Virtual Currency Regulations in Canada: Will Your Blockchain Business Be Affected?
Virtual Currency Regulations in Canada: Will Your Blockchain Business Be Affected?
Chetan Phull · Feb 8, 2018
Introduction
If you or your business is "dealing in virtual currencies", registration with FINTRAC will be required (see PCMLTFA, ss.11.1, 261), in addition to additional regulatory compliance.
The Canadian federal Governor in Council has the power to regulate persons and businesses "dealing in virtual currencies" (see PCMLTFA, s.73(1)(a)).
Although this power has yet to be exercised, we anticipate that Canadian regulations on virtual currencies will be released relatively soon, on the basis of the following:
the original intent to enact virtual currency regulations since mid-2014;
the increase of novel virtual currency applications and mechanisms, even if only in the initial stages (for example, see our earlier blog post, "Toronto May Soon Drive Virtual Currency Laws Across Canada"); and
the increasingly regulated landscape for virtual currency activities generally. Quebec has been regulating ATM virtual currency activity since 2015 (see Autorité des marchés financiers, policy statement dated February 6, 2015, at Part 1(5)). Moreover, general virtual currency rules were enacted in New York State in 2015, and the ULC drafted a virtual currency model code in 2017 which is being promoted for adoption in all U.S. states (see our previous post, “Your Blockchain Business Needs a Blockchain Lawyer”).
Will the Virtual Currency Regulations Apply to Your Business?
The Canadian regulations are anticipated “to cover entities such as virtual currency exchanges, not individuals or businesses that use virtual currencies for buying and selling goods and services.” This was provided in a FINTRAC statement dated July 30, 2014.
While such application is consistent with the virtual currency rules enacted in New York State (s.200.3(c)(2)), and the ULC model code (s.103), there is unfortunately little additional guidance at present.
In these circumstances it is helpful to consider a U.S. perspective. The commentary to s.103 of the ULC model code indicates an intention to regulate persons that engage in one or more of the following activities:
issuing virtual currencies;
providing services that allow others to transfer virtual currencies;
providing virtual-currency exchange services to the public; and
offering to take custody of virtual currency for other persons.
It is foreseeable that the same or similar objectives will appear in Canada’s virtual currency regulations. On this basis, we anticipate that the Canadian regulations will apply to the following types of businesses:
cryptocurrency developers;
cryptocurrency miners;
cryptocurrency exchanges;
cryptocurrency brokerages;
cryptocurrency clearing houses;
cryptocurrency investment firms;
cryptocurrency ATMs;
cryptocurrency wallets or other bank-like businesses;
cryptocurrency bailment companies;
businesses offering rewards, points, or coupons through a blockchain mechanism;
cryptocurrency trust companies; and
gambling establishments which accept bets in cryptocurrency.
This list is by no means exhaustive and is not restricted to the private sector. For example, government entities collecting taxes and levies by means of crypto-payments may also be subject to the virtual currency regulations. (See our previous blog post, “Toronto May Soon Drive Virtual Currency Laws Across Canada”, as an example of a proposed municipally administered crypto-payment system.)
Moreover, any blockchain business that holds tokens and facilitates their use as a cryptocurrency (for example, through smart contract micropayment operations), may also be caught by the regulations. This applies to both public and private blockchains.
Every blockchain business model should be considered on its own merits, to determine the likelihood of being caught by the upcoming regulations.
We recommend that every blockchain business consult a cryptocurrency lawyer to:
assess the probability that the blockchain business is “dealing in virtual currencies”; and
develop a customized set of compliance strategies and policies.
These measures will help with navigation through the upcoming regulatory storm. We offer additional measures tailored to your business as part of our virtual currency service offerings.
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