Canadian Lawyer InHouse

39 CANADIANLAWYERMAG.COM/INHOUSE JANUARY/FEBRUARY 2019 Securities Advisory Committee of the On- tario Securities Commission. On top of that, some Canadian securities regulators have issued further guidance and notices that they assert are in line with the ap- proach taken by regulators in other countries such as Australia, Great Britain and the U.S. The OSC warned in March 2017 that initial coin offerings, a form of fundraising popular among crypto-currency fi rms, may trigger certain Ontario securities law requirements, including registration or prospectus require- ments. The Canadian Securities Adminis- trators, an umbrella organization of Canada's provincial and territorial securities regula- tors, also waded in and offered two notices over the past 18 months. In essence, the CSA stated that it will look at the substance of the transaction when considering whether secu- rities laws apply. The use of new technology and new terminology, such as selling a coin or a token instead of shares or equity, to raise money will not determine whether securities laws apply. The CSA further cautioned that, depending on the facts and circumstances, coins or tokens may be considered deriva- tives and therefore be subject to legislative and regulatory requirements. "Crypto people are wondering how far these rules go," remarks Cameron-Huff. But "if you look at the language people use, talking about investments and returns and many of the things that are hallmarks about securities, people shouldn't be surprised that securities regulators are interested." Securities regulators, such as the OSC, claim they are keen on supporting crypto- currency innovation through the imple- mentation of regulatory sandboxes. The forward-thinking platform, such as the OSC's LaunchPad, can provide exemptions from securities laws and requirements in a faster and more fl exible manner than a stan- dard application, allowing companies to test their products. But while the idea of regula- tory sandboxes is "really compelling," Wiley says far too few companies have been able to take advantage of it. Since it was launched in 2016, Canadian securities administrators granted less than 10 exemptions. "Given how quickly technology is evolving and competi- tion in capital markets is ramping up, I would hope we can see more progress," says Wiley. "Industry and regulators need to continue to fi nd ways to kind of meet in the middle and fi nd an appropriate balance to encourage in- novation and hopefully we will see an uptick in the number of sandbox exemptions." Other players in the crypto industry also seek regulatory clarity. Coinsquare is one of them, forcefully arguing that clear rules would go a long way towards lending cred- ibility to an emerging sector that buys and sells virtual currencies. Canada was the fi rst country to approve regulation of crypto-cur- rencies in 2014, which amended the Proceeds of Crime (Money Laundering) and Terrorist Fi- nancing Act. Bill C-31 laid out the framework for regulating entities in digital currencies by treating them as money services businesses, which meant that they would have to comply with numerous obligations including record keeping, know-your-customer requirements, registration and reporting certain electronic funds transfers and suspicious transactions to FINTRAC. But the rules have not yet come in force and will not come into effect any time soon. In the summer of 2018, the Department of Finance Canada published in the Canada Gazette proposed changes to strengthen Canada's anti-money-laundering regime that would update customer due dili- gence and regulate businesses that deal in vir- tual currency. But Ottawa has postponed the release of its fi nal regulations. But that hasn't stopped Coinsquare from forging ahead. It has registered itself as a money services business with FINTRAC at the federal level and with the Autorité des marchés fi nanciers, Quebec's securi- ties regulator. All of which means that it has implemented a fully compliant anti-money laundering program. It has gone further. The trading platform completed a third- party consolidated fi nancial statement audit conducted by a national accounting fi rm that covered 2015 to 2017. That in turn paved the road for Coinsquare to forge a re- lationship with the Bank of Montreal, a fi rst in the crypto-currency exchange space. It is also the kind of move that industry observ- ers assert will help to legitimize the sector. But Cieslik is nevertheless concerned about where the crypto-currency exchange market is heading. In one of its staff notices, the CSA cautioned that these exchanges are generally unregulated and may not be effi - cient markets. It also warned that if a cryp- to-currency exchange facilitates trading in securities and operates in Canada, it would have to be recognized as a marketplace un- der Canadian securities law or be exempt from recognition. But so far no crypto- currency exchange has been recognized or exempt from recognition in Canada. There are signals that things may be about to change. "Recently securities commissions have started to sell lots and lots of informa- tion requests to these exchanges," says Dru- zeta. "My understanding is that the theory is that even if these crypto-currencies are not securities, if the exchange is holding them and you have the right against the exchange, that right could be a derivative which allows securities commissions to take jurisdiction over these exchanges." Cieslik is concerned "about the interplay of securities, FINTRAC and the Depart- ment of Finance Canada and people taking different stances over what crypto-cur- rencies are. We're in the infancy. This is a developing area, and nothing is going to be settled in black and white any time soon. It makes it a bit challenging." It's time for a co-ordinated international regulatory framework to deal with digital as- sets, according to Toronto lawyer and block- chain expert Amy ter Haar. "There are vari- ous regulatory ecosystems for these types of securities that need to be mapped out, and then the regulators need to work together and regulate because it is an increasingly interconnected world," says ter Haar. "The solution can come through a contextual ap- proach to principle-based regulations." IH Securities regulators are taking this on a one-off basis so they are looking at each business model and they are trying to determine how they need to regulate it and what the risks are. CONRAD DRUZETA, Bennett Jones LLP. I n d u s t r y S p o t l i g h t

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