CSA Expands Requirements of Trading Platforms as Regulators Crack Down on Bad Eggs

While the implosion of FTX occurred weeks ago, a fresh wave of developments stemming from the incident have occurred in the last 24 hours.  These include the arrest and extradition of Sam Bankman-Fried, charges being laid by the Securities and Exchange Commission (SEC), and a fresh crackdown on bad actors within the sector by regulators like the Canadian Securities Administrators (CSA).  The following is a brief look at what the latter had to say in its most recent communication to the public regarding its toughening stance.

A Strengthened Approach

The new stance being taken by the CSA is directed primarily towards ‘crypto trading platforms', and does not just involve closer monitoring of the sector, but the implementation of various new requirements – each with the stated goal of protecting investors.

Registration Deadline

One example of this is a pending deadline for pre-registration undertaking (PRU) forms.  Until now, the Canadian Securities Administration (CSA) was trying to work harmoniously with the sector, by allowing for unregistered platforms to continue operating, providing registration was being pursued.  This pursuance was open-ended however, with many unregistered platforms still having yet to attempt becoming registered months later.  This grace period is now closing, with the CSA indicating a firm deadline will soon be shared.

While the OSC has been intentionally lax until now, in an effort to allow companies the time to become registered, the CSA is now at the point of bringing enforcement action against those which remain non-compliant.

“…the CSA will consider all applicable regulatory options to bring the platform into compliance with securities law, including enforcement action.”

The OSC also made it clear that as long as services are accessible to residents of Canada, these requirements apply to platforms located both within and outside of the nations border.

Expanded Terms and Conditions

Beyond registration requirements, the OSC is imposing the following terms and conditions which must be adhered to by trading platforms.

• Must hold Canadian clients' assets with a custodian regulated within North America or nations with similar oversight
• Must segregate client assets from platform's proprietary business
• Can no longer offer margin trading for Canadian clients
• Can no longer offer leverage for Canadian clients

Like its pending deadline on registrations, the CSA indicates that it will soon release further information regarding these expanded terms and conditions.

Stablecoins Not Allowed

While the CSA indicates that it is continuing to ‘monitor and assess' the role of stablecoins, it is clear in its current stance – stablecoins are most likely securities, and as such, they are prohibited from being offered to Canadian clients by crypto trading platforms.

More than just stablecoins, the CSA stressess that crypto trading platforms must not allow either direct or indirect exposure to securities of any kind, and must “…have established policies and procedures to determine whether each crypto asset they provide exposure to is a security and/or derivative.”

Continued Risks

While the steps described above each highlight a tightening grip on the sector by regulators, the CSA is quick to acknowledge that risks still exist.  As millions have been made aware after weathering recent events, these include, but are not limited to, the following.

• platform non-compliance
• industry interconnectedness
• insolvencies
• hacks
• price volatility
• uncertain value propositions

Keeping each of the above risks in mind, it is crucial that industry participants, new and old, employ safe habits.  This means doing due diligence on any company  or asset one as exposure to, and most importantly ensuring the safety of ones assets through use of non-custodial wallets for any assets not actively being used for trading.