Canadian Regulatory Group Targets Crypto Exchanges Holding Users' Digital Assets

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Canada's top financial watchdog has told crypto exchanges they will be subject to securities law if they act as custodians to users' digital assets.

The Canadian Securities Administrators said in guidance published Thursday the common exchange practice of custodying users' assets - "Merely providing users with a contractural right or claim to an underlying crypto asset" - could subject them to securities legislation.

The CSA is a group of the provincial securities regulators in Canada, which does not have a federal equivalent like the U.S. Securities and Exchange Commission.

Exchanges that facilitate "Immediate delivery" will be exempt, according to the CSA. It's unclear what timeframe the group has in mind for a transaction to qualify under this exemption, said Pamela Draper, president and CEO of Canadian crypto exchange Bitvo.

The new regulatory requirements may have a significant impact on the exchange landscape.

Exchanges that can't or don't comply could be pushed out of Canada, Draper said, leaving the field open to a handful of exchanges that are both willing and able to fit within a more comprehensive regulatory framework.

The guidance, which applies to exchanges based in Canada, or with Canadian users, is consistent with a consultation paper the CSA and the Investment Industry Regulatory Organization of Canada published in March 2019, said Evan Thomas, a litigator with Osler, Hoskin & Harcourt.

Users of the Quadriga exchange were unable to recover more than $190 million worth of funds when founder Gerald Cotten died mysteriously in December 2018.

In November, the British Columbia Securities Commission was forced to seize the Einstein exchange after users complained they couldn't access their funds.

"They saw a wipeout of ~$200 [million] worth of retail deposits. Exchanges have a terrible history of mismanagement. Canada is saying: [T]he crypto industry cannot be trusted with custodial models."

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