Cryptocurrency and Canadian Securities Laws: Is Your Project a Security?
Written By: Hasman Dhaliwal
As the cryptocurrency market grows, so too does the need for regulation to protect investors and businesses and ensure the integrity of the market. In Canada, the regulatory framework for cryptocurrency is primarily determined by the Canadian Securities Administrators (CSA) and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
With respect to cryptocurrency businesses, one of the primary areas of concern in the regulation of cryptocurrency is the application of securities laws. According to the CSA, many digital assets, including some cryptocurrencies, may be considered securities under Canadian securities laws. This means that if a token distribution constitutes an investment contract, it would be considered a security and subject to securities laws.
In Canada, the test for determining whether something is a "security" is set out in the securities legislation of each province and territory. Generally speaking, the test is based on the concept of an "investment contract," which is defined as an agreement or scheme involving an investment of money with the expectation of profit, primarily from the efforts of others.
The CSA has provided guidance on how this test is applied to crypto assets, such as Initial Coin Offerings (ICOs) and ERC-20 tokens (which stands for Ethereum Request for Comments 20, a technical standard for a token on the Ethereum block chain). According to the CSA, an ICO or token may involve the issuance of a security if it meets the following criteria:
1. An investment of money: The project involves an investment of money, such as the purchase of tokens using fiat currency or other cryptocurrencies.
2. An expectation of profit: The purchaser of the tokens expects to make a profit, such as through appreciation in the value of the tokens or through access to goods or services that can be purchased using the tokens.
3. The efforts of others: The expectation of profit is primarily from the efforts of others, such as the efforts of the issuer to develop and promote the underlying platform or network.
The CSA has provided guidance regarding the application of securities laws to trading platforms that list crypto-assets and operate in or from Canada. This guidance outlines the regulatory requirements that apply to such platforms, including registration and marketplace operation requirements. Additionally, the CSA offers guidance on its expectations for governance, risk management, and compliance, with the aim of promoting transparency and investor protection.
The Canadian regulatory framework surrounding cryptocurrency and securities laws is evolving, and it remains important for businesses operating in this space to stay up to date of the latest developments and requirements.
About the writer:
Hasman Dhaliwal is a lawyer with SB LLP, South Edmonton’s premier law firm conveniently located at 209, 2920 Calgary Trail NW, Edmonton, AB, T6J 2G8.
Hasman, who works primarily as a commercial and corporate lawyer, advises cryptocurrency clients across Canada.
To learn more about Hasman, please visit our website: https://sb-llp.com/hasman-dhaliwal