Key Highlights:
- Canadian Crypto Authority places a ban on crypto margin and leverage trading;
- A brief explanation of margin trading;
- The CSA lists other strict requirements for crypto exchanges and service providers,
- The CSA goes after stablecoins.
The Canadian Securities Administrators (CSA) recently released a statement banning crypto margin trading and leverage in Canada, along with other stringent rules for cryptocurrency exchanges to follow. The move follows the US SEC’s crackdown on such products earlier this year.
Image Source: CSA
Over the years, several countries have banned margin trading on cryptocurrency assets, including South Korea and China. However, this is the first time a G7 nation is doing so, marking a notable point in crypto regulation.
The move comes as regulators around the globe move to prevent events like the FTX collapse from ever occurring again. Interestingly, the collapsed FTX attempted to expand its operations into Canada in June 2022, five months before its historic implosion. Canada unknowingly dodged a massive bullet by stalling its approval of FTX.
The Canadian Securities Administrators appear to be taking their crypto exchange supervision within their jurisdiction even more seriously as the FTX collapse spooks regulators into action.
For context, let’s take a quick look at what these services are.
A Brief Explainer on Margin Trading
In simple terms, a margin trade is when you borrow money from a broker to buy an asset like Bitcoin (BTC) or Ethereum (ETH).
Image Source: CryptoPotato
Often, brokers will offer borrowers loans that are secured against their portfolios of assets. This allows traders to speculate on the performance of a specific asset without actually having to buy the underlying token itself. The borrower pays interest on their loan, and the broker charges a fee for facilitating the trade. This is an effective method of speculating on the price movements of an asset without having to put down the full amount required to purchase it.
One popular example of this would be CFDs (contracts for difference), which are typically used to speculate on the price movements of cryptocurrencies such as Bitcoin.
Canada Renews Effort to Keep Crypto Exchanges Following FTX Collapse
In its renewed effort to oversee the operations of crypto exchanges, the CSA prohibits crypto service providers from accepting payments via credit cards or the equivalent and mandates these entities to store customer assets in a different holding facility from operational funds.
The regulator asserted in its statement that “crypto trading platforms that are registered or that have entered into a pre-registration undertaking are reminded that they are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative.” The CSA further stated:
“Crypto trading platforms are expected to have established policies and procedures to determine whether each crypto asset they provide exposure to is a security and/or derivative.”
Cryptocurrency exchanges operating in Canada are required to submit a pre-registration undertaking to their major regulator to allow them to continue functioning while their application is being reviewed. By committing to these obligations, the cryptocurrency exchange essentially admits that terms and conditions on investor protection apply to its platform and must be upheld.
Image Source: Twitter
CSA members may take legal action against a cryptocurrency exchange if it fails to file an undertaking or does not follow its conditions.
The statement further read:
“These risks could result from, among other things, crypto trading platform non-compliance with registration terms and conditions or undertakings, interconnectedness within the crypto sector, insolvency, hacks, price volatility, and uncertain value propositions for individual assets.”
Canadian Crypto Authority: Canada’s Persistent Crackdown on Crypto
In its December 12 statement, the CSA maintained its position that cryptocurrency assets are extremely speculative, stating: “Even with the adoption of these measures, crypto assets or financial products relating to crypto assets are high-risk investments.”
“These risks could result from, among other things, crypto trading platform non-compliance with registration terms and conditions or undertakings, interconnectedness within the crypto sector, insolvency, hacks, price volatility, and uncertain value propositions for individual assets.”
The majority of Canadian authorities largely hold a skeptical outlook toward cryptocurrency. When it comes to cryptocurrencies, Prime Minister Justin Trudeau has criticized opponents for advancing “questionable, reckless economic ideas,” and the Bank of Canada has cautioned that using Bitcoin and other tokens is not a method to “opt out of inflation.”
Early this year, the Canadian government strengthened its anti-terrorism laws to prevent Bitcoin donations to the ostensible “Freedom Convoy” demonstration against COVID restrictions.
Source: Elliptic
Securities regulators are cracking down on unregistered businesses while specifically naming popular platforms like KuCoin and Binance for their failure to obtain authorization.
Sadly, none of these actions prevented local pension funds from getting burned in some of the biggest crypto meltdowns in 2022. For example, behemoth institutional investors Caisse de Dépôt and the Ontario Teachers Pension Plan had $150 million and $95 million, respectively, in FTX. This is $245 million of investor funds that may never be recovered.
Canadian Crypto Authority: Is the CSA Against Stablecoins?
In addition to its ban on crypto margin trading and other strict requirements for crypto exchanges, the CSA appears to also be baring its teeth at stablecoins. The Canadian regulator says it is worried about the number of stablecoins in circulation and is considering labeling stablecoins as “securities and/or derivatives.”
This puts crypto exchanges in a tricky position considering the regulator has a strict no-no stance on investor exposure to derivatives. That said, exchanges have been mandated to assess their listed crypto assets to determine which ones fall under the stated category.
The CSA added: “Even with the adoption of these measures, crypto assets or financial products relating to crypto assets are high-risk investments.” It also issued a warning to Canadian investors, saying:
“Canadian investors are urged to exercise caution and consider seeking advice from a registered investment advisor before investing in crypto.”
