Understanding the Impact of the PRU

In the rapidly evolving world of cryptocurrencies and digital assets, complying with the applicable regulatory frameworks is crucial in ensuring the soundness of operations, investor protection, and market integrity. One such regulatory requirement in Canada is the Pre-Registration Undertaking (PRU) for crypto trading platforms (CTPs). This blog will delve into what the PRU is, its significance for investors, and how it helps the Canadian cryptocurrency landscape.

A PRU is a regulatory requirement mandated by the Canadian Securities Administrators (CSA) for all unregistered, but operating, CTPs offering services in Canada while those CTPs seek registration under applicable Canadian securities legislation. The PRU requires these non-registered CTPs to implement certain systems changes to their operations that are focused on enhancing investor protection measures that are consistent with the regulatory framework developed by the CSA for the trading of crypto assets that are not securities and/or derivatives under applicable securities legislation. Through PRUs, the CSA  takes a crucial step towards establishing a secure and transparent trading environment for Canadian investors trading in crypto assets.

Under the PRU, the CSA introduces specific regulatory standards focused on, among other things: the implementation of enhanced commitments regarding the custody and segregation of crypto assets held on behalf of Canadian clients; the implementation of enhanced commitments to preclude CTPs from pledging, re-hypothecating or otherwise using crypto assets held on behalf of Canadian clients; the prohibition on CTPs from offering margin, credit or other forms of leverage to clients in connection with the trading of crypto assets; establishing certain restrictions and expectations with respect to operational transparency and financial standards; and the implementation of other operational requirements, such as the retention of a qualified chief compliance officer, the requirement to implement policies and procedures for conducting appropriateness assessments of clients’ accounts before being permitted to trade on a CTP, and the expectation to maintain clear and constant communication and disclosures to clients. By following these regulatory standards, the operations of non-registered CTPs are required to give effect to provisions that are consistent with the regulatory framework developed by the CSA for registered CTPs while they continue to seek registration.

The PRU enhances investor protection measures in several ways, including as follows:

• The PRU includes additional commitments from a CTP to hold client assets (including cash, securities and crypto assets that are not securities): separate and apart from its own property; in trust for the benefit of clients; in the case of cash, in a designated trust account or in an account designated for the benefit of clients with a Canadian custodian or a Canadian financial institution; and in the case of crypto assets, in a designated account in trust or in an account designated for the benefit of clients with a custodian within the definition of “Acceptable Third-party Custodian” (as defined in the PRU).
• 
  Under the PRU, a CTP is expected to provide CSA staff with evidence of meaningful compliance systems and corporate governance controls with respect to the prohibition from pledging, re-hypothecating or otherwise using crypto assets held on behalf of clients.
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  While CTPs were previously permitted to offer margin, credit or other forms of leverage to “permitted clients” (as defined in National Instrument 31-103), the PRU prohibits CTPs from offering margin, credit, or other forms of leverage to any client in connection with the trading on a CTP of crypto contracts or crypto assets.
• 
  As part of the account opening process, CTPs are required to conduct an assessment as to whether an account to trade in crypto assets is appropriate or not, and CTPs have to assess whether investors have an adequate level of knowledge in investing in and understanding of the risks associated with the trading of crypto assets and volatility of the market, as well as their ability to tolerate such risks. This assessment helps prevent inexperienced or uninformed investors from engaging in high-risk trades that may not align with their investment objectives or risk tolerance.
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  The PRU mandates CTPs to maintain clear and accurate communication with clients and provide clients with adequate information and disclosures. By providing timely information and disclosures about the relationship between the CTP and clients, on information about the crypto assets offered on the platform, and on regulatory changes, platform updates, and potential risks, investors can make well-informed decisions and stay updated on significant developments.
• 
  The PRU requires CTPs to comply with other specific regulatory standards, which include measures to prevent fraud, safeguard user funds, and maintain operational transparency, such as the retention of a chief compliance officer during the pre-registration process.

The list above does not reflect all of the measures under the provisions of a PRU. For more information about PRUs, see a list of the CTPs that have entered into a PRU with their principal regulator to continue operations while their application for registration is reviewed here.

By adhering to these enhanced measures, CTPs offer investors a safer, transparent, and more secure trading environment, with which the CSA aims to prevent or limit future fraudulent activities, unethical practices, and potential security breaches.
 

Given the importance of regulatory compliance and the need to prioritize investor protection, the CSA may take compliance and/or enforcement action against any unregistered CTP that is operating under a PRU if such CTP fails to implement the required systems changes to abide by the provisions of their PRU, or does not make a bone fide attempt to progress through the registration process with the CSA on a timely basis. Additionally, the CSA may also take action against a CTP if CSA staff becomes aware of any investor protection or other public interest concerns that arise as a result of a CTP’s operations.

Since launching in 2018, Ndax Canada Inc. (Ndax, we, us, or our) has demonstrated its commitment to security and user protection through various measures, including a Service Organization Controls (SOC) 2 Type 2 certification. This certification attests to the platform's robust security protocols and its prioritization of the safety and privacy of user information. By subjecting user data and funds to stringent security measures, Ndax has been at the forefront of protecting the integrity and confidentiality of user information and assets.

Under the terms of the PRU dated March 24, 2023 (found here) signed in favor of the Alberta Securities Commission and the other members of the CSA, Ndax will implement certain enhanced investor protection measures that put clients’ interest first, including the safeguarding of user assets (incl cash and crypto assets), the conducting of an account appropriateness assessments, the implementation of investment limits (in the jurisdictions where required), and loss limits on user accounts.
The account appropriateness assessment will evaluate users' knowledge, risk tolerance, financial position, and experience in trading in crypto assets to determine whether an account on our platform is appropriate for a user or not in order to help users make informed trading decisions and mitigate the risk of high-risk trades. The information collected is also used to establish early warning loss limit notifications. These loss limit notifications are designed to help users stay informed on market fluctuations and are designed to provide users with a warning when unrealized losses reach the limit established for a particular user on their account.

In addition to investor protection, the PRU promotes transparency by establishing clear guidelines and standards for CTPs. Ndax has always been an industry leader and strongly believes that clear communication is the key to a long-lasting relationship and is committed to providing users with the same level of transparency as we always have. Ndax will ensure users are provided with prompt updates on any regulatory changes and platform updates. This dedication to transparent communication empowers users to stay informed and make well-informed decisions while trading on Ndax.

Lastly, unlike many of the PRUs entered into by other CTPs, under the terms of our PRU, Ndax is permitted to custody those crypto assets of our users that (i) are not themselves securities or derivatives or (ii) are designed to maintain a stable value over time by referencing the value of a fiat currency or any other value or right, or combination (referred to as value-referenced crypto assets or stablecoins) that are available on our platform, rather than using the custodial services of a third-party custodian. We are permitted to use our self-custody solutions until the earlier of (i) the launch of Ndax Trust Co., an affiliated Alberta trust company, and (ii) March 24, 2024. Ndax is committed to the custody and safekeeping of users’ crypto assets and value-referenced crypto assets, and we believe that our state-of-the-art security systems provide that security.
 

The PRU plays a pivotal role in ensuring that CTPs providing services to Canadian investors operate within the regulatory framework established by the CSA. By following the PRU requirements, Ndax and other unregistered CTPs can contribute to the overall regulatory compliance of the Canadian cryptocurrency landscape, fostering a healthy and well-regulated industry. The provisions contained in the PRUs strengthen market integrity by deterring fraudulent activities and unethical practices. By adhering to these regulatory standards, Ndax promotes a level playing field and instills confidence among investors, fostering a sustainable and trustworthy cryptocurrency market in Canada. With PRUs in place, Canadian investors can have greater confidence in the cryptocurrency market, attracting more participants and contributing to its growth and development.

For additional information, see the frequently asked questions (FAQs) available on our website.

What Changes Will Users See as a Result of the PRU and When Will They be Implemented? 

Why Do We Require Users to Fill Out an Appropriateness Assessment?

What is the loss limit, and how will it be applied?

What is the investment limit, how is it calculated and what happens to your account if the limit is reached?