Canada’s securities regulators sent a blunt message to the 600 or so unlicensed crypto-asset trading platforms (CTPs) operating in this country last month. CTPs were told they must register as a marketplace or dealer immediately and bring their operations into compliance with laws that protect investors and promote market fairness very quickly afterward.
Most CTPs just scoffed at this demand. Many are foreign-based platforms. A few of these are big operations; others are basically a guy running a trading floor out of his personal laptop. CTPs’ libertarian vibe is their ethos, and they have little appetite for conforming to Canada’s disjointed patchwork of rules in different parts of this country. Do we really expect them to stick around and bother with all that – for the sake of accessing our puny 3 per cent of the world’s capital markets?
Their derision was predictable. So, there must be a reason why Canadian regulators chose to trigger it this way. Perhaps our officials actually want the foreign CTPs to decamp and fish elsewhere. But in that case, the plan must also figure our domestic crypto platforms are vigorous enough and sufficiently disciplined, committed, and dutiful to march in formation with our policy aims of investor protection and fair, efficient markets.
Indeed, some Canadian firms have said they stand ready to serve any clients whose platforms abandon them. But the guy running a crypto trading floor inside his laptop lives in a place with few rules, and no one who cares if he uses accounts there to trade for people here. That’s how all those creepy binary options platforms still manage to rook hapless Canadians, despite being banned from setting up shop on our soil. Regulators are powerless to stop this web-based raiding by offshore entities.
Consequently, domestic registration won’t bring harmony or a level playing field to Canada’s crypto trading scene. Instead, it’ll just sting any platforms that maintain offices here. Lacking the efficiencies of scale enjoyed by firms in bigger markets, or the freedom to blithely disregard rules like the platforms operating from lightly regulated foreign territory, Canadian CTPs will be simply weighed down by the cost of dealing with our fragmented system.
That will compel them to do two things: charge Canadian investors a premium for crypto trading services and demand fewer and looser rules. They’ll argue both measures are necessary to keep them in business. Policy-makers will find it hard to disagree.
So, more cynical laughter will rain down upon us as it’s pointed out that, thanks to our regulators’ efforts to foster investor protection and market efficiency, the exact opposite will be achieved. The phrase ‘competitive Canadian crypto’ will become a sardonic punchline – you can combine any two of those words but not all three.
This descent into farce doesn’t have to happen, however. Not if we redefine competitiveness on our own terms. For example, we can’t do much about the fact that our market’s small and complicated, and therefore pricing here will always be higher than in several other countries. But we can stick a stake in the ground on rules and professional standards to make Canada the safest, most reliable place to buy or sell crypto assets in the world.
That could be big. Reliability is a competitive advantage, even when it’s a little pricey. Just ask Swiss bankers, or German automakers, or the New York Yankees. They’ve all made perennial, high-calibre dependability their trademark.
And the crypto world is practically begging for it. It’s what blockchain was supposed to deliver – but, ironically, blockchain’s transparency, efficiency, and indisputable proof of asset ownership still aren’t enough to safeguard traders against faulty procedures, negligent systems design, or the risks of theft and fraud.
A distributed ledger eliminates intermediaries but not crooks. It tells you who owns what’s in an electronic wallet, but as investors with QuadrigaCX found out, it won’t tell you the computer password needed to access that wallet if the computer’s owner suddenly dies.
Well-regulated systems develop robust proficiency and conduct standards and hold people to them. They audit. They build in appropriate redundancies to protect against catastrophe. They enforce their rules, slap the non-compliant, and kick out the dishonest and ungovernable. All of that, in combination, gives competent, trustworthy people the latitude to get things done – because good regulation provides a framework for accountability, safety, and reliability.
So, let’s make crypto trading safety and dependability our brand, by getting very hands-on and interventionist, in a good way, in order to make our CTPs the best in the world. Let’s mandate our regulators do so swiftly, powerfully, and unapologetically.
If we want Canadian officials to accomplish that, we can’t hesitate or dilute the initiative. We need to seize it with full commitment. We have to refuse to be a comic punchline and instead forge ourselves into the pre-eminent line of defence.
Neil Gross is president of Component Strategies, a capital markets policy consultancy in Toronto.