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Regulation of cryptocurrencies in Canada: a digital dollar, stringent licensing, and Bitcoin ETFs

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In October, the Investment Industry Regulatory Organization of Canada registered Toronto-based Coinsquare as the country’s first cryptocurrency trading company (IIROC). This is significant since Coinsquare is now forced to disclose its financial condition on a regular basis and investors’ monies are now protected by the Canadian Investment Protection Fund in the event of collapse.

This news serves as a reminder of the unique aspects of Canadian cryptocurrency regulation. The nation outperforms the neighboring United States in its experiments with cryptocurrency exchange-traded funds (ETFs), pension fund investments, and central bank digital currency (CBDC) efforts—even though it still has a somewhat rigid licensing process for producers of virtual assets.

A time of limited dealers

Since none of its rivals can now claim the same legal footing, Coinsquare, which also happens to be Canada’s longest-running crypto asset trading platform, benefits from its new legal standing. All other local players must hold the status of a “restricted dealer” by the time of publication, indicating that they have submitted their registration bid and are awaiting IIROC’s judgment.

IIROC and the Canadian Securities Administrators (CSA) released the Guidance for Crypto-Asset Trading Platforms in 2021. Businesses using security tokens or crypto contracts are required to register as “regulated markets” or “investment dealers.” The registration process should be started by all local businesses during the two-year transitional period, and in some situations, they should also apply for the interim “restricted dealer” registration.

The list of “restricted dealers” who have been given a two-year grace period to continue doing business while the registration procedure is still in progress is rather small and consists mostly of local businesses like Coinberry, BitBuy, Netcoins, Virgo CX, and others. These businesses continue to have the legal right to make it easier to acquire, trade, and store crypto assets, but what lies ahead for them is the rigorous compliance process required to continue running their businesses until 2023. For instance, Coinsquare was required to finance a trust account held at a Canadian bank and obtain an insurance policy that contains an endorsement for losses of crypto assets.

The prosecutors have been attentively monitoring for any instances of non-compliance. Bybit and KuCoin were hit with financial penalties by the Ontario Securities Commission (OSC) in June 2022 for allegedly operating unregistered crypto asset trading platforms and violating securities regulations. KuCoin was forbidden from trading on the provincial capital markets, and the exchange was fined more than $1.6 million as a result of the orders it acquired.

The experimental region

While this is happening, there are adoption situations in Canada that seem radical to Americans. For instance, while there are other crypto ETFs available for investment in the nation, Grayscale is still fighting the U.S. Securities and Exchange Commission (SEC) in court for the right to introduce its first ETF.

The OSC for Purpose Investments approved the first Bitcoin BTC $16,536 ETF for individual investors back in 2021. The fact that the purpose Bitcoin ETF acquires about 23,434 BTC is actually a clear sign of the bear market. It had about 41,620 BTC in May 2022. The Purpose Bitcoin ETF saw a significant outflow in June when investors withdrew roughly 24,510 BTC, or about 51% of its asset under management, in a single week.

The top pension funds in Canada began to invest in digital assets, marking another milestone in the country’s adoption of cryptocurrencies. One of the major pension funds in the French-speaking region of Quebec, the Caisse de Depot et Placement du Québec, invested $150 million in Celsius Network in 2021.

The Ontario Teachers’ Pension Plan disclosed its $95 million investment in FTX in the same month. Unfortunately, this information didn’t stand the test of time because both businesses eventually failed, forcing the pension funds to write off their assets. The U.S. Department of Labor’s recommendation to employers not to use pension funds that contain Bitcoin or other cryptocurrencies may now appear like a sensible precaution in light of that.

Canada is one of the top locations in the world for cryptocurrency mining due to its chilly environment, affordable electric supply, and lax regulations. It made up 6.5% of the world’s BTC hash rate in May 2022. Hydro-Québec, the business in charge of managing electricity in the Canadian province of Quebec, asked the government to relieve it of its duty to supply electricity to the region’s crypto miners this fall. According to the logic, Quebec’s electricity demand would increase to the point where powering cryptocurrency will put pressure on the energy provider.

Another area where Canada has been outpacing its southern neighbor is the development of the CBDC. In partnership with the Massachusetts Institute of Technology, the Bank of Canada began a 12-month research project in March 2022 that was centered on the creation of the Canadian digital dollar.

In a study report released in October, the Bank of Canada suggested a number of specific CBDC archetypes as suitable for classifying “the conceivable CBDC architectures.” A minor part on “Addressing the Digitalization of Money” can be found in the country’s most recent budget amendment, even though “no decision was taken on whether to implement a CBDC in Canada” back in March. In the statement, the government said that stakeholder consultations on digital currencies, stablecoins, and CBDCs will begin on Nov. 3. However, it is yet unclear which stakeholders will be involved.

Partisan differences

The debate over bill C-249, which may have established Canada’s official regulatory framework for cryptocurrencies, revealed a stark party difference on the issue. In February 2022, a member of the Conservative party and former minister Michelle Garner filed a bill to the House of Commons for the “encouragement of the expansion of the cryptoasset sector.” Three years after the bill’s adoption, the MP suggested that Canada’s Minister of Finance speak with business professionals to create a legal framework intended to foster innovation around cryptocurrencies.

Despite the local crypto community’s expressed support, the bill didn’t receive much support from other MPs. As a result of the criticism leveled at the proposal and the Conservative party during the second reading on Nov. 21–23 by members of other political parties, including the dominant Liberal party, who claimed that they were promoting the “dark money system,” a Ponzi scheme, and bankrupting retirees, C-249 has now been declared dead.

While Michelle Garner was the bill’s sponsor, Pierre Poilievre, head of the Conservative Party, received the majority of the criticism. Using tokens, smart contracts, and decentralized finance, Poilievre, a former minister of employment and social development, has been promoting more financial freedom. He urged the people of Canada to elect him as their leader earlier this year in an effort to “make Canada the blockchain capital of the world.”

Given C-249’s failure and the current state of the market, it seems unlikely that Poilievre and the Conservatives will receive widespread support in the Parliament for their pro-crypto initiatives before the country’s next general elections in 2025. Only 16 of the 105 Senate seats and 119 of the 338 seats in the House of Commons are currently held by the Conservative party.

Next steps

According to Julia Baranovskaya, chief compliance officer and member of the co-founding team at Calgary-based NDAX, there are particular issues from the perspective of trading platforms that the sector works to resolve. “Clear criteria and a risk-based strategy” are what the majority of industry stakeholders want to see. At this time, the majority of regulatory bodies in Canada have decided to apply the rules and regulations already in place for the traditional financial industry.

Baranovskaya did point out that regulators and the cryptocurrency business have been conversing more frequently in recent years. The Securities Commission has established a sandbox and encouraged creative enterprises providing alternative financial instruments as well as platforms for trading crypto assets to join. In order to better understand business models and determine how the existing framework may be applied to them, the IIROC has also been facilitating discussions with industry participants.

There are still issues with the fragmented regulatory environment and the lack of laws that specifically apply to crypto assets. The majority of current rules are product-based, but given how quickly the crypto industry is developing, this strategy “will always lag behind.” Understanding the underlying technology of crypto assets and De-Fi solutions that establish a flexible yet strong regulatory framework that can adapt to the constantly shifting crypto asset environment is crucial, according to Baranovskaya.


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