto assets that are securities ('Security Tokens'), or
  • instruments or contracts involving crypto assets ('Crypto Contracts')

In keeping with the expansive scope of securities legislation, the consultation paper states that regulation may also apply to the buying and selling of crypto assets that are commodities because the users' contractual right to the crypto asset may itself constitute a derivative. This occurs when the crypto asset is not immediately delivered to users.

Whether delivery has occurred is a fact-specific inquiry; however, regulators will generally consider immediate delivery to have occurred if:

  • the CTP immediately transfers ownership, possession and control of the crypto asset to the CTPs user, and as a result the user is free to use, or otherwise deal with, the crypto asset without
    • further involvement with, or reliance on the CTP or its affiliates,
    • the CTP or any affiliate retaining any security interest or any other legal right to the crypto asset; and
  • following the immediate delivery of the crypto asset, the CTP user is not exposed to insolvency risk (credit risk), fraud risk, performance risk or proficiency risk on the part of the CTP.

Step 2: If Securities Laws Apply, Determine How

If the CTP facilitates the trading of Security Tokens or Crypto Contracts, the next step in the regulatory analysis is to determine whether the CTPs conduct will qualify it as a (1) marketplace (referred to as a 'Marketplace Platform'), or (2) a business of trading securities that is not a marketplace (referred to as a 'Dealer Platform').

On March 29, 2021, the CSA and IIROC published a joint consultation paper to help prospective CTPs identify applicable regulatory requirements. However, the consultation paper also notes that designation as a Marketplace Platform or a Dealer Platform is not mutually exclusive and CTPs may be subject to regulatory requirements under both designations. Therefore, registration requirements will ultimately depend on the business activity of the CTP.

Generally, designation as a Marketplace Platform will subject the CTP to oversight from the relevant provincial or territorial securities regulator and IIROC. Applicable requirements derive from National Instrument 21-101 Marketplace Operation (NI 21-101), National Instrument 23-101 Trading Rules (NI 23-101), National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces (NI 23-103) and IIROC's Universal Market Integrity Rules (UMIR). Designation as a Dealer Platform subjects the CTP to oversight from the same authorities, but requires compliance with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and IIROC member rules for Dealer Platforms.

(1) Marketplace Platforms

A CTP is a Marketplace Platform if it:

  • constitutes, maintains or provides a market or facility for bringing together multiple buyers and sellers or parties to trade in Security Tokens and/or Crypto Contracts;
  • brings together orders of Security Tokens and/or Crypto Contracts of multiple buyers and sellers or parties of the contracts; and
  • uses established, non-discretionary methods under which orders for Security Tokens and/or Crypto Contracts interact with each other and the buyers and sellers or parties entering the orders agree to the terms of a trade.

The CSA has clarified that regardless of whether a blockchain ledger is used to record trades, if the orders of multiple buyers and sellers are brought together on a third-party facility, and the interaction of those orders results in a trade, that facility acts as a marketplace.

(2) Dealer Platforms

The appropriate category of dealer registration for a Dealer Platform will depend on the nature of its activities. The two most common characteristics of a CTP that suggest it could be considered a Dealer Platform and not a Marketplace Platform are as follows:

  • The CTP only facilitates the primary distribution of Security Tokens, or
  • The CTP is the counterparty to each trade in Security Tokens and/or Crypto Contracts, and client orders do not otherwise interact with one another on the CTP.

Generally, where Dealer Platforms trade or solicit trades for retail investors that are individuals, they will be expected to register as investment dealers under NI 31-103, and as IIROC members. If the Dealer Platform only facilitates distributions or the trading of Security Tokens in reliance on prospectus exemptions and does not offer margin or leverage, registration as an exempt market dealer or a restricted dealer may be appropriate. Investment dealer registration and IIROC membership are required to offer margin or leverage. If a Dealer Platform starts conducting marketplace activities that would cause it to be considered a Marketplace Platform, the regulatory framework applicable to Marketplace Platforms will also apply.

Step 3: Determine Whether Other Requirements Apply

A CTP may also perform clearing functions and require recognition as a clearing agency or a clearing house under securities legislation. A CTP may need to seek an exemption from recognition as a clearing agency or a clearing house depending on the jurisdiction.

Where a Dealer Platform or Marketplace Platform have custody of assets (or private keys), there are additional regulatory requirements in NI 31- 103 and the IIROC rules. Where CTPs outsource custody services to third-party providers, they will also be subject to requirements applicable to outsourcing key services or systems to a service provider, which include ensuring that the securities regulator has access to all data, information and systems maintained by the third-party service provider.

To the extent that foreign CTPs are accessed by Canadian clients, the CSA has expressed that they would consider a registration or exemption regime for those CTPs depending on the regulatory regime applicable and whether the risks are addressed.

Time and Cost Management: Interim Approaches for Dealer Platforms

Obtaining the necessary registration and IIROC membership for Marketplace Platforms and/or Dealer Platforms is a time consuming process; accordingly, the CSA has indicated that Dealer Platforms may take an interim approach by seeking registration as a restricted dealer, provided they do not offer leverage or margin trading. Under this interim approach the Dealer Platform would be subject to terms and conditions tailored to their business model. This approach may also involve certain limitations on the Dealer Platform's activities depending on the business conducted by a Dealer Platform and the risks it creates. More information on this process can be found in an excellent article by our colleagues Michael DeCosimo and Suraj Rammohan here.


Ultimately, the scope of regulation applicable to the CTP depends on the business activities of the CTP, which in certain instances may result in the application of additional requirements, and/or CTP eligibility to apply for an exemption from existing rules. Whether exemptions are granted is a matter of discretion, to be determined through communication with the relevant regulator. Accordingly, prospective CTPs seeking to reduce costs while addressing regulatory concerns should consult counsel that understand the technical nature of their business.

For more information please reach out to Tracy Molino.

A special thank you to Noah Walters, articling student, for his assistance in the preparation of this article.

1 Recent publications include:

2 The Investment Industry Regulatory Organization of Canada is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.