Canada Cracks Down on Crypto: Key Changes You Need to Know

The Canadian Securities Regulators (CIRO) has just tightened the vice on cryptocurrencies. On February 5, the regulator excluded crypto funds from reduced margin eligibility, citing their high volatility and liquidity risks.

A regulatory decision with immediate consequences

On February 5, CIRO updated its list of securities eligible for reduced margin (LSERM), strictly excluding crypto funds until further notice.

This announcement comes as Evolve Funds Group Inc. is preparing to launch Canada’s first leveraged crypto fund, with a modest leverage of 1.25x on Bitcoin and Ether.

In practical terms, investors will need to deposit more collateral for their positions in these funds, making leverage more expensive and increasing the risks of forced liquidation in case of high volatility.

This new regulation comes in a particular political context, as Pierre Poilievre, a frontrunner for the position of Prime Minister and a pro-bitcoin advocate, promotes a crypto-friendly approach.

The Canadian crypto sector, already experiencing investment losses in 2024, faces an uncertain future. American competition and the flight of capital toward the recently approved Bitcoin ETFs in the United States increase the pressure. To date, crypto ETFs are the only category of Canadian ETFs to record massive withdrawals, exceeding $1.1 billion, according to National Bank Financial.

Strict criteria that naturally exclude crypto assets

CIRO has established rigorous criteria for reduced margin eligibility, effectively excluding crypto funds. To be eligible, securities must, among other things, exhibit price volatility limited to 25%, maintain a minimum market value of 2 CAD per share, and have a public float value exceeding 100 million CAD.

This regulatory decision comes amid a turbulent political context, with the recent resignation of Justin Trudeau and the possible rise to power of Pierre Poilievre, a candidate explicitly supportive of bitcoin.

This political transition could influence the future of crypto regulation in Canada as the country seeks to balance financial innovation and investor protection.

In summary, investors and fund managers will now need to adapt to this new and stricter regulatory framework, which could redefine the crypto investment landscape in Canada.