Cryptocurrencies: Canada severely restricts speculation

Only registered crypto service providers are allowed to serve Canadians. Betting on credit and use of customer deposits are prohibited. The rest will be limited.

New investor protection rules are severely restricting the cryptocurrency industry in Canada. The reason for this is enormous losses for investors, among other things due to the many fires after the FTX collapse, as well as rampant fraud and money laundering. The umbrella organization of the Canadian capital market authorities CSA (Canadian Securities Association) requires that all providers (crypto asset trading platforms, CTPs) register, meet extensive conditions and restrict offers and advertising. The remaining providers must be financially strong, with the value of cryptocurrencies held by the provider being considered zero.

This provision is based on the fact that most crypto assets are speculative in nature and that their value is highly volatile. As a new class of assets, crypto assets have limited investment history which indicates that they may lose substantial, if not all, their value in a very short period,” explain the CSA.

Crypto bets on credit, margin, or other forms of leverage are generally prohibited, even for foreign customers; Exceptions are made for certain entities, including financial institutions, pension, and mutual funds, government agencies, charities, and individuals with a net worth of more than $5 million.

Stablecoins always suspect

Canadian authorities keep a keen eye on so-called stablecoins – these are virtual coins that are said to have stable exchange rates in a real currency. Even the suggestive term stablecoin annoys the authorities. They prefer to call the kid “Value-Referenced Crypto Assets” (VRCA). Trading VRCA that is not fully backed by real, liquid cash reserves is completely prohibited. This applies, for example, to “algorithmically secured” stablecoins such as Luna.

Having real money backing throughout, and managing it separately by certain independent entities, does not mean that trading in such a stablecoin would be allowed: the platform operator then only has the opportunity to apply for permission to trade. Not only the trading platform but also the issuer of the stablecoin should participate in the approval process. And anyway, so the explicit warning, regulations, and any permits are only provisional and could change or be revoked at any time

Securities only with permission

In principle, trading in so-called securities (imprecisely translated as “securities”) requires approval. The umbrella organization of the Canadian financial supervisory authorities CSA could not or did not want to explain exactly what securities are. Assessing this is explicitly a risk that the CTPs will have to take. US authorities such as the SEC (Securities Exchange Commission) and the New York Attorney’s Office classify classic cryptocurrencies as security and the CTFC (Commodity Futures Trading Commission) as differently regulated commodities (commercial goods).

The crypto platforms may issue their own virtual coins and trade their own virtual coins or virtual coins issued by partners only with prior approval. Here, too, the competent Canadian authorities want to keep the lid on it. Which of the 13 Canadian authorities is responsible depends on the location of the provider; in Canada, each province and territory has its own financial regulator.

Registration obligation with many conditions

In principle, all CTPs must register there. Those who have not already done so have until the end of the week to apply, otherwise, they will have to cancel all Canadian customers. Providers who submit the application in good time and participate prosperously in the process may continue to work, but must immediately meet the conditions for providers who are already registered. Only is currently at this stage. Its operator submitted an application in August and will probably have to revise it in view of the stricter rules.

One of the requirements is that customer deposits are managed separately and not used for any of their own purposes. The platform operator must hand over at least 80 percent of customer deposits to a qualified trustee. Only Canadian financial institutions, one of two dozen other clearing banks in other countries, and other custodian banks that meet the requirements for Canadian investment funds or another institution that has been expressly approved in individual cases are qualified.


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