Home News Gary Gensler, You Should Be Watching How Canada Is Regulating Coinbase

Gary Gensler, You Should Be Watching How Canada Is Regulating Coinbase


Canada Is Regulating Coinbase. Indeed, SEC Chair Gary Gensler has suggested that exchanges like Coinbase should register with the SEC since they sell “dozens of tokens that may be securities”. Coinbase’s CEO, Brian Armstrong, has delated the SEC of “sketchy behaviour” and plans to publish his own recommendations on how crypto should be regulated.

It’s all calm up north in Canada. The question of whether crypto exchanges must register with Canada’s equivalent of the SEC has already been resolved. Crypto exchanges must be registered with a securities regulator, according to a March 2021 notice from the Canadian Securities Administrators. Exchanges that wish to continue serving Canadians are scrambling to meet the new requirements.

Given how hazy the position of crypto regulation is in the United States, it’s impressive that Canada’s equivalent of the SEC has been able to quickly clarify the situation. Is it feasible other governments looking for a long-term solution to crypto exchange regulation may follow Canada’s lead?

Bitcoin and Ether aren’t securities, XRP is

Let’s take a look at the situation in the United States before we go on to Canada. The SEC’s authority over cryptocurrency exchanges such as Coinbase and Kraken is contingent on whether the tokens they offer are considered securities. Bitcoin and ether are not securities, according to the SEC. But XRP is.

Bitcoin & Ether

Determining whether a token is secure or not appears to be more of an art than a science. It hinges on how attorneys interpret the SEC’s definition of security. Which encompasses a wide range of instruments such as notes, stocks, bonds, investment contracts, fractional undivided interest, and more. SEC v. W. J. Howey and Reves v. Ernst & Young are two esoteric Supreme Court cases that give further legal information on what it means to be an “investment contract” or a “note”.

Now, maybe SEC authorities could go through all of the thousands of crypto tokens generated in the previous 12 years and develop a list of which ones are securities and which are not. Then Coinbase and Kraken may delist whatever the SEC considers being a security, avoiding the need to register with the SEC.

SEC Chair Gensler, on the other hand, has taken a less cooperative attitude in recent public statements. It goes something like this: “Coinbase, you list 300 tokens, and chances are that at least a few of them are securities (we won’t specify which ones), therefore you should register with the SEC nevertheless”.

Not your keys, not your coins (and certainly a security)

If Gensler’s strategy to bringing cryptocurrency exchanges under securities legislation appears indirect and hazy, the Canadian Securities Administrators (CSA) has chosen a far more straightforward approach. The CSA is a federation of provincial and territorial securities regulators in Canada, with the Ontario Securities Commission serving as its most powerful member (OSC).

The CSA has established a new catch-all term: a crypto contract, to put Coinbase and Kraken under the authority of securities legislation. Because Coinbase and Kraken provide crypto contracts, they are within the purview of Canadian securities legislation.

SEC Chair Gary Gensler

Bitcoin is not a security, according to virtually everyone (including Canadian authorities). However, the CSA claims that the bitcoin in a Coinbase client’s account isn’t genuine bitcoin. A crypto contract, as defined by the CSA, is a contractual right or claim to the underlying bitcoin. In addition, even if the underlying cryptocurrency, such as bitcoin, isn’t a security, the CSA considers all crypto contracts to be securities. Coinbase and other crypto exchanges must register with one of Canada’s provincial securities authorities. Since they trade in crypto contracts and provide a marketplace for them.

In comparison to the United States, this strategy is rather unique. The CSA’s position on crypto contracts is one that “no other international securities regulator has yet taken,” according to law expert Ryan Clements.

The CSA has a broad and detailed set of criteria (see Appendix B of this document). A set of global market integrity criteria must be followed by Canadian exchanges and dealers, which now includes Coinbase. These requirements include abusive trading, front running, customer priority, and other topics. When interacting with customers, Coinbase would have to think about appropriateness and suitability. That is only a small sampling.

Binance, FTX, OKEX, and Houbi are out

Many exchanges will be unable to fulfil the CSA’s criteria. In June, Binance announced its departure from the province of Ontario. FTX no longer accepts users from Ontario. OKEX has ceased serving clients in Quebec and Ontario, and Huobi has designated the whole country a “limited jurisdiction”.

Cryptocurrency exchanges in Canada, such as Wealthsimple and Coinberry, have joined the bandwagon. They also don’t appear to be irritated by it. The CSA’s “measured” restrictions, according to Coinberry CEO Andrei Poliakov, mark the end of the “wild west” of cryptocurrencies in Canada.

It’s easy to understand how the north would welcome regulation. QuadrigaCX, a local cryptocurrency exchange, went bankrupt, which left the Canadians in astonishment. Customers, authorities, and cryptocurrency companies all view regulation as a means to rid Canada of potential crypto disasters.

It’s unclear whether any of the major US crypto exchanges will take the CSA’s definition of “crypto contracts” to court to defend their bailee business model. That would entail delving into Canadian securities legislation. Which, like its American counterpart, has a long list of perplexing instruments. Which are classified as securities, including the nebulous “investment contract” category.

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