On October 12, 2022, Coinsquare Capital Markets Ltd. (CCML) was approved as a member of the Investment Industry Regulatory Organization of Canada (IIROC), the Canadian SRO for investment dealers. This is the first crypto-asset trading platform (CTP) to become a fully registered investment dealer and IIROC member firm enabling it to offer trading in Crypto Contracts to retail investors under the current joint regulatory initiative of the Canadian Securities Administrators (CSA) and IIROC to regulate CTPs under the existing securities regulatory framework.

Background

On March 29, 2021, the CSA and IIROC published Joint Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (Joint Staff Notice 21-329) requiring CTPs dealing in crypto assets that are securities (Security Tokens) or instruments or contracts involving crypto assets that the CSA view as securities or derivatives (Crypto Contracts) to obtain membership with IIROC and registration as investment dealers and, in some cases, as regulated marketplaces. Joint Staff Notice 21-329 provides for a two-year transition period during which CTPs may apply for registration as restricted dealers under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations while they work towards full investment dealer registration and IIROC membership. Since the publication of the Joint Staff Notice 21‑329, several CTPs have been granted restricted dealer registrations along with corollary exemptive relief.

In contrast to these other platforms, CCML applied directly for investment dealer registration and, under a framework of terms and conditions negotiated with IIROC and the CSA, it is now the first CTP to become an IIROC-registered investment dealer and marketplace member in Canada that offers trading in Crypto Contracts to retail investors.

Registration, Exemptions, Terms and Conditions

The approval of CCML's membership in IIROC is accompanied by exemptive relief from certain IIROC Rules that IIROC indicates are designed to accommodate the CTP’s business model while seeking to ensure investor protection and fair and efficient capital markets. In particular, the IIROC Board of Directors provided:

• relief from the requirement under IIROC Rule 4456 to maintain financial institution bond (FIB) insurance providing coverage for all types of losses specified in that Rule; and
• relief from the requirement under IIROC Rule 4342 that client assets must be held at an Acceptable Securities Location (as defined in IIROC Rule 4341). This relief is granted for an initial period of one year and may be extended at IIROC’s discretion. The exemption is subject to Tetra Trust Company (Tetra), one of CCML’s custodians, adhering to various operational commitments made to CCML.

The exemptive relief attempts to address some of the more contentious issues that CTPs are facing in fulfilling the securities regulatory requirements that are imposed on conventional registered dealers, namely, insurance and custody requirements. As a condition to obtaining the exemptive relief, CCML was required to provide representations and undertakings to the effect that CCML:

• must obtain an FIB insurance policy that includes an endorsement pertaining to losses of crypto assets once one becomes available to CCML;
• must obtain a Vault Risk Policy pertaining to crypto assets held at another of CCML’s custodians, Coinbase Custody Trust, LLC (“Coinbase”) with the terms and conditions of the policy acceptable to IIROC;
• must fund a CCML Trust Account, maintained at a Canadian bank, trust company or other acceptable institution^[i], dedicated to covering an amount greater than or equal to IIROC’s minimum FIB insurance coverage formula for client assets that are not held at CCML’s custodian, Coinbase;
• is prohibited from using client free credit cash balances to fund the CCML Trust Account; and
• must ensure and regularly confirm to IIROC that Coinbase and Tetra comply with various custodian-related requirements, including maintaining a net worth in excess of C$100 million, obtaining a SOC 2 Type 2 report annually, and providing annual audited financial statements, etc.

CCML also obtained exemptive relief (the “CSA Relief”) from the securities regulators in all provinces and territories from certain prospectus, trade reporting requirements and marketplace requirements applicable to alternative trading systems (ATS). The terms and conditions of the CSA Relief are similar to those imposed upon other CTPs in connection with their restricted dealer registrations.

CCML’s IIROC membership and accompanying exemptions were granted shortly after the CSA announced that CTPs that continue to operate in Canada while they take steps to comply with applicable securities legislation as outlined in Joint Staff Notice 21-329, are now expected to provide a pre-registration undertaking to their principal regulators to continue operations while their applications are underway. CCML filed the pre-registration undertaking on August 10, 2022. The undertaking contained representations similar to the terms and conditions now embedded in the CSA Relief.

To date, only one other CTP, Foris Dax, Inc. (operating as Crypto.com) has filed a pre-registration undertaking.

[i] Acceptable institution is defined in IIROC Form 1.