As reported earlier, the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada has jointly proposed a framework for the regulation of cryptocurrencies in the country. Now, the Canadian crypto exchange Kraken has published a paper in response to this joint proposal, explaining the problems with the framework via a Twitter post on 16 May. The issue has sparked off a meaningful and timely debate around the nature of crypto as an asset category and its classification under any existing asset category.
Kraken has argued in the paper that the proposal to include crypto-assets under securities has a fundamental error of reasoning. They state that almost all exchanges act merely as trustees of the cryptocurrencies that they store on behalf of their customers. The customers do not lose the legal ownership to the instrument. Therefore, according to Kraken:
“…the customer’s interest is not derived from the underlying asset — it IS the underlying asset.”
Hence, a securities law framework cannot be used to regulate this asset class.
The paper further states four features of the contractual relationship between the exchange and the customers, which establishes the ownership of the customers over the cryptocurrencies held by the exchange. These include the rights of the customer to dispose of their assets and the wording used by most exchanges, like ‘custodial’ accounts.
Also, the market prices offered for the cryptos are aligned with the price of the same crypto on other networks. This also goes on to show how this instrument in itself is an indicator of the underlying asset. All these points, the paper argues, should go on to demonstrate the inappropriateness of applying the securities regulation to crypto assets.
Concerns of Security
The paper also proposes a free-market model to the security up-gradation of the exchanges, as they are competing to outdo each other to develop more secure frameworks. This, the paper says, can be stifled by direct regulation.
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