Robust Regulation Makes Canada Attractive to Global Cryptocurrency Market

The robustness of Canada’s regulation of the trade in cryptocurrency has made it “inherently attractive” to domestic and foreign dealers and portfolio and fund managers active in what has become a burgeoning asset class.

“It’s a robust regulatory review that looks at facets that I don’t think are looked at globally, whether it’s counterparty risk, custodians, internal control, [or] cybersecurity,” said Julie Mansi, a partner at Borden Ladner Gervais who has extensive experience in securities regulation.

Securities regulators in other jurisdictions still tend to be reviewing and attempting to come up with the “right structure,” she said, “where Canada really has jumped in with both feet and very much reviewed the risks with these platforms and with the offerings and created a robust path to registration.”

In March 2021, the Ontario Securities Commission, the largest of Canada’s provincial securities regulators, notified crypto-asset trading platforms (CTPs) that were offering trading in derivatives or securities in the province that they needed to register with the Investment Industry Regulatory Organization of Canada (IIROC). British Columbia and other provinces did the same. Those notices followed on the heels of a joint notice from the IIROC and the Canadian Securities Administrators providing “guidance” on how securities regulations applied to CTPs.

Currently, there are only seven platforms registered to offer crypto products in Ontario, but dozens more are signaling their intention to register, according to the Ontario Securities Commission (OSC), which has also started enforcement actions again holdouts, including Seychelles-based Poloniex. Hearings related to that case are scheduled for later this month.

While regulation of CTPs in Canada is in full swing, Cassels Brock & Blackwell partner Alison Manzer said there’s nothing unique or innovative about the system—rather it’s that cryptocurrency is properly being recognized as “a digital representation of something.”

Manzer said there was “a lot of confusion” at first as to whether digital assets were “something separate and apart from what they effectively represented. But the conclusions that are being reached regulatorily, in Canada, the U.S., the EU, [and elsewhere], is that they are not. They are simply a digital representation.”

Those digital assets fit into four buckets, she explained: a form of currency, a good or service, a security, or a commodity. So if the digital asset fits into a category that would ordinarily be regulated, such as a security or derivative, then it will be. And if it doesn’t, such as a non-fungible token (NFT) that is a piece of art, then it won’t.

Again at the forefront, the world’s first bitcoin exchange-traded fund, Purpose Bitcoin ETF, began trading on the Toronto Stock Exchange in February of last year.

Canada is also in line with most countries in the world in terms of regulating money service businesses. Any organizations dealing in virtual currency exchange or virtual currency transfer services have to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and abide by obligations and regulations under federal legislation to combat money laundering and terrorist activity financing. Those include companies that deal in so-called stablecoins.

“The regulation is very closely aligned with what exists in the other G20 countries,” said Simon Grant, the co-head of Bennett Jones’ fintech and blockchain practice group.

Manzer said what’s still missing is regulation of how cryptocurrency wallets and custodian chips are set up.

“I haven’t seen any country move to this one yet, because that’s where real abuses are occurring right now in the cybercrime side of things,” she said.

Grant said he’s seeing a lot of activity from foreign money services businesses in Canada— getting registered as a dealer, M&A, raising capital, tax, and litigation. There’s a lot of exciting fintech innovation in this area as well, he said, such as “open banking” and the soon-to-be-launched Real-Time Rail payments system.

“Across the firm, there’s been a lot of activity in really every area to do with cryptocurrency and fintech, particularly in the last six to nine months,” he said.

Mansi said BLG’s digital asset team, which she notes “is so much more than trading Bitcoin!”, consists of 15 to 17 very busy lawyers. The big issues they’re dealing with right now are Russian economic sanctions issues and asset-seizure requests relating to the controversial “Freedom Convoy,” the protests against COVID-19 mandates that traversed Canadian provinces before converging on Ottawa in January. 

“What I think is less known is how much more nimble the crypto trading platforms are to comply with user requests and asset freezing than financial institutions are because of the technology that’s behind it,” said Mansi. “They can, within minutes, isolate and freeze an account.”

Carol Derk, another partner at BLG whose specialty is product development, said Vancouver and Toronto are the hotspots, and there’s a lot of work relating to NFTs, including in relation to both art and video games as well as in helping foundations and charities raise money for Ukraine. Calgary is not far behind, with Binance, the largest crypto exchange in the world, setting up its Canadian HQ there.

The next horizon will be the introduction by more countries—including Canada—of government-backed central bank digital currencies (CBDCs), said Manzer. Canada is well into the research stage for this. Once those become more broad-based (there are only a handful of Caribbean nations that have them right now), she predicts “a very significant implosion” in the several thousand, mostly unregulated cryptocurrencies around the world.

She added that there is already a movement in the market toward stablecoins or asset-backed currency, which are not considered as speculative as most crypto is now. Such a digital currency backed by the government will also likely mean financial institutions will then start dealing and trading in them, thus “flooding out” those less stable cryptocurrencies.