Canada to explore regulating crypto exchanges

Yesterday the Canadian securities regulators announced they are consulting on a framework for the regulation of crypto-asset trading platforms. The Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC) jointly published a paper and are looking for feedback by 15 May.

Few in the blockchain world will have missed the story of Canadian cryptocurrency exchange QuadrigaCX where the CEO died leaving clients unable to access funds. Unsurprisingly one of the items on the list for consideration is systems and business continuity planning.

Other areas to be explored include custody and verification of assets, price determination, market surveillance, conflicts of interest, crypto-asset insurance, and clearing and settlement.

Crypto-asset insurance is problematic since there’s a shortage of insurers willing to take the risk. And often the cost of insurance is prohibitive.

“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 and 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 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,” added Andrew J. Kriegler, President and CEO, 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.”

The regulators say that some platforms may be subject to securities and/or derivatives regulation. In these cases, the CSA and IIROC are considering a tailored regulatory framework.

The paper lists some factors to evaluate:

whether the Platform is structured so that there is intended to be and is delivery of crypto assets to investors,

if there is delivery, when that occurs, and whether it is to an investor’s wallet over which the Platform does not have control or custody,

whether investors’ crypto assets are pooled together with those of other investors and with the assets of the Platform,

whether the Platform or a related party holds or controls the investors’ assets,

if the Platform holds or stores assets for its participants, how the Platform makes use of those assets,

whether the investor can trade, or rollover positions held by the Platform, and

having regard to the legal arrangements between the Platform and its participants, the actual functions of the Platform and the manner in which transactions occur on it:
who has control or custody of crypto assets; who the legal owner of such crypto assets is; and what rights investors will have in the event of the Platform’s insolvency.

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