Canada was one of the first countries in the world to establish a clear regulatory framework for digital assets, having regulated cryptocurrencies under securities laws since 2014. The stable, open minded and flexible approach to crypto regulation has made Canada a popular destination for crypto investment and innovation.
Canadian regulations consider cryptocurrencies securities based on a test that is substantially similar to the Howey Test. The test for determining whether an arrangement is an “investment contract” and a security is set out in Pacific Coast Coin Exchange v. Ontario Securities Commission. The regulators have emphasized that although a new technology is involved, and what is being sold is referred to as a coin or token, instead of a share, stock or equity, a coin or token may still be a “security” as defined in securities legislation in Canada.
For an investment contract to exist, all four elements of the test must be satisfied. In general, the test in Pacific Coast Coin Exchange v. Ontario Securities Commission holds that a transaction is an investment contract if it involves:
While traditional cryptocurrencies fit this definition, it is less clear with things like non-fungible tokens (NFTs), which leaves the door open to further clarification from regulators. These assets are still operating in a regulatory grey area by comparison to true cryptocurrencies.
The high-profile failure of FTX highlighted the urgent need for updated regulation. FTX further highlighted key risks for crypto exchanges, including transparency, liquidity, margin trading and segregation of accounts.
When it comes to crypto regulation, cryptocurrencies are considered securities in Canada, and because securities are regulated separately in each province, making quick changes to national regulations can be challenging. Many industry observers were therefore impressed that the national umbrella organization of securities regulators, Canadian Securities Administrators (CSA), engaged with regulators globally as early as 2018 to seek input on a variety of regulatory approaches that exist in this area. Less than months following the FTX collapse, the CSA refined its regulations for crypto asset trading platforms.
The enhanced regulations for crypto asset trading platforms offering services to Canadians include:
There are currently 11 crypto trading platforms registered to do business in Canada, with many more operating unregistered who satisfy eligibility criteria to provide a pre-registration undertaking and working with the CSA towards a full registration. All firms, regardless of their registration status, are required to adhere to the revised rules. If not, they must wind-up all Canadian accounts and block Canadian clients from using their services. In the short term, some exchanges have decided that they cannot operate within the revised rules and have opted to pull out of Canada altogether, including OKX which is currently the world’s second largest exchange by trading volume.
Even before the revised regulations were introduced, there were provisions in Canadian law designed to ensure that crypto trading platforms are operating legally. These include the requirement that all transactions of greater than $10,000 per day are tracked and submitted to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), as well as 100% KYC (“know your client”) compliance. This type of oversight is a prerequisite for most insurers to even consider writing a crypto-based risk. From an underwriting standpoint, additional regulation and transparency is almost always a good thing and might help soften the overall chilly market for crypto risks in Canada.
It remains to be seen whether the revised CSA rules bring stability to the Canadian crypto market and whether there is any long-term impact. Even with the current regulatory framework, crypto is some way off from becoming mainstream, and widespread adoption is pushed further down the road with every high-profile failure. We will continue to monitor insurance market appetite for crypto risks, and hope that additional regulation helps to reassure the insurance market and this will lead to more meaningful risk solutions for clients who are active in this space.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
