In the 2014 federal budget, the Canadian government made unequivocal its concern that virtual currencies, specifically Bitcoin, are an emerging risk that threatens "Canada's international leadership in the fight against money laundering and terrorist financing". The Government promised to introduce anti-money laundering and anti-terrorist financing regulations for virtual currencies and to provide FinTRAC up to $10.5 million over five years to implement these changes.
Making good on that promise, the budget implementation bill, Bill C-31, introduced on Friday March 28, 2014, includes important amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "Act") that would subject digital currency to the application of the Act. Like other money service businesses and foreign exchanges, once enacted, these changes would require certain virtual currency businesses to comply with record keeping, verification of identity, reporting of suspicious transactions and registration requirements under the Act.
Other amendments to the Act attempt to deter businesses from operating outside of Canada for the purpose of avoiding the Act's compliance regime. Under the proposed changes, reporting, KYC ("know your customer") and licensing requirements would also apply to money service businesses that do not have a place of business in Canada but that provide services, which include dealing in virtual currencies, foreign exchange dealing, remitting or transmitting funds, and issuing or redeeming money orders, to persons or entities in Canada.
A new provision would prohibit certain Canadian financial service providers, including money service businesses, businesses dealing with virtual currencies, and securities dealers, from having a banking relationship with any money service business that does not have a place of business in Canada unless those foreign entities are registered with FinTRAC. For digital currency businesses operating in Canada this means that when opening or maintaining an account or providing services to a foreign money service business such as international electronic funds transfers, and cash management they must ensure that the foreign entity with which they are dealing is registered with FinTRAC where such registration is needed.
It is important to note that the inclusion of virtual currency is merely part of a wider scale crusade to strengthen Canada's anti money laundering and terrorist financing efforts. For example, the Act imposes additional obligations on money service businesses with respect to customer identification and record keeping specifically for dealings with certain individuals such as politically exposed foreign persons. New categories have been added to expand these obligations to dealings with politically exposed domestic persons and international organization members.
At these early stages there are still many questions as to how these changes will apply to the virtual currency industry. It is still not clear what types of virtual currency activities would be subject to the law. The proposed amendments apply to businesses in Canada that are engaged in the business of providing the service of "dealing in virtual currencies, as defined in the regulations". While we can be somewhat confident in expecting this definition to include bitcoin and alt-coin exchanges, much needed clarification should come from corresponding amendments to the regulations.
The imminent arrival of compliance requirements to the virtual currency industry means that bitcoin businesses starting up in Canada should set up their business model and practices in ways that facilitate compliance with not only anti-money laundering laws, but privacy and consumer protection laws as well. Having these types of policies have become best practices in the virtual currency industry.
Not only is it less costly to implement these policies at the early stages of a business rather than changing the status quo later on, federal and provincial regulators may not grant a grace period for digital currency-service businesses before requiring them to have a license. Moreover, having these policies and practices in place can help your business acquire consumer confidence and increase the value of your business.
Despite the initial skepticism of the federal government and FinTRAC towards the role of Bitcoin in the Canadian financial system, many continue to view the government's regulatory stance to be investigative, rather than hostile. Anticipation is tainted however, by fears that Canada, currently a hotbed for innovation and growth for Bitcoin and distributed ledger technology, may stifle potential with onerous and misguided legislation. While it is perhaps too early to speculate on the broader effect of these proposed amendments, at the very least they suggest a desire to make virtual currency businesses play by the same rules as their fiat counterparts.
The Senate Committee on Banking Trade and Commerce's decision to study virtual currency until June 2015 also conveys an investigative approach. In light of these developments, industry players can continue to be guardedly optimistic that impending legislation regarding virtual currency can be the result of careful deliberation and thorough consultations that take into account the important views and perspectives of industry stakeholders while balancing with the need to protect the public and fight crime.
We will continue to monitor the ongoing initiatives by Canadian regulators and industry as the virtual currency landscape in Canada continues to evolve and will provide market participants with information about any new developments as they arise.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
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