New Guidelines Released for Public Crypto Asset Funds in Canada
Canada’s securities regulator has released a new set of guidelines to help fund managers understand and comply with securities law requirements for public investment funds holding crypto assets. The guidelines, published by the Canadian Securities Administrators (CSA), provide recommendations for both existing and future offerings of Public Crypto Asset Funds.
The CSA recognizes that the nature of crypto assets presents unique challenges for fund managers, and therefore, specific regulatory considerations are necessary. The guidelines aim to provide greater guidance on CSA staff expectations for these funds.
Growth of Public Crypto Asset Funds in Canada
Since the launch of the first Canadian public crypto asset fund in April 2020, the industry has seen significant growth. As of April 2023, there are 22 Public Crypto Asset Funds in Canada, collectively holding approximately CAD $2.86 billion in net assets. This growth prompted the CSA to release the new guidelines to ensure fund managers stay up-to-date with securities law developments.
Regulatory Framework for Public Crypto Asset Funds
The CSA emphasizes that public crypto asset funds are subject to the same regulatory framework as other publicly distributed investment funds in Canada. This includes the requirement for these funds to have a registered investment fund manager (IFM) and portfolio manager(s). Additionally, the funds must compute a net asset value (NAV) on a daily basis, and comply with National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).
Determining Suitability of Crypto Assets for Investment
When considering investing in a publicly distributed investment fund, the CSA highlights several important factors that fund managers should consider. These factors include the ability to determine a fair value of the crypto asset, its liquidity, and its classification.
The CSA recommends fund managers seek sufficient evidence of an active market, the presence of a regulated futures market, and publicly available indices administered by a regulated provider for the crypto asset.
Valuing Crypto Assets
The CSA advises investment fund managers to accurately value crypto assets by considering the trading volume and comparing it to other markets for commodities and equities. They also recommend using publicly available indices that aggregate pricing from various sources to determine the spot price of a crypto asset.
Liquidity Risk Management
Effective liquidity risk management is crucial for public crypto asset funds. The CSA recommends that fund managers regularly measure, monitor, and manage the liquidity of the fund’s underlying portfolio assets. This includes ongoing portfolio management, continuous liquidity assessments, and monitoring relationships with liquidity providers. Alternative sources of liquidity should also be available.
Staking Crypto Assets
If a fund wishes to include staking crypto assets, it can only do so for blockchains designed specifically for proof-of-stake (PoS) and on networks where the staked assets guarantee the legitimacy of new transactions. Investment fund managers are required to be knowledgeable about staking crypto assets and enter into written agreements with third parties for staking. Custodians for staked assets must safely hold the assets in offline storage or cold wallets in secured facilities.
Custody and Security Measures
Ensuring proper custody and security measures is crucial for public crypto asset funds. IFMs and custodians must have the necessary expertise and experience to safely custody the assets and hold them in offline or ‘cold wallets’. Funds’ assets should be separate from the assets of the custodian and the custodian’s other clients. Website security measures should be implemented, and appropriate insurance for the crypto assets should be maintained. Annual reports should assess the organization’s security, availability, processing integrity, confidentiality, and privacy controls.
Know-Your-Client/Know-Your-Partner (KYC/KYP) Obligations
All IFMs are required to comply with securities legislation related to KYC/KYP. This includes collecting and verifying information from clients or business partners, and keeping the information current. The CSA advises that holding crypto assets, including Public Crypto Asset Fund securities, comes with elevated levels of risk that may not be suitable for all investors.
The release of these guidelines is a significant step for the regulation of crypto assets in Canada. Fund managers now have clearer guidance on compliance with securities laws and best practices for public investment funds holding crypto assets.
