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CSA Consultation on Public Investment Funds and Crypto Assets

Crypto Consultation | Jan 22, 2024

Canadian Securities Regulators Open Consultation for Second Phase of Feedback on Public Crypto Asset Fund Regulations

The CSA is focusing on how to effectively regulate public investment funds interested in crypto assets. This is part of the second phase of establishing a regulatory framework for such funds (Proposed Amendments to National Instrument 81-102 Investment Funds
Pertaining to Crypto Assets)  Last year, the CSA published guidance to help fund managers understand and comply with securities law requirements for public investment funds holding crypto assets (view CSA notice).  The CSA's initiative is not just about setting boundaries; it's about fostering a safe and vibrant market for crypto assets. By inviting feedback from the public, the CSA is ensuring that a wide range of perspectives and expertise are considered in the formulation of these rules.

The CSA's announcement is a response to the burgeoning interest in cryptocurrencies and their increasing adoption by investment funds. The proposed rules aim to provide a clear regulatory framework, ensuring that public investment funds engaging in crypto assets do so in a manner that is consistent with the principles of investor protection and market integrity.

Stan Magidson, CSA Chair and Chair and CEO of the Alberta Securities Commission:

“We recognize the current regulatory framework for public investment funds needs to be adapted to address the unique aspects and risks of crypto assets. Formalizing these fundamental requirements will provide fund managers with greater clarity while we continue to assess whether a more comprehensive regime is required.”

See:  Canada to Require Pension Funds to Report Cryptocurrency Investments

Key aspects of the proposed rules include:

  • Restrictions on Fund Types: Only alternative mutual funds and non-redeemable investment funds would be allowed to invest directly or indirectly in crypto assets.
  • Eligibility of Crypto Assets: Investments would be limited to crypto assets that are fungible and trade on a recognized exchange or are the underlying interest of a specified derivative that trades on a recognized exchange.
  • Custodian Obligations: Custodians and sub-custodians of crypto assets would need to keep private keys in offline storage, maintain insurance, and obtain an annual assurance report on their internal controls and policies.
  • Acceptance of Crypto Assets as Payment: Mutual funds could accept crypto assets as payment for their securities, subject to conditions like consistency with the fund's investment objectives and acceptability to the fund’s portfolio advisor.

What Additional Changes Are Being Proposed?

The guidance on crypto asset investment funds by the Canadian Securities Administrators (CSA) as of July 6, 2023, and the proposed changes as of January 18, 2024, exhibit several key differences:

Existing CSA Guidance (July 2023)

  • The guidance discusses key findings from reviews of Public Crypto Asset Funds, including liquidity, ETF structural matters, and custody.
  • It emphasizes the CSA staff’s expectations for stakeholders concerning investment in crypto assets other than Bitcoin and Ether, which are the only accepted investments for Public Crypto Asset Funds at that time.
  • The notice outlines expectations for custodians of crypto assets to meet the standard of care obligations under NI 81-102.
  • It addresses issues related to the staking of crypto assets or other similar yield-generating activities within Public Crypto Asset Funds.
  • The guidance also covers know-your-product (KYP), know-your-client (KYC), and suitability obligation issues with respect to Public Crypto Asset Funds.
  • As of April 30, 2023, there were 22 Public Crypto Asset Funds in Canada with approximately $2.86 billion in net assets, primarily investing in Bitcoin and/or Ether directly or through fund structures.

Proposed Changes (January 2024)

  • The proposed amendments aim to provide greater regulatory clarity regarding key operational matters such as the types of crypto assets that Public Crypto Asset Funds are permitted to purchase, use, or hold.
  • They introduce restrictions on investing in crypto assets by Public Crypto Asset Funds or other types of reporting issuer investment funds.
  • The amendments propose requirements concerning the custody of crypto assets held on behalf of a Public Crypto Asset Fund.
  • These changes intend to codify practices of existing Public Crypto Asset Funds developed mainly through the prospectus review process, as well as codifying exemptive relief previously granted to these funds.
  • The proposed amendments include changes such as:
    • Amending the definition of "alternative mutual fund" to include mutual funds that invest in crypto assets.
    • Limiting the types of crypto assets that alternative mutual funds and non-redeemable investment funds can invest in to those listed for trading on, or as underlying interests for specified derivatives that trade on, an exchange recognized by a Canadian securities regulatory authority.
      • "We are proposing to add section 3.3.01 which will provide guidance clarifying that the proposed requirement that funds only invest in crypto assets that are either listed for trading, or are the underlying interest in specified derivatives that are listed for trading, on a “recognized exchange” is not intended to restrict funds to only acquire crypto assets through a recognized exchange. In other words, funds can continue to acquire crypto assets from sources such as crypto asset trading platforms so long as the crypto asset the fund invests in meets the necessary criteria set out in subsection 2.3(1.3) of NI 81-102."
    • Prohibiting the use of crypto assets in securities lending, repurchase transactions, or reverse transactions.
      • "We are proposing to prohibit the use of crypto assets in securities lending, repurchase transactions or reverse transactions, as
        the loaned securities, transferred securities or collateral posted in connection with these transactions, as applicable. While we
        believe that the market characteristics of most crypto assets make them impractical for these types of transactions in an investment
        fund, we think it is important to remove any regulatory ambiguity."
    • Clarifying that "money market funds" cannot buy or hold crypto assets.
    • Adding guidance related to what is generally considered to be crypto assets for investment funds regulation.

See:  Consultation: OSFI Unveils Guidelines for Robust Financial System

The proposed changes reflect an evolution in the regulatory approach, seeking to integrate crypto asset investment into the existing regulatory framework with a focus on investor protection and market integrity.  National Instrument 81-102 Investment Funds:  In effect in all CSA members: Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec, Saskatchewan, Yukon


NCFA Canada encourages its members and the wider financial community to participate in this consultation process. Your insights and feedback are vital in shaping a regulatory environment that is both progressive and protective. Stakeholders can submit their comments in writing on or before April 17, 2024 (90 day comment period).

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