Category Archives: Legal Issues and Regulation

The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”

Crowdfund Insider | | June 20, 2019

RegCF SEC report - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”The Securities and Exchange Commission (SEC) has published a statutory report on Regulation Crowdfunding commonly referenced as Reg CF. The mandated report must be forwarded to Congress three years after Reg CF rules became effective (May 2016).

Reg CF is the smallest of three federal “crowdfunding” exemptions allowing issuers to raise just $1.07 million from both accredited and non-accredited investors.

According to the report authors:

“the number of crowdfunding offerings, as well as the total amount of funding during the considered period, was relatively modest.”

The report tallies activity under Reg CF from May 2016 to December 31, 2018. At the end of the period, there were 45 active Portals and 9 Broker-Dealers which had participated in at least one Reg CF offering.

See:

Three platforms accounted for two-thirds of all initiated offerings and proceeds raised.

SEC: the number of #RegCF #crowdfunding offerings, as well as the total amount of funding during the considered period, was relatively modest Click to Tweet

According to the SEC:

  • Between May 16, 2016, and December 31, 2018, there were 1,351 offerings, excluding withdrawn filings, seeking in the aggregate a target, or minimum, amount of $94.3 million and a maximum amount of $775.9 million.
  • Of the completed offerings, approximately $107.9 million has been raised during the period.
  • 29 offerings reported raising at least $1.07 million from May 16, 2016, through December 31, 2018
  • The typical offering was small and raised less than the 12-month offering limit. The median target amount sought was $25,000 and the median maximum amount sought was $500,000.
  • Pointing to an external report, the SEC notes that the total number of investors in successful offerings increased from 77,558 in 2017 to 147,448 in 2018

Regarding the cost of launching a Reg CF campaign, the SEC states:

“According to the survey, the average issuer employed three people who collectively spent 241 hours to launch a crowdfunding campaign. Based on the survey estimates, the total cost of creating a campaign page, issuer disclosures, film, and video, and hiring a marketing firm, a lawyer, and an accountant amounts to approximately 5.3% of the amount raised.”

The most costly portion of the campaign preparation has to do with disclosure. This cost, on average, $6218 or a time allocation of 86 hours, according to the SEC.

See:  Architecting a New World: Investment Crowdfunding and Digital Assets

The report mentions that cost and complexity have impacted this sector of online capital formation. The authors point to previous SEC Small Business Forums where participants have made recommendations to improve Reg CF for the past few years but to date, no action has been taken on these recommendations.

The document includes some anecdotal feedback from crowdfunding platforms. For example, one platform states that “while few offerings reach the current limit, many issuers choose not to rely on the crowdfunding exemption because the limit is too low.”

Another intermediary thought the current cap was ok.

But several respondents stated that the offering limit should be higher, recommending limits from $5 million to $20 million.

Negative Selection Bias?

Importantly, the SEC report states:

“Some of these market participants stated that the existing offering limit may deter some high-quality, high-growth issuers with substantial financing needs from relying on Regulation Crowdfunding, thereby lowering the average quality of issuers in the Regulation Crowdfunding market. One intermediary respondent stated that raising the offering limit could attract more issuers and expand opportunities for non-accredited investors.”

Many platforms have crafted a workaround to bypass constricted Reg CF rules regarding investment caps and investors limitations.

It is now commonplace to run two concurrent offerings: a Reg CF and Reg D side-by-side for accredited investors. But some intermediaries told the SEC this was “unnecessarily confusing to investors and more costly to issuers.”

The report says that no enforcement actions have been taken against Reg CF issuers by the SEC but FINRA has taken 4 separate actions against a funding portal and NASAA says a small number of actions have been taken by state regulators.

See:  OurCrowd Double IPO Success Provides Crowdfunding Validation

A fair amount of review is given to the development of (or lack of) a secondary market for Reg CF issued securities. To date, no platform has been able to successfully maintain a marketplace for securities as the size of the market is simply too small and affiliated costs too high.

The important concept of a Special Purpose Vehicle (SPV) for aggregating investors into a single entity is addressed. The report cites the potential investor protections an SPV structure could provide. An SPV could facilitate a vehicle where “small investors [could] invest alongside a sophisticated lead investor who may negotiate better terms, protect against dilution by negotiating during subsequent financings, mentor the company, and represent smaller investors on the board.”

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NCFA Jan 2018 resize - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest” The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Canadian securities regulators release report on 2016-2019 Achievements and 2019-2022 Business Plan

CSA | June 13, 2019

CSA business plans and priorities regulation - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”Montreal – The Canadian Securities Administrators (CSA) today released two publications: the CSA Business Plan 2016-2019 Achievement Highlights and the CSA Business Plan 2019-2022. Both documents demonstrate the CSA’s commitment to investor protection, fostering fair and efficient capital markets, reducing risks to market integrity, streamlining regulation and effective enforcement.

The CSA Business Plan 2019-2022 sets out the priorities of its members over the course of the next three-year period. This new plan re-affirms the CSA’s commitment to responsive and harmonized regulation at the national level and alignment with international standards, where appropriate. The CSA members have highlighted forty initiatives that continue to address industry participants’ needs and promote market integrity and investor confidence in Canada’s capital markets.

The new business plan includes projects such as the elimination of undue regulatory burden and the streamlining of regulatory requirements without reducing investor protection or impeding the efficient functioning of capital markets. It also includes projects to better manage the impact of new and emerging technologies and communication tools on Canadian capital markets.

“The initiatives outlined in the 2016-2019 Achievement Highlights demonstrate the collaborative efforts of CSA members to successfully deliver on our objectives. Many of these initiatives, both completed and on-going, have led us to understand, evolve and sharpen our strategic objectives outlined in the CSA Business Plan 2019-2022,” said Louis Morisset, Chair of the CSA and President and Chief Executive Officer of the Autorité des marchés financiers.

See:

CSA Staff Notice: Update on the Start-up Crowdfunding Registration and Prospectus Exemptions

March 1, 2019: NCFA Submission to the Ontario Securities Commission on Regulatory Burden

NCFA Comments: CSA/IIROC Joint Consultation Paper 21-402: Proposed Framework for Crypto-Asset Trading Platform

Open Banking: What’s Really at Stake

 

As outlined in its CSA Business Plan 2016-2019 Achievement Highlights, the CSA has completed the majority of the planned initiatives and is working towards finalizing the remaining ones in the coming months. The report showcases the strong collaborative work undertaken by CSA members in a rapidly changing and complex financial landscape.

As an example, the CSA’s Regulatory Sandbox was created to gain a better understanding of how technology innovations across the country are impacting capital markets, and to assess the scope and nature of regulatory implications and steps required for the modernization of the securities regulatory framework to accommodate fintech and other novel financial products and services.

Within its scope of work, the Regulatory Sandbox informs the industry of the CSA’s approach to innovative business models. The Regulatory Sandbox recently published guidance on cryptocurrency offerings and launched a public consultation on a proposed framework for crypto-asset trading platforms. In addition, the Regulatory Sandbox has facilitated the granting of time-limited registrations and exemptive relief to ten firms with innovative business models.

The CSA, the council of the securities regulators of Canada’s provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets.

View the CSA Business Plan 2016-2019 --> here


Share your views with us on upcoming CSA priorities

Please send all comments to info@ncfacanada.org for review


NCFA Jan 2018 resize - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest” The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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FCA confirms new rules for P2P platforms

FCA | June 7, 2019

FCA - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”Following consultation, the Financial Conduct Authority (FCA) is introducing rules designed to prevent harm to investors, without stifling innovation in the peer-to-peer (P2P) sector. When the FCA set its first rules for P2P, it committed to keep these under review as the sector evolved. These new rules are designed to help better protect investors and allow firms and fundraisers to operate in a long-term, sustainable manner.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:

'These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.'

The FCA has refined its proposals to ensure the new rules protect consumers and support the P2P market. In particular, additional guidance has been provided to make it clear that platforms will not be prevented from including information about specific investments in their marketing materials.

As originally proposed, the FCA is placing a limit on investments in P2P agreements for retail customers new to the sector of 10 per cent of investable assets. This is an important means of ensuring that they do not over-expose themselves to risk. The investment restriction will not apply to new retail customers who have received regulated financial advice.

See:  FCA publishes update on wide-ranging review of retail banking sector

In addition to these restrictions, the new rules cover:

  • More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.
  • Strengthening rules on plans for the wind-down of P2P platforms if they fail.
  • Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to them.
  • Setting out the minimum information that P2P platforms need to provide to investors.
  • Applying the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.

P2P platforms need to implement these changes by 9 December 2019, except for the application of MCOB, which applies with immediate effect.

The FCA will continue to closely monitor the P2P market as it develops further.

Continue to the full article --> here

Download the Loan-based Peer to Peer and Investment Crowdfunding Rules -> Now

 


NCFA Jan 2018 resize - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest” The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Fintech, decentralization pose risks: Report

Advisors Edge | June 7, 2019

digital world - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”Regulators should engage with a broader group of players, including tech-sector firms, FSB says

Innovations such as blockchain technology, crowdfunding and peer-to-peer lending pose novel risks and benefits to the financial system, suggests a new report published Thursday by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system.

The report from the Basel, Switzerland-based organization examines the implications of decentralizing the financial services system through fintech innovation. For example, technologies such as blockchain could move clearing and settlement functions from a central authority to a diverse, dispersed set of participants.

This trend could have benefits for the financial services system, the report suggests, by reducing the systemic importance of certain institutions, enhancing competition and diversity.

See:  Finally. Canadian Securities Administrators Announce Intent to Harmonize & Improve Crowdfunding Exemption

Yet decentralization could also pose new risks, the FSB warns. Decentralization could make accountability and legal liability less clear, create new sorts of concentration risks and exacerbate market trends (such as increasing volatility in the provision of credit).

Additionally, decentralization could make regulation more difficult — by expanding opportunities for regulatory arbitrage and undermining traditional supervision of centralized financial institutions.

“This should help avoid the emergence of unforeseen complications in the design of decentralized financial technologies at a later stage,” the report says.

Ultimately, these new risks could undermine confidence in the financial system, the report says.

“A more decentralized financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities,” the report states.

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NCFA Jan 2018 resize - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest” The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

Latest news - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”FF Logo 400 v3 - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”community social impact - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”
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SEC sues Kik for US$100M for ‘illegal’ securities offering of digital tokens

CBC News | Armina Ligaya | June 4, 2019

sec sues kik - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”Suit over digital "Kin" token sold by Kik


NCFA Jan 2018 resize - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest” The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

Latest news - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”FF Logo 400 v3 - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”community social impact - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”
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QuadrigaCX Aftermath: The Bigger Picture

Magdalena Gronowska | June 4, 2019

quadrigacx - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”This year’s biggest Canadian cryptocurrency story is the downfall of one of its largest and longest-lived crypto exchanges – QuadrigaCX – where an estimated $250million in funds is owed to 115,000 users.

Inadequate succession and business continuity planning lie at the heart of Quadrigas unraveling. The unexpected death its Founder and sole director, Gerald Cotten, was a crippling blow to the exchange’s ability to conduct normal day to day operations, forcing its closure as the company could not access cryptoasset wallets or company records.

Investigations conducted by Ernst & Yonge into its operations during the course of ongoing legal proceedings reveal more troubling business practices that make QuadrigaCX a perfect case study for regulators of ‘bad'-practices in custody and asset verification, market integrity, internal controls, recordkeeping, and business continuity:

  • Despite assurances user cryptoassets would be securely stored in cold wallets, the cold wallets were empty and unused since April 2018 – platform funds were transferred to other exchanges (not always under official accounts of the platform).
  • Corporate and personal boundaries were not maintained between the funds of the platform and the Founder and QuadrigaCX’s third party payment providers.
  • User funds may have been used to acquire assets held outside of Quadriga.
  • Fake accounts were created, funded with artificial deposits and significant trading and withdrawals of cryptoassets occurred on these accounts.

Tracking and recovering user funds has proven to be a difficult endeavour, requiring specialized technical expertise and multiple court orders due to improper records, the co-mingling of funds, banks unwilling to accept deposits (due to perceived high levels of risk), and questions around the identity and ownership of the accounts funds were transferred out to.

See:

Following the $250 million failure of our largest exchange, Canadian Securities Administrators and regulators proposed a regulatory framework for platforms that trade crypto-assets that are securities. This proposal considers rules for marketplaces, dealers and clearing agencies around custody and asset verification, market integrity, business continuity and risk mitigation, price discovery, surveillance, clearing and settlement, and conflicts of interest.

Regulators have turned their sights on implementing a framework that will mitigate the risk of another QuadrigaCX-like collapse – that’s a good step forward. Another positive step is that regulators are aligned across Canada in this proposal – harmonization is critical to reducing legal and compliance costs and regulatory burden for companies operating across Canada.

However, the regulation of platforms that trade securities is only a piece of the puzzle that’s necessary to build a supportive ecosystem for Canadian blockchain and crypto companies. A comprehensive regulatory framework enables companies to operate in a compliant, open and transparent manner, providing the certainty companies need to start-up, relocate, conduct long-term business planning and make capital investments. Companies value certainty over regulatory risk.   They want to operate in a environment that is unlikely to change the rules, either raising the costs of doing business or banning the sector or business activities outright.

Greater regulatory clarity is needed around cryptoasset types – definitions under what conditions they are security, utility, or payment tokens (or a hybrid). Canada would also benefit from harmonized and clear rules around token creation, issuance, and distribution mechanisms (ie, mining, ICOs, STOs, airdrops, and forks) – as well as a modernized tax act with clear guidance for companies and investors.

See:  Fidelity Will Offer Cryptocurrency Trading Within a Few Weeks

Access to banking services is a significant challenge facing crypto companies worldwide and banking challenges contributed to liquidity and solvency issues at QuadrigaCX. With banks refusing to operate or outright closing accounts of Canadian companies due to regulatory barriers and risk aversion, businesses are leaving for more favourable international jurisdictions, like Liechtenstein, Malta, Bermuda and France which have amended their laws to help crypto companies access banking services; they are also moving to Alberta where ATB Financial and DC Bank have been more open to Canadian crypto companies. Banking restrictions present a competitive disadvantage for jurisdictions and an impediment to economic growth – Canada can do more to support its SMEs.

Canadian regulators and policy makers should also look to their global counterparts like the US and EU where industry and government come together in roundtables, task forces and working groups. And it’s our responsibility as an industry to educate and participate. We have a rich pool of talent and expertise to draw from that can help government understand for which activities regulations, standards or guidelines can work best to protect investors and preserve market integrity, while remaining flexible enough to support the fast pace of innovation.

This is a critical time for Canada's blockchain and cryptoasset sector to mobilize and work collaboratively with industry peers and with regulators to build a regulatory framework that ensures Canada remains competitive globally.

magdalena - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”Magdalena Gronowska, Founder, Canadian Digital Asset Coalition

Magdalena advised Government for 10 years on economic and innovation policy and multi-$million tech deployment initiatives. She is active in the Canadian blockchain space – Magdalena founded the Canadian Digital Asset Coalition, consults with Metamesh Group, sits on Quadriga's Official Committee of Affected Users and advises the Blockchain for Climate Foundation.


NCFA Jan 2018 resize - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest” The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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NCFA Comments: CSA/IIROC Joint Consultation Paper 21-402: Proposed Framework for Crypto-Asset Trading Platforms

NCFA | Regulatory Committee | May 2019

OSC and IIROC consultation crypto assets trading platforms - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada

Joint Consultation Paper 21-402: Proposed Framework for Crypto-Asset Trading Platforms

Comments from the National Crowdfunding & Fintech Association of Canada (NCFA)

 

Introduction

The NCFA welcomes this consultation.  We are in favour of the regulation of crypto asset platforms as long regulation is:

  • principles based and outcomes focused,
  • proportionate,
  • risk based,
  • not unduly limiting of innovation and competition,
  • consistent with global regulation and international best practices,
  • fully harmonized across Canada, and
  • technology neutral to the extent reasonably possible.

 

Whether Platforms are trading securities or not, they should be covered by KYC/AML/CFT legislation. Apart from that, regulators should be nimble yet cautious as global approaches remain unclear and the landscape remains unsettled. We also know that overly prescriptive regulation can severely limit innovation and competition. At this stage, less is more.

 

Questions:

  1. Are there factors in addition to those noted in Part 2 that we should consider?

- We have nothing to add to the remarks of other commenters.

 

  1. What best practices exist for Platforms to mitigate the risks outlined in Part 3? Are there any other significant risks which we have not identified?

 

- ASIFMA Best Practices for Digital Asset Exchanges June 2018 (https://www.lw.com/thoughtLeadership/ASIFMA-best-practices-digital-asset-exchanges)

- Cryptocurrency security standard (https://cryptoconsortium.github.io/CCSS/Details/)

- https://www.bitcoinmarketjournal.com/ico-investment-best-practices/

- ISDA CDM on representing derivatives trade events and processes (https://www.isda.org/2019/03/20/isda-publishes-cdm-2-0-for-deployment-and-opens-access-to-entire-market/)

 

The risks have been highlighted in the CP, but we think that regulators should give equal status to the opportunities (as well as the threats) – for example: democratisation of investment opportunities, the advantages that come from dis-intermediation, more product/services innovation and efficiencies, access to wider sources of capital, more liquidity, and so on.

 

  1. Are there any global approaches to regulating Platforms that are appropriate to be considered in Canada?

- We prefer the less restrictive and prescriptive (and more supportive and collaborative) approaches in the United Kingdom and Germany, which are clearly working.

See: Canada's regulatory system for fintech is complex, costly and chaotic and is stifling innovation

 

  1. What standards should a Platform adopt to mitigate the risks related to safeguarding investors’ assets? Please explain and provide examples both for Platforms that have their own custody systems and for Platforms that use third-party custodians to safeguard their participants’ assets.

 

- Market participants have responded to this question.  Standards should vary depending on the size, functions, risks, etc of each Platform. Each platform should have a duty to protect the digital assets, security of its users, and their data; however following regulatory standards through on-boarding should remain the responsibility of the custodian(s) of capital.

 

- We note that for permissioned/centralized issues, there is lower custody risk as the issuer can freeze when potential threats occur, burn and reissue if the threat is confirmed.

 

  1. Other than issuance of Type I and Type II SOC 2 Reports, are there alternative ways in which auditors or other parties can provide assurance to regulators that a Platform has controls in place to ensure that investors’ crypto-assets exist and are appropriately segregated and protected, and that transactions with respect to those assets are verifiable?

 

- For a period of time, finding enough competent internal and external auditors or other sources of assurance may be tough. We assume that CSA is collaborating with the relevant accounting and auditing bodies in Canada and internationally on education and standards. It may be that auditors will need to retain the support of skilled persons to provide them with the necessary confidence to sign off on the Reports, or should perhaps be able to rely on an ISR. The comments of the CPA in this consultation are helpful. Auditors may also collect a list of “best practices” to understand what common virtual checklists may include throughout the vetting/assurance of a Platform.

 

- Having said that, we understand that some auditors are today offering these services in Canada and are competent to do so.

 

  1. Are there challenges associated with a Platform being structured so as to make actual delivery of crypto assets to a participant’s wallet? What are the benefits to participants, if any, of the Platforms holding or storing crypto assets on their behalf?

 

- These questions are better answered by market participants, but one obvious benefit is that holding or storing crypto (safely) should reduce the costs (and risks) of moving the assets on and off the Platform.

 

  1. What factors should be considered in determining a fair price for crypto assets?

- We suggest that regulators should usually leave this question to the market, subject to full disclosure and regulatory and audit oversight.

 

  1. Are there reliable pricing sources that could be used by Platforms to determine a fair price, and for regulators to assess whether Platforms have complied with fair pricing requirements? What factors should be used to determine whether a pricing source is reliable?

- Market participants have responded to this question in this consultation.

 

  1. Is it appropriate for Platforms to set rules and monitor trading activities on their own marketplace? If so, under which circumstances should this be permitted?

- Yes, subject to regulatory access and oversight, where the activities are relatively straightforward, and the Platforms are relatively small and low risk. As the risks increase, so will the regulatory requirements and oversight. Platforms that have a built in trust systems (eg, smart contracts) or hashes of transactions, or any other type of verifiable audit trail will require less oversight as their process will be more transparent.

 

  1. Which market integrity requirements should apply to trading on Platforms? Please provide specific examples.

- This question is best answered by market participants.

 

  1. Are there best practices or effective surveillance tools for conducting crypto asset market surveillance? Specifically, are there any skills, tools or special regulatory powers needed to effectively conduct surveillance of crypto asset trading?

- This question is best answered by market participants.

 

  1. Are there other risks specific to trading of crypto assets that require different forms of surveillance than those used for marketplaces trading traditional securities?

 

- Yes (dis-intermediation, global reach, speed, highly technical nature of the business, security issues, anonymity of wallets – FATF guidance on a risk-based approach for the regulation of virtual asset service providers is coming, and FinCEN is here – https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf. Recent FINTRAC Guidance on the Interpretation of Money Services Business is also broadly helpful.

 

  1. Under which circumstances should an exemption from the requirement to provide an ISR by the Platform be appropriate? What services should be included/excluded from the scope of the ISR? Please explain.

- Once again, it depends on the risks to the regulatory objectives. Each situation must be evaluated on its own facts.

 

  1. Is there disclosure specific to trades between a Platform and its participants that Platforms should make to their participants?

- As above, question 13.

 

  1. Are there particular conflicts of interest that Platforms may not be able to manage appropriately given current business models? If so, how can business models be changed to manage such conflicts appropriately?

- None that we are aware of.

 

  1. What type of insurance coverage (e.g. theft, hot-wallet, cold-wallet) should a Platform be required to obtain? Please explain.

 

- Platforms should obtain insurance that is adequate/ appropriate. The appropriate nature and extent of the insurance will vary with the circumstances, taking into account the nature of the risks, other forms of risk transfer and risk mitigation mechanisms used, whether an insured custodian is involved, etc.

 

  1. Are there specific difficulties with obtaining insurance coverage? Please explain.

 

- Yes. Most insurers and brokers have inadequate experience with crypto assets, cyber security, DLT, etc, so insurance cover (if available at all) is unlikely to be wholly adequate at this time and may cost too much. CSA guidance might be helpful here, drawing on global sources. (We note the more positive comments in the submission of the Wall Street Blockchain Alliance.)

 

- One option is to start with eg D&O insurance and add to that as the insurers become more confident.

 

  1. Are there alternative measures that address investor protection that could be considered that are equivalent to insurance coverage?

 

- Yes. EG, security bonds, guarantees, letters of credit, catastrophe bonds (being used in an ever widening variety of situations), ring-fenced capital, investor’s own insurance, an industry fund.

 

  1. Are there other models of clearing and settling crypto assets that are traded on Platforms? What risks are introduced as a result of these models?

- We agree with what CSA/IIROC propose in this section.

 

- We understand that in a permissioned/centralized Platform, which will be standard for all regulated securities exchanges, clearing and settlement will be instant, enabled by initial security token programming (assuming that the AML/KYC requirements are met by both the seller and the buyer).

 

  1. What, if any, significant differences in risks exist between the traditional model of clearing and settlement and the decentralized model? Please explain how these different risks could be mitigated.

 

- There are increased risks in a decentralized model, but it appears that these can be mitigated. It is crucial that the programming of the securities ensures that CFT/AML/KYC requirements will be met.

 

  1. What other risks could be associated with clearing and settlement models that are not identified here?

- Best answered by market participants.

 

  1. What regulatory requirements (summarized at Appendices B, C, and D), both at the CSA and IIROC level, should apply to Platforms or should be modified for Platforms? Please provide specific examples and the rationale.

 

- This would be an enormous (but valuable) exercise which the NCFA is not resourced to perform. We support calls for a collaborative ongoing discussion about this (and regulation generally) among regulators and market participants.

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