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Canadian regulator adds new requirements for crypto exchanges seeking registration

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(Kitco News) - The Canadian Securities Administrators (CSA) published a notice on Wednesday outlining the enhanced investor protection commitments that it expects crypto asset trading platforms (CTPs) to abide by.

The CSA highlighted the struggles of multiple crypto firms throughout 2022 and into 2023 as the reason behind the updated commitments, which come in the form of enhanced pre-registration requirements that CTPs must adhere to while pursuing their applications for registration with Canadian securities regulators.

"Recent insolvencies involving several crypto asset trading platforms highlight the tremendous risks associated with trading crypto assets, particularly when conducted on unregistered platforms based outside of Canada," said Stan Magidson, CSA Chair and Chair and CEO of the Alberta Securities Commission.

CTPs that are unregistered but continue to operate in Canada while pursuing registration are expected to “provide an enhanced pre-registration undertaking to their principal regulator” within 30 days of publication of today’s notice.

The CSA provided a list of nine “Pre-registration undertakings” that CTPs are expected to undertake, including enhanced expectations regarding the custody and segregation of crypto assets held on behalf of Canadian clients and a prohibition on offering margin, credit, or other forms of leverage to any Canadian client.

Trading platforms are “precluded from pledging, rehypothecating or otherwise using crypto assets held on behalf of Canadian clients,” and restrictions have been put in place to limit a CTP from relying on crypto assets to determine “the capital of the CTP for excess working capital purposes and in determining the capital base of the CTP.”

CTPs will also be prohibited from allowing clients to purchase or deposit stablecoins and other “proprietary tokens” without the prior written consent of the CSA.

Providers are expected to file financial updates with the CSA on a regular basis and are required to retain the services of a qualified Chief Compliance Officer (CCO) during the pre-registration process.

Those who do not wish to abide by the required pre-registration requirements are expected to “take appropriate action to off-board existing Canadian users and impose restrictions to prevent Canadian users from accessing its products or services.”

13% of Canadians hold Bitcoin, says Bank of Canada

While the CSA issued the notice for unregistered CTPs that continue to operate in Canada while they seek registration, some of the guidance may also be relevant to registered CTPs and investment funds that invest in crypto assets. These companies have been invited to contact the CSA to “discuss whether any changes to the registered CTP’s registration or related relief may be required.”

The CSA repeatedly stressed the fact that trading in crypto assets carries an elevated level of risk and “may not be suitable for many investors, particularly retail investors.”

Today’s notice is an addendum to the update the CSA provided in December, which sought to strengthen the regulator's oversight of cryptocurrency exchanges by expanding the existing requirements for platforms that operate in the country.

Included in that update was a ban on registered exchanges offering margin or leverage trading to any Canadian client, a requirement that platforms hold all Canadian clients’ assets with an appropriate custodian and segregate these assets from the platform’s proprietary business, and a determination that stablecoins may constitute securities and/or derivatives and should be regulated as such.

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