What new Canadian cryptoasset regulatory framework should address
This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
Canadian blockchain companies have long complained about the constant regulatory uncertainty they face while operating in an innovative industry. These businesses operate in an opaque regulatory environment, whether incorporating cryptocurrencies into their offerings or engaging in decentralized finance activities. In many cases, it is nearly impossible for them to ascertain or even receive legal advice on the legality of their business operations and growth plans.
For this reason, it came as a pleasant surprise to learn about the introduction of Alberta MP Michelle Rempel Garner’s private member’s bill on creating regulatory clarity for the cryptoasset sector in Canada. This bill represents the changing tides towards recognizing the importance of regulating businesses involved with cryptoassets and the first steps towards broader blockchain legislation in Canada.
The introduction of new legislation could not come at a better time as regulatory uncertainty continues to be top of mind for many cryptoasset businesses. Many of these businesses constantly worry about their operations or offerings being deemed illegal through ambiguous applications of the law and existing regulations. Some cryptoasset companies have received threats that their bank accounts will be closed over arbitrary concerns. Others have struggled to find accountants and other professionals willing to provide them with the necessary services required to run a business.
This hasn’t gone unnoticed by non-cryptoasset service providers and has created a general reluctance amongst many from doing business with blockchain companies. Understandably, the prospect of regulation for the industry is welcome in Canada. Intelligently regulating the cryptoasset industry can protect cryptoasset companies and their workers who are denied services and discriminated against. Regulations addressing access to banking, cryptoasset payments and advertising are just a few of the areas that should be addressed in any upcoming framework.
Access to banking
For many cryptoasset businesses in Canada, their proximity to cryptocurrencies has resulted in financial institutions refusing them service or threatening account closures down the road. This results from a lack of regulations on how cryptoasset companies must manage and record cryptoasset transactions for banking purposes. With this lack of regulations, banks’ compliance departments have become the ultimate decision-makers on which cryptoasset companies can exist in Canada.
Business owners understand that banking is an essential part of running a business. Without a bank account, a company can’t make payroll, pay taxes or generally do business with others. It makes it almost impossible to operate in Canada. This dynamic has forced many companies to develop contingency plans or otherwise move to other jurisdictions willing to accommodate companies involved with cryptoassets.
As more businesses incorporate cryptoassets into their offerings, this is becoming a growing issue. Developing regulations that define how companies must manage or maintain records of cryptoasset transactions will provide much-needed clarity. This will also reduce the administrative burden of cryptoasset businesses having to guess what actions are required to satisfy their banking partners’ needs and protect their employees from the consequences of their employer’s bank accounts being closed.
Dealing in cryptoassets
On a similar note, businesses also face uncertainty when dealing in cryptoassets instead of fiat currencies. In recent years, regulations and guidance have been introduced to address the developing trend of companies engaging in traditional business using cryptoassets instead of fiat currencies. Anti-money laundering legislation has been updated to recognize entities dealing in virtual currencies. Securities regulators have published guidance on when the activities of cryptoasset companies must comply with securities legislation. The federal government has even provided guidance on the tax treatment of cryptocurrencies in different situations. This contrasts with the lack of guidance as to what measures (if any) cryptoasset companies should take when accepting payment in cryptoassets for the sales of goods or provision of services.
The lack of guidance has forced cryptoasset businesses to guess what measures they must take to screen and accept cryptoasset payments. This is due to the private companies they work with, much like financial institutions, essentially setting differing standards for what cryptoasset companies must do to screen and trace the cryptoassets they receive. This creates an inefficient environment where each new business must spend their finite resources to learn what is required and on tools that may otherwise not be needed with standardized and transparent rules.
Finally, the federal government should consider addressing cryptoasset advertising rules within its jurisdiction. While not reducing administrative burdens, protecting Canadians unfamiliar with cryptoassets from bad-acting cryptoasset businesses trying to take advantage of them would be a helpful consumer protection. For this, the government can take an approach similar to the illegal online gambling regime.
Countries such as Singapore, Spain and the United Kingdom have already set their sights on targeting cryptoasset advertising. Their approaches range from treating cryptoasset advertisements like financial promotions to targeting social media influencers promoting cryptoassets to broad audiences. They all have in common the view that unregulated advertisements of cryptoassets pose a significant risk to individuals who may lack the requisite knowledge about what they are purchasing. Responsible advertising rules relating to cryptoassets would similarly benefit responsible Canadian cryptoasset companies and promote the industry’s growth.
As cryptoasset companies grow and increase their presence in Canada, guidance on how they can legally operate will provide economic benefits to Canada and help local companies better compete on a global scale. The introduction of the first cryptoasset-focused private member’s bill is the promising start of more attention and efforts towards the beneficial regulation of cryptoasset companies.
It’s not widely known, but several of Ethereum’s founders are Canadian. With government action and meaningful consultations with the cryptoasset community, the Canadian government may persuade future leading cryptoasset businesses to call Canada home in future waves of innovation. This can bring immense benefits to employment, investment and Canada’s future technological infrastructure.
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