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Samuel Bankman-Fried, founder and CEO of FTX, testifies during a Senate Committee on Feb. 9.SAUL LOEB/AFP/Getty Images

Blair Wiley is chief legal officer of Wealthsimple, which offers cryptocurrency trading.

Critics are quick to suggest that events like the recent collapse of FTX Ltd. make crypto a Wild West, without the regulatory oversight we take for granted in other industries. But in fact, in Canada, we do have a regulatory framework for crypto and it’s been working, and working well.

Canadians are affected by the insolvencies of the Bahamas-based FTX, and New Jersey’s Celsius before it, largely because those companies have been operating in the country without conforming to its regulatory framework. It’s estimated that total losses from FTX could exceed US$10-billion, spread across a million creditors, including in Canada.

More needs to be done to bring these foreign platforms under our regulatory framework and fast, otherwise Canadians will continue being victim to poor actors.

Globally, Canada has led other markets in crypto regulation. Following the 2019 insolvency of Quadriga – at its heart a result of misuse of client funds in ways eerily similar to FTX – Canadian securities regulators began to work closely with homegrown crypto trading platforms to adopt a regulatory framework that both protects Canadian investors and supports responsible innovation.

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Despite FTX implosion, overzealous crypto enforcement is not the answer

This framework has many strengths. Perhaps most importantly, the focus is on regulating the platforms that hold client assets. Platforms regulated under the framework cannot use customer deposits to fund risky proprietary trading strategies or offer high-leverage derivatives. Instead, client assets must be held in trust with arm’s-length qualified custodians. These rules are designed to prevent client assets held by registered platforms from being directly exposed to any of the recent crypto industry collapses.

But only some domestic platforms have registered under this country’s regulatory framework. Meanwhile, according to a recent OSC study, the majority of Canadians trade on unregistered foreign platforms despite education efforts by regulators meant to discourage this. These foreign platforms have big ad budgets, and some aggressively promote risky high-yield products as safe investments. By and large, these unregistered foreign platforms don’t adopt the same standards for investor protections as registered domestic ones.

We need to see more funding from provincial governments provided to securities regulators, so they can apply the resources necessary to regulate all platforms – domestic and foreign – equally and consistently. And pursue enforcement against the bad actors.

We need to focus less on the protocols, and more on the platforms. The collapse of FTX was a business failure, not a technical failure. The bitcoin network and other decentralized blockchains and protocols are, and have always been, completely unaffected by the failure of centralized businesses.

In the interim, we need to find better ways to make it more clear to investors that not all platforms offer the same level of investor protections. These foreign platforms are indeed our competitors, but these measures are not only about positioning homegrown platforms to succeed on their own soil. Above all, they make investor protection an imperative.

Regulation does not need to slow our pace of innovation. Instead, regulation can help us implement tried-and-tested systems for ensuring Canadians are protected and prioritized. It can help give Canadians the clarity to make decisions as they explore the crypto ecosystem – such as where to hold their assets safely and securely. And it can encourage innovators to build within our borders, rather than seeking opportunity elsewhere.

This sector is more than trading tokens – it’s about the technology that can power the next generation of financial services and transform the financial industry for the better. The events of the past week are terrible, but demonstrate the huge opportunity at hand to champion innovation that protects Canadian investors. Innovations such as decentralized finance and self-custody wallets can dramatically reduce the credit and counterparty risk for investors from high-risk intermediaries like FTX.

FTX wasn’t the first and won’t be the last bad actor to be exposed. But Canada is in a better position than other jurisdictions. We have already laid the groundwork for a strong regulatory framework and budding crypto ecosystem thanks to collaboration between regulators and innovators. We need to build on this success.

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