Brane Capital chair Adam Miron envisions a day in the not-too-distant future when Canada’s big banks invite clients to deposit their cryptocurrency like they would cash. “You’re going to open up your banking app on your phone and see your chequing account, your savings account, your mortgage, maybe a little trading portfolio and [then] digital assets.” 

Miron believes clearer regulation of how those digital assets are held would give financial institutions and investors alike a confidence boost in a section of the digital economy plagued by high-profile losses. Other startup executives and regulatory experts say a lack of interest, not rules, is keeping banks out of cryptocurrency. Nonetheless, Brane is calling on the federal government to follow the U.S. and Germany in introducing guidelines it hopes will help Canada earn a piece of the fast-growing cryptocurrency market.

Founded in 2017, Ottawa-based Brane holds and insures digital assets on behalf of its customers, charging customers a fee based on their value. Current clients include cryptocurrency-mining firms—an increasingly popular type of business in Canada—but it eventually hopes to work with traditional financial institutions that want to accept customers’ cryptocurrency deposits, in much the same way they store precious metals with third-party custodians. 

“If we’re successful in our mission, you can go up and down Queen Street in Ottawa and every single bus stop is going to be lined with a poster that says, ‘Now you can deposit your bitcoin today at [a major bank],’” Miron said in an interview with The Logic, adding that the company has “been in discussions with the banks.”

In a submission this month to the House of Commons finance committee’s pre-budget consultations, Brane called for the federal government to “implement financial supervision regulations around digital asset custody,” and give the Office of the Superintendent of Financial Institutions oversight of such services. It pointed to a July statement from the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) letting banks know they can hold cryptocurrency—typically in the form of the private keys that allow coins to be transferred—for customers. Germany’s financial regulator began licensing digital asset custody providers in January. 

Miron previously co-founded Hexo, a cannabis producer listed on the Toronto and New York stock exchanges and has personally invested in Brane, which has raised $3 million. Former Ontario premier Dalton McGuinty is on the board. 

In November 2019, The Logic reported that RBC had filed patent applications for a cryptocurrency-trading platform and accounts containing digital assets; the company later said it wasn’t planning to launch an exchange imminently. In January 2018, then-TD Ameritrade CEO Tim Hockey said millennial investors were showing particular interest in cryptocurrency. Both banks as well as BMO did not respond to The Logic’s questions about whether they plan to accept cryptocurrency deposits or offer investment services, were seeking new digital asset custody regulations or had engaged with Brane. Scotiabank, CIBC and National Bank declined to comment.

“Digital asset custody activities are not specifically addressed in” the statutes that govern federally regulated financial institutions, said Michael Toope, an OSFI spokesperson. The regulator said it could only determine whether such services are permitted “on a case-by-case basis,” with close attention to the specific language of arrangements and contracts.

It’s up to OSFI to decide whether it has authority for digital asset custody under existing legislation, said Finance Canada spokesperson Anna Arneson. The department did not directly answer The Logic’s questions about whether it is considering new cryptocurrency rules, but said it is working with international authorities such as the G7, G20 and Financial Stability Board on regulation. 

Neither OSFI nor provincial regulators have said that deposit-taking institutions like banks, trust companies and credit unions can’t provide digital asset custody services, noted Lori Stein, a Toronto-based partner in Osler’s investment funds and asset management group. Exchanges that allow cryptocurrency trading also often hold them for customers, who consider the platforms safer than their own personal wallets and can’t currently transfer them to an account at a bank that also holds their regular money. 

Stein, a securities lawyer, said Canadian securities regulators have been more proactive about regulating digital assets than the bodies that oversee deposit-taking institutions, because of investor protection concerns.

All of the executives and experts to whom The Logic spoke for this story cited Quadriga, the Toronto-based trading platform that was granted creditor protection in February 2019, owing users $215 million. The company initially claimed it couldn’t access the wallets in which their funds were stored after founder Gerald Cotten’s death; Ernst & Young later recovered $46 million in assets from frozen bank accounts and other non-crypto sources.

Few German banks have launched digital asset custody businesses since the new rules took effect in January, but some have shown interest, said Philipp Sandner, head of the Frankfurt School of Finance & Management’s blockchain centre. The law is the first step in regulators’ plan to update the country’s heavily paper-based securities system; blockchain-based debt instruments and stocks will follow. 

While German commercial banks and other financial institutions are lagging the regulator on cryptocurrency regulation, some are succeeding in the new space, said Sandner, a member of the federal finance ministry’s fintech advisory committee. A Bitcoin trading app from Börse Stuttgart, the country’s second-largest stock exchange, opened to retail investors in December 2019 and has quickly become a market leader. Other established firms are seeking to partner with startups—Sandner said both Commerzbank and Deutsche Börse issued requests for proposals for custody businesses in March. 

Tie-ups between financial institutions with customer relationships and regulatory compliance bonafides and startups with technical and blockchain expertise make sense in this still-nascent field, said Knox CEO Alex Daskalov. The Montreal-based firm, which raised $8.25 million in September 2019 from investors including Inovia Capital and Fidelity, holds bitcoins on behalf of exchanges, trusts, investments advisers and funds. 

Daskalov wants regulators to avoid imposing traditional financial rules on digital asset custody, calling insurers’ willingness to cover a particular provider “the best signal for safety that you could possibly produce.” Knox’s holdings are fully insured, he said. Miron said Brane’s policy covers wallets up to $5 million apiece, to avoid limiting the total value of assets it can accept. 

The OCC statement was likely prompted by a request from U.S. chartered banks, but large Canadian financial institutions haven’t yet shown the same interest in custody services, according to Daskalov. Stein also said the lack of a regulatory framework isn’t what’s holding them back. Canadian financial services is “quite a traditional and conservative sector [with] a pretty low appetite for risk,” she said. Examples like Quadriga have bolstered their concerns about crypto, although the U.S. move is a positive signal.

Pre-budget consultations are typically well subscribed—the finance committee received 493 briefs for the 2019 edition, for example. And Stein noted crypto-related regulatory processes in Canada can be very slow—legislation to bring exchanges under the country’s anti-money-laundering law was passed in June 2014, but the registration requirement only took effect this June.

Brane’s submission anticipates a faster timeline. Cryptocurrency custody will “take off” once regulatory guidance is in place, predicted Miron.