Ontario Securities Commission (OSC) Issues Guidance for Crypto Asset Trading Platforms
On December 10, 2024, the Ontario Securities Commission (OSC) published Staff Notice 33-757, following a focused compliance review of crypto asset trading platforms (CTPs) registered as restricted dealers in Ontario. The review, known as a “Sweep,” assessed the Know-Your-Client (KYC), account appropriateness assessment, and Client Limit practices of six CTPs. The Staff Notice details the Sweep’s findings and offers guidance to help CTPs meet their regulatory obligations.
This initiative underscores the Canadian Securities Administrators’ (CSA) ongoing efforts to enhance the regulatory framework for CTPs through discretionary securities law compliance reviews of both registered and unregistered platforms. CTPs are encouraged to review the recommendations and potential issues outlined in the Staff Notice to ensure they are meeting regulatory expectations.
Key Takeaways of the OSC Staff Notice
Sweep Findings
The central finding of the Sweep was that the CTPs often used an ineffective approach to gathering client information. This was largely due to inconsistencies within the client’s account settings that were not properly addressed. The OSC has provided specific requirements for CTPs to remain compliant.
For CTPs to remain compliant, information on the following “Account Appropriateness Factors” must be adequately collected:
- The client’s experience and knowledge in investing in crypto assets
- The client’s financial circumstances
- The client’s risk tolerance
- The crypto assets
Some CTPs also failed to update client information regularly, which subsequently led to inappropriate account openings and maintenance. The OSC found no non-compliance instances concerning “Investment Limits.” These limits define the maximum amount of crypto assets (excluding Specified Crypto Assets) a client can buy and/or sell on the platform within a 12-month period. This absence of non-compliance indicates adherence to the prescribed maximums for crypto asset purchases on platforms.
However, the OSC identified issues with CTPs’ “Client Limits.” This specifically relates to appropriately limiting client losses based on the Account Appropriateness Factors. Some platforms assigned limits based solely on risk tolerance or arbitrary metrics. The OSC found that these methods did not adequately consider a client’s ability to tolerate losses. Furthermore, certain CTPs did not effectively monitor or act upon Client Limits. These platforms allowed clients to exceed their limits without intervention.
OSC Guidance
To address the Sweep’s findings, the OSC’s Staff Notice recommends several practices for account appropriateness assessments. These include:
- Onboarding questions should capture all relevant factors (e.g., questions related to the Account Appropriateness Factors), and follow-ups should address any inconsistencies.
- Assessments should be comprehensive and updated at least annually, or more frequently if significant changes occur in the client’s circumstances or market conditions.
- Policies and procedures should be established for collecting, documenting, and reviewing client information.
- Measures should be implemented to prevent clients from gaming the onboarding process.
For Client Limits, the Staff Notice advises developing an onboarding process that collects sufficient information to set appropriate limits based on all Account Appropriateness Factors. Limits should reflect clients’ circumstances and be monitored continuously. Moreover, clients should receive notifications when nearing their limits and educational materials on the risks of excessive trading. Adequate policies and procedures must be in place to evaluate, monitor, and apply the Client Limit system effectively.
The Sweep: Findings and Guidance Assessment
The Sweep was conducted for six registered CTPs whose principal regulator is the OSC. The core aim was to assess their compliance with the terms and conditions of their respective exemptive relief decisions. Specifically, the focus was on:
- Account appropriateness assessments
- Investment Limits
- Client Limits
The findings and corresponding recommendations of the OSC are outlined below:
Account Appropriateness Assessments
During the Sweep, the OSC identified the use of a “mechanical ‘tick box’ approach” by CTPs to gather the Account Appropriateness Factors. Where inconsistencies resulted, CTPs did not follow up with the client to address them. Additionally, the OSC observed that certain CTPs failed to update client Account Appropriateness Factors on an ongoing basis. This resulted in subsequent assessments based on outdated information.
The OSC noted that “[these] failures sometimes resulted in accounts being opened or maintained for clients where the account was not appropriate for the client.” Given these findings, the Staff Notice recommends several practices for conducting an account appropriateness assessment. Firstly, onboarding questions should capture all relevant factors for each prospective client. Follow-ups must be undertaken to address any inconsistencies in the collected information. The assessment should be meaningful and comprehensive, considering Account Appropriateness Factors at both the onboarding stage and on a continuing basis.
The Staff Notice further notes the importance of updating the account appropriateness assessment for each client at least annually, or more frequently if there are significant changes in the client’s circumstances or market conditions. In the OSC’s view, maintaining books and records that document any changes in a client’s information is essential. Policies and procedures should be established for collecting, documenting, and reviewing the information required to conduct a proper assessment. Finally, there should be policies and procedures in place for handling situations where it is determined that it is not appropriate for a prospective client to open an account, including measures to prevent clients from “gaming the onboarding process.”
Investment Limits
During the Sweep, the OSC found no instances where CTPs failed to comply with their obligation to limit client purchases of crypto assets to the prescribed maximum amounts on their platforms. As such, no guidance on Investment Limits was provided in the Staff Notice.
Client Limits
During the Sweep, the OSC identified several instances where CTPs assigned Client Limits that were not adequately tailored to individual client circumstances. For example, some firms relied solely on risk tolerance as the Account Appropriateness Factor. This would not provide a comprehensive view of the client’s situation. Some Client Limits were based on “arbitrary factors and dynamic factors” such as:
- Changes in the trading price of crypto assets
- Fluctuations in the market value of a client’s portfolio
- Shifts in the market value relative to the adjusted book value of their holdings
The OSC concluded that these methods do not adequately consider the client’s ability to tolerate losses and are not customized to each client’s circumstances. Furthermore, the OSC found that some CTPs did not effectively monitor Client Limits or take meaningful action when these limits were met or exceeded. This enabled clients to continue transactions without intervention to prevent further losses.
Considering the above, the Staff Notice recommends developing an onboarding process that collects sufficient information to set an appropriate Client Limit for each client. This should consider all Account Appropriateness Factors. The Client Limit should reflect the client’s circumstances and be based on a dollar value to monitor ongoing trading activity. Clients should receive notifications when their trading activity nears the Client Limit, and they should receive educational materials on the risks of excessive trading. Finally, the OSC notes that adequate policies and procedures must be in place to evaluate, monitor, and apply the Client Limit system effectively.
Looking Ahead
The OSC’s continued focus on compliance and regulatory oversight of crypto asset trading will be crucial in shaping the future of CTPs in Ontario. To this end, all CTPs should stay informed about the evolving guidelines and recommendations outlined by the OSC and other regulatory bodies. If CTPs implement these recommendations, they can better ensure compliance and contribute to a more secure and transparent market environment.
Disclaimer: This content is intended to offer general information only. Seek professional advice regarding your specific circumstances.
