Canada Proposes Comprehensive Regulatory Framework for Public Investment Funds Holding Crypto Assets

January 18, 2024
 |  Regulatory & Compliance News
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Key Insights

  • The Canadian Securities Administrators (CSA) have proposed regulatory requirements for public investment funds investing in crypto assets.
  • Proposed amendments aim to protect investors and reduce risk, including restrictions on crypto asset investments and custodial obligations.
  • The amendments mark the second phase of a project for a Canadian regulatory framework for crypto-holding public investment funds.
  • Only alternative investment funds and non-redeemable investment funds can directly buy, sell, or hold crypto assets under the proposed changes.
  • Assets must be listed on recognized exchanges, fungible, insured, and custodied in cold wallets, with an annual review by a public accountant.

Detailed Summary

The Canadian Securities Administrators (CSA) have released proposed regulatory changes for public investment funds dealing with crypto assets, acknowledging the need to adapt the existing framework to address the unique aspects and risks associated with crypto investments.

CSA Chair Stan Magidson emphasized the importance of formalizing fundamental requirements to provide clarity to fund managers. The proposed amendments, constituting the second phase of the project, aim to enhance investor protection and risk mitigation in the crypto asset space.

Under the proposed changes, only alternative investment funds and non-redeemable investment funds would be permitted to directly engage with crypto assets. Mutual funds seeking exposure to cryptocurrencies must do so through these vehicles. Moreover, the assets in question must be listed on exchanges recognized by Canadian securities regulatory authorities, ensuring fungibility.

Additional safeguards include the requirement for assets to be insured and custodied in cold wallets. An annual review of the custodian’s internal management by a public accountant is mandated to ensure compliance with regulatory standards.

The CSA anticipates that these regulatory adjustments will not only provide greater clarity but also foster new product development in the crypto space while embedding risk mitigation measures within the investment fund regulatory framework.

However, the CSA remains cautious, emphasizing the speculative nature of crypto asset investments and the inherent volatility in their value and liquidity. The regulatory oversight, though significant for investor protection, cannot eliminate all associated risks.

Stakeholders and the public have a 90-day comment period, concluding on April 17, 2024. The CSA plans to consult publicly on a broader framework in the project’s third phase.

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