The bitcoin and cryptocurrency laws in Canada have been, for better or worse, fairly hands-off. Innovative Canadian initiatives like QuadrigaCX and Ethereum have seen spectacular success. At the same time, a rapid rise in fraudulent ICOs, or initial coin offerings, mirrored the rapid rise in crypto markets.
We hope this guide helps you understand what Canadian crypto companies are dealing with. You will get a snapshot of bitcoin and cryptocurrency laws in Canada today as well as a peek into the future of Canadian crypto regulation.
If you’re hoping for advice for your personal or business crypto activity, stop reading and go talk to a lawyer. Only someone trained in securities, money services or income tax law can give you that advice.
Canada’s Crypto Catch-22
There’s a quirk of Canada’s parliamentary system that the country’s crypto businesses have to overcome. Once Parliament passes legislation, the Governor General gives it Royal Assent and it becomes a law. The law doesn’t go into force, however, until it “commences.”
Back in 2014, Parliament passed Bill-C31, amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). This is the legislation that defines licensing and reporting requirements for businesses that handle money. The changes classified companies that “handle virtual currency” as regulated money services businesses (MSBs).
Those changes were passed, assented, became law… but never commenced. Bill C-31’s virtual currency amendments are currently classified as “Amendments Not in Force”. As a result, companies that deal in cryptocurrencies are not MSBs under the law.
Don’t look at us
FINTRAC is the Financial Transactions and Reports Analysis Centre of Canada. This is the organization that would have been responsible for regulating trading platforms and other crypto-based businesses. When those businesses ask FINTRAC about crypto regulations, you’ll see responses like this:
“Individuals and entities engaged in the business of dealing solely in virtual currency services will be MSBs, but cannot yet register with FINTRAC…. regulations need to be written to define what it means to be engaged in the business of providing services such as dealing in virtual currency.”
There’s a regulatory twilight zone for Canada’s crypto industry. The law says handling virtual currency makes you an MSB, but FINTRAC hasn’t written the regulations that define what “handling virtual currency” means, so companies that handle virtual currency aren’t MSBs.
Reactions from crypto innovators
The thing is, Canada’s bankers hate twilight zones. Banks see uncertainty as a risk they must manage to stay in compliance with their own FINTRAC obligations. A report from The Vancouver Sun found that banks caused some of the recent transaction delays QuadrigaCX, Einstein Exchange and other Canadian crypto firms experienced.
“Instead of simply blocking Bitcoin companies from having direct bank access,” QuadrigaCX CEO Gerald Cotton told the Vancouver Sun, the banks “went after both the customers as well as the payment companies that help facilitate transactions related to Bitcoin.”
CIBC, according to Cotton, froze $30 million one of QuadrigaCX’s payment processors held. Beyond that, TD Bank and BMO now block crypto transactions on their debit and credit cards. Bank of Nova Scotia and RBC told the Vancouver Sun that they are looking at similar policies.
This is the situation that has led the founders of crypto startups to beg the Canadian government for more regulation.
“We want to be regulated,” Cole Diamond, the CEO of Toronto-based trading platform Coinsquare, told The Globe & Mail, “because ultimately we want to be able to provide certainty to our customers that we’re not some fly-by-night trading platform, that they can trust us.”
How Canada Got Here
Parliament introduced the PCMLTFA in 2000, a full eight years before Satoshi Nakamoto published his proposal for a peer-to-peer electronic cash system. Bill C-31 only required two small changes to fold cryptocurrency into Canada’s anti-money laundering and anti-terrorism regime:
Adding “virtual currency” to the list of services that define domestic money services businesses (MSBs).
Requiring foreign companies dealing in virtual currency to register as an MSB.
Those small changes would require crypto companies doing business in Canada to register with FINTRAC as an MSB. However, the only way to do that is to implement a full suite of anti-money laundering procedures.
Financial institutions must provide regulators with the information they need to fight money laundering and terrorism. The transactions that have to be reported include:
- Large cash transactions of $10,000 or more.
- Electronic transfers greater than $10,000 that leave the country.
- Transactions involving known terrorists and “politically exposed persons.”
- Any suspicious transactions.
As regulated companies, crypto MSBs must collect that data and send it to FINTRAC.
Know Your Customer
FINTRAC lets MSBs use one of three methods to confirm a customer’s identity. The customer can provide a government-issued photo ID or the company can run a credit check to confirm the customer has at least a 3-year credit history.
The third option is for customers to provide documents from two independent, reliable sources that confirm their identities. However, FINTRAC does not let MSBs accept scans of those documents. A company employee must physically see the documents. If the documents are electronic, the customer has to email it or display it on a tablet or smartphone.
Risk and Compliance Programs
FINTRAC requires all licensed MSBs to develop formal compliance processes that include:
- Appointing a compliance officer.
- Documenting compliance policies and procedures.
- Conducting risk assessments.
- Training employees on AML/KYC policies.
- Conducting effectiveness reviews.
Doing it Anyway
This is a lot of work for small, fast-growing startups. However, many of Canada’s crypto companies have taken the extra step of complying with FINTRAC’s requirements — whether the agency wants them to or not.
Coinsquare’s Diamond told The Globe & Mail that his company “decided to do it anyway because we explained to [FINTRAC] we don’t have anywhere else to go. We want to be regulated.”
There is one aspect of cryptocurrency regulation that is not in doubt: Canadians who own cryptocurrencies have to pay taxes. The Canada Revenue Agency (CRA) has a dedicated “digital currency” page where Canadians can learn how and when tax laws apply.
The CRA explains that, despite its name, a digital currency is not a currency. When you buy a pizza with bitcoin, the CRA says you are bartering. You exchange one property (your bitcoins) for another property (the pizza). In that situation, the dollar value of the pizza must be counted as the seller’s income.
When trading cryptocurrencies, Canadians’ gains or losses have to be calculated just like any capital gains. Likewise, companies that pay their employees in cryptocurrency must report the dollar value as the employee’s income. When employees convert their crypto into fiat, any change in the value would be a capital gain or loss that they must report.
Insecurity About Crypto Securities
Money-laundering and terrorism are not the only reasons governments regulate cryptocurrency. Many of the recent initial coin offerings, or ICOs, have come under scrutiny by securities regulators. Unlike bitcoin or ether, these altcoins and tokens have many of the characteristics of traditional equities like stocks.
Regardless of the way these ICOs are marketed, securities regulators take the attitude that if an ICO looks and quacks like a security, it’s a security.
Protecting Canadian investors
Earlier this year, the Ontario Securities Commission (OSC) conducted a survey about cryptocurrency (PDF). It found that 81% of Ontario residents had heard of bitcoin. A nationwide survey the Bank of Canada conducted a year earlier (PDF) found only 64% of Canadians had heard of bitcoin. Last year’s skyrocketing cryptocurrency markets clearly caught the public imagination.
Protecting investors is the driving force behind Canada’s securities regulations. Unsophisticated investors risk losing their savings by buying into bad investments. In many cases, ICOs are really thinly-disguised scams. In other cases, the ICOs are run by people clueless about securities law.
The speculative nature of bitcoin and other cryptocurrencies has gained more public attention. In turn, Canada’s securities regulators themselves are paying more attention.
Prosecuting ICO scams
Canada’s securities regulators are pursuing fraudulent ICOs more aggressively. They have joined American securities regulators in “Operation Cryptosweep” to go after ICO scams.
In an announcement from the British Columbia Securities Commission, Doug Muir said: “Fraudsters are always looking for new ways to attract victims and many are taking advantage of the popularity of cryptocurrencies to perpetrate their schemes.”
“To avoid investment fraud, investors should always check that they are dealing with a registered individual or firm,” Leslie Byberg said in the OSC’s announcement. Byberg warned investors to “carefully consider the risks associated with investing in this novel space.”
The OSC named five crypto companies that “appear to be involved in schemes that target Ontario investors and encourage them to trade or invest in cryptocurrencies.” According to the OSC, the companies BTCReal, BitSerial, Hypercube Ventures, CabinCoin OÜ, and BaapPay are not registered to offer their securities-related services in Ontario.
Stopping Clueless ICOs
Not all bad ICOs are scams. Launching an ICO is so easy, and ICO developers know so little about securities, that some projects unintentionally violate security regulations. Canada’s regulators hope raising awareness in the crypto community will protect investors.
Quebec’s Autorité des marchés financiers and the Alberta Securities Commission issued advisories to help the crypto community understand securities. The British Columbia Securities Commission (BCSC) even went so far as to create a video describing the securities implications of ICOs.
Canada does not have a national securities regulator like America’s Securities and Exchange Commission. All securities laws are set by the provinces and territories. However, that does not make Canada a securities free-for-all. The provincial securities commissioners work together through Canadian Securities Administrators (CSA) to coordinate their work.
Last year, the CSA issued Staff Notice 46-307 “to help financial technology (fintech) businesses understand what obligations may apply under securities laws.” Among those obligations, a prospectus must thoroughly document the company’s finances, executive backgrounds, business risks and more. All of this information lets investors make informed decisions before purchasing shares.
The white papers that ICOs post rarely meet the standards regulators set for a prospectus.
Besides protecting investors, the CSA Staff Notice has words of caution for Canada’s cryptocurrency industry. An ICO that gets classified as a security could have profound effects on crypto exchanges. These companies prefer to call themselves “trading platforms” to distinguish themselves from regulated stock exchanges. But what happens if a cryptocurrency the trading platform lists turns out to be a security?
Under the law, the trading platform becomes an unregistered “marketplace” and could face severe penalties.
Promoting good ICOs
At the same time that regulators are stopping the fraudulent and incompetent ICOs, they are also going out of their way to help legitimate projects. They understand that fintech innovations in general, and cryptocurrency innovations in particular, offer enormous economic benefits. Regulators understand that small startups don’t always have the resources or time to register and comply with every regulation.
The CSA developed a “regulatory sandbox” to give young projects a chance to get on their feet. An ICO, for example, can apply for a 12-month exemption to the prospectus requirements. The sandbox also fast-tracks the registration process. Within the past year, four crypto investment funds and two ICOs enrolled in the sandbox program.
The OSC created its own sandbox program, the Launchpad, for Ontario’s fintech industry. Companies wanting to start crypto or other fintech businesses can get limited, short-term regulatory exemptions as well as guidance through the licensing process.
The BCSC is taking more steps to help British Columbia’s crypto industry. Besides creating a “Tech Team” to help the province’s fintech startups, the BCSC has conducted a series of meetings and surveys to understand where the fast-moving industry is heading.
Most recently, the commission released of a Notice and Request for Comment in early 2018. The BCSC hopes to get feedback on topics ranging from reducing regulatory risks for fund managers investing in ICOs and cryptocurrency to clarifying what makes an ICO a security.
Canadian regulators are going through the same crypto learning process as everyone else. The slow and steady approach of the past few years has fostered a thriving cryptocurrency and blockchain industry, especially in the Vancouver and Toronto fintech hubs.
The challenge facing Parliament and regulators alike is how to continue this support while protecting Canadians from scams. Fortunately, the decision-makers are listening. Rather than reacting to headlines, they are engaging with founders and innovators in Canada’s crypto industry.
With luck, the next round of bitcoin and cryptocurrency laws in Canada will strengthen the country’s crypto-based businesses and keep innovation flourishing.