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Canadian securities regulators have issued highly anticipated guidelines for cryptocurrency trading platforms to address the proliferation of unregistered platforms that are based in Canada or facilitate trades for Canadians.

The guidelines, published by the Canadian Securities Administrators (CSA), lay out in detail how existing securities legislation for dealers and issuers of traditional securities would apply to cryptocurrency trading platforms, depending on their exact function.

Broadly speaking, all platforms that facilitate trades in digital tokens or contracts involving crypto assets are now required to register as investment dealers and become members of the Investment Industry Regulatory Organization of Canada (IIROC); alternatively, they must apply for an interim registration until the activities of their business are clarified with regulators.

There are currently hundreds of companies offering crypto trading services in Canada, but only one – Wealthsimple Crypto – has voluntarily registered for regulation. Most of these businesses are only required to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), a government agency responsible for tracking and policing money laundering and terrorist financing.

“The guidance in our notice details steps platform operators need to take to comply with securities legislation as they prepare to fully integrate into the Canadian regulatory structure,” said Louis Morisset, CSA chair and chief executive officer of the Autorité des marchés financiers, Quebec’s securities regulator, in a statement.

The next step for these platforms, according to Mr. Morisset, is to contact their local securities regulator to figure out how to register and what regulatory requirements are applicable.

Regulators have long seen a need to regulate crypto exchanges and trading platforms, especially after the collapse of QuadrigaCX – the largest cryptocurrency exchange in Canada at the time – which resulted in tens of thousands of investors collectively losing $169-million through fraudulent trading.

But the design and mechanics of how crypto trading platforms operate have become increasingly complex and thus complicated to regulate, owing in part to the proliferation of digital tokens beyond just bitcoin and Ether, which often need their own unique platforms to trade on.

In tandem with the new guidelines, the Ontario Securities Commission issued a stern warning to crypto trading platforms that fail to bring their businesses “into compliance” by April 19, the deadline to contact the OSC about registering their activities. “Unregistered crypto asset trading platforms expose Ontario investors to significant risks, including potential loss, theft and misuse of their assets. The recent explosion of unregistered platforms has magnified these risks,” Grant Vingoe, chair and CEO of the OSC, said in a statement.

The new guidance provides clarification for Canadian exchanges such as Bitbuy and Coinsmart, as well as international crypto giants such as Coinbase and Binance – which facilitate trades for Canadians – as to who regulates them and how their businesses can be regulated within the current securities legislation framework.

For example, crypto trading platforms that hold their customers’ crypto assets, rather than immediately deliver those assets to customers’ wallets, will have to register as securities dealers with provincial authorities. Within two years, these platforms will have to become members of IIROC if they provide services to retail investors, which most of them do.

“In the past, even though these platforms facilitated trading for retail investors, there was no clear mechanism as to how IIROC would regulate them,” said Matthew Burgoyne, a partner at Calgary law firm McLeod Law LLP who deals heavily with the cryptocurrency and blockchain industries.

“So a client would call IIROC, and IIROC would say, ‘We aren’t quite ready yet to tell you what to do.’ So the platforms were kind of in limbo, through no fault of their own,” Mr. Burgoyne said.

But Lori Stein, a partner at Bay Street law firm Osler, Hoskin & Harcourt LLP, says she believes while the new rules offer much needed clarity, they add a significant amount of regulatory compliance requirements, as all crypto trading platforms have to register with the relevant authorities first, then apply for exemptive relief depending on their business models.

“It’s a catch-and-release system, and it will be costly and time-consuming for platforms to achieve regulatory compliance under this framework,” she said.

Mr. Burgoyne said the new guidelines from the OSC signal there is no longer a grace period when it comes to cracking down on unregulated crypto trading platforms. “They’ve made it crystal clear now, and you don’t want to be on the receiving end of enforcement. It adds cost and work to you, so your best option is to pro-actively reach out.”