Canadian government and crypto – what should Canadian investors consider

There is now a growing and expanding regulatory framework for crypto assets and trading platforms. Investors, speculators, and buyers may be left uncertain as to whether or not applicable securities laws apply.

Among these standards are risk management, transparency, and treating customers with honesty, fairness, and good faith; all of which assist ensure that investors are protected when a company or person is registered. Due to massive investment losses and the high-profile bankruptcy of certain crypto lenders, the cryptocurrency market crashed between May and July of this year, triggering a crisis of trust. Before making any crypto investments, institutional investors should do their homework and carefully weigh the benefits and drawbacks. Even though investing in cryptos can be rewarding they are linked to risks and might cause investors to lose money. In this article, we’ll provide you with information on Canadian regulations towards cryptocurrencies and whether or not these regulations can protect investors. 

How does crypto regulation work in Canada?

The Canadian government has sought to avoid the massive wave of legal problems that would arise if the digital currency becomes more mainstream. By expanding its anti-money-laundering statute, the Proceeds of Crime and Terrorist Financing Act (PCA), to include bitcoin traders in 2014, Canada was the first country to enact legislation specifically targeting digital currency. As expected, the blockchain community and cryptocurrency aficionados were dismayed by the Canadian government’s effort to define and accept cryptocurrencies, which reflected their attitude toward the new technology: cryptocurrency is a danger with an undetermined position in our society.

It is worth highlighting that the Canadian Securities Administrators (CSA) stated on August 15, 2022, that CTPs seeking registration under securities rules would be required to give a publicly disclosed undertaking before they may continue offering their services in Canada.

These commitments are intended to alleviate confusion among Canadian consumers about the legal standing of different CTPs and to address concerns of registered CTPs about unfair competition from unregistered CTPs.

The March 2021 release of Staff Notice 21-329 shed light on how securities regulations should be applied to cryptocurrency exchanges. An operator of a cryptocurrency trading platform may continue to do so temporarily under the interim regulatory framework if they register as a limited dealer and comply with certain limitations and exemptions related to their business model. Operators are required to apply for investment dealer registration and IIROC dealer membership during the transition period, which is typically two years.

Nine cryptocurrency exchanges have applied for and been given limited dealer or investment dealer status as part of the strategy outlined in Staff Notice 21-329. When it comes to complying with Canadian securities rules, several other crypto trading platforms have already begun talking to their primary securities authorities.

Things to remember

Group 1 crypto assets will be subject to the categorization requirements set out in the statement, while Group 2 crypto assets will be supervised using a more stringent prudential framework, as per the statement.

It is stated in the document that “this advise lays out OSFI’s expectations as to when FRFIs should inform their lead supervisor if they plan to have exposures to crypto assets.” As indicated in the instructions.

After the Basel Committee issued its second consultation paper on the prudential regulation of banks’ crypto-asset exposures, which said that “Canada would keep an eye on the significant developments depending on the overall performance of the crypto market”.

It should also be stated that cryptocurrency trading platforms (CTPs) would fall under securities law if they hosted transactions involving crypto assets that qualify as securities or derivatives. In addition, securities law would apply to a CTP if it engaged in the trading of contracts or instruments that were derivatives of crypto assets.

Because the crypto asset is not delivered instantly with a CTP, the user is forced into a perpetual state of utter dependency on the service. By storing a user’s crypto assets in a wallet managed by the CTP, the user is entering into a contract that is governed by securities legislation if the user ever wants to trade or transfer the stored crypto assets.

One major difference between the pre-registration undertakings and the terms and circumstances of the “exemptive” relief offered to crypto trading platforms under the interim framework in Staff Notice 21-329 stands out.

Although bitcoin ETFs were allowed in Canada, the Canadian Securities Administrators and the Investment Sector Regulatory Organization of Canada have taken a tough stance on the industry, forcing crypto trading platforms and dealers to register with the relevant provincial authorities.

The Canadian government has mandated a registration scheme for trading platforms providing custodial services to residents of the country. Several businesses have registered to take advantage of the new marketing and advertising regulations. In addition, the Ontario Securities Commission has taken strong action to enforce these rules against unlicensed offshore trading venues.

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