Is Crypto Regulation in Canada a Smart Move?

By Heidi Unrau | Published on 04 Dec 2022

Table of Contents

In collaboration with CoinSmart

It’s a plane! It’s a DeLorean! No, it’s Bitcoin! If Dr. Brown’s time machine became a reality it would revolutionize how we travel and do business. But a flying car free-for-all would be a public safety nightmare.

What rules would apply, who would enforce them, and when? What legal responsibilities would manufacturers have? And what does any of this have to do with crypto regulation in Canada?

Bitcoin and crypto markets do crash. Luckily, crypto regulations in Canada are evolving and platforms like CoinSmart* welcome the oversight.

Why? It’s just good business. Let’s spill the tea on some stunning crypto scandals and what they can teach us about the role of regulation.

*Please Note: CoinSmart is now part of WonderFi and the platform is not accepting new signups. If you’re looking for the best crypto experience in Canada, we recommend signing up for Bitbuy, another licensed Canadian cryptocurrency trading platform operated by the same parent company, WonderFi. With Bitbuy, you will get access to an improved experience on web and mobile, staking rewards, Private Wealth services, and an advanced trading interface.

Mt. Gox

Once upon a time, Mt. Gox was the biggest crypto trading platform in the world. Its CEO, Mark Kerpeles, called himself the King of Bitcoin.

In 2014, it was forced to file bankruptcy after hackers stole roughly 850,000 Bitcoins, the majority of which belonged to users. Based on Bitcoin’s price at the time of writing, Mt. Gox customers lost over $26 billion CAD worth of assets.

And it wasn’t the first time they were hacked either. Bankruptcy proceedings revealed the platform was an especially easy target thanks to gross mismanagement, lax security, and straight-up incompetence.

However, an investigation revealed that Kerpeles was entirely unconcerned with network security and other standard business practices. These could have easily prevented the platform’s collapse.

QuadrigaCX

Just a few years ago, QuadrigaCX was the largest crypto platform in Canada. Unbeknownst to users, the platform was a scheme run entirely by a single person: CEO Gerald Cotton.

When users traded Bitcoin, Cotton would update the account with a fake balance. He was a long-time cyber-scammer who used customer assets to bankroll his lavish lifestyle.

Eventually, his luck ran out and the exchange went bankrupt when he couldn’t keep up with customer withdrawals. Gerald suddenly disappeared, some say he died, taking with him the only keys to any remaining digital assets.

Celsius

Celsius was a popular crypto lending and borrowing platform that operated a lot like a traditional bank. It promised users up to 17% returns on their crypto deposits, which the company would then turn around and lend out.

On June 12th, 2022, the platform froze accounts. Users lost access to their assets.

In the midst of a brutal bear market, Celsius found itself $1.2 billion US in the hole. Double-digit returns were unsustainable in a sharp market downturn. Trauma from the Terra Luna massacre spooked investors and leveraged trading slowed down even more.

Now, there weren’t enough new borrowers coming in to subsidize the promised returns for depositors. Suddenly, they didn’t have enough “cash on hand” to support operations.

Preliminary investigations revealed that Celsius was also grossly over-leveraged, and even engaged in some extremely risky trades with institutional borrowers.

It is unlikely users were aware their assets were involved in such high-risk maneuvers. Nor were their deposits protected by depositor insurance, like your savings account at a traditional bank.

Is crypto regulation in Canada a smart move?

Despite the narrative from Bitcoin purists, regulators don’t want to crush your investment returns. They want to help you do it safely. Crypto regulation in Canada is not the enemy, here’s why:

What are the benefits of a regulated crypto exchange?

Two words: less risk. In order to normalize crypto, we need to legitimize it by separating the wheat from the chaff.

CoinSmart wants every Canadian to access the opportunities crypto has to offer by giving us a legitimate reason to trust them with our money. Here are a few things, among many, that CoinSmart is doing to make crypto safer for everyone:

Transparency & accountability

CoinSmart is monitored by financial regulators with legal authority to ensure CoinSmart is following the letter of the law. If other financial institutions can’t act willy-nilly with your investments, neither can CoinSmart.

For example, they have to keep:

data
Information
records about their operations as proof of compliance.

CoinSmart has to do all the same record keeping and reporting stuff as any other legitimate business.

Basically, they have to prove they’re prudent with customer assets and do not act without customers knowing about it.

Better risk management for everyone

Disclosures, disclosures, disclosures! You can’t invest according to your risk tolerance if you don’t understand how this market works or what CoinSmart is up to. On their website, you’ll find various disclosure statements to ensure you have the right information to assess risk according to your comfort level.

In addition to that, new users who want to open an account with CoinSmart must answer an “account appropriateness questionnaire.” Why? As co-founder Michael Koral puts it, “crypto assets aren’t for everyone,” and that’s OK.

CoinSmart and the Ontario Securities Commission (OSC) want to ensure you understand the risks involved before you invest. Suggestions and notifications ensure you have the facts so you can make an informed decision.

Security & stability

To stabilize the platform and keep bad guys at bay, CoinSmart has set up a few core business practices to keep your assets safe. A few of them include, but are not limited to:

Two-factor authentication

The Google Authenticator app generates a code in order to access your account. To make a withdrawal, CoinSmart sends a confirmation email to you.

The withdrawal will not go through until you click on the link within the email to authorize the transaction. This way, fraudsters can’t just casually drain your account, as they did on Mt Gox.

Cold storage to secure assets under management

CoinSmart stores 80% of user crypto offsite in cold wallets provided by BitGo, an industry leader for institution-level digital asset storage. This prevents hackers from accessing everyone’s crypto and crippling the exchange.

The remaining 20% is kept online in hot wallets provided and secured by Firblocks Inc. Oh, and unlike Quadriga, multiple designated people have access so that no one single person holds all the power.

Institutional insurance against internal malpractice

You might not be able to insure your crypto, but CoinSmart can, well sort of. CoinSmart has certain institutional insurance on assets under management to compensate you for loss resulting from internal misconduct like theft, fraud, or gross negligence.

Backed by Canadian banks

This ensures that the money CoinSmart receives is properly accounted for. Unregulated platforms don’t tell you where that money goes or what they do with it.

But CoinSmart deposits the CAD they receive in Canadian bank accounts that are separate from their internal business accounts. Your money stays in the country and isn’t co-mingled with their business accounts or used to bankroll bougie lifestyles.

It also means the money will be there when you’re ready to cash out, unlike Celsius.

The role of crypto regulation in Canada

Financial regulators get a bad rap. The truth is, these laws and regulations aren’t meant to restrict opportunity or cash-grab your gains.

In fact, financial regulation was born from the infamous 1929 stock market crash. Plus, the deregulation of Wall Street was the root cause of the 2008 global financial crisis.

In Canada, crypto regulations are designed to protect investors from unnecessary risk, like the debacles described above. That means a regulated platform like CoinSmart has to comply with certain laws and business practices to protect us.

I want crypto to go mainstream because I believe it is the future of finance, but I don’t want to read about another avoidable crypto meltdown. Do you?

Heidi Unrau

Heidi Unrau is a senior finance journalist at Hardbacon. She studied Economics at the University of Winnipeg, where she fell in love with all-things-finance. At 25, she kicked-off her financial career in retail banking as a teller. She quickly progressed to become a Credit Analyst and then Private Lender. This hands-on industry experience uniquely positions her to provide expert insight on loans, credit scores, credit cards, debt, and banking services. She has been featured in publications such as WealthRocket, Scary Mommy, Credello, and Plooto. When she's not chasing after her two little boys, you'll find her hiding in the car listening to the Freakonomics podcast, or binge-watching financial crime documentaries with a bowl of ice cream. Fun Fact: Heidi has lived in five different provinces across Canada and her blood type is coffee.