Canada’s securities watchdog has published suggested rules to guide public investment managers’ involvement with digital assets.

The Canadian Securities Administrators (CSA) called on the public to give feedback on the proposed rules within 90 days. They seek to offer clarity and regulatory guidance to investment funds interested in investing in digital assets directly or indirectly.

The CSA proposes amending the rules to bar mutual funds from investing directly in or holding digital assets. Only non-redeemable investment funds and alternative mutual funds will be permitted to buy, sell, hold, or use digital assets under the proposed framework.

The umbrella organization also wants to limit the assets that these funds can invest in to only those listed on exchanges formally recognized by a Canadian securities watchdog.

This requirement would exclude some major exchanges that have failed to obtain registration in Canada, with some opting to exit the market altogether. Binance ceased
supporting Canadian users in May 2023, joining OKXPaxosBybit, and some other big names that have failed to acquire an operating license.

The CSA further proposes prohibiting asset managers from investing in non-fungible assets. The umbrella body says that non-fungibility creates added valuation and liquidity risks and that the existing regulatory frameworks are insufficient to cover the sector. However, it is open to suggestions on specific situations under which it would allow investment in such assets.

Canadian investors will not be allowed to lend digital assets or use them as collateral to obtain loans under the new rules.

For custodians, the CSA’s rules propose a requirement to hold digital assets in cold storage, maintain insurance, and be audited annually by a public accountant.

“We think [these proposals] can facilitate new product development in the space while also ensuring that appropriate risk mitigation measures are built directly into the investment fund regulatory framework,” the CSA says.

Commenting on the proposals, CSA chair Stan Magidson said that the umbrella body recognizes the need for regulations to evolve with changes in financial services.

“Formalizing these fundamental requirements will provide fund managers with greater clarity while we continue to assess whether a more comprehensive regime is required,”
commented Magidson, who also serves as the CEO of the Alberta Securities Commission.

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