The British Columbia Securities Commission successfully tested new software to enhance crypto exchange oversight.
The Canadian province of British Columbia could demand crypto exchanges run newly-developed monitoring software as regulators push for further understanding of their financial activities.
The British Columbia Securities Commission (BCSC) has collaborated with US digital asset intelligence firm Inca Digital to initiate a pilot to develop a prototype, with participation from a number of Canadian platforms.
The commission noted that much of the action tied to crypto exchanges ends up on blockchains, which is a new ball game for securities regulators. On the other hand, off-chain operations involve information that exchanges give to customers about their holdings.
“Regulators should ideally be able to ascertain that an exchange’s on-chain assets match its off-chain liabilities – in other words, that the exchange has enough crypto assets to cover its obligations to clients,” a BCSC spokesperson told Blockworks.
“This monitoring, as part of a comprehensive oversight program, could provide warnings of situations comparable to Quadriga, FTX or Mt. Gox,” the spokesperson added, referring to infamous crypto exchanges known for mishandling customer funds.
Inca Digital prototype proves promising for British Columbia
Founded in 2009 by former Interpol analysts, the software vendor is behind the Nakamoto Terminal, a system employed by the US Commodity Futures Trading Commission to conduct market surveillance.
Inca Digital is backed by investors like Galaxy Digital, Wedbush Capital Partners and GTS Venture Capital, per Crunchbase.
According to the BCSC, Inca’s prototype provided the regulator with comprehensive access to on-chain, off-chain data and transactions of the exchanges.
The experiment with Inca Digital turns out to have been successful. As a result, the regulator is confident that a tool could be devised to confirm reserves match balances.
It would also determine whether exchanges meet the Canadian mandate that demands at least 80% of total crypto value be held by a third-party custodian. The tool could even assess whether the exchange is mixing its own crypto with clients’ or holding any prohibited crypto.
US also wants more oversight of crypto exchanges
The British Columbia commission said it will share the outcomes of the pilot project and the prototype’s potential with other Canadian securities regulators to assess its viability for broader implementation.
In the US, there is a comparable demand for oversight, particularly concerning exchange-traded funds (ETFs).
The Securities and Exchange Commission (SEC) is requiring surveillance-sharing agreements among parties associated with bitcoin ETFs to prevent manipulation.
These agreements facilitate the sharing of information related to market trading activity, clearing activity and customer identity.
Crypto companies in the US are increasingly striving for greater compliance. Among the top choices for third-party help is Eventus, a compliance software company based in Texas.
Eventus has already collaborated with players such as Coinbase, Gemini and options exchange Deribit.