The Canadian Securities Administrators (CSA) published proposed regulatory requirements for public investment funds which plan to invest in crypto assets.
"We recognize the current regulatory framework for public investment funds needs to be adapted to address the unique aspects and risks of crypto assets," said Stan Magidson, CSA chair and chair and CEO of the Alberta Securities Commission (ASC). "Formalizing these fundamental requirements will provide fund managers with greater clarity while we continue to assess whether a more comprehensive regime is required."
The CSA says the proposed amendments are the second phase of a project to implement a Canadian regulatory framework for public investment funds holding crypto assets. “In the project’s third phase, the CSA will consult publicly on a broader framework.”
The proposed changes to National Instrument 81-102 Investment Funds and proposed changes to companion policy 81-102CP Investment Funds introduce new criteria regarding the type of crypto assets that public funds are permitted to purchase, use and hold, restrictions on investing in crypto assets and requirements for custodians of crypto assets held on behalf of public crypto asset funds.
“We think this 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 notice and request for comment states. “The project is a recognition by the CSA that the existing regulatory framework in NI 81-102 needs to be adapted to properly account for the unique aspects of crypto assets as an investment product for publicly distributed investment funds.”
Some of the amendments include changes to the definition of alternative mutual funds and proposed restrictions permitting only alternative mutual funds and non-redeemable investment funds to buy, sell, hold or use crypto assets directly. The amendments also propose to limit the types of crypto assets that eligible funds can invest in. An additional restriction prohibits funds from buying or holding assets that are not fungible. “Non-fungible assets, such as collectibles, may have characteristics that are incompatible with investment fund products offered to retail investors,” the notice states. “We welcome submissions regarding circumstances where it would be appropriate to allow investment funds to invest in crypto assets that are not fungible.”
The notice also includes proposals to prohibit the use of crypto assets in securities lending, repurchase transactions or reverse transactions. Proposed provisions were also created for custodians and sub-custodians holding the assets on behalf of investment funds. Guidance changes include information on what the CSA generally considers to be a crypto asset for the purposes of investment fund regulation and best practices for custodians, including the requirement that custodians obtain insurance.
The 90-day comment period closes April 17, 2024.