Canadian Lawyer InHouse

JANUARY/FEBRUARY 2019 38 INHOUSE out its strategy. Indeed, Canada's regulatory framework governing virtual assets is "still a work in progress," said Timothy Lane, the deputy governor of the Bank of Canada, in a speech recently at the University of Calgary. With so many federal and provincial authorities having their hands in the till, overseeing a byzantine array of laws and regulations, it is also extremely complex and convoluted. Provincial securities regula- tors have a say as do the Bank of Canada, the Competition Bureau, the Offi ce of the Superintendent of Financial Institutions, the Canada Revenue Agency, the Financial Consumer Agency of Canada, and the Fi- nancial Transactions and Reports Analysis Centre of Canada. And then there is legisla- tion that deals with securities, anti-money laundering and terrorist fi nancing, privacy and consumer protection. "There are still challenges for innovators, for startups where they can't go to one point of contact and get clear, concise and defi ni- tive feedback on a fi nancial services prod- uct that might have elements of banking, insurance, investments, all rolled into one," says Blair Wiley, general counsel and head of regulatory affairs at Wealthsimple, who previously led the blockchain and crypto- currencies multidisciplinary team at Osler Hoskin & Harcourt LLP. "There is no one- stop shop for people." Addison Cameron-Huff, a Toronto-based tech lawyer who until recently was the pres- ident of Decentral Inc., a leading Canadian blockchain startup, concurs. "The problem is that people are not sure what they are al- lowed to do," says Cameron-Huff. "Clear answers are hard to come by." A 2018 report by the Blockchain Research Institute said that innovators in the space lament the "lack of regulatory clarity and guidance." But while Canadian regulatory authori- ties are trying to work out the kinks, Canada may be losing out. Though fi gures are hard to come by, word on the street has it that growing numbers of crypto-currency com- panies are leaving Canadian soil for friend- lier regulatory regimes. "From the perspec- tive of a crypto-currency company, that sort of light touch regulatory regime is extremely welcome and compelling," says Wiley. "We regularly see businesses come to us with questions on how to effectively structure their businesses to avoid the application of Canadian law. There is a whole host of places for people who have a perception that there is more willingness or welcoming en- vironment for crypto-currency businesses." Cameron-Huff, while working at Decentral, worked with many Canadian fi rms that were incorporated in a jurisdiction outside of Canada even though he "encouraged people to think very carefully about why they want- ed to incorporate somewhere else." In the meantime, regulators worldwide are having a hard time fi guring out what to do with crypto-currencies. In an unparalleled situation, the U.S. Securities and Exchange Commission has changed its stance several times over the past year on crypto-curren- cies. The SEC now seems to consider Bit- coin, the decentralized digital currency that set the ball rolling, and Ether, the second- largest crypto-currency by market cap after Bitcoin, as not being securities because of their decentralized structure. But the major- ity of this new digital asset class are deemed by the SEC to be securities. An SEC settle- ment reached with two digital coin startups in November 2018 seems to bolster that new stance. Paragon Coin Inc. and CarrierEQ Inc. agreed to comply with investor-protec- tion rules, including fi ling audited fi nancial statements and other disclosures about their business. More settlements with U.S. regula- tory authorities are likely to take place. The North American Securities Administrators Association revealed that more than 200 ac- tive investigations of initial coin offerings, a form of fundraising popular among crypto- currency fi rms, and crypto-currency-related investment products are currently underway by state and provincial securities regulators in the U.S. and Canada as part of Operation Cryptosweep. "This is what we are going to have to deal with for the foreseeable future, this back and forth debate and discussion," observes Charlene Cieslik, the chief anti-money laundering offi cer at Coinsquare, a fast- growing Canadian crypto-currency trading platform. "None of it is happening in Can- ada that is transparent to the rest of us. It is mostly happening in the U.S., and let's face it: in Canada, we tend to follow." Canadian securities regulators have tak- en a similar stance to American authorities. Crypto-currencies are primarily regulated under provincial securities laws — except when they are not, such as Bitcoin and Ether. "Securities regulators are taking this on a one-off basis so they are looking at each business model and they are trying to deter- mine how they need to regulate it and what the risks are," explains Conrad Druzeta, co-head of the fi ntech and blockchain group at Bennett Jones LLP. Still, regulators who have devoted a lot of resources over the last 18 months to wrap their minds around this new digital asset are guided by well-estab- lished tests such as the investment contract test laid out by the Supreme Court of Can- ada in Pacifi c Coast Coin Exchange v. Ontario Securities Commission in 1978, itself based on U.S. jurisprudence. The four-pronged test requires that in order for an instrument to be classifi ed as a security, there must be an investment of money, with an intention or expectation of profi t, in a common en- terprise, whose success or failure is signifi - cantly affected by the efforts of those other than the investor. But a virtual currency can be a security for other reasons, warns Wiley. The defi nition of a security under provincial securities legislation is broad and expansive, and there are "many things that could constitute a security, such as evidence of indebtedness that could lead one to con- clude that a particular crypto-currency is a security," independent of the investment contract test, adds Wiley, a member of the There are still challenges for innovators, for startups where they can't go to one point of contact and get clear, concise and defi nitive feedback on a fi nancial services product that might have elements of banking, insurance, investments, all rolled into one. BLAIR WILEY, Wealthsimple

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