Over the past year, eight crypto asset trading platforms (“CTPs”) have become regulated as securities dealers in Canada. These CTPs operate online platforms which allow Canadian residents to buy, sell and hold crypto assets. By contrast, no crypto asset service providers that offer savings or loan products are registered under securities laws, or any other prudential regulatory framework, in Canada.

Each CTP that is registered as a securities dealer operates pursuant to terms and conditions of a bespoke exemption order (each, a “CTP Order”) granted by the Canadian Securities Administrators (CSA), including a condition that the CTP will not list crypto assets that are securities or derivatives. Crypto assets like Bitcoin, Ether and other large market-cap, high volume crypto assets that are generally accepted to be commodities, are available on these CTPs.

You may ask: if these CTPs are not permitted to list crypto assets that are themselves securities or derivatives, then why did they have to register under securities laws in the first place? The answer is somewhat technical, but very important, to understanding the regulatory framework for crypto asset service providers in Canada, and why there is ongoing regulatory uncertainty regarding crypto asset lending activities.

CTP Regulatory Framework

In two Staff Notices published in January 2020 and March 2021 (the “Staff Notices”), Staff of the CSA took the position that where a CTP does not immediately deliver the crypto assets that it sells to its clients (such that ownership, possession and control of the crypto asset is passed on to the client from the outset and further involvement by the CTP is not necessary), then the contract between the CTP and its clients is itself treated as a security or derivative, which Staff describe as a “Crypto Contract”.

Consequently, CTPs that offer custodial services to clients for the crypto assets bought and sold on their platforms according to Staff Notices must register as dealers under securities laws and obtain exemptive relief from the prospectus requirement for the Crypto Contracts they issue to clients. The Staff Notices, together with the exemption orders issued to the eight custodial CTPs registered so far in Canada, represent an emerging regulatory framework for CTPs in Canada (the “CTP Regulatory Framework”).

Crypto Lenders

In addition to spot crypto trading, Canadian residents can also access numerous other services relating to crypto assets through online platforms, including loans collateralized by crypto assets, as well as savings accounts that offer holders the opportunity to earn interest or yield by depositing their crypto assets with the platform. For the purpose of this post, these platforms are referred to as “Crypto Lenders”. While some Crypto Lenders also offer crypto asset trading services, many do not.

The Staff Notices are entirely focused on platforms that offer both trading and custody; they do not mention savings accounts or loan products. Similarly, none of the registered CTPs offer savings and loan products. Consequently, Crypto Lenders continue to operate in an environment of regulatory uncertainty in Canada.

For the CSA to exert jurisdiction over Crypto Lenders, such businesses would need to offer services that are considered securities or derivatives in one or more CSA jurisdictions. To date, only spot platforms that offer buy, sell and hold services are considered to be issuers of Crypto Contracts under the CTP Regulatory Framework.

In some CSA jurisdictions, such as Ontario, the definition of security includes an “evidence of indebtedness”, with specific carve-outs for deposit accounts at regulated financial institutions and contracts of insurance issued by regulated insurance companies. It is possible that a savings account offered by a Crypto Lender may be considered to be evidence of indebtedness of the lender, however, this would depend on the specific contractual arrangements between the Crypto Lender and its customers. Such contractual arrangements could also be interpreted by regualtors as analogous to “investment contracts” and ultimately become regulated that way.

In other CSA jurisdictions, such as Quebec, the definition of security includes “an instrument evidencing a loan of money” and “a deposit of money”, with carve-outs for various types of debt securities and “a deposit of money within the meaning of the Deposit Institutions and Deposit Protection Act”. Since crypto assets are not recognized as legal tender or currency in Canada, strong arguments can be made that evidences of loans of crypto assets and deposits of crypto assets are not caught by that part of the definition of “security”. It is therefore unclear whether Crypto Lenders issue or deal in products and services that are regulated as securities or derivatives across the CSA.

Moreover, deposit-taking institutions are traditionally prudentially regulated as banks, trust companies, credit unions or similar financial institutions under the supervision of the federal Office of the Superintendent of Financial Institutions (OSFI) or prudential regulators in provinces and territories of Canada. Generally, deposit-taking institutions are regulated under statutes and regulations, and supervised by regulatory authorities, which are separate from the capital markets regulatory regime administered by members of the CSA, which applies to securities and derivatives.[1]

As the Staff Notices and CTP Orders demonstrate, the CSA is making efforts to adopt a harmonized approach toward the regulation of crypto assets in Canada. We expect that the CSA is well aware of the activities of Crypto Lenders and is considering the extent to which they can or should be regulated under securities or derivatives laws. We expect that the CSA is also mindful of the potential overlapping jurisdiction of OSFI and provincial prudential regulatory authorities, and the desirability for streamlined regulation to minimize burden and foster innovation in Canada.

Money Services Business Registration

Crypto asset service providers may also be regulated as money services business (“MSBs”) in the category of virtual currency dealer Canada, under the federal regime administered by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and/or the Quebec regime administered by Revenu Canada.

For the purpose of MSB registration, dealing in virtual currency includes providing services for virtual currency exchange and/or or virtual currency transfer (e.g. remittance). While some Crypto Lenders may offer virtual currency exchange and/or remittance services, many do not. In addition, MSBs that are domiciled outside of Canada are only required to register with FINTRAC as foreign MSBs if they are directing services toward Canadian customers and provide these services to clients in Canada.

FINTRAC offers specific guidance regarding when a foreign MSB is “directing services” toward Canadians, such as marketing or advertising directed toward persons or entities located in Canada, operating a “.ca” domain name or listing the business in a Canadian business directory. FINTRAC provides a non-exhaustive list of additional indicia on its website, including offering products or services in Canadian dollars and seeking feedback from Canadian clients.

Therefore, the extent to which a Crypto Lender domiciled outside of Canada may need to register as an MSB is very fact specific. While Revenu Quebec has not published guidelines on this topic, the analysis is similarly fact-dependent in Quebec.

Ongoing Regulatory Uncertainty

While the CTP Registration Framework has helped to provide clarity to CTPs that offer buy, sell and hold (custody) services, and the virtual currency dealer category of MSB has provided clarity to crypto asset exchange and remittance businesses, the regulatory landscape for Crypto Lenders remains uncertain in Canada.

In addition, while eight custodial CTPs have registered under the CTP Registration Framework, dozens of other CTPs domiciled inside and outside of Canada continue to offer trading services in Canada without being registered as securities dealers.

Many CTPs and Crypto Lenders are actively engaged with the CSA concerning the application of securities and derivatives laws to crypto savings and loan products. As indicated in the Staff Notices, the CSA are seeking to balance investor protection concerns with the objective of supporting financial innovation in Canada.

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[1] The exception is Quebec, where the Autorite des Marches Financiers regulates both deposit-taking institutions and capital markets participants, such as dealers and marketplaces for securities and derivatives.