Canadian regulator explains stance on crypto staking, lending for investment funds

The Canadian Securities Administrators (CSA) — Canada’s chief financial authority — has confirmed its trust in the regulated futures market for crypto, which “promotes greater price discovery.” Apart from the United States, the Canadian market hosts several crypto exchange-traded funds (ETFs). 

On July 6, the CSA issued guidance to help fund managers comply with law requirements for investment funds holding crypto assets. A 15-page document defends the existence of crypto ETFs in Canada, emphasizing that ETFs possess the necessary tools to hedge against the price fluctuations of particular crypto assets.

The CSA named the markets for Bitcoin (BTC) and Ether (ETH) as providing the best public crypto asset funds support without compromising investor protection. It also lays restrictions on the proportion of “illiquid assets,” i.e., the assets in the funds that couldn’t be swiftly disposed of directly through the open market.

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After proper due diligence, the regulator expects investment funds to determine whether or not the crypto assets they propose to invest in are securities or derivatives. It also reminds investment managers that they’re prohibited from lending assets that are not securities.

The document also lays out “the minimum expectations” for the crypto assets custody. Among them are primary storage in cold wallets, segregation of assets, visibility on the blockchain, insurance for corporate crime and providing reports to fund auditors.

Another issue mentioned is crypto staking. The CSA confirms that it doesn’t explicitly prohibit staking, but it expects funds managers to stay alert to liquid crypto assets becoming illiquid during staking, ensuring they comply with the illiquidity restrictions.

In the spring of 2023, some major crypto exchanges froze operations in Canada due to the regulatory climate. In April, decentralized exchange dYdX announced a winding down of its services for Canadian users. In May, Binance proactively withdrew from the country along with another platform, Bybit.

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