This month, Canadian securities regulators provided further guidance to Crypto Platforms on the permissibility of trading stablecoins[1]. In its Staff Notice 21-333 Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (“21-333 Guidance”), the CSA set out an interim framework focused on reserve assets and governance.
The 21-333 Guidance builds on regulatory requirements published in February[2], when the CSA stated that while stablecoins may be securities and/or derivatives, Crypto Platforms could offer them to clients only if (1) they received prior written consent from the CSA; and (2) the stablecoins offered were collateralized (i.e., backed by a reserve of assets, as opposed to algorithmic stablecoins).
The 21-333 Guidance applies to both registered Crypto Platforms[3], or Crypto Platforms that only provided a pre-registration undertaking[4]. It covers purchases or deposits of stablecoins as well as entering into crypto contracts[5] to buy or deposit stablecoins. Provided that the terms and conditions in Appendix A of the 21-333 Guidance are followed[6] (“Appendix A”), Crypto Platforms permitted to trade stablecoins.
Crypto Platforms may permit their clients to trade stablecoins provided[7] at least the following are satisfied:
- The stablecoins are collateralized
- The reference asset is Canadian or US fiat currency
- There is a right of redemption on a one-to-one basis (minus fees)
- The stablecoin issuer maintains adequate reserves
- Reserves are held with a qualified custodian
- The stablecoin issuer publicly discloses material information[8]
- The stablecoin issuer files an undertaking with the CSA
- The stablecoin issuer submits to Canadian jurisdiction
- Clients receive disclosures[9] on stablecoin risks
- There are procedures to quickly halt trading if required[10]
Even if these conditions are met, the CSA warns the investing public to be cautious and not view it as an endorsement or approval of stablecoins. The CSA also emphasizes that the 21-333 Guidance is an interim approach only and may change.
Crypto Platforms that choose not to comply with the guidance must cease making the stablecoins available to clients by December 29, 2023 or April 30, 2024, depending on the type of stablecoin at issue[11].
[1] The CSA calls stablecoins “value referenced crypto-asset” to emphasize its view that stablecoins can lose their peg and experience value volatility. This post uses the colloquial term “stablecoin” to refer to the same.
[2] Staff Notice 21-332 Crypto Asset Trading Platforms: Pre-Registration Undertakings – Changes to Enhance Canadian Investor Protection dated February 22, 2023.
[3] The CSA uses the term CTPs, or crypto asset trading platforms.
[4] Pre-registration undertakings are promises by Crypto Platforms to abide by certain conditions while they pursue the registration process, barring which they would face enforcement action from a regulator.
[5] Recall that crypto contracts are defined by the regulators as a contract or instrument for the purchase, sale or delivery of a crypto asset where the underlying crypto asset is not immediately delivered to the user.
[6] Appendix A imposes obligations on stablecoin issuers as well as the Crypto Platforms.
[7] See 21-333 Guidance at Appendix A.
[8] Appendix A identifies the type of information that must be disclosed by the stablecoin issuer. This includes details about the aggregate value and number of outstanding units, any redemption restrictions, rights of the holder in case of insolvency or winding up, annual audited financial statements and other disclosures. See 21-333 Guidance at Appendix A.
[9] Known as “Crypto Asset Statements”, these are plain language descriptions sent to clients regarding each Crypto Asset available on the Crypto Platform.
[10] Appendix A of the 21-333 Guidance requires that the Crypto Platform have policies and procedures to halt trading of the stablecoin if the issuer or Crypto Platform does not meet its obligations.
[11] December 29, 2023 is the cease date for trades of non-collateralized stablecoins (i.e., algorithmic stablecoins) and collateralized stablecoins that do not satisfy the conditions in Appendix A (1) (i.e., conditions that apply solely to the Crypto Platform). April 30, 2024 is the cease date for trades for fiat-backed stablecoins that fail to satisfy all of the conditions in Appendix A (i.e., conditions applying to both the Crypto Platform and the stablecoin issuer). See 21-333 Guidance at 3-4.