The Canadian Securities Administrators (CSA) recently published guidance around the application of Canadian securities laws to platforms that facilitate transactions involving crypto assets (each, a Platform). This guidance provides clarity to Platforms on the applicability of securities laws to their business operations, based on the specific features of the transactions that are conducted.
The CSA states that where a Platform facilitates transactions of crypto assets, securities laws will apply, unless each of the following is satisfied:
- The crypto asset is not a security or derivative of a security; and
- The transaction for the crypto asset results in an obligation to make an immediate delivery of the asset to the buyer, and is facilitated using a platform that makes an immediate delivery in its normal commercial practice.
If the above criteria are not satisfied and securities laws do apply to a transaction, the facilitating Platform will be considered a marketplace or dealer. As a marketplace or dealer, Platforms are subject to securities oversight, including registration and compliance obligations.
Where a crypto asset is a security
To determine whether an investment or other form of asset, including crypto assets, is a security, the following four criteria must be met:
- Assets are invested;
- The person investing the assets expects profits from that investment;
- The investment is made in a common enterprise; and
- The profit from the common enterprise is produced by the efforts of others.
Most crypto assets meet this test and are considered securities. Common examples are coin or token offerings. Typically, the purchaser of the asset acquires immediate rights to some form of profit or other rights, or receives rights to be exercised at a later time. When the rights are immediate, the asset is a security. Where the rights are delayed, the asset is a derivative and subject to securities laws.
Following the emergence of blockchain technology, securities regulators have established that most of these forms of assets are subject to securities regulation. Thus, if a Platform is considering whether securities laws apply to its operations, the first factor as outlined by the CSA will likely have been met.
Immediate delivery of an asset
The commercial practice of the Platform and the features of the agreements governing any given transaction, considered as a whole, will determine whether an asset is immediately delivered. The analysis is based on facts, circumstances and unwritten features of agreements, in addition to the written terms of the transaction.
Where the asset is immediately delivered to the purchaser, the CSA states a Platform will not be subject to securities regulation. For immediate delivery to occur, all of the following conditions must be present:
- It must be the typical commercial practice of a Platform to immediately transfer the asset to the purchaser;
- The transfer must be complete in terms of ownership, possession and control;
- The Platform cannot retain any associated rights or benefits to the crypto asset;
- The purchaser must be able to transact with or use the asset freely, immediately following its receipt, without the requirement of any further involvement with the Platform;
- The Platform and its affiliates should not have any security interest or legal right in the asset; and
- The purchased asset shall not be subject to any risk or liabilities of the Platform.
When determining whether an asset has been immediately delivered, the surrounding facts are critical and to be considered in conjunction with written agreements. If an asset is held on a Platform’s domain for any reason and any length of time following a transaction, immediate delivery has not taken place. The ability of a purchaser to transfer the asset to its own possession upon request is not sufficient to meet the condition that ownership, possession and control are immediately transferred.
If any of the above conditions are not satisfied, immediate delivery of the asset has not occurred. Provided the crypto asset is a security or derivative as outlined above, the Platform will be subject to securities regulation.
Takeaways for business
Platforms that facilitate transactions of crypto assets should be aware of potential obligations under securities laws. If a Platform’s typical commercial practice makes it subject to oversight by securities regulators, the Platform can take steps to register with the appropriate governing bodies. Further, specific exemptions to securities regulation may be possible through initiatives by the CSA and provincial authorities that foster innovative businesses, while balancing regulatory objectives. All Platforms are encouraged to consult with legal counsel to assess any securities-related obligations.
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