- Canada is a regulated jurisdiction, and that’s a reality that needs to be considered, but it’s quite advanced from a technology and infrastructure perspective and well positioned to be a base for almost any type of blockchain project.
- Canadian regulators have a relatively open-door policy and are easily accessible. The ability to quickly and easily gain access to regulators is what sets Canada apart from many other jurisdictions.
- The “Proposed Framework for Crypto-Asset Trading Platforms” acknowledges that certain cryptoassets, that function as a form of payment or as a means of exchange, are not currently considered to be securities or derivatives. However, the paper suggested securities laws may apply to the platforms that trade in these types of cryptoassets, because the investor’s contractual rights to the cryptoasset may itself constitute either a security or a derivative.
- Various constituents in the fintech community need to engage with the regulators by providing comments on this paper. The most important piece of feedback that anyone, and everyone, should give to the regulators, is the need to maintain a flexible approach – to build a set of rules and regulations that work for this new asset class and its underlying technology, rather than trying to put a square peg in a round hole.
Please tell us more about yourselves and your firm.
Jason Brooks: Borden Ladner Gervais, otherwise known as BLG, is Canada’s largest law firm. We have more than 700 lawyers and other professionals in our offices in the major cities in Canada. Carol and I are partners in our securities and capital markets group, and co-leaders of the firm’s cryptocurrency and blockchain group.
I am also the Vancouver regional leader of our investment management group and Carol is the national leader of our derivatives group. Our cryptocurrency and blockchain group gathers lawyers from across the country whose practices are based in a variety of legal areas, including corporate finance, investment management, derivatives, registration, regulatory compliance, anti-money laundering, intellectual property, and technology.
We help companies with coin or token offerings, launch investment funds focused on digital assets and advise custodians, dealers, clearing systems, exchanges and market places, and other service providers, on the legal and regulatory issues they face in connection with the trading of digital assets. We also work with our clients and their service providers to address the legal issues surrounding the use of blockchain technology, such as information management, regulatory compliance, intellectual property rights management, and the development of smart contracts solutions.
How did BLG first get involved with blockchain projects?
Jason Brooks: Initially, our involvement was focused on providing advice in relation to various types of token offerings, principally to Canadian-based firms conducting offerings outside of Canada, and on the private placement in Canada of token offerings conducted internationally. Our first significant Canadian-based project was our role as counsel to First Block Capital, in connection with their registration as an investment fund manager and exempt market dealer – which were the first registrations in Canada of a fund manager offering products focused solely on cryptocurrency investments. In addition, we also advised First Block Capital on the launch of the first investment fund in Canada that invested in Bitcoin. Those projects were the ones that really got us to the front and centre of the industry.
A whole industry has come to life in relation to blockchain. Is Canada active in all the fields associated with it, such as STOs, IEOs, crypto exchanges, crypto investment funds, etc.?
Jason Brooks: Canada has definitely been active in many of those areas since the first fund offering in 2017. We now have a number of fund managers with funds focused on investments in cryptoassets. To date, they have been limited to funds offered on a private placement basis, but the regulatory appetite for a retail public offering of a crypto fund is currently being tested and the industry is certainly watching that very carefully. In addition, there are a group of crypto exchanges based in Canada, currently operating with very minimal local regulation.
I think that the market for raising funds through ICOs and STOs in Canada has been a bit more limited than that in other areas of the world, given the general approach to treat digital assets as securities here, but it’s definitely been another area of significant activity.
What is the key information anyone seeking to raise money via token sales in Canada should seek?
Carol Derk: Ultimately, and with limited exceptions, token offerings in Canada are treated as security offerings. So anyone who wants to do a token sale in Canada needs to understand who their target market is, how the tokens can be sold, and then the steps that need to be taken to ensure that any resales that occur after the offering are done in compliance with securities legislation.
What would be the kind of blockchain projects best suited for Canada?
Jason Brooks: I don’t really think there are any limits on that front. Obviously, Canada is a regulated jurisdiction and that’s a reality that needs to be considered, but it’s quite advanced from a technology and infrastructure perspective, and we think it’s well positioned to be a base for almost any type of blockchain project.
Is proximity to the US an advantage or an inconvenience for Canada when trying to develop as a crypto-friendly jurisdiction?
Carol Derk: I’m really not sure that the US’s proximity is relevant as to why Canada is becoming one of the leading crypto jurisdictions. I think the key is that our regulators have a relatively open-door policy and are easily accessible. In addition, our securities regulatory authorities have regulatory sandboxes and launchpads, where people are able to come and discuss their ideas and understand the regulatory hurdles that they have to overcome. Our ability to quickly and easily gain access to regulators is what sets Canada apart from many other jurisdictions that are tackling the same issues.
Recently the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada released a consultation paper on cryptoassets. Can you give an overview of this paper?
Carol Derk: On March 14, the consultation paper called “21-402 Proposed Framework for Crypto- Asset Trading Platforms” was released. The purpose of this consultation paper is to seek feedback from the fintech community, and other stakeholders, on how securities law requirements should be tailored for cryptoasset trading platforms. The regulators then plan to use this feedback to establish a framework that provides regulatory clarity for these platforms, while still addressing investor risk and the need for market integrity.
As you can imagine, the paper actually raises more questions than it answers. It acknowledges that certain cryptoassets, that function as a form of payment or as a means of exchange, such as bitcoin, are not currently considered to be securities or derivatives – but rather more analogous to commodities such as currencies and precious metals. However, the paper suggests that securities laws may still apply to the platforms that trade in these types of cryptoassets, because the investor’s contractual rights to the cryptoasset may itself constitute either a security or a derivative. The paper raises a number of questions that regulators are considering in trying to determine if the platforms that trade these cryptoassets are involved in the trading of securities or derivatives.
The regulators are also clearly concerned about investor risk and you get the clear impression when you read the paper that any regulatory requirements that are eventually imposed on these trading platforms will be based on addressing investor risks, both real and perceived. It’s important to know that the reach of the proposed framework will be very broad, as it will apply both to platforms that operate in Canada, as well as to those that have Canadian participants. The regulators have opened the door to the potential for exemptive relief for platforms that are located outside of Canada, but only if the platform is regulated by a foreign regulator in a manner that is similar to what will be required in Canada.
The proposed framework will look to build on the existing regulatory requirements for marketplaces and securities dealers. Some of the key issues that the platforms will need to address, some of which are particularly problematic in the world of cryptoassets, include things like custody and verification of assets. The paper specifically refers to having to satisfy existing custody requirements – as well as other, yet to be determined, custody standards.
They’re looking to address price determination and fairness, the surveillance of trading activity, and so, while the regulators are working on how to conduct appropriate market surveillance, they’re proposing that, at least initially, these platforms should not permit dark trading or short selling activities and that they should not extend margin to their participants.
They are also looking at systems and business continuity planning and whether they should require independent system reviews. Conflict of interest is a big issue, which it seems that the regulators proposed to address through disclosure and the possible application of the market integrity rules. Insurance is something else that the regulators describe, which is considered to be particularly important for those platforms that hold investor assets in their wallets.
Finally, clearing and settlement are also mentioned, as well as the degree to which the regulatory requirements that apply to a clearing agency should also apply to these platforms. The comments on the consultation paper are requested by May 15 and we expect that this will be a slow process. Like other regulated jurisdictions, Canadian regulators are going to be hesitant to be an early mover in the crypto space when it comes to regulating these platforms.
If you were providing feedback to the regulator, what would it be?
Carol Derk: I actually think that it’s a bit difficult for a lawyer involved in this space to provide a lot of constructive feedback or analysis to the regulators, given the format of this consultation paper, because many of the questions that they are asking are operational in nature. However, I think there are still some comments that we can make. For example, I think the regulators are going down a fairly slippery slope by suggesting that trading of cryptoassets that are widely accepted as commodities, such as bitcoin, could still involve a security or a derivative. If they eventually determine that the trading relationship itself creates a contract, that is a derivative or a security, in the context of bitcoin and other cryptoassets, then I question how they will be able to distinguish these assets from other commodities, such as cash and gold, the trading of which is treated differently.
I really think that the various constituents in the fintech community need to engage with the regulators by providing comments on this paper. For example, the insurance industry is best suited to address the questions that the regulators have regarding the provision of insurance for investor assets. The existing exchanges and other marketplaces are really uniquely positioned to provide feedback and input on the application of their current regulatory requirements to a cryptoasset platform.
Likely the most important piece of feedback that anyone, and everyone, should give to the regulators, is the need to maintain a flexible approach – to build a set of rules and regulations that work for this new asset class, and its underlying technology, rather than trying to put a square peg in a round hole, so to speak.
You have been very active in assisting traditional investment funds. How can blockchain reshape this industry and what are the legal issues that need to be addressed to make that happen?
Jason Brooks: We are at the very early stages of the use of blockchain in the investment funds industry and the financial services industry generally. While we’re seeing potential changes related to the use of blockchain, I don’t think we’re really expecting to see any significant changes in the short term. The value remains placed on the trusted intermediaries that are, and for many years have been, part of the system here, and we don’t think there’s going to be a significant change in the near future. But obviously, there’s plenty of potential for that to happen to down the road
As lawyers, what opportunities do you see with regards to wider blockchain adoption and growing popularity of cryptoassets?
Jason Brooks: All businesses, market participants, asset managers, trading platforms and investors need to understand the rapidly evolving area of digital assets – including cryptocurrencies and blockchain technology. Previously largely unregulated, the growing interest in this asset class and the use of peer to peer networks is resulting in a significant increase in scrutiny by regulators globally.
BLG has been at the forefront of the trends and developments in the cryptocurrency space, having worked with regulators on novel issues and the evolving regulatory framework. I think we have the unique ability to help clients who are involved in this industry, to navigate the known and unknown regulatory issues, and to launch products that address both the regulatory and investor concerns. So, we think there’s a great deal of opportunity for lawyers generally and BLG in particular.