On February 22, 2023, the Canadian Securities Administrators (CSA) published Staff Notice 21-332, Crypto Asset Trading Platforms: Pre-Registration Undertakings—Changes to Enhance Canadian Investor Protection, in which the CSA shared its views on the characterization of stablecoins and outlined its requirements for crypto asset trading platforms trading in crypto contracts for stablecoins.
A stablecoin is a crypto asset that is designed to function the way its name suggests—by maintaining a stable value relative to an underlying asset. However, the crash in 2022 of terraUSD (an algorithmic stablecoin issued by the Terra Network, which was supposed to maintain a peg to US$1) showed the crypto community and regulators worldwide that, in certain situations, stablecoins are neither as stable nor as risk-free as the fiat currencies to which they are purportedly pegged.
The CSA in SN 21-332 acknowledges, that stablecoins, which it refers to as “value-referenced crypto assets”, experience volatility and notes that there have been several instances where stablecoins did not maintain their peg on trading platforms. Whether a particular stablecoin is a security and/or derivative will depend on the specific facts and circumstances of the stablecoin. In SN 21-332, CSA staff note that they are of the view that fiat-backed stablecoins generally meet the definition of security and/or derivative. Moreover, CSA staff indicate that they would consider stablecoins backed by assets other than fiat currency (such as gold or other crypto assets) to also be a security and/or derivative.
The CSA in SN 21-332 requires platforms trading crypto contracts for a particular stablecoin to seek prior written consent from the CSA and conduct sufficient due diligence to address the applicable risks of that stablecoin, including ensuring that:
SN 21-332 clarifies the CSA’s view that most stablecoins fall within the purview of Canadian securities regulators. It will be interesting to see how the CSA further develops the regulatory approach to the issuance and distribution of stablecoins and regulates platforms that trade crypto contracts for such instruments.
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