If you aren’t buying cryptocurrency directly into a digital wallet, chances are your crypto assets fall under securities regulations.
Are your cryptocurrency assets properly managed in Canada?
Unless you obtain or purchase cryptocurrency directly, into a digital wallet, it may be that your assets are held by a crypto-trading platform (CPT), the likes of which fall under securities regulations in Canada.
Currently, there are six registered and regulated platforms in Canada, according to a list provided by the Canadian Securities Administrators (CSA).
However, there are 60 platforms (including 10 in B.C.) in the registration process, according to Hyder Zach Massum, manager of legal services for capital markets regulations at the B.C. Securities Commission (BCSA). The BCSA is a member of the CSA.
The six presently regulated platforms Canadians may be familiar with are:
- Wealthsimple Digital Assets Inc.;
- Netcoins Inc.;
- Simply Digital Technologies Inc. (CoinSmart);
- Fidelity Clearing Canada ULC;
- Coinberry Limited; and
- Bitbuy Technologies.
These platforms allow Canadians to invest money in various cryptocurrencies, such as Bitcoin and Ethereum, but also dozens of other start-up cryptocurrencies.
Masum says platforms must meet certain conditions to trade in cryptocurrency. For instance, some restrictions may be placed on “risky” assets, he said.
Platforms also must hold enough assets in custody to fulfill redemptions from customers. The platforms also have to exhibit proper safekeeping of the asset and provide certain disclosures, said Masum.
Mark Wang, director of capital markets regulations at BCSC, says platforms fall under securities regulations because they retain custody of the asset and customers only hold a contractual right to them — what’s called a derivative, which is a regulated entity.
Platforms may also offer customers securities in cryptocurrency companies. Otherwise, the actual cryptocurrency is neither a security nor derivative and the commission does not oversee currencies or commodities and the exchanges they trade on.
Wang explains a trading platform is like an “on and off ramp” to the cryptocurrency blockchain (the online digital ledger where cryptocurrency is bought and sold with digital wallets) and “much of the risk is getting money to and from the blockchain.”
And so, the commission addresses some of those “ramps,” said Wang.
By comparison, some companies operate directly as a cryptocurrency exchange/digital wallet provider, such as Coinbase, as compared to trading platforms such as Wealthsimple. With the former, one may withdraw cryptocurrency directly from one’s digital wallet whereas with the latter one needs to sell the contract or shares and convert them into standard money. The likes of Coinbase hope to one day link to online retail stores.
Another component of platform regulations, according to the CSA, is marketing.
In September 2021, the CSA and Investment Industry Regulatory Organization of Canada (IIROC), which oversees brokerage firms and investment dealers, issued guidance for platform marketing.
“In several cases, CSA and IIROC staff have observed statements in crypto-trading platforms’ advertising and marketing materials that could mislead investors. Staff are also concerned about crypto-trading platforms’ use of gambling-style promotions that may encourage excessive and risky trading by retail investors,” stated the CSA.
The regulator issued a number of examples of questionable marketing. One looks at how platforms advertise a lack of commission fees but don’t disclose small markups in prices.
In another case, the CSA warns of platforms holding themselves out to be exchanges.
Finally, in all cases, platforms are obliged to perform an “appropriateness assessment” at the account-opening stage, meaning a new customer must be made aware of their own risk tolerance, among other matters.
“Advertising and marketing strategies designed to encourage trading may be considered a form of solicitation or invitation to trade and may therefore trigger suitability obligations for registered CTPs,” the CSA noted.
Masum said unregistered foreign platforms may not engage with Canadians; however, “there is no easy way to address this” at the moment, he said.
Nevertheless, Masum said such platforms are subject to enforcement action, if not registered.