Cryptocurrency

 

Cryptocurrency

 
 
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Contracts denominated in cryptocurrency

Canadian cases  indicate that cryptocurrency could be "money". U.S. cases indicate that cryptocurrency definitely is "money". This presents a problem under Canadian law, because contracts denominated in cryptocurrency are not legal if the cryptocurrency is treated as "money". (See our article, "Cryptocurrency Can’t Be “Money” in Canadian Commercial Law".)

Treating cryptocurrency as a commodity does not entirely fix the problem, because such treatment has negative GST-HST implications. (See our blog post, "The CRA’s Present Position on Crypto-Tax.)

As your cryptocurrency lawyers, we will work toward achieving contract mechanisms and results that are "normal", or at least predictable. We approach cryptocurrency contracts with an appreciation of:

  • the relevant "money" cases in Canada and the U.S; and
  • drafting subtleties required to navigate the above "money" issues. 

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Virtual currency regulations, including operation as a "money services business"

Canadian federal regulations have been released in draft for persons and businesses "dealing in virtual currencies".

As your cryptocurrency lawyers, we will assess the probability of your business being a money services business as a result of "dealing in virtual currencies", and develop a customized set of compliance strategies and policies. (See our blog post, "Virtual Currency Regulations in Canada: Will Your Blockchain Business Be Affected?")

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Anti-money-laundering (AML) issues

We assess compliance with regulatory requirements for money services businesses that deal in virtual currencies, under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its Regulations.

New draft Canadian AML regulations have been released. Once passed, a (revised) version of these draft regulations will be federally binding.

As your blockchain and cryptocurrency lawyers, we will develop a customized set of compliance strategies and policies that consider your AML position today, and when the new regulations come into force.

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Know Your Client (KYC) issues

Canadian regulations, which address KYC requirements for persons and businesses "dealing in virtual currencies", have been released in draft.

These draft regulations address the issue of anonymous crypto transfers facilitating money laundering and terrorist financing. (See our blog post, "Crypto-KYC in Canada".)

As your cryptocurrency lawyers, we will:

  1. assess your risk associated with current and foreseeable KYC issues;
  2. assess your compliance with current and foreseeable regulations; and
  3. develop a customized set of compliance strategies and policies.

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Crypto trading and related tax issues

The CRA does not recognize cryptocurrency as national legal tender. It has stated that GST-HST is applicable to trades for goods or services depending on fair market value in CAD.

As your cryptocurrency lawyers, we will assess how this position affects to your particular business model and transactions pursuant to the Income Tax Act and the Excise Tax Act. (See our "Crypto-Tax Primer" blog series.)

For cryptocurrency exchanges and wallets—we will assess whether your users' activities invoke GST-HST tax liability for the following types of transactions performed between initial account funding and interim/final withdrawals:

  • fiat-to-cryptocurrency;
  • cryptocurrency-to-fiat;
  • cryptocurrency-to-cryptocurrency; and
  • fiat-to-fiat.

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Crypto value manipulation issues

We are equipped to assess whether the foreseeable use of your token may attract exposure under the fraud and market manipulation provisions of Ontario's Security Act and the Criminal Code. (See our article, "Foreign Issued Tokens Traded Over-the-Counter in Canada".)

As your blockchain and cryptocurrency lawyers, we will provide feedback on your business plan and token mechanisms to limit the risk of attracting such exposure.

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Financial institution regulations, and fiduciary obligations

Depending on the business model, a cryptocurrency exchange or wallet business could in substance be engaged in "banking", and be required to continue operations under the Bank Act. Alternatively, continuation under the Trust and Loan Companies Act may be required. (See our article, "Financial Institution Regulations".)

At the very least, there may be fiduciary obligations owed, including those of an administrative nature to charge and remit GST-HST for all on-platform trades. (See our blog, "Crypto-Exchange/Wallet Tax Issues".)

As your cryptocurrency lawyers, we will consider your business operations to develop a strategy for minimizing the risk and/or impact of such obligations.

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Cryptocurrency monetary instruments

It is not presently possible under Canadian law to create an "inland" cryptocurrency monetary instrument. However, it may be possible to create a "foreign" cryptocurrency monetary instrument.

The creation and use of such an instrument would require an appreciation of the Canadian cases that distinguish legal tender from monetary instruments. (See our article, "Cryptocurrency and Monetary Instruments".)

As your cryptocurrency lawyers, we will draft a legal plan that most closely aligns your cryptocurrency monetary product with its intended objectives.

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Payment system issues

The designation of a payment system in the public interest is at the option of the Minister of Finance. On this basis, it is entirely foreseeable that cryptocurrency payment mechanisms will eventually be subject to regulation under the Canadian Payments Act.

As your cryptocurrency lawyers, we will assess what this could mean for your business, and whether an application for membership in the Canadian Payments Association would be advantageous.  (See our article, "Financial Institution Regulations".)

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Mining coalition agreements

Mining coalitions share computing resources, real estate, profits, losses, tax benefits, and tax liabilities. Decisions and dispute outcomes largely rely on agreements establishing coalition parties' rights and liabilities. As your cryptocurrency lawyers, we will represent your coalition, or you as an individual coalition party, in negotiation or in dispute.

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