COINSQUARE CAPITAL MARKETS LTD.

Coinsquare Capital Markets Ltd. (CCML) is admitted to membership in the Investment Industry Regulatory Organization of Canada, effective October 12, 2022.

The head office is located at 590 King Street West, Suite 400 Toronto, Ontario M5V 1M3 Telephone: 1 877 620 9006

The Executives are:

• Martin James Piszel, Chief Executive Officer
• Kuno Tucker, Chief Compliance Officer
• Jessica Trott, Chief Financial Officer
• Eric Edward Richmond, Chief Operating Officer
• David Gregory Harris, Head of Capital Markets

Concurrent with the approval of the membership of CCML, the IIROC Board of Directors also granted exemptive relief from certain IIROC Rules to CCML. In particular, the Board provided:

• relief from the requirement under IIROC Rule 4456 to maintain FIB insurance providing coverage for all types of losses specified in that Rule; and
• relief from the requirement under IIROC Rule 4342 that client assets must be held at an Acceptable Securities Location and the requirement set out in Form 1 that imposes a capital penalty equivalent to 100% of the market value of the assets held at any non-Acceptable Securities Location.

The conditions of the relief granted are described in more detail in Appendix “A” to this Notice.

As is standard for exemption orders of this type, the exemption orders also specified that:

• The Board of Directors reserves the right to revoke CCML’s exemption, at any time, upon notice to the applicant.
• This exemption order is void upon the earliest of the following taking place:
  • The implementation of any material amendments to the rules by IIROC or the provincial securities commissions relating to insurance requirements and/or the capital requirements arising from securities held in custody at a non-acceptable securities location. IIROC, and not CCML, will determine whether any rule amendments implemented are considered to be related to insurance requirements and/or the capital requirements arising from securities held in custody at a non-acceptable securities location and are considered to be material, thus rendering this exemption order void.
  • CCML’s breach of any of the representations of the applicant in its application for this exemption order.
  • CCML’s breach of any of the conditions imposed with respect to the Insurance Exemption and Custody Exemption.

In addition, in connection with CCML’s application for membership, CCML made certain representations and agreed to provide certain undertakings to IIROC.

Staff will only recommend approval of such exemptive relief under exceptional circumstances, and where the Dealer Member demonstrates that it has taken all reasonable steps to comply with IIROC Rules.

Background

Since late 2018, IIROC has been working with the Canadian Securities Administrators (CSA) to develop a regulatory framework for crypto-asset trading platforms (CTPs).

In March 2019, the CSA and IIROC jointly published a consultation paper to seek feedback from the fintech community, market participants, investors and other stakeholders on how requirements may be tailored for CTPs. IIROC and the CSA received 52 comment letters in response to the Consultation Paper1.

In January 20202, the CSA established the application of securities legislation to CTPs that facilitate the trading of two categories of digital assets:

1. crypto assets that are securities3,
2. instruments or contracts involving crypto assets4.

In March 2021, the CSA and IIROC jointly published a response to the March 2019 consultation paper (Notice 21-239).5

The intended purpose of Notice 21-239 was to provide guidance and clarity regarding steps that a CTP needs to take to comply with securities legislation, including interim steps that will allow it to operate as it prepares to fully integrate into the Canadian regulatory structure.

IIROC’s Approach to the CTP Applications and Other Novel Business Models

The CSA has required a number of CTPs to apply for membership at IIROC. IIROC is taking a risk-based approach to the review of CTP applications and other novel business models that focuses on investor protection and market integrity while supporting innovation. With respect to CTPs, we believe IIROC’s rules provide a framework which is well-positioned to mitigate the risks of CTPs as outlined in Notice 21-239 and the report entitled “Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms” released by the International Organization of Securities Commissions (IOSCO) in February 20206. Given the novel and quickly evolving nature of CTPs and the assets they trade, IIROC has taken a flexible approach, where necessary, to membership approvals and the provision of exemptive relief, including the use of terms and conditions and member undertakings. In many cases the exemptive relief is time-limited to allow IIROC and the CSA to consider rules amendments/development as applicable.

Our decisions regarding membership approvals and exemptive relief also consider the impact to the current dealer and market structures in Canada to ensure that, while we demonstrate flexibility, our decisions do not result in unintended consequences. While IIROC is considering the development of a more formal sandbox process for CTPs and other novel businesses, any interim approvals should be viewed through a similar lens that aims to support innovation within a regulated environment that protects the investing public and not be relied upon as precedent-setting or an indication of future rule amendments or developments.

Appendix “A”

Conditions relating to general and specific insurance coverage exemption

• CCML shall obtain a Financial Insurance Bond (“FIB”) policy that includes an endorsement pertaining to losses of crypto assets once one becomes available to CCML.
• CCML shall obtain a Vault Risk Policy pertaining to crypto assets held at Coinbase Custody Trust, LLC (“Coinbase”) that satisfies the following:
  1. the loss coverage under the Vault Risk Policy must be equal to or greater than two times that which would be required under IIROC’s minimum insurance coverage formula for assets held at Coinbase
  2. the terms and conditions of the Vault Risk Policy must be acceptable to IIROC
  3. any insurance deductible under the Vault Risk Policy must be deducted when CCML determines its risk adjusted capital.
• CCML must fund a CCML Trust Account dedicated to covering an amount greater than or equal to IIROC’s minimum FIB insurance coverage formula for client assets that are not held at Coinbase.
• CCML must ensure that the CCML Trust Account is opened at an “Acceptable Institution” for the purposes of IIROC Rule 1201 and IIROC Form 1 and is operated in a manner acceptable to IIROC.
• CCML is prohibited from using client free credit cash balances to fund the CCML Trust Account.
• When determining its risk adjusted capital, CCML must deduct the amount normally required to be provided under IIROC’s minimum FIB insurance coverage formula (excluding the minimum coverage required for assets held at Coinbase).
• CCML must provide an annual SOC 1, Type 2 report, that includes additional testing covering the applicable controls outlined in the Risk Management Policy pertaining to the management of private keys and obtain and review the SOC 2, Type 2 reports from its custodians on an annual basis.

Conditions relating to the non-acceptable securities location capital charge exemption re client assets to be held at Coinbase Custody Trust, LLC

• CCML must ensure and regularly confirm to IIROC that Coinbase at all times:
  1. maintains its good standing status as a New York State-chartered trust company,
  2. maintains its good standing status with, and continues to be, regulated by the New York State Department of Financial Services (“NYS DFS”),
  3. complies with the NYS DFS capital and insurance requirements.
• CCML must verify immediately upon Coinbase’s quarterly information becoming available that Coinbase maintains a net worth in excess of $100 million.
• CCML will obtain from Coinbase a SOC 2 Type 2 report to be provided to IIROC on an annual basis.
• Each year CCML will provide IIROC with a copy of the annual audited financial statements prepared for Coinbase.
• CCML’s custody agreement with Coinbase must be in a form acceptable to IIROC and CCML must ensure than any proposed material amendments to the agreement are approved by IIROC.
• CCML will promptly notify IIROC if any United States regulatory authority makes a determination that Coinbase, for CCML client’s crypto assets, is not permitted by the regulatory authority to hold client crypto assets.
• CCML will notify IIROC, promptly, of any material breach or failure of Coinbase systems of controls or supervision in relation to the crypto assets held by Coinbase, and the steps taken by CCML to address each such breach or failure.

Conditions relating to the non-acceptable securities location capital charge exemption re client assets to be held at Tetra Trust Company

• This limited relief will be granted to CCML for an initial period of one year and may be extended at the Board’s discretion if they determine that Tetra Trust Company (“Tetra”) is making sufficient progress toward meeting the Acceptable Securities Location requirements under the General Notes and Instructions to Form 1 or such other alternative as is developed for crypto assets.
• CCML acknowledges that this exemption is subject to Tetra adhering to various operational commitments made to CCML, and agrees to notify IIROC should CCML become aware that Tetra Trust is not adhering to these commitments.
• CCML must ensure the total market value of crypto asset holdings held at Tetra not exceed an amount specified by IIROC (the cap). The cap will be reviewed, at a minimum, on a bi-annual basis by IIROC Staff and may be adjusted at Staff’s discretion. CCML must promptly notify IIROC if they believe CCML may exceed the cap.
• CCML must provide clear disclosure informing clients of the regulatory oversight of Tetra by the Alberta Treasury Board and Finance (ATBF) and provide a link to ATBF’s website. The content and form of this disclosure will require the approval of IIROC staff and clients must be required to acknowledge they have read and agreed to the disclosure.
• CCML must ensure, and regularly confirm to IIROC, that Tetra at all times:
  1. maintains its good standing status as an Alberta chartered trust company,
  2. maintains its good standing status with, and continues to be, regulated by ATBF, and
  3. complies with the ATBF requirements.
• CCML will obtain from Tetra a SOC 2, Type 2 report to be provided to IIROC on an annual basis.
• Each year CCML will provide IIROC with a copy of the annual audited financial statements prepared for Tetra.
• CCML’s custody agreement with Tetra must be in a form acceptable to IIROC and CCML must ensure that any proposed material amendments to the agreement are approved by IIROC.
• CCML will promptly notify IIROC if any Canadian regulatory authority makes a determination that Tetra, for CCML client’s crypto assets, is not permitted by the regulatory authority to hold client crypto assets.
• CCML will notify IIROC, promptly, of any material breach or failure of Tetra systems of controls or supervision in relation to the crypto assets held by Tetra, and the steps taken by CCML to address each such breach or failure.

Any of the above conditions on the exemptive relief granted may be amended upon prior written notice to CCML.

• 1CSA/IIROC Consultation Paper 21-402 – Proposed Framework for Crypto-Asset Trading Platforms.
• 2CSA Staff Notice 21-327 – Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.
• 3The CSA refers to these as “tokens”.
• 4The CSA uses the term “crypto asset contract”, which possesses the following characteristics:
  (i) the underlying crypto asset is not itself is a security or derivative (such as bitcoin or ether), and
  (ii) the contract or instrument for the purchase, sale or delivery of a crypto asset:
  • does not result in an obligation to make immediate delivery of the crypto asset, and
  • is not settled by immediately delivery of the crypto asset to the Crypto Asset Trading Platform’s user.
• 5CSA Staff Notice 21-329 – Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements. Notice 21-239 defines and distinguishes several foundational concepts:• Crypto assets that are securities• Instruments or contracts involving crypto assets,• Platforms that facilitate or propose to facilitate the trading of tokens or crypto asset contracts,• Platforms that operate in a manner similar to marketplaces, and• Platforms that are in the business of trading tokens or crypto asset tokens that are not marketplaces.
• 6See FR02/20 - February 2020