Bitcoin ETFs, strict licensing and a digital dollar

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In October, Toronto-based Coinsquare became the first crypto-trading business to obtain dealer registration from the Investment Industry Regulatory Organization of Canada (IIROC). This means a lot, because now the funds of Coinsquare investors enjoy the safety of the Canadian Investment Protection Fund in the event of insolvency, while the exchange must report its financial status regularly.

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

An era of limited traders

Coinsquare, which happens to be Canada’s longest running crypto-commerce platform, benefits from its new legal status as none of its competitors can currently boast the same legal footing. At the time of publication, all other local players must have “limited dealer” status, signaling that they have made their registration offer and are now awaiting IIROC’s decision.

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

All local companies were given a two-year temporary period, during which they would have to start the registration process and, in some cases, obtain the temporary registration of “restricted trader”.

The list of “restricted merchants” who were given a two-year relief 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 enjoy the right to facilitate the buying, selling and holding 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 endorsement. from crypto asset losses and fund a trust account maintained at a Canadian bank.

The prosecutors kept a close eye on any non-compliance. In June 2022, the Ontario Securities Commission (OSC) issued financial penalties against Bybit and KuCoin, alleging violation of securities laws and operating unregistered crypto asset trading platforms. It obtained orders banning KuCoin from participating in the capitals of the province and fining the exchange for 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 has yet to lead the court battle with the US Securities and Exchange Commission (SEC) for the right to launch its first ETF.

The world’s first Bitcoin (BTC) ETF for individual investors was approved by the OSC for Target Investments back in 2021. Target Bitcoin ETF accumulates around 23,434 BTC, which is actually an outstanding symptom of the bear market. As of May 2022, it held around 41,620 BTC. The most important outflow of the Purpose Bitcoin ETF it happened in June, when about 24,510 BTC, or about 51% of its assets under management, were withdrawn by investors in a single week.

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Another breakthrough in Canadian crypto adoption exploded when the country’s largest pension funds began investing in digital assets. In 2021, the 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.

The same month, the Ontario Teachers’ Pension Plan announced its $95 million investment in FTX. Unfortunately, this news did not age well, as both companies later collapsed and both pension funds had to divest 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 sensible precaution.

Due to its cold climate, cheap electricity supply and light regulation, Canada is among the world’s top 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. According to the reasoning, 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 where Canada has moved faster than its neighbor to the south. In March 2022, the Bank of Canada launched a 12-month research project focused 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 distinct CBDC archetypes as useful for organizing “the potential CBDC designs.” While in March, there was “no decision on whether to introduce a CBDC in Canada”, the country’s recent budget amendment contains a small section on “Dealing with the Digitization of Money”. In the statement, the government said consultations with stakeholders on digital currencies, stablecoins and CBDCs will be launched on November 3, although exactly which stakeholders will be involved remains unclear.

The party split

The debate over what could become Canada’s formal legal framework for crypto — bill C-249 — has shown a sharp partisan divide over the issue. A bill for the “encouragement of the growth of the crypto sector” was introduced to the House of Commons in February 2022 by member of the Conservative party and former minister Michelle Garner. The lawmaker proposed that Canada’s Finance Minister consult with industry experts to develop a regulatory framework aimed at boosting innovation around crypto three years after the passage of the bill.

Despite the vocal support of the local crypto community, the bill did not meet with much approval among fellow lawmakers. During the second reading on November 21-23, members of other parties, including the ruling Liberal party, blasted both the proposal and the Conservative party with accusations of promoting the “dark money system”, and a Ponzi scheme and going bankrupt retirees 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. Former Minister of Employment and Social Development, Poilievre 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 condition of the market, it is unlikely that Poilievre and the Conservatives will receive broad support in Parliament for their pro-crypto efforts until then. time Currently, the conservative party holds only 16 out of 105 seats in the Senate and 119 out of 338 in the House of Commons.

What follows

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 at 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 regulatory authorities in Canada have chosen to apply existing financial industry rules and regulations designed and implemented for the traditional financial industry.

However, Baranovskaya emphasized that in recent years, regulators have engaged in a closer dialogue with the crypto industry. The Securities and Exchange Commission created a sandbox and encouraged crypto asset trading platforms and innovative types of businesses offering alternative financial instruments to join. The IIROC also led a dialogue with the 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-specific regulations are still here. Most of the existing regulations are based on the product, but with the constantly evolving crypto space, the product-based approach “would always be a few steps behind.” In Baranovskaya’s words:

“Understanding the underlying technology behind crypto assets and De-Fi products that develop a flexible yet robust regulatory regime that can adapt to the ever-changing crypto asset space is essential.”