Canadian authorities have issued new guidance to determine which digital currency trading platforms fall under derivatives law.

The Canadian Securities Administration (CSA) explained new provisions in the “Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets” published on Jan. 16.

In general, the agency drew a line between trading platforms that make an immediate delivery of a crypto assets to its users, and those that hold the transaction of crypto assets until the user makes a later request.

To what exchanges do securities laws apply?

Following an analysis of trading techniques on different platforms, the CSA concluded that some of them only provide their users with a contractual right or claim to a crypto asset, and do not immediately transfer it to a user. Such crypto trading platforms are subject to securities legislation, and thus fall under derivatives laws. The guidance detailed:

“Potentially, there will be ongoing reliance and dependence of the user on the Platform until the transfer to a user-controlled wallet is made. 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.”

The CSA will not apply securities laws to crypto exchanges on which the underlying crypto asset is not a security or derivative, and crypto assets are delivered to a user immediately.

Canada’s crackdown on crypto

Previously, state and provincial securities regulators in the United States and Canada launched probes into potentially fraudulent crypto investment programs as part of the North American Securities Administrators Association’s (NASAA) “Operation Cryptosweep.” The initiative resulted in hundreds of investigations of initial coin offerings and crypto-related investment products.

In late December 2019, the NASAA said that cryptocurrency investment is among the top five investor threats for 2020. Commenting on the matter, the NASAA’s president Christopher Gerold said: