Canada:

Developments In Cryptocurrency Regulation And Enforcement

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Canadian regulators continue to take a collaborative and
cautious approach to regulating the cryptocurrency industry. Due to
the ever-evolving landscape of the industry, regulators have taken
it upon themselves to clarify the regulatory framework, to better
support businesses seeking to offer innovative products, services
and applications, and to protect Canadian investors. This may be a
welcome approach insofar as it fosters increased stability and
predictability, which will serve the industry well in the long
run.

By way of example, the Canadian Securities Administrators
(“CSA”) has published Staff Notice 21-327 Guidance on
the Application of Securities Legislation to Entities Facilitating
the Trading of Crypto-assets
1 (“Staff
Notice”). The Staff Notice describes situations where
securities legislation will and will not apply to platforms
facilitating crypto-asset transactions. In particular, it confirms
that securities legislation governs not only trading in
crypto-assets that are clearly securities, but also trading in
contracts or instruments that are derivatives based on
crypto-assets. Securities legislation will therefore apply to
platforms that facilitate the trading of crypto-assets as
commodities, whereby the user’s contractual right to the
crypto-asset may constitute a derivative.

Conversely, the Staff Notice sets out the following conditions
under which securities legislation will not apply:

  • The underlying crypto-asset itself is not a security or
    derivative; and
  • The contract or instrument for the purchase, sale or delivery
    of a crypto-asset results in an obligation to make immediate
    delivery of a crypto-asset, and is settled by the immediate
    delivery of the crypto-asset to the Platform’s user according
    to the Platform’s typical commercial practice.

Overall, the Staff Notice can be seen as a part of an ongoing
effort to help stakeholders better navigate the evolving regulatory
regime.

As another example and in a further attempt to foster increased
transparency, reliability and security in the cryptocurrency space,
amendments to the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act 2019
now require all dealers in
virtual currency that service Canadian customers to register with
the Financial Transactions and Reports Analysis Centre of Canada
(“FinTRAC”). These entities are now subject to similar
due diligence, record keeping, monitoring, and reporting
requirements as other reporting entities. Some of these
requirements include identifying all clients, appointing a
compliance officer, and maintaining records of clients and
transactions. In addition, any “reporting entity” that
receives $10,000 CAD or more in cryptocurrency must now identify
the sender, record details of the transaction, and report the
transaction to FinTRAC. In order to ensure compliance, FinTRAC is
authorized to impose Administrative Monetary Penalties
(“AMPs”) on any entity that does not comply and can
revoke registrations where entities have failed to pay the
AMPs.

Collaborative Approach with Industry Stakeholders

Wealthsimple Digital Assets Inc. has been granted permission to
operate Canada’s first regulated crypto trading platform under
CSA’s “regulatory sandbox,” an initiative designed to
allow firms to test innovative ideas with exemptive relief from
securities laws requirements.2 Wealthsimple plans to
operate on a beta testing basis and solicit feedback from early
users to improve the platform before it transitions to normal
operation. Wealthsimple’s successful application to the
regulatory sandbox represents another example of the CSA’s
collaborative approach to developing regulatory requirements with
the input of industry stakeholders.

Increased Enforcement Efforts

On the flipside to industry collaboration, recent events
indicate that provincial securities commissions are using the
registration requirement to bring enforcement proceedings against,
and protect investors from, fraudulent parties.

This approach was adopted by the OSC in the Matter of Miner
Edge Inc. et. al.
,3 where the accused is alleged to
have falsely promised investors that their funds would be used to
invest in a crypto mining venture. The OSC has made allegations of
fraud, alongside allegations that the accused engaged in trading
and distributing securities while not being registered to do so.
This approach was also adopted in the Matter of ASBC Financial
and Walter Turner
,4 where the accused were
prosecuted for having engaged in the business of trading and
advising in securities of underlying crypto-assets without being
registered to do so, rather than the more serious alleged
infraction of defrauding an investor out of $190,000.

The motivation to adopt this approach is likely due, at least in
part, to the significantly less onerous proof requirements involved
in prosecuting alleged failures to comply with the applicable
registration requirements. We would expect regulators to continue
utilizing this approach as the regulatory framework continues to
mature and as long as it continues to serve as a uniquely efficient
means of enforcing breaches of the Securities Act
committed by actors in the crypto industry.

Footnotes

1 CSA Staff Notice 21-327, Guidance on the
Application of Securities Legislation to Entities Facilitating the
Trading of Crypto-assets
.
2 2020 OSCB 6548.
3 2019 SECPOLY 631032676005.
4 2020 SECPOLY 636747441005.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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