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Grant Vingoe: Canadian crypto-asset regulation needs a balanced, prudential approach

Commentary

The recent article by Ossowski and ClementCanada’s shaky rules on cryptocurrencies have their root in Ontario https://thehub.ca/2022-08-08/yael-ossowski-and-david-clement-canadas-shaky-rules-on-cryptocurrencies-have-their-root-in-ontario/ mischaracterizes the Canadian regulatory environment for crypto assets in significant ways.

The Canadian Securities Administrators (CSA), the umbrella organization for all of Canada’s provincial and territorial securities regulators, of which the Ontario Securities Commission (OSC) is a part, has developed consistent viewpoints on crypto asset regulation.

For virtually all crypto asset trading platforms, the relationship between investors and platform operators is marked by a critical dependency on the operators for the selection of assets to trade, the manner in which those assets are marketed and sold, risk disclosure, and critically, the safety of the custodial arrangements that are in effect. Investors have only a contractual claim to the underlying crypto assets.

We all observed the risks in Canadian-based QuadrigaCX’s failure and the revelation of the stark reality that it was a Ponzi scheme wrapped in the jargon of innovation, resulting in well over $100 million in losses, predominantly to Canadians.QuadrigaCX: A Review by Staff of the Ontario Securities Commission https://www.osc.ca/quadrigacxreport/ This was a formative event for our development of crypto regulation.

The definition of a security in Ontario is broad and technology-neutral. Canadian regulators have had ample precedents applying that definition to unregistered online trading platforms offering products such as commodity warehousing schemes, contracts for differences (CFDs), foreign exchange (forex) contracts, and binary options. We view the totality of the arrangements that platforms have with investors as securities; notwithstanding that over time, Bitcoin and Ether evolved in a manner that allowed them to be characterized as commodities. The result is that platforms are subject to dealer registration. These crypto contracts may also be derivatives since their value is dependent on the value of underlying interests, in the same way that a swap is a derivative because it is based on an index or on gold. Additionally, platforms have explicitly marketed crypto derivatives, essentially off-exchange futures contracts, which also fall unquestionably within the jurisdiction of CSA members.

Although regulatory efforts are underway in the U.S., American authorities have faced challenges in providing clarity because of the divided jurisdiction between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). In Canada, we have the challenge of coordinating multiple provincial and territorial securities regulators, but we all share unified jurisdiction over securities and derivatives.

Canadian securities regulators share the view that platforms offering these crypto assets to Canadians need to be subject to conduct and prudential regulation, adapted to how they conduct business but with a central commitment to investor protection. They need to be subject to scrutiny and ongoing examination like any other dealer. History has shown that sunshine is indeed the best disinfectant and its absence will lead to market failures, fraud, and cheating.

As partners with other financial services regulators and law enforcement bodies, we recognize that it is necessary to protect against criminal activity, notably money laundering and terrorist financing. As market regulators, we have a shared commitment to combating market manipulation, improper promotional activity, and insider trading.

At the OSC, we are of the view that the Investment Industry Regulatory Organization of Canada (IIROC), the investment dealer self-regulatory organization that governs conduct, prudential regulation, and market surveillance, is the right destination for most of these firms as they typically deal with retail investors. Direct regulation by the OSC is a temporary measure on the way to IIROC membership. It is not sound public policy to exclude platforms that deal in the most speculative assets from IIROC oversight, yet require it for dealers that are involved in capital formation for businesses that develop our economy and can support stable retirement savings.

Implicit in the op-ed is the question of how we came to have a two-tier system where large global players are unregistered while we have Canadian-based regulated firms. The answer is that global firms were established in crypto safe havens or where there was regulatory ambiguity and conducted internet-based business initially largely without permission from either their home countries or the jurisdictions where targeted investors resided. The fact that the comprehensive U.S. regulation has been delayed by definitional and jurisdictional questions has allowed this situation to flourish for far too long.

We had a compelling interest in regulating home-grown players who were likely to garner an increasing proportion of Canadian assets. We wanted to avoid Canada being a base of operations for fraud and possible systemic risk arising from home-grown firms. As many in the now-established crypto world agree, regulation is a critical key to trust and adoption. We are working to ensure that the Canadian system of regulated entities deserves the confidence that follows from regulated status. Our hope continues to be that Canadians will turn to firms that have submitted to Canadian regulation.

Global players will have to decide whether accessing Canadian investors in accordance with Canadian law is worth the compliance effort. Established firms seeking credibility will not wish to be banned in Canada or be subject to enforcement and other sanctions. They want to be in good standing in established securities markets. We already have had successful enforcement actions against global players who feel differently.

“The role of securities regulators is not to choose economic winners or losers but to create an enabling and competitive environment”

The authors point out that efforts to block internet access by Canadians can be circumvented by VPNs. This is true. However, if we see any encouragement of this or other actions to attract Ontario investors after platforms agree to block access, we will treat such misconduct as equivalent to recidivist violations and seek the most serious consequences. Compliance systems are improving rapidly, and we will demand vigilance. The solution for the residual risk will ultimately lie in increased international regulatory cooperation.

The authors also point out variations in the treatment of some global platforms where Canadians can transact from one province and not another. That arose from our decision in Ontario to set a deadline for these platforms to embark on the road to registration. We didn’t want to give them an incentive to drag their feet. If they missed the deadline or said they didn’t want to do business in Ontario, they had to stop offering services in Ontario or face enforcement. Other provinces didn’t impose the same deadline, and the result was different. It remains a challenge to bar non-compliant firms from offering services in Canada, but we are making progress.

This week CSA members have accepted pre-registration undertakings from two firms, including a large global firm, to help ensure that fundamental investor protections are in place while the firms work through the registration process with us. All unregistered firms operating in Canada will be expected to provide these undertakings while their applications are being processed.

The authors incorrectly attribute the differences in approach among CSA jurisdictions to the absence of a two-way passport with Ontario. That is false. There isn’t and never has been a two-way passport among CSA jurisdictions for the registration of restricted dealers such as crypto asset trading platforms, whose novel businesses require tailored terms and conditions. All jurisdictions weigh in so that we can benefit from the best thinking before new business models can be employed in the Canadian marketplace. It can be challenging for regulators and firms alike to go through this collaborative process, but it is one that respects Canadian federalism. In this context, a two-way passport is a red herring, and the authors’ claims reflect a fundamental misunderstanding of how our regulatory regime operates.

The role of securities regulators is not to choose economic winners or losers but to create an enabling and competitive environment in which investors, innovators, and entrepreneurs have the confidence to participate.

We continue to prioritize investor education to help equip investors with the appropriate knowledge of this sector so they can better understand the potential risks involved.

The Canadian securities regulatory approach to crypto assets has been principled, pragmatic, and measured, with a view to protecting investors and creating a level playing field that facilitates competition and innovation in the crypto sector.

Malcolm Jolley: Château Cissac: A fine French wine for the Welsh countryside (or wherever you find yourself)

Commentary

Before the interruption of COVID-19, my family routinely spent an August holiday every year in rural Wales to visit the branch of my in-laws that live in the U.K. I am back for the first time since 2019, the reunion and re-access to the wine cellar at Cefnperfedd Uchaf, has got me thinking about a wine I have got to know here, and the pleasures of revisiting it year after year, vintage after vintage.

My first visit to Maesmynis was in the mid-90s before I had anything like a family of my own, and just an interesting girlfriend who thought I ought to see where she spent her summers as a kid. (My wife was born in England to Canadian ex-pat parents, and moved to Canada with her mother as a kid when her parents divorced.) What was a weekend and summer house in Wales is now the permanent home of my father-in-law and his wife Nancy (another Canadian ex-pat). Now the house and the barns that surround it are a working lavender farm,“The story of FARMERS’ and Wales’ first lavender farm begins in 2003 with the Oxford philosopher, Bill Newton-Smith, and international journalist Nancy Durham, wondering how their sheep farm might be put to new use under the blustery, grey skies of Wales. One fine spring evening in Wales, Nancy thought of the lavender hedge in their Oxford garden and wondered if she might be able to grow one on the farm. Never mind the hedge, by September that year an entire field of lavender had been planted. This is how the philosopher and the journalist became farmers, distillers of lavender oil and creators of lavender gifts.” https://www.welshlavender.com/about-farmers/ cosmetics business, agriturismo, shop, and tourist attraction.

I was instantly impressed by the beauty of the green valleys and hills of mid-Wales in the shadow of the Brecon Beacons and the Black Mountains. The routine for us in Wales then has not changed very much over the last quarter century or so, and I was glad that we got right back into it after the pandemic pause. Days are spent hiking across fields full of sheep and searching for panoramic views on the high moorlands. Evenings are spent preparing dinner, made from local ingredients, supplemented by whatever looks good from the garden, and raiding the wine cellar.

Bill, my father-in-law, earned his doctorate and then taught at Oxford. (One of his students was Boris Johnson.) There he developed an interest in wine and took the first opportunity he could to join his college’s wine committee. The Oxbridge tradition in wine, as I understand it, is firmly rooted in what the English still call, in some circles, Claret. In any event red Bordeaux was the order of the day in the 1970s, but the only one of the wines on the list that a young academic could afford was Château Cissac, a Cru Bourgeois from the Haut-Médoc.Blend: 75% Cabernet Sauvignon, 20% Merlot, 5% Petit Verdot http://www.chateau-cissac.com/uk/fiche_technique.php?vin_id=1&id_millesime=1 So his first purchase was a case of the 1970, and he hasn’t looked back since.

The English wine critic, author, encyclopedist, and broadcaster Jancis Robinson calls Cru Bourgeois “a category of red wine properties, or crus, designated bourgeois, or a social stratum below the supposedly aristocratic crus classés.” The idea being that those of us who have to work for a living might be able to enjoy well-made wines that don’t break the bank but exceed the reds headed for supermarket shelves. Recent vintages of Cissac, when they get to Canada, usually sell for about $30-$35 a bottle.

Bordeaux bottles more wine than all the other French regions combined, so while the few hundred Cru Bourgeois producers may be at the modest end of the classification spectrum, they are still very much at the pointy end of the quality pyramid.

Cissac is, in my humble and extremely biased opinion, one of the best of the Cru Bourgeois. In 2003, Robert Parker praised the Vialard family who have made it since the late 19th century. Writing in Bordeaux: A Consumer’s Guide to the World’s Finest Wines (4th Ed.), he states plainly that “their beloved Château Cissac produces one of the best Bourgeois wines of the central Médoc.” Parker adds [Cissac] seems to have a growing following among American connoisseurs who have the patience to wait for its slow (for a Cru Bourgeois) but sure evolution.”

Note Parker’s emphasis on Cissac’s ageability. Because I married well, I have had access, albeit intermittently, to a rolling vertical library of Chateau Cissac that has spanned about 50 years. In addition to buying each vintage of the wine “en première” when it is first released, Bill also buys wine at auction, and so I have had the pleasure of tasting Cissac from storied vintages like 1961.And 1982, but I have no notes for either because I am feckless and live in the moment when I am not consciously on the clock. It didn’t occur to me at the time that I would ever write about them. I do certainly recall they were very, very good.

1995 and 1996 were good years for Cissac, and I think Bill must have stocked up on both because there was a run of a few years when he’d serve them both at once. At first, the ’96 was the crowd-pleasing hare, but then the tortoise of ’95 opened up and won the race.

Bill won’t open a Cissac that’s longer than 10 years, and we don’t have it every night; it’s still a treat. On this year’s trip, we have enjoyed the 2008 in bottle and the 2009 in magnum. Both are mistakably Cissacs with left bank Cabernet Sauvignon driven notes of black current and a finish of cedar. In this way, it is a pleasure to be reunited with an old friend of a wine.

Of the two, despite being younger and in a larger bottle, it was the 2009 that struck me at point, mellowed, still good on fruit and acid, and holding a tannic structure that melted into a velvety wash. The 2008, on the other hand, was zippy and full of energy, with blackberry violet notes to complement the black current. If the 2009 was a wine of quiet contemplation, the 2008 still held some raucous character of youth.

Bill told me over dinner with one of the wines that there has been some talk among Cissac fans about whether recent vintages are being made to be ready to drink earlier. This may have as much to do with global warming, which has flattened vintage variation in Bordeaux and all but guaranteed ripe fruit every year, than a pre-meditated marketing decision.

It really shouldn’t matter how old a wine is if it’s well made and brings pleasure to its drinker. And yet wine is more than just a drink, and the tension between the consistency of a wine made at the same place over generations and the unpredictable variability of the wine from year to year makes tasting wine that much more fun. I guess we’ll see what’s happened at Cissac in a few years when we get into the 2010s.