This blog post addresses the entrepreneur looking at starting a company to buy and sell cryptocurrency ("virtual currency" under AML laws) like Bitcoin, Ethereum, and the myriad tokens that have been launched. There are three main areas of regulation in Canada; virtual currency dealers, securities, and tax. This article concludes with a brief discussion of what sort of teams people put together for implementing the paperwork side of this business.
Virtual Currency Dealers
Most businesses that buy and sell cryptocurrency must be registered as virtual currency dealers with FINTRAC (at least). "FINTRAC" is the Financial Transactions and Reports Analysis Centre of Canada, a part of the fedderal government that runs a system for anti-money laundering/anti-terrorist financing (AML/CTF). FINTRAC's guidance and the applicable AML laws are relatively easy to understand and comply with (as compared to the securities laws covered further below). MSB consultants (e.g. Outlier) often help with the paperwork required, training needs, and other advice. Lawyers who deal with AML (anti-money laundering laws) often cover some of the same territory as MSB consultants but typically more focused on legal advice and issues that might be escalated from compliance teams. MSB consultants provide virtual currency dealers with cost-effective advice (sometimes as an alternative to lawyers) who can often help with day-to-day compliance (and more). Most compliance activities in the financial sector are carried out by people who aren't lawyers. In many cases, consultants know more than lawyers do because they're more involved in the practical reality of this field, which is important due to the variety of guidance documents that issue from FINTRAC on a regular basis. A lot of FINTRAC's activities are very practically-minded and are addressed to compliance staff (e.g. Chief Compliance Officer role).
There isn't a "license" or "permit" for FINTRAC's system for virtual currency dealers. It is a "registration", and it's mandatory for the companies that are covered by registration, with tremendous penalties for non-compliance/non-registration (since these laws are ostensibly about fighting serious crime). It is a simpler system than what exists in some other jurisdictions, but one to be treated seriously. There's a significant amount of overlap between AML efforts and anti-fraud efforts so this area often overlaps with the responsibilities of those outside of legal teams.
The FINTRAC system can also be useful for consumers because it shows who is registered: https://www10.fintrac-canafe.gc.ca/msb-esm/public/msb-search/search-by-name/.
In addition to the registration and MSB compliance issues, dealers also need quality contracts, which are typically prepared by commercial lawyers with expertise in this area. Some companies might also need special assistance with Quebec's AMF (which overlaps with FINTRAC in this area for Quebec-only). The AMF is also involved in the securities side of cryptocurrency.
Sometimes this issue is framed to me as being about "security tokens" but that's usually the wrong focus. It's not that there are security tokens and non-security tokens, but rather that there are some things that are securities. And then there's everything else. Most of the economy falls into the "everything else" bucket. But if an activity falls within securities laws then it's automatically subject to a very stringent regulatory system (even if the people involved don't recognize it).
For most businesses, they can be confident that their business will not stray into the highly regulated domain of securities other than raising money from investors. For crypto companies, and especially virtual currency dealers, this comes up in the context of tokens that qualify as securities (or might) but aren't advertised as such.
Whether or not something is a security is not a straightforward exercise. Companies should carefully consider the advice they receive (or read about). Dealers and brokers should do their own analysis when it comes to what sort of blockchain-based assets they're working with. They should also be careful about assuming that major players have necessarily done their homework, especially for non-Canadian businesses that may not have looked into Canadian law. This is an area of law dominated by large law firms, some of whom have a great track record in this space.
A recent issue that's arisen in the cryptocurrency sector is the idea that companies that are engaged in virtual currency dealing are necessarily also engaging in securities dealing. This is a complicated issue that deserves the attention of anyone in this area. Enforcement actions are being taken. I've covered this issue in previous blog posts (before some of the recent elaboration on it) but the gist of it is that the Ontario Securities Commission and other provincial securities regulators have taken the view that the way in which most exchanges/dealers operate is not sufficient to avoid derivatives regulation. This overlaps with the securities token issue too, but it's a free-standing concern. (The details are important and this is an incomplete summary.)
Provincial securities regulators have been encouraging companies that might be in this area to speak with them and apply to become a "restricted dealer". This system will become more clear over the next couple years and some guidance has been issued already.
Securities lawyers can help with registration, and everyone in this area should be aware of the risk of not pursuing the restricted dealer process. Everyone should also be aware of the risk of miscommunicating with provincial securities regulators without the help of a legal team behind them. Securities laws are serious, unintuitive for many, and sometimes contested. But this is not to say that "everything is securities law". Some Canadian regulatory authorities have created an impression in the minds of many that more ground is covered by securities laws than what truly is covered.
Most companies that would need to be a restricted dealer would also need to be registered with FINTRAC because these are separate regulatory systems. These rules apply to foreign and domestic companies alike (in most circumstances), so international companies with Canadian customers need to pay attention to.
Taxation of crypto is a tricky subject. For businesses, the concerns are sometimes about how coins/tokens are carried on the books and the tax treatment when selling them. A secondary issue is what accountants and tax lawyers call "ITCs". These issues are better dealt with by accountants, but there are tax lawyers who specialize in this area too.
I've had clients use tax lawyers for dealing with Excise Tax Act (sales tax) issues (e.g. how to ensure that the company can continue to deduct the tax they pay from what they remit). The solutions are fact-specific but they're worth being aware of and discussing with a tax lawyer/accountant. There are a number of accounting firms that specialize in this area or have significant experience in advising dealers, and major law firms usually have a team that works on sales tax issues.
What Do Lawyers Do?
Lawyers play a large role in this system by ensuring good quality processes, contracts, and compliance. Lawyers can also help understand the landscape for strategic planning. There's a need for consulting with specialty counsel on complicated issues, the contours of the evolving law in this space, and how to navigate the bureaucracies. They can also identify which areas are risky (i.e. too risky), debated, or potentially subject to regulation in the coming years to help plan for the future in an uncertain environment.
A good legal team, including compliance professionals (who aren't typically lawyers), provides a diverse set of perspectives on these issues, and how they might apply. The best teams right now are the ones educating regulators and putting forward the best practices that will define the industry. Virtual currency dealers will have a lot more certainty five years from now . In the meantime, companies need to digest a range of laws and positions on them.
For new companies, the biggest challenge remains banking, which is largely out of the hands of lawyers. Most companies can also benefit from the work of accountants, which is essential for ensuring good processes.
Putting It Together
Teams on the legal side of the cryptocurrency space usually include: compliance professionals, a corporate/commercial lawyer (sometimes different people), specialty external counsel on demand (e.g. AML, securities, privacy, province-specific, etc.), the executive team, and an accountant. Often the technical people within the company are involved too in obtaining information or implementing the legal/compliance functions in customer-facing software. As the industry matures and expands I expect the professional teams required will continue to expand and become even more specialized.
1. Most business formation work (e.g. incorporation, investing, etc.) is independent of the nature of the company. Most cryptocurrency dealers don't have a need for specialty advice in this area, as any corporate lawyer should be capable of handling the work. The regulatory and commercial sides of virtual currency dealing are much more particular to the industry than the setup of the company.
2. Be sure that you want to get into this area. It has become rather complicated over the years (and also more competitive). Other types of companies in the crypto space typically have an easier time navigating the laws. Anyone entering the industry now should expect there will be more compliance/legal work required in the future as provincial and federal governments create and apply more rules.
3. AML laws change regularly, and securities law is constantly evolving through regulatory changes and legal decisions. Older blog posts (even on this blog) and news articles may not be relaying accurate information because they're outdated. Be sure to get legal advice about the current state of play before embarking on starting a company in the virtual currency dealer space.