REGULATION
Crypto Market Abuse Regulations in
Canada
By
CSA and IIROC
(
Canadian Securities Administrators and Investment Industry Regulatory Organization of Canada
)
Canada’s regulators have been consistent in taking steps to mitigate the risk of financial crime and safeguard the integrity of the financial system with the growth of crypto. Canadian financial markets are regulated by 13 provincial and territorial securities regulators that are harmonized by the Canadian Securities Administrators (CSA), an umbrella organization that coordinates a country-wide approach to securities regulation. The Investment Industry Regulatory Organization of Canada (IIROC) – a self-regulatory organization that sets and enforces rules governing the conduct of trading activities in debt, equities, and now crypto markets – also plays an important role in protecting market integrity.
The CSA and IIROC have jointly acknowledged, and provincial regulators have confirmed through various settlement cases, that Crypto asset Trading Platforms (CTPs) fall under the purview of existing securities laws (See CSA Staff Notice 21-327 for more information on what constitutes a CTP). These regulations include general prohibitions against market manipulation, making misleading statements, and engaging in fraud, as well as obligations to register with a provincial regulator. Importantly, regulators acknowledge that emerging fintech businesses may not fit seamlessly into the current framework, specifically with regards to registration obligations. To address this, they have been collaborating closely with each CTP to determine the specific requirements that will apply to their operations, to ensure that appropriate regulatory oversight is maintained. It is therefore incumbent upon CTPs to engage with their principal provincial securities regulator to comply with their securities law obligations. If a CTP is not based in Canada but is serving the Canadian market, it must engage with the Canadian jurisdiction with which it has the most significant connection to obtain regulatory authorization to operate.
Overall, Canada’s proactive approach ensures that businesses operating in the crypto asset industry are held to the same high standards as other financial institutions. This helps contribute to a cohesive regulatory landscape that promotes market integrity and fosters trust and confidence in the industry.
In Canada, businesses that deal in Virtual Currency (defined below), whether operating within the country or offering services to Canadian customers, are required to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as a Money Services Business (MSB). This requirement was contemplated as early as 2014, when the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) was amended to include "dealers in virtual currency." As a result, virtual currency exchanges, brokerages, and automated teller machines that deal with virtual currency are subject to the same anti-money laundering (AML) and know-your-customer (KYC) regulations as traditional financial institutions.
Crypto trading platforms that operate in Canada are required to register with provincial or territorial securities regulators and abide by certain conditions to help protect investors. The registration regime is a cornerstone to securities law in Canada and seeks to promote confidence in capital markets by upholding standards of proficiency, solvency and integrity, among others. However, the requirements that will be applicable to a CTP depends on how it operates and whether it is classified as a Dealer or Marketplace.
The two most common characteristics of a CTP that suggest it would be a Dealer Platform are:
A CTP is a Marketplace Platform if it:
To foster innovation and provide flexibility, the CSA has implemented an interim approach whereby CTPs can obtain exemptive relief from certain obligations for a period of two years while seeking registration and membership with IIROC. The majority of Canadian CTPs, including Bitvo, Bitbuy, Coinberry, and Fidelity (full list available here) have been granted restricted dealer registrations with exemptive relief. Coinsquare, taking a different route, applied directly for investment dealer registration and, subject to certain terms and conditions set by IIROC and the CSA, and in October 2022 became the first CTP to become an IIROC-registered investment dealer and marketplace member in Canada.
As a registered MSB, virtual currency businesses are held to rigorous standards to combat money laundering and terrorist financing in Canada. These requirements are set forth in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and associated Regulations, which demand that MSBs take specific actions to fulfill their obligations. Notably, these same rules apply to traditional money-handling entities like foreign exchange businesses. These obligations include, but are not limited to, registration with FINTRAC, implementation of a comprehensive compliance program, conducting thorough know-your-client (KYC) procedures, fulfilling reporting and recordkeeping requirements, abiding by the travel rule, and adhering to ministerial directives. For more information on requirements, visit the Money services businesses page of FINTRAC’s website.
Crypto transaction monitoring software can address FINTRAC’s requirements by analyzing on-chain and off-chain data to mitigate your platform’s money laundering risks.
MSBs must verify the identity of persons and entities for certain activities and transactions, and carry out other customer due diligence activities such as confirming the accuracy of beneficial ownership information for entities. Activities that require identification verification include (without limitation): large transactions of $10,000 or more, transferring or exchanging virtual currency in an amount equal to $1000 or more, and suspicious transactions. As part of an MSB’s ongoing monitoring requirements for business relationships, client identification information must be kept up to date.
Crypto onboarding verification software can streamline retail and institutional customer onboarding, including KYC verification and customer & company due diligence.
Members of IIROC are subject to the Universal Market Integrity Rules (UMIR), which govern trading practices in Canada and are intended to promote fair, equitable, and efficient markets. These rules contain specific prohibitions on market abuse, front-running, insider trading and unacceptable trading practices among other things. However, CTPs are still working with IIROC to determine what best practices look like from a functional perspective.
The definitions used throughout this document are specific to Canada. Since the cryptocurrency industry is still developing, different jurisdictions may use different terms.
Crypto asset Trading Platforms (CTPs) are online applications or systems that bring together buyers and sellers of crypto assets to facilitate transactions or trades.
Virtual Currencies are: a) digital representations of value that can be used for payment or investment purposes, are not fiat currencies, and can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or b) private keys of a cryptographic system that enables persons or entities to have access to digital representations of value.
