Watchdogs look to curb crypto risks

TORONTO • Canada’ s securities watchdogs said Thursday that they are considering a new framework to address the risks posed by the websites and companies that have popped up to allow investors to buy and sell bitcoin and other digital currencies.

There are currently more than 2,000 crypto-assets trading on more than 200 platforms worldwide, a joint consultation paper from the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada says.

Some of those platforms may already be subject to securities regulation — and may have traits similar to investment dealers and exchanges — but none is currently recognized as an exchange or authorized to operate as a marketplace or dealer in Canada, the paper notes.

“Depending on their structure, they may also introduce novel features which create risks to investors and our capital markets that may not be fully addressed by the existing regulatory framework,” the paper says.

“Where securities legislation applies to Platforms we are considering a set of tailored regulatory requirements for them to address the novel features and risks (the Proposed Platform Framework).”

The plan from regulators follows incidents such as the one that befell leading Canadian crypto-exchange Quadrigacx, which filed for creditor protection after its founder died in December and left the company unable to access or find millions of dollars in bitcoin and other digital assets.

A number of risks related to cryptocurrency-trading platforms are outlined in the paper, including that they may not hold enough assets to cover investor claims in the event of a bankruptcy. Also noted is that there was reportedly thefts of nearly US$1 billion in crypto-assets in 2018 from global trading platforms.

“The CSA supports innovation in our capital markets while protecting investors and promoting fair and efficient capital markets,” the paper says. “We are therefore considering a set of requirements tailored to Platforms’ operations that appropriately addresses the new risks introduced.”

According to the regulators, they have already talked with several crypto-trading platforms and heard they are looking for guidance and would welcome such a regulatory framework, as the companies aim to grow their businesses and maintain consumer confidence.

The paper’s purpose is to collect feedback on how rules can be tailored for firms in Canada subject to securities law, which regulators would use to set up a framework “that provides regulatory clarity to Platforms, addresses risks to investors and creates greater market integrity.”

Existing securities laws may apply to any company “advertising, offering, selling or otherwise trading or matching trades” of cryptoassets considered securities or derivatives, the paper says. Securities legislation could also apply to trading platforms where the digital assets may be considered commodities, it adds, as an investors’ contractual right to the asset could constitute a security or derivative.

The proposed framework would apply to platforms subject to those regulations, but that may not fit within the existing rules. It would apply to Canadian-based platforms and those with Canadian investors, and contemplates platforms typically registering as investment dealers and IIROC members.

“For example, if the trades on a Platform do not occur on the distributed ledger, and instead the Platform keeps track of changes in ownership on its own internal ledger, we will evaluate whether the Platform has a robust system of internal controls, including records, that ensures that a participant’s crypto assets are accurately accounted for by the Platform and appropriately segregated from assets belonging to the Platform,” the paper says.

Platforms would be expected to enable price discovery for their digital assets, the paper proposes, such as by ensuring information on orders and trades is available.