Financial Institution Regulations


Financial Institution Regulations

Part 5 of the “Smartblock Law Guide to Cryptocurrency Contracts, Litigation, Monetary Instruments, and Financial Institution Regulations in Canada”


Chetan Phull · April 26, 2018


The “Smartblock Law Guide to Cryptocurrency Contracts, Litigation, Monetary Instruments, and Financial Institution Regulations in Canada” is comprised of:

I. Introduction

Various financial institutions in Canada are federally regulated, “so as to contribute to the public confidence in the Canadian financial system” (Office of the Superintendent of Financial Institutions Act, R.S.C., 1985, c. 18 (3rd Supp.), Part I, (“OSFI Act”) ss.3.1, 4(4)).

Among the institutions regulated are statutory banks and statutory trust companies, which are respectively governed by the Bank Act and the Trust and Loan Companies Act (“TLCA”) (see OSFI Act, s.3 “financial institution”, 6(1), Schedule to Part I).

Every cryptocurrency business in Canada should determine whether it is in substance operating as a bank. The answer will determine whether the business must be registered under the Bank Act and regulated as a bank, or whether the business may be regulated under the Trust and Loan Companies Act or some other legislation.

Cryptocurrency businesses that regularly hold or facilitate cryptocurrency transfers may also wish to consider obtaining membership in the Canadian Payments Association, discussed below.


II. Bank vs Trust Company

Any business engaged in “the business of banking” must be incorporated or continued under the Bank Act, and is subject to the Bank Act (Interpretation Act, RSC 1985, c I-21, s.21(3); Bank Act, ss.2 “bank”, 13, 14; Canadian Pioneer Management Ltd. et al. v. Labour Relations Board of Saskatchewan et al., [1980] 1 SCR 433 at 463 [“Canadian Pioneer”]; Canada Business Corporations Act, RSC 1985, c C-44, s.3(4)).

The question of whether a business is in fact engaged in “the business of banking” is important. In Canada, such classification carries various duties and regulatory requirements under the Bank Act.

Moreover, although banks have been held not to owe common law fiduciary duties in the absence of exceptional circumstances, such exceptional circumstances appear to be broad and “quite muddy”. (Compare Re*Collections Inc. v. Toronto-Dominion Bank, 2010 ONSC 6560 (CanLII) at para. 142; M.H. Ogilvie, Bank and Customer Law in Canada, 2d ed. (Markham, Ontario: Irwin Law, 2013) at 202-237 esp 219).

Whether a given business is a bank, or engages in banking, requires fact-specific consideration. Consider that:

Banking is both so complex and dynamic that there may well be no essential core for a court to identify…. Notwithstanding the complex and comprehensive legislation in relation to banking, Parliament has left room for the courts to operate when specific issues of jurisdiction and definition arise….

[M.H. Ogilvie at 10.]

The difficulty in determining whether a business is operating as a bank is compounded by the different rights of banks between jurisdictions and at different times in history. (See Re*Collections at para 134; Central Computer Services Ltd. v. Toronto-Dominion Bank, 1979 CanLII 2681 (MB CA) at paras. 4, 47, 50; Canadian Western Bank v. Alberta, 2003 ABQB 795 (CanLII) at paras. 146 and 159.)

It has been held—very generally—that “banking” includes the act of obtaining “information which formerly ... clients had in their own ledgers where the entry had manually been made by employees and servants” (Central Computer at para. 7). However, this view is probably not a core distinguishing feature of banking. If it were, almost every business would be engaged in “the business of banking” and be subject to the requirements of the Bank Act.

It has also been held, more specifically, that “banking” includes “activity which aids in providing funds ‘at the lowest cost to borrowers and the highest return to savers’” (Canadian Commercial Bank (Re), 1986 CanLII 1644 (AB QB)at para. 10).

Moreover, the attempted creation of a new medium of exchange has been considered to be, in pith and substance, “banking” (Reference Re Alberta Statutes, [1938] S.C.R. 100, discussed in Part 1; however, consider Canadian Western Bank v. Alberta at para. 159).

On this basis, it would appear that many cryptocurrency businesses—particularly those that issue cryptocurrency—may be subject to the Bank Act.

However, notwithstanding the foregoing, we note that the Supreme Court of Canada has stated: “the safe-keeping of securities appertains much more … to the business of a trust company than to that of a bank” (Canadian Pioneer at 453).

As was discussed in our earlier article, “The Law of ICOs/ITOs: Simplified,” a cryptocurrency token can be a security under Ontario’s Securities Act. On this basis, it would appear that a given cryptocurrency business could be a trust company instead of a bank.

Note, however, that a finding of ongoing banking activity may prevent classification as a trust company under the TLCA (Canadian Pioneer, [1980] 1 SCR 433 at 463-65). Any related analysis should consider that both banks and trust companies are permitted to provide “financial services” (Bank Act, s.409(2)(a); TLCA, s.409(1); Canadian Western Bank at paras. 140, 142, 157).

If the business is a trust company, it is not subject to the requirements of the Bank Act. It may be subject to the requirements of the TLCA, although it is uncertain whether incorporation or continuance under the TLCA would be compulsory (see TLCA, ss.12, 21, 25(1), 26). This question merits further research because, for example, there are restrictions on deposit taking that statutory trust companies must observe (TLCA, s.413).

We suspect that the business classification may ultimately depend on how the business treats cryptocurrency in its possession (i.e. as a security, currency/money, commodity, facilitator of services, etc.), and how it deals with its users/customers.

We invite you to consider our service offering, “Financial institution regulations and fiduciary obligations”, further to the above discussion.


III. Payment Systems

The Canadian Payments Act, R.S.C., 1985, c. C-21 (“CPA”) governs the “regulation of systems and arrangements for the making of payments” (CPA, subtitle).

Under the CPA, the designation of a payment system in the public interest is at the option of the Minister of Finance (CPA, s.37(1), 36 “payment system” and “rule”).

On this basis, it is entirely foreseeable that cryptocurrency payment mechanisms will eventually be subject to regulation under the CPA.

The CPA also establishes the Canadian Payments Association (“the Association”) (CPA, s.3(1)). Membership in the Association is compulsory for “every bank” (CPA, s.4(1) and (3)), and optional for most trust companies (CPA, s.4(2)(a)).

The Association’s objects include, “to facilitate the development of new payment methods and technologies” (CPA, s.5(1)(c)). Moreover, it has been argued that the Association has an exclusive mandate to run the national payments systems (Guy David, “Money in Canadian Law”, (1986) 65 Can. Bar Rev. 192 at 201).

This practical influence and objective would appear to be an advantage to Association members, on account of the Minister’s rights to:

  1. issue guidelines and directives to the manager or participants of a payment system (CPA, ss.39(1) and 40(1)); and

  2. exercise the option to not consult any interested party in issuing such guidelines and directives (CPA, ss.37(3) and 40(2)).

Members of the Association are also exclusively permitted to clear and settle payment items (i.e. financial instruments as discussed in Part 4) (CPA, s.29; Re*Collections at para 30).

On this basis, membership in the Association may be a “practical requirement” for any cryptocurrency business that offers services related to the deposit of financial instruments or electronic payments (non-cryptocurrency), since the alternative is to operate with an ongoing “relationship with a direct clearer” (Re*Collections at paras. 12, 14, 16).

For an opinion tailored to your business, we invite you to contact us further to our “Payment system issues” service offering.


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