This fall, the Canadian Securities Administrators ("CSA") released CSA Staff Notice 21-333 Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-referenced Crypto Assets with Clients (the "Staff Notice") to provide further guidance to crypto asset trading platforms ("CTPs") on the CSA's interim approach to value-referenced crypto assets ("VRCAs", commonly referred to as "stablecoins"). The Staff Notice sets out terms and conditions on which the CSA would consent to a CTP continuing to make certain VRCAs available to its clients, along with important dates for implementation.

Background

A VRCA is a crypto asset that is designed to maintain a stable value over time by referencing the value of a fiat currency, any other value or right or a combination thereof. As we discussed in a previous post, VRCAs may constitute securities and/or derivatives in some jurisdictions. Registered CTPs and CTPs that have provided a pre-registration undertaking ("PRU") to the CSA are prohibited from allowing clients to: (i) trade crypto assets that are securities and/or derivatives; and (ii) enter into crypto contracts in respect of crypto assets that are securities and/or derivatives.

While these prohibitions remain in force, a CSA Staff Notice published earlier this year suggested that the CSA might provide CTPs with written consent to permit their clients to continue trading, on an interim basis, certain VRCAs that seek to replicate the value of a single fiat currency ("Fiat-backed Crypto Assets" or "FBCAs"). Such consent would be subject to potential terms and conditions, including, in all cases, that the issuer set aside an adequate reserve of assets denominated in that currency. The CSA clarify this interim approach in the most recent Staff Notice but note that it does not apply to: (i) VRCAs that are not FBCAs; and (ii) any new VRCA that a CTP may wish to offer after the publication date of the earlier CSA Staff Notice (i.e., February 22, 2023).

Terms and Conditions

Appendix A to the Staff Notice ("Appendix A") outlines terms and conditions on which the CSA would consent to a CTP continuing to allow its clients to buy or deposit VRCAs or to enter into crypto contracts to buy or deposit VRCAs. They require the:

  • CTP to establish that certain conditions are met; specifically: (i) the VRCA references, on a one-for-one basis, the value of a single fiat currency (the "reference fiat currency"); (ii) the reference fiat currency is the Canadian or United States dollar; (iii) the VRCA entitles a holder who maintains an account with the issuer to a right of redemption, as prescribed; and (iv) the issuer maintains a reserve of assets, as prescribed;
  • Issuer to make certain information publicly available; specifically: (i) details of each type, class or series of the VRCA, including the date on which the VRCA was launched and its key features and risks; (ii) the quantity of all outstanding units of the VRCA and their aggregate nominal value at least once each business day; (iii) the names and experience of the persons or companies involved in the issuance and management of the VRCA; (iv) the quantity of units of the VRCA held by the issuer or any of the foregoing persons or companies and their nominal value at least once each business day; (v) details of how a holder may redeem the VRCA, including any possible restrictions on redemptions; (vi) details of a holder's rights against the issuer and the reserve of assets, including in the event of insolvency or winding up; (vii) all fees charged by the issuer for distributing, trading or redeeming the VRCA; (viii) whether holders are entitled to any revenues generated by the reserve of assets; (ix) details of any instances when the issuer suspended or halted redemptions for all holders or was unable to satisfy redemption rights at the price or in the time specified in its public policies; (x) an assurance report from a public accountant, as prescribed; and (xi) annual financial statements, as prescribed;
  • Crypto asset statement to include certain information; specifically: (i) certain prescribed prominent statements that relate to risks associated with VRCAs; (ii) a description of the VRCA and its issuer; (iii) a description of the due diligence performed by the CTP with respect to the VRCA; (iv) a brief description of the information that the issuer must make publicly available, with links to that information; (v) a link to the location on the issuer's website where any event that has or is likely to have a significant effect on the value of the VRCA or the reserve of assets will be disclosed; (vi) a description of the circumstances in which the secondary market trading value of the VRCA may deviate from par with the reference fiat currency and details of any such material instances during the last 12 months on the CTP's platform; (vii) descriptions of risks related to the VRCA, as prescribed; (viii) certain additional statements, as prescribed, depending on whether the CTP is registered or provided a PRU; and (ix) the date on which this information was last updated;
  • CTP to include or reference a statement regarding its use of the term "stablecoin" or "stablecoins" in any information, communication, advertising or social media related to its platform that is targeted at or accessible by Canadian investors, as prescribed, if applicable;
  • Issuer to file an undertaking acceptable to the CSA, in substantially the same form as Appendix B to the Staff Notice, and which includes a submission to jurisdiction and the appointment of an agent for service in the form of Appendix C to the Staff Notice;
  • CTP to have policies and procedures that require the CTP to assess whether the VRCA or its issuer satisfies certain criteria on an ongoing basis and, if the VRCA no longer satisfies such criteria, facilitate halting or suspending deposits or purchases of the VRCA or crypto contracts in respect of the VRCA as quickly as is commercially reasonable; and
  • VRCA to be offered as described in the exemptive relief decision or PRU of the CTP.

The CSA also caution that a VRCA's satisfaction of the terms and conditions in the Staff Notice should not be viewed as an indication of regulatory endorsement or approval, that the VRCA is risk-free or that all risks are adequately mitigated or that the VRCA or its issuer are in compliance with Canadian securities legislation.

Implementation

CTPs

If a CTP that is registered or that has provided a PRU does not intend to continue to allow its clients to buy or deposit VRCAs or to enter into crypto contracts to buy or deposit VRCAs, the CSA expect the CTP to no longer allow clients to do so by December 29, 2023.

Alternatively, if the CTP intends to continue to make VRCAs available to its clients, the CSA expect the CTP to:

  • as soon as possible, contact its principal regulator to discuss next steps;
  • by December 29, 2023, no longer allow clients to buy or deposit VRCAs or to enter into crypto contracts to buy or deposit VRCAs that are not FBCAs that satisfy certain conditions in Appendix A; and
  • by April 30, 2024, no longer allow clients to buy or deposit FBCAs or to enter into crypto contracts to buy or deposit FBCAs that do not comply with the terms and conditions in Appendix A.

Issuers

Issuers are expected to have filed an undertaking acceptable to the CSA by December 1, 2023, and to contact the CSA as soon as possible to discuss next steps. While this deadline does not preclude an issuer from filing an undertaking on a later date, a delayed filing may prevent a CTP from continuing to make the VRCA of such issuer available to its clients.

What's Next?

The CSA continue to monitor and assess the presence and role of VRCAs in Canadian capital markets as well as international regulatory developments. The Staff Notice presents an interim approach, and the CSA remain receptive to comments and alternative proposals, provided that investor protection is addressed.

The Staff Notice also contemplates potential future approaches to VRCAs. These include long-term regulation, the referencing of other fiat currencies and the offering of VRCAs that are not FBCAs. To this end, the CSA welcome submissions from stakeholders, which will be considered as any regulatory changes and policy statements are developed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.