On April 12, 2023, the Canadian Securities Administrators (CSA) published pre-registration undertakings (PRUs) given by ten crypto asset trading platforms (CTPs) on March 24, 2023. These CTPs met the short deadline announced a month prior, described in our article CSA Sets 30 Day Deadline for Crypto Trading Platform Pre-Registration Undertakings and Issues Guidance on Stricter Oversight of Platforms.

In its April 12 press release, the CSA said it is reviewing other PRUs which were presumably either filed after the deadline or deviate from the language of those published. The CSA press release was silent on the future treatment of CTPs that failed to file by the deadline or filed PRUs that are not ultimately accepted. Platforms that did not file PRUs are expected to off-board Canadian clients and exit Canada. To date, only a few CTPs have announced their intention to exit Canada.

CTPs which gave PRUs that were accepted by the CSA by the March 24 deadline include U.S.-based Coinbase, Kraken and Gemini, longstanding Canadian CTPs NDAX and Shakepay and several other smaller CTPs, four from Canada and two international platforms (collectively, the PRU Platforms). The Ontario Securities Commission is principal regulator (PR) of four PRU Platforms, while the Alberta Securities Commission is PR for three, the Autorité des marchés financiers du Québec is PR for two and the British Columbia Securities Commission is PR for one PRU Platform.

Generally, the PRU Platforms agreed to the stringent requirements set out in CSA Staff Notice 21-332 Crypto Asset Trading Platforms: Pre-Registration Undertakings: Changes to Enhance Canadian Investor Protection (SN 21-332), including stricter requirements regarding custody and segregation of client assets, prohibitions on offering margin or leverage and prohibitions on offering stablecoins or proprietary tokens without the consent of the CSA, as detailed in our February 23, 2023 article. The PRU Platforms have committed to operationalize these requirements within 90 to 120 days after the date of the PRU and become registered as securities dealers within 12 months, or else exit Canada unless their PR consents to an extension.

Considering the firm March 24 deadline established by the CSA as part of their PRU initiative, it would be appropriate that the prescribed timelines for fulfilling applicable investor protection commitments would run from the same start date for all CTPs that gave PRUs. Imposing a uniform deadline will ensure a level playing field for all registered and unregistered CTPs that continue to offer services in Canada pending registration.

Six of the ten PRU Platforms have agreed to terms and conditions regarding the staking services provided to Canadian clients (Staking T&C). The Staking T&C set out in the PRUs are substantially similar to the terms and conditions accepted by Wealthsimple Digital Assets and Bitbuy Technologies, two Canadian-based platforms that are registered as restricted dealers and have been offering staking services since October 2022.

Five of the ten PRU Platforms have agreed to terms and conditions relating to the provision of “marketplace” services (Marketplace T&C), indicating that such platforms (Marketplace Platforms) offer facilities that bring together orders of multiple buyers and sellers and use automated methods under which the orders interact and buyers and sellers agree to trades[1]. These Marketplace Platforms will join four CTPs that are already allowed to offer marketplace services in Canada on terms and conditions prescribed by the CSA: Canadian-based Coinsquare Capital Markets, Bitbuy Technologies and Simply Digital Technologies (operating as CoinSmart)[2] and U.S.-based Fidelity Digital Asset Services.

In the wake of insolvency events in the global crypto asset market, the PRUs contain broad reporting and information sharing obligations, many of which go beyond the usual obligations of firms that are registered under securities laws in Canada. These include covenants of the CTP to:

• permit the PR to contact and discuss the PRU Platform and its affiliates with other international regulators;
• deliver any information that is reasonably requested by the PR, including a SOC 1 report, if available and up-to-date data reporting;
• direct its auditor to conduct any audit or review required by the PR, deliver the written direction to the PR and fully cooperate with the audit;
• promptly notify the PR of any material system failure involving the PRU Platform or its affiliates, including a cybersecurity breach, that impacts Canadian clients;
• provide to the PR on a timely basis and on demand any information that the PRU Platform, its affiliates and control persons would reasonably be expected to have available regarding their business, including their information technology system, software, intra-company arrangement or services, marketplace service and clearing and settlement service; and
• share with the PR information relating to regulatory and enforcement matters that will materially impact the PRU Platform’s business, including the marketplace service and clearing and settlement service.

The PRUs of all non-Canadian CTPs include commitments in support of the PRU from global affiliates and controlling minds as contemplated in SN 21-332, however, the language used to achieve this requirement varies across the PRUs. 

While they are largely consistent, there are some differences among the PRUs. For example:

• Two of the ten PRUs leave open the possibility that the Platform may provide custody other than through a custodian that meets the “Acceptable Third-Party Custodian” definition set out in SN 21-332.
• Some PRU Platforms have negotiated a deadline of 120 days or longer for requirements that most PRU Platforms have agreed to implement within 90 days.
• Ontario-based Satstreet Inc. is the only PRU Platform that will not seek exemptive relief from the suitability obligation and has opted to restrict its clients to “Accredited Crypto Investors”.

On the whole, the CSA’s PRU initiative appears to have been successful in moving some platforms operating in Canada toward registration. A small number of global platforms have also announced exits from the Canadian market. Canadian market participants should expect changes on the PRU Platforms over the next 90 to 120 days as operational requirements are implemented. It will also be interesting to see how many more PRUs are published in the near future, and how many PRU Platforms become registered as dealers in the next year.

For more information about our firm's Fintech expertise, please see our Fintech group page.

[1] See definition of “marketplace” in Section 1(1) of the Securities Act (Ontario) and Section 1(1) of National Instrument 21-101 Marketplace Operation.

[2] On April 3, 2023, these three platforms announced their pending merger, subject to regulatory approval.