How Regulation in the Cryptocurrency Industry Protects Investors and De-risks Investments
Canadian cryptocurrency platforms need to make significant investments to register as securities dealers and operate in compliance with regulations.
In November 2021, the global cryptocurrency market hit an all-time high market capitalization of $3 trillion after the world’s two largest cryptocurrencies — bitcoin and ether — reached record highs. Its market capitalization has grown fivefold since November 2020, when it was only $578 billion.
With the global cryptocurrency market expected to grow at a compound annual growth rate of 11.1 percent to reach a whopping US$1.9 billion in 2030, the need for regulation and transparency is taking the industry by storm.
Blockchain and crypto assets are among the first decentralized global industries. Naturally, since the very beginning, there have been calls from some investors and companies with cryptocurrency platforms to establish a regulatory framework, both domestically and internationally, that protects investors without stifling innovation.
In this article, we’ll cover where crypto regulations stand in Canada, why regulation is a good thing for the industry, what its impacts are and why a balanced approach to regulation and innovation is essential.
Cryptocurrency regulations in Canada
While the market has a reputation of indifference and hostility towards regulators, the story is different in Canada. Canada has established itself as a leader in digital asset legislation by proactively passing national laws since 2014, when the market was still in its infancy.
In Canada, cryptocurrency companies must register with the Financial Transactions and Reports Analysis Center of Canada (FINTRAC). As a result, cryptocurrency companies are subject to regulatory oversight and the reporting requirements of FINTRAC. Organizations such as the Investment Industry Regulatory Organization of Canada and the Ontario Securities Commission have also introduced regulatory measures for the industry.As of December 2021, there were six registered cryptocurrency-trading platforms in Canada. In 2020, Wealthsimple became the first and only regulated crypto-trading platform in Canada for an entire year, before Coinberry became the second. Shortly after, Netcoins became the third and CoinSmart (NEO:SMRT) became the fourth. Previously, Canadians had to use one of the hundreds of risky and unregistered platforms to trade bitcoin and ether or to make purchases with either.
Why the cryptocurrency industry needs regulation
The urgent need for regulation comes after countless scams involving collapses and fraud of various custodial cryptocurrency platforms. According to the Federal Trade Commission, more than $80 million was lost in cryptocurrency-related scams in the US from October 2020 to May 2021.
Most recently, a digital token inspired by the popular Netflix series "Squid Game" collapsed, with developers making an estimated $3.38 million. The token traded at $0.01 and then skyrocketed to over $2,856 in less than a week — only to crash by 99.99 percent of its value.
However, scams and collapses aren’t the only concerns when it comes to an unregulated cryptocurrency market. Some warn that an unregulated market could trigger runs and undermine traditional banks’ ability to conduct monetary policy. Other concerns include crashing and hacking-related thefts, which have already been documented. The market is rife with cybersecurity concerns and ransomware attacks that need addressing.
An even greater concern is that it could facilitate illegal activity such as money laundering, tax evasion, funding terrorism and kidnapping.
Regulation has proven to be a polarizing topic, with regulators and cryptocurrency platforms often in disagreement. However, regulation will undoubtedly mitigate several of the risks associated with the cryptocurrency market by defrauding the industry, ensuring security, establishing standardization and enhancing transparency.
How regulations will impact investors and the digital asset industry
Canadian cryptocurrency platforms need to make significant investments to register as securities dealers and operate in compliance with regulations. Several cryptocurrency companies have reported that part of this investment involves hiring new staff to focus on accounting, finance and compliance. Among many of the new operations include enhancing insurance, improving financial reporting, implementing suitability models and licensing custodians to hold clients’ cryptocurrency assets.
Cryptocurrency companies are also required to adhere to guidance from regulators on false or misleading ads to further protect consumers. VirgoCX, a Toronto-based cryptocurrency company, has even gone so far as to monitor its TikTok influencers. This vigilance may allow the digital asset industry to flourish in a way that is honest, transparent and worthy of trust from consumers.
According to KPMG, regulatory bodies are one of many trust agents that help consumers build trust in the industry — ultimately facilitating scale. This concept — referred to as “trustware” — is expected to be a driving factor in de-risking the industry. Other trust agents include auditors, academic institutions, consortiums, trade groups and nonprofit foundations. It’s noted that trust in the industry can also stem from technological innovations such as consensus mechanisms.
As a result, regulation in the industry will provide consumers with peace of mind and a sense of security that the platform is legitimate, legal and secure.
Balancing regulatory needs with industry innovation
Applying regulations to any industry — no matter how good the intentions are — can have a devastating impact on the industry. This is often why it’s critical for regulators and industry executives to collaborate and balance regulatory needs that protect consumers with industry needs that support innovation and ultimately the economy. Several factors such as feasibility, reasonability and protection must be carefully assessed and weighed against one another through open communication and fair planning.
According to cryptocurrency industry executives, tight regulations on the industry will severely restrict the growth of cryptocurrency, encourage innovation abroad, risk the dollar’s primacy and eliminate the promise of digital finance. A major concern is that tight regulation will stifle the Canadian market and bolster innovation in international markets.
However, if regulation is not too tight or loose, it can also foster innovation. For example, various industries, such as the automobile and pharmaceutical industries, are heavily regulated, but remain highly innovative.
As a result, the cryptocurrency market may not only continue to thrive in regulated markets, but even do better. This is because companies will be required to advertise their platforms fairly in ways that are representative of the facts and can easily be audited to ensure proper standards — thus, developing trust with consumers.
Registered cryptocurrency companies in Canada
Wealthsimple is a Canadian company that offers an online investment management system. The system allows users to easily develop and invest into a diversified portfolio with a robo-advisor, trade stocks commission-free, invest in more than 20 cryptocurrency coins and file taxes for free. Wealthsimple is backed by some of the largest financial firms and tech investors, and currently has $15 billion in assets under management. The company’s cryptocurrency platform, offered under Wealthsimple Digital Assets, is registered as a restricted dealer through the Canadian Securities Administrators’ Regulatory Sandbox.
CoinSmart is a Canadian company that has revolutionized the digital asset landscape by making a cryptocurrency-trading platform accessible to investors of all experience levels. With a platform based on four pillars – accessibility, community, accountability and honesty – CoinSmart is fully on board with a regulated cryptocurrency market. The company possesses all the appropriate licensing and registrations required from each jurisdiction that it operates in. CoinSmart’s end goal is to ensure the very best for its clients while pushing the digital asset market in Canada forward.
CoinSmart is committed to protecting investors with fair regulations that account for the differences between crypto assets, securities and derivatives. After the Canadian Securities Administrators (CSA) announced that crypto assets should be regulated like securities and derivatives, the company has advocated on behalf of investors to the CSA. CoinSmart referenced a previous CSA paper that suggested a separate regulation and legislative framework would be applied to crypto fassets.
With the explosive growth of the cryptocurrency market seen in recent years expected to continue, Canadian investors can look forward to investing in registered cryptocurrency companies. Registered cryptocurrency companies are subject to oversight and reporting requirements that de-risk investors’ investments, and ensure security, standardization and transparency while eliminating the potential for fraud, unlike unregistered companies.
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