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.
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.
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:
- 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;
- 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 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;
- 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”:
- 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.
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.
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.