The Canadian Securities Administration (CSA) explained new provisions in the “Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets” published on Jan. 16.
Canadian authorities have issued new guidance to determine which digital currency trading platforms fall under derivatives law.
In general, the agency drew a line between trading platforms that make an immediate delivery of a crypto assets to its users, and those that hold the transaction of crypto assets until the user makes a later request.
To what exchanges do securities laws apply?
Following an analysis of trading techniques on different platforms, the CSA concluded that some of them only provide their users with a contractual right or claim to a crypto asset, and do not immediately transfer it to a user. Such crypto trading platforms are subject to securities legislation, and thus fall under derivatives laws. The guidance detailed:
“Potentially, there will be ongoing reliance and dependence of the user on the Platform until the transfer to a user-controlled wallet is made. Until then, the user would not have ownership, possession and control of the crypto assets without reliance on the Platform. The user would be subject to ongoing exposure to insolvency risk (credit risk), fraud risk, performance risk and proficiency risk on the part of Platform.”
The CSA will not apply securities laws to crypto exchanges on which the underlying crypto asset is not a security or derivative, and crypto assets are delivered to a user immediately.
Canada’s crackdown on crypto
Previously, state and provincial securities regulators in the United States and Canada launched probes into potentially fraudulent crypto investment programs as part of the North American Securities Administrators Association’s (NASAA) “Operation Cryptosweep.” The initiative resulted in hundreds of investigations of initial coin offerings and crypto-related investment products.
In late December 2019, the NASAA said that cryptocurrency investment is among the top five investor threats for 2020. Commenting on the matter, the NASAA’s president Christopher Gerold said:
“It is important for investors to understand what they are investing in and who they are investing with. Don’t fall for promises of guaranteed high returns with little to no risk or deals pitched with a false sense of urgency or limited availability.”
Central Banks Have Three Options for Crypto Regulations, Says Official
Denis Beau, the deputy governor of France’s central bank, Banque De France, recently delivered comments regarding central banks’ approaches to cryptocurrencies.
Establish appropriate cryptocurrency regulations
On Oct. 16, Beau spoke at the Official Monetary and Financial Institutions Forum conference in London, where he discussed the role of cryptocurrency assets in today’s global financial payment system.
Beau stated that the traditional bank-based ecosystem could face significant changes due to the many technological developments, such as blockchain and distributed ledger technologies, further explaining:
“With the emergence of so called crypto-assets … and so called stablecoins, we may also see new settlement assets develop which may compete against and possibly, according to their promoters, replace commercial and central bank money as settlement assets at the center of our payment systems.”
Beau continues by saying that stablecoins of potentially large size and reach might present unforeseen challenges of “system-wide importance, to competition policy, financial and monetary stability.”
Beau adds that central banks really only have three available options to address cryptocurrencies. The first would be to completely ignore crypto-assets, which would not mitigate any of the potential risks. The second option would be to ban all cryptocurrencies and the third available option, which is the most preferred one in Europe and France according to Beau, is to establish and standardize crypto regulations across the board.
The challenge of standardization
Indeed, the lack of standardization of regulations and procedures in the cryptocurrency and blockchain spaces has been identified as a problem both by regulators and industry players. Big Four professional services firm Deloitte noted the lack of standardization as a major obstacle to blockchain adoption in a report last year. ‘
Monero (XMR) core developer Riccardo Spagni has previously suggested that uneven international regulatory standards will result in a cryptocurrency-related brain drain, as the talent involved in the industry moves to the most beneficial jurisdictions.
Lawmakers in some countries have attempted to get ahead of such an exodus of talent and investment by making friendly regulatory environments within their home jurisdictions. Earlier this year, United States Representative Warren Davidson reintroduced the Token Taxonomy Act – a bill that would exclude cryptocurrencies from classification under U.S. securities laws.
