QuadrigaCX Scandal Effects? Canada Proposes a Ban on Cryptocurrency Short Selling and Margin Trading

The sudden death of Gerald Cotten, founder at what used to be Canada’s largest Bitcoin exchange, QuadrigaCX, caused a massive uproar in the cryptocurrency community. It now appears that the country’s Securities Commission is taking actionable steps towards introducing new and quite frankly, drastic changes which may have a massive impact on the industry on a local scale.

Canada To Ban Short Selling and Margin Trading

The Joint Canadian Securities Administration and Investment Industry Regulatory Organization of Canada has issued a Consultation paper on March 14th, 2019.

The document, called Proposed Framework for Crypto-Asset Trading Platforms, outlines key positions in the market, saying that there are over 200 platforms facilitating the trade of digital assets for government-issued fiat currencies. According to the paper, many of them operate globally without any regulatory oversight.

The paper details that “global incidents point to crypto assets having heightened risks related to loss and theft as compared to other assets.”

More importantly, however, the document also proposes one drastic change, which, if passed, will definitely impact cryptocurrency trading across the board in the country.

“To reduce the risks of potentially manipulative or deceptive activities, in the near term, we propose that Platforms not permit dark trading or short selling activities, or extend margin to their participants. – Reads the paper.”

Short selling is a very commonly used trading technique which benefits the seller if the price of the asset depreciates. In other words, traders use this to profit when the market is declining.

One important thing that has to be noted, however, is that professional traders use short selling as means of hedging their downside risks of opened long positions with the same asset or with a related one. As such, it is a very important instrument, essential for successful trading.

Margin trading, on the other hand, refers to the common practice of using borrowed funds from a brokerage in order to trade a financial asset in leverage. It’s a technique used to increase profitability, but it also carries serious risks for the user’s balance in case the trade doesn’t go as planned.

In theory, if passed, the new framework would appear to only allow long positions, where traders benefit when the price of the traded asset goes up.

In all fairness, the framework also stipulates that:

“We may revisit this once we have a better understanding of the risks introduced to the market by the trading of crypto assets.”

Without any clearly set terms, however, this statement does sound like a bit of a stretch.

Cryptocurrency Custody is Also Under Aim

Another point in the proposed framework concerns cryptocurrency custody solutions. Per the document, the proposed changes will require such platforms to seek registration as an investment dealer, as well as membership in the Investment Industry Regulatory Organization of Canada (IIROC).  

As a result, existing cryptocurrency custody platforms will have to satisfy the existing custody requirements for traditional custodians. Moreover, the paper also details that they will “also be expected to meet other yet-to-be determined standards specific to the custody of crypto assets.”

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