Wealthsimple Digital Assets Inc. Devient La Première Plateforme De Négociation De Cryptoactifs Inscrite Au Canada – Technology – Canada


Canada:

Wealthsimple Digital Assets Inc. Devient La Première Plateforme De Négociation De Cryptoactifs Inscrite Au Canada

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Les Autorités canadiennes en valeurs
mobilières (ACVM) ont accordé une dispense à
Wealthsimple, ce qui en fait la première plateforme de
négociation de cryptoactifs autorisée au Canada dans
le cadre du bac à sable réglementaire lancé
par les ACVM.

Une traduction de ce billet sera disponible
prochainement.

The Canadian Securities Administrators (CSA) has granted
exemptive relief to Wealthsimple making it Canada’s first
crypto asset platform authorized through the CSA Regulatory Sandbox
initiative.

  • The CSA granted Wealthsimple Digital
    Assets Inc. time-limited relief from certain requirements to allow
    it to trade crypto assets and operate a platform that facilitates
    the buying, selling and holding of crypto assets.
  • Trading will be restricted to Bitcoin
    and Ether and is limited to a maximum of $30,000 per client over a
    12-month period.
  • Gemini Trust Company, LLC will serve
    as a licensed third-party custodian while multiple crypto asset
    trading firms will act as liquidity providers for the purchase and
    sale of crypto assets.

On August 7, 2020, the CSA granted time-limited relief from
certain registrant obligations (including suitability relief and
relief from the requirement to deliver audited financial
statements), the prospectus requirement and derivatives trade data
reporting requirements to allow Wealthsimple Digital Assets Inc.
(WDA) to trade crypto assets and operate a platform that
facilitates the buying, selling and holding of crypto assets. In the Matter of Wealthsimple Digital Assets
Inc.
is the first decision authorizing the operation of a
crypto trading platform in Canada under the CSA Sandbox initiative
and it applies in all Canadian jurisdictions other than Quebec
which has issued separate exemptive relief. While the CSA has noted
that the decision should not be viewed as precedent-setting, it
nevertheless represents an important development for the Canadian
fintech community.

Background

Wealthsimple is an established Canadian online investment
management service that, through separate affiliates, is registered
in Canada as a portfolio manager and a full-service investment
dealer. WDA, a wholly owned subsidiary of Wealthsimple, made an
application to the CSA Regulatory Sandbox seeking exemptive relief
from certain prospectus requirements and relief from delivery of
financial statements and derivatives trade data requirements.

The relief was granted on a time-limited basis subject to
certain conditions set out in the decision, including:

  • client investment limits;
  • account appropriateness; and
  • reporting requirements.

The decision requires WDA to be registered as a restricted
dealer, while it transitions the digital asset platform to its
fully registered investment dealer firm affiliate, and to commence
operations in a beta testing environment. The decision also allows
WDA to operate, on an interim basis, a “closed loop”
system platform to enable WDA’s clients to enter into
“crypto rights contracts” and to buy, sell, and hold
crypto asset with WDA.

Importantly, the regulators have noted that the decision should
not be understood to constitute a precedent but is “tailored
for the specific facts and circumstances” of the application.
The relief expires on the earlier of 24 months from the date of the
decision or the date WDA transitions the platform to its IIROC
registered affiliate.

The Decision

The decision sets out certain conditions with respect to trading
restrictions, third-party verification, platform operation and
appropriateness and reporting requirements.

Trading Restrictions

  • Clients trading on WDA’s platform
    enter into “crypto right contracts” and are responsible
    for initiating transactions that are then carried out by WDA
    through multiple trading firms (Liquidity Providers).
  • Trading is restricted to Bitcoin and
    Ether using only crypto assets or Canadian dollars.
  • Custody of the crypto assets is
    maintained by a digital asset exchange third-party custodian
    – Gemini Trust Company, LLC (Gemini). Gemini, a New York
    trust company regulated by the New York State Department of
    Financial Services is a “qualified custodian” for
    purposes of Canadian securities law.
  • Importantly, WDA will not operate
    either as a “marketplace” or a “clearing
    agency” under Canadian securities law. Expanding on previous
    CSA guidance, the CSA noted that WDA’s custody model and
    trading of “crypto rights contracts” constituted trading
    of securities and/or derivatives. Clients’ control and
    possession over the crypto assets remains an important factor in
    determining the application of securities law.

Third-Party Verification

  • The Liquidity Providers, through
    which WDA carries out the buying and selling of crypto assets, are
    to be verified by WDA to ensure they are appropriately licensed or
    registered to trade crypto assets in their home jurisdictions and
    that they are not in default of securities legislation in the
    relevant Canadian jurisdiction. While the current state of the law
    on the trading of crypto assets in Canada may make it challenging
    to conduct the assessment, the decision signals some degree of
    acceptance of different business models and established foreign
    crypto trading platforms.
  • WDA is also expected to verify that
    each Liquidity Provider has “effective policies and procedures
    to address concerns relating to fair price, fraud and market
    manipulation”.
  • WDA conducted due diligence on
    Gemini, including a review of its SOC 2 Type examination reports
    and did not identify “any material concerns”. If a change
    of custodian were to take place, WDA must provide securities
    regulators with at least 10 days prior written notice.

Platform Operations

  • WDA will operate its platform as a
    closed-loop system. Clients may not transfer into their account any
    crypto assets purchased outside of the platform or withdraw from
    their account any crypto assets bought through WDA’s platform.
    While a closed-loop system will reduce the likelihood of
    “fraud, money laundering, or client error in sending or
    receiving crypto assets to incorrect wallet addresses”, it may
    expose clients to “insolvency risk (credit risk), fraud risk
    or proficiency risk” on WDA’s part.
  • In addition to licensing and
    regulatory verification, WDA must also evaluate the pricing
    provided by Liquidity Providers on an ongoing basis against global
    benchmarks to ensure clients are provided with fair and reasonable
    pricing.
  • WDA will be compensated by the spread
    on trades but will not apply any account opening or maintenance
    fees, commissions or other charges of any kind.
  • Finally, WDA will not hold crypto
    assets on a proprietary basis and will not take any long or short
    positions in crypto assets with its clients or any other
    party.

Appropriateness and Reporting

  • WDA is expected to provide an
    approved form of risk disclosure statement and make educational
    materials available to clients on an ongoing basis.
  • WDA will not provide recommendations
    or perform trade-by-trade suitability determinations for clients
    but will rather perform account and product assessments.
  • Compliance with know your client
    requirements and, following recent amendments to Canadian federal anti-money
    laundering legislation
    involving virtual currency, Canadian
    federal anti-money laundering legislation is expected.
  • Pre-account opening and product
    assessments of whether it would be “appropriate” for a
    prospective client to trade on the platform, on the basis of the
    client’s experience in investing in crypto assets, using online
    order-execution brokerage facilities and risk tolerance are
    expected to be carried out by WDA.
  • WDA is also required to monitor
    client activity on an ongoing basis to deter behaviours that
    indicate that trading is not appropriate for the client or that
    additional education is required.
  • Annual unaudited financial statements
    must be filed by WDA. While the CSA does not provide a timeline for
    delivery of the audited financial statements, WDA expects to file
    audited final statements for the 2021 financial year end. WDA must
    also deliver to regulators anonymized account-level data as well as
    aggregate activity data.

Takeaways

Although the decision in In the Matter of Wealthsimple
Digital Assets Inc.
advises that it should not treated as a
precedent, it represents an important milestone for the Canadian
fintech community by expanding on earlier guidance set out in CSA
staff notices and the CSA and IIROC Consultation Paper 21-402 – Proposed
Framework for Crypto-Asset Trading Platforms
.

The decision highlights the limitations of the current Canadian
regulatory environment but offers a bridge to emerging custodial
and trading solutions for crypto asset trading that are rapidly
developing outside of Canada. The WDA exemptive relief provides
regulators the ability to monitor and analyze anonymized trade data
to build out data-driven regulatory options and, as they state,
“advance the development of the Canadian regulatory framework
for trading crypto assets”.

The decision also highlights the importance of risk management.
The conditions upon which relief was granted place a strong
emphasis on internal controls to ensure fraud, money laundering,
and insolvency risks are mitigated. For platforms, monitoring of
the practices of counterparties and service providers, such as
custodians and crypto trading firms, are key to ensuring investor
protection and fair and reasonable pricing.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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