The proposed amendments tailor requirements for public investment funds investing in cryptoassets to "better protect investors and reduce risk." Requirements include cryptoasset investment restrictions and custodial obligations.

The amendments are the second phase of a project to implement a Canadian regulatory framework for public investment funds holding cryptoassets. In the project’s third phase, the CSA will consult publicly on a broader framework.

Deadline for comments is 17 April 2024.

The notice sets out interim terms and conditions that would apply to cryptoasset trading platforms and the issuers of fiat-backed cryptoassets if they wish to continue allowing Canadian clients to purchase or deposit these assets.

The interim terms and conditions are intended to address investor protection concerns presented by value-referenced cryptoassets and include, among other things, the following provisions:

• The issuer of the value-referenced cryptoasset must maintain an appropriate reserve of assets with a qualified custodian, held for the benefit of the cryptoasset holder.
• The issuer of the value-referenced cryptoasset and cryptoasset trading platforms that offer them must make certain information related to governance, operations and reserve of assets publicly available.

OFSI is proposing changes to its capital and liquidity approach to cryptoassets to "reflect an evolving risk environment and international developments."

Final versions of the guidelines will come into effect in fiscal Q1 2025. They will replace the interim advisory on the regulatory treatment of cryptoasset exposures published in August 2022. That advisory will be withdrawn on enactment of the new guidelines. 

The draft guidelines incorporate the Basel Committee on Banking Supervision (BCBS) standards for cryptoasset exposures released in December 2022. They have also been updated to reflect the Canadian context and the industry for which the guideline has been developed (i.e. banking or insurance).

OFSI said the new guidelines propose a simplified approach and a comprehensive option depending on the extent of an institution’s exposure to cryptoassets.

Both guidelines detail four classifications of cryptoassets and the capital treatment for each.

Deadline for comments is 20 September 2023.

The guidance provides an overview of public cryptoasset funds operating in Canada and describes related oversight initiatives by CSA members.

The notice also covers:

• Market characteristics of cryptoassets that could impact their viability as investments for public cryptoasset funds
• Expectations concerning custody of cryptoassets held on behalf of a fund
• Issues relating to yield-generating activities, like staking, by public cryptoasset funds
• Know-your-client, know-your product and suitability obligations with respect to public cryptoasset funds.

The initiatives are intended to, among other things, "optimize services to financial consumers, achieve a better understanding of the challenges and risks facing consumers, and step up oversight and supervision and the fight against emerging illegal practices. Special attention will be given to enhancing Quebeckers’ financial literacy in the context of digital transformation in the financial sector, increased consumer connectivity and steady growth in on-line fraud."

Enhanced pre-registration undertaking will be required, which CTPs must provide in order to continue operating in Canada while pursuing their applications for registration with Canadian securities regulators.

Unregistered CTPs that continue to operate while pursuing registration are expected to provide an enhanced pre-registration undertaking to their principal regulator within 30 days of publication of this notice.

These pre-registration undertakings will include "enhanced expectations regarding the custody and segregation of cryptoassets held on behalf of Canadian clients and a prohibition on offering margin, credit, or other forms of leverage to any Canadian client". They will also "prohibit CTPs from permitting clients to purchase or deposit value-referenced cryptoassets (stablecoins) and proprietary tokens without the prior written consent of the CSA."

If a CTP is unable or unwilling to provide an enhanced pre-registration undertaking, the CSA expects it will take "appropriate action to off-board existing Canadian users and impose restrictions to prevent Canadian users from accessing its products or services."

On 15 August 15 2022, the CSA announced that it expected unregistered crypto trading platforms operating in Canada to do a pre-registration undertaking (PRU), while their application was processed.

In the latest update, the CSA said: "If a platform currently subject to securities legislation in Canada does not deliver a PRU to its principal regulator or cease operating, the CSA will consider all applicable regulatory options to bring the platform into compliance with securities law, including enforcement action." 

CSA members will shortly communicate to platforms a deadline by which PRUs must be delivered. Platforms located outside of Canada that are accessible by Canadians are regarded as operating in Canada for the purposes of securities regulation.

"Crypto trading platforms giving these undertakings agree to comply with expanded terms and conditions that will include, among other things, requirements to hold Canadian clients’ assets with an appropriate custodian and segregate these assets from the platform’s proprietary business, as well as a prohibition on offering margin or leverage for any Canadian client," said the CSA..

"Custodians will generally be considered qualified if they are regulated by a financial regulator in Canada, the U.S., or a similar jurisdiction with a supervisory regime for conduct and financial regulation." 

CSA members will contact registered crypto trading platforms individually to discuss the application of the expanded terms and conditions to those firms.

The CSA added: "The CSA continues to monitor and assess the presence and role of stablecoins in Canadian capital markets. As a result of this ongoing work, the CSA is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives. Crypto trading platforms that are registered or that have entered into a pre-registration undertaking are reminded that they are prohibited from permitting Canadian clients to trade, or obtain exposure to, any cryptoasset that is itself a security and/or a derivative. Crypto trading platforms are expected to have established policies and procedures to determine whether each cryptoasset they provide exposure to is a security and/or derivative."