Canada is a nation with an increasingly developed financial technology sector and is open to blockchain and crypto-native assets. In April of 2021, three Ethereum exchange-traded funds (ETF) received approval from the Ontario Securities Commission (OSC) for trading on the Toronto Stock Exchange, just two months after the first Bitcoin ETF was launched in the country.
The nation’s regulations on crypto are robust and touch on Anti-Money Laundering/Countering the Financing of Terrorism, ICO/STO securities laws and more. Canada’s Financial Intelligence Unit, FINTRAC, has oversight over crypto-asset trading platforms (CTPs) which are regulated as Money Service Businesses (MSBs) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR).
Although crypto-assets are legal to be traded, created and received/sent by individuals and corporations in Canada, the nation has no provincial or federal deposit insurance so far.
On March 2021, two regulatory agencies, the Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC), issued a notice on crypto-asset trading platforms, the Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements.
The notice stipulates that if ‘Crypto Contracts’ are being solicited to individuals on margin or leverage trading, these ‘Dealer Platforms’ will be expected to be registered and become members of the IIROC.
The regulatory note outlines that in the jurisdiction of Québec, these platforms that offer derivatives must register as derivatives dealers under the Québec Derivatives Act (QDA). Dealer Platforms that also create and market derivatives must be qualified by the Autorité des marchés financiers (AMF) before derivatives are offered to the public.
Existing registered entities such as financial institutions and investment funds that are “introducing crypto asset products and/or services are required to report changes in their business activities to their principal regulator.”
Canada has a number of financial regulators for varying financial activities such as securities issuance, securities trading, tax collection and others.
Various reports must be submitted to FINTRAC through the Financial Intelligence Unit’s web reporting system. These include; Electronic Funds Transfer Report (EFTR), Suspicious Transaction Report (STR), Terrorist Property Report (TPR), Large Cash Transaction Report (LCTR), Large Virtual Currency Transaction Report (LVCTR).
A copy of every report made to FINTRAC must be retained by the Virtual Asset Service Provider.
Repeated failure to follow FINTRAC’s proper reporting – and general compliance – requirements will result in financial, and in some egregious cases, criminal penalties.
On March 23, 2021, FINTRAC updated its Know Your Customer (KYC) guidance. From June 1, 2021, it is a requirement as a Money Service Business operating in Canada to have in place processes that enable the firm to carry out effective KYC and that those processes must be in line with the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR).
KYC for VASPs in Canada means verifying the client identities in the ensuing circumstances if the VASP has not done so prior and maintained the relevant records for clients that process:
Some organizations are exempt from KYC in Canada such as those that are public entities, subsidiaries of public entities or those that have at a minimum of 75 million CAD of net assets on their last audited balance sheets and if the entity is a publicly-traded company on any Canadian stock exchange.
KYC does not end for some clients after they have become onboarded to the firm’s client base. KYC additionally entails conducting Enhanced Due Diligence (EDD) such as ongoing transaction monitoring of high-risk clients such as Politically Exposed Persons (PEPs) and high net worth individuals (HNWIs).
For the purpose of AML, a business conducting trade in virtual assets is treated as a Money Service Business (MSB) by FINTRAC. As such, MSBs must have in place a proper compliance programme in line with the Canadian law on Anti-Money Laundering, Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR).
A holistic and efficient regulatory compliance policy and procedure base is crucial to fulfilling all assignments of the PCMLTFA and relevant regulations. In the course of a FINTRAC examination, it is crucial to show the necessary credentials are in place and that staff, representatives, and all others permitted to carry out functions of an organization are well trained and can properly execute every part of the entity’s compliance agenda.
An organization’s senior officer must accept the compliance policy and procedures and must possess the required authority within an organization to conduct it. The crypto compliance programme must consist of; appointing a compliance officer, risk assessment, continued compliance training policy and procedures, and a 2-year effectiveness review and plan.
From June 1, 2021, FINTRAC stipulates that firms must follow Travel Rule requirements. This means collecting originator information such as; the legal name, known address and acc no. or another reference of the individual or organization that requested a transfer, the name and address of the beneficiary; and if applicable, the beneficiary’s account number or another reference number.
The Risk-Based Approach guidance for MSBs by FINTRAC delves deeper into key money laundering and terrorist financing risks VASPs face such as geographical risk.
In Canada, exchanges are termed ‘crypto-asset trading platforms’ or ‘CTPs’.
Firms dealing in virtual currencies must register with FINTRAC as Money Services Businesses (MSB).
FINTRAC’s definition of a Money Service Business that deals in virtual currency includes both those that exchange and transfer crypto-assets. This includes exchanging fiat to and from crypto-assets and from one crypto-asset to a different crypto asset. Cryptoasset transfer services include transferring assets on requests of clients or receiving a transfer of assets for remittance to a beneficiary.
MSBs must follow FINTRAC’s compliance requirements of KYC, AML/CFT, EDD and institute a succinct Risk-Based Approach. Firms that deal with clients in Canada or solicit them must also comply with the law.
Initial Coin Offerings (ICOs) are regulated in Canada.
In regards to Initial Coin Offerings (ICOs) or Initial Token Offerings (STOs), if a coin or token is deemed to be a security, registration and prospectus requirements are necessary.
Securities in the jurisdiction of Canada are overseen by the Canadian Securities Administrators (CSA).
Cryptocurrency use is allowed in Canada, but are not considered legal tender.
The Canadian Revenue Agency (CRA) identifies cryptoassets as commodities and transactions with them exchanged for goods and services are deemed to be barter transactions.
Cryptocurrencies are covered by the Income Tax Act.