Crypto enthusiasts in Canada are giving regulators their ideas about how to monitor the space. This will include the practice of short-selling.
The Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada filed a joint consultation paper last week called the Proposed Framework for Crypto-Asset Trading Platforms.
Short-selling bitcoin and other cryptos has been steeped in controversy, though many say it was needed. That was back when it seemed like cryptocurrencies’ prices had room to run for years. Now, in the wake of the historic downturn, short-selling is back on the table.
As CCN explained in 2013 about trading, a bet that a security’s price will fall is called a “short.” This is the opposite of a “long,” which is buying something in the expectation of a future price rise.
Here’s the language from Canada’s paper about short-selling:
To reduce the risks of potentially manipulative or deceptive activities, in the near term, we propose that platforms not permit dark trading or short-selling activities, or extend margin to their participants. We may revisit this once we have a better understanding of the risks introduced to the market by the trading of crypto assets.
Some observers have shot back about the motivation behind the joint paper:
"If manipulative...activities enabled by shorting are the concern here...then perhaps [the Canadian Securities Administrators] could, like, actually do their job and investigate individuals engaging in those practices?" https://t.co/ZwQsRahPIK
— Matteo Leibowitz (@teo_leibowitz) March 18, 2019
Crypto Critics May Have A Point
In the world of traditional finance, short-sellers can make lots of money or lose just as much. When they take short positions on a company’s stock, it can drive long-term investors crazy. There have been cases where short-sellers have been accused of deliberately trying to make a company’s stock price fall.
A notable case was Tesla’s CEO Elon Musk, who spoke on an earnings call about short-sellers driving the company’s stock down. He even said it should be illegal.
The manipulation is real, and it could be especially aggravating for bitcoin and its respective crypto holders.
CCN reported that shorting bitcoin could be a tricky process due to the problems inherent with lending out irreversible, decentralized and anonymous currency. We mentioned:
Think about it this way; would you be willing to lend a non-trivial amount of bitcoin to a stranger? Unlike shorting through a regulated exchange, there’s no central authority to manage your counterparty risk. You could really only lend cryptocurrency to people you trust.
To Allow Shorting or Not
Some of the questions Canadians will answer include:
- What best practices exist for platforms to mitigate risks? Are there any other substantial risks which we have not identified?
- Are there any global approaches to regulating platforms that would be appropriate for consideration in Canada?
- What standards should a platform adopt to mitigate the risks related to safeguarding investors' assets? Explain how platforms that have their own custody systems should be regulated. Also, explain how platforms use third-party custodians to safeguard their participants' assets.
- Are there challenges associated with a platform being structured so as to make actual delivery of crypto assets to a participant's wallet? What are the benefits to participants, if any, of platforms holding or storing crypto assets on their behalf?
Comments must be submitted by May 15.