The Canadian Securities Administrators (CSA) has issued a statement outlining regulatory concerns regarding Initial Coin Offerings (ICOs) that may fall under securities laws. The CSA, an umbrella organization comprised of Canada’s thirteen key provincial financial regulators, has expressed its belief that many tokens distributed via ICOs fall under the legal classification of securities.
The Canadian Financial Regulator Believes Many ICOs Should Be Subject to Securities Laws
The Canadian Securities Administrators has issued a statement outlining the regulator’s belief that many ICO token sales may fall under the legal classification of securities. As such, certain ICOs will be required to adhere to Canadian securities laws, depending upon the specificities of the token sale.
The CSA states that “cryptocurrency offerings can provide new opportunities for businesses to raise capital and for investors to access a broader range of investments. However, they can also raise investor protection concerns, due to issues around volatility, transparency, valuation, custody and liquidity, as well as the use of unregulated cryptocurrency exchanges.” The CSA is particularly concerned that “investors may be harmed by unethical practices or illegal schemes, and may not understand the properties of the investment products that they are purchasing.”
The CSA states that “many of these cryptocurrency offerings involve sales of securities”, and that “securities laws in Canada will apply if the person or company selling the securities is conducting business from within Canada or if there are Canadian investors.” The CSA also notes that ICOs “may also be derivatives and subject to the derivatives laws adopted by the Canadian securities regulatory authorities, including trade reporting rules.”
The CSA’s Statements Are Intended to Give Advance Warning to ICOs So That They Can Seek Independent Advice and Ensure Full Regulatory Compliance
Echoing recent sentiments outlined by the United States Securities and Exchanges Commission, the CSA appears to be defining ICOs issuing securities as companies issuing tokens corresponding to the future development of a platform or utility, with ICOs that distribute tokens associated with the facilitation of an already developed utility likely being exempt from Canadian securities law. “If an individual purchases coins/tokens that allow him/her to play video games on a platform, it is possible that securities may not be involved. However, if an individual purchases coins/tokens whose value is tied to the future profits or success of a business, these will likely be considered securities.“
The Canadian regulator has emphasized its desire to balance the fostering innovation whilst providing consumer protections to cryptocurrency users. “We welcome digital innovation and we recognize that new fintech businesses may not fit neatly into the existing securities law framework”. The CSA also states that “investors may also have civil remedies against persons or companies that fail to comply with securities laws, including a right to withdraw from the transaction and/or damages for losses on the grounds that such transactions were conducted in breach of securities laws.”
The CSA’s statements are intended to give advance warning to ICOs so that they can seek independent advice and ensure full regulatory compliance. Although the CSA’s statements do not explicitly articulate the legal repercussions of ICOs that fail to comply with existing Canadian regulations, the document hints at the regulator’s intention to actively pursue projects that fail to adhere to securities legislation.
Do you think that the CSA’s concerns regarding ICO’s comprising the issuance of securities is indicative of a regulatory stance that will become the norm across western nations? Share your thoughts in the comments section below!
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