Crypto Assets

Defining Crypto Assets

The regulatory framework regarding crypto assets and Crypto Asset Trading Platforms (CTP) is continually evolving. Crypto assets include cryptocurrencies, including stablecoins, (bitcoin is one example), non-fungible tokens (NFTs), and other tokens that are transacted directly on a blockchain.

Are Crypto Assets Securities or Derivatives?

Several factors to help determine whether securities legislation applies to entities that facilitate transactions relating to crypto assets, even when the assets are considered commodities, such as bitcoin. Key considerations include whether the token provides an option to acquire an asset in the future, or whether the transaction involves immediate delivery and settlement of the asset being purchased or sold (see CSA Staff Notice: 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets).

Securities legislation applies to a crypto asset, if:	Securities legislation does not apply to a crypto asset, if:
You receive common shares and things like voting rights and receive rights to future dividends You do not receive immediate delivery of a crypto asset but instead get a right relating to a crypto asset, including the right to receive delivery in the future	You are promised immediate delivery of the coin/asset, or you receive the coin/asset immediately, settling the transaction; and The coin/asset does not possess common attributes of a security or derivative, such as for example a partial ownership of a business enterprise

A key concept to understand is that even if a crypto asset is not a security or a derivative, securities legislation might still apply. This is because the activity relating to crypto assets might still involve securities or derivatives. A simple example is an exchange-traded fund (ETF) that uses money from its investors to buy bitcoin. While the bitcoin itself isn’t a security or derivative, the units of the ETF that investors buy and sell are securities.

Similarly, buying and trading on crypto trading platforms (CTPs) might still involve securities or derivatives even if users are only engaging in transactions relating to commodities like bitcoin. This is because many CTPs don’t actually trade the bitcoin or other crypto asset with their customers but rather provide rights relating to a crypto asset. Let’s take a customer’s purchase of bitcoin on this type of CTP as an example.

• In this bitcoin “buy” transaction, the CTP does not actually send the bitcoin to the customer (unless the customer requests delivery). Instead, the CTP keeps possession and control over the bitcoin. It might not even buy the bitcoin itself. Either way, it owes bitcoin to the customer in an amount equivalent to the “buy” transaction.
• When the customer decides to “sell” the bitcoin, the CTP credits the user the value of the bitcoin, not the bitcoin itself. It’s generally up to the CTP what to do with the actual bitcoin, and how to ensure it can continue to meet its obligations to its customers. If the CTP does a poor job of managing its crypto assets, it might not have bitcoins to deliver to customers or the money to pay customers the value of the bitcoin when the customer decides to sell.
• This CTP needs to comply with securities laws because the agreements it makes with customers to keep their bitcoin for them are considered securities or derivatives across Canada. CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets provides guidance as to whether securities laws apply to a CTP’s operations.

Stablecoins

‘Stablecoins’ are also referred to as “value-referenced crypto assets” or “VRCAs”, which are designed and promoted to maintain a stable value over time in relation to a reference asset. VRCAs may constitute securities and/or derivatives.

On February 22, 2023, the Canadian Securities Administrators indicated that it may allow, subject to terms and conditions, the continued trading of certain VRCAs that are referenced to the value of a single fiat currency (fiat-backed crypto assets). Provisions to address investor protections include having a reserve of assets with a qualified custodian, and public transparency of information related to the VRCA’s governance, operations and reserve of assets.

Crypto Asset Transactions in British Columbia

If the crypto assets or related instruments being sold are securities or derivatives, then securities laws in B.C. will apply if the person or company selling the securities is conducting business from within B.C. or if there are B.C. investors. See our guidance on the topic.

Buying and Trading Crypto

There are many ways people can purchase or trade crypto assets. Some of these methods may trigger B.C. securities laws, others may not.

Two popular methods of obtaining crypto assets that Securities Commissions are often asked about are crypto trading platforms and crypto ATMs (Automated Teller Machines).

A crypto ATM is a physical kiosk that facilitates a transaction between a crypto asset platform to convert fiat currency into cryptocurrency which is deposited into a digital wallet. If a crypto ATM immediately delivers a crypto asset that is a commodity to the owner’s crypto wallet, it would not be considered to be a security or derivative and therefore not subject to securities regulation. Some types of crypto assets, such as fiat-backed crypto assets, are themselves securities or derivatives and crypto ATM transactions using these assets are subject to securities legislation even if the crypto ATM immediately delivers these assets to the owner’s crypto wallet. Methods of delivering and trading crypto assets are constantly evolving, as are the types of crypto assets being made available to the public. Therefore, there could be additional circumstances that are subject to B.C. securities laws.

Cryptocurrencies are primarily traded through online trading platforms. Crypto trading platforms, often referred to as “crypto exchanges”, may trigger securities laws both by how they trade, and by what crypto assets the platform facilitates the trading of. (See the “Are Crypto Assets Securities or Derivatives?” section above.) Crypto trading platforms that facilitate trades of securities or derivatives in Canada are required to be authorized by a provincial or territorial securities regulator. Depending on the platform’s business model, it may require authorization as one or more of a dealer, marketplace or clearing agency.

Refer to the section on Crypto Trading Platforms on our Fintech Business Models page to learn more.

Crypto Asset Information for Investors

Crypto assets are considered high-risk because of their speculative nature. Learn more about investing in crypto assets.

Crypto Asset Fraud

Fraudsters run a variety of crypto asset-related scams (fake crypto exchange websites, illegal advisory services, social engineering, etc.) to convince investors to send them crypto assets (usually popular cryptocurrencies) or fiat currencies, which are stolen and never recovered.

To find out more about these schemes and how they work visit the Crypto Asset-related Scam page on our investor education website, InvestRight.org.