Bitcoin ETFs, strict licensing and a digital dollar

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

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

An era of limited traders

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

The guidance for crypto-asset trading platforms was launched in 2021 by IIROC and the Canadian Securities Administrators (CSA). It requires crypto businesses that trade in 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 must begin the registration process and, in some cases, obtain the “limited trader” temporary registration.

The list of “restricted merchants” granted a two-year grace period to operate amid the ongoing registration process is rather short and includes mainly local companies such as Coinberry, BitBuy, Netcoins, Virgo CX and others. These companies still enjoy a right to facilitate the buying, selling and holding of crypto-assets, but what lies ahead of them is the strict compliance procedure required to continue their operations beyond 2023. For example, Coinsquare had to take out an insurance policy get which includes an endorsement of losses of crypto-assets and funds a trust account maintained at a Canadian bank.

The prosecutors kept a close watch for any non-compliance. In June 2022, the Ontario Securities Commission (OSC) issued financial penalties against Bybit and KuCoin, which alleged that they violated securities laws and operated unregistered cryptoasset trading platforms. It won injunctions barring 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 court 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 Target Investments back in 2021. Target Bitcoin ETF collects approximately 23,434 BTC, which is actually a prominent symptom of the bear market. In May 2022, it held approximately 41,620 BTC. The Purpose Bitcoin ETF’s major outflow occurred in June, when approximately 24,510 BTC, or approximately 51% of its assets under management, were withdrawn by investors in a single week.

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Another breakthrough in Canadian crypto adoption broke out 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.

That same month, the Ontario Teachers’ Pension Plan announced its $95 million investment in FTX. Unfortunately, this news did not age well as both companies have since collapsed and both pension funds have 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 electrical supply and light regulation, Canada is one of 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 firm that manages electricity across the Canadian province of Quebec, Hydro-Québec, petitioned the government to release the company from its obligation to power crypto miners in the province. As the reasoning goes, the demand for electricity in Québec is expected to grow to the point that the power of 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 specific archetypes of CBDC as useful for organizing “the possible CBDC designs.” While in March “no decision has been made on whether to introduce a CBDC in Canada,” the country’s recent budget amendment includes a small section on “Addressing the Digitization 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 involved remains unclear.

The partisan divide

The discussion of what could become Canada’s formal legal framework for crypto — Bill C-249 — showed a stark partisan divide around 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 former minister Michelle Garner. The lawmaker proposed that Canada’s Minister of Finance should consult with industry experts to develop a regulatory framework aimed at promoting innovation around crypto three years after the bill’s passage.

Despite the expressed support of the local crypto community, the bill did not gain much approval among fellow lawmakers. During the second reading on 21–23 November, members of other political parties, including the ruling Liberal Party, blasted both the proposal and the Conservative Party with accusations of promoting the “dark money system” and Ponzi scheme and bankrupting 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. Poilievre, a former minister of employment and social development, 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 C-249’s failure and the general state of the market, it is unlikely that Poilievre and the Conservatives will gain broad support in Parliament for their pro-crypto efforts to not at that time. 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’s next

From a trading platform perspective, there are specific challenges 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 the 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 regulators have engaged in a closer dialogue with the crypto industry in recent years. The Securities Commission created a sandbox and encouraged crypto-asset trading platforms and innovative types of businesses that offer 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-asset-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 “will always be a few steps behind.” In Baranovskaya’s words:

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

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