Coinsquare, a Toronto-based crypto trading company, was the first to be granted dealer registration by the Investment Industry Regulatory Organization of Canada in October. That means a lot as now Coinsquare investors’ funds enjoy the security of the Canadian Investment Protection Fund in the event of insolvency, while the exchange is required to report its financial standing regularly.
This news brings to our attention the peculiarities of Canadian crypto regulation. While the country still holds a rather tight process of licensing the virtual asset providers, it outpaces the neighboring United States in its experiments with crypto exchange-traded funds (ETFs), pension funds’ investments and central bank digital currency (CBDC) efforts.
The era before restricted dealers
Coinsquare, which happens to be Canada’s longest-operating crypto asset trading platform, benefits from its new legal status as none of its competitors can currently boast the same legal footing. By publishing time, all other local players must have the status of a “restricted dealer,” signaling that they’ve made their registration bid and now await IIROC’s decision.
In 2021, IIROC and Canadian Securities Administrators (CSA), introduced the Guidance for Crypto-Asset Trading Platforms. It requires crypto businesses dealing with security tokens or crypto contracts to register as “investment dealers” or “regulated marketplaces.”
All local companies have been given a two-year transitory period, during which they should start the registration process and, in some cases, obtain the “restricted dealer” temporary registration.
The list of “restricted dealers” that have been granted a two-year relief period to operate amid the ongoing registration process is rather short and includes mainly local companies, such as Coinberry, BitBuy, Netcoins, Virgo CX and others. These companies have the right to facilitate the purchase, sale, and holding of crypto assets. However, they will need to comply with strict compliance requirements to continue operating after 2023. Coinsquare needed to purchase an insurance policy with an endorsement for losses of crypto assets, and also fund a trust account that was held at a Canadian Bank.
All non-compliance is being closely monitored by the prosecutors. Bybit, KuCoin and KuCoin were penalized by the Ontario Securities Commission in June 2022. The OSC claimed they had violated securities laws and operated unregistered crypto-asset trading platforms. It obtained orders banning KuCoin from participating in the province’s capital markets and fining the exchange for more than $1.6 million.
The land of experiments
There are also adoption cases in Canada which sound very radical to the United States. Grayscale is still fighting the U.S. Securities and Exchange Commission for the right to launch its first ETF.
The world’s first Bitcoin (BTC) ETF for individual investors was approved by the OSC for Purpose Investments back in 2021. The Purpose Bitcoin ETF holds approximately 23,434 BTC. This bear market symptom is quite prominent. It had approximately 41,620 BTC as of May 2022. It was the largest outflow from Purpose Bitcoin ETF occurred In June, investors retracted approximately 24,510 BTC or 51% of the asset under management in one week.
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Another breakthrough in Canadian crypto adoption erupted when the country’s largest pension funds started to invest in digital assets. In 2021, the Caisse de Depot et Placement du Québec — one of the largest pension funds in the French-speaking province of Quebec — invested $150 million into Celsius Network.
The same month, the Ontario Teachers’ Pension Plan announced its $95-million investment in FTX. Unfortunately, this news didn’t age well as both companies have since collapsed and both pension funds had to write off their investments. Perhaps, in that light, the U.S. Department of Labor’s warning to employers against using pension funds that include Bitcoin or other cryptocurrencies now seems like a prudent precaution.
Due to its cold climate, cheap electric supply and light regulation, Canada is among the world’s leading destinations for crypto mining. It accounted for 6.5% global BTC hash rates in May 2022. However, this fall, the firm managing electricity across the Canadian province of Quebec, Hydro-Québec, requested the government to release the company from its obligation to power crypto miners in the province. As the reasoning goes, electricity demand in Québec is expected to grow to the point that powering crypto will put pressure on the energy supplier.
Canada is moving in a different direction than its neighbour to the south with the development of the CBDC. The Bank of Canada, in partnership with the Massachusetts Institute of Technology, launched a 12-month-long research project to design the Canadian digital currency.
In October, the Bank of Canada published a research report and proposed several particular archetypes of CBDC as useful for organizing “the possible CBDC designs.” While back in March, there was “no decision made on whether to introduce a CBDC in Canada,” the country’s recent budget amendment contains a small section on “Addressing the Digitalization of Money.” In the statement, the government said consultations with stakeholders on digital currencies, stablecoins and CBDCs are being launched on Nov. 3, although exactly which stakeholders will be engaged remains unclear.
The partisan divide
The discussion of what could have become Canada’s formal legal framework for crypto — bill C-249 — showed a sharp partisan divide around the topic. A bill for the “encouragement of the growth of the cryptoasset sector” was introduced A member of the Conservative party and former Minister Michelle Garner introduced Garner to the House of Commons on February 20, 2022. The lawmaker proposed having Canada’s Minister of Finance consult with industry experts to develop a regulatory framework aimed at boosting innovation around crypto three years after the bill’s passage.
Despite the voiced support from the local crypto community, the bill didn’t meet much approval among fellow lawmakers. During the second reading on Nov. 21–23, members of other political parties, including the ruling Liberal party, blasted both the proposition and the Conservative party with accusations of promoting the “dark money system,” and Ponzi scheme and bankrupting retirees and as a result, C-249 is now officially buried.
Michelle Garner introduced the bill. But, Pierre Poilievre of the Conservative party took the brunt. Poilievre is a former Minister for Employment and Social Development and has been advocating more financial freedom through tokens and smart contracts and decentralized financing. Earlier this year, he urged the Canadian public to vote for him as their leader to “make Canada the blockchain capital of the world.”
The next general elections in Canada are scheduled for 2025, and given C-249’s failure and the general condition of the market, it’s not likely that Poilievre and the Conservatives will get broad support in the Parliament for their pro-crypto efforts until that time. Currenty, the Conservative party has 16 of the 105 Senate seats. It also holds 119 of 338 House of Commons members.
What’s next
Julia Baranovskaya (chief compliance officer, co-founding member of Calgary-based NDAX) stated that there are certain challenges from a trading platform perspective.
The majority of industry stakeholders would like to see “clear guidelines and a risk-based approach.” Currently, a majority of regulatory authorities in Canada have chosen to apply existing financial industry rules and regulations designed and implemented for the traditional financial industry.
Baranovskaya noted that regulators have been in closer contact with the cryptocurrency industry in recent times. The Securities Commission established a sandbox to encourage crypto asset trading platforms as well as innovative businesses that offer alternative financial instruments to join. The IIROC also has been leading a dialogue among industry participants to better understand business models and to identify ways that the current framework could be applied to them.
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However, there are still challenges to be faced due to the fragmented regulatory structure and lack of crypto-specific regulations. Most of the existing regulations are based on the product, but with the constantly evolving crypto space, the product-based approach “would always stay a few steps behind.” In Baranovskaya’s words:
“Understanding the underlying technology behind crypto assets and De-Fi products that work out a flexible but robust regulatory regime that can adjust to the ever-changing crypto asset space is essential.”