CSA Regulatory Sandbox

CSA Regulatory Sandbox
Written by Nikolas Kalantzis

If your start-up is in the business of trading or advising securities you are subject to Canadian securities laws and must register under the Alberta Securities Commission (ASC). Securities may include stocks in a company, corporate bonds, profit-sharing agreements, shares in an investment fund, or investment contracts. And yes, according to CSA Staff Notice 21-327, when cryptocurrencies are traded on a platform they are also considered a security.

Spurred into action by the QuadrigaCX fiasco, securities regulators across Canada have now stepped up their game to more closely regulate financial technology (fintech) start-ups and cryptocurrencies (crypto) while still allowing some innovation and experimentation in the market. In doing so, the ASC has created a Financial Innovation in the Capital Markets unit in partnership with the Canadian Securities Administrators (CSA) and have released a regulatory Sandbox to exempt fintech start-ups from certain securities regulations.

What is the Sandbox?
The Sandbox is a coordinated relief initiative to allow fintech start-ups the chance to apply their ideas and test their products on the securities market. The CSA allows relief across Canada subject to local regulators. It is also in collaboration with international fintech networks allowing international testing of their innovative product or service.

A regulatory sandbox can be defined as a “safe space” that allows start-ups to work in “a limited capacity and receive regulatory relief from traditional rules” such as waivers or no-action letters (Clements 2019, 8). This provides the necessary regulatory oversight that promotes start-ups to work more precisely than the traditional Silicon Valley tech start-ups of the “move-fast-and-break-things” ethos (Clements 2019, 9). As such, financial markets and consumers are still protected while allowing Canadian start-ups the chance to innovate and grow.

Who’s Allowed In?
Applicants must be a fintech start-up or business with an innovative product, service, or application. Fintech itself has a wide net that covers processes, products, technology, and innovations that materially effect financial markets, business transactions, or financial systems (Clements 2019, 3). This may include more efficient ways to trade securities, promote financially underserved markets, enhance customer-user experiences, and reduce transaction costs. While the CSA is not explicit in defining fintech, your start-up should likely fit into this area to operate within the Sandbox.

To date, crypto and crypto trading platforms makeup the majority of the Sandbox. The ASC defines crypto as generally referring to coins or tokens that are digitally represented assets produced by cryptography or blockchain technology. The CSA puts out an online decisions list of the various decisions or recommendations to applicants of the Sandbox. Before applying, interested fintech start-ups may want to consider these decisions to see the types of relief previously requested and the responses that the regulators gave.

The Rest of the Playground
Fintech is a new an exciting place with many growing start-ups. But outside the safe space of the Sandbox, fintech start-ups are likely subject to many regulatory requirements under Alberta’s Securities Act. This may include filing a prospectus, dealer registration, continuous disclosure, and market manipulation conditions among others. Fintech start-ups who are not registered with the ASC or another jurisdiction’s regulator may not have the normal safeguards in place such as trustworthy record keeping, confidentiality protections, fair pricing mechanisms, disclosure of fees, and risk warnings.

Hop-in!
If you have more questions about the Sandbox or just want to discuss the legal options for your fintech start-up please contact the BLG Business Venture Clinic. You can also contact the ASC directly at: [email protected]

Nikolas Kalantzis is a member of the BLG Business Venture Clinic and is a 2nd year student at the Faculty of Law, University of Calgary.

Sources:
Clements, Ryan 2019. “Regulating Fintech in Canada and the United States: Comparison, Challenges and Opportunities”: View of Regulating Fintech in Canada and the United States: Comparison, Challenges and Opportunities (ucalgary.ca)
CSA Regulatory Sandbox - Canadian Securities Administrators (securities-administrators.ca)
Financial innovation in the capital markets | ASC (albertasecurities.com)
Securities Act, RSA 2000, c S-4, <https://canlii.ca/t/5541x> retrieved on 2021-10-25.