The revenge of Canada — crypto exchanges are put under securities regulation

How pissed off is Canada about the collapse of the Quadriga exchange? Any cryptocurrency exchange that doesn’t deliver bought coins immediately — but holds them on the platform — is now subject to securities regulation.

The Canadian Securities Administrators — the umbrella organisation of provincial securities regulators — issued guidance on Thursday 16 January 2020: [CSA Staff Notice, PDF; press release]

Securities legislation may also apply to Platforms that facilitate the buying and selling of crypto assets, including crypto assets that are commodities, because the user’s contractual right to the crypto asset may itself constitute a derivative.

… we note that some Platforms are merely providing their users with a contractual right or claim to an underlying crypto asset, rather than immediately delivering the crypto asset to its users. In such cases, after considering all of the facts and  circumstances, we have concluded that these Platforms are generally subject to securities legislation.

… In our view, a mere book entry does not constitute delivery, because of the ongoing reliance and dependence of the user on the Platform in order to eventually receive the crypto asset when requested.

“Not your keys, not your coins,” indeed.

Canadian securities regulation is per province — but  the local regulators wrote and reviewed this guidance and signed the press release, and will apply it seriously.



Obviously, this upends the last ten years’ practice of how crypto exchanges work — almost all exchanges hold your coins on the exchange, because it’s much more convenient for everyone.

But then, nobody can say the risks that the CSA outline here aren’t a real and present danger. Exchanges are hacked — or “hacked,” i.e., exit-scam — regularly.

The word “Quadriga” isn’t mentioned — but the collapse of the Quadriga crypto exchange in February 2019 is why Canadian regulators are thinking along these lines.

The regulators got so much rubbish in the mainstream press over Quadriga, for half a year — a $200 million financial disaster happened in a sector they were barely aware of. There wasn’t much public sympathy for the Bitcoin gamblers — but $200 million just being stolen was something that couldn’t be allowed to stand.

The November 2019 collapse of the Einstein exchange would also be in regulators’ minds — where the British Columbia Securities Commission finally showed up, but all the money and cryptos were already gone. And ezBtc in July, which was also in British Columbia.

How this will be implemented isn’t clear as yet — but this could be quite big, as international regulators follow each others’ leads. And nobody wants a Quadriga in their back yard.

This is guidance, not law — custodial exchanges can fight this in court if they want. But just leaving the Canadian market may well be easier than fighting or complying — particularly given how shonky crypto exchange internal accounting so often is.

See the writeup of this guidance by Osler, Hoskin & Harcourt LLP, a prominent Canadian legal firm. Osler also mentions decentralised finance (DeFi) having the same issue as exchanges — what CSA is concerned with is the risk of assets being lost while in the custody of the platform. Osler suggested in March last year that Canada was likely to treat coins on an exchange as derivatives under securities law. [Osler current, Osler March]

(All of this is separate from the requirement from July 2019 that exchanges register with FinTRAC as money transmitters by June 2020 — a much easier regulatory requirement, and one they’ve largely come into compliance with already.) [Canada Gazette]

By the way, Nikhilesh De from CoinDesk was the first crypto journalist to hear of the — alleged — death of Gerald Cotten from Quadriga, on 2 January 2019, and that withdrawals from the exchange had stopped. He thought it was a hoax at first — Quadriga seemed as healthy as any crypto exchange, and he’d spoken to Cotten in November 2018. [CoinDesk, archive]

De wonders if anyone’s learnt a thing from the collapse of Quadriga. I’d say the regulators have learnt they need a much bigger stick to deal with crypto.

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