The Canadian crypto industry knew mainstream adoption would inevitably come with a regulatory load, especially after the 2019 collapse of the largest exchange at the time, QuadrigaCX. Participants, however, did not expect regulators to come with one of the most heavy-handed approaches possible.
On March 29, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) released a notice reaffirming that securities laws apply to cryptocurrency trading platforms (CTPs), or exchanges, and gave them three weeks’ time to register and apply for IIROC membership.
Canadian officials have decided to throw the burden onto crypto firms and try to corset them in 20th-century legislation. By playing safe, they are jeopardizing jobs, foreign investment and financial inclusion for Canadians.
The document concerns exchanges that offer “cryptoassets that are securities,” also known as security tokens. The notice did not specify which security tokens, but the CSA has sided with U.S. regulators in the past in considering that virtually all security tokens fall under its purview. In practice, all major exchanges qualify. This has restricted the availability of crypto assets to Canadian investors, and that limitation will continue under the new regime. Exchanges that offer derivatives, futures contracts and swaps are also subject to CSA jurisdiction.
Because Canada lacks a national capital-markets authority, every exchange must reach out to a provincial securities regulator to start the process. Foreign-based exchanges that wish to continue serving Canadian clients must register and comply with Canadian securities legislation too, under penalty of a Canadian ban and enforcement actions.
The deadline to do so expired on April 19. Now begins a two-year limbo, during which officials will monitor the crypto ecosystem and develop a long-term regulatory framework. They can demand that exchanges adjust to yet-to-be-decided compliance requirements, raising uncertainty.
The document’s reception has been mixed. Bennett Jones of the Fintech and Blockchain Group says “this interim period is an opportunity for CTPs to work with provincial regulators to develop tailored regulatory approaches” that can coexist with crypto entrepreneurship. However, for the Canadian law firm Osler Hoskin and Harcourt, “CTPs should be prepared for high registration costs and lengthy negotiations with CSA staff during the interim period. And that is just the beginning for CTPs that want to deal with retail investors.”
The new guidance mandates that exchanges must self-identify into two categories: (1) dealer platforms and (2) marketplace platforms.
Dealer platforms, known in the industry as centralized crypto exchanges, are counterparties when trading and generally offer custody of assets (through the exchange’s digital wallets). In contrast, marketplace platforms—the so-called decentralized exchanges—merely set up a virtual space and bring together buyers and sellers. In the latter, clients hold assets in their own wallets.
However, the world of crypto exchanges is not so clear-cut. Assessing whether a CTP is a dealer or a marketplace can be tricky. Many exchanges offer both asset custody and a marketplace for clients to trade with each other. Will exchanges have to break up into two or more business units and register separately?
One can predict the outcome by looking at the United States, where such a regime is already in place. Binance, the world’s largest crypto exchange by volume, had to create a separate platform to serve U.S. customers that is devoid of many instruments and innovations available to the rest of the world. Exchanges also shun New York residents to avoid the onerous BitLicense.
Similarly, many startups without an army of lawyers and compliance officers will simply decide to avoid Canadians.
If one adds this ultimatum against exchanges to the CSA’s past crackdown on custodial crypto firms, the Canadian Revenue Agency’s bullying approach to taxing crypto assets and stricter know-your-customer requirements, one gets a bleak picture for an otherwise promising industry.
Canadian regulators need to understand that crypto assets and decentralized finance are some of the most competitive markets out there. Funds flow from continent to continent in a second, chasing the best returns and places to do business—nationalism be damned. The reality is Canada must adapt and emulate countries such as Liechtenstein and Malta. Visionary leaders there have understood that staying one step ahead is key and have adapted their legislation in advance to attract crypto entrepreneurs. Otherwise, Canada risks shooting herself in the foot by shutting off trillions of dollars in investment and associated jobs.
Thanks to Canada’s decentralized capital markets, hope remains that a province will understand what is at stake and carve out enough exceptions to leave the door open. Let’s just hope the federal takeover is not complete by then, making Canada a flyover destination in the new financial world.
Paz Gomez is a research associate with the Frontier Centre for Public Policy. Daniel Duarte contributed to this article.
Photo by Stanislaw Zarychta on Unsplash.