In a recent LiquiTrade Ltd.(2024 BCSECCOM (July 3, 2024)) decision, the British Columbia Securities Commission (BCSC) found that LiquiTrade Ltd., operating the crypto trading platform LATOKEN (the Platform), was trading derivatives without proper registration and operating as an unrecognized exchange in British Columbia. The platform allows users to trade digital assets, charges fees, and retains control over user assets stored in cold storage. The BCSC investigator opened an account on the Platform, made trades in some crypto assets and tried to withdraw them. As the investigator mentioned, he was unsuccessful in trying to withdraw Bitcoin notionally held in his account because the amount was lower than the minimum amount required for approval of a withdrawal. The investigator was successful in transferring the Tether into an external wallet.
The BCSC has determined that a user deposits crypto assets with the Platform and the Platform takes control of that crypto asset until the user makes a withdrawal request. As a result, a user trades rights (Rights) to crypto assets, not the crypto assets themselves. Given that the value of a Right is derived from the value of the underlying crypto asset notionally reflected in the balance in the user’s wallet and given that a Right is not a direct interest in such assets, the BCSC found that such Rights traded on the Platform were derivatives. As a consequence, the BCSC found that the Platform was recognized as operating an unrecognized derivative exchange in British Columbia.
This is a notable development and is one of the first instances when a securities commission recognized that transactions at a crypto asset trading platform (a CTP) that required custody of a user’s crypto assets were derivatives. Earlier, securities regulators suggested that arrangements providing a contractual right of claim to an underlying crypto asset (a Crypto Contract) could be regarded as a security. In Re Polo Digital Assets, Ltd (2022 ONCMT 32), it was reasoned that a Crypto Contract is a security where investors on a CTP are dependent on the actions, custody arrangements and solvency of such CTP, the investors are engaged in the common enterprise with CTP and are dependent on the CTP‘s significant efforts for the failure or success of their investment. If such Crypto Contracts are considered derivatives, unless an exemption is available, CTPs would also be subject to compliance obligations of local derivative regulations and National Instruments relating to derivatives.