The cryptocurrency industry is complex, and to support innovation, regulation must work on the ground. (Photo: 123RF)
Canadian authorities recently revised the regulations regarding crypto-asset trading platforms. This creates some uncertainty for both users and operators. Analysis with Frank Hepworth, of the law firm Borden Ladner Gervais (BLG).
Until recently, “crypto exchanges,” the trading platforms for bitcoin and other digital currencies, were subject to somewhat dated regulations in the country. But the Canadian securities regulators have recently dusted off the application of existing regulations (CSA / IIROC Staff Joint Notice 21-329).
“Due to the novelty of services and products, i.e. crypto assets that are similar to commodities, but which are sometimes considered securities or traded in a way that makes them derivatives, there is was reasonable to clarify the situation of the sector in Canada, ”contextualizes Frank Hepworth of law firm BLG.
Which is not without consequence. The changes that users will face are uncertain, as the conditions for registration as a broker or marketplace will only be determined during the registration process, BLG said, while minimizing the impact that will not be such as to prevent users from continuing to buy and sell their cryptocurrencies.
Incremental regulation
That being said, if trading platforms are to be regulated like their non-crypto financial sector counterparts, investment limits will apply to the majority of their client base.
“The securities commissions have indicated that they are prepared to prescribe custom exemptions to reflect their appreciation of innovative industries in Canada. However, this assessment will be tempered for the investment security of a retail client, ”recalls Frank Hepworth.
Wealthsimple Crypto is currently the only provider to have already received such exemptions and an investment limit of C $ 30,000 for its retail customers.
In addition, for crypto players, it is important to be aware of the need to be subject to the regulation of brokers and securities markets. These regulations establish specific requirements for personnel, operations, reporting standards, auditing, disclosure, etc. Compliance will be a significant and ongoing expense for operators in Canada.
More broadly, these new guidelines will have implications for the financial services sector in Canada as a whole, as authorities themselves have recognized that this is “an evolving market” and that new models are being developed. “case-by-case” consideration might emerge over time. In other words, the regulatory treatment will be variable geometry.
Progressive Canada?
“The approach taken around the world for the cryptocurrency industry is: innovation first, regulation second. This is probably a necessary approach, which historically has not been exclusive to crypto. The guidance given by regulators in Canada over the past two years is progressive in that it speaks directly to its internal crypto industry - a step that many other jurisdictions have yet to take, ”adds BLG law firm.
Reducing the time between innovation and regulation is the job of regulators. However, let’s concede that the cryptocurrency industry is complex, and to support innovation, regulation must work on the ground.
“Regulators are in a difficult position, especially Canadian regulators who are just one player in a much larger game. Universal ground rules have not been adopted, so each country is doing its best to protect investors, public policy interests and promote innovation. There are good reasons why Canadian regulators want to be sure of their position before making hard-hitting statements, ”Borden Ladner Gervais said.
A loop-hole
It should be noted that many cryptocurrency investors in Canada will not submit to these regulatory restrictions. Because the ecosystem born with bitcoin carries a fundamental difference: the ease with which anyone can access unregulated markets.
“The Challenge (decentralized finance) is an increasingly popular term, which refers to the phenomenon that an Internet-native financial services infrastructure is being built. The ease with which a person can access DeFi, by simply downloading an application to a cell phone, contrasts sharply with the classic financial process of customer identification (KYC), anti-money laundering (AML), product evaluation. and customer assessment that crypto platforms should now demand from their customers, ”says Frank Hepworth.
There is clear evidence of market preference. Binance, the world’s largest cryptocurrency exchange, is a privately managed offshore platform and handles a daily transaction volume worth nearly C $ 47 billion. The largest regulated platform in the United States, Coinbase, trades for comparison almost 10 times less volume (~ 5 billion).
“The disparity is even more pronounced if we add Uniswap, a DeFi-type crypto-exchange, whose access and management are completely open. Uniswap’s daily volumes often exceed Coinbase’s, ”Hepworth notes.
Would Canadian cryptocurrency investors have strongly opposed preferences to these trends? Or will they continue to have access to more liquidity and investment options, all without (too many) restrictions imposed by the platforms they use?
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