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Fallout from crypto exchange FTX’s collapse shows importance of regulation: experts

Canada has stronger regulation than U.S., experts say
The FTX logo appears on a home plate umpire’s jacket at a baseball game with the Minnesota Twins, in Minneapolis, Sept. 27, 2022. The rapid collapse and bankruptcy of crypto-exchange giant FTX shows the importance of regulation in the space where Canada has been a leader, experts say. THE CANADIAN PRESS/AP-Bruce Kluckhohn

The rapid collapse of crypto-exchange giant FTX shows the importance for the sector to be regulated, something that Canada has helped lead the way on, experts say.

Canada has numerous safeguards in place that would help prevent some of the alleged practices that went on at FTX, including the use of client funds for company trading, said Ryan Clements, chair in business law and regulation at the University of Calgary’s Faculty of Law.

“We actually have in this country quite a robust regulatory framework that was created after Quadriga,” said Clements, referring to the Canadian crypto exchange that collapsed in 2018, leading to $169 million in customer assets lost.

In an review compiled after Quadriga’s downfall, the Ontario Securities Commission found its founder had committed fraud and the company operated like a Ponzi scheme.

“What happened at Quadriga was an old-fashioned fraud wrapped in modern technology,” the OSC said in its 2020 report.

Clements said regulators rolled out changes after Quadriga’s downfall, including rules around third parties holding crypto assets, the need for insurance and limits on what can be traded, all of which can benefit investors, said Clements.

“It’s designed to provide both custodial and other prudential measures for crypto asset trading platforms, but also marketplace controls, also things like client cash segregation and conflict avoidance measures.”

Canadian exchanges have been emphasizing their adherence to these measures in recent days as they try and distance themselves from the likes of FTX.

“Although some see regulation as overreaching, it plays a critical role in ensuring that these tragedies do not happen,” said Coinsquare chief executive Martin Piszel in a statement.

“While we were working with regulators, building out regulatory technology and compliance infrastructure, our global competitors were launching products like 100x margin, unregulated derivatives products, and lending out client assets,” he said, noting that Coinsquare is the first crypto trading platform registered through the Investment Industry Regulatory Organization of Canada.

“All of us have now seen the results of some of these experiments,” Piszel said.

While Canadian efforts are ahead in some ways, regulators may need to put more effort into cracking down on access to international exchanges, said Clements, which provide riskier trades and less oversight.

“If you’re a Canadian you should be using a registered trading platform. Because there are better controls for you. Right, the problem is these huge offshore platforms … just because something bigger and just because something has celebrity endorsements doesn’t necessarily mean it’s safer.”

The FTX issues show some clear flaws in the wider crypto sector, said Henry Kim, an associate professor at York University’s Schulich School of Business and director of the school’s Blockchain.Lab.

“It says there’s not enough regulation. It says that it’s too centralized. It says that it’s basically we still don’t have enough grown-ups in the room.”

He advised that those in the crypto space should assess what their goals are, and if they’re more of an investor where they’ll buy and hold for the long term they should aim for the most established exchanges.

“If you’re going to be an investor, then do your research and be at the most blue-chip exchanges.”

The collapse of FTX, which was one of the world’s crypto exchange before it fell apart, shows how difficult that research can be, and how much of a wider impact this development will have.

“There’s a contagion effect because FTX was the gold standard, because they were heavily involved with investment,” said Kim.

Several Canadian crypto companies have already announced some knock-on effects from FTX.

Calgary-based Bitvo Inc. announced in June that FTX was going to buy it for an undisclosed sum. On Monday, the company clarified that the transaction has not closed and it remains independent from the FTX group of companies.

The company also emphasized that it operates on a full reserve basis and in compliance with Canadian regulations.

For those who are losing faith in exchanges there is always the option of not holding cryptocurrency on an exchange, but Kim warns that with the risks of physical theft and lost passwords and other issues it’s not to be taken casually either.

“For those that are really, really savvy, they can still hold crypto in their wallets, but you have to be pretty savvy. You have to know what you’re doing. And I wouldn’t advise that unless you do.”

Ian Bickis, The Canadian Press

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