Unfolding Quadriga drama highlights crypto oversight gap

Investors who lost hundreds of millions are left with no clear idea of which regulator they could turn to

Unfolding Quadriga drama highlights crypto oversight gap

For many hyped-up investors around the world during the crypto boom in 2017, the floodgates couldn’t open fast enough. The words “Bitcoin,” “crypto,” and “coin” would trigger a near-Pavlovian response as people rushed to pour money into the new, largely unregulated investment frontier.

Fast forward to today, and the once-lucrative space has turned into a no-man’s land for many duped by bogus initial coin offerings, victimized in exchange hacks, or caught up in the crypto asset bust. The unfolding drama involving cryptocurrency exchange Quadriga is the latest addition to that list for Canadian investors — and it’s not clear which regulator they could turn to for help.

In a piece published on the Financial Post, Terence Corcoran quoted an October statement from Bank of Canada Deputy Governor Timothy Lane. “The Bank of Canada is not responsible for regulating these crypto products,” Lane said. “Indeed, the term ‘cryptocurrencies’ is a misnomer … they don’t do a good job of performing the basic functions of money.”

And while the Office of the Superintendent of Financial Institutions (OSFI) is currently focused on questions around its contentious mortgage stress test, Corcoran said it is hands-off on crypto. He recalled a January 2017 statement from OSFI saying it had “not issued specific guidance related to trading in Bitcoin (or other ‘virtual currencies’) and fintech,” but expected “federally regulated financial institutions to be aware of the risks of engaging in financial activity, including activities that may be linked to Bitcoin, and to take appropriate measures if the activity is assessed to be higher risk.”

The chartered banks appeared to be doing so, Corcoran said, noting that CIBC froze $28 million in accounts linked to Quadriga in October as questions arose over their ownership.

While the Financial Consumer Agency of Canada (FCAC) has been investigating retail selling practices at the big banks, he added, the agency has not made a similar push to look into the retail sales practices of crypto exchanges and other issuers of such assets. The FCAC website, he acknowledged, has a primer to warn consumers that digital currencies come with risks.

The Canadian Securities Administrators (CSA) has also been puzzlingly quiet, according to Allan Goodman, a partner with Goodmans in Toronto and co-author of the Cryptocurrency in Canada newsletter. “They spent over a year looking at a lot of these situations and there has been no pronouncements yet,” he said. “I would have thought by now we would have seen something.”

Goodman, along with fellow newsletter author Michael Partridge, noted the CSA’s broad warning that cryptocurrency exchanges are generally unregulated and may not be efficient markets. It pointed out that a cryptocurrency exchange operating in Canada that facilitates trading in securities must be recognized as a marketplace under Canadian securities law or be exempt from recognition. However, Corcoran said, provincial securities regulators have gotten bogged down in determining whether cryptocurrencies should count as securities.

One contributing factor, he observed, is that cryptocurrency markets operate in direct opposition to the foundations of any regulatory structure. An example is the crypto market’s fixation on anonymity, which could stifle the enforcement of “know your client” rules required in the securities industry.


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