Crypto evolving: embracing TradFi compliance amid regulatory uncertainty

As we approach 2025, the regulatory landscape for the cryptocurrency and emerging technology sectors remains uncertain. Ongoing efforts by securities regulatory and other agencies to assert jurisdiction over these innovative industries and constrain their activities are continuing, notwithstanding their repeated professions of openness to emerging technologies in the capital markets.  

Several developments occurred throughout 2024 that suggest regulatory challenge in the sectors has not abated and will be ongoing in the years to come. Regulatory frameworks continue to evolve in both Canada and the United States and regulatory enforcement in the sector remains active.

As we approach 2025, the regulatory landscape for cryptocurrency and digital assets remains complex and fluid. In light of the growing efforts by the Canadian Securities Administrators (CSA) and other regulatory bodies to clarify their jurisdiction, companies operating cryptoasset trading platforms, cryptoasset custodians and crypto investment funds must prepare for increasing alignment with traditional finance standards. Anticipated guidance on decentralized finance (DeFi) and value-referenced cryptoassets, or stablecoins, will further shape compliance obligations.

Industry participants should prioritize staying informed about new regulations, assessing their operational impact and investing in robust compliance measures to adapt to this evolving framework.

Investment fund investments in cryptoassets

As we previously noted, on January 18, 2024, the CSA published CSA Notice and Request for Comment – Proposed Amendments to National Instrument 81-102 – Investment Funds Pertaining to Crypto Assets (the amendments). The amendments attempt to provide greater regulatory clarity for reporting issuer investment funds seeking to invest directly or indirectly in crypto assets (public cryptoasset funds). The amendments include a number of key proposals affecting these funds.

The amendments propose to restrict investment funds from directly or indirectly investing in cryptoassets. The one exception to the general prohibition would be a framework for allowing alternative mutual funds and non-redeemable investment funds to invest in cryptoassets or derivatives, provided the assets are listed on an exchange recognized by a Canadian securities authority. However, the exception does not extend beyond listed assets and expressly prohibits alternative mutual funds from holding non-fungible tokens (NFTs) due to liquidity and valuation risks.    

Canadian securities regulators are likely to continue asserting jurisdiction over various aspects of the crypto industry, potentially expanding their focus to include NFTs and other emerging digital assets.

Further, under the proposed framework, public cryptoasset funds would be prohibited from using cryptoassets as the loaned securities, transferred securities or posted collateral in securities lending, repurchase or reverse repurchase transactions.

The amendments also seek to clarify expectations for cryptoasset custodians holding cryptoassets on behalf of investment funds. New requirements relate to keeping cryptoassets in offline (or “cold wallet”) storage, maintaining insurance and reporting.

Although the comment period has now closed, there have been no further indications from the CSA of how they propose to respond to the comments received, including comments relating to the storage of cryptographic keys and cryptoasset staking. Some industry stakeholders, including the Chartered Professional Accountants of Canada [PDF], have questioned why the amendments propose that cryptographic keys be stored in omnibus accounts given that regular mutual funds under NI 81-102 are required to be held in segregated accounts. Further, stakeholders are seeking clarity with respect to cryptoasset staking requirements and their implications for fund compliance.

Sector participants should prepare for a new framework that adopts a number of the elements contained in the amendments.

Crypto trading platforms must obtain dealer registration

On August 6, 2024, the CSA and the Canadian Investment Regulatory Organization (CIRO) issued a reminder to crypto trading platforms (CTPs) to prioritize their applications for registration as investment dealers and for membership with CIRO. In particular, CTPs in Canada that facilitate trading either in cryptoassets that are securities or derivatives or in instruments or contracts based on cryptoassets that are securities or derivatives are expected to register as investment dealers and become members of CIRO. The CSA expects that CTPs are engaged in active discussions with CIRO and are diligently pursuing registration by the end of the period provided for CTPs.

The CSA further confirmed that it no longer intends to continue with the interim approach for time-limited restricted dealer registration for CTPs.

CTPs who are not actively engaged with CIRO are strongly encouraged to do so to ensure that they meet the requirements for dealer registration. CIRO has provided helpful guidance on the process for applying for membership, as well as a helpful readiness questionnaire to assist CTPs with their planning.

Extended deadline for value-referenced cryptoassets

CTPs have been favoured with an extension for compliance with CSA guidance on value-referenced cryptoassets (VRCAs). Initially, the deadline for compliance was April 30, 2024, which was subsequently extended to October 31, 2024. The CSA has now further extended this deadline. As announced on September 26, 2024, the deadline is now December 31, 2024.

Interestingly, the CSA noted that the extension is meant, in part, to allow for the proposal of alternatives that address investor protection concerns. This leaves the door open for CTPs and VRCA issuers to present innovative solutions that could mitigate risks associated with these unique assets. With December 31 rapidly approaching, CTPs and VRCA issuers wishing to propose, finalize and implement alternatives need to get moving.

Arguably, the CSA’s decision to extend the deadline reflects an ongoing engagement with the digital asset industry and a willingness to consider alternative approaches to regulating VRCAs. However, it also underscores the regulator’s determination to bring the sector under its purview, maintaining its stance that many cryptoassets fall within securities law jurisdiction.

NFT marketplace enforcement activity

Recent developments in NFT marketplace enforcement in the United States have the potential to spill across the border and affect Canadian NFT marketplaces going forward. In response to the developments south of the border, and as Canadian consumers increasingly engage with these platforms, the CSA may feel compelled to clarify its stance on the regulatory status of NFTs and the platforms that facilitate their trade.

On August 28, 2024, the U.S. Securities and Exchange Commission (SEC) issued a Wells notice to OpenSea, one of the largest NFT marketplaces. The notice indicates the SEC’s intention to sue the company, alleging that NFTs traded on the platform are unregistered securities. OpenSea’s CEO, Devin Finzer, expressed shock at the SEC’s “sweeping move against creators and artists” and affirmed the company’s readiness to contest the allegations.

This action by the SEC signals a potential expansion of regulatory focus beyond traditional cryptoassets to include NFTs. This expansion occurring south of the border could prompt Canadian regulators to scrutinize similar platforms operating within Canada.

The ongoing extensions and adjustments that have been a hallmark of Canada’s efforts to regulate VRCAs, coupled with the SEC’s broadening enforcement scope and efforts, highlight the complex and evolving nature of cryptoasset regulation. These developments suggest that Canadian securities regulators are likely to continue asserting jurisdiction over various aspects of the crypto industry, potentially expanding their focus to include NFTs and other emerging digital assets. Industry participants in Canada should be on the lookout for forthcoming CSA staff guidance on topics such as VRCAs, DeFi and NFTs.

Looking ahead

As we move into 2025, the regulatory landscape for cryptoassets and emerging technologies remains in flux. The CSA’s willingness to engage with industry participants and consider alternative regulatory approaches offers some hope for collaborative solutions. However, the persistent uncertainty and potential for increased scrutiny, especially in light of international developments, suggest that companies operating in these sectors should remain vigilant and proactive in their compliance efforts. As we look to 2025, it is clear that dialogue between regulators and the crypto industry remains crucial in shaping the future of digital asset regulation in Canada.