A Turning Point for Institutional Custody in Canada
On March 1st, 2022, Knox and Tetra Trust announced that Tetra Trust will begin operating Knox's deployed and long-exercised custodial infrastructure. This marks an important milestone in the Canadian Bitcoin ecosystem, as together we are bringing forth a true institutional Qualified Custodian to the Canadian market. For a custodian to be considered for institutional use in Canada, several aspects need to come together, from regulatory to technical. Knox's hardened infrastructure run by Tetra Trust can achieve the desired properties for the Canadian institutional market.
Canadian Securities Regulation
Canada has a set of provincial and territorial securities regulators, which oversee their respective jurisdiction. For example, Ontario is governed by the OSC (Ontario Securities Commission), Québec by the AMF (Autorité des marchés financiers), and Alberta by the ASC (Alberta Securities Commission). While each regulator oversees its own jurisdiction, there is an umbrella organization, the CSA (Canadian Securities Administrators), which seeks to harmonize regulations between provinces.
One way harmonization occurs in practice is by way of a National Instrument, which is an instrument adopted by all Canadian provinces and territories. There are two National Instruments relevant to our field: NI 81-102, and NI 31-103.
National Instrument 81-102 dictates the use of a Qualified Custodian for various kinds of funds. Most notably in the Bitcoin ecosystem, this includes physically-settled Bitcoin ETFs. While Canada has led the way in approving such vehicles, there has been a historic lack of custodians able to meet the regulatory and technical demands necessary to maintain custody in Canada. As a result, all of the underlying assets in these funds ultimately sit with American custodians, with values now exceeding $4B CAD.
National Instrument 31-103 makes similar demands for the use of a Qualified Custodian, in the context of a different set of market participants. Notably, this includes Canadian entities such as exchanges and marketplaces that have chosen to register following the joint CSA/IIROC Staff Notice 21-329.
Knox and Tetra Trust each bring something critical to the table when it comes to bringing forth a true institutional Qualified Custodian.
1. Tetra Trust — Compliance with NI 81-102 and NI 31-103
Tetra Trust is a special purpose trust company governed under the Loan and Trust Corporations Act (Alberta), and regulated by Alberta's Ministry of Treasury Board and Finance. This allows Tetra Trust to offer Knox infrastructure as a Qualified Custodian under National Instruments 81-102 and 31-103.
2. Knox — World-class insured and audited infrastructure
Knox has been focused since day one on producing sound insured infrastructure that can meet the rigorous technical demands of discerning customers. In 2019 we launched a Bitcoin custodian with comprehensive insurance coverage, having spent nearly a year working with the insurance industry to bind a bespoke policy that we could stand behind. Our geographically distributed multi-signature architecture is built from the ground up to decrease the risks inherent in custody with a combination of unique technology and rigorous controls. In 2020, Knox became the first (and to this day only) firm in the space to undergo a successful SOC 2 Type 2 audit, which is demanded by many customers and their auditors when selecting an appropriate custodian. Together, these elements are crucial for institutional custody in Canada, and when operated by an NI 81-102 and 31-103 compliant party, finally meet the exacting standards required by a large set of customers.
With Tetra Trust licensing and running our advanced infrastructure, we believe this is an important turning point for the Canadian institutional ecosystem. In turn, Knox will remain committed to our goal of advancing institutional-grade custodial technology and insurance coverage.