Canadian regulators tighten rules for unregistered crypto platforms

On Dec 12, 2022

CSA said crypto assets and financial products will remain ‘high-risk’ investments even with new undertakings in place

Sources familiar with the matter estimate FTX had more than 30,000 users in Canada when it ran into trouble. Photo by Dado Ruvic/Reuters/Illustration/File Photo

On the heels of the spectacular collapse of global cryptocurrency platform FTX, Canadian regulators have announced a co-ordinated oversight regime that will require all crypto trading platforms seeking registration to sign undertakings to comply with investor protections before they are formally under regulatory watch.

This pre-registration “undertaking” must include a pledge that Canadian clients’ assets will be held with an appropriate custodian and that these assets will be segregated from the platform’s proprietary business. Crypto platforms will also be prohibited from offering margin or leverage for any Canadian client, the Canadian Securities Administrators, an umbrella organization for the country’s 13 provincial and territorial watchdogs, said Monday.

If a pre-registration undertaking is not provided to the principal regulator by a deadline to be determined, or the platform has not ceased operations in Canada, “all applicable regulatory options to bring the platform into compliance with securities law, including enforcement action, (will be considered), the CSA said in a statement.

The CSA announced preliminary plans to enhance oversight of crypto operators in this country in mid-August, before FTX’s November collapse.

However, sources say the run on deposits of the second-largest crypto exchange in the world — along with allegations of unauthorized co-mingling of client funds between the Bahamas-based crypto exchange and a related hedge fund — accelerated the attempt to close gaps that could allow platforms to establish themselves in one or more jurisdictions within Canada.

“Following recent events in the crypto market, the Canadian Securities Administrators is strengthening its approach to oversight of crypto trading platforms by expanding existing requirements for platforms operating in Canada,” the organization said in a statement Monday afternoon.

The Ontario Securities Commission, Canada’s largest capital markets regulator, has taken a hard line on crypto operators, including tangling with FTX behind closed doors last year and ordering the firm to immediately halt the sale of crypto assets and derivative products to all Ontario retail investors until it was properly registered or obtained restricted dealer status, sources have told the Financial Post.

Canadian investors are urged to exercise caution and consider seeking advice from a registered investment advisor before investing in crypto
Canadian Securities Administrators

Still, there were many FTX clients outside Ontario. Sources familiar with the matter estimate the platform had more than 30,000 users in Canada when it ran into trouble.

In addition, FTX was in the midst of buying a Calgary-based crypto platform, Bitvo Inc., a deal that would have given it access to the Canadian company’s restricted dealer status, which had been obtained from the Alberta Securities Commission in April. However, the combination of the two crypto firms was called off when FTX was revealed to be on the brink of collapse.

In Monday’s statement, CSA also said it is of the view that stablecoins can be securities or derivatives, or both.

Given the conditions around crypto and derivatives, “crypto trading platforms are expected to have established policies and procedures to determine whether each crypto asset they provide exposure to is a security and/or derivative,” the CSA said.

Even with the new undertakings in place, the umbrella organization for securities regulators said crypto assets and financial products will remain “high-risk” investments.

“These risks could result from, among other things, crypto trading platform non-compliance with registration terms and conditions or undertakings, interconnectedness within the crypto sector, insolvency, hacks, price volatility and uncertain value propositions for individual assets,” the CSA said.

“Canadian investors are urged to exercise caution and consider seeking advice from a registered investment advisor before investing in crypto,” the regulatory authority said, adding that those who choose to invest should make sure the platform is registered with a provincial or territorial securities regulator.

There is growing appetite for crypto in Canada, with a recent OSC survey showing 30 per cent of Canadians plan to invest in crypto products over the next 12 months, despite the fact that most who responded also lacked working knowledge of the practical, legal and regulatory particulars of owning them.

In a speech in early November, OSC chief executive Grant Vingoe said it is challenging to regulate the fast-growing sector where operating outside the system is can be seen as a virtue. He said global crypto firms with “opaque” operations outside Canada can nevertheless have “really significant impacts” on Canadian investors, and pledged to crack down on platforms that encourage or permit Canadians to use VPN technology to disguise the user’s location and obtain access to services that are not permitted here.

The OSC has tangled publicly with Binance Holdings Ltd., the world’s largest crypto exchange, which briefly flirted with buying FTX when the rival ran into trouble.

Binance announced its intention to withdraw its services from Ontario last year rather than follow a requirement to register with the provincial regulator, but then notified users last December that it was permitted to continue its operations in Ontario. This prompted the OSC to issue a rebuke and insist “no entity in the Binance group of companies holds any form of securities registration in Ontario.”

In March, Binance signed a legally enforceable undertaking committing to the OSC that activities involving Ontario residents had ceased — aside from expressly “permitted actions to protect investors” — and committed to ensuring it would prevent any further activities.

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