CSA Provide Further Guidance on the Regulation of Stablecoins

CSA Provide Further Guidance on the Regulation of Stablecoins

On October 5, 2023, the Canadian Securities Administrators (“CSA”) published CSA Staff Notice 21-333 Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (the “Staff Notice”). The Staff Notice provides further guidance on the CSA’s interim approach to the regulation of stablecoins in Canada (referred to as “Value-Referenced Crypto Assets” or “VRCAs” by the CSA), and builds on the previous guidance released by the CSA in CSA Staff Notice 21-332 Crypto Asset Trading Platforms: Pre-Registration Undertakings – Changes to Enhance Canadian Investor Protection (“SN 21-332”), published on February 22, 2023.

The CSA define a VRCA as a “crypto asset that is designed to maintain a stable value over time by referencing the value of a fiat currency or any other value or right, or combination thereof”. In SN 21-332, the CSA set out their expectation that crypto trading platforms (“CTPs”) should obtain the prior written consent from the CSA in order to facilitate the trading of VRCAs and that such consent is premised on the satisfaction of terms and conditions imposed on the CTP and the issuer of the VRCA. In the Staff Notice, the CSA sets out an interim regulatory framework imposing enhanced terms and conditions applicable to both CTPs seeking CSA consent to support VRCAs on their platforms and issuers of VRCAs.

Notably, this interim approach only applies to VRCAs “that seek to replicate the value of a single fiat currency where the issuer sets aside an adequate reserve of assets denominated in the fiat currency” (referred to as “Fiat-Backed Crypto Assets” or “FBCAs” by the CSA) and excludes VRCAs that reference assets other than fiat currency or use an algorithm to maintain their pegged value.

This bulletin summarizes the regulatory framework set out in the Staff Notice.

Interim Approach: Key Take-Aways

1. The regulatory framework introduced in the Staff Notice is temporary. The CSA intend to implement a longer-term framework applicable to VRCAs in the future.
2. Under the interim approach, the CSA will consent to a registered CTP, or a CTP that has filed a pre-registration undertaking (“PRU”), to continue to allow their clients to either buy or deposit FBCAs or to enter into crypto contracts to buy or deposit FBCAs, if the terms and conditions contained in Appendix A of the Staff Notice are satisfied (the “VRCA Terms and Conditions”).
3. Pursuant to the VRCA Terms and Conditions, CTPs may only facilitate the trading of a VRCA if the VRCA issuer has filed an undertaking with the applicable regulator or securities regulatory authority (discussed further below).
4. Significantly, the interim approach only applies to FBCAs that reference the Canadian dollar or U.S. dollar and that are fully backed by a reserve of assets in the same currency. Additionally, the interim approach excludes any new VRCA that a CTP may wish to offer after October 5, 2023.
5. If a CTP or VRCA issuer wishes to offer: (a) a VRCA that references a currency other than the Canadian dollar or U.S. dollar; or (b) a VRCA that is not an FBCA, the CSA have indicated that they are open to receiving alternative proposals and will consider submissions received in developing any future regulatory changes or interim policy statements regarding VRCAs.

Implementation of the VRCA Terms and Conditions

The Staff Notice outlines the following steps for registered CTPs and CTPs operating pursuant to a PRU to obtain consent to support VRCAs on their platforms:

• The CTP must contact its principal regulator as soon as possible to discuss the process for obtaining consent and implementing the VRCA Terms and Conditions.
• As of December 29, 2023, the CTP will be prohibited from allowing its clients to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, unless such VRCAs are FBCAs and satisfy the conditions set out in paragraph (1) Appendix A of the Staff Notice (as described in (1) below).
• As of April 30, 2024, the CTP will no longer allow their clients to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, unless the VRCA Terms and Conditions are satisfied.

If a CTP does not intend to complete the above steps, the CSA expect that the CTP will no longer allow clients to continue to buy or deposit VRCAs, or to enter into crypto contracts to buy or deposit VRCAs, by December 29, 2023.

VRCA issuers are expected to provide the undertaking to the CSA by December 1, 2023, to accommodate continued support of VRCAs by CTPs under the timeline described above.

VRCA Terms and Conditions

Below is a summary of the material VRCA Terms and Conditions:

(1)  Required due diligence for CTPs: The CTP is required to establish that the VRCA and its issuer meet certain conditions, including that:

1. the VRCA references the value of a single fiat currency, on a one-for-one basis,
2. the reference currency is the Canadian dollar or U.S. dollar,
3. the VRCA entitles the holder thereof to a right of redemption against the issuer or against the reserve of assets in certain circumstances,
4. the issuer of the VRCA maintains a reserve of assets that is in the reference fiat currency and is comprised of cash or certain other assets, including such other assets that the principal regulator and the applicable regulators or securities regulatory authorities have consented to in writing,
5. all of the assets that comprise the reserve of assets are (i) measured at fair value in accordance with Canadian GAAP for publicly accountable enterprises or U.S. GAAP at the end of each day, (ii) held with a “Qualified Custodian”[1] in an account clearly designated for the benefit of the VRCA holders (or in trust), and in such a manner as to protect ownership in the VRCA by the VRCA holders, including against the VRCA issuer’s creditors, and in particular in the event of insolvency of the issuer, and (iii) not encumbered or pledged as collateral, and
6. the fair value of the reserve of assets is at least equal to the aggregate nominal value of all outstanding units of the VRCA at least once each day.

(2) Disclosure obligations for VRCA issuers: CTPs may only list a VRCA if the issuer has made certain information publicly available. The required disclosure includes details regarding the VRCA and its reserve of assets, details regarding the individuals or companies involved in the issuance and management of the VRCA (including the issuer of the VRCA), details of the rights and entitlements of the holders of the VRCA, any fees charged by the issuer, assurance reports, and audited annual financial statements of the issuer that comply with the standards set out by the CSA.

(3) Enhanced disclosure in crypto asset statements: The VRCA Terms and Conditions expand the disclosure required in a CTP’s crypto asset statements[2] to address considerations specific to VRCAs.

(4) A warning to Canadians: If the CTP uses the term “stablecoin” or “stablecoins” in any message accessible by Canadians, the CTP is required to include a clarifying statement that “[a]lthough the term “stablecoin” is commonly used, there is no guarantee that the asset will maintain its value against its reference asset or that the reserve of assets, if there is one, will be adequate to satisfy all redemptions”.

(5) Undertaking filed by the VRCA issuer: CTPs may only list a VRCA if the issuer of such VRCA has filed an undertaking substantially in the form provided in the Staff Notice. The undertaking includes representations addressing the matters described in (1) above, the absence of certain enforcement actions taken against the issuer, and a representation regarding the sufficiency of the issuer’s policies, procedures, and controls. Pursuant to the undertaking, the VRCA issuer is required to provide the disclosure described in (2) above, update such disclosure such that it remains current and accurate, disclose on its website any event that has or is likely to have a significant effect on the value of the VRCA or on the reserve of assets, and inform its principal regulator in writing if any of the representations given are no longer true, or the issuer, an affiliate thereof, or control person of the issuer or affiliate, is subject to a bankruptcy, insolvency, winding up, receivership, or similar event or proceeding.

The Staff Notice contains important guidance applicable to both CTPs and issuers of VRCAs, and sets out strict timelines for compliance. As noted above, the CSA have made clear that the framework set out in the Staff Notice is intended to be an interim approach only. We will continue to keep industry participants apprised of further developments.

About McMillan Crypto

McMillan has a comprehensive understanding of blockchain, cryptocurrency, digital assets and other decentralized technologies. We use an integrative, pragmatic, and proactive approach when providing counsel in connection with an ever-changing regulatory landscape. Our cross-disciplinary team brings together specialists across many fields, including litigation, securities regulation, capital markets, investment funds and asset management, mergers and acquisitions, derivatives, technology, privacy and cybersecurity, intellectual property, consumer protection, anti-money laundering, financial services, tax, and bankruptcy and insolvency.

[1] As defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
[2] Under the current regulatory framework, registered CTPs and unregistered CTPs operating pursuant to a PRU are required to provide crypto asset statements to their clients that are plain language descriptions of each crypto asset made available through the CTP’s platform.

by Jennie Baek and Matthew DeAmorim

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2023