OSC Reviews Compliance of Crypto Trading Platforms with New Client Safeguards

The Ontario Securities Commission (OSC) has released Staff Notice 33-757, summarizing the results of its compliance review of crypto asset trading platforms (CTPs) registered as restricted dealers. The review focused on how these platforms are meeting key regulatory obligations related to client protection, specifically in the areas of Know-Your-Client (KYC) assessments, account appropriateness, investment limits, and client limits.

The review, also known as the "Sweep," assessed six registered CTPs in Ontario. It revealed a range of compliance practices, some of which require improvement to better protect investors. The OSC highlighted several areas where CTPs must focus their efforts to meet regulatory expectations.

1.    Account Appropriateness Assessments

CTPs are required to evaluate if it is appropriate for a client to trade crypto assets on their platform. This involves assessing factors such as the client’s financial circumstances, investment knowledge, and risk tolerance. The OSC found that some CTPs used a "tick-box" approach to collect client information, failing to conduct a meaningful assessment.

The key expectations outlined by the OSC include:

• Using all relevant client factors (not just one or two) to assess appropriateness

• Conducting reassessments at least annually or when a client’s circumstances change.

• Clearly communicating to clients when their account is deemed inappropriate for trading.

2.    Investment Limits

To protect investors, CTPs must restrict the total value of crypto assets that non-accredited clients can purchase within a 12-month period. These limits vary based on the client's investor status.

The investment limits by client type are as follows:

• Non-eligible investors are subject to an annual limit of $30,000

• Eligible investors are subject to a higher annual limit of $100,000

• Accredited investors are not subject to any investment limit

The OSC did not identify any major failures by CTPs in meeting their investment limit obligations, however, it did emphasize the ongoing importance of these safeguards to reduce risk exposure for retail investors.

3.    Client Limits

Client limits are tailored restrictions on the financial losses a client can incur while trading on a CTP. Unlike investment limits, client limits are specific to each client’s personal financial situation. The OSC’s review found that some CTPs failed to assign appropriate limits to clients or did not monitor these limits effectively.

The key issues identified by the OSC include:

• Limits were set using arbitrary thresholds instead of client-specific factors.

• Client activity was not properly monitored, allowing them to continue trading after exceeding their limit.

Suggested Best Practices for CTPs

The OSC provided several recommendations for CTPs to improve compliance, including:

• Design onboarding questions to capture all relevant factors for appropriateness assessments.

• Conduct meaningful assessments rather than "tick-box" evaluations.

• Regularly review and update account appropriateness assessments.

• Establish clear procedures for dealing with clients deemed ineligible for an account.

• Implement real-time monitoring and proportional client notifications for client limits.

CTPs registered as restricted dealers will migrate to CIRO

Based on the recent Terms and Conditions and Exemptions granted to existing CTPs that are CIRO members, when a CTP that is relying on a Pre-Registration Undertaking or is registered as a restricted dealer, obtains CIRO membership, the firm should expect similar requirements will apply.