Canadian securities regulators propose regulatory framework for crypto platforms

The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are seeking input from the FinTech community on how Canada should construct regulation for crypto-asset trading platforms in Canada.

The two organizations released a consultation paper on Thursday, with a proposed framework for crypto-asset trading platforms and are now looking for feedback on building that framework.

“We must provide clarity to the market about how regulatory requirements might best be tailored.”
 

Although crypto trading platforms can already be subject to securities or derivatives regulations, depending on their structure, others may include features that are not covered by existing regulations, and create risks for investors. Where securities legislation applies to platforms, the CSA and IIROC are considering a tailored regulatory framework to address the potential new features and risks of cryptos.

“This consultation outlines a proposed regulatory framework that provides clarity for platforms, greater market integrity and protection for investors,” said Louis Morisset, CSA chair and president, as well as CEO of the Autorité des marchés financiers. “Platforms have told us that a tailored regulatory framework is welcome as they seek to build consumer confidence and expand their businesses across Canada and globally.”

The recent QuadrigaCX fiasco highlighted the near-absence of regulations covering the cryptocurrency industry in Canada. The Vancouver-based platform, which had once been one of Canada’s largest crypto exchanges, collapsed when the CEO Gerald Cotton died and the company lost access to $250 million in cash and cryptocurrency.

Last month, crypto and blockchain lawyer Michael Stephens spoke to BetaKit about what regulations could have prevented Quadriga. He noted that the lack of federal regulations made it easier for a company like Quadriga, which was registered in BC, to get away with certain activities, especially since it wasn’t considered a securities marketplace.

RELATED: The QuadrigaCX debacle continues, with new revelations

Canada is the only developed federal democracy that does not have any securities regulatory authority at the federal government level. Securities regulators in Canada operate on a province-by-province basis, and many regulators also do not consider Ether, Bitcoin, Bitcoin Cash, Ripple, or Litecoin as securities.

In the past, the Toronto-based Blockchain Research Institute has recommended creating a central regulatory body at the federal level like the U.S. Securities and Exchange Commission, in order to streamline a national, unified policy on crypto exchanges in Canada. Last year, the federal government was set to implement regulations specifically for cryptocurrency and blockchain companies, but postponed the release to late 2019.

The CSA and IIROC consultation paper is now seeking input from the FinTech community on how to tackle custody and verification of assets, price determination, market surveillance, systems and business continuity planning, conflicts of interest, crypto-asset insurance, and clearing and settlement.

Canadian business law firm Osler, Hoskin and Harcourt released a written statement providing comment on the CSA and IIROC proposals for a regulatory framework. The statement detailed some of the benefits of creating a regulatory framework. It claimed the framework could open the door for platforms to operate within Canada in a compliant manner and could also make it easier for platforms to obtain and maintain commercial relationships with banks and other financial institution.

The statement also discussed some challenges platforms will face if a regulatory framework were to be created, including acquiring insurance, verifying assets, and meeting proficiency requirements.

“The framework contemplates various operational requirements intended to protect participants from the counterparty and other risks associated with platforms, most recently exemplified by the collapse of QuadrigaCX, such as requirements for market integrity, market surveillance, fair pricing, custody, clearing and settlement, disclosure of conflicts of interest, and systems and business continuity planning,” the statement read.

Osler said that it is imperative for the scope of the framework to be restricted to activities that are already subject to oversight by Canadian securities regulators, specifically dealing in, advising in or providing a marketplace for crypto assets that are characterized as securities or derivatives.

Pauline Brunel, a senior associate at Impression Ventures, told BetaKit that although debate around crypto regulation has existed for some time in Canada, Quadriga’s case underscored the need for a regulatory framework.

Pauline Brunel

Pauline Brunel – Senior Associate, Impression Ventures

“Without regulation, Quadriga-esque cases were bound to happen,” Brunel said. “It appears fraud cases are now coming to light in multiple jurisdictions and, unfortunately, have caused at least a billion dollars in lost and stolen crypto assets in 2018 alone.”

Brunel said a framework would allow Canada to play a lead role in innovation within crypto asset classes while providing supervision and a level playing field for participants. She added that regulations enable consumers and investors to quickly react to the ever-changing market, advocate for the space to improve its operating standards, and foster education and trust in the industry.

“We believe this open approach is healthy and constructive,” Brunel said. “In the future, we hope that regulators will play a critical role in monitoring and protecting investors from the significant conflicts of interests that arise within the crypto ecosystem.”

“Regulators will play a critical role in monitoring and protecting investors from the significant conflicts of interests…within the crypto ecosystem.”

“The emergence of digital and crypto assets continues to be a growing area of interest for regulators, investors, and marketplaces. And together, securities regulators are taking steps to deepen our understanding of this area,” said Andrew J. Kriegler, president and CEO of the IIROC. “We must adapt to innovation, and provide clarity to the market about how regulatory requirements might best be tailored and applied to these unique business models, while maintaining investor protection.”

In light of the QuadrigaCX incident, another organization, the Crypto Action Task Force (CATF), is attempting to build a ‘code of conduct’ for businesses operating in the blockchain industry. The CATF plans to build a framework outlining structure, standardization, and common practices crypto exchanges should be following. The organization is looking to gather input from businesses, leaders, and experts in the cryptocurrency space in Canada, as well as around the world.

The CSA and IIROC noted they are also engaged with international regulators to get feedback and input about their approach to crypto-asset trading platforms.

Image courtesy Pixabay.

Isabelle Kirkwood

Isabelle Kirkwood

Writer, globetrotter, drone pilot & David Attenborough enthusiast