How to navigate growing crypto regulation in Canada

These events—and crypto’s growing prominence in the global economy—reinforce the case for greater regulatory scrutiny of the crypto market.

Some crypto watchers argue that the growing adoption and decentralized nature of cryptocurrencies create unique risks for financial authorities, capital markets regulators, investors, consumer protection groups and tax authorities worldwide.

Regulators, both in Canada and the U.S., reveal concerns about the risks crypto investors face. Crypto analysts, too, are increasingly vocal in warning that more intense regulation is on the way. Against that backdrop, what can investors do to navigate a more regulated cryptosphere?

But before that, let’s look at why the crypto market needs regulation and what that could look like.

Why crypto needs regulation

Some investors were initially drawn to crypto because it wasn’t regulated, but the asset class has evolved greatly since the birth of bitcoin in 2009. Today, investors face several risks, including theft or loss of their crypto due to hacking or human error.

Crypto experts like Nigel Green have long argued the crypto industry needs to be regulated. “It seems absurd, frankly, that there has not already been more progress in this regard,” says Green, chief executive officer and founder of deVere Group, one of the largest independent financial advisory organizations.

Few would dispute that the future of finance is inevitably going to be digital and that cryptocurrencies are going to play a greater role in the global financial system, says Green. As such, they need to be held to the same standards.

Digital assets as a means of exchange should have regulatory oversight, without which adoption will never accelerate, says Michael Zagari, an investment advisor at Mandeville Private Client and Zagari+Simpson. “You could make the argument that blockchain and decentralization are built with trustless capabilities, but the end user still needs to trust the underlying technology; [and] regulation can accelerate that trust,” he says.

While financial watchdogs, governments and central banks are moving in this direction, the pace remains slow, says Green.

Canada’s current crypto rules

Recently, the Canadian Securities Administrators (CSA), in partnership with the Investment Industry Regulatory Organization of Canada (IIROC), issued the following guidance about crypto regulation in Canada: 

• If crypto assets are trading as securities or derivatives on a crypto asset trading platform, the platform would be subject to securities legislation. 
• If a crypto platform stores an account holder’s crypto assets in a wallet controlled by the platform, the contract would be subject to securities law. 
• If an initial coin offering (ICO) issues security tokens, securities laws may apply. 

Read more details on the CSA website.

More recently, the CSA provided another update to crypto trading platforms operating in Canada, including expanded terms and conditions for them to comply with. These include requirements to hold users’ assets with an appropriate custodian and keep these assets apart from the platform’s proprietary business. The CSA also prohibited platforms from offering margin or leverage for any Canadian client.

“If Canadian platforms want to do business in Canada, they need to be registered with the Canadian Securities Administrators,” says Zagari, noting that a platform’s approval is contingent on meeting investor protection requirements.

These investor protections include mandatory insurance covering losses of clients’ assets, custody of clients’ assets with a qualified custodian and cold storage requirements and prescribed risk disclosure to clients, he adds. 

What crypto regulation may look like

Many investors and analysts want to know whether cryptocurrencies should abide by the same regulations as securities or if they should have new rules.

In the U.S. context, Zagari insists bitcoin should be viewed as a currency (regulated under the Office of the Comptroller of the Currency) while protocols such as Ethereum, Solana and Cardano should be regulated by the Securities Exchange Commission (SEC).

North of the border, he argues, Canada has a real opportunity to be a global leader in the crypto regulation space, similar to how it was the first country to launch bitcoin ETFs. “There is a regulatory regime for crypto platforms in Canada, and there is a way of dealing with digital assets and blockchain assets in a safe way,” Zagari says.

However, he adds, this isn’t the case with crypto lending platforms because such products and services are not yet subjected to a specific regulatory regime in Canada.

Green says the regulation should start with crypto exchanges, the nerve centres of all crypto activity. “Nearly all foreign exchange transactions go through banks or currency houses, and this is what needs to happen with cryptocurrencies,” he says. “When flows run through regulated exchanges, it will be much easier to tackle potential wrongdoing, such as money laundering, and make sure tax is paid.”

However, Green insists crypto is a brand new market and that new regulations must be devised and implemented for this tech-driven sector. “Older regulations, designed for other asset classes in the last century, are likely not to be adequate,” he says.

In addition, regulators must work with leading industry participants—including trading platforms, blockchain developers and consumer advocacy groups—to ensure the rules don’t limit innovation and that they work to support and protect consumers and firms, notes Green.

How do investors navigate crypto regulation?

For starters, investors should prepare for regulation, and they should expect bouts of volatility when it is rolled out.

Further, investors should acknowledge that 90% of crypto today has very little utility and could ultimately go to zero, says Zagari. He cites the dot-com craze of 1995–2001, when many internet companies rushed to go public and the bulk of them disappeared a couple of years later.

Investors should also expect an enormous amount of consolidation among crypto firms. “With regulation comes consolidation, where the best technology wins,” says Zagari. “The next few years for crypto will be extremely volatile until the consolidation process is completed.”

Coins and protocols that are rated highly for their utility, popularity, technical prowess and applications will attract more developers and innovation. Thus, the safest bets are assets that have robust developer communities, security safeguards and infrastructure surrounding them, says Zagari. These are the assets that will survive regulatory scrutiny and industry consolidation. (Read more about which cryptos are likely to survive in the long term.)

Regulation and crypto prices

There’s a common misconception that growing regulation could be a drag on crypto prices. Fact is, growing regulation shows that the market is maturing, says Green. “It also means that it will become increasingly attractive to institutional investors, including mutual funds, pensions and insurance companies.”

With large investors come capital, influence and expertise, which tend to drive up asset prices. Increased regulation will also boost investor confidence and fuel adoption. “Greater regulation will provide greater levels of protection for retail investors, consumers and businesses, thereby driving confidence and mass adoption,” says Green.

The key goals of regulation would be to secure consent, trust and confidence from the public, including consumers and regulated entities, using powers that are used consistently, transparently and proportionately.

“Such regulation will help protect investors, tackle cryptocurrency criminality and reduce the potential possibility of disrupting global financial stability,” Green argues.

Referring to the recent FTX fiasco, Green says crypto does not need saviours in the form of business leaders with their own interests at stake. “What crypto does need, however, is a strong regulatory framework to be established and approved at an international level.”

Where to buy crypto in Canada

If you’re thinking about investing in crypto, choose your platform carefully. CoinSmart (SMRT.NE) is a fully regulated Canadian crypto platform with an easy-to-use interface, a transparent fee structure and 24/7 customer support. Its security features include two-factor authentication and offline cold storage. Sign up for an account* with the code money30 and receive CAD$30 in bitcoin when you deposit a minimum of CAD$100. 

Read more about crypto:

• When will crypto prices recover?
• Who’s buying crypto in Canada, and why?
• What the ETH? MoneySense’s guide to ethereum and other altcoins
• Video: Is crypto a good investment?
• What’s the best type of crypto wallet?