Canada’s Regulator Moves to Reinforce Crypto Safeguards
Canada’s top investment industry watchdog has introduced new custody standards for digital assets, marking a significant step in strengthening oversight of the country’s crypto market. The Canadian Investment Regulatory Organization (CIRO) published its Digital Asset Custody Framework on Tuesday, outlining how dealer members operating crypto trading platforms must safeguard client-held crypto assets.
CIRO said the framework will be enforced immediately through membership terms and conditions, allowing regulators to respond more quickly to emerging threats while permanent legislation is still being developed. The organization stressed that the rules address technological, operational, and legal risks unique to digital assets, reflecting hard lessons learned from past industry failures.
Lessons From QuadrigaCX Still Shape Policy
One of the clearest influences behind the new framework is the 2019 collapse of QuadrigaCX, a Canadian crypto exchange whose failure left thousands of users unable to access their funds. CIRO referenced the case as a reminder of how weak custody practices and poor governance can devastate retail investors.
By explicitly acknowledging those failures, CIRO signaled that preventing custody-related losses is now a regulatory priority. The framework is designed to reduce exposure to hacking, fraud, mismanagement, and inadequate internal controls, all of which played a role in earlier crypto collapses in Canada and abroad.
Tiered Custody Model Limits Risk Exposure
At the core of the new rules is a tiered, risk-based custody structure that classifies crypto custodians into four tiers. Each tier reflects factors such as capital strength, regulatory oversight, insurance coverage, and operational resilience. The higher the tier, the greater the share of client assets a custodian is permitted to hold.
Top-tier custodians meeting the strongest standards may hold up to 100% of client assets, while lower-tier custodians face stricter limits, with Tier 4 capped at 40%. CIRO also placed firm restrictions on internal custody practices, limiting dealer members to holding no more than 20% of client crypto assets themselves, a move aimed at reducing conflicts of interest and operational risk.
Governance, Insurance, and Audits Now Mandatory
Beyond asset limits, the framework imposes robust governance requirements across the custody stack. Firms must maintain strict controls over private key management, cybersecurity defenses, incident response planning, and third-party risk oversight. Regular independent audits, security compliance reports, and penetration testing are now mandatory under the new standards.
CIRO also emphasized the importance of clear legal accountability. Custody agreements must explicitly define liability for losses caused by negligence or preventable failures, closing loopholes that previously left investors exposed during insolvencies or security breaches.
A Balance Between Protection and Innovation
CIRO described the framework as a “risk-based and proportionate approach”, designed to protect investors without stifling innovation. The regulator said the rules were developed in consultation with crypto trading platforms, custodians, and international regulatory benchmarks, signaling alignment with global best practices rather than isolationist policy.
The move fits into a broader Canadian effort to professionalize crypto market infrastructure, particularly as institutional participation grows. While the framework tightens standards, it also provides clear expectations, something industry participants have long called for.
Enforcement Comes Amid Rising Scrutiny
The announcement follows a period of heightened enforcement in Canada’s crypto sector. Last October, FINTRAC fined local exchange Cryptomus roughly $126 million for failing to report suspicious transactions tied to darknet markets and fraud. Earlier in the year, offshore exchanges KuCoin and Binance faced similar penalties.
As a self-regulatory body with enforcement authority, CIRO can investigate misconduct, impose fines, and suspend members, giving real teeth to its new custody rules. Together, these measures suggest Canada is serious about closing regulatory gaps while allowing crypto markets to mature under stronger guardrails.
