If you do not buy cryptocurrency directly into a digital wallet, your cryptocurrencies are probably subject to the securities rules.
Are your cryptocurrency assets properly managed in Canada?
Unless you are acquiring or buying cryptocurrency directly in a digital wallet, your assets may be in possession of a crypto-trading platform (CPT) which falls under the securities rules of securities in Canada.
Currently, there are six platforms registered and regulated in Canada, according to a list provided by the Canadian Securities Administrators (CSA).
However, there are 60 platforms (including 10 in British Columbia) in the registration process, according to Hyder Zach Massum, director of legal services for capital market regulation at the BC Securities Commission (BCSA). BCSA is a member of CSA.
The six currently regulated platforms that 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 startup cryptocurrencies.
Masum says platforms need to meet certain conditions to trade cryptocurrencies. For example, certain restrictions can be placed on “risky” assets, he said.
Platforms must also have sufficient assets on deposit to carry out client redemptions. Platforms must also exhibit good storage of the asset and provide certain information, Masum said.
Mark Wang, director of financial market regulation at BCSC, says that the platforms fall under securities regulation because they retain the custody of the assets and the customers only have a contractual right to them – which is what is called a derivative, which is a regulated entity.
Platforms can also offer clients securities in cryptocurrency companies. Otherwise, the actual cryptocurrency is neither a security nor a derivative, and the Commission does not supervise currencies or commodities and the exchanges on which they trade.
Wang explains that a trading platform is like a “to and from ramp” to the cryptocurrency blockchain (the online digital ledger, where cryptocurrencies are bought and sold with digital wallets), and “much of the risk is getting money to and from the blockchain.”
And then the commission tackles some of those “ramps,” Wang said.
In comparison, some companies operate directly as providers of cryptocurrency exchanges / digital wallets, such as Coinbase, versus trading platforms such as Wealthsimple. With the former, one can withdraw the cryptocurrency directly from their digital wallet, while with the latter one has to sell the contract or the shares and convert them to standard currency. People like Coinbase hope to one day link to online retail stores.
Another aspect of platform regulation, according to CSA, is marketing.
In September 2021, the CSA and the Investment Industry Regulatory Organization of Canada (IIROC), which oversees brokerage firms and investment dealers, issued guidelines for platform marketing.
“In several cases, CSA and IIROC staff 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-like campaigns that may encourage excessive and risky retailer trading,” he said. CSA.
The regulator has released a number of dubious marketing examples. We look at how the platforms announce missing commission fees, but do not reveal small price increases.
In another case, the CSA warns against platforms pretending to be exchanges.
Finally, the platforms are in all cases obliged to carry out a “suitability assessment” in the account opening phase, which means that a new customer must, among other things, be informed about their own tolerance.
“Advertising and marketing strategies designed to promote trade can be considered as a form of solicitation or invitation to trade and can therefore trigger suitability obligations for registered CTPs,” the CSA noted.
Masum said unregistered foreign platforms cannot interact with Canadians; however, “there is no easy way to solve this problem” at the moment, he said.
Nevertheless, Masum said that these platforms are subject to enforcement if they are not registered.