In depth
On 5 October 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 (SN 21-333) to provide further clarity and guidance to crypto asset trading platforms ("CTP") regarding its interim approach to the trading of stablecoins ("Stablecoins"), which are referred to by the CSA as "value-referenced crypto assets" (or VRCAs)1.
In February of this year, the CSA in CSA Staff Notice 21-332 - Crypto Asset Trading Platforms: Pre-Registration Undertakings - Changes to Enhance Canadian Investor Protection ("SN 21-332") expressed its view that Stablecoins may meet the definition of a "security" and/or "derivative" in several jurisdictions. SN 21-332 went on to note that, while CTPs are prohibited from allowing clients to enter into crypto contracts in respect of crypto assets that are securities and/or derivatives, the CSA contemplated that written consent by securities regulators may be provided for CTPs to allow their clients to continue trading certain Stablecoins, subject to terms and conditions imposed on the CTP and issuer of the crypto asset.
SN 21-333 clarifies the CSA's interim approach to Stablecoins, including by imposing updated terms and conditions for CTPs that offer Stablecoins, and requiring issuers of certain Stablecoins to provide undertakings in a form substantially acceptable to the CSA by 1 December 2023. Accordingly, if an issuer of a Stablecoin is interested in providing an undertaking to continue to be offered in the Canadian market, it should contact the CSA. At Baker & McKenzie LLP, we can facilitate that discussion.
Stablecoins (or Value-Referenced Crypto Assets)
Stablecoins or VRCAs (as referred to by the CSA) are defined in SN 21-332 as crypto assets that are 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. The CSA's definition of VRCA includes both Stablecoins 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") and those Stablecoins that are pegged to and backed by assets other than fiat currency or a basket of asset types.
As the CSA noted in SN 21-333, their broad definition of a Stablecoin encompasses not only those crypto assets that are commonly referred to as "stablecoins" (including Fiat-Backed Crypto Assets), but also other types of crypto assets such as "wrapped tokens"2, which include crypto assets created on a blockchain as a synthetic representation of a given token on another blockchain. The CSA notes that such other crypto assets may be collateralized by non-traditional assets (such as other crypto assets), that they may be used for different purposes, and that they can give rise to risks that are different than those that arise in relation to Fiat-Backed Crypto Assets.
Terms and conditions for trading of stablecoins
SN 21-333 outlines the updated terms and conditions for which the CSA would consent to a registered CTP, or a CTP that provided a pre-registration undertaking, to continue allowing their clients either to buy or deposit certain Stablecoins, or to enter into crypto contracts to buy or deposit certain Stablecoins. Note that these terms and conditions have been developed for Fiat-Backed Crypto Assets that reference the Canadian or United States Dollar and that are fully backed by a reserve of assets in the same currency, as opposed to other types of Stablecoins. In addition, the new terms and conditions include a requirement that the issuer of the Stablecoin must have filed an undertaking with the CSA pursuant to the form provided in its notice, and that the issuer of the Stablecoin must have also filed a submission to jurisdiction and appointment of agent for service.
The CSA reiterated that it will continue to monitor and assess the presence and role of Stablecoins in the Canadian market and will continue to work collaboratively with international organizations and standard-setting bodies, such as the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO).
Next steps
SN 21-333 clarifies the CSA's interim approach to the regulation of Stablecoins, specifically Fiat-Backed Crypto Assets, including by:
1. Requiring CTPs to no longer allow clients to buy or deposit Stablecoins, or enter into crypto contracts to buy or deposit Stablecoins, that are not Fiat-Backed Crypto Assets by 29 December 2023;
2. Requiring CTPs by 30 April 2024 to no longer allow clients to buy or deposit Fiat-Backed Crypto Assets, or to enter into crypto contracts to buy or deposit Fiat-Backed Crypto Assets, that do not comply with CSA's required terms and conditions;
3. Requiring issuers of Stablecoins (specifically, Fiat-Backed Crypto Assets) to file by 1 December 2023 an undertaking that is acceptable to the CSA that is substantially in the form provided in SN 21-333; and
4. Requiring issuers of Stablecoins to file a submission to jurisdiction and appointment of service in the form provided in SN 21-333.
Alternative regulatory approaches
The terms and conditions noted in SN 21-333 only apply to Fiat-Backed Crypto Assets that reference the Canadian or United States Dollar and that are fully backed by a reserve of assets in the same currency, as noted above. However, if a CTP or Stablecoin issuer wishes to offer a Stablecoin that references another currency and otherwise meets the substance of the terms and conditions of SN 21-333, the CSA is open to considering appropriate adjustments to elements of the terms and conditions and form of undertaking, such as the composition of the reserve assets or the applicable accounting principles or audit standards.
In addition, the CSA invites CTPs or Stablecoin issuers that wish to offer a Stablecoin that is not a Fiat-Backed Crypto Asset, such as an algorithmic instrument, to provide relevant data and analysis on the uses and risks, which should include sufficient details on the due diligence to ensure that the applicable risks related to the Stablecoin are effectively addressed, and that the CTP has sufficiently taken into account the interests of Canadian investors.
For more information on this new guidance, including getting in contact with a CSA member, please contact any member of the Baker & McKenzie LLP Blockchain Group to discuss next steps.
1 The CSA have indicated their preference to use the term "value-referenced crypto asset" or "VRCA" since the term "stablecoin", in their view, may be misleading in that these types of assets can experience volatility and there have been instances in the past where such assets did not maintain their “peg”. See SN 21-332, p. 10
2 In the IOSCO Decentralized Finance Report (March 2022), IOSCO highlighted that “wrapped tokens” are tokens that “are a subset of [crypto assets] created on a blockchain as a synthetic for a given token on another blockchain, thereby enabling the reference token to be used on a different blockchain. These tokens are often treated as if they are the equivalent of the original token, but they are technologically distinct and require either third-party custodians or the creation and operation of smart contracts on each blockchain.
