Lynn Johannson, Advisor, Sustainability and ESG
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Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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OSC Crypto Trading Platform Compliance Review Findings
Regulation | Dec 20, 2024
Image: Freepik/upklyak
Are Restricted Dealer Crypto Platforms Doing Enough to Protect Investors? The OSC Weights In
The Ontario Securities Commission (OSC) recently conducted a compliance review of 6 restricted dealers operating crypto asset trading platforms (CTPs) in Ontario, and published a summary of their findings, "Staff Notice 33-757" (see press release). The results? A mix of compliance successes and serious gaps, especially in investor protection practices. Here’s what the OSC found, why it matters, and key takeaways.
Focus of the Review and Findings
This was about the fundamentals: are platforms doing enough to ensure that the people using them actually understand the risks involved? Are they setting limits to protect clients from losing more than they can afford? Specifically, there were 3 areas of concern being investigated:
1. "Account Appropriateness Assessments"
Are platforms making sure accounts are appropriate for their users,based on their individual financial situations and crypto knowledge? CTPs are required to evaluate clients based on their experience with crypto assets, financial circumstances, and risk tolerance.
See: OSC Urges Stricter Rules on Gamified Investing Features
The OSC found that some platforms are using inadequate processes, such as relying only on self-reported user information without sufficient verification. Many platforms use a bare-bones approach to assess whether accounts are appropriate for their clients. They rely too heavily on online forms and didn’t follow up on inconsistencies or update/maintain client information over time. This means people are being approved to trade without a clear understanding of whether the crypto investment is the right fit for them.
2. "Investment Limits"
Are clients being prevented from investing more than they should in a high risk investment or asset? The OSC sets investment limits on certain crypto assets to protect investors (especially retail investors).
The OSC found that most crypto trading platforms implemented the 'investment limits' but lacked an effective monitoring system. CTPs need a good mechanism to enforce the limits and also prevent clients from exceeding them, which is a problem because of crypto's volatility.
3. "Client Limits"
Are there suitable safeguards in place to stop users from losing too much money? Client limits refer to the maximum value of crypto assets a client can hold on a platform.
See: Regulatory Updates for Crypto Asset Trading Platforms
The OSC observed that some platforms do not have clear policies or systems in place to monitor client holdings (and compare them against the limits). This appears to be the biggest issue in the compliance review since CTPs are supposed to restrict people from losing more than they can afford. Too often platforms either ignore the limits or don't act quickly enough if client limits are breached. Clients aren't being warned in time and in some cases no action is taken at all.
Takeaways for Your Business
These findings should be a wake-up call if you operate a fintech or crypto business. The OSC is sending the industry and specifically CTPs a message to review their policies and internal systems to ensure they comply and tighten the ship. Here are some takeaways.
- Think of on-boarding as your chance to really understand your clients. what their financial situation is, their knowledge of crypto, and how much risk they can handle. Make sure you check in with them regularly and all information is verified and documented. Not just once a year but whenever things change for them or in the market.
- Limits are there for a reason. It's how much a client can invest or how much they can lose, so baking these guardrails into your system is critical. Have systems in place to monitor and track these limits in real time. Don't wait until it's too late - automate the alert process.
See: UK vs. Canada: A Tale of Two Different Crypto Consumers
- Communication is key. When clients are getting close to their limits, let them know. But do it in a way that’s clear and educational. This isn't financial advice. You're giving them the tools to make better decisions.
- Stay up to date with all regulatory updates and changes that may impact your business, and to remain compliant.
Final Thought
Consider this your advanced warning. Are your processes strong enough? Are your systems up to date? Are you putting your clients first? The OSC’s findings are an opportunity to plug gaps, strengthen your approach, and turn compliance into a competitive advantage.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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