Bitcoin ETFs, strict licensing and a digital dollar

In October, Toronto-based Coinsquare became the first crypto trading firm to receive dealer registration from the Investment Industry Regulatory Organization of Canada (IIROC). That means a lot as now Coinsquare investor funds enjoy the safety of the Canadian Investment Protection Fund in the event of insolvency, while the exchange is required to report its financial position regularly.

This news reminds us of the peculiarities of Canadian crypto regulation. While the country still has a fairly tight process for licensing virtual asset providers, it is outpacing its neighboring US in its experiments with crypto exchange-traded funds (ETFs), pension fund investments and central bank digital currency (CBDC) efforts.

An era of limited dealers

Coinsquare, which happens to be Canada’s longest operating crypto-asset trading platform, benefits from its new legal status as none of its competitors currently have the same legal footing. By publishing time, all other local players must have the status of a “restricted dealer”, signaling that they have submitted their registration bid and are now awaiting IIROC’s decision.

The Guidance for Crypto-Asset Trading Platforms was introduced by IIROC and the Canadian Securities Administrators (CSA) in 2021. It requires crypto businesses that handle security tokens or crypto contracts to register as “investment dealers” or “regulated marketplaces.”

All local companies have been given a two-year transition period during which they should start the registration process and in some cases obtain the temporary “limited dealer” registration.

The list of “restricted merchants” that have been given a two-year grace period to operate amid the ongoing registration process is quite short and includes mainly local companies, such as Coinberry, BitBuy, Netcoins, Virgo CX and others. These companies still have the right to facilitate the purchase, sale and storage of crypto-assets, but what lies ahead of them is the strict compliance procedure necessary to continue their operations after 2023. For example, Coinsquare had to obtain insurance that includes an endorsement of loss of crypto assets and fund a trust account in a Canadian bank.

The prosecution has followed closely any non-compliance. In June 2022, the Ontario Securities Commission (OSC) issued financial sanctions against Bybit and KuCoin, alleging violations of securities laws and operating unregistered trading platforms for cryptoassets. It obtained orders banning KuCoin from participating in the province’s capital markets and fining the exchange more than $1.6 million.

The land of experiments

At the same time, there are adoption cases in Canada that sound radical to the United States. For example, there are dozens of crypto ETFs to invest in the country, while Grayscale still has to lead the legal battle with the US Securities and Exchange Commission (SEC) for a right to launch its first ETF.

The world’s first Bitcoin (BTC) ETF for individual investors was approved by the OSC for Purpose Investments back in 2021. The Purpose Bitcoin ETF accumulates around 23,434 BTC, which is actually a prominent symptom of the bear market. In May 2022, it held around 41,620 BTC. The largest outflow from the Purpose Bitcoin ETF occurred in June, when approximately 24,510 BTC, or around 51% of assets under management, were withdrawn by investors in a single week.

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Another breakthrough in Canadian crypto adoption erupted when the country’s largest pension fund began investing in digital assets. In 2021, Caisse de Depot et Placement du Québec – one of the largest pension funds in the French-speaking province of Quebec – invested $150 million in Celsius Network.

That same month, the Ontario Teachers’ Pension Plan announced its $95 million investment in FTX. Unfortunately, this news did not survive as both companies have since collapsed and both pension funds had to write off their investments. Perhaps, in that light, the US Department of Labor’s warning to employers against using pension funds that include Bitcoin or other cryptocurrencies now seems like a prudent precaution.

Due to its cold climate, cheap power supply and light regulation, Canada is among the world’s leading destinations for crypto mining. In May 2022, it accounted for 6.5% of the global BTC hash rate. However, this fall, the company that manages electricity across the Canadian province of Quebec, Hydro-Québec, asked the government to release the company from its obligation to operate crypto miners in the province. As the reasoning goes, electricity demand in Québec is expected to grow to the point that running crypto will put pressure on the energy supplier.

The development of the CBDC is another direction in which Canada has moved faster than its neighbor to the south. In March 2022, the Bank of Canada launched a 12-month research project focusing on the design of the Canadian digital dollar in collaboration with the Massachusetts Institute of Technology.

In October, the Bank of Canada published a research report and proposed several particular CBDC archetypes as useful for organizing “the possible CBDC designs.” While back in March there was “no decision made on whether to introduce a CBDC in Canada,” the country’s recent budget amendment includes a small section on “Addressing the Digitalization of Money.” In the statement, the government said stakeholder consultations on digital currencies, stablecoins and CBDCs will be launched on November 3, although exactly which stakeholders will be engaged remains unclear.

The partisan divide

The debate over what could become Canada’s formal legal framework for crypto – Bill C-249 – showed a sharp partisan divide on the topic. A bill to “encourage the growth of the crypto-asset sector” was introduced to the House of Commons in February 2022 by Conservative Party member and ex-minister Michelle Garner. The lawmaker proposed to have Canada’s finance minister consult with industry experts to develop a regulatory framework aimed at boosting innovation around crypto three years after the bill was passed.

Despite the stated support of the local crypto community, the bill did not gain much approval among other lawmakers. During the second reading on 21–23 In November, members of other political parties, including the ruling Liberal Party, blasted both the bill and the Conservative Party with accusations of promoting the “dark money system” and Ponzi schemes and bankrupting pensioners and as a result, C-249 is now officially buried .

While Michelle Garner introduced the bill, Conservative Party leader Pierre Poilievre took most of the heat. A former Minister of Employment and Social Development, Poilievre has advocated for more financial freedom through tokens, smart contracts and decentralized finance. Earlier this year, he urged the Canadian public to vote for him as their leader to “make Canada the blockchain capital of the world.”

The next general election in Canada is scheduled for 2025, and given the failure of C-249 and the general state of the market, Poilievre and the Conservatives are unlikely to gain broad support in parliament for their pro-crypto efforts until then. Currently, the Conservative Party only has 16 out of 105 seats in the Senate and 119 out of 338 in the House of Commons.

What will be next

From a trading platform perspective, there are specific challenges that the industry is striving to address, Julia Baranovskaya, chief compliance officer and co-founding team member of Calgary-based NDAX, told Cointelegraph.

The majority of industry stakeholders would like to see “clear guidelines and a risk-based approach.” Currently, a majority of regulators in Canada have chosen to use existing financial industry rules and regulations designed and implemented for the traditional financial industry.

But Baranovskaya highlighted that in recent years, regulators have engaged in a closer dialogue with the crypto industry. The Securities and Exchange Commission has created a sandbox and encouraged crypto-asset trading platforms and innovative types of businesses offering alternative financial instruments to join. IIROC has also led a dialogue with industry participants to better understand business models and identify how the current framework can be applied to them.

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But the challenges of the fragmented regulatory framework and the lack of crypto-asset-specific regulations are still here. Most of the existing regulations are based on the product, but with the ever-evolving crypto space, the product-based approach “will always be a few steps behind.” In Baranovskaya’s words:

“It is important to understand the underlying technology behind cryptoassets and De-Fi products that devise a flexible yet robust regulatory regime that can adapt to the ever-changing cryptoassets.”