Canadian regulator says securities laws apply to most exchanges

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In July 2019, Canadian Securities Administrators (CSA), one of Canada’s several securities regulators, promised it would take a look at how it could produce a tailored regulatory regime in the country. On January 16, they provided their opinion on how securities laws should apply to exchanges that trade in cryptocurrencies, and to summarize it: they usually apply.

In their release, titled “Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets,” they make it clear that securities laws don’t apply to digital assets if they are not securities or derivatives. However, even if they are neither of those things, the asset must be immediately delivered upon purchase, or securities laws start to apply. Using a typical scenario where a user would buy an asset, but the exchange does not immediately send it to their private wallet, they note:

Until then, the user would not have ownership, possession and control of the crypto assets without reliance on the Platform. The user would be subject to ongoing exposure to insolvency risk (credit risk), fraud risk, performance risk and proficiency risk on the part of Platform.

This makes a lot of sense. If an exchange is acting like a brick and mortar currency exchange does, you give them one currency, they give you another, there’s nothing resembling investing in securities there. But if the crypto exchange doesn’t immediately turn over a currency, leaving it on a ledger somewhere for you to request a withdrawal, then it looks a lot like a typical security would to the CSA.

The announcement goes on to give some details about how the CSA will qualify if an exchange is delivering assets immediately or not. The bottom line with these circles around if there is an expectation of a timely delivery, or none at all.

As several experts noted, this is a huge win for Canadian crypto users. Adam Goldman, founder of Bitbuy, told The Block, “Having a defined regulatory landscape will promote the cryptocurrency industry in Canada, and will provide platforms that seek to lawfully participate in the financial system a clear path forward, while at the same time protecting the rights of Canadians.” Christine Duhaime chimed in, saying this was “a solid move for consumer protection.”

Had this opinion been offered a few years ago, it could have gone a long way to help protect Canadians from the likes of QuadrigaCX and the Einstein Exchange. In both cases, millions went missing as the exchanges founders are accused of squandering user funds.