CSA gets tougher on crypto platforms

Amid growing concerns about investor protection in the crypto sector, the Canadian Securities Administrators (CSA) are bringing in tougher custody and asset segregation requirements, and threatening enforcement action for platforms dealing with Canadian investors without compliance commitments in place.

Back in August, the CSA announced that crypto trading-platforms seeking registration will be expected to provide the regulators with pre-registration undertakings that essentially commit them to complying with similar terms and conditions that apply to crypto firms that are already registered.

Now, in the wake of the collapse of FTX and ongoing turmoil in the sector, the CSA said it’s stiffening its expectations.

“Crypto trading platforms giving these undertakings agree to comply with expanded terms and conditions that will include, among other things, requirements to hold Canadian clients’ assets with an appropriate custodian and segregate these assets from the platform’s proprietary business, as well as a prohibition on offering margin or leverage for any Canadian client,” the CSA said in a release.

The regulators indicated that they will be contacting registered platforms directly to discuss these new conditions, while also setting a deadline for unregistered firms to enter into these stricter undertakings.

Specifically, the CSA said that if a crypto platform that’s operating in Canada — including offshore platforms that are accessible in Canada — do not either enter into one of these undertakings or shut down in Canada, they risk facing enforcement action.

The CSA cited “recent events in the crypto market” as justification for stepping up oversight of crypto platforms, saying that it will soon give platforms a deadline for delivering the required undertakings.

Last year, as regulators started to come to grips with the growth of the crypto sector, the CSA issued a similar warning to firms on March 29, which gave them until April 19 to signal their intention to register or face possible enforcement action.

Since then, the Ontario Securities Commission has brought several cases resulting in sanctions against offshore crypto platforms for failing to respond to its deadline, and for operating in Canada without registration.

Additionally, the CSA said Monday that they have now concluded that stablecoins may constitute securities or derivatives. “Crypto trading platforms that are registered or that have entered into a pre-registration undertaking are reminded that they are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative,” it said.

It also reminded platforms that they are expected to have policies and procedures in place to determine whether each crypto asset they enable investors to trade constitutes a security or a derivative.

The regulators issued a new warning to investors as well.

“Even with the adoption of these measures, crypto assets or financial products relating to crypto assets are high-risk investments,” the CSA warned. “These risks could result from, among other things, crypto trading platform non-compliance with registration terms and conditions or undertakings, interconnectedness within the crypto sector, insolvency, hacks, price volatility and uncertain value propositions for individual assets.”

Given the risks of trading in crypto, the regulators warned investors to “exercise caution and consider seeking advice from a registered investment advisor before investing in crypto.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.