The Ontario Securities Commission and other Canadian securities regulators are cracking down on unregulated cryptocurrency trading platforms in the wake of FTX's spectacular bankruptcy, a situation one regulator has called an "emergency."
On Wednesday, the CSO and the national umbrella organization Canadian Securities Administrators announced details of a crackdown they had proposed in December.
Crypto trading platforms now have 30 days to assure regulators that they are following some specific rules if they want to continue serving Canadian clients. Among the rules are making sure the client's cryptocurrency is segregated from the company's own funds and a ban on offering margin trading or other forms of debt. Companies also can't offer stablecoins, a form of cryptocurrency tied to the underlying value of an asset, such as a traditional currency or gold, unless they get specific permission from regulators.
With just two months between an initial notice and the new requirements going into effect, it's almost lightning fast for a regulator. That, says OSC CEO Grant Vingoe, is because there is an emergency in the crypto market.
"It was kind of an emergency," Vingoe said, "after we saw substantial failures that led to FTX."
If a cryptocurrency trading platform does not provide an official "pre-registration" commitmentโ to follow the rules within 30 days, they are expected to liquidate the accounts of their Canadian customers and block Canadians from accessing their services.
The rules are aimed at cryptocurrency platforms that have not yet registered with securities regulators in Canada, and would bring them up to the same standards as platforms that have registered; there are 11 platforms that have already registered. Securities regulators are in talks with about 20 others.
In November, FTX, which had been the third largest crypto exchange in the world, filed for bankruptcy, along with the Alameda Research hedge fund and dozens of other affiliated companies.
FTX founder Sam Bankman-Fried has been charged with fraud and various securities violations.
Making sure that client assets are in separate accounts from those on the platform and that they are in the hands of an unrelated third party are basic ways to protect investors, Vingoe said.
"These are traditional principles of securities regulation, so if a registered investment broker ... is going to have clients' assets, they have to safeguard them with appropriate controls and act as if they are owned by clients and not yours," Vingoe said. . "Investors who use the services of these platforms have a right to know that if something goes wrong, they can get their assets back and that those assets...will not be lost in bankruptcy proceedings."
Coinsquare, one of 11 companies already registered with Canadian regulators, praised the announcements.
โAll Canadians should have the opportunity to invest in crypto assets knowing that they have the protections of Canadian securities managers behind their investments,โ Coinsquare COO Eric Richmond said in an emailed statement.
The stricter rules on stablecoins will not be popular with some trading platforms and investors, because they are generally presented as a faster and safer way to get money in and out of a platform, said Matthew Burgoyne, a partner at the Osler law firm. and head of the firm's cryptocurrency practice.
โSome people won't be happy about that,โ Burgoyne said, โbut a lot of people were expecting a full ban on stablecoins, so this is less restrictive than that.โ
Vingoe said the new rules on stablecoins are necessary because they are not as stable in value as advertised and there is often a lack of transparency about exactly how they are issued and run.
โThe biggest concern is the lack of transparency of what lies behind it. And we have seen that they have actually not been that stable in some circumstances,โ Vingoe said, adding that before any stablecoin is approved by regulators, they will be thoroughly vetted.
โIt is not a pro forma requirement. We are going to dig into how a stablecoin is managed to determine its safety and whether it should be available to Canadian investors,โ Vingoe said. โAnd we will insist on those transparency requirements.โ
The announcement was praised by Jean-Paul Bureaud, executive director of FAIR Canada, an investor rights organization.
"There are a lot of risks for Canadian investors," Bureaud said, "and I think it's important that they act quickly."
While some investors may choose to put their money into a volatile and risky asset like cryptocurrencies, they also shouldn't have to worry about the potential collapse of the platform through which they're investing, Bureaud said.
โThere are many more risks than just the asset itself. This is still a new technology. โฆ They don't follow many of the traditional safeguards.โ
JOIN THE CONVERSATION
Anyone can read Conversations, but to contribute, you must be a registered Torstar account holder. If you don't have a Torstar account yet, you can create one now (it's free)
