An article by ABC Assistant Director of Legal Matt Burgoyne with McLeod Law on Canadian consumer protection law and how it applies to cryptocurrency/blockchain businesses operating in Canada (and foreign businesses operating in Canada). Alberta consumer protection law applies to ‘internet sales contracts’, which includes a consumer transaction where (a) the consideration for the goods or services exceeds $50.00 and the contract is formed by “text-based internet communications” (i.e. any contract formed via the internet). I discuss the requirements pertaining to internet sales contracts, and general ‘unfair practices’ which Alberta proprietors (or foreign businesses selling to Albertans) are prohibited from engaging in.
Blockchain Legal Resources
Blockchain Business Operating in Canada
Proposed Framework for Crypto-Asset Trading Platforms
This is a link to the Canadian Securities Administrators Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms, and the comment letters received by various industry members on the proposed regulations. Essentially, the CSA is concerned that securities legislation may apply to crypto exchange platforms in Canada that offer trading of crypto assets that are commodities (like bitcoin), because the user’s contractual right to the crypto asset may constitute a security or a derivative (which can also be a security under Canadian law). The CSA is looking at situations where a user’s crypto stored on an crypto exchange platform wallet may be subject to the control and custody of the exchange, where the user’s crypto assets are pooled together with those of other users and with the assets of the exchange, and where the exchange holds or stores assets for its participants. In these cases, the way the crypto is stored could constitute a security (perhaps under the ‘evidence of an indebtedness’ prong of the definition of a ‘security’ under Alberta law) or a derivative. The risk the CSA is primarily concerned with is that a user’s crypto assets could be subject to the mismanagement, bankruptcy or insolvency of the exchange (as we saw with Quadriga CX). The CSA proposes a model framework going forward on the regulation of crypto exchange platforms, which includes the application of some very stringent ‘marketplace” and dealer registration requirements found in securities law, systems and business continuity planning, conflicts of interest policies, insurance requirements and clearing and settlement policies. There were quite a number of response letters which were sent to the CSA in response to this consultation paper, we will publish the second consultation paper which will no doubt be published for comment in the near future.
This is the first notice the Canadian Securities Administrators published on token offerings, published on August 24, 2017, entitled CSA Staff Notice 46-307 Cryptocurrency Offerings. The notice confirms that the Supreme Court of Canada’s decision in Pacific Coast Coin Exchange v. Ontario (Securities Commission),  2 S.C.R., and its adoption of the “Howey Test” analysis for investment contracts, applies to token sales in Canada. This notice sets out the Howey test and also provides a primer on the prospectus and registration requirements which are the cornerstones of Canadian securities law, and discusses some exemptions to those requirements.
This is the second notice which the Canadian Securities Administrator published on token offerings, published on June 11, 2018, entitled CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens. In this notice, the CSA notes that since the publication of the previous notice on token offerings, the CSA has met with numerous businesses wishing to complete token offerings and has found that most of the offerings have involved securities. This notice discusses the concept of a ‘utility token’ and confirms that the regulators will consider substance over form (just because it’s called a ‘utility token’ doesn’t mean it is). The fact that a token has utility is not, on its own, determinative as to whether an offering involves the distribution of a security. The notice goes on to cite a lengthy amount of examples of situations and their possible implication on one or more of the elements of an investment contract. The notice also touches on the two stage token distribution model or “SAFT” model. Unsurprisingly, the CSA considers that in some cases a token delivered at a second or later step is a security, despite the fact that the token may have some utility (because the token may still have security like attributes).
Token Offerings in Canada
This article was written by our Assistant Director if Legal Matt Burgoyne with McLeod Law on how Canadian regulators would view token offerings in Canada in light of some of the guidance recently published by the Canadian Securities Administrators. I discuss a 2016 Ontario Securities Commission enforcement proceeding entitled “Furtak” where the parties in the case were selling licenses to use relatively complex financial software agreements which granted users the right to use the financial software to trade futures contracts. The OSC held that they were trading in investment contracts. I draw parallels to crypto token/platform operators in Canada and how the definition of ‘investment contract’ in Canada is extremely broad.