The previous posts in this series (part 1, part 2, part 3, part 4, and part 5) establish what's regulated and why. The primary issue that's arisen for token creators in Canada has been provincial securities laws but, when properly understood through a neutral lens (i.e. not through the lens of the regulator itself) is far more limited than most people understand. To put this altogether, I've explained below what the special categories of tokens are that have challenging legal regimes that apply. Despite what most people think, Canada is still a country generally governed by the rule of law, and the rule of law is that if something is not forbidden then it's permitted. If there is no legal reason why a token can't be launched, then it can. Below are some special situations where maybe they can't be launched. Or, if they can be, that there's significant rules that are relevant to the viability of doing this in Canada.
The special categories that are danger zones are:
1. Stablecoins
2. Tokens that are securities
3. Tokens that embody an investment scheme (and also tokens that are an essential element of an investment scheme)
4. Tokens that otherwise embody some other illegal activity, like drug trafficking
Special Category: Canadian Dollar Stablecoins
Launching a stablecoin is a special category because the government has issued special guidance about this, and there are open questions about them. But, most importantly, the provincial securities regulators have regulated crypto exchanges and they've told them what their criteria must be for having stablecoins on the platform. So even if someone can legally launch a stablecoin, if it doesn't conform to the exchange-level rules, then there won't be any Canadian platforms carrying the stablecoin, which severely undermines the token.
An example of this is QCAD, a stablecoin that I was the original lawyer for but haven't represented in many years. QCAD recently was granted exemptive reflief under securities laws. Anybody who is considering a stablecoin should carefully pay attention to QCAD and USDC, and the relevant securities law implications in Canada. This is an unusual example of the interplay between platform regulation and the stablecoin creator, because a Canadian Dollar stablecoin has a unique reliance on Canadian crypto platforms. This is not the case for most tokens, where the primary markets will not be in Canada.
It would be interesting to see someone launch a non-CAD stablecoin from Canada and see how that would play out, with no reliance on local exchanges. But for a domestic-targetted stablecoin? There's no solution to the exchange problem, since the exchanges have voluntarily signed themselves up to follow whatever the OSC and other provincial regulators demand of them. There's also special new legislation, the Stablecoin Act that was just passed as part of the omnibus budget act. This isn't relevant to most companies though because the market for CAD stablecoins is relatively small. Stablecoins are generally a winner-takes-all market for non-USD, and even for USD stablecoins there's a few clear winners and many small projects that are undoubtedly losing money due to the nature of stablecoins as a business.
Special Category: Securities Tokens
There are two sub-categories here: 1) the token is the security or 2) the token embodies an investment contract (i.e. investment scheme).
A token that's intended to be a security is generally not permitted. An example of this is a token that's supposed to represent a stock in a company. Over a decade ago, a Canadian company called Havelock Investments tried to start an unregulated exchange for these kinds of tokens, and it was quickly shutdown. Today there's a number of token securitization platforms that work properly, but they're generally just for accredited investors. There's also a new world of tokenized stocks/ETFs that opened up this summer, but these are all run from foreign jurisdictions. These are explicitly designed to be a tokenized version of the underlying security.
Real estate tokens suffer from this problem.
If someone launched a token that worked like Pacific Coin's system, in which there's a derivative or a loan component to an underlying asset (so it's leveraged), such as silver, then that token very likely wouldn't be permitted either. Because it's not about the token, it's that these sorts of systems are generally prohibited by securities laws. The token part is irrelevant, it's the surrounding investment system that matters. If the token simply embodies that system, it will be prohibited the same way as Pacific Coin's business system was prohibited. Even though the difference in this example is that the token is the investment contract, whereas in Pacific Coin the bags of silver were fine and the investment contract was the overall system around the silver.
Essentially, a securities token is a token where the token either is or stands for a system that isn't permitted under securities laws. That's a little circular in the definition, but that's ok - Canada has securities laws and they must be followed. Exactly what qualifies as a security and what doesn't is something securities laws are well-versed in. But the thing to keep in mind is: does the customer buy the token, and then management receives that money and uses it in some sort of business, and the splits the revenue/profit with the holders of the tokens? If the answer is yes, there's a high chance of a security being involved. Especially where it involves money (or crypto used as money) for the payment part. If it involves loyalty points, access to something, or other kinds of non-financial incentives, then maybe it isn't like a security, because generally securities are investments into something, and the investor expects a financial reward.
This is a large topic, and it's covered in the previous posts in this series, but in short: if the token is a security itself, then that's not going to work for a Canadian business to launch it. Generally securities like this need to only be sold to accredited investors, and there's many special rules about how that works. There are so many in fact that most companies don't bother doing this once they find out what's involved. Even worse: if it's a security then generally dealers/exchanges in Canada, the US, and other places, can't offer trading in it, which usually means it is a non-starter for crypto projects that operate globally (as most do).
To recap: what's prohibited is a token that is the security, because if it is unlawful to sell the security, it's unlawful to sell the token version of that security by the same means. This is an important distinction because, for example, it is legal for a public company to sell its own stock, but it has to do so in compliance with a great many rules. If a public company made a token of its own stock and sold that token, the applicable rules would not be more favourable than selling the underlying stock (although, see my notes about how this is being solved
by third party token creators using international trusts and dealers).
It's also prohibited to make a token that embodies an investment system, because the investment system is prohibited, not because the token is prohibited. If the Pacific Coin company had sold its system as a token, instead of as a contract people sign and money they send from their bank account, it wouldn't have somehow been transformed into a lawful activity.
Special Category: Otherwise Unlawful Tokens
As I mentioned in a previous post, a token that stands for narcotics trafficking is just as illegal as the narcotics trafficking itself (maybe more so actually!), and the tokenized nature of it is irrelevant. This is the general rule. When the token is a stand-in for a thing that is unlawful, the use of the token doesn't legalize the underlying activity. The token is a neutral technological tool that can be wielded in any way the creator wants, just like email, databases and word processing software. It is the use that people make of it that triggers special laws. If a company made a token that worked like store credit for 1g of opium in Canada, and then it sold those tokens to Canadians, the concern would not be securities laws, it would be drug trafficking.