Although the Bitcoin craze has recently fallen by the wayside, parties interested in digital and crypto-assets continue to press forward despite unclear regulations. This remains true in Canada, where the regulatory framework is still under development.  Toronto Finance International and Norton Rose Fulbright recently hosted two panel discussions exploring the trends and emerging issues in the regulation of this sphere.

Members of the first panel consisted of three partners from Norton Rose Fulbright: Hannah Meakin, John Kim, and Anthony de Fazekas, Head of Technology and Innovation for Norton Rose Fulbright Canada. The discussion focused on the regulatory trends in digital and crypto-assets in Canada and worldwide.

The panel identified some of the difficulties associated with creating a regulatory framework for digital and crypto-asset exchanges. One of the problems that Canada and other jurisdictions must solve is how to address the fact that these newer exchanges incorporate many roles, such as custodians and transfer agents, which are outside the scope of traditional exchanges. Such issues may prompt Canadian regulators to forgo modifying existing securities regulation in favour of creating a bespoke framework for digital and crypto-assets.

While Canada does not have a regulatory framework for digital and crypto-asset exchanges, development is underway, as evidenced by the recent CSA/IIROC consultation paper 21-402. This paper summarizes key issues regulators are focused on, of which the panel noted that regulators are particularly concerned with custody, mandatory safeguards, mandatory disclosures, insurance, price determination, and market integrity requirements. One of the main goals of regulation is to enable the creation, transfer, and exchange of these digital assets, given their new importance and the growing interest in tokenization and innovative digital assets, all of which is being driven by the expanding deployment of blockchain across enterprises.

Digital fiat currencies backed by a central bank, also known as Central Bank Digital Currencies (CBDCs), are also a topic that Canada and other jurisdictions are looking into. Recently, Norton Rose Fulbright advised NZIA Limited on the development and implementation of a CBDC for the Central Bank of the Bahamas. About 60 central banks are considering implementing CBDCs. If CBDCs increase in popularity, there is a possibility that regulators may begin to view cryptocurrencies less like currency, and more like securities.

The panel stressed the importance of expanding the discussion beyond Canada, since businesses are looking to scale globally. While digital and crypto-asset exchanges are mostly unregulated in Europe, there are regulations which capture crypto-assets that resemble securities. However, cryptocurrecies that function as pure currencies enjoy a lack of regulation. In light of the difficulties associated with creating a regulatory framework for this area, the European Securities and Markets Authority has focused its efforts on addressing the AML risk and educating buyers about the risks of crypto-assets. However, some member states, such as Malta, have taken unilateral action in an attempt to position itself as a crypto-friendly nation. Countries in Asia have taken a less uniform stance. China has banned crypto-asset exchanges, while Japan will regulate those exchanges under its current payment services legislation. Hong Kong has adopted an approach similar to Europe, while Singapore is continuing to create bespoke legislation.

The second panel comprised of David Wismer, Managing Director of BMO Capital Markets, Cole Diamond, CEO & Co-Founder of Coinsquare, and Blair Wiley, General Counsel & Head of Regulatory Affairs for WealthSimple. These panellists shared their practical experience in dealing with the current regulatory scheme on digital and crypto-assets and offered insight into next steps in this area.

The panellists underscored the importance of education for all parties involved. While the public is becoming more familiar with the volatility that is often associated with crypto-assets, there is still a lot of fear and misinformation in this space. Businesses dealing with crypto-assets are investing in educating consumers and regulators alike, but the task may be too onerous for the private sector to handle alone. Instead, a concerted effort with government and business is required.

The private sector has outpaced regulators, putting some businesses in a position where they are unable to comply with the current securities regulations. Regulators are aware of this legislative gap and are taking steps to ensure that such business can be properly regulated. However, in light of the controversy surrounding QuadrigaCX ‘s loss of over $200 million in assets, the panel agreed there is a strong need to establish some sort of oversight. Whether that means implementing imperfect regulations to prevent another incident or waiting to establish better regulations remains up for debate.

Looking ahead, Blair Wiley was optimistic about seeing more institutional support, especially once the space is regulated. Cole Diamond hopes that Canada can become a regulatory leader, noting that Toronto is a major blockchain hub where Ethereum was founded. David Wismer highlighted that many applications of blockchain are solutions in search of a problem, though there is potential for this technology to substantially revamp financial systems as we know them.