The Canadian Investment Regulatory Organization (CIRO) decided on an interim framework to regulate the custody of crypto and tokenized assets with the aim to providing investor protection and regulatory clarity.
The initiative outlines the requirements for dealer members must handle the safeguarding of client holdings while permanent crypto-specific regulations are still being developed.
Tiered Custody Model
Within the framework, dealer members are required to keep the crypto assets either with CIRO, approved digital asset custodians, or in internal custody arrangements that fulfill the baseline standards.
The regulator has introduced a tiered custodian model that associates capital, insurance, governance, and technology assurance requirements with the proportion of client assets that a custodian is allowed to hold.
Tier 1 and Tier 2 crypto custodians can hold up to 100% of a dealer’s crypto, but they need to comply with higher capital thresholds and enhanced assurance standards, such as external cybersecurity reviews.
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Regulatory Oversight
CIRO’s framework primarily functions by setting binding terms and conditions of members, rather than making changes to its core rulebook. This gives the regulator the flexibility to address new risks as they arise without making the requirements part of the permanent rule structure.
The framework also establishes minimum capital requirements for custodians, which vary based on risk assessment of the business, with higher requirements for foreign companies to take into account cross-border enforcement and insolvency risks.
Conclusion
The development of this temporary framework demonstrates that Canada takes a careful and step-by-step approach to supervising the crypto market.
While the country is still crafting comprehensive crypto regulations, the CIRO framework provides a roadmap for its dealer members that ensures investor protection and regulatory clarity.
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