In October, Toronto-based Coinsquare became the first crypto trading company to obtain broker registration with the Investment Industry Regulatory Organization of Canada (IIROC). This means a lot, as Coinsquare investor funds now benefit from the safety of the Canadian Investment Protection Fund in the event of insolvency, while the exchange is required to regularly report its financial situation.
This news reminds us of the peculiarities of Canadian crypto regulations. While the country still maintains a fairly strict licensing process for virtual asset providers, it overtakes neighboring United States in its experiments with crypto exchange-traded funds (ETFs)pension fund investments and central bank digital currency (CBDC) efforts.
An era of restricted dealers
Coinsquare, which happens to be the oldest crypto asset exchange in Canada, benefits from its new legal status as none of its competitors can currently boast the same legal footing. At the time of publication, all other local players must have “dealer-restricted” status, signaling that they have made their listing offer and are now awaiting IIROC’s decision.
Guidelines for crypto-asset trading platforms were introduced by IIROC and the Canadian Securities Administrators (CSA) in 2021. They require crypto businesses dealing in security tokens or crypto contracts to s register as “Investment Dealers” or “Regulated Markets”.
All local businesses were given a two-year transition period, during which they must begin the registration process and, in some cases, obtain temporary “restricted distributor” registration.
The list of “restricted resellers” who have been given a two-year relief period to operate under the current registration process is rather short and mainly includes local businesses, such as Coinberry, BitBuy, Netcoins, Virgo CX and others. These companies still benefit from the right to facilitate the buying, selling and holding of crypto assets, but what awaits them is the strict compliance procedure necessary to continue their operations after 2023. For example, Coinsquare had to obtain a police insurance that includes a crypto asset loss endorsement and funding a trust account maintained at a Canadian bank.
Prosecutors closely monitored any breaches. In June 2022, the Ontario Securities Commission (OSC) imposed financial sanctions on Bybit and KuCoin, alleging violations of securities laws and operating unregistered crypto asset trading platforms. He obtained orders prohibiting KuCoin from participating in the province’s capital markets and fine the exchange over $1.6 million.
The land of experiences
At the same time, there are adoption cases in Canada that seem radical in the United States. For example, there are dozens of crypto ETFs to invest in the country, while Grayscale has yet to fight the legal battle with the U.S. Securities and Exchange Commission (SEC) for the right to launch its first ETF.
The world’s first bitcoin (BTC) ETFs for individual investors has been approved by the OSC for Purpose Investments in 2021. Purpose Bitcoin ETF accumulates around 23,434 BTC, which is actually a significant symptom of the bear market. In May 2022, he held around 41,620 BTC. The major release of the Purpose Bitcoin ETF occurred in June, when around 24,510 BTC, or around 51% of its assets under management, were withdrawn by investors in a single week.
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Another breakthrough in crypto adoption in Canada came when the country’s largest pension funds began investing in digital assets. In 2021, Caisse de Dépôt et Placement du Québec — one of the largest pension funds in the French-speaking province of Quebec — invested $150 million in Celsius Network.
That same month, the Ontario Teachers’ Pension Plan announced its $95 million investment in FTX. Unfortunately, this news has not aged well as both companies have since collapsed and both pension funds have had to write off their investments. Perhaps, in this light, the US Department of Labor’s warning to employers against the use pension funds that include bitcoin or other cryptocurrencies now seems like a prudent precaution.
Due to its cold climate, cheap electricity supply, and light regulations, Canada is among the world’s top destinations for cryptocurrency mining. In May 2022, it represented 6.5% of the overall BTC hash rate. However, this fall, the company that manages electricity in the Canadian province of Quebec, Hydro-Quebec, asked the government to release the company from its obligation to power crypto miners in the province. According to the reasoning, the demand for electricity in Quebec should grow to the point that the supply of crypto will put pressure on the energy supplier.
The development of the CBDC is another direction in which Canada is moving faster than its southern neighbor. In March 2022, the Bank of Canada launched a 12 month research project focused on the design of the Canadian digital dollar in collaboration with the Massachusetts Institute of Technology.
In October, the Bank of Canada released a research and proposed several particular CBDC archetypes also useful for organizing “possible CBDC designs”. While in March, “no decision had been made on whether or not to introduce a CBDC in Canada”, the country’s recent budget amendment contains a small section on “Combating the digitization of money”. In the statement, the government said that consultations with stakeholders on digital currencies, stablecoins and CBDCs would be launched on November 3, although the exact stakeholders who will be engaged remain unclear.
The partisan divide
Discussion of what could have become Canada’s official legal framework for crypto – Bill C-249 – showed a strong partisan divide around the topic. A bill for “encouraging the growth of the crypto-asset sector” has been introduced in the House of Commons in February 2022 by Conservative Party MP and ex-minister Michelle Garner. The lawmaker has proposed that the Minister of Finance of Canada consult with industry experts to develop a regulatory framework to stimulate innovation around crypto. three years after the adoption of the bill.
Despite expressed support from the local crypto community, the bill has not met with much approval among other lawmakers. During the November 21-23 second reading, members of other political parties, including the ruling Liberal party, lambasted both the proposal and the Conservative party, accusing them of promoting the “system of black money”, and the Ponzi scheme and bankruptcy of retirees and as a result, C-249 is now officially buried.
As Michelle Garner introduced the bill, Conservative Party leader Pierre Poilievre took over. Former Minister of Employment and Social Development, Poilievre was Advocate for more financial freedom through tokens, smart contracts and decentralized finance. Earlier this year, he urged the Canadian public to vote for him as leader to “make Canada the blockchain capital of the world.”
The next general election in Canada is scheduled for 2025, and given the failure of C-249 and the general state of the market, Poilievre and the Conservatives are unlikely to win widespread support in Parliament for their pro- -crypto until then. Currently, the Conservative Party holds only 16 of 105 seats in the Senate and 119 of 338 in the House of Commons.
And after
From a trading platform perspective, the industry is struggling to address specific challenges, Calgary-based chief compliance officer and co-founder Julia Baranovskaya told Cointelegraph.
The majority of industry stakeholders would like to see “clear guidelines and a risk-based approach”. Currently, the majority of regulators in Canada have chosen to apply existing financial sector rules and regulations designed and implemented for the traditional financial sector.
However, Baranovskaya pointed out that in recent years regulators have engaged in closer dialogue with the crypto industry. The Securities Commission has created a sandbox and encouraged crypto asset trading platforms and types of innovative companies offering alternative financial instruments to join. IIROC also engaged in dialogue with industry participants to better understand business models and determine how the current framework can be applied to them.
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But, the challenges of the fragmented regulatory framework and the lack of specific regulations for crypto assets are still there. Most existing regulations are product-based, but with the ever-evolving crypto space, the product-based approach “will always be a few steps behind.” In Baranovskaya’s words:
“Understanding the underlying technology of crypto assets and De-Fi products that builds a flexible yet robust regulatory regime that can adapt to the ever-changing crypto asset space is critical.”