Is a Regulatory Fight Over Crypto Lending Brewing in Canada?

Coinberry CEO Andrei Poliakov is looking to see how things play out in the US between Coinbase and the SEC, although some of his unlicensed competitors already offer the service

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Andrei Poliakov, Coinberry CEO

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key takeaways

  • Licensed exchange Coinberry has had preliminary discussions with the Ontario Securities Commission over crypto lending.
  • In Canada, securities regulation is a provincial affair, and the addition of any new products to a licensed exchange would need to get the approval of nearly a dozen regulators

Licensed Canadian crypto exchange Coinberry doesn’t have immediate plans to launch lending products in Canada, but CEO Andrei Poliakov said he is having preliminary discussions with the Ontario Securities Commission on the matter. 

“I’m very interested to see how this evolves because ultimately this will also play into how the OSC in Canada looks at the lending business as a whole because there are platforms in Canada that are not registered that are offering this,” Poliakov said in an interview with Blockworks. “We’ve had preliminary discussions with the OSC about this.”

Complicating Coinbase’s affairs in the US is that its lending products are very much a security, according to Poliakov.

“Coinbase trades securities — like us. They trade contracts for delivery. You’re buying a promise from us that you can withdraw the crypto when you want it,” he said. “There’s an underlying asset that’s not a security that supports the contract, but at the end of the day it’s a security.”

Which is not a problem for Coinberry because they registered with the OSC to do just that, trade securities.  

Ultimately it’s an arguable case whether or not lending can be considered a registerable activity or not, as the underlying asset — bitcoin or ether — isn’t a security but rather a commodity, “but this is all an argument for the lawyers to make,” he explained.

The inherent problem, Poliakov argued, is that Coinbase went ahead with preparing the product anyway and putting users on a waiting list even though the SEC signalled that it wasn’t comfortable with the product.   

“What did you expect the SEC to do? They literally just told them not to do it and they went ahead and now they’re going to do it in October. So I’m not surprised that the SEC is coming back and taking a more forceful position again,” Poliakov said.

So what’s the pathway to getting a lending product created in Canada? 

The first step would be bringing it to the OSC. Once it’s approved in Ontario, Coinberry would need to take it to securities regulators in the country’s other nine provinces and three territories via the Canadian Securities Administration, a nationwide alliance of provincial securities regulators that acts as a vehicle for national regulation and harmonization.

Unlike the US, in Canada securities regulation is squarely a provincial affair: both liberal and conservative governments have been in favor of a national regulator akin to the SEC, though the country’s courts have previously decided twice that it’s a provincial matter.

“It’s not like the OSC decides something and everybody just agrees. At any point, any province could have opted out,” Poliakov said, recalling how Coinberry’s initial application took three years before the OSC and the CSA were comfortable with Coinberry’s custody, control mechanisms and insurance. QuadrigaCX  — a scandal that involved its CEO taking the exchange’s keys to the grave  — was clearly still on the minds of regulators.

“Everyone is happy when everything works, but when things break down and you have the Quadrigas happen, everyone says to regulators ‘why weren’t you overseeing this?’” said  Poliakov.  

As a result, creating a crypto lending product properly, with the requisite regulation, would simply take time, especially since, according to Poliakov, Coinberry’s business model is to always move in alignment with regulators — even if it’s a long drawn-out process, he added.

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