News Canada Lawmakers Propose a Ban on Cryptocurrency Short Selling

The Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada (IIROC) have jointly proposed a framework for cryptocurrency exchanges that would halt short selling and margin trading of digital assets.

Ban on Cryptocurrency Short Selling and Margin Trading

The Canadian Securities Administrators and the IIROC have filed a joint consultation paper called Proposed Framework for Crypto-Asset Trading Platforms on March 14th, 2019, seeking community feedback regarding the direction cryptocurrency regulations should partake.

At the very beginning of the paper, the regulators outline their main concerns:

Although DLT may provide benefits, global incidents point to crypto assets having heightened risks related to loss and theft as compared to other assets.

The framework, if approved, will likely cause a massive turmoil amid cryptocurrency traders, mainly because it intends to strip them off two of the most commonly used trading instruments, namely, short selling and margin trading.

To reduce the risks of potentially manipulative or deceptive activities, in the near term, we propose that Platforms not permit dark trading or short selling activities, or extend margin to their participants.

Removing short selling and margin trading as instruments on cryptocurrency exchanges would essentially limit traders to only execute regular spot trades.

As Bitcoinist reported, Japanese regulators approved legislative amendments to their existing payment services law, limiting the amount of leverage cryptocurrency exchanges may offer their users to two-to-four times their initial deposit.

However, it’s worth noting that Japan hasn’t stripped away the possibility to short trade digital assets.

QuadrigaCX Aftermath?

The proposed framework comes following the scandal with what used to be Canada’s largest cryptocurrency exchange QuadrigaCX and the death of its CEO. The deceased was supposedly the only who had the private keys to cold wallets which held $250 million worth of cryptocurrency of customer funds.

It seems that the event has made an impression on legislators, as one of their main points of concern regarding cryptocurrency custody solutions is the lack of protection on behalf of the trading platform itself.

To the extent that the Platform holds or has control over investors’ assets, a significant risk is that investors’ assets are not sufficiently accounted for or protected by the Platform. As a result, the Platform might not have sufficient crypto assets or cash to satisfy demand or could be vulnerable to theft.

Not surprisingly, the proposed regulations take aim at cryptocurrency custody providers, seeking to put them under traditional legislative oversight.

…we contemplate that Platforms seeking registration as an investment dealer registration and IIROC membership that plan to provide custody of crypto assets will not only need to satisfy existing custody requirements but will also be expected to meet other yet-to-be-determined standards specific to the custody of crypto assets.

What do you think of the proposed regulatory framework for cryptocurrency exchanges in Canada? Let us know in the comments below!

Images courtesy of Shutterstock