The Canadian Securities Administrators (CSA) are done mulling their rules for crypto funds. Though well-intentioned to protect investors and provide regulatory clarity, these proposed rules would have the unintended consequence of stifling the very innovation they seek to promote. We all want guardrails, but what happens when those guardrails turn into prison bars.

Overly Strict Custody Cripples Agility

Imagine a Formula One Grand Prix where each pit stop needs a complete background investigation and a seven-day financial audit. So, too, do the CSA’s inflexible custody rules. Protecting digital property is extremely important. No one wants to see a repeat of the QuadrigaCX disaster. The existing standards are so onerous that they threaten to stifle agility in the rapidly evolving and innovative crypto marketplace.

It’s the incubator of innovation. Smaller funds—which is where most of the new innovation occurs—will find it difficult to meet these requirements. It’s not that they don’t want to protect their data—they just do not have the resources to implement the sophisticated security protocols required by the CSA. This serves as a heavy barrier to entry, privileging incumbents and keeping new ideas from ever gaining meaningful traction. Think about it: how many groundbreaking startups were built in garages, not corporate boardrooms? These rules are, in effect, closing the garage door on Canadian crypto innovation. It’s an impossible standard, similar to asking every artist to use only one type of paint in order to pursue a creative vision.

Limiting Asset Types Kills Diversity

The CSA’s limitations on the types of crypto assets funds are allowed to hold are just as upside down. By determining in advance which assets are “appropriate,” the regulators are automatically choosing winners and losers. This isn't their role. Not a federal agency trying to interpret 20-year-old rules, the market should determine which projects flourish.

This is similar to saying to a chef they can only make a meal with five ingredients. Of course they’ll still be able to produce something, but the culinary experience is going to get shockingly vanilla and lifeless. Crypto is a fast-moving space, and fresh, creative projects come to the fore daily. The CSA is making it harder for Canadian funds to invest. As a direct outcome, they’re pushing investments and talent out of Canada. Are we actually comfortable with the idea of Canada being left behind by crypto havens, while the rest of the world moves towards the future?

Investment Strategy Limits Breed Complacency

The regulations impose restrictions on investment strategies. The effect of these restrictions is to fundamentally make the investment landscape more homogenous. Funds will be incentivized to move with the herd rather than pursue new and potentially gamechanging strategies.

This is not dissimilar from the industry conditions that crushed the music industry. For decades, major labels controlled the fates of artists and their creative output. This unprecedented control over art dampened creativity and resulted in a vastly unproductive climate for popular musicians. Not until independent artists and labels truly showed up on the scene did music really start to change again. The same principle applies to crypto. By narrowing the CSA’s investment strategies, the CSA is ironically stifling the independent voices that are critical to fostering innovation. Instead of encouraging a rich ecosystem of different investment strategies, we would create a stifling environment of complacency and mediocrity.

So, what can we do? Complaining is easy. Action is harder, but necessary.

Don't let Canada fall behind. We have the talent, the resources and the ambition to be a global leader in all things crypto. But we don’t just need regulations, we need regulations that encourage innovation—not suppress it. Together, we can push the CSA to change its crypto rules for the better. Collectively, we can build a more equitable, durable, and thriving ecosystem moving forward. The alternative? A slow, agonizing decline into irrelevance. And that's a future no one wants. Don't just read this; share it. Let's make some noise.

1. Contact Your Elected Officials: Let them know that you believe these regulations are overly restrictive and will harm the Canadian crypto industry. Explain how these rules will impact your business, your investments, and the overall Canadian economy. Make it personal!
2. Participate in Future Consultations: The CSA has indicated that they will be conducting further consultations on a more comprehensive crypto regulatory regime. Make your voice heard! Attend these consultations, submit written feedback, and advocate for a more balanced approach.
3. Support Industry Advocacy Groups: Organizations like the Canadian Blockchain Consortium are working to represent the interests of the crypto industry. Support their efforts by becoming a member, donating, or simply spreading the word about their work.

Don't let Canada fall behind. We have the talent, the resources, and the potential to be a global leader in the crypto space. But we need regulations that foster innovation, not stifle it. Let's work together to ensure that the CSA's crypto rules are revised to create a more balanced and sustainable ecosystem for the future. The alternative? A slow, agonizing decline into irrelevance. And that's a future no one wants. Don't just read this; share it. Let's make some noise.