FTX meltdown highlights need for co-ordinated international oversight

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The liquidity crunch at cryptocurrency exchange FTX.com, which threw it into the arms of rival Binance Holdings Ltd., highlights the need for co-ordinated international oversight of the sector, a group of senior Canadian regulators said Wednesday. 

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Peter Routledge, head of the Office of the Superintendent of Financial Institutions, told the audience at GRI Summit 2022 in Toronto, that the origin story of crypto leads some to believe the sector should have an alternative system of oversight removed from well-established conventions like prudential regulators and central banks. 

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“I just reject that… entirely,” he said, adding that the “under-regulated” sector presents risk.

While recognizing constitutional requirements to respect federal and provincial jurisdiction, Routledge said regulators must “capture the risks that migrate across” those jurisdictions.

Canadians “expect us to make the extra effort to figure out where there might be gaps and cover them up through negotiation,” he said. “We’re… protecting the same people.”

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Grant Vingoe, chief executive of the Ontario Securities Commission, who joined Routledge in the panel discussion Wednesday morning, said global firms with “opaque” operations outside Canada, such as FTX, can nevertheless have “really significant impacts” on Canadian investors. 

The meltdown earlier this week “highlighted the need for regulation on a collaborative basis, globally,” Vingoe said.

The OSC has taken steps to register crypto platforms and subject them to undertakings, including Binance, he said. But Vingoe described it as a “rolling effort” to keep up with the burgeoning sector, with new iterations such as yield products, pooled staking and stable coins being introduced regularly and involving retail investors.

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It’s “really challenging to regulate,” he said, adding that the ongoing efforts of Canadian regulators “should be judged over the next few years.”

A recent OSC survey indicated that around 30 per cent of Canadians plan to invest in crypto products over the next 12 months, despite the fact that most lacked working knowledge of the practical, legal and regulatory particulars of owning them.

Vingoe said he viewed that finding as a wake-up call about the need for more education and oversight. But the industry immediately used the survey as a marketing pitch to entice more buyers, highlighting a “fear of missing out” or being left behind.

FTX’s rapidly sinking fortunes this week highlighted another unfortunate exposure to the crypto world of a second large Canadian pension fund. 

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The Ontario Teachers’ Pension Plan participated in two funding rounds for the Bahamas-based crypto exchange in late 2021 and early this year. The investment size has not been disclosed, but the stake was not on Teachers’ list of investments over $200 million in the pension’s 2021 annual report.

In August, the Caisse de dépôt et placement du Quebec said it had written off a US$150-million investment in fizzled crypto lender Celsius Network LLC. Caisse chief executive Charles Emond said at the time that the Quebec pension fund was keen on “seizing the potential of blockchain technology” and perhaps the investment in Celsius was made “too soon” in the company’s development.

It is understood that Canadian regulators including Quebec’s Autorité des marchés financiers (AMF) are working alongside counterparts in the United States as multiple jurisdictions investigate the multi-billion-dollar collapse of Celsius, which suspended customer redemptions last June.

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