In a sternly written paper to the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada, the crypto exchange explained its gripes. The two regulatory bodies have proposed a security law framework that all exchanges would have to abide by whether they like it or not.
Kraken strongly recommends against Canada imposing a security law framework on crypto currency exchanges in public response to the Proposed Framework for Crypto-Asset Trading Platforms published by the CSA and the IIROC #bitcoinca https://t.co/z2TgW3vjQu
— Kraken Exchange (@krakenfx) May 16, 2019
In March, the regulator pair released a consultation paper called the “Framework for Crypto-Asset Trading Platforms.” The industry had until May 15 to submit comments about the proposal, CCN reported.
Questions posed by the regulators related to risk mitigation, safeguarding investors’ assets, and market manipulation and deception.
Kraken got to work on its response, delivering on the deadline day in a nine-page document.
One of the proposed items Kraken takes issue with relates to how the regulators would define securities. In their proposal, regulators state:
“However, securities legislation may still apply to Platforms that offer trading of crypto assets that are commodities because the investor’s contractual right to the crypto asset may constitute a security or derivative.”
“This premise is faulty with respect to reputable Exchanges…[Most] reputable exchanges operate as custodians or bailees. As such, the assets are legally owned by the customer and not the Exchange operator. This means, critically, that the customer’s interest is not derived from the underlying asset – it IS the underlying asset. The application of a securities law framework, accordingly, is both unnecessary and inappropriate to this structure.”
Kraken Calls Out Manipulation Argument
Regulators are concerned about manipulation:
“Platforms may be susceptible to manipulative and deceptive trading given the market volatility, lack of reliable pricing information for crypto assets, the fact that they trade 24 hours daily and the fact that trading on many Platforms is not currently monitored.”
Regulators seem particularly worried about the nature of crypto trading leaving the door open for “manipulative and deceptive trading activities” on exchanges.
Calling it a “unique challenge,” the regulators said protecting investors was difficult because:
“…crypto assets trade on a global basis, on and off Platforms, outside regular trading hours, and may be illiquid and highly volatile. This, and the fact that there is currently no central source for pricing, may affect the price of a crypto asset trading on a Platform. This may also make it difficult to obtain reliable reference data that is needed to conduct effective surveillance.”
Kraken found that the regulators’ assertions aren’t legitimate.
“Regarding the assertion that the 24-hour trading cycle contributes to the risk of market manipulation, we would argue the contrary. The fact that there are not artificial obstacles to trading (i.e., when the market is open) enhances price discovery, thereby reducing the risk of market manipulation.
“We believe that this risk is largely addressed by the functioning marketplace for Exchange services. Moreover, as the market continues to evolve, we believe that security differentiators will become more significant from a competitive perspective.”