For years, Canada innovated while the U.S. stalled. The SEC dug in its heels, blocking spot crypto ETFs while grudgingly allowing only futures-based products. The SEC only relented after a successful legal challenge from Grayscale, opening the door to spot Bitcoin ETFs in early 2024. Spot Ether ETFs followed later that year.

Those Bitcoin and Ether ETFs remain the only spot crypto ETFs listed in the U.S., but that is about to change. In the past, any new crypto ETF in the U.S. had to go through the rule 19b-4 process, a review lasting up to 240 days where exchanges sought approval from the SEC to list a specific ETF product. Crypto ETFs faced additional hurdles, as prior SEC orders had created unique requirements for digital assets. But earlier this month, the SEC approved generic listing standards for “commodity-based trust shares,” which is how most U.S. crypto ETFs are structured.

This change means that if an ETF meets the generic standards, an exchange can list it, skipping the 19b-4 process. The standards also contemplate staking, though some U.S. tax questions still need to be resolved. Importantly, the standards allow spot ETFs for any crypto asset that underlies a futures contract that has traded for at least six months on a CFTC-regulated designated contract market (DCM). That sweeps in a broad set of assets. Coinbase Derivatives, for example, already lists futures on Bitcoin, Ether, Solana, XRP, Cardano, Dogecoin, Polkadot, Litecoin, Avalanche, Shiba Inu, Stellar, and Hedera.

Meanwhile, Canada has been tightening its rules for crypto ETFs. In July 2025, securities regulators amended National Instrument 81-102 to restrict the crypto assets eligible for inclusion in an ETF. Under the new rules, Canadian ETFs may only invest in crypto assets that are listed for trading on, or are the underlying for a derivative that trades on, an exchange recognized by a Canadian securities regulator.

On paper, that looks similar to the new U.S. approach. In practice, it is far narrower: CME and Cboe meet the Canadian recognition requirement, but Coinbase Derivatives and other DCMs with broader crypto futures markets do not. And no Canadian exchange currently offers crypto derivatives at all.

The effect is stark. Canadian issuers are boxed into just four assets — Bitcoin, Ether, Solana, and XRP — because only those assets currently have futures on CME or Cboe. U.S. issuers, by contrast, now have a path to launch ETFs covering nearly any crypto asset with an established futures market.

Canadian investors won’t be fenced in. They can easily access U.S. ETFs through mainstream investment platforms. This disadvantages Canadian issuers, and Canadian demand for U.S. crypto ETFs drives more custody business to U.S. custodians.

The recently adopted Canadian restrictions make little sense. They are stricter than U.S. rules, yet Canadians can freely bypass them by purchasing U.S. ETFs. The fix is straightforward: align Canadian asset eligibility rules for crypto ETFs with the U.S. generic listing standards. That would ensure Canadian investors have access to a broader set of Canadian ETF products, allow Canadian ETF issuers to compete against U.S. products, and give Canadian crypto custodians a larger addressable market.

Canada set the pace on crypto ETFs. The U.S. has caught up and is about to sprint past. Unless Canadian rules change, our early advantage will vanish, shrinking investment options for Canadians and limiting the ability of Canadian ETF issuers and crypto custodians to compete and grow.

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.

The Exemption

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 Crypto Contract Theory, Expanded

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.

Why This Is an Overreach

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:

1. An investment of money,

2. In a common enterprise,

3. With the expectation of profit,

4. 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.

Regulation by Stealth

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.

A Growing Regulatory Perimeter, with No Clear Limits

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.

Conclusion

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.

Circle’s undertaking means that Canadian crypto trading platforms can continue to make USDC available to their clients after December 31, 2024. While the platforms and their clients using USDC are undoubtedly relieved, Canadian stablecoin policy is still a mess.

Traditionally, the federal government deals with money and payments, but they haven’t shown much interest in regulating stablecoin issuers. Instead, provincial securities regulators have labelled stablecoins as securities or derivatives and imposed their own requirements on the issuers. Treating stablecoins as securities or derivatives is legally incorrect, undermines innovation and competition in payments, and is inconsistent with the policy approach to stablecoins taken by other major economies.

If there’s any hope of having Canadian stablecoin policy that supports innovation, protects consumers and is aligned with international consensus, the federal government needs to get in the stablecoin game, and provincial securities regulators need to stay out of it.

Stablecoins are a true killer app of crypto. Want to pay anyone in the world, for very low fees, essentially instantaneously? Stablecoins can do that.

Not surprisingly, the use of stablecoins for payments and other transfers of value has grown staggeringly fast. In 2020, there were approximately $5 billion USD worth of fiat-backed stablecoins in circulation. As of December 2024, there is nearly $180 billion USD - an astounding 3,500% growth in four years. In Q2 of 2024, there was reportedly $8.5 trillion USD in stablecoin transaction volume. Stablecoin transactions now account for nearly ⅓ of blockchain transactions.

Given this rapid growth, regulatory guardrails for stablecoins are sensible. Fiat-backed stablecoins hold value in markets only so long as the market is confident that the issuer can and will redeem the stablecoin for money. Issuers can do this only if they have a portfolio of high quality liquid assets somewhere that can be used to meet redemption requests. If confidence is undermined, or if something happens to that portfolio, the stablecoin’s market value may not be so stable, businesses and consumers holding stablecoins may suffer losses, payments may be disrupted and there may be an impact on the broader financial system. These are all good reasons to regulate stablecoin issuers.

For Canadian securities regulators to have jurisdiction over the distribution or trading of stablecoins, stablecoins must be securities or derivatives. These terms are defined broadly in securities legislation, but this does not mean securities regulators can regulate anything and everything that might cause financial loss to Canadians.

The regulators’ legal theory is that stablecoins are either “evidence of indebtedness”, in which case they are securities, or they are instruments referenced to an underlying currency, in which case they are derivatives.

As a legal theory, this theory is manifestly wrong. For a longer explanation, read the appendix to this industry submission coordinated by the Canadian Web3 Council. The short version is that if stablecoins are securities or derivatives, then so are PayPal accounts, Starbucks cards, and loyalty points programs. A stablecoin is merely an entry in a ledger. When you pay someone using stablecoins, the value of your ledger entry goes down and that of the recipient’s entry goes up. Functionally, stablecoins are no different from how PayPal, Starbucks and loyalty programs keep ledgers to track transactions by their customers.

It would make no sense to treat peer-to-peer payments, payment cards and loyalty points as securities or derivatives. Securities laws were obviously never intended to regulate the businesses that run these systems because these are payment systems, not investment schemes. As stablecoins are fundamentally payment systems, they too fall outside of securities laws.

Treating stablecoins as securities or derivatives is a terrible idea if you value greater innovation and competition in Canadian payments. Want to create a CAD stablecoin so that Canadians don’t have to use USD-denominated stablecoins? Want to build payments or remittance services using stablecoins to make it cheaper and faster for Canadians to transfer money to friends and family? Want to enable stablecoin payments for Canadian merchants struggling with high payment processing fees? Want to run a business in Canada exchanging stablecoins for currency? Good luck to you.

The problem is that if you are “in the business of trading” in securities or derivatives, you need to be registered under securities laws. Treating stablecoins as securities or derivatives means that any Canadian business innovating with stablecoins needs to consider registration. Registration is not fast, easy or cheap. Most likely, Canadian payments innovators will have a conversation with securities regulatory counsel, realize that their stablecoin idea requires two years and millions in legal fees to bring to market, and elect to steer clear of stablecoins or build outside of the Canadian market.

The securities regulators’ VRCA requirements do not solve this problem. The Ontario Securities Commission’s website explicitly states that if a VRCA issuer files an undertaking, that does not mean “the issuer or the VRCA is compliant with Canadian securities laws.” Nothing in the securities regulators’ VRCA framework gives any assurance to innovative Canadian businesses that their use of stablecoins will comply with how securities regulators (mistakenly) interpret the law.

Recognizing the need to regulate stablecoins in a way that allows adoption and innovation, other jurisdictions have spent considerable time consulting stakeholders or otherwise developing regulatory frameworks in a transparent fashion. The EU has addressed stablecoins in the Markets in Crypto Assets (MiCA) legislation. The New York Department of Financial Services has issued guidance on stablecoins issued by companies subject to NYDFS supervision. Hong Kong, Singapore and the United Kingdom have all consulted on stablecoin regulation and are in the process of introducing regulatory frameworks. The U.S. Congress is widely expected to pass federal stablecoin legislation in the near future.

In all of these jurisdictions, policy-makers and regulators are treating stablecoins like payments and money, not securities or derivatives. Canada stands alone in treating stablecoins as securities or derivatives. Besides creating uncertainty for Canadian consumers and innovators, Canada’s policy approach to stablecoins is completely out of step with the rest of the world’s.

Canada might not find itself in this situation but for the federal government’s limited interest in stablecoins. Back in late 2022, the federal government did announce consultations on digital currencies, including stablecoins. There were some consultations, but no findings were ever published and no concrete legislative or regulatory action was ever proposed. Since provincial securities regulators were already regulating crypto trading platforms, it’s fair to infer that federal policy-makers and politicians decided to lump stablecoins in with the more volatile aspects of crypto and let the provincial securities regulators deal with it.

Two years later, the federal Department of Finance has quietly re-started consultations on stablecoins, but most likely, it is too little, too late. Now that there is a regulatory approach that some parts of industry have grudgingly accepted (while facing the prospect of an effective ban on stablecoins, mind you), it is hard to see stablecoin policy prioritized at the federal level. And even if it was, there’s little reason to think provinces and their securities regulators will simply give up the jurisdiction those regulators have interpreted for themselves. Instead, in classic Canadian fashion, stablecoins will most likely become a matter of concurrent jurisdiction, with overlapping and potentially contradictory regulatory regimes doing their best to protect Canadians from anything innovative or efficient.

If the stablecoin situation is to be salvaged, federal policy-makers need to get over their distaste for crypto, accept that stablecoins will just keep getting bigger, a truth that other major jurisdictions have already recognized, and bring stablecoins within payments regulatory schemes that already exist. At the same time, provincial securities regulators need to remember that the securities regulatory perimeter, while expansive, is not unlimited. Only by treating stablecoins for what they are - a way to move around money - will Canada realize their benefits.