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Many of the world’s 200 cryptocurrency exchanges need to become licensed as securities dealers to operate in Canada unless they change their business models, following new guidance issued by Canada’s securities commissions.

The Canadian Securities Administrators, the umbrella organization that represents the country’s provincial and territorial commissions, issued a long-awaited legal interpretation to the fledgling industry on Thursday, saying cryptocurrency exchanges that provide users with a “contractual right” to an underlying digital asset – rather than immediately delivering them crypto coins – will likely be subject to the country’s provincial securities laws.

The announcement will have a significant impact on Canada’s estimated 15 cryptocurrency exchanges, and is largely seen as the regulatory response to the collapse of QuadrigaCX, industry observers said Thursday. In 2018, the founder and chief executive officer of Quadriga, Gerald Cotton, died in India, leaving Quadriga’s 76,000 users without access to the exchange or the $214.6-million in cash and cryptocurrency held by the company.

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The guidance clears up long-standing questions about where cryptocurrency exchanges fit in Canada’s regulatory framework. Regulators have already ruled that digital currencies such as bitcoin and ethereum are considered commodities, but the exchanges where they are sold have been operating in a regulatory vacuum.

The CSA’s five-page notice clarified that, if an exchange retains “ownership, control and possession” of the digital assets it is making available for sale, it will be seen as selling securities. Only in cases where an exchange immediately transfers the digital asset to a user, and where the user is “free to use ... the crypto asset without further involvement” of the exchange, will the transaction not fall under securities laws, the note states,

Lori Stein, a Toronto lawyer who specializes in financial technology, called the guidance a “sweeping statement” because many digital currency exchanges maintain custody of their clients’ holdings and will have to address the new directive.

“[Regulators] sort of say it’s a derivative, it could be a security, and it’s subject to securities regulation,” Ms. Stein said. "So it’s a pretty sweeping statement.”

Ms. Stein said she will be advising clients that operate digital exchanges that they could face a securities enforcement action unless they take steps to register with the Investment Industry Regulatory Organization of Canada (IIROC), the self-regulating body that oversees securities dealers.

“The issue is that for many Canadian crypto platforms, registration as an IIROC member is not a viable option due to the cost and regulatory requirements,” she said.

Dean Skurka, vice-president of finance and compliance for Bitbuy, a Toronto-based digital exchange, said that the guidance will help bring legitimacy to the industry.

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“It’s encouraging that these rules are being fleshed out. It will likely mean that, at some point in the future, we’ll have to comply with securities regulation or adjust [our] business model.”

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