Notice sets out expectations for reporting issuers on safeguarding crypto assets, use of trading platforms, and other risk factors
As interest in cryptocurrency exposure, particularly bitcoin, continues to heat up among investors, the Canadian Securities Administrators (CSA) has published new guidance to help address the challenge of regulating crypto assets.
"The crypto asset industry is relatively nascent and notably presents unique accounting issues and auditing challenges," Louis Morisset, CSA Chair and president and CEO of the Autorité des marchés financiers, said in a statement. "This guidance is meant to support crypto asset reporting issuers in providing the information necessary for investors to make informed investment decisions."
Drawing from a review of initial disclosures filed by crypto asset reporting issuers in 2019 for the annual reporting period ending in 2018, the notice outlined expectations of CSA staff with respect to disclosures in several key areas.
In its notice, the CSA highlighted safeguarding of crypto assets as one focus area for disclosure reviews, particularly controls to guard against the risk of loss and/or theft. Failure to adopt adequate protections, it said, “may give rise to public interest concerns about the issuer.”
Issuers that have a self-custody system may disclose their use of multi-signature wallets, safeguarding of private keys, “cold wallets,” and frequent monetization of crypto assets into fiat currency, and measures to mitigate cybersecurity risks, among others.
Those that use third-party custodians, meanwhile, are expected to disclose a broader set of information that includes the identity and location of the custodian and any sub-custodians, a discussion of the services provided by the third-party custodian to the issuer, and any information the issuer knows about the custodian’s operations that could affect the issuer’s ability to obtain an unqualified audit opinion on its financial statements, among others.
“The use of, and reliance on, crypto asset trading platforms also raises issues that extend beyond an issuer’s own controls,” the notice said. “Their account with the crypto asset trading platform generally represents a contractual claim against the trading platform and subjects the reporting issuer to the risks related to the solvency, integrity and proficiency of the operators of the trading platform.”
Many of the investor protection considerations applicable to investment funds may also be relevant to issuers who are materially involved in investing in cryptocurrencies and do not have other substantial operations, according to the CSA. Issuers that file a prospectus, the CSA said, may face challenges getting a receipt unless they take relevant risk mitigation efforts comparable to those expected under the investment fund regime.
Citing novel accounting issues unique to the crypto asset industry, the guidance outlined considerations with respect to accounting and disclosures for cryptocurrencies, including how the fair value of holdings is determined, the nature and quantity of different types of cryptocurrencies held, and accounting for cryptocurrency mining, among others.
“As the mining of cryptocurrencies and holding of crypto assets in Canada is an emerging industry with unique technological aspects, a number of novel auditing challenges have arisen. Audit firms, standard setters, and regulatory bodies continue to explore these challenges and potential solutions,” the notice said. “We encourage issuers, and their audit committees and advisors, to review guidance that has been published by the Chartered Professional Accountants of Canada and communications from the Canadian Public Accountability Board.