Lightweight And Comprehensive Cryptocurrency Exchange Framework
- The framework was developed through a multi-year case study of 860 past exchange hack/scam/fraud events. It prevents all historic cases where funds were lost in cryptocurrency exchanges.
- Typical securities frameworks will cost Canadians millions of dollars (ie Sarbanes-Oxley is $5m USD/yr per firm). Implementation costs of our proposed framework are significantly cheaper.
- This framework fully protects Canadians traders and fully supports innovation. We can maintain a diverse set of exchange platforms, keep small platforms we know and love, and encourage innovation while keeping Canadians safe.
High Level Overview
Effective standards to prevent both internal and external theft. Platform operators are trained and certified, and have a legal responsibility to users.
Regular Transparent Reviews
Provides visibility to Canadians that their funds are fully backed on the platform, while protecting privacy and sensitive platform information.
Full support for hot wallets to automate and speed up user withdrawals, while fully removing risk to platform users through comprehensive insurance.
- Proper multi-signature cold wallet storage.
- Each cold storage private key is the personal and legal responsibility of one person - the “signatory”. Signatories have special rights and responsibilities to protect user assets. Signatories are trained and certified through a course covering (1) past hacking and fraud cases, (2) proper and secure key generation, and (3) proper safekeeping of private keys. All private keys must be generated and stored 100% offline. If a private keys is ever breached or suspected to be breached, the wallet must be regenerated and all funds relocated to a new wallet.
- All signatories must be separate background-checked individuals free of past criminal conviction. Signing of transactions must take place with all signatories on Canadian soil or on the soil of a country with a solid legal system which agrees to uphold and support these rules (from an established white-list of countries which expands over time).
- 3-5 independent signatures are required for any withdrawal. There must be 1-3 spare signatories, and a maximum of 7 total signatories. The following are all valid combinations: 3of4, 3of5, 3of6, 4of5, 4of6, 4of7, 5of6, or 5of7.
- A security assessment should be conducted to validate the cold wallet is set up correctly and provide any additional pertinent information. The primary purpose is to ensure that all signatories are acting independently and using best practices for private key storage. A report summarizing all steps taken and who did the assessment will be made public.
- There is an approval process if signatories wish to visit non-compliant countries. At most 2 signatories can be outside of aligned jurisdiction at any given time. Non-compliant countries would be required to keep a separate cold wallet for Canadian funds within a Canadian office if they wish to serve Canadian customers.
- Regular and transparent solvency reviews.
- Reputable individuals and entities in Canada serve as "reviewers", whose job is to validate the backing and assess the platforms to ensure 100% backing of customer assets. Reviewers obtain tiers based on performing a number of reviews, time as a reviewer, and other credentials such as accounting backgrounds.
- A review must be conducted at founding, after 3 months of operation, and at least once every 6 months to compare customer balances against all stored cryptocurrency and fiat balances. The reviewer will be known, independent, and never repeat within a 14 month period. Larger platforms (more assets) will require reviews from higher tier reviewers.
- A report must be published featuring the reviewer and the steps conducted in a readable format. This should be made available to all Canadians on the exchange website, the reviewer website, and on a government website. The report must include the percentage of each customer asset backed on the platform, and how those funds are stored.
- The reviewer will independently produce a hash of each customer's identifying information and balance as they perform the review. This will be made publicly available alongside the report, including simple instructions that each customer can use to verify that their balance was included in the process.
- The review needs to include a proof of ownership for any cryptocurrency wallets included. A satoshi test (spending a small amount) or partially signed transaction both qualify.
- Full and comprehensive insurance regime.
- Through coordination of industry and regulators, establish a collective insurance fund. The objective and mandate of this fund is to protect all Canadian cryptocurrency platform users, with each case decided based on a simple majority vote taking into consideration past cases. This covers fraud, insolvency, and other forms of losses that may typically be excluded from third party coverage. It does not cover losses due to authorized market activity and price changes.
- The insurance fund is managed by a council of 7 signatories, with the requirement that each represent a separate organization and at least 4 seats be held by reputable platform operators. Crypto-asset funds will be held in a 4 of 7 multi-signature wallet. Fiat funds will be held in a legal structure constituting a similar voting mechanism for release of funds. Should a council member resign or lose capacity, a majority vote (4 or more) is used to establish a replacement and recreate wallets.
- Platforms pay premiums at an established rate proportional to the full balance of customer funds as denominated in the same currency, or double the value as denominated in bitcoin or CAD at a daily established trading rate. If the insurance balance is ever insufficient due to market movements, the firm must rectify this within 48 hours by moving assets to cold storage or increasing the insurance coverage.
- Any wallet which holds customer deposits and is not set up as cold storage as per rule 1 (hot wallets) are subject to an additional cost proportional to the balance held in the hot wallet. Platforms may or may not have hot wallets and there is no requirement to have any hot wallets or to fund hot wallets from customer assets.
- Breaches or losses require the endorsement of one council member or a petition of 100 Canadian signatures to be considered. The council will assess the situation and decide on a potential remedy. They have discretion to disburse funds to platform operators, bankruptcy proceedings, or separately to affected users directly. The ultimate decision is made based on the 4 of 7 majority vote.
We are calling on regulators, Canadian crypto users, and exchange platforms to provide feedback and support for our proposal.
Please join our discussion and help us build a future that works for everyone and that we can all be excited about.