Cryptocurrency industry participants are warning that recent guidelines imposed by Canadian securities regulators on crypto-trading platforms could lead foreign-based platforms to block Canadian users rather than comply with the regulations.
Foreign crypto-exchange giants such as Coinbase Inc., Binance and Gemini are popular in Canada because they offer a wide range of assets and generally more favourable buy and sell rates.
On Monday, the Canadian Securities Administration – an umbrella group of all 13 provincial and territorial securities regulators – released guidelines compelling all crypto-trading platforms, including non-Canadian ones, to register with the relevant authorities and bring their operations into compliance.
“It is reasonable and likely to expect that many of the big foreign platforms will not want to comply to Canadian securities legislation and will instead shut off access to Canadian investors,” said Brian Mosoff, chief executive officer of Toronto-based Ether Capital Corp.
Mr. Mosoff, who is also a member of the Investment Industry Regulatory Organization of Canada (IIROC)’s crypto-asset working group, said large foreign platforms can benefit local investors because they tend to be technically superior and offer exposure to a variety of innovative assets.
“It is possible in the near term Canadians will be cut off from these platforms if they feel that there is no benefit to undertake the expense and time to comply with Canadian regulators.”
The Globe and Mail asked several popular foreign crypto platforms that offer services in Canada, including Coinbase, Binance, FTX Exchange and Gemini, if they had begun registering with Canadian regulators or intended to. Only Coinbase responded, saying it does “not have anything to share on the topic right now,” but “might have more to discuss in the future.”
Jonathan Ip, a lawyer whose clients are predominantly blockchain and cryptocurrency companies, said Canadian investors could be left with fewer choices. “The offshore platforms might say, ‘Okay, that’s nice that you have these new regulations and all, but Canada is a small market for us, so we’ll just pack up and leave altogether,’” he said.
As part of the new regulation, platforms that facilitate trading in security tokens or contracts involving crypto assets will have to register to become investment dealers and eventually, members of IIROC. The deadline to get in touch with regulatory authorities about being regulated is April 19, 2021.
Most of these platforms are currently required only to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), a government agency responsible for tracking and policing money laundering and terrorist financing.
In the United States, the Securities and Exchange Commission (SEC) does not regulate platforms such as Coinbase primarily because digital currencies are not considered a security.
“We don’t want to see our competitors shut down, but of course we do have the platform capacity to take on additional accounts if foreign platforms decide to exit,” said Stacey Hoisak, the recently appointed CEO and general counsel of Coinsquare, a Toronto-based trading platform for digital assets.
The company and its former executives were fined $1.9-million by the OSC last July after admitting to market manipulation and retaliating against an internal whistle-blower. Regulators forced Coinsquare to register with the OSC and IIROC.
“It is a costly process and time-consuming. But we are really happy to work with regulators and engage in a more collaborative process in regulating the industry,” Ms. Hoisak added.
Justin Hartzman, co-founder and CEO of Toronto-based crypto exchange CoinSmart, agreed it was possible offshore exchanges will leave Canada if the “cost of regulation is deemed too high relative to the market opportunity,” but added that this would be a good thing for his company.
Other Canadian crypto-trading platforms also appeared to welcome the new regulatory guidance.
“Registration does add certain significant costs in terms of registration and legal fees to complete the IIROC application process and become registered … but we believe that the guidance released by the CSA yesterday is helpful as it provides further clarity around operating in our industry that we have been seeking,” said Pamela Draper, the CEO of Bitvo Inc., a Calgary-based cryptocurrency exchange.
Mr. Mosoff said the new guidelines, while necessary to protect investors, are perhaps not entirely appropriate for the cryptocurrency industry. “I feel sorry for everyone – the regulators who are trying to understand this, the investors trying to get involved in an entirely new asset class and the platforms that are trying to be cutting-edge.”
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