Arweave TX
Last week, Canadian securities regulators issued an exemption to APX Inc., allowing the company to operate its crypto-backed lending platform without registering as a securities dealer or filing a prospectus, provided it complies with a detailed and extensive set of conditions.
Framed as a time-limited, tailored effort to support innovation, the decision in fact marks a significant and unjustifiable expansion of Canadian securities law - one that reclassifies a basic collateralized loan as a securities transaction. Rather than encouraging innovation, the decision risks chilling market development, distorting competition, and undermining confidence in regulatory fairness and predictability.
APX allows Canadians to borrow fiat currency by pledging their Bitcoin (BTC) or Ether (ETH) as collateral. APX, or one of its wholly owned special purpose vehicles (SPVs), holds the borrower’s crypto until the loan is repaid. It does not rehypothecate the collateral.
In its exemption decision, Canadian securities regulators granted APX an exemption from dealer registration and prospectus requirements under Canadian securities laws. The conditions attached to the decision impose a compliance regime modelled on the one applicable to registered crypto trading platforms, including requirements for risk disclosures, custody safeguards, and ongoing reporting to regulators.
Unfortunately, all of this rests on a deeply flawed premise: that Canadian securities law applies to this kind of lending activity in the first place.
The regulators’ rationale is that a lender that holds crypto assets as collateral under a loan may be engaged in an activity subject to securities legislation because the borrower’s contractual rights - to the collateral and under the borrowing agreement more broadly - may constitute a “security”.
This builds on what Canadian regulators have called the “crypto contract” theory. The theory asserts that even if a crypto asset is not a security, the contractual relationship between a platform having custody of a client’s crypto can be a security or derivative, typically in the form of an “investment contract”.
This theory has become the foundation of regulatory oversight of crypto trading platforms in Canada. But applying it to a simple loan secured by crypto is a dramatic and unjustified expansion.
The exemption’s legal foundation - that a crypto-backed loan could amount to a security - is a tortured application of established law. The test for what constitutes an investment contract comes from the Supreme Court of Canada’s decision in Pacific Coast Coin Exchange and asks whether there is:
An investment of money,
In a common enterprise,
With the expectation of profit,
To come significantly from the efforts of others.
APX’s business fails this test on multiple grounds:
No investment of money: A borrower does not invest in a lender. The idea that giving collateral to a lender is an “investment” in the lender disregards the plain meaning of the word “investment” and the economic realities of a loan transaction.
No expectation of profit for borrowers: Borrowers don’t profit from a loan; after all, loan interest costs the borrower money. Moreover, many borrowers borrow to meet expenses or finance consumption, not for investment or business purposes.
No managerial efforts by APX to generate profit for borrowers: APX’s role with respect to the collateral is custodial, not entrepreneurial. In no way would a borrower expect to profit because APX is holding their collateral.
Alternatively, one might argue that crypto-backed loans somehow come within the definition of “security” because they are “evidence of indebtedness”. However, that part of the definition of “security” is intended to capture debt instruments used to raise capital, such as bonds and debentures. Treating any loan as “evidence of indebtedness” subject to Canadian securities laws would bring all sorts of credit providers - payday lenders, equipment finance companies, private mortgage lenders, rent-to-own stores, buy-now-pay-later fintechs, accounts receivable financing firms and working capital lenders - within the scope of the securities laws. That is not how the legislation has ever been interpreted or applied.
Collateralized lending models identical to crypto-backed loans have long existed and have never been subject to Canadian securities law. Pawn loans - one of the oldest forms of consumer credit - involve a lender taking custody of an item belonging to the borrower until the borrower repays the loan. Similarly, high net-worth individuals routinely obtain loans secured by gold, fine art, or luxury assets. These arrangements, like APX’s, involve the lender’s custody of the borrower’s collateral, but they have never been regulated as securities in Canada. That Canadian regulators would treat crypto-backed loans differently - based solely on the type of collateral - underscores how the exemption stretches the law beyond its breaking point.
Perhaps more troubling than the legal theory is how the exemption was granted: without public notice, let alone consultation.
Prior guidance from Canadian securities regulators has never suggested that crypto-backed loans might fall under securities laws. By granting APX an exemption based on a novel and expansive interpretation of existing law, regulators have effectively created a regulatory privilege for one firm, leaving others in the dark.
Competitors now face a dilemma: continue lending without an exemption and risk an investigation and potentially enforcement action, or pause operations and enter an uncertain, costly exemption process that could take a year or more. In the meantime, APX operates with a de facto first-mover advantage.
The APX exemption decision may also cast a shadow over crypto liquidity providers or OTC desks. These players may take crypto as collateral for various purposes incidental to crypto trading, such as providing short-term loans or extending delayed settlement terms. If a borrower’s contractual right to reclaim crypto collateral under a loan agreement is now viewed as a security in Canada, that creates regulatory uncertainty for these market players, which play a critical role in supplying liquidity to Canadian crypto trading platforms and crypto funds.
The result of this decision will be regulatory uncertainty and competitive distortion. This kind of regulation by stealth undermines faith in Canada’s regulatory framework and sends a chilling message to innovators and investors in the crypto industry.
This decision is not an isolated case - it’s part of the broader trend of Canadian securities regulators expanding their jurisdiction over crypto through a patchwork of staff notices, discretionary exemptions, and the occasional press release.
Instead of contorting old legal tests to fit emerging technologies, securities regulators should be candid: existing law doesn't always fit. And where genuine risks to borrowers exist, regulators should look to the tools already available.
In Ontario, for example, the Consumer Protection Act, 2002 governs loan terms and unfair lending practices. Legislation in other provinces provides similar protections to borrowers. If crypto-backed lending poses new consumer risks, then lawmakers - not securities regulators - should modernize those laws. Using securities law to fill perceived regulatory gaps is legally unsound and practically harmful.
The APX exemption is framed as a pragmatic regulatory response to innovation. But in reality, it reflects a expansion of Canadian securities law, carried out without consultation, and built on a legally dubious foundation.
Instead of promoting innovation, this approach chills it. Instead of levelling the playing field, it tilts it. And instead of building confidence in regulation, it undermines it.
Evan Thomas