CSA beefs up demands on crypto firms

Citing their growing concerns about investor protection in the fledgling crypto space, the Canadian Securities Administrators (CSA) are beefing up their demands on crypto trading platforms.

Last August, the CSA first indicated that unregistered crypto trading platforms would be expected to provide a “pre-registration undertaking” to regulators, which committed them to meeting certain standards in order to keep dealing with Canadian investors while they undergo the registration process.

Then in December, in the wake of the collapse of FTX, the CSA indicated that regulators would be expanding the content of these undertakings.

Today, the CSA issued a new staff notice detailing the tougher, new requirements for unregistered crypto trading platforms operating in Canada.

Among other things, the regulators are seeking stricter custody and segregation of investors’ crypto assets; prohibitions on offering margin, or other forms of leverage, to Canadian clients; banning investors from buying, or depositing, stablecoins or proprietary tokens in their crypto trading accounts, without written consent from regulators; restrictions on platforms using proprietary tokens in their capital calculations; and commitments to hire a qualified chief compliance officer (CCO) during the pre-registration process.

“These commitments are generally consistent with requirements currently applicable to registered [crypto trading platforms] and are intended to address investor protection and level-playing-field concerns,” the CSA said in its notice.

In its notice, the CSA pointed to events such as the failures of FTX, Voyager Digital, Celsius Network, BlockFi and Genesis Global, as the basis for “introducing important new investor protection provisions” into these undertakings.

“Recent insolvencies involving several crypto asset trading platforms highlight the tremendous risks associated with trading crypto assets, particularly when conducted on unregistered platforms based outside of Canada,” said Stan Magidson, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC), in a statement.

While firms are expected to provide the regulators with these enhanced undertakings within the next 30 days, the deadlines for implementing any changes to their existing operations in order to comply with the terms of the undertakings will be set out in the undertakings themselves — giving crypto platforms time to adopt the changes.

Firms that don’t provide these promises to the regulators are expected to start dropping their Canadian clients, and taking action to block these users from accessing their products or services.

“We are seeking to protect investors not only from the risks inherent in trading in highly speculative assets but also the risk of loss when such businesses fail and losses occur through inadequate custody and controls,” Grant Vingoe, CEO of the Ontario Securities Commission (OSC), said in a statement.

“Canadian securities regulators are adapting to this fast-moving area in which many proponents established large-scale businesses with ever-evolving offerings with limited regard to the established principles of securities regulation,” Vingoe added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.