CSA releases enhanced pre-registration undertakings requirements for crypto asset trading platforms

Against the backdrop of recent insolvencies of a number of crypto asset trading platforms, the Canadian Securities Administrators (CSA) published Staff Notice 21-332 to introduce important new investor protection provisions applicable to crypto asset trading platforms that are seeking registration and related exemptive relief.

What you need to know

• The CSA published Staff Notice 21-332, Crypto Asset Trading Platforms: Pre-Registration Undertakings—Changes to Enhance Canadian Investor Protection, requiring crypto asset trading platforms that are seeking registration and related exemptive relief to provide enhanced pre-registration undertakings.
• Platforms that are continuing to operate in Canada while pursuing their applications for registration and related exemptive relief are expected to provide the enhanced undertakings and implement necessary system changes.
• Platforms that do not provide the enhanced undertakings or do not implement the required system changes are expected to identify and off-board existing clients in Canada in an orderly manner and impose meaningful restrictions to prevent Canadian clients from accessing the platform’s products and services.

Background

On February 22, 2023, the Canadian Securities Administrators published Staff Notice 21-332, Crypto Asset Trading Platforms: Pre-Registration Undertakings—Changes to Enhance Canadian Investor Protection, requiring crypto asset trading platforms that are seeking registration and related exemptive relief to provide enhanced pre-registration undertakings. The enhanced undertakings build upon existing requirements released last year and strengthen oversight over crypto asset trading platforms and introduce important new investor protection provisions.

Who needs to provide enhanced undertakings?

The enhanced pre-registration undertakings are required to be provided by platforms that are seeking registration and related exemptive relief from members of the CSA. Accordingly, the enhanced undertakings (similar to the original undertakings that preceded them) are not an alternative to registration but are intended to address investor protection concerns for clients of platforms that are seeking registration.

What are the enhancements?

The new commitments requested from platforms seeking registration and related exemptive relief relate to the following areas:

• enhanced commitments for the custody and segregation of assets held on behalf of Canadian clients;
• strengthened commitments to preclude the pledging, re-hypothecating or otherwise using crypto assets held on behalf of Canadian clients;
• no offering of margin, credit or other forms of leverage to any type of client;
• new commitments from the controlling minds and affiliates of platforms;
• strengthened capital requirements;
• enhanced filing requirements of financial information;
• Chief Compliance Officer requirement;
• no trades in crypto contracts based on proprietary tokens except with the prior written consent of the CSA; and
• no trades in crypto contracts for stablecoins (referred to as value-referenced crypto assets) without the prior written consent of the CSA.

Next steps

Platforms that are continuing to operate in Canada while pursuing their applications for registration and related exemptive relief are expected to:

• provide the enhanced undertakings based on the template set out by the CSA; and
• implement systems changes to effect the provisions of the enhanced undertakings within the timeframes set out in their enhanced undertakings.

Platforms seeking registration and related exemptive relief that have already provided their pre-registration undertakings are expected to provide their enhanced undertakings within 30 days from February 22, 2023 (i.e., by March 24, 2023).

Given that the CSA is providing a template for the enhanced undertakings, we anticipate that any material variations from the template will need to be justified and be in accordance with the investor protection principles articulated by the CSA.

Platforms that do not provide the enhanced undertakings or implement the required systems changes within the timeframes set forth in their enhanced undertakings are expected to:

• identify and off-board existing clients in Canada in an orderly manner;
• impose meaningful restrictions to prevent Canadian clients from accessing the platform’s products and services; and
• provide notice and timelines to the CSA for the implementation of such steps and restrictions.