Canada’s government has released draft regulations for “virtual currencies” with a consultation period of 90 days, saying that proposed regulatory changes could mean a loss of $60 million over 10 years for businesses that deal in cryptocurrencies but will improve Canada’s international reputation and make it easier for crypto businesses to deal overseas.
The Canadian crypto business community is still assessing the new proposed regulations but a number of experts have told Bitcoin Magazine that the impact on the community will be “massive” and “significant” and may result in a shake-up and consolidation of companies, including blockchain companies currently in the space.
Amber D. Scott, CEO of Outlier Solutions, a company that focuses on helping bitcoin and blockchain crypto startups to understand and comply with government regulations, said:
“If the definitions are broadly interpreted, there could be significant dislocation in both the cryptocurrencies and blockchain communities that were not expecting to be regulated in this way. This includes any blockchain company that has issued, sold or traded a token that fits within the definition of ‘virtual currency.’”
Among other proposals, the new regulations will require firms (including exchanges) to keep detailed records of users and inform the government about suspicious activities, provide written policies and procedures, undergo a risk assessment and be ready for audits.
Jason Beitchman, a commercial litigation lawyer in Toronto with experience in anti-money laundering and cryptocurrency litigation, told Bitcoin Magazine:
“The impact on the cryptocurrency business is going to be massive. I can see it playing a significant role in allowing some market participants to rise to the top and separate themselves from others who don’t get out ahead of compliance issues.”
Beitchman notes that some of the language in the draft regulations seems strangely vague and unclear:
“I found the language in the second part of the definition of ‘virtual currency’ to be curious: ‘information that enables a person or entity to have access to a digital currency.’ What kind of information? This seems unusually vague and broad. Isn’t a webpage explaining how to trade in bitcoin ‘information’ that would enable a person to have access to a digital currency?”
Beitchman credits crypto companies for their generally imaginative marketing and innovative technology but says:
“... in time, cryptocurrency businesses will be forced to focus on the more brown-bag aspects of long-term and self-sustaining financial services businesses. These include a focus on operations, administration, compliance and legal. I expect we will see some portions of the sector embrace this development and other parts either ignore it or avoid it, at their peril.”
Evan Thomas, who practices compliance law in Toronto, told Bitcoin Magazine:
“Speaking for myself only, the regulations will undoubtedly have significant implications for many cryptocurrency and blockchain businesses.”
Thomas also reiterated that the regulations were not very clear on things like defining virtual currencies. The language used could mean a whole raft of businesses that deal in value transfer services.
“The commentary with the draft regulations suggests that ‘dealing in’ activities ‘include virtual currency exchange services and value transfer services,’ but there are many other businesses, such as miners, mining pools and developers of tokenized applications, that could be considered ‘dealing in virtual currencies,’ depending on how that phrase is interpreted,” he said.
Scott agrees that the language could be considerably clearer:
“The biggest issue that I see is that some of the definitions can be interpreted very broadly. Unfortunately, regulators sometimes get focused on the ‘letter’ rather than the ‘intent’ of the regulations. In practice, this means that if the Department of Finance doesn't tighten up some of the wording or provide additional exclusions, business models that don't really present much money laundering or terrorist financing risk (like in-game tokens) or things that are already regulated (like securities tokens) may be swept in.”
What Happens Now?
There's a 90-day comment period, then the Department of Finance redrafts the final version. Once this is published, there will be a 12-month transition period for compliance, meaning that it will likely take at least 15 months or longer for everything to be fully in force.
Even though this is a draft, Scott noted, the final versions of regulations like these are usually very similar to the draft version.
“I don't think that we're likely to see substantial shifts, but there are real opportunities to refine the content (better definitions, exclusions for things that shouldn't be captured, etc.) for interested companies and organizations.”
Beitchman’s view is that there is not likely to be a significant challenge from the crypto community and that other types of financial services may be better able to afford to make presentations to the Department of Finance. He further suggested that some of the significant issues that could arise will be resolved in the courts over the next 5–10 years through regulatory or litigation proceedings.
“Advocacy and lobbying activity is a highly sophisticated business strategy that requires a clear vision, funding and either large market share or wide-spread consensus,” he said. “While I am hopeful that there will be a positive dialogue with Finance, there are certainly challenges in advancing cryptocurrency interests here.”
“You also have to look at the sectors that traditionally have a large advocacy and lobbying presence in financial services and consider whether and how those sectors may be participating in the comments process,” he added.
Scott’s company, Outlier Solutions, will be active in the comment process:
“I expect that we'll be spending the next 90 days telling people not to panic. We participate in a number of industry groups and will be submitting comments through them, as well as on our own behalf. We've also set up a survey for community members that want to comment but may be reticent to have their names attached to comments (so no personal information is required).”