Canadian Regulator Introduces Tiered Crypto Custody Framework

Canada’s crypto regulators have introduced new crypto custody rules aimed at protecting investors and reducing the risk of high-profile failures.  The framework was created and rolled out by the Canadian Investment Regulatory Organization (CIRO), and its goal is to set new standards for the storage and transfer of crypto assets.

The move shows that regulators are worried about potential risks following several industry-wide breaches that have affected thousands of users and caused damages in millions of dollars.  The rules are interim, but they will serve as the basis for future regulations.

Why Canada Felt the Need to Act

Past failures have exposed Canadian crypto regulations as insufficient, leading regulators to make the rules stricter and more focused on user safety.  The collapse of QuadrigaCX in 2019 was the defining moment for crypto regulators.  Regulators have especially focused on poor governance and weak custody controls.

Similar issues have emerged globally across jurisdictions that allow crypto trading.  It reinforces the belief that, now that cryptos are firmly part of the traditional economy, governments need to step in and create stricter rules.

Crypto custody presents unique challenges.  It can be affected by cybersecurity threats, mismanagement of private keys, and unclear liability structures.  The measures will restore confidence in the industry and, in the long run, lower volatility.  At the same time, the EU has issued comprehensive regulations regarding crypto, and Canada, as well as other jurisdictions, have implemented measures of their own.

 Inside the New Crypto Custody Rules

An Interim Framework with Immediate Impact

CIRO’s new regulations are part of an interim Digital Asset Custody Framework, and they will remain in effect until permanent measures are put in place.  CIRO has decided to implement these measures rather than wait for a lengthy legislative process.  It also allows the regulators to change the rules quickly if needed.

A Tiered Custodian System

At the core of the new regulations is a system that categorizes custodians into four tiers based on capital strength, insurance coverage, governance standards, and technical safeguards.  Top-tier custodians are permitted to hold up to 100% of client crypto assets, Tier 3 custodians can store up to 75%, and Tier 4 custodians are capped at 40%.  The goal is to push the users towards safer custodians.
Limits on Internal Custody

There’s also a limit on how much of their assets clients are allowed to hold themselves.  Internal custody is set at 20% under the new regulations.  It reduces the risk of platform failure or, at least, the impact it could have on users.
Governance and Security Requirements

The framework also outlines the security requirements that wallet providers must meet.  It includes regular audits, insurance coverage, and a robust set of cybersecurity controls.  Companies need to demonstrate strong internal governance and transparent reporting efforts.

What This Means for the Crypto Industry

For investors, a new set of standards proposed by the regulations provides more protection and greater transparency.  The standards are supposed to make all actors more confident in the process and in the crypto market.  There’s a strong push for institutional crypto investment, and experts such as those at CryptoManiaks have written about banks and insurance companies starting to invest in crypto.

For platforms, additional regulations will result in higher expenses.  Companies may need to restructure custody arrangements, partner with approved providers, and upgrade their infrastructure.  These expenses are usually passed on to end users, often by raising fees and subscription costs.

 Canada’s Approach in a Global Context

Crypto investing is a global business, and Canadian efforts are part of a growing global trend to regulate the industry further, making it safer and more appealing to ordinary investors.  Regulators in the EU and the US have also made an effort to focus on segregation of assets, custody, and governance standards.

The only difference in Canada’s approach is that the government chose the interim approach.  It’s an interesting difference from an industry standpoint, since it allows Canadian regulatory agencies to experiment with the rules for a while and quickly change them based on feedback.

To Sum Up

Canada has come out with a new set of regulatory measures to help protect crypto investors.  The rules are mostly focused on custodial issues and were enacted in response to past breaches that have rocked public confidence in crypto and custody wallets.  The rules are made on an interim basis and will later be turned into law.  Similar changes are happening across the globe, and Canada is trying to catch up with European regulations.

The main feature of the new regulation is the introduction of tiers for the custodian system.  It will limit how many assets a custodian can hold based on their trustworthiness.  The rules will also limit the number of assets a crypto user can have in their own name.

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