How Canada’s regulatory regime can ensure the protection of Canadian investors

Following the ongoing crypto-crisis started when Bitcoin dropped from its all-time high above $68,000 in 2021 to less than $18,000 in 2022, the crypto market went from boom to collapse, opening a new era called “crypto winter”. As cryptocurrencies hit a rough patch in 2022, especially between May and July, a bunch of investors experienced large portfolio losses, and some cryptolenders – the bankruptcy. For institutional players, it is essential to properly understand the market and to identify all risks before contributing in these volatile assets. Pursuing this purpose, investors should take into account due diligence measures that can regulate their risks and ensure higher levels of protection when dealing with crypto.

A storm in the crypto market

The period between May and June saw another sensitive “hit” to the crypto market: shock waves rippled through crypto combining debt, high leverage, problems with collateral valuation, and a downtrend market.

In May 2022, the breakdown of a famous stablecoin went for investors billions of dollars and led to a shockwave on global crypto markets blacking out $1trillion of UST and its token Luna experienced a tremendous jump before it zeroed.

The results were notable: UST “switched off” from its link to the dollar and Luna came in at $0, making it a de facto dead coin, provoking a crisis in confidence in crypto markets with bear trends. This crisis was sharpened by big bankruptcies of cryptolenders and hedge funds, which all experienced significant losses from their expanses to Luna, and each other.

Canadian regulated platforms ensure market security

In Canadian jurisdiction, there is an applicable legal and regulative mechanism for crypto platforms that ensures that dealing with digital assets is secure, transparent, and available to the general public. While cryptolending is not yet covered by a certain regulative regime in this jurisdiction, Canadian platforms that are formed with the Canadian Securities Administrators (CSA) or are in process of acquiring such status are subject to investor protection obligations.

Valid terms enforceable to crypto platforms include:

• Obligatory insurances that can cover losses of client’s assets;
• Storing client’s assets with an approved custodian and cold storage obligations;
• Preparation of risk disclosure to platform users;
• Know Your Customer approach;
• Introduction of purchase limits;
• 2-year transition to IIROC licensing.

When contributing to the crypto market, whether in a product or an entity, an investor should keep in mind the following aspects:

• Having a clear vision and comprehension of the business model;
• Auditing code-reliance;
• Ensuring following laws and building on an appropriate compliance system;
• Ensuring the execution of rights on intellectual property.

If you wish to find out more about how investors can be protected when operating in the crypto market, feel free to contact us and we will help you determine if your crypto project is workable or entails any risks from a legal perspective.