Securities laws have an almost unique structure: forbid everything and then allow action through certain exceptions. The default prohibition is found in Ontario securities laws, and the other provinces, and in America (which is the origin of Canadian securities laws, see footnote #1). Some of the exceptions are quite broad, others much more narrow. There are many, many exceptions from the general rule of prohibition. The exceptions are designed to permit the existing markets and players in the securities industry. But this is a fairly unique legal structure. Most laws have a list of what can't be done, rather than prohibiting everything and then listing what can be done. This subverts the general legal maxim that what is not prohibited is permitted.

Many people have a hard time with understanding securities laws because they turn the general rule on its head. People are much more used to a system in which certain activities are prohibited. In a sense, securities laws are like that, but the legal structure of how that's achieved is the inverse. Securities laws are not a list of what can be done but rather exceptions from the rule that all cannot be done. This gives enormous flexibility to the regulator tasked with enforcing the law but also creates uncertainty for market participants who may not be sure what they are permitted to do. Savvy market players often operate at the edge of what's permitted or not, and sometimes their activities are legalized and become a part of the standard practice (e.g. RTOs).

Maybe, Might, and Many: Hedging By Securities Regulators

Although many people in the cryptocurrency industry are aware that securities laws exist, they're usually not very aware of how they're structured. And it's not a theoretical distinction because the structure dictates how the law functions. The structure is the source of the uncertainty that prevails in the cryptocurrency industry because securities regulators constantly issue statements that the law may apply or might apply.

In the 2018 staff notice issued by Canada's provincial securities regulators about token offerings, titled Securities Law Implications for Offerings of Tokens, the staff notice is full of maybes. Similar staff notices since have been full of the same language. Below are a few examples from this staff notice, which are indicative of the general problem:

In CSA Staff Notice 46-307 Cryptocurrency Offerings (SN 46-307), we stated that many cryptocurrency offerings, such as initial coin offerings (ICO) and initial token offerings (ITO), involve sales of securities.

1. "In CSA Staff Notice 46-307 Cryptocurrency Offerings (SN 46-307), we stated that many cryptocurrency offerings, such as initial coin offerings (ICO) and initial token offerings (ITO), involve sales of securities."

2. "we emphasize that none of these examples should be interpreted as determinative on its own of whether or not a security exists"

3. "It is possible that an offering of tokens may be viewed as involving, or not involving, a security even with the existence, or absence, of one or more of the characteristics listed below."

In the most recent staff notice on this subject:

1. "As a result of this ongoing work, the CSA is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives."

2. "Whether a particular [stablecoin] is a security and/or derivative will depend on the specific facts and circumstances."

3. "Staff are of the view that [fiat stablecoins] generally meet the definition of 'security' and/or would meet the definition of 'derivative' in several jurisdictions."

If the provincial securities regulators can't tell you clearly whether their own law applies then that's a problem in the eyes of most people. In one of the examples above they don't even want to declare a category, whether security or derivative! The reason for this problem is the vague nature of securities laws, which are designed to be vague in some places so that the regulator can decide what they don't like after the fact.

The law is wider than the enforcement of it. In staff notice 46-307, the government describes this process as [i]n determining whether or not an investment contract exists, the case law endorses a purposive interpretation that includes considering the objective of investor protection..

In fairness to the provincial securities regulators, some of the hedging language above is because there are a wide variety of models in the cryptocurrency space, and it's difficult to draw definitive boxes to put them in, but this challenge is much greater for securities laws than for other legal regimes that are more clear about what can and cannot be done.

Clearing up this misunderstanding about how securities laws work, as opposed to laws people are more familiar with like say tax rules or real estate law, would help many people to conceptually understand the battles going on over what is and isn't a security in the blockchain space.


#1: The history of Ontario's securities laws are closely related to its role in Canada's mining industry but strongly influenced by the United States. This history is covered in Christopher Armstrong's Moose Pastures And Mergers: The Ontario Securities Commission and the Regulation of Share Markets in Canada, 1940-1980.