Canada Releases Guidelines for Investment Funds Holding Crypto Assets

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(Kitco News) – 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.

According to the notice released Thursday by the Canadian Securities Administrators (CSA), all of the recommendations provided are based on existing securities regulatory requirements and do not create any new legal requirements or change existing ones.

“The nature of crypto assets can create unique challenges for funds that directly hold these assets, which may require specific regulatory consideration,” the CSA said. “We have identified a number of areas where we believe there may be merit in better guiding the expectations of ASC staff, for existing and possible future offerings from Public Crypto Asset Funds. One or more of the areas identified could also be the subject of future policy development work by the CSA. »

The first prospectus of a Canadian public crypto asset fund was published on April 1, 2020 and resulted in the creation of a non-redeemable investment fund that invests its assets directly in Bitcoin (BTC). Following the creation of this fund, several other public crypto asset funds were launched, including the world’s first exchange-traded funds (ETFs) that invested directly in Bitcoin and Ether.

As of April 30, 2023, there were 22 public crypto asset funds in Canada that collectively held approximately C$2.86 billion in net assets. This growth has prompted the CSA to publish their recommendations for fund managers to help them stay abreast of the latest securities law developments and guidance.

The CSA have stated that public crypto asset funds are subject to the same regulatory framework as other publicly distributed investment funds in Canada. This framework includes a requirement that these funds must have a registered investment fund manager (RFM) and one or more portfolio managers, and must also calculate a daily net asset value (NAV) calculated in accordance with National Instrument 81-106. . Investment fund continuous disclosure (NI 81-106).

Proper Crypto Investments

The CSA stated that when determining whether a crypto asset is suitable for investment in a publicly distributed investment fund, the most important considerations are “the ability to determine a fair value for the crypto asset, the liquidity of the crypto asset and the classification of the crypto asset and the implications arising from its classification.

To make this decision, the CSA said that fund managers must find “sufficient evidence of an active market for the crypto asset comprising real and regular market transactions at arm’s length; the presence of a regulated futures market for that crypto asset; and publicly available indices administered by a regulated index provider for the crypto asset.

To accurately value a crypto-asset, an IFM must determine whether the market for that crypto-asset has a real and substantial trading volume, large in size, both in absolute terms and relative to other commodity markets. raw and shares.

The CSA has recommended using publicly available indices that aggregate prices from various sources to determine a spot price for a crypto asset, saying this will “help mitigate the risks of inaccurately pricing a particular asset.”

IFMs are expected to regularly measure, monitor and manage the liquidity of the underlying assets of the investment fund’s portfolio. The CSA stated that public funds should have “effective liquidity risk management programs that include the use of stress testing and ongoing monitoring of underlying crypto asset market liquidity and encourage regular review of these programs.

Recommended methods to help IFMs manage liquidity risk include “ongoing portfolio management and ongoing liquidity assessments of the underlying crypto asset, in addition to ongoing monitoring of relationships with liquidity providers. and ensuring that other sources of liquidity are available”.

exchange traded funds

Funds that are structured as ETFs or conventional mutual funds are classified as “alternative mutual funds”. These products have a greater ability to borrow money or provide security over their assets, engage in short selling, or use specified derivatives applicable to alternative mutual funds, subject to the limitations set out in this rule. , the CSA said.

In a review of available liquidity for currently listed funds, CSA staff found that these products had “not encountered material difficulties in meeting redemption requests since their respective inceptions.”

The CSA found that most ETFs traded “very close” to their net asset value (NAV) and that funds structured as ETFs were able to meet large redemption requests without the need to borrow funds additional.

Staking of crypto assets

For funds that wish to include staking of crypto assets, they can only do so for blockchains designed specifically as proof-of-stake (PoS), and only on networks where “staked crypto assets that are used to ensure legitimacy new transactions the validator adds to the blockchain.

MFIs should be knowledgeable and knowledgeable about staking crypto assets, and they should enter into written agreements with one or more third parties to stake the fund’s crypto assets.

Custodians of staked assets are required to remain in possession, custody and control of the staked crypto assets at all times, and the staked assets must be kept in offline storage or cold wallets in secure facilities operated by the custodian crypto, if applicable.

Custody Guidelines

Regarding custody, the CSA said that IFMs and custodians are required to have the necessary expertise and experience to keep crypto assets safe; must hold the fund’s crypto assets in an offline “cold wallet”; must ensure that the assets of the funds are segregated from the assets of the depositary and other clients of the depositary; must use the security measures of the site; must maintain appropriate insurance for the crypto-assets in their custody; and must provide annual reports that assess the organization’s security, availability, processing integrity, confidentiality, and privacy controls.

All IFMs are also required to comply with obligations under securities legislation related to Know-Your-Client/Know-Your-Partner (KYC/KYP). This includes collecting certain information from customers or business partners, taking reasonable steps for customers to confirm the accuracy of information, and updating information.

“When making KYC, KYP and suitability determinations in connection with recommending public crypto asset funds to clients, registrants should be aware that holding crypto assets, including securities of the public crypto asset fund, carries high levels of risk that may not be suitable for many investors,” the CSA said.

“We encourage stakeholders to review these guidelines to better understand our expectations of public crypto asset funds,” said Stan Magidson, CSA Chair and Securities Commission President and CEO. from Alberta. “It is important that these funds clearly understand their existing regulatory obligations given recent events in the crypto market.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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