Crypto needs regulatory clarity and alignment: Our submission to CSA’s consultation concerning crypto asset funds

The Canadian Web3 Council recently submitted comments to the CSA’s consultation concerning crypto asset funds. See the full submission here. The Canadian Securities Administrators (CSA) sought feedback on proposed regulatory amendments concerning investment funds that invest in cryptocurrencies. The proposed amendments aim to refine the regulatory framework for Public Crypto Asset Funds. These include stipulating which crypto assets these funds may include in their portfolios, restrictions on investing in crypto assets, and codifying the CSA’s expectations for digital asset custody.

Other proposed changes include:

  • Broadening the scope of « alternative mutual funds » to encompass funds that allocate investments to crypto assets.
  • Limiting direct investments in crypto assets exclusively to alternative mutual funds and non-redeemable investment funds, accompanied by defined eligibility criteria for these assets.
  • Banning the use of crypto assets in securities lending, repurchase agreements, or reverse repurchase agreements.
  • Specifying that money market funds are precluded from investing in crypto assets.
  • Implementing new regulations concerning the custody of crypto assets, which mandate offline storage solutions and insurance coverage.
  • Permitting the use of crypto assets for the subscription of shares in mutual funds, subject to certain stipulated conditions.

We commend the CSA for initiating amendments that consider crypto assets. Below are the highlights from our submission: 

  1. Clear Definitions: Clear definitions are essential to ensure consistency in the interpretation and application of defined terms in securities regulations. We believe that the CSA’s proposed “description” of crypto assets leads to inconsistent results particularly once tokenisation of real world assets such as stocks and bonds take hold.
  2. Creating a Crypto Asset Taxonomy: It is crucial to establish a taxonomy that provides a strong foundation for rule-making in Canada, and we provide an approach. Market participants can use the taxonomy to determine regulatory classification with more consistent results, and this will reduce regulatory burden for all. 
  3. Investor Protection and Regulatory Alignment: We stress the importance of evolving securities regulations in tandem with other legal and regulatory frameworks to address overlapping jurisdictional issues, and alignment with global standards.  It’s also time to review the definition of a “qualified custodian” more broadly.  Consideration should be given to a custodian’s expertise and operational resilience for improved investor protection goals particularly as we transition to a digital financial system.  This will enhance Canada’s competitive position in the international market and ensure our regulations are cohesive, comprehensive and forward-thinking, and prioritizes Canada’s national interest.
  4. Product Development: The CSA states that the proposed amendments will help new product development while providing investor protection under an investment fund regulatory framework. Canada has been a global leader in bringing public crypto asset funds to market. We believe that restricting crypto asset funds to only invest in crypto assets that trade on an exchange recognized by a securities regulator in Canada to be overly restrictive, and will actually inhibit new product development.  We believe it’s time to develop a regulatory framework that gives recognition to regulated CTPs.
  5. Flexibility and Innovation: We encourage the CSA to adopt principles-based regulations that allow for flexibility to adapt to rapid technological changes. This will support innovation in the crypto asset space while ensuring that investor protection goals remain at the forefront.

We appreciate the opportunity to provide comments as public consultations are an important part of the rule-making process. We ask the CSA to provide a blacklined version of NI 81-102 to facilitate a comprehensive review by market participants.

We encourage the CSA to provide more opportunities for pre-consultation with the crypto industry. At this critical juncture, it’s essential to ensure alignment within Canada and globally to address the important intersections between securities regulation and other regulatory frameworks.