This article is a round-up of recent developments in Canadian blockchain law:
- A novel Bitcoin investment fund ("The Bitcoin Fund") put forward by 3iQ Corp. was approved by the OSC
- Upcoming changes to the Excise Tax Act to clarify virtual currency sales tax treatment
- Changes to take effect next summer regarding virtual currency dealers (PCMLTFA)
- Ontario Securities Commission makes clear that "I didn't know it was wrong" won't be accepted going forward
- OSC Launchpad approves the "FreedomX" secondary market trading platform by the TokenFunder team
- BC regulation prohibits sellers of "pill presses" from accepting virtual currency
Each of the above developments are explained below with links to the decisions/laws.
The Bitcoin Fund
A win for progressive capital markets players on October 29th: the Ontario Securities Commission (OSC) reversed a staff decision to allow 3iQ Corp. to launch an NRIF for the public to invest in Bitcoin through a professionally managed fund. See my earlier post about this fund from when it was denied to read about what an NRIF is and what this case was about: https://www.cameronhuff.com/blog/3iQ-Bitcoin-Fund/index.html. I attended the openings for this hearing and was not impressed with the OSC's arguments (much of it not about Bitcoin at all), so it was refreshing to see that former securities lawyer Lorie Haber saw the weakness in the government's case and the need for limits on the discretion of OSC staff:
I do not agree with Staff’s submission that investor protection under s. 61(1) necessarily extends to a consideration of the assets a fund proposes to hold or the markets in which those assets trade. If that analysis were applied to deny a receipt to the Fund, as Staff submits it should, it would amount to a ban on any funds holding bitcoin, regardless of their structure or management. Further, the length of Staff’s proposed ban would be uncertain. Staff is effectively proposing a ban on funds holding bitcoin that would remain in place until Staff deems the market for bitcoin to have matured enough that Staff’s concerns about the operational risks have diminished. Staff has not provided any authority for imposing such an indeterminate ban.
Given that investors have other means of acquiring bitcoin, I question whether the ban proposed by Staff would protect investors from “unfair, improper or fraudulent practices”, as provided for under the Act’s purposes. Instead of ensuring that investors could not invest in bitcoin, denial of the receipt would only ensure that investors could not invest in bitcoin through a public fund.
The full decision is worth a read for anyone involved in the capital markets space as it touches upon a number of issues faced by players in Canada and the US such as custody, insurance and audit.
Excise Tax Act Changes for Virtual Currency
The Federal Government is contemplating changes to the Excise Tax Act that will affect some virtual currency transactions. The explanatory notes for this change are rather technical but explain what the changes are and what the results will be. The proposed amendment introduces a new (and concise) definition for "virtual currency instrument":
virtual payment instrument means property that is a digital representation of value, that functions as a medium of exchange and that only exists at a digital address of a publicly distributed ledger, other than property that
(a) confers a right, whether immediate or future and whether absolute or contingent, to be exchanged or redeemed for money or specific property or services or to be converted into money or specific property or services,
(b) is primarily for use within, or as part of, a gaming platform, an affinity or rewards program or a similar platform or program, or
(c) is prescribed property;
PCMLTFA Changes: Virtual Currency Dealers as Money Services Businesses
Next summer will be an important time for Canada's virtual currency dealers as they'll be required to register as Money Services Businessses ("MSBs"). The regulatory changes were published in the Canada Gazette on July 7th. This follows a number of regulatory efforts that flow from the 2014 amendment to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that I blogged about when it was in first reading back in 2014.
Given that the largest dealers are typically registered as MSBs already, this probably won't be a significant change for the industry. For smaller players the compliance costs may mean closing up shop/consolidation. because this change will put them into a similar regulatory category as precious metals dealers, foreign currency stores, and money sending businesses like Western Union.
This move has been welcomed by many industry players as they look for legitimacy by accumulating government licenses/certifications/registrations, especially in light of this year's failure of QuadrigaCX.
The OSC Wants You To Know About Registration Requirements
A blockchain token marketing company called CoinLaunch led by Reuven Cohen settled with the Ontario Securiies Commission in late July. The Commission noted in its decision that not knowing about the Ontario Securities Act registration requirement won't take parties very far in future enforcement proceedings:
We have also taken into account the asserted lack of understanding by CoinLaunch’s officers and directors concerning the applicability of the registration requirements under Ontario securities laws to CoinLaunch’s crypto-asset consulting activities. As a result of our decision in this matter, we expect that such an assertion is not likely to receive much weight in the future.
Given the number of enforcement actions in Canada and the United States in 2019, and 2018, and 2017, and before that, I'm surprised this argument received any traction. But the above quote is from an approval of a settlement, and I suspect had it been contested that this wouldn't have been very helpful for CoinLaunch. At the time of the settlement CoinLaunch had filed an intent to dissolve and they paid the penalties.
Unfortunately for Ontario companies, the OSC has focused on domestic companies like CoinLaunch (based in Ontario) while offshore companies that marketed into Canada during the "ICO boom" have largely escaped enforcement action.
Exemptive Relief for Novel Secondary Market Platform in Ontario
Token Funder is a company led by Alan Wunsche (former Scotiabank VP) who has achieved a few legal milestones with his ventures (e.g. 2017 CSA relief). On October 23rd, an affiliate of Token Funder, TokenGX Inc. was granted exemptive relief from a number of Ontario securities laws. This decision relates to a new secondary market trading platform called "FreedomX" that will be open only to Ontario residents. FreedomX is described in the decision as a smart contract-based exchange:
The Secondary Trading Platform will be comprised of an order book displaying buy and sell orders entered by the Participants (the Order Book), with an interface system that utilizes blockchain smart contracts to execute the transactions that occur in the Order Book. The Participants will interact with one another on the Order Book.
BC Pill Press Regulation
At the beginning of this year a new regulation took effect in British Columbia that explicitly forbids accepting virtual currency for certain industrial equipment used in the pharmaceutical industry (and by illegal drug manufacturers). The regulation previously prohibited using certain prepaid cards and gift cards to pay for equipment and now it also prohibits using virtual currency:
An authorized seller must not receive, as any part of the consideration for the sale of controlled equipment, a cash card, prepaid purchase card or virtual currency.
This is a minor law that affects very few people but it is the first I'm aware of in Canada that bans using cryptocurrency for certain transactions. It's unusual for laws to differentiate between payment methods as the focus is usually on the wrongfulness of the transaction, not the means by which it was carried out.