Why is Canada dragging its feet on blockchain policy?

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

The recent rallies in the price of both bitcoin and ethereum have created a renewed swelling of mainstream interest in the cryptocurrency space. With interest steadily rising to heights last observed in the previous “cryptocurrency bubble,” a renewed focus on associated blockchain technologies will likely follow. Unfortunately, the government of Canada and provincial regulators in recent years have also diverted their attention and efforts away from introducing regulations for blockchain technologies.


The lack of regulatory clarity surrounding blockchain technologies hasn’t gone unnoticed. According to the blockchain industry’s largest trade organization, “legal and regulatory challenges” have been cited as one of the top issues facing Canadian blockchain companies. Thus far, Canada’s uncertain legal landscape has influenced blockchain companies, both domestic and international, to focus their efforts elsewhere internationally.


Blockchain policy should be pursued before Canada gets left behind. Canada can develop a robust blockchain ecosystem with appropriate policy and shed its “mid-level player” status internationally. The chance to attract higher-paying jobs and international investments are just two of the many considerations that justify the continued improvement of Canada’s blockchain ecosystem on the international stage.


Privacy issues


The federal government made significant strides with the recently released Digital Charter Implementation Act (Bill C-11). The proposed legislation seeks to modernize Canada’s privacy rules. The legislation introduced rules addressing artificial intelligence (algorithmic transparency), open banking (data mobility frameworks) and other innovative trends.


One notable omission in the proposed rules was the lack of provisions that relate to blockchain technology. In the legislation, there are no provisions that provide clarity or directions on the technology nor address any of the previously unanswered privacy issues that relate to blockchain technologies.


As early as 2017, the Office of the Privacy Commissioner of Canada had flagged blockchain technology as a topic about which businesses required clarity and certainty regarding its adherence to privacy rules. Despite its inclusion on a list of innovative topics meant to be addressed by 2021, there has been no guidance on blockchain technologies’ privacy implications since. The recently proposed privacy legislation did not change this trend.


Cryptocurrencies and capital raising


Blockchain companies, especially ones that operate exchanges or hope to crowdfund capital through non-traditional avenues, are currently subject to significant uncertainty when fundraising from Canadians.


Many blockchain companies are beginning to sell tokens or rights in their projects in exchange for cash or other kinds of cryptocurrencies. These projects may be for-profit, which could render any interests in them sold as investment contracts in some contexts (as was found to be the case with Ripple).


Many blockchain companies currently selling or advertising their tokens to Canadians may be offside with Canadian securities regulations that can be confusing and uninterpretable to well-meaning businesses. Under Canadian securities laws, investment contracts are one form of securities that can subject a company to significant fines and penalties if traded without proper disclosure.


For example, many blockchain companies are unaware that merely having a website accessible to Canadians that advertises or allows for the sale of securities, even if operated offshore, can be trading securities in Canada. (see Re Gibraltar Global Securities Inc. 2012 BCSECCOM 194 at para 32.) Canadian blockchain companies that unknowingly sell tokens or other interests to Canadians may be in violation of the law.


What complicates matters further is that for many blockchain companies and newly introduced decentralized autonomous organizations, securities law compliance may be impossible or incompatible with their framework. The legality of how some blockchain companies finance or operate their business in Canada is a further hindrance.


Policy enactments globally


What is troubling about Canada’s inaction is that other nations are starting to take proactive measures to introduce blockchain regulations. The People’s Republic of China recently released standards using blockchains in the financial sector, including details for blockchain architecture specifications.


South Korea recently passed amendments to its financial services laws creating a framework to regulate and legalize cryptocurrencies and exchanges. South Korea’s government subsequently augmented its new legislation by banning the use of “dark coins” (privacy-oriented coins) due to their use in money laundering and cyberattacks.


The United States, at both the federal and state levels, has begun to introduce progressive blockchain legislation. Vermont passed into law a new form of legal structure called “blockchain- based limited liability companies.” These regulations enable a novel legal structure for newly formed blockchain entities. Wyoming introduced laws to create blockchain-friendly rules to formally authorize institutions to provide banking and lending services to blockchain and cryptocurrency companies.


More recently, in an interpretive letter the Office of the Comptroller of Currency allowed U.S. banks to use public blockchains and “stablecoins” to facilitate payment transactions for customers. This announcement is considered a significant milestone in the inclusion of blockchain technologies in the larger financial ecosystem.


Going forward


With the continuous integration and adoption of blockchain technologies globally, Canada has the opportunity to introduce regulations that can intelligently promote its use in Canada. Whether it is by clarifying how blockchains fit in the privacy compliance landscape to providing greater certainty on how companies can raise funds in innovative matters, many industry participants are desperate for clarity on how they can legally operate their businesses.


Introducing clarity on the legality and standards for blockchains and their applications can provide economic benefits and promote an ecosystem that encourages investment in the space and inbound interest. If the Canadian government continues to neglect blockchain’s relevance and promise, it risks international competitors surpassing it. Canada should start considering providing regulatory clarity before it is too late.


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