Crypto-KYC in Canada
Crypto-KYC in Canada
Chetan Phull · Feb 8, 2018
Introduction
One of the key features of the “be your own bank” movement is the anonymity with which crypto-funds can be transferred. There are merited concerns that this aspect of cryptocurrency enables money laundering and terrorist financing.
The legislation in Canada dealing with money laundering and terrorist financing is:
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”); and
PCMLTFA Regulations (“PCMLTFR”).
The initial compliance-question is whether a given person or business is “dealing in virtual currencies”. This question was discussed in our previous blog post, “Virtual Currency Regulations in Canada: Will Your Blockchain Business Be Affected?”
A person or business “dealing in virtual currencies” will soon also be a “money services business” (“MSB”), pursuant to the PCMLTFA, on a day to be fixed by the Governor in Council. This provision is expected to come into force after virtual currency regulations come into force (see FINTRAC’s statement dated July 30, 2014).
The present blog post is concerned with “crypto-KYC”. This is our term for the KYC requirements imposed on persons and businesses that are MSBs as a result of "dealing in virtual currencies".
What are the Main Crypto-KYC Requirements?
MSBs must ascertain the identity of every person who seeks to: (1) transact $1,000 or more, or (2) issue/redeem a negotiable instrument (e.g. money order or cashier’s cheque) for $3,000 or more. The latter rule applies as well to foreign currency transactions. (See PCMLTFR, ss.59 to 59.01.) (Note that all dollar amounts refer to CAD after conversion, pursuant to PMCLTFR, s.2(b).)
For any transaction amounting to $10,000 or more within a 24-hour period, unless such transaction involves cash paid by a financial entity or public body, the relevant parties to the transaction must be identified (PCMLTFR, ss.53, 29, 3, 1 “large cash transaction record”).
Moreover, records must be kept of employees who are authorized to transact under the following types of agreements (PCMLTFR, s.32):
agreement for ongoing fund transfers/remittance;
service agreement for foreign exchange; or
service agreement to issue/redeem “negotiable instruments”.
There are additional rules for ascertaining and recording the identity of politically exposed foreign persons (see PCMLTFR, ss.59(5), 54.2(1), 56.1, 67.2(5)).
More Crypto-KYC Regulations?
The Governor in Council has jurisdiction to regulate in respect of: (1) virtual currency dealings, and (2) verification of identities. (See PCMLTFA, ss.71(1)(a) and (c), 6.1, 5.)
Given the increasing KYC concerns presented by anonymous cryptocurrency activity, further KYC requirements specific to "businesses dealing in virtual currencies" should be expected.
We recommend that you consult a blockchain / cryptocurrency lawyer for a KYC compliance plan that: (1) anticipates upcoming regulations and their effect on your particular business model, and (2) supports defences against allegations of money laundering and terrorist financing. We service clients in this area further to our KYC service offering.
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