The Canadian Securities Administrators (CSA) published CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets (the Staff Notice) on January 18, 2020. The objective of the Staff Notice is to clarify where securities legislation may apply to certain crypto asset transactions facilitated by entities (collectively Platforms), including the buying and selling of crypto assets. Any Platform which trades crypto assets that are “securities” or “derivatives” will be subject to securities legislation.
The Staff Notice has its roots in the Joint CSA/IIROC Consultation Paper 21-402 of March 2019 (the Consultation Paper), which stated if crypto assets that are securities or derivatives are traded on a Platform, such Platform would be subject to securities legislation.
A crypto asset may be considered a “security” where it falls under the definition of a “security” including any document “commonly known as a security.” One example, is where a crypto asset carries rights traditionally attached to common shares such as voting rights and rights to receive dividends.
A crypto asset may be characterized as a “derivative” where it provides an option to acquire an asset in the future including a crypto asset that is a “commodity.” The user’s contractual right to the crypto asset may itself constitute a derivative. In some jurisdictions, a crypto asset that is a “derivative” may also be considered a “security” where it falls under the definition of a “security” including as an “investment contract” or an “evidence of indebtedness” or an “evidence of title to or interest” in the assets or property of another person.
Platforms will not be subject to securities legislation where they only allow for transactions involving crypto assets that are not, in and of themselves, derivatives or securities. A Platform would not generally be subject to securities legislation if each of the following apply:
- the underlying crypto asset itself is not a security or derivative; and,
- the contract or instrument for the purchase, sale, or delivery of a
- results in an obligation to make immediate delivery of the crypto asset, and
- is settled by the immediate delivery of the crypto asset to the Platform’s user according to the Platform’s typical commercial practice.
The Staff Notice states that while there is no “bright-line” test to determine whether a contract or instrument results in an obligation, the transaction will generally be subject to securities legislation if the transaction does not result in an obligation to make and take delivery of the crypto asset immediately following the transaction. The CSA will consider the terms of contracts regarding the terms between the Platform and the user, including whether the contract or instrument creates an obligation to make immediate delivery of the crypto asset. As part of this analysis, the CSA will consider whether the Platform and the user intend, at the time the contract or instrument is entered into, to make and take delivery of the crypto asset on which the contract or instrument is based.
Generally, an obligation to immediate delivery of a crypto asset occurs where:
- the contract
creates an obligation on the Platform to immediately transfers ownership,
possession, and control of the crypto asset to the Platform’s user, and,
as a result, the user is free to use, or otherwise deal with, the crypto
- further involvement with, or reliance on the Platform or its affiliates, and
- the Platform 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 Platform’s user is not exposed to insolvency risk (credit risk), fraud risk, performance risk or proficiency risk on the part of the Platform.
The Staff Notice provides further clarification on certain Platforms that provide users with an opportunity to transact in crypto assets, including an opportunity to buy and sell crypto assets while retaining ownership, control, and possession of crypto assets. These Platforms only transfers ownership, control and possession from the Platform’s address to the user-controlled address (usually a wallet for crypto asset storage) upon the user’s request. Until the user makes their request, there is no obligation on the Platform’s part for delivery of ownership and possession of the crypto asset. This kind of a transaction may be subject to securities legislation if:
- the contract or instrument does not create an obligation to make immediate delivery of the crypto assets to the user; and,
- the typical commercial practice on the Platform is not to deliver and users who do not request to transfer crypto assets do not receive full ownership, possession, and control over the crypto assets that they transacted in.
The Staff Notice provides clarification on when Platforms that trade in bitcoin will be subject securities legislation. Generally, securities legislation will not apply to these Platforms where there is an obligation to deliver the crypto asset from the Platform to the user and immediate delivery occurs; and each of the following criteria apply:
- a Platform offers services for users to buy or sell bitcoin and does not offer margin or leveraged trading;
- users send money to the Platform to purchase bitcoin at a given price;
- the terms of the transaction require that the entire quantity of bitcoin purchased from the Platform or counterparty seller be immediately transferred to a wallet that is in the sole control of the user, and the transfer is immediately reflected on the Bitcoin blockchain;
- there is no agreement, arrangement or understanding between the parties that would allow the transaction to be settled other than by immediate transfer of bitcoin;
- the Platform’s typical commercial practice is to make immediate delivery in accordance with the terms of the transaction, and for the Platform or its affiliates not to have ownership, possession or control of the user’s bitcoin at any point following the transaction;
- the sale or purchase of bitcoin is not merely evidenced by an internal ledger or book entry that debits the seller’s account with the Platform and credits the crypto assets to the user’s account with the Platform, but rather, there is a transfer of the bitcoin to the user’s wallet; and
- the Platform or counterparty seller retains no ownership, possession or control over the transferred bitcoin.
CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets is available for download from the websites of the Participating Jurisdictions.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.