Author’s Note: History has repeatedly shown—and will continue to show—that incidents like the Fcoin collapse are not isolated. Protecting customer assets is a critical compliance issue crypto exchanges must address. Canada plans to expand its regulatory scope, while Hong Kong has established specialized rules.
In the absence of robust regulation, customer assets remain vulnerable to mismanagement, theft, or misuse by crypto exchanges. Traditional securities markets mitigate these risks through third-party custodianship (e.g., "brokers handle trades, banks manage funds"). However, crypto asset markets often lack such safeguards, leading to recurrent issues like Mt. Gox’s hack or Fcoin’s liquidity crisis.
To address these gaps, jurisdictions like Japan, Hong Kong, and Canada are implementing frameworks to protect investor assets. Japan’s 2016 Payment Services Act mandates segregation of exchange and customer funds. Hong Kong’s Securities and Futures Commission (SFC) introduced tailored rules in its 2019 Position Paper: Regulation of Virtual Asset Trading Platforms. Meanwhile, Canada’s CSA and IIROC proposed rules in 2020 to cover nearly all centralized exchanges.
Canada’s Regulatory Approach: Expanding the Scope
Criteria for Regulation
Unlike jurisdictions that regulate only exchanges listing security tokens (e.g., U.S., Singapore), Canada includes exchanges trading non-security tokens if they fail to ensure "immediate delivery" of assets. Key considerations:
- Derivative Classification: If users hold only contractual claims to assets (not actual ownership), these claims may qualify as derivatives, triggering securities laws.
- Immediate Delivery Defined: Transfer of full ownership/control to users without reliance on the exchange. Merely recording transactions on ledgers does not qualify.
Implications
Most centralized exchanges—regardless of token type—control customer assets (e.g., via exchange-held private keys). Thus, Canada’s rules could encompass nearly all such platforms operating within or serving Canadian residents.
Hong Kong’s Targeted Custody Rules
Hong Kong’s SFC established comprehensive safeguards, blending traditional securities custody with crypto-specific measures:
Dedicated Custodian Entity
- Exchanges must hold assets via a wholly owned HK-incorporated trust company.
- Client funds must be stored in segregated accounts labeled as trust/client accounts.
Internal Controls
- Private Key Management: Strict protocols for key generation/backup.
- Wallet Storage: 98% offline holdings; adherence to international standards.
- Withdrawals: Clear procedures to prevent fraud/theft.
Transparency & Oversight
- Disclose custody arrangements, hard fork policies, and insurance coverage.
- Regular audits and monitoring of inactive accounts.
- Insurance Mandate
Coverage must extend to online and most offline assets against hacks/theft.
Key Takeaways
- Canada’s Model: Broad regulation based on custodial control rather than token type.
- Hong Kong’s Model: Detailed rules mirroring securities custody but adapted for crypto’s technical risks.
👉 Explore secure crypto trading platforms with robust asset protection.
FAQ Section
Q1: Why does Canada regulate non-security token exchanges?
A1: To address risks from custodial control—common across all centralized exchanges, regardless of token type.
Q2: How does Hong Kong ensure crypto asset safety?
A2: Via segregated trusts, offline storage, and mandatory insurance against hacks.
Q3: What’s "immediate delivery" in Canada’s framework?
A3: Full transfer of ownership/control to users, eliminating reliance on the exchange post-trade.
Q4: Are decentralized exchanges (DEXs) covered?
A4: Typically no—users retain asset control via self-custody wallets.
About the Author:
Zhang Ling, Partner at HanYi Law Firm. The views expressed are the author’s alone and not legal/financial advice. For reuse, credit the author.
### **Key SEO Elements**