Canadian Regulator Unveils Stricter Crypto Custody Standards to Mitigate Losses

Canadian Regulator Unveils Stricter Crypto Custody Standards to Mitigate Losses

Canada's main investment regulatory body has announced a new set of regulations aimed at enhancing the safeguarding of crypto assets. This initiative aims to reduce losses associated with hacks, fraud, and inadequate governance.

Key Takeaways:

Canada has launched new temporary regulations on crypto custody to prevent losses due to hacks and fraud.
Custodians now face varying limits based on their capital strength, oversight measures, and operational resilience.
The framework introduces stricter governance, insurance, and audit requirements while encouraging innovation.

The Canadian Investment Regulatory Organization (CIRO) unveiled its Digital Asset Custody Framework on Tuesday, detailing the expectations for dealer members that manage crypto asset trading platforms.

This framework functions as a temporary measure and is to be enforced through membership regulations, enabling CIRO to adapt swiftly to emerging risks while longer-term regulations are formulated.

Canada Implements Tiered Crypto Custody Regulations

CIRO indicated that the framework directly addresses the "technological, operational, and legal risks unique to digital assets." It builds on insights gained from previous failures, notably the QuadrigaCX collapse in 2019, which left many customers unable to retrieve their funds.

At the heart of this new regime is a tiered, risk-based structure for crypto custodians. Custodians are categorized into one of four tiers based on key factors, including capital strength, regulatory oversight, insurance coverage, and operational resilience.

Top-tier custodians are allowed to hold up to 100% of client crypto assets, while custodians in lower tiers face progressively stricter limits, with Tier 4 custodians capped at holding 40%.

Additionally, dealer members opting to custody assets internally can hold a maximum of 20% of the total value of client crypto.

The framework also establishes an extensive set of operational requirements that include formal governance policies on private key management, cybersecurity measures, incident response procedures, and third-party risk management.

Custodians are mandated to have insurance coverage, undergo independent audits, provide comprehensive security compliance reports, and conduct regular penetration testing.

Custody agreements must clearly define liability in scenarios where losses occur due to negligence or other preventable circumstances.

CIRO stated that this approach aims to strike a balance between enhancing investor protection and allowing space for competition and innovation.

The regulations were developed following consultations with crypto trading platforms, custodians, and various industry stakeholders, and they are aligned with international best practices.

Canada Intensifies Crypto Compliance Oversight Following Significant FINTRAC Fines

This initiative is part of a broader effort to strengthen crypto compliance in Canada. In October, the country’s financial intelligence agency, FINTRAC, imposed a hefty fine of approximately $126 million on the local exchange Cryptomus for failing to report suspicious activities related to darknet markets and fraud.

Earlier this year, FINTRAC also penalized offshore platforms KuCoin and Binance for similar compliance violations.

As a self-regulating organization, CIRO has the authority to investigate misconduct among its members and can enforce sanctions such as fines and suspensions.

Reports indicate that Canada is gearing up to introduce its first comprehensive framework for fiat-backed stablecoins as part of the 2025 federal budget, closely mirroring the recent regulatory developments in the United States.

The Bank of Canada is reportedly set to allocate $10 million over two years, beginning in the 2026-2027 fiscal year, to supervise this rollout.

This announcement comes just months after the U.S. enacted the GENIUS Act in July, a landmark legislation concerning stablecoins that has intensified global regulatory efforts.