OSC chief makes the case for crypto regulation

According to Vingoe, soon-to-be-released research from the OSC has found that more than 30% of Canadians plan to buy cryptoassets within the next year.

Against that backdrop, he argued, it’s essential that the sector be subject to minimum standards of investor protection and prudential oversight.

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While Vingoe acknowledged there is “clearly great potential in blockchain technology,” he said the crypto market is “extremely volatile,” much of the investment activity in the space has been primarily speculative, and speculation has led to losses for investors from misconduct and plunging cryptoasset prices.

“The prominent losses, platform failures and instances of fraud we’ve all heard about have a devastating cost to people’s financial lives,” he said.

This in turn inflicts a cost on the real economy, Vingoe said, by siphoning off risk capital from companies looking to grow.

“There is only a limited amount of high-risk capital that a retail portfolio can appropriately withstand,” he said. “When it is being diverted to an unknown avatar somewhere in the virtual world, it is not supporting our local businesses and communities.”

The role for regulators is to ensure that the crypto sector is on a more level playing field with the traditional financial sector, and that investors can rely on similar protections.

“For a market to be competitive it must offer a level playing field to attract capital and be supported by appropriate disclosures and fundamental investor protections,” Vingoe said. “These foundations provide investors, innovators and entrepreneurs with the confidence to participate.”

Investor confidence is essential for markets to function, and for genuine innovation and competition to flourish, Vingoe suggested.

“The freedom for bad actors to rip off their fellow citizens is not the kind of freedom that benefits any market,” he said.

Adequate disclosures and basic investor protections must be in place, he insisted.

“The fundamentals of regulation are equally applicable to stocks, bonds and crypto contracts,” he said. “Cryptoasset trading platforms need to be subject to scrutiny and ongoing examination like any other intermediary. History has shown that without this, there will be fraud, cheating and potential harm to investor confidence.”

Regulators in Canada have begun building this architecture, he noted, pointing to early efforts by the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) to craft a regulatory framework for crypto trading platforms, CSA guidance in 2021 on disclosure for crypto issuers, and the ongoing registration of trading platforms in Ontario.

“It is not sound public policy to exclude platforms that deal in the most speculative assets from IIROC oversight while requiring it for dealers that are involved in traditional capital markets,” he said. “That is the very definition of an uneven playing field.”

The OSC has begun enforcement actions against a number of platforms that have failed to pursue registration, and it has required others to adopt pre-registration undertakings designed to hold them to the same standards as registered firms.

“In Canada we have been at the forefront of bringing cryptoassets into the regulatory perimeter to give genuine innovators room to develop their ideas while still protecting investors,” Vingoe said. “We have taken many concrete measures, while others continue to struggle with definitions and fight jurisdictional battles.”

He suggested that the OSC intends to stick to its guns in bringing oversight to the crypto space.

“When approaching innovation, we need to be responsive to feedback and flexible to different business models, but the fundamental policies of securities regulation, including investor protection, are not negotiable,” Vingoe said.

“It is my hope that firms, investors and members of the public will understand that it is the presence of sound regulation, not its absence, that gives our capital markets their strength and resilience.”