Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
Regulatory Updates for Crypto Asset Trading Platforms
CTP Regulatory Update | Sep 9, 2024
Insights from the OSC Registrant Report 2023-24 for Crypto Asset Trading Platforms (CTPs)
As noted in OSC Staff Notice 33-756 (published July 26, 2024) and new guidelines from the Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO), Crypto Asset Trading Platforms (CTPs) are subject to tightening restrictions. The fundamental compliance standards for CTPs are outlined in the 2023–24 OSC report, however to maintain long term compliance its important for CTPs to meet the regulatory expectations for platforms registered as Investment Dealers and to pursue CIRO membership. McCarthy has written a very helpful summary of the staff notice to draw from.
1. Registration and Compliance Obligations
On August 6, 2024, the CSA announced that they intend to no longer offer the time-limited Restricted Dealer registration for CTPs (to be discontinued). Platforms that have not already registered or entered into a pre-registration undertaking (PRU) must now apply for Investment Dealer registration and CIRO membership. Current Restricted Dealers or PRU-holders must diligently work towards full Investment Dealer registration within a two-year window. Tip: Regular internal audits are advised to ensure that compliance frameworks are documented and in line with regulations.
2. Asset Custody and Delivery Requirements
The report emphasizes the importance of immediate asset delivery to clients to avoid triggering regulatory infractions. The OSC describes rapid delivery of cryptocurrency assets as a platform giving the user complete ownership, control, and possession without requiring them to rely on the platform or any of its affiliates going forward. Platforms that provide wallet features or payment services that exchange cryptocurrency for fiat money may not adhere to this requirement if they maintain control over users or put them at unnecessary danger. While determining whether a transaction complies with the immediate delivery criterion, variables like asset control and time are critical to manage.
See: Resurgence of Cryptoassets in Canada’s Investment Landscape
Tip: Develop an effective asset transfer procedure immediately, and notify users of the status of their assets.
3. Client-Focused Reforms and Marketing Compliance
CTPs must adhere to Client-Focused Reforms (CFRs), which include Know Your Client (KYC) and Know Your Product (KYP) requirements. The OSC expressed concerns about CTPs using the OSC's logo improperly, making deceptive marketing claims, and running 'gambling style' incentives that promote quick trading. These actions could lead to further responsibilities including suitability evaluations. The OSC urges CTPs to avoid utilizing regulator logos and to make sure all marketing are truthful and well supported. CTPs should also stay away from promotions that encourage excessive trading and obtain permission before utilizing the identities of other registrants in marketing materials. Tip: Review all client processes and marketing efforts to ensure they meet the latest regulatory standards.
4. Conflict of Interest Management
The OSC found many instances in which Crypto Asset Trading Platforms (CTPs) failed to properly identify, disclose, and manage material conflicts of interest, including partnerships with crypto issuers, staff trading activity, referral agreements, and crypto asset transaction fees. To avoid these risks, the OSC suggests that CTPs adopt policies to resolve conflicts in the best interests of their clients, keep proper records, provide employee training, and ensure that conflicts are clearly and timely disclosed to clients.
See: OSC: 2023 Canadian Crypto Survey Insights
Tip: Update your conflict of interest policy regularly and ensure clear communication with clients regarding potential conflicts.
5. Cybersecurity and Business Continuity
Given the OSC's focus on cybersecurity, CTPs are required to ensure strong client data protection and business continuity strategies to manage any operational interruptions. Tip: To protect operations against unanticipated disruptions, prioritize cybersecurity measures and develop a thorough business continuity strategy.
Outlook
As detailed in the 77 page PDF OSC Staff Notice 33-756 and new guidelines from the CSA and CIRO, the regulatory landscape for CTPs is still changing quickly. In order to maintain compliance, platforms must switch to Investment Dealer registration and CIRO participation, as highlighted by the end of the Restricted Dealer regime. Crucial regulatory guidance on asset custody, marketing compliance, managing conflicts of interest, and cybersecurity must be addressed by CTPs to comply with regulations.
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