Emerging Canadian Crypto-Asset Jurisdictional Uncertainties and Regulatory Gaps

(2021) 37 Banking and Finance Law Review 25

29 Pages Posted: 9 Aug 2021 Last revised: 13 Dec 2021

See all articles by Ryan Clements

Ryan Clements

University of Calgary Faculty of Law

Date Written: July 22, 2021

Abstract

Canadian securities regulators recently advanced a novel jurisdictional claim over crypto-asset trading platforms (CTPs) that trade Bitcoin and other decentralized commodity crypto-assets (DCAs) which are not securities or derivatives on their own. The regulator asserted that a platform user’s “contractual right” to delayed delivery of a DCA creates either a security or a derivative - a position that no other international securities regulator has yet taken. This jurisdictional claim is a positive development in the evolution of crypto-asset regulation in Canada, but it is also incomplete. Third-party intermediaries, and custodial services, are a centralized point of risk transmission and investor transaction volume. As such, the regulator’s measures will bring certainty, stability, and credibility to a historically vulnerable segment of an industry surging in investor interest. Nevertheless, jurisdictional uncertainties, regulatory gaps and standards deficits remain in crypto assets, which could lead to investor harm and financial system instability.

This article illustrates numerous crypto regulatory uncertainties including intermediated blockchain proof of stake validation rewards (crypto staking); decentralized finance (DeFi) passive income “yield farming” and non-fungible tokens (NFTs). Also, user controlled DCA and stablecoin wallets, and non-custodial DCA investment advice are currently unregulated with no standards, certifications, or safeguards. Nascent DeFi applications like peer-to-peer exchanges, lending protocols, smart contract-based prediction and derivatives markets, synthetic investments and lotteries also currently operate outside of meaningful supervision or standards, and in many cases without an intermediary due to automated smart contracts on a decentralized programmable blockchain. Ultimately, a legislative solution which brings DeFi under the supervision of the securities regulator for applications that resemble capital markets regulated products and services, aligned with consistent international standards and coordination with other financial market agencies, is necessary to fully support innovation in crypto assets while ensuring financial system stability and investor protection.

Keywords: Cryptocurrency, Crypto, Defi, Decentralized Finance, NFT, Non-Fungible Token, Bitcoin, Uniswap, Securities, Derivatives, Canada, Crypto-Assets, Fintech

JEL Classification: G20, K22, O16, O30, O31, O51

Suggested Citation

Clements, Ryan, Emerging Canadian Crypto-Asset Jurisdictional Uncertainties and Regulatory Gaps (July 22, 2021). (2021) 37 Banking and Finance Law Review 25, Available at SSRN: https://ssrn.com/abstract=3891809

Ryan Clements (Contact Author)

University of Calgary Faculty of Law ( email )

Murray Fraser Hall
2500 University Dr. N.W.
Calgary, Alberta T2N 1N4
Canada
4036191173 (Phone)

HOME PAGE: http://https://law.ucalgary.ca/profiles/clements

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