Securities regulator publishes guidance on cryptocurrency offerings

Canadian securities regulators are providing additional clarity on what factors to consider when determining whether a particular cryptocurrency token offering contravenes securities laws.

In a staff notice published on Monday, the Canadian Securities Administrators – an organization comprised of provincial securities regulators – provides a number of examples of situations involving the offering of a new digital token or coin. For each example, it outlines what factors could come into play when determining whether the token is a security or not − factors such as whether there is a finite number of coins, whether their value is fixed and how the the tokens are promoted.

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Initial coin offerings, or ICOs, have become popular recently as a means of financing a new venture, but have also attracted the scrutiny of regulators who believe the issuers may be flouting securities laws.

In its notice, the CSA says it has spoken to numerous businesses involved in ICOs and has found that most of the proposed offerings had the characteristics of securities. That was often the case even with so-called utility tokens, which are typically purported to be exempt from securities rules because they serve some utility or purpose, such as allowing users to access a platform.

“In many of these cases, the offering will involve securities despite the fact that the tokens have one or more utility functions,” the notice reads.

Blair Wiley, a lawyer at Osler, Hoskin & Harcourt LLP who advises cryptocurrency companies, said the notice emphasizes a broad approach that looks at the purpose behind the ICO, rather than focusing on technicalities.

“[The CSA] is focusing on the economic realities of the offering and not trivial factors designed to dress up what is effectively a capital-raising activity,” Mr. Wiley said.

He added that some industry players who have been asking the CSA for more clarity will still be frustrated at the “considerable latitude” that regulators have given themselves to interpret whether a particular offering should be subject to securities laws.

“Some in the business community may have hoped for more definitive goalposts around what’s permitted or not,” Mr. Wiley said.

“I can appreciate that desire, but I can also appreciate the perspective of the regulators that they need to remain nimble and flexible and not draw a line in the sand.”

The news comes as regulators around the world grapple with how to balance the competing needs of protecting investors while allowing innovation to flourish in the emerging blockchain and cryptocurrency industry.

It also comes on the heels of proposed amendments to Canada’s anti-money laundering and terrorist financing rules.

The long-awaited regulations, published Saturday in the Canada Gazette, would bring all virtual currency dealers, including cryptocurrency exchanges, under the purview of the Financial Transactions and Reports Analysis Centre of Canada (Fintrac), requiring them to keep client records and report certain transactions to the anti-money laundering watchdog.

The proposed regulations are “fairly similar” to existing rules for money services businesses, said Charlene Cieslik, the chief anti-money laundering officer at Coinsquare, a virtual currency trading platform.

“It’s just that now there’s a separate section called virtual currencies, but it captures basically the same things as would be required of money services businesses,” she said.

Daniel Fuke, a lawyer at Fasken Martineau DuMoulin LLP who also works with cryptocurrency companies, urged regulators to provide more flexibility with regards to allowing dealers to participate in initial coin offerings.

“The next step that we need to see is flexibility in terms of registration issues, so that dealers can participate in these kinds of offerings,” Mr. Fuke said. “Because otherwise, you tell all these issuers that it’s a security but they have no way to raise money with them.”