Tighter Rules for Canadian Crypto Platforms

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A Wild Ride 🎢

Is it 2023 yet? Asking for a friend.

We’ve had epic wins: The Merge, Wall Street giants introducing crypto custody services and Big Tech accepting crypto as a form of payment. There have also been some pretty massive failures like the collapse of FTX, Terra’s UST/LUNA wiping out billions of dollars from the space, and of course we can’t forget the parade of crypto companies that faced insolvency.

Once again the industry has become the world’s no. 1 punching bag capturing the attention of regulators across the globe.

Them’s The Rules ☝️

Canadian Securities Administrations (CSA) released an update on Monday with stricter requirements for trading platforms citing recent events in the crypto market. Hmm, wonder what that could be. We’ll take FTX continues to ruin our lives for $1,000 please! 

The new policy mandates all unregistered crypto trading platforms make a commitment to their respective principal regulators in the form of a pre-registration undertaking (PRU). The PRU essentially binds the exchange or trading platform to terms and conditions that are consistent with requirements for registered platforms.

This guidance was previously issued by the CSA in August, but this week’s announcement gives off a sense of urgency and reiterates that enforcement action could be taken should platforms not comply by a set date.

This does not seem surprising given the FTX calamity that is still unfolding. However, the updated policy from CSA did turn heads in the industry as it calls to question the future for stablecoins in Canada.

As a reminder, stablecoins are digital assets that peg their value to another specific asset, usually in the form of fiat currency like CAD or USD. In some cases, they can be correlated to the price of a commodity or a cryptocurrency. 

The CSA says it continues to “monitor and assess the presence and role of stablecoins in the Canadian capital markets.” The regulatory body is of the view that stablecoins, or stablecoin arrangements, may constitute as securities and/or derivatives, which could pose a serious threat to development and activity in the sector. It would impose further restrictions on CSA registered platforms as they are unable to trade coins defined as securities, not to mention it would directly impact users who rely on stablecoins to access Web3.

Our Take 💡

More collaboration is needed among key industry players, like the Canadian Web3 Council (CW3), government officials and regulators to decide what the best approach is when building a national framework for digital assets. Knee-jerk policies or reactions to events that take place in the ecosystem will only end up complicating regulation down the line as the technology continues to evolve. It will also confuse investors and drive away potential business and development from the Canadian economy.

Meanwhile south of the border, U.S. Senators Elizabeth Warren and Roger Marshall introduced a bill that has advocacy groups calling an “unconstitutional assault on cryptocurrency self custody, developers, and node operators.”

Warren and Marshall tabled the Digital Asset Anti-Money Laundering Act of 2022 amid this week’s hearings in the Senate about the collapse of FTX. The bill, which doubles down on know-your-customer (KYC) requirements in the space, outlines that platforms should be required to identify customers who opt for self-custody wallets and track their transactions.

Another eye-catching part of the bill is prohibiting financial institutions from using a digital asset mixer service or other privacy-enhancing technologies. Mixers are typically used to conceal transactions of cryptocurrency between wallets — a viable option for users who want an added layer of privacy when transacting. Ethereum mixer service, Tornado Cash, was banned by the U.S. Treasury via sanctions in August and its developer, Alexey Pertsev, was subsequently arrested. Pertsev remains in jail in the Netherlands until at least late February 2023. Many in the community consider this an attack on free speech (i.e., code).

“The crypto industry should follow common-sense rules like banks, brokers, and Western Union, and this legislation would ensure the same standards apply across similar financial transactions,” said Warren in a statement. “The bipartisan bill will help close crypto money laundering loopholes and strengthen enforcement to better safeguard U.S. national security.”

What We Think 👇

It’s possible the senators are hitting the panic button following the catastrophic implosion of FTX, but the purpose of cryptocurrency is not to recreate the traditional financial system. People should have a choice when it comes to their assets, including being allowed to transact privately and anonymously. It’s our job to figure out how we can put additional measures in place to enhance security and allow people to have the freedom they desire.

Certain regulations could also create a barrier to entry for new investors, and an uneven playing field for entities operating within the crypto space. Additionally, there are worries about centralized control of the industry, something that goes against the core principles of crypto.

Sound familiar?

It’s worth listening to a podcast episode we recorded earlier this year with Chris Giancarlo, former chair of the U.S. CFTC, about entity-based regulation vs. activity-based regulation. You can click here to access the episode that is conveniently broken down into sections. 

Ether Capital on The Hill 🇨🇦

We were recently invited to speak in the House of Commons along with other CW3 members about blockchain and cryptocurrencies.

Legislators seemed very receptive to our views about why we feel crypto and web3 innovation will benefit the Canadian economy. Many were eager to hear more about the potential use cases for cryptocurrencies beyond speculative assets.

You can go here to watch the full hearing — what we hope will be the first of many!

Upcoming Appearances 🎬

If you want to get our take on the FTX debacle and what it means for crypto in Canada, make sure you tune into The Agenda with Steve Paikin on Monday, December 19th at 8:00pm ET. You can go here to access the live stream.

We’ll also be joining BNN Bloomberg in studio on Thursday, December 22nd at 4:30pm ET for a year-end interview on the industry. Ether Capital CEO Brian Mosoff will share our predictions and key themes to watch out for in 2023 #alpha. You won’t want to miss it.

Newsworthy Links & Highlights 🗞️

• ChatGPT has entered the chat: Crypto Twitter is lighting up over the new AI tool that has also passed a practice bar exam. We actually used OpenAI to write a paragraph in this newsletter, can you guess which one?
• Bullish on tokenization: A New York-based investment firm anticipates financial institutions will tokenize more than US$25 billion in off-chain assets onto blockchains next year.
• MetaMask mobile users in the U.S. can now purchase ETH using PayPal.
• Shanghai update: Ethereum developers target March 2023 for staked ETH withdrawals followed by upgrades that focus on scalability.

Confused About Crypto? 🤔

Don’t worry, we want to help!

While we can’t provide specific investment advice, we do want to steer you in the right direction to stay informed. Please reach out to us and we’ll do our best to answer your questions.

This newsletter is geared towards traditional investors who are interested in the space. If you have suggestions on how we can improve our content or make it better, please let us know — we love feedback! Thanks for subscribing.