While Canada has been one of the most enthusiastic countries in the world when it comes to cryptocurrency adoption, there has still been some uncertainty around regulations in the country when it comes to crypto trading. Thus, it is a welcome scenario that Canadian regulators have now published guidance around how trading platforms for cryptocurrencies should be regulated as digital tokens.
A 56-page document has been released by the Canadian Securities Administration and Investment Industry Regulatory Organization of Canada (IIROC), where they state that platforms that are involved in the trading of digital tokens must become members of the IIROC or apply for interim registration to continue operations. This is meant to show how existing rules can be tailored to include crypto trading platforms, rather than creating new rules specifically for them, with the goal being to balance flexibility and innovation with the need to protect Canadian investors by providing fairness and efficiency. This guidance was triggered by the growth in crypto trading platforms, on the back of the substantial price rally in Bitcoin and other crypto-assets during 2020 and this year as well.
Securities regulation is generally a matter for provincial governments in Canada, but the regulation of derivative products is divided between federal and provincial governments. These new regulations will also apply to foreign crypto exchanges that are operating in Canada, and they will now have to licensed as securities dealers in Canada to continue operations. The Ontario Securities Commission has already reached out to crypto-asset platforms that are currently trading in derivatives and other securities that they must bring operations into compliance soon or face regulatory action. The deadline for beginning these processes is 19th April. This is also aimed at protecting crypto users in the province, as unregistered platforms can expose investors to significant risks including fraud, theft and misuse of their assets and funds.
Canadian regulators have also stated that they intend to take a tailored approach to this issue, and so even those platforms which are only categorized as dealer platforms will need to register themselves as registered dealers, as long as they do not provide leverage or margin trading. This flexible approach is needed, as the nature of cryptocurrency trading makes it nearly impossible to apply rules and definitions that are in place for traditional securities trading to the crypto and digital asset marketplace. If an exchange qualifies as a marketplace, it must apply to its relevant jurisdiction’s securities regulator for an exemption from reporting requirements and obligations to settle trades through a regulated clearing agency.
Following this new guidance, most, if not all crypto exchanges in Canada will have to register to continue operating in the country. The regulators will also examine the contractual agreements between exchanges and users to determine if exemptions can be granted in certain cases, provided that they can comply with the required policy intent in alternative ways.
This is a very welcome development, as this regulation makes the terms of operation clear for crypto exchanges in the country. At a time where other countries are struggling to draw up appropriate regulation for the crypto industry, with many even banning crypto transactions, Canada is leading the way in providing effective rules and regulations that can allow innovation to take place while at the same time protecting users and investors in the industry. Canada has become a world leader in the crypto investment space as a result, and we can expect more countries to try and emulate Canada through the creation of their own regulations, which will be crucial if cryptocurrencies are to become mainstream financial assets that can be traded and invested in freely.