2017 has been an extraordinary year for cryptocurrencies.[1] The recent increase in the number of cryptocurrency offerings reflects a dramatic shift in investor-attitudes towards the crypto-economy. However, the increased popularity of initial coin offerings (ICO), initial token offerings (ITO) and cryptocurrency investment funds has triggered a wave of regulatory responses, from the USA to Singapore and to, most recently, Canada.[2]

On August 24, 2017, the Canadian Securities Administrators (CSA) announced that securities law requirements may now apply to cryptocurrency offerings (ICOs and ITOs) involving persons or companies conducting business from within Canada or with Canadian investors.[3]  According to CSA Staff Notice 46-307 – Cryptocurrency Offerings,[4] securities law will apply to cryptocurrency offerings when the cryptocurrencies can be properly categorized as securities.

To determine whether a cryptocurrency is properly classified as a security, the CSA will focus on the substance of a given transaction, considered in its totality, as opposed to its mere form.[5] Typically, cryptocurrencies that are offered through an exchange and traded, or that are subject to fluctuations in value and speculation by investors will have the character of securities. However, the concept of securities has an expanded meaning in the Canadian context.  For example, cryptocurrencies may also constitute securities if they are exchanged in the context of transactions or arrangements involving an investment contract.[6]  An investment contract exists when there is an investment of money in a common enterprise with the expectation to profit significantly from the efforts of others.[7]  In such a case, securities law will likely apply.

In the CSA’s view, every cryptocurrency offering is unique and must be assessed on a case-by case-basis. As an example, the CSA suggests that securities law would not necessarily apply where an individual simply purchases coins or tokens to “play video games on a platform” but would apply if, instead, the value of the coins or tokens “is tied to the future profits or success of a business”.[8]

Aside from dealing with ICOs and ITOs, cryptocurrency investment funds, which allow investors to pool their capital and allocate their individual investments between various cryptocurrencies, will also be subject to various securities laws requirements, especially when dealing with retail investors and cryptocurrency exchanges.[9]

Without a doubt, this is an exciting time for fintech businesses. However, going forward, businesses that plan on offering cryptocurrencies and cryptocurrency investment funds should be attuned to their potential securities market obligations at home and abroad.  In Canada, businesses must consider whether they are subject to securities law, including any prospectus and dealer registration requirements. In addition, businesses should be aware of the possibility that a planned arrangement or transaction might constitute an “investment contract”, and therefore fall within the expanded meaning of a “security”.[10]  The CSA is encouraging businesses contemplating cryptocurrency offerings to contact their local securities regulatory authority to discuss how to comply with securities laws.[11]

The author would like to thank Blanchart Arun, student-at-law, for his contribution to this article.

[1] https://www.smithandcrown.com/icos/; https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass-early-stage-venture-capital-funding.html; https://www.cnbc.com/2017/07/18/startups-raise-record-1-point-27-billion-selling-bitcoin-other-cryptocoins.html; https://cointelegraph.com/news/cryptocurrency-market-cap-reaches-record-161-bln-investments-flow.

[2] http://www.huffingtonpost.com/entry/sec-issues-report-on-initial-coin-offerings-icos_us_59a5bbe4e4b05fa16286bdcc; http://fortune.com/2017/08/28/canada-ico/.

[3] https://www.securities-administrators.ca/aboutcsa.aspx?id=1606; http://www.cbc.ca/news/business/cryptocurrency-regulators-1.4262279.

[4] http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20170824_cryptocurrency-offerings.htm.

[5] Ibid.

[6] Ibid.

[7] Ibid; see also Pacific Coast Coin Exchange v Ontario (Securities Commission), [1978] 2 SCR 112.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.