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

Crypto Exchange-Traded Funds in Canada

The Canadian Securities Administrators (CSA) has affirmed its confidence in the regulated futures market for crypto, which “promotes greater price discovery”. Canada is home to a number of crypto exchange-traded funds (ETFs), apart from the United States.

On July 6, the CSA released a 15-page document to help fund managers comply with the legal requirements for investment funds that hold crypto assets. The document defends the existence of crypto ETFs in Canada, and highlights that ETFs have the necessary tools to hedge against the price fluctuations of specific crypto assets.

The CSA identified the markets for Bitcoin and Ether as providing the best support to the public crypto asset funds without compromising investor protection. It also set limits on the proportion of “illiquid assets”, i.e. the assets that cannot be quickly disposed of through the open market, in the funds.

The regulator expects investment funds to determine (after proper due diligence) if the crypto assets they intend to invest in are securities or derivatives. It also reminds investment managers that they are prohibited from lending assets that are not securities.

Crypto Regulations and Staking

The Canadian Securities Administrators (CSA) has laid out the minimum expectations for crypto asset custody, such as storage in cold wallets, asset segregation visible on the blockchain, insurance for corporate crime, and reports to funds’ auditors.

When it comes to crypto staking, the CSA does not prohibit it, however fund managers are expected to remain alert to the possibility of liquid crypto assets becoming “illiquid” during staking and to adhere to the “illiquidity” restrictions.

In the spring of 2023, a number of major crypto exchanges, including dYdX, Binance and Bybit, had to withdraw their services from Canada due to the “regulatory climate”.

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