As QuadrigaCX’s woes unfold on an international stage, the crypto community is reeling. The firm owes its clients $190 million CAD, which it cannot access from the company’s now-deceased CEO’s encrypted laptop. Now, questions are being raised about the fact that Canada has virtually no existing regulatory framework around cryptocurrency exchanges.
“This is a gap in the regulatory landscape, it’s arisen as a result of technology outstripping the ability to legislate faster.”
Quadriga’s story shook cryptocurrency investors in the volatile and budding marketplace to their core. Many onlookers have been left wondering how such a disaster was allowed to unfold in a developed country like Canada. Despite Stephen Harper’s government passing groundbreaking legislation in order to prevent the money laundering of cryptocurrency in 2014, Canada still 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 body or backup strategy.
In order to understand the regulatory landscape around cryptocurrencies, BetaKit sat down with crypto and blockchain lawyer Michael Stephens to understand what regulators and the crypto community can learn from Quadriga. Stephens is an information technology law partner in the Vancouver office of Fasken and is engaged with BC’s tech ecosystem. Stephens represents companies in all stages of development, with a particular focus on early-stage entrepreneurs, startups, and emerging growth companies.
Under Canadian law, digital currencies are permitted, but cryptocurrencies are not considered legal tender. Stephens noted that many regulators also do not consider Ether, Bitcoin, Bitcoin Cash, Ripple, or Litecoin as securities.
Securities regulators in Canada operate on a province-by-province basis, which Stephens noted, makes sense considering Canada’s geographic size, but could be impractical in regulating companies that are based in one province but conduct the majority of their business in other jurisdictions.
Quadriga notably operated across jurisdictions. The exchange was registered in British Columbia, but had no offices in the province, in fact, no offices at all. It was run off its CEO, Geral Cotten’s laptop, who was based out of Nova Scotia.
“It is kind of silly now to have a different regulator in each province especially when the propensity for overlap is pretty high, and [the provinces] don’t all see eye-to-eye,” Stephens said. “What you’re getting now is companies that don’t really see themselves as tethered to any one jurisdiction.”
“Because there are no standards, or codes of conduct, or regulatory framework…companies like Quadriga are capable of being run poorly.”
Canada is the only developed federal democracy that does not have a securities regulatory authority at the federal government level. The federal government was set to implement regulations for cryptocurrency and blockchain companies, but postponed the release. The regulations would allow crypto to be regulated the same way other securities are in Canada. The finalized regulations were supposed to be due this fall, but the government said they won’t be published until late 2019.
One set of comments submitted to the federal finance department, regarding cryptocurrency regulations, included a report from the Toronto-based Blockchain Research Institute (BRI). The BRI 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.
“It has always surprised me that there really isn’t any sort of governing body for [crypto] exchanges,” said Stephens. “Because there are no standards, or codes of conduct, or regulatory framework for these types of companies to fit into, companies like Quadriga are capable of being run poorly.”
He added that before blame is shifted to securities regulators in BC, amid Quadriga’s fiasco, the public should remember what the specific job mandates of securities regulators in Canada are.
“Their job is not to make sure people run companies with common sense,” he said. “Their job is to protect the investing public and to ensure that there’s an efficient capital market.”
Earlier this month, the BC securities regulator told Bloomberg that it doesn’t have jurisdiction over the exchange, meaning Quadriga’s clients won’t be able to get assistance from the BC Securities Commission. Stephens said he suspects if Quadriga could have been considered a securities marketplace, it could have been brought in on the jurisdiction of provincial securities regulators.
He noted, however, even if this was the case, the provincial regulators might not know what to do with Quadriga. “I’m not sure [regulators] would have known quite how to enforce against Quadriga with its 115,000 clients and $290 million under management,” he said. “Something of that scale would have probably been a huge resource strain on a provincial regulator.”
“I’m not sure [regulators] would have known quite how to enforce against Quadriga.”
In 2018, the BRI hosted a roundtable of 70 contributors from the cryptocurrency industry and submitted a report that concluded there is substantive regulatory work that needs to be done to create certainty and build a competitive industry. But Stephens said before any legislation happens, there has to be a process of education for regulators about cryptocurrencies. He said he doesn’t think regulators and lawmakers know enough about cryptocurrency to make any meaningful strides.
“My crypto and blockchain clients get asked on a regular basis to come to the British Columbia Securities Commission to demo their products, just to talk to them and educate them,” Stephens said. “I think before any legislation happens there has to still be a process of education.”
He said rather than attempting to divide and conquer, Stephens believes regulators need to collectivize and put all their expertise, strength, and resources in a more central and harmonized structure. However, the concept of cryptographic tokens is also not caught within the definition of securities in Canadian securities laws. Therefore, even if a more centralized regulatory framework existed, regulating cryptocurrencies would not be within the jurisdiction of securities regulators.
“I think this is a gap in the regulatory landscape and it’s arisen as a result of technology outstripping the ability to legislate faster,” he said. “Is there legislation coming soon to address this? I would expect yes.”
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