Canada disrupts the crypto market with a new framework deemed ultra strict

Canada, under the governance of Mark Carney, is going through a period of multiple geopolitical and economic pressures. Between a national economy undergoing adjustment and increasing international tensions, the question of crypto asset regulation becomes more and more urgent. As cryptocurrencies establish themselves as major players in the financial landscape, the country is reacting with an ultra strict framework to regulate the custody of digital assets. But does this new regulation represent a security model or a brake on innovation in the crypto sector? The answer lies in the fragile balance that Canada seeks to establish.

Canada imposes strict but necessary regulation for the crypto sphere

Canada under Mark Carney has recently launched its digital asset custody framework, a measure that is already making waves in the crypto sphere. The CIRO (Canadian Investment Regulatory Organization) took the initiative to define rigid standards for the custody of crypto assets on trading platforms, a sector still marred by scandals like QuadrigaCX. 

This framework, structured into four levels, imposes strict caps on the amount of crypto that can be held under internal arrangements (40% for the lowest custody levels), requiring more centralized asset management.

The stated objective is clear: to protect investors while promoting a secure environment for industry development. CIRO aims to strengthen crypto asset security by addressing specific industry risks: fraud, insolvency and cyberattacks. 

However, this regulatory model could have side effects for small crypto platforms. Indeed, the high compliance costs associated with this framework could force them to turn to large custody players, thus reinforcing market concentration.

As Alexandra Williams, vice president of CIRO, pointed out:

Digital asset custody is one of the most critical security points in the crypto ecosystem… This new framework offers companies the flexibility to operate and innovate responsibly. It reflects what we have heard from the industry and demonstrates CIRO’s commitment to being an agile and trustworthy regulator. 

The Canadian framework faces a dilemma: protect or constrain the market?

Although this regulation aims to protect crypto asset investors, it could also hinder innovation, especially among small crypto platforms. Compliance costs to meet these new requirements are high and could push these small entities to turn to large players capable of bearing the associated costs.

Guarantee and cybersecurity requirements pose a dilemma: if the goal is to secure digital assets, this regulation risks leading to a concentration of the crypto market, with a limited number of custodians authorized to maintain asset security. In return, this could create a dependency on these large players and restrict market access for new entrants.

Although this framework is essential to limit risks of fraud, hacking and insolvency as observed in the QuadrigaCX scandal, it could stifle small crypto businesses. Small platforms might be forced to turn to more centralized solutions, thereby reducing market diversity and increasing the concentration of data and control among a few large custodians.

Key facts to remember:

• The bitcoin price at the time of writing is 69,280 dollars;
• Canada’s custody framework imposes strict caps on the proportion of ETH that can be held internally;
• Canada wants to avoid past mistakes, like those seen with QuadrigaCX;
• CIRO has introduced custody levels (from 1 to 4) for crypto platforms;
• The risk of market concentration could increase if compliance costs become too high for small platforms.

Just a year ago, Canada revised its stance on crypto asset regulation, introducing stricter standards to regulate a rapidly expanding market. CIRO’s regulation marks a new stage in this process, aiming to ensure investor security while facing innovation challenges in the sector.