Navigating the Digital Dice: The Changing Landscape of Gambling Regulation in Ontario

Ontario, Canada's most populous province, is undergoing a transformative shift in its approach to online gambling regulation.

As the digital age continues to redefine how people interact with the world, the way we engage with games of chance and skill is also evolving. Ontario's lawmakers and regulators find themselves at a crossroads, facing the challenge of adapting an antiquated framework to an era of online gaming and technological innovation.

In this article, we embark on a journey through the rapidly changing landscape of online gambling regulation in Ontario.

A brief overview of the gambling industry in Canada

Canada has its own regulation of the gambling industry. In order to carry out any gambling-related activity in Canada, you must obtain regulatory approval (usually at the provincial level).

At the same time, the provisions of Section 6 of the Criminal Code of Canada indicate that provincial regulators cannot grant permission to third parties to conduct gambling that takes place on a computer, video device, slot machine (i.e. online gambling). Thus, these provisions of the Criminal Code of Canada only authorize provinces to conduct online gambling themselves.

According to statistics, the money turnover in the gambling sector in Canada in 2021 was $12.5 billion, and the same figure was in 2022.

Considering the popularity of gambling, the province of Ontario, Canada has come up with its own model on how to make online gambling legal and supplement its budget with it. To this end, Ontario has utilized iGO and AGCO  iGaming Ontario (hereinafter – “iGO”) и Alcohol and Gaming commision Ontario (hereinafter – “AGCO”). What these bodies are and why they are needed – let’s take a look at them next.

Ontario’s online gambling model

It is worth starting with the fact that the regulator of gambling in Ontario is the Alcohol and Gaming commision Ontario  -AGCO.

The main regulation that governs gambling in Ontario is the Gaming Control Act of Ontario (1992).

In June 2021, lawmakers approved Bill C-218, known as the Safe and Regulated Sports Betting Act. This Act gave the provinces the ability to implement single sports betting systems in Canada and effectively gave the provinces the right to conduct online gambling.

Ontario’s regulator, the AGCO, has created a subsidiary company for this purpose, iGaming Ontario, which is authorised to carry out online gambling.

Given the strict limitations of the Criminal Code (prohibition on licensing third parties to conduct online gambling) – Ontario has devised an approach whereby iGaming Ontario enters into a commercial agreement with a third-party gambling service provider (usually from other jurisdictions) and effectively “leases” its licence. Clearly, the business model is as follows.

What do you need to do online gambling with iGaming Ontario?

It is mandatory for organisations operating Internet gaming sites in Ontario to register as Internet gaming operators. Based on the variety of structures and practices of companies, there is no definitive list of activities that defines what is meant by “operating a gaming site”. In general, operating a gaming site in the gambling industry involves ongoing responsibility for the entire gaming site, including:

  • Making strategic decisions.
  • Ensuring compliance with all requirements relating to the gaming site.
  • Managing supplier relationships, including the selection of Gaming Related Suppliers.

In order to legally operate a gambling website in Ontario, a regulatory fee must also be paid. For example, the operator of an Internet gambling site is required to pay a regulatory fee of $100,000 annually for each gambling site.

It is also important to emphasise that the subject of the authorisation is the website. Thus, in order to conduct online gambling through a network of websites – it will be necessary to register each website.

In addition, the step-by-step procedure for registering with AGCO and iGaming Ontario is outlined on the official iGaming Ontario website. The steps required include, among others, the following:

  • NDA with iGaming Ontario;
  • AGCO registration;
  • setting up access and secure channels;
  • developing policies and other measures to monitor compliance with the standards of the regulator, the AGCO;
  • filing required information with iGaming Ontario and the AGCO;
  • entering into an operating agreement with iGaming Ontario.

At the time of application for authorisation to the AGCO, it is necessary to provide detailed information on the business activities of the Gaming Platform Operator (website), financial statements, corporate structure, incorporation documents and other necessary documents.

Additionally, the legal aspects of applying to the AGCO are regulated in the Internet Gaming Operator Application Guide.

What are the rules for internet gaming operators in the AML field?

The AGCO Standards require Internet gaming operators to comply with stringent AML/CFT measures. 

For example, an Internet gaming operator must ensure that anti-money laundering policies and procedures are in place to support its obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

AGCO requires that operators, as a minimum, develop the following control measures:

  • implement policies, procedures and controls that define risk-based times and situations where the Operator will identify and reasonably confirm the source of a player’s funds;
  • implement risk-based policies and procedures that provide for enhanced measures to deal with players whose behaviour is consistent with indications of money laundering, including refusal of transactions or exclusion of the player;
  • ensure that mechanisms are in place to legally share information about high-risk or suspicious activities with other Operators who may also be subject to similar activities.

Conclusions

Thus, the Ontario government has developed a model whereby third-party suppliers can enter the online gambling market in Canada. This solution helps to fill local budgets and also brings the online gambling business, which was previously in Canada, out of the shadows.

The ability to get authorisation to provide their services in Canada is also terrific news for Gaming Website Operators. With a clearly regulated registration procedure and clear requirements – the latter can expand their business to Canada and do so with absolutely clear legal consequences.

FAQ

Are Internet gaming operators required to have a registered entity in Canada? 

No. There is no such requirement.

Do players have to be residents registered in Ontario? 

A player’s residency status is not a factor in determining whether they can play on websites offered by registered and authorised operators. The requirement is that players must be physically located in Ontario to play legally.

Notwithstanding the above, players can register and operate their account (e.g. deposit or withdraw funds) while physically located outside of Ontario.

How long does it usually take to complete the registration and authorisation process for an Internet gaming operator? 

Each case is different, but typically operators should expect a minimum of 90 days to complete all registration procedures with the AGCO and sign an Operating Agreement with iGaming Ontario.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation. 


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Canada: Legal clarity regarding Stablecoins

The supervisory authority for securities in Canada - Canadian Securities Administrators (CSA) has provided specific guidelines regarding the trading and issuance of stablecoins.

The supervisory authority for securities in Canada – Canadian Securities Administrators (CSA) has provided specific guidelines regarding the trading and issuance of stablecoins. CSA provided further instructions to cryptocurrency trading platforms regarding its “interim approach” for dealing with the trading of crypto assets that are tied to a specific value (including those commonly known as “stablecoins”).

On February 22, 2023, CSA restated its perspective that crypto assets, which are structured and promoted with the intention of maintaining a consistent value over time relative to a reference asset, could be considered as securities and/or derivatives. Although crypto asset trading platforms in Canada are restricted from trading crypto assets categorized as securities and/or derivatives, the CSA recognizes that value-referenced crypto assets might have specific utility for Canadian clients using these platforms.

In line with this, the CSA has suggested that it might consider permitting, with certain stipulations, the ongoing trading of specific value-referenced crypto assets that are linked to the value of a sole fiat currency (referred to as fiat-backed crypto assets). The notice released on October 5, 2023 outlines provisional terms and conditions that would be in effect for cryptocurrency trading platforms and the creators of fiat-backed crypto assets if they intend to enable Canadian clients to continue buying or depositing these assets.

Stan Magidson, the Chair of the CSA and the Chair and CEO of the Alberta Securities Commission, emphasized the importance of transparency regarding the makeup and sufficiency of reserves, as well as the governance of value-referenced crypto assets. These aspects are crucial to safeguard Canadian investors and maintain the integrity of our financial markets. The interim framework, which serves as a foundation for future developments, establishes specific standards aimed at ensuring that investors are provided with the necessary information about the assets they are acquiring, including associated risks.

The interim terms and conditions have been shaped, in part, by feedback from participants in the Canadian cryptocurrency market, as well as the evolving global standards and regulations. Their purpose is to tackle concerns related to investor protection associated with value-referenced crypto assets. These provisions encompass various elements, including the following:

  • The entity issuing the value-referenced crypto asset is required to uphold an adequate reserve of assets, safeguarded by a qualified custodian, for the benefit of the holders of the crypto asset. 
  • Both the issuer of the value-referenced crypto asset and the cryptocurrency trading platforms that provide them must disclose specific information pertaining to their governance, operations, and asset reserves for public access.

The comprehensive set of terms and conditions, along with guidance for cryptocurrency trading platforms that intend to permit clients to purchase or deposit value-referenced crypto assets, can be found in CSA Staff Notice 21-333 titled “Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients.” This information is accessible on the websites of CSA members.

The CSA wants to alert Canadian investors to the fact that value-referenced crypto assets, even those fiat-backed crypto assets that meet the provisional terms and conditions, carry several risks and should not be equated with traditional fiat currency. The mere fact that an asset complies with these interim terms and conditions should not be interpreted as an endorsement or certification of the asset, nor should it imply that the asset is devoid of risks.

The CSA is open to receiving input on the suitable long-term regulatory framework for value-referenced crypto assets, including potential criteria for trading various types of value-referenced crypto assets. Crypto asset trading platforms and issuers of such assets are encouraged to reach out to their Principal Regulator for inquiries or to engage in further discussions.The CSA plays a role in coordinating and aligning regulations within the Canadian capital markets. 

Key takeaways for the businesses

After conducting thorough due diligence, the regulator requires investment funds to determine whether the crypto assets they intend to invest in qualify as securities or derivatives. Additionally, it reminds investment managers that they are not permitted to lend assets that do not fall under the category of securities.

The document also outlines the “minimum expectations” for the custody of crypto assets. These expectations encompass practices such as primary storage in cold wallets, segregation of assets, transparency through blockchain visibility, obtaining insurance coverage for corporate crime, and providing reports to fund auditors.

The issue of crypto staking is addressed as well. Should issuers uphold an adequate asset reserve with a qualified custodian and should cryptocurrency exchanges that provide stablecoins disclose “specific details concerning governance, operations, and asset reserves for public access,” the CSA may consider permitting the trading of such assets. The CSA confirms that staking is not explicitly prohibited, but it expects fund managers to exercise caution to prevent liquid crypto assets from becoming illiquid during staking. Compliance with illiquidity restrictions is emphasized.

In conclusion, the recent regulatory developments in the Canadian cryptocurrency landscape have introduced both challenges and opportunities for investors, investment funds, and cryptocurrency-related businesses. The guidance provided by the Canadian Securities Administrators (CSA) underscores the importance of comprehensive due diligence, compliance, and risk management in this evolving field.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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Cryptocurrency regulation in Canada

While the governments around the globe stay separated on how to regulate the rising class of digital currency, the Canadian government is attempting to respond to capital market developments.

Regulators seem to recognize the importance of innovation and market integrity, as the Bank of Canada is considering the issuance of a central bank digital currency to support the resonance of the digital economy. So it is worthy to shed some light on existing regulatory measures in Canada to see what is happening in the landscape of virtual currencies.

Legislative framework

As per article 8 of the Currency Act, legal tender is those coins issued under the Royal Canadian Mint and notes issued by the Royal Bank of Canada, thus crypto assets are not legal tender in the country. Rather Canada treats cryptocurrency as a security and cryptocurrency service providers are treated as money service businesses (hereinafter referred as: “MSB”). Provincial and territorial security laws apply to cryptocurrencies, while the normative framework across the country is substantially harmonized and streamlined, along with specific discrepancies in regional laws.

Regulators

There are a number of regulatory bodies that supervise cryptocurrency activities:

  • The Financial Transactions and Reports Analysis Centre of Canada (hereinafter: “FINTRAC”) is Canada’s financial intelligence unit responsible for investigating financial crime. FINTRAC has oversight of all crypto-asset firms. Starting from June 2021, the virtual currency exchange must undertake registration as MSBs and comply with applicable market valuation and margin requirements.
  • Canadian Securities Agency, (hereinafter referred as: “CSA”) oversees the nation’s provincial and territorial security regulators to govern Canada’s capital markets.
  • The Canadian Revenue Agency (hereinafter referred as: “CRA”) is the main tax collection body.
  • The Investment Industry Regulatory Organization of Canada (hereinafter referred as: “IIROC”) is a self-regulating and non-profit organization which establishes the industry norms for all security, debt and equity dealers.

Interpretation of terms and activities

FINTRAC defines a virtual currency as a ‘digital representation of a value that can be used for payment purposes, that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value.’ Moreover, FINTRAC also interprets virtual currency service providers as dealers exchanging and transferring crypto assets.

Initial Coin offerings (“ICOs”) and Initial Token Offerings are regulated by CSA if they are considered to be financial security. The CSA announced staff notice on cryptocurrency offerings to outline if an ICO is deemed to be a security or a software product and to determine the application of security law.

In 2019, CSA and IIROC have jointly published a consultation paper to propose a regulatory framework for crypto asset trading platforms (hereinafter referred as:- “CTPs”). In accordance with regulators’ explanation, CTPs handle either with crypto assets which are securities or derivatives; or crypto assets, while not considered as securities or derivatives, held on account of customers as a security, thus subject to security laws.

In line with that, on March 21, 2021, CSA and IIROC also issued a staff notice No. 21-329, on guidance for CTPs on compliance with regulatory requirements. The notice also laid out the requirements for businesses in cryptocurrency exchange:

  • Marketplaces:
  1. these platforms are subject to registration as investment dealers and acquire membership of IIROC in case they carry out the same activities as dealers or have custody of client assets;
  2. additionally, marketplaces offering security tokens or crypto contracts services might require prospectus exemptions for facilitating the distribution of trades in tokens and crypto contracts.
  • Dealers:
  1. dealers that allocate or trade security tokens or enter into crypto-contracts solely on a prospectus exempt basis and that don’t offer margin or leverage may register as exempt market dealers or restricted dealers;
  2. in general, dealers which offer margin or leverage for security tokens, or services to retail investors in either security tokens or crypto contracts should be registered as investment dealers and become members of IIROC.
  • Two-year “interim approach”:
  1. to promote innovation and offer flexibility to growing exchange platforms, the notice also prescribes a two year transition period (interim approach) during which CTPs can get restricted dealer registration with CSA and seek IIROC membership, given that they don’t offer leverage or margin trading. In the interim, IIROC works with CTPs to foster market integrity and investment protection while ensuring they operate in a properly regulated setting. This period allows new market participants to adjust to strict rules and procedures so they will have enough time to adopt proper internal standards.

CSA and IIROC also explained that CTPs and dealers must register with provincial regulators around the country.

Fighting against money laundering and terrorist financing

As Canada implements similar regulatory measures to cryptocurrency exchanges as other MSBs, they must comply with FINTRAC’s anti-money laundering and combating terrorist financing (hereinafter referred as: “AML/CFT”) requirements. Hereby, crypto service businesses must have working systems set for due diligence, reporting, verification and record-keeping to mitigate this type of risk.

Entities dealing with virtual currencies are regulated under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (hereinafter referred as: “PCMLTFA”), FINTRAC being the primary supervisor over the activities conducted as MSBs. Under the PCMLTFA, Virtual Asset Providers should identify and verify their customers for particular specified activities and transactions and to maintain relevant customer records.

As of June 2021, FINTRAC’s updated guidance came into force for ‘know your customer’ requirements for MSBs which needs to be compiled in line with PCMLTFA. The Guidance clarifies that electronic funds transfer, suspicious, large cash or large digital currency transactions or transactions which are alleged to be controlled by a terrorist organisation must be reported and submitted to FINTRAC. To be more precise:

  • 10,000 CAD (6,960 EUR) or more in virtual assets received within 24 hours;
  • 3,000 CAD (2,090 EUR) or more in foreign exchange transactions;
  • 1,000 CAD (670 EUR) or more in virtual asset transfers, capital transmissions, virtual asset exchanges (including both crypto-to-crypto and fiat-to-crypto), virtual asset remittance to a beneficiary and electronic funds transactions;
  • regardless of the amount, any operation which might cause suspicion.

Virtual currency operators entities are contingent on regular inspections by FINTRAC for compliance with regulatory policies. businesses should appoint compliance specialists and make sure that working AML/CFT internal procedures are in place.

Tax treatment

CRA considers the virtual assets to be commodities, hence transactions carried out using these assets are held to be barter transactions. As of 2013, CRA taxed cryptocurrency transactions as capital gains or business income under the Income Tax Act. While declaring transactions with cryptocurrencies, the value of gains and losses should be converted into fiat currency (Canadian dollars) to calculate a reasonable market value. When virtual currencies are taxed in the form of business income, 100% of the income is taxed, while capital gains are taxed only for 50%. Hereby, taxpayers should report the full amount of income gained from cryptocurrency transactions.

Final remarks

In 2017, the securities commission of British Columbia registered in Canada the first investment fund that trades exclusively with cryptocurrencies. In February of 2021, Ontario Securities Commission announced the launch of the first bitcoin exchange-traded fund (Bitcoin ETF) in Canada, followed by the approval of the three Ethereum exchange-traded funds to trade on the Toronto Stock exchange. All things considered, the emerging nature of the digital economy is necessitating the growing need to adopt more flexible standards and norms. Providing more access to cryptocurrency triggers an interest in trading in the virtual assets ecosystem, thus more transparent exposure is needed to regulate progressive security class, while industry stakeholders should take relevant measures to comply with statutory requirements. Before the Canadian government considers any further rulings, time is needed to see the ultimate outcomes of the recent legislative developments in the cryptocurrency domain.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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