In Ontario’s sweeping new legislation to modernize its capital markets, one key piece has proven controversial: how much power securities regulators should have to oversee the growing crypto sector.

Some of Canada’s largest startups that handle crypto, including Wealthsimple, Shakepay and Dapper Labs, have pushed back on language in the draft Capital Markets Act, saying it gives the Ontario Securities Commission (OSC) too much latitude to determine which cryptocurrencies fit the definition of a security and are subject to the agency’s oversight.

Under the draft bill, released in October 2021, Ontario’s chief regulator would have the power to designate a cryptocurrency as a security, so long as they consider it in the public interest to do so. The change is intended to bring crypto-asset trading platforms into compliance with capital-markets laws, after regulators found hundreds of unregistered exchanges operating in Canada.

The Ontario government solicited comments on the act late last year as part of an industry consultation into the proposals. Through an access-to-information request, The Logic obtained copies of letters submitted during that process, which ended in February.

The Capital Markets Act would represent a major step in regulating Canada’s growing crypto sector, giving regulators more discretion to create rules tailored to crypto.

However, that expansive power could lead to uneven enforcement of rules for the sector, Evan Thomas, Wealthsimple’s head of legal for crypto, told The Logic. The proposed process wouldn’t provide the clarity that the industry would get from relying on written laws and definitions, he added.

“The consultation commentary provides no explanation or justification for giving the chief regulator this expansive designation power over all crypto assets,” Wealthsimple chief legal officer Blair Wiley wrote in a consultation memo.

Ministry of Finance spokesperson Scott Blodgett said the Ontario government is still reviewing the comments, as well as recommendations by its capital-markets modernization taskforce. 

“The Ministry of Finance and the OSC will continue to work with the sector to track the evolution of crypto-assets and ensure that Ontario’s regulatory framework promotes innovation while also protecting investors, and supporting efficient and competitive capital markets.”

The issue of overseeing the rapidly developing sector has vexed regulators worldwide over the years. The OSC has so far focused much of its attention on preventing unregistered crypto exchanges from operating in the province, driving away some platforms like Binance and FTX, both of which added restrictions for users after a crackdown last year.

The high-profile collapses of the TerraUSD stablecoin and crypto lenders such as Celsius Network and Voyager Digital have shifted global attention to those assets and businesses as new risks for investors. 

In the U.S., the Biden administration has advocated for new legislation on stablecoins, and the Security and Exchange Commission’s Gary Gensler has taken an increasingly aggressive stance toward the industry. The debate in Ontario reflects conversations taking place in the U.S. and elsewhere as crypto grows in prominence: which of the old rules to apply to a new technology, and who should be in charge of enforcing them. 

“No one should be welcoming the OSC’s fierce regulatory hand in a new, fast-moving industry like cryptocurrency dealing that simply doesn’t have the same problems as securities markets,” Shakepay wrote in its submission to the Ministry of Finance. “None of this will help Ontario’s export-focused cryptocurrency sector but it is guaranteed to raise the cost of doing business and thus cost Ontarians more money.”

Dapper Labs, the Vancouver-based company behind the NFT collectible series NBA Top Shot, said it isn’t clear from the legislation whether NFTs “that are solely collectible in nature” would be subject to securities regulation. 

In addition, the existing language in the bill risks painting cryptocurrencies with a broad brush and failing to recognize different types of assets, according to Morva Rohani, executive director of the Canadian Web3 Council, an industry lobby group.

“Unless regulations recognize that different kinds of crypto assets may require different regulatory approaches, the CMA may bring about unintended consequences that could further stifle the industry and the future economy,” Rohani told The Logic. 

The stakes of getting the regulation right are higher for Ontario, now that the Alberta government is trying to attract crypto companies by advertising a permissive regulatory environment. Binance recently established its Canadian headquarters in Calgary after the OSC cracked down on exchanges operating without a proper licence.

Binance Canada CEO Lawrence Truong told The Logic last month that it was working with government officials to scale up its presence in the region.

With files from Claire Brownell