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In Canada, many platforms are currently not registered with securities regulators. Always check to see if the platform you plan to use is registered (for Ontario, see registered crypto trading platforms and visit Check before you invest).
If you are shopping for a crypto asset trading platform, here are some questions to consider.
Crypto asset trading platform
A crypto asset trading platform is an online trading service that allows investors to buy and sell crypto assets. It’s sometimes referred to as a crypto exchange.
When you look at a crypto asset trading platform, there are three basic questions you should ask:
Where are the crypto assets kept — in your own wallet or on the trading platform?
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Is the crypto trading platform centralized or decentralized?
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Is it a dealer platform or a marketplace platform?
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It’s important to know where your crypto assets are stored.
Why it matters
You should understand where your crypto assets are stored and how easy it is to access them. If they are stored with the crypto asset trading platform, be sure you know what safeguards the trading platform uses to keep your crypto assets safe.
A custodial crypto asset trading platform will hold the private key on your behalf, like a bank.
To transfer assets to your own digital wallet, you would need to withdraw the crypto assets from the platform, which may impose costs and limitations on how much can be withdrawn. Not all custodial platforms allow users to withdraw assets to their own wallet.
A non-custodial crypto asset trading platform connects directly to your wallet (address on the blockchain) to facilitate trades directly. This ensures you maintain control of your assets at all times.
It’s useful to understand how transactions are carried out on the crypto trading platform.
Why it matters
There are risks with both DeFi and CeFi. You need a good level of technical knowledge to use either and be comfortable with the risk you may lose your investment due to errors, bad code or fraudulent actors.
Centralized finance (also known as CeFi) shares elements of decentralized finance, but with the features commonly associated with traditional financial services products.
Centralized platforms charge a fee for transactions, the transactions don’t appear on the blockchain, and a user may need to provide identity verification information.
Decentralized finance (also known as DeFi) builds on the basic premise of cryptocurrency by using smart contracts, or digital programs, to transact financial products and services.
It uses peer-to-peer networks of computers on blockchains to facilitate financial transactions without going through a traditional legal intermediary. Transactions through a decentralized platform are completed through the blockchain. Decentralized platforms may have lower fees.
You may want to consider if the crypto asset trading platform is a dealer platform or a marketplace platform or both.
Why it matters
You want to understand whether the price is determined by the platform operator or by users in the marketplace. Also, either platform needs to be registered with the OSC to operate in Ontario.
A dealer platform allows you to buy and sell crypto assets only with the platform operator. It facilitates trading of crypto assets and is the counterparty to each trade. It does not allow you to interact with other users on the platform.
A marketplace platform can allow you to transact with other users of the platform. These other users may be other customers of the platform operator or may be liquidity providers, including the operator. It brings multiple buyers and sellers to trade in security tokens or crypto contracts.
For a crypto asset trading platform to be registered in Ontario, it needs to meet the same standards, designed for your protection and to promote stability in our financial markets, that apply to every other security dealer in the province.
You’ll want to feel confident the trading platform you are using is staying out of trouble and managing funds according to best practices. The trading platform would have to demonstrate that it employs individuals who have the requisite proficiency, solvency and integrity to operate a crypto asset trading platform in a regulated financial services environment.
Before allowing you to open an account, the trading platform would have to comply with applicable “Know your Client” requirements and anti-money laundering regulations. It would also have to provide you with a description of the crypto assets, the location and manner in which the crypto assets are held on your behalf, how the crypto assets are accessed by the trading platform and the associated risks and benefits.
You need to understand how crypto assets are priced on the platform. If it is a dealer platform, you need to understand how the platform operator arrives at the price it is quoting you. Does it evaluate its pricing against global benchmarks to ensure its prices are fair and reasonable?
Currently, the trading platform has not been permitted to hold all of its clients’ crypto assets in its own hot or cold wallets. Instead, it must use a trusted third-party custodian that it has conducted appropriate due diligence on to hold the majority of its clients’ crypto assets. The third-party custodian must be registered and licenced by the appropriate authorities in its home jurisdiction and have proper controls and processes in place.
When it comes to investing in crypto exchange traded funds or blockchain funds, it is important to understand how the underlying crypto asset is purchased and where it is stored.
Currently, there are few crypto asset trading platforms that are registered in Ontario. Others may join the list as the OSC continues their discussions and review of applications.
The level of risk is elevated if you use a crypto asset trading platform that is not registered as a securities dealer in Ontario. In fact, the OSC has started to take enforcement action on unregulated crypto asset trading platforms.
Is the platform registered?
Does the platform have any investor alerts or warnings issued against it?
In general, anyone selling securities or offering investment advice must be registered with their provincial securities regulator.
Visit CheckBeforeYouInvest.ca to learn more.
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