In the wake of the recent record CAD $176,960,190 administrative monetary penalty levied by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) on Xeltox Enterprises Ltd. of Vancouver (also known as Cryptomus ), the Canadian Securities Administrators (CSA) have issued a caution to crypto-backed lending platforms and regarding their obligations under securities law, encouraging them to comply with regulatory requirements. In addition, the regulator reminded members of the public to confirm the regulatory status of the platforms they seek to do business with.
The CSA has granted exemptive relief to crypto-backed lending platforms which offer loans backed by crypto assets, tailored to the platform’s specific business model, and includes conditions intended to address investor protection. Crypto-backed loans typically involve the investor (or borrower) transferring their crypto assets to the platform (or lender) as collateral in an amount that exceeds the value of the loan.
Depending on the circumstances, crypto-backed lending platforms may be engaged in securities trading and distribution with clients, which may require registration and the filing of a prospectus. The regulator warns that platforms that are not registered with, or have not obtained exemptive relief from, securities regulators may present significant risks to investors, such as a lack of internal controls to safeguard collateral, or inadequate or inappropriate disclosure regarding terms of the loan.
The regulator advises the public before engaging with a crypto-backed lending platform as either an investor or a customer to verify whether the platform is registered with a Canadian securities regulator or is operating under exemptive relief from securities legislation requirements.
A list of those crypto-backed lending platforms that have obtained exemptive relief is available on the website of the Canadian Securities Administrators.
The CSA encourages platforms currently offering, or planning to offer, loans collateralized by crypto assets to contact the appropriate securities regulator (if they haven’t already done so. The regulator also warns that platforms who do not engage with regulators risk contravening securities laws and may be subject to regulatory action.
For more information, please call Barbara Hendrickson at BAX Securities Law (647) 403-4606.
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.