By Shaed Hashimkhial
Canada is a forefront contender in financial innovation and cryptocurrency, with significant potential to dominate the digital asset sector. However, opinions vary within the industry; some advocate for clear legislation to support growth, while others warn against restrictive regulations that may impede progress.
As anticipation for another market surge grows, Canada stands to benefit greatly. Achieving a unified regulatory approach and fostering an inclusive environment is crucial for Canada to become a leading global cryptocurrency center.
Investor protection to avoid another domino collapse
In February 2023, the Canadian Securities Administrators, a principal regulatory authority for cryptocurrency in the nation, issued a comprehensive set of guidelines targeting cryptocurrency exchanges and stablecoins. This new regulatory framework mandated all digital asset platforms to register, established investment caps for individuals, and introduced stricter regulations for transactions involving stablecoins. Non-adherence to these regulations could lead to fines in the millions of dollars.
This regulatory clampdown was a response to the need for heightened investor protection, spurred by the cryptocurrency market’s downturn in 2022, highlighted by the collapse of the FTX exchange and the precipitous decline of the UST stablecoin, which had previously boasted a market capitalization in the billions.
Despite the intentions behind these regulations, their reception among market participants was lukewarm. The enforcement of these rules saw a notable exodus of international exchanges from the Canadian market just a week after their announcement. However, this withdrawal opened up significant opportunities in the market, quickly capitalized on by other market players looking to fill the void.
The current regulatory landscape in Canada, while designed to mitigate certain risks and prevent losses among retail investors, might also potentially hinder the expansion and innovation within the DeFi sector and the broader financial revolution it represents.
Stablecoins as securities
In Canada, the Canadian Securities Administrators (CSA) and the Ontario Securities Commission are pivotal in regulating the cryptocurrency sector. Their roles encompass formulating crypto market guidelines, safeguarding investors from scams, and restricting the variety of cryptocurrencies and futures available for trading.
A particularly controversial proposal from the CSA was to categorize stablecoins as securities or derivatives. This move aims to protect investors but has sparked intense debate within the Canadian crypto community. Critics argue that such regulation could effectively outlaw stable assets nationwide, given their fundamental role in crypto and Web3 value transactions. This stringent categorization might significantly hamper the growth of Canada’s cryptocurrency sector.
The debate over the new stablecoin regulations is set to continue until April 19th, offering Canada-based crypto platforms until April 30th to align with the existing rules or cease stablecoin trading services.
Canada’s crypto market overview
Amid regulatory challenges, Canada’s cryptocurrency sector is experiencing growth. Projected revenues for Canadian crypto firms are expected to reach US$1.74 billion in 2024. For context, the US market, with a population almost nine times greater, stands at $23.2 billion.
In 2023, Canadian startups raised over $365 million in investment, ranking fourth globally. Additionally, Canada stands within the global top ten for the quantity of registered blockchain services, underscoring its prominent position in the industry.
10% of Canadians own crypto
Canada ranks as the third highest in global cryptocurrency awareness: as of November 2023, one in 10 Canadians held cryptocurrency, a slight dip from 2022, likely because of the bear market. However, with an anticipated bull market, there’s potential for user growth, emphasizing the need for careful regulatory considerations to capitalize on the forthcoming upswing.
Typically more risk-averse than Americans, Canadians have nonetheless been at the forefront of financial innovations, notably in the introduction of cryptocurrency ETFs.
Canada’s unique crypto ETF market
In 2021, Canada set a global precedent by launching the first spot Bitcoin and Ethereum ETFs, securing a 46% share of the worldwide market for spot crypto ETFs before such funds were sanctioned in the USA. By February 2024, Canada’s market share had adjusted to 7.4%, with the value of these ETFs reaching $3.1 billion.
CBDC: Will the Canadian dollar go digital?
Canada is exploring another frontier in financial innovation with its focus on a Central Bank Digital Currency (CBDC). The Bank of Canada is in the research phase of creating a digital counterpart to the Canadian dollar.
This initiative gained momentum in response to the shifts in financial behavior induced by the COVID-19 pandemic, including a surge in cryptocurrency usage and a decline in cash transactions. With blockchain technology increasingly embedded in payment systems and everyday transactions, and the rise of stablecoins in online transactions, there’s a perceived risk of the national currency being sidelined. In response, the Bank of Canada is developing a digital currency designed to centralize the payment ecosystem, potentially offering a solution that wouldn’t necessarily require users to have a traditional bank account.
The operational framework and implementation details of the digital currency are still under consideration by Canadian officials, with the final decision on its introduction resting with the federal government.
Gaming vs. crypto in Canada
The growth trajectory of Canada’s cryptocurrency market mirrors that of its burgeoning gaming sector, another rapidly expanding component of the digital economy. With over 900 gaming studios, including industry behemoth Ubisoft, Canada’s gaming industry is nearing a $4 billion valuation—doubling the crypto market’s size. The gaming sector’s annual growth is expected to surpass 9% in the near future.
Since the 1990s, Canada has played a pivotal role in the global gaming landscape, supported by a highly skilled workforce and government policies conducive to industry growth. As gaming studios increasingly venture into Web3, the interplay between game development and the cryptocurrency market presents a unique opportunity for synergy, potentially propelling Canada’s influence in both domains.
Securing Canada’s pioneering position
Canada led the global charge not only in launching the first crypto ETF but also in pioneering the concept of ETFs overall, with the first ETFs trading on the Toronto Stock Exchange in 1990, predating their U.S. counterparts by three years. The country has been a cradle for groundbreaking crypto initiatives, including decentralized platforms such as Ethereum and Cosmos, the trailblazing blockchain game CryptoKitties, among other significant projects.
The Canadian Web3 Council, a non-profit entity, plays a pivotal role in nurturing the Canadian crypto ecosystem. It comprises a coalition of crypto exchanges, investors, open-source projects, and educational entities collaboratively engaging with Canadian regulatory bodies to enhance policy-making and advocate for the sector’s interests.
A notable endeavor by the council involved drafting an open letter to the CSA, endorsed by 21 of Canada’s leading crypto businesses. This letter calls for a reconsideration of proposed stablecoin regulations, which the signatories argue could impede the growth of Canada’s crypto industry for an extended period.
Canada as a global crypto leader: steps to take
Canada is poised to be a frontrunner in the worldwide cryptocurrency arena, thanks to its historical contributions. Yet, recent developments could jeopardize its leading position unless proactive measures are taken. Some immediate actions to be taken can be;
- Fostering a constructive dialogue between regulators and the crypto industry. The concerns of entities like the CSA regarding investor safety are valid, but the industry also highlights the drawbacks of new regulations. A collaborative approach, akin to the partnership between the FSB, IMF, and G20 with industry stakeholders, could facilitate a balanced regulatory framework.
- Contemplate more lenient legislation for crypto assets. Despite appreciating regulatory clarity, stringent rules have forced significant players out of the Canadian market. With a bullish market forecast, incorporating insights from industry experts is crucial.
- Revisiting the classification of stablecoins is particularly urgent, as their role is vital in the Web3 ecosystem. Designating them as securities might stifle innovation.
Observing nations that have adopted crypto-friendly yet consumer-protection regulations, like the UAE and Thailand, shows the potential benefits of such an approach. These countries are crafting environments conducive to pioneering platforms while ensuring consumer safety, positioning themselves as emerging leaders in the crypto space.
Canada must undertake a united effort to demystify the legal standing of crypto assets, balancing investor security with the encouragement of innovation. With a strategic approach, Canada can affirm its leadership in the global cryptocurrency market, particularly during favorable global market trends.
About the author: Shaed Hashimkhial has been an active innovation leader within the Canadian fintech ecosystem, known for launching cutting-edge products for some of the country’s leading banks and providing strategic consultancy to financial institutions and startups across North America. His journey in fintech led him to discover Bitcoin in 2016 and ultimately transition into the industry to help propel the adoption of this new asset class. He is currently at Bitget, leading go-to-market strategy and operations for North America. Prior to Bitget, Hashimkhial was responsible for Global BD & Partnerships at Koinly, a leader in crypto tax software used by more than 1 million investors around the world.
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