In the first part of this series I noted some of the reasons why the time is right to think about launching a token in Canada. The enormous change in the posture of American regulators (without underlying legislative action) is the reason to think that the same will one day happen in Canada. But the starting point for understanding why things have changed is to look at how things were. Anyone with a deep understanding of the regulatory guidance and applicable laws, like loyal readers of this blog, may want to skip to part four of this series (part three concerns securities laws).

Why Do People Think You Can't Launch A Token In Canada?

What have Canadian regulators said about crypto? Why did that scare so many entrepreneurs off and lead to lawyers telling their clients not to launch tokens? What exactly did the regulators say, and how does that impact how we should view the legal landscape for new tokens? But first, a look at the regulators who are in play, and what laws have been passed.

Regulators: Federal vs. Provincial

The government has always been the #1 fear of projects looking at launching tokens in Canada. Private litigants aren't in scope for this blog series because it's always possible to do something wrong and be held to account for it, and this hasn't held back tokens in other jurisdictions that have the same common law system. Private action was never an important factor in the reluctance of Canadians to launch tokens from their home territory. The major factor has always been regulators. Specifically: securities regulators. But, to a lesser extent, there's two relevant federal regulators: Bank of Canada and FINTRAC. Since federal regulators are the least problematic, it's useful to start with what they've said (as guidance/policy interpretations) and what their governing laws say.

Federal Regulation: PCMLTFA

Canada's principal anti-money laundering (AML)/counter-terrorist financing (CTF) law is the PCMLTFA (or, for people who don't live and breathe AML: Proceeds of Crime (Money Laundering) and Terrorist Financing Act). This was one of the first statutes in the world to specifically address cryptocurrency. I wrote about it back in 2014, 12 years ago, when the amending legislation was first introduced in Parliament.

Following the amendments to the PCMLTFA, dealing in cryptocurrency became a registrable category of Money Services Business (MSB). What that means is that companies that are dealers need to register, file reports about suspicious activities, and more. On first glance, this wouldn't seem to impact a company launching a token. But many lawyers have questioned that assumption. Below are the definitions from the law that show where the issue might lie in this relatively unexplored question:

The regulation defines virtual currency as:

a digital representation of value that can be used for payment or investment purposes, that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds ... [and then another clause irrelevant to the issue at hand]

And the rule is only relevant to:

(h) persons and entities that have a place of business in Canada and that are engaged in the business of providing at least one of the following services: ... dealing in virtual currencies

There are two key ways that these definitions work together to keep newly launched tokens out of the ambit of FINTRAC: 1) the tokens don't qualify as virtual currency; or b) the selling of the tokens doesn't qualify as being in the business of being a dealer in virtual currency.

Not A Virtual Currency Under The PCMLTFA?

Is a newly created token a digital representation of value? Not really, unless it's a stablecoin, but the way this has been interpreted is to include dealing in bitcoin, with the idea being that it's digitally represented, and has value, rather than it being a digital representation of value. PI-11495 (a FINTRAC-published interpretation bulletin) assumes that bitcoin is a virtual currency, and the entire purpose of the amendment to the law 12 years ago was to include bitcoin.

Exchanging

One odd consequence of the very specific definition of exchange is found in PI-10644, which explains that if a company sold virtual currency to people in exchange for airline miles, the definition would not be met, because one leg of the transaction is neither funds nor virtual currency. This suggests a company could sell virtual currency in exchange for anything other than funds or virtual currency, but there's not many token projects that could actually avail themselves of this in the initial phase of their operations (other than perhaps paying people in tokens).

So can a company sell its own tokens, to buyers (for $/crypto), without registering under the PCMLTFA? Not if it can be readily exchanged. But newly launched tokens generally can't be readily exchanged, because no one is offering that service. Perhaps this isn't true for tokens that launch via DEXs, but even there, it's not that exchange is impossible but rather than exchange has to be readily available which is something more than simply being available somewhere.

Does this phrase mean readily exchanged at a Canadian business? Or anywhere? Fortunately, probably not many tokens would need to get to that question, because the threshold question of used for payment or investment purposes probably wouldn't be met. If the company selling the token doesn't accept it for payment, on initial launch, that leaves only investment purposes. But, tokens should generally not be launched for that purpose anyway, because that engages with securities laws (explained in part three), although it's possible that the PCMLTFA definition of investment is something different than what's meant in provincial securities law. In short: the actual boundaries of what qualifies as crypto dealing under the PCMLTFA are hard to identify, and not well-tested.

FINTRAC may not even have considered the issue of whether a newly created token sold by its creator might qualify as virtual currency dealing. The reason for this is not so much oversight, as that the target of the law is companies that let people convert money to crypto and back again, which is relevant to anti-money laundering. A one-way sale of newly-created tokens, on a limited time basis, is not in the same category of risk.

Not A Dealer

Maybe the above points are a problem, but a company that sells tokens might still be in the clear if they aren't in the business of .... dealing in virtual currencies. This is maybe an arguable point, but few useful tokens would be sold by companies that see their activities as being focused on dealing in their own token. A company that exists purely or primarily for that purpose would be caught by this, and its obvious the types of businesses this rule is meant to capture. But a company that incidentally sells its own token, and does so as part of a different mission, and where that different mission takes up most of the company's time and efforts? I would think they're generally not going to be a dealer. Especially if the public doesn't view them in the same way as a dealer or exchange service. The manner in which newly-created tokens are sold just does not look like dealing, and at the end of the day, that may be dispositive. FINTRAC is looking for certain activities, and the further away a company is from what those are, the less interested they'll be in trying out novel stretches of the law.

In the most common scenario, a company only sells some tokens for a limited period of time, and then it pursues other business activities. Even if it might, at a given point in time, operate in a way similar to a dealer, that isn't their overall goal, and it's a transitory phase rather than a business model being pursued. In most cases, probably a newly created token being sold for a while by its creator, in connection with a larger business objective, wouldn't be a dealer. And the lack of enforcement along these lines by FINTRAC further supports this interpretation as either being correct, or at least the de facto stance by FINTRAC (which is also sufficient for a token project!). FINTRAC has, to my knowledge, not enforced the view that every newly created token sold is one that ought to be done under the PCMLTFA framework. Instead, securities regulators have taken up that challenge.

Bank of Canada: Not A Significant Regulator

The Bank of Canada has recently taken on the role of regulating PSPs under the Retail Payment Activities Act, which was created in response to protesters (or, in the Prime Minister's words: racists, misogynists, insurrectionists and a fringe minority) crowdfunding opposition to the federal government during Covid times (using mostly funds but also crypto). Despite its genesis, the RPAA is not focused on tokens or cryptocurrency. It's more focused on the crowdfunding platforms that protesters used to raise money, and the MSBs that are generally now subject to a second regulator.

So long as a company selling tokens isn't holding user funds before selling them a token, and isn't involving themselves in sending money to third parties, or routing money, the RPAA will probably not apply. That said, stablecoins will soon be introduced into the RPAA framework by the budget act that's about to be passed into law. So for a company making stablecoins, they would want to pay attention to the RPAA, while for most regular projects making a token that serves some purpose in a larger system, they would be hard-pressed to conduct their business in a way that falls afoul of the Bank of Canada's jurisdiction over retail payment activities.

Conclusion

The federal regulators that have been most active in relation to cryptocurrency are not the barriers to launching tokens. There just isn't a federal law that bars people from making and selling blockchain tokens.

Securities Regulators

Securities law has been the biggest topic for token-based projects, and accordingly, the entire next part of this series explores that angle.