Do Canadian securities laws apply to cryptocurrencies?
Cryptocurrencies straddle a grey area when it comes to the application of securities laws. Some cryptocurrencies are not considered a security under Canadian securities laws and are not subject to oversight and regulation by any securities regulatory authority in Canada. Canadian securities law may apply if a cryptocurrency forms the holding of an investment fund or forms the underlying interest of a futures contract or other derivative. Canadian Securities Administration Staff Notice 46-307 Cryptocurrency Offerings provides guidance as to when a cryptocurrency might be considered a security.
Considerations before investing in cryptocurrencies
Lack of regulation: Many cryptocurrencies are not securities or derivatives. As such, they are not subject to regulation under Canadian securities laws and may not be subject to regulation under any foreign laws.
In an unregulated environment, investor protections designed to provide appropriate disclosure and prevent misrepresentations, market manipulation and other harmful practices do not exist. In addition, unregulated cryptocurrency trading platforms and dealers are not subject to any oversight or rules concerning their conduct or the protection of client funds, assets and personal information. This lack of regulation increases the risk of you losing all of your investment.
Some of the risks arising from lack of regulation include the following:
- There is no government backing the cryptocurrency and often there is no inherent value to it.
- There is no insurance covering losses in the cryptocurrency.
- There may be little or no regulatory oversight, meaning that in respect of the people who created the cryptocurrency or operate the exchange on which it trades:
- there have been no criminal or other background checks performed
- they may have little or no financial resources
- they may have little or no experience
- there may have been no independent assessment of any of their claims or statements
- The anonymous nature in which cryptocurrency can be traded can attract investment by parties engaged in illegal businesses.
Volatility: Trading in many cryptocurrencies has been extremely volatile. Investors may lose all their investment.
The value of a cryptocurrency is often determined solely by the public’s interest in it and current levels of supply and demand. There is often no inherent value to it. Media coverage of a cryptocurrency can have a major impact on its value over a short period of time without any organization or mechanism mitigating volatility. The price of a cryptocurrency may be driven primarily or solely by speculative demand that may be unsustainable. The resulting volatility can result in dramatic fluctuations in the value of your investment. A collapse in demand for a cryptocurrency may result in you losing all or most of your investment.
Liquidity: It may not be easy or cost-effective to trade your cryptocurrency for another cryptocurrency or for money that is legal tender. There is limited liquidity in some cryptocurrencies and prices and bid-ask spreads (that is, the spread between the price sought by a seller and the price offered by a buyer) may vary widely across cryptocurrency trading platforms. Cryptocurrency trading platforms may limit or suspend trading, or there may be limitations or suspensions imposed on funding and withdrawals from accounts. These risks may limit your ability to liquidate your investment on a timely basis or without significant expense.
Loss through fraud, theft or hacking: Cryptocurrencies are intangible assets susceptible to loss through theft, hacking and the compromising or loss of digital wallets and keys. Since cryptocurrencies are typically sold online, their creation and sale may be by persons located in foreign jurisdictions making it difficult for law enforcement agencies to monitor or take action. Additionally, because trading in cryptocurrencies is largely anonymous, it can attract parties engaged in illegal businesses and with unscrupulous practices. These characteristics make cryptocurrencies attractive to those intending to perpetrate scams and fraud. These risks could result in the loss of your investment.
Starting a business involving cryptocurrencies
Whether you are looking to deal or advise in cryptocurrencies or start a cryptocurrency trading platform, please review the CSA Staff Notice 46-307 Cryptocurrency Offerings to understand the obligations and securities laws applicable to your business.