In a bid to safeguard investors and reduce the risks associated with cryptocurrencies, the Canadian Securities Administrators (CSA) have published a set of new requirements for crypto companies. Stablecoin trading platforms have been a primary focus of the CSA’s regulatory efforts, with new restrictions set to limit the trading and distribution of Value Referenced Crypto Assets (VRCAs), which includes stablecoins.
Trading platforms will be prohibited from allowing customers to buy or deposit stablecoins without the CSA’s prior written consent, and to obtain that consent, companies must satisfy several due diligence requirements, including ensuring that the stablecoin is fully backed by an appropriate reserve. The CSA will only approve a stablecoin if its reserves are made of “highly liquid assets” such as cash and cash equivalents, and if those reserves are held with a qualified custodian. The regulator will also require monthly reviews by independent auditors, with results to be made public in a “timely manner.”
While the CSA recognizes the use cases for stablecoins such as payments and volatility hedging, it also considers them riskier than fiat currency. Any consent given should not be viewed as a statement that the VRCA has been distributed in accordance with Canadian securities legislation.
The CSA prefers to use the term VRCA rather than stablecoin as some so-called stablecoins have failed to maintain a stable value in the past. Last May, TerraUSD (UST), formerly the third-largest stablecoin by market cap, lost its peg to the dollar after flaws surrounding its algorithmic peg sent it into an unsalvageable death spiral.
Canada’s focus on stablecoins mirrors the increased scrutiny the sector has received worldwide, with regulators from various jurisdictions seeking to tighten their control. In the United States, the Securities and Exchange Commission recently issued a Wells notice to Paxos, alleging that its BUSD stablecoin is an unregistered security.
The CSA’s regulatory effort is in line with the Canadian government’s attempt to create a robust regulatory framework for the crypto sector. The government has recognized that cryptocurrencies and blockchain technology offer many opportunities but have also led to many scams and fraudulent schemes.
According to Kevin Lelonek, CEO of CurrencyWorks, a blockchain technology and digital currency solutions provider, “Canada’s regulations for cryptocurrency are more stringent than most countries. It’s clear that the CSA has been working hard to ensure investors are protected and that companies have the necessary compliance measures in place.”
Despite the new regulations, Canada has been seen as a crypto-friendly country. The country’s central bank is currently exploring the possibility of launching its digital currency, and several cryptocurrency companies have chosen to set up shop in Canada due to its favorable regulatory climate.
The new regulations in conclusion represent an important step towards ensuring that Canada’s crypto industry operates within a safe and compliant environment. While the regulations are expected to put more pressure on stablecoin trading platforms, they could also help promote transparency and accountability, which could encourage more investors to enter the market.