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January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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Canada’s Proposed Mutual Fund Crypto Regulations 2024
Crypto Regulations | May 14, 2024
Image: Freepik
Strategic Update on CSAs Proposed Crypto Regulations for Mutual Funds
On January 18, 2024, the Canadian Securities Administrators (CSA) published proposed amendments aimed at enhancing investor protection by refining the frameworks under which mutual funds can engage with cryptocurrencies, specifically "Notice and Request for Comment – Proposed Amendments to National Instrument 81-102 Investment Funds Pertaining to Crypto Assets".
Main Changes and Impact
- The proposed regulations would only allow mutual funds classified as 'Alternative Mutual Funds' to invest in cryptocurrencies exclusively. This classification aims to limit exposure to the volatile crypto market to more sophisticated investment vehicles that are better equipped to manage higher risks.
- A significant aspect of the new rules is the requirement for all crypto investments by mutual funds to be made in assets traded on recognized, regulated exchanges. So, at this point that would only include Bitcoin (BTC) and Ethereum (ETH) as qualifying crypto assets that would be available for trading. This measure seeks to reduce the risks associated with unregulated markets and enhance the overall stability of the financial ecosystem.
See: Resurgence of Cryptoassets in Canada’s Investment Landscape
By mandating investments in regulated venues, the regulations aim to shield investors from the unpredictable nature of many crypto assets. The move is expected to foster a more stable and reliable market environment. While the regulations are primarily protective, they also pose questions about potential limitations on innovation and the growth of Canada's crypto market.
Perspectives and Reactions
While regulators view these changes as a necessary step to ensure the safety and integrity of the financial market, there's a balance to be struck between protective oversight and stifling regulation. The Investment Executive published a piece citing 'industry pushback on proposed crypto holdings - only for alt funds?'
1. Investor Advocates (Ontario Securities Commission's Investor Advisory Panel)
"[Investments in non-exchange traded crypto assets present too much risk...]"
See: Canada to Enforce Cryptoasset Reporting by 2027
Advocates emphasize the need for strict regulations to protect retail investors from the inherent risks of non-exchange traded and non-fungible crypto assets. They support the CSA's proposals as a way to safeguard investor interests against speculative and volatile investments.
2. Alternative Investment Management Association (AIMA)
"[These stringent provisions may stifle market and product development...]"
AIMA argues that restricting crypto investments to assets traded on regulated exchanges might limit market opportunities to major cryptocurrencies like Bitcoin and Ether, thereby hindering broader market and product development.
3. Investment Industry Association of Canada (IIAC)
"[Investors may be better protected if they are able to gain exposure to cryptoassets through a regulated investment product...]"
See: CRA Pursues $54 million in Unpaid Crypto Taxes
IIAC suggests that regulated investment products offer better protection for investors than direct purchases of cryptoassets, advocating for more flexible regulations that can include a broader array of crypto products.
4. 3iQ Corp (Toronto-based fund manager)
"The outright prohibition of lending activities is a brute force approach that removes the ability for asset managers to innovate in Canada...[Leaning in to providing regulated products will actually better protect consumers...]"
3iQ emphasizes the importance of regulated products in protecting investors, especially in light of the recent high-profile failures in the crypto market. They advocate for regulations that do not stifle innovation but instead support the development of safe investment options.
5. The Canadian Blockchain Consortium
"The Canadian cryptoasset industry requires separate statutory oversight (and potentially an independent regulator) instead of integrating trading platform requirements into existing securities legislation...”
See: BRICS Announces Launch of Blockchain Payment System
This segment criticizes the proposed regulations for being overly restrictive, potentially stifling innovation and limiting growth in the Canadian crypto market. There is a significant concern that these constraints could push investors towards less-regulated markets.
Outlook
As these rules transition from proposal to enforcement, they will reshape how crypto investments are perceived and handled in Canada. At the National Crowdfunding & Fintech Association (NCFA Canada), we believe that an appropriate balance between innovation and regulation must exist for healthy and sustainable markets while maintaining Canada's competitiveness in the global fintech industry. We advocate for regulations that support the development of safe investment options and globally competitive products without stifling innovation.
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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