The plan said technologies like blockchain could potentially “transform the landscape of the financial industry.”
The CSA said in its business plan it is considering developing a “regulatory regime” tailored toward crypto trading platforms that are subject to securities or derivatives regulation. The plan stems from a desire for the CSA to consider the implications of emerging technologies, including social media and innovations in distributed ledger technology (DLT) like blockchain.
“DLT has the potential to transform the landscape of the financial industry,” the CSA said in its plan. “Crypto-assets are probably the most well-known and widespread application of blockchain.”
The CSA’s plan to address crypto regulation involves first research to identify emerging regulatory issues, and potentially propose custodial requirements for registrants and investment funds that facilitate custodial solutions for the trading and holding of regulated crypto-assets that qualify as securities. The CSA’s plan said securities regulators should consider implications of activist short selling in the context of this technology.
“There are currently no platforms facilitating the secondary trading of crypto-assets that are regulated as a marketplace in Canada,” the CSA stated in its plan. “Some of these platforms, depending on how they operate and the crypto-assets they offer, may be subject to securities or derivatives regulation.”
Such regulation is presumably intended to subvert possible future QuadrigaCX scenarios. At the end of last year, Quadriga, a Vancouver-based crypto trading platform lost access to approximately $190 million CAD, after the CEO Gerald Cotton passed away in India. The story was a wake-up call for securities regulators and investors to the fact that Canada has no official rules that would prevent a future Quadriga scenario, where tens of millions in client funds could be stored on a personal laptop, without any supervising party.
It should be noted that Canada is the only developed federal democracy that does not have a securities regulatory authority at the federal government level. The CSA itself is not a federal body, but a coalition of all existing securities regulators from Canada’s 10 provinces and three territories each with its own enforcement power and regulatory framework. Further complicating the situation, the concept of cryptographic tokens is also not caught within the definition of securities in Canadian securities laws, meaning even if Canada were to have a federal securities regulator, it may not necessarily cover the crypto industry.
Earlier this month, the United States’ Securities and Exchange Commission (SEC) charged Kik over its $157 million CAD initial coin offering (ICO) in 2017. The ICO was conducted by Kin, a crypto-asset created by Kik in May 2017. Kik has decided to fight the SEC in court, and recently decided to crowdfund $5 million to do so. More regulatory crackdowns in Canada could lead to crypto companies fighting future regulations or actions.
“I think it certainly is hopeful,” crypto and blockchain lawyer Michael Stephens told BetaKit. “The important aspect of putting this plan in motion will be the extent to which the CSA consults with industry and law firms to ensure they are striking the right balance between investor protection and encouraging innovative business models.”
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