Canadian securities regulators clarify framework for crypto platforms

Canadian securities regulators are clarifying existing regulations for crypto firms.

In a new notice published March 29, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) explored how existing regulation can be "tailored" to crypto innovation, including interim approaches for crypto marketplaces and dealers.

The lead-up

The notice comes as a collaboration between the CSA, the council of securities regulators across provinces, and the IIROC, a self-regulatory organization overseeing investment dealers. The two first published a consultation paper proposing a framework for crypto platforms in 2019. It received 52 comment letters at the time.

Canada recently approved a wave of bitcoin exchange-traded funds (ETFs), and though bitcoin is not considered a security within the framework, the CSA acknowledged that growing interest in bitcoin has driven the adoption of a variety of digital assets.

The CSA did not comment in time for publication on whether the rise of the Canadian bitcoin ETF affected the release of this guidance.

A commitment to flexibility

Within the new guidance, regulators showed commitment to flexibility with investor protections by including interim approaches for dealer and marketplace platforms. In both cases, the venues would seek registration as a "restricted" form granted they are not offering leverage or margin. In both cases, the interim approach would be time-limited with the expectation that the venue intends to transition to a long-term solution. 

If marketplace platforms perform exchange functions, they wouldn't qualify for the interim approach. Instead, the applicable securities regulators would consider "whether recognition as an exchange or an exemption is needed
in the interim."

It's not yet clear how the CSA will treat clearing and settlement processes, but the agency said it anticipates imposing some terms and conditions on registrants.

"In order to provide flexibility in these cases, we will look at the specific risks presented by the clearing functions in order to determine whether a [crypto asset trading platforms] will be required to be recognized as a clearing agency or exempted from the requirement to be recognized and what terms and conditions should apply," the notice explained.

The same rules apply

While the guidance shows commitment to fostering innovation, it reminds venues that they're still beholden to existing regulation. It provides a framework for managing risks related to digital assets, including transparency, price discovery, insurance and custody standards. Any interim measures would only be applicable if risks and requirements are properly addressed, according to the CSA. 

The guidance didn't reference how over-the-counter firms should interpret the notice, but the CSA said it plans on providing more clarity for those venues.

"In the future, the CSA plans to examine the regulatory framework that applies to dealers and marketplaces that trade over-the-counter derivatives more generally."

Crypto in the room

It's also looking to give crypto a seat at the table by including some "novel businesses" as members of IIROC. 

"IIROC recognizes the need to be flexible and foster innovation and has therefore established a path to membership for businesses or entities with novel business models, including Marketplace or Dealer Platforms that do not necessarily fit in the existing IIROC membership structure," it said.

It acknowledged that it needs a different review process for crypto, and expects so-called "novel business models" to be granted membership with conditions and exemptions so they can get their business models up and running. This differs from how it currently admits dealers.