The federal government recently confirmed that oversight measures designed to reduce money laundering will soon be mandatory for all virtual currency dealers offering services in Canada. This confirmation is timely, considering the recent release of the joint CSA/IIROC Consultation Paper, wherein the Canadian securities regulators put forth a proposed regulatory framework for crypto-asset exchanges.
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Starting June 1, 2020, virtual currency dealers will be required to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), keep records of major transactions, verify the identification of clients, and report any suspicious transactions. Many major virtual currency dealers have already been voluntarily complying with these requirements.
The government also announced regulations that would bring the obligations for financial institutions dealing in virtual currency in line with transactions in fiat currency. These changes will be effective on June 1, 2021.
The Changes Have a Broad Application
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act was amended in 2014 to better align with international standards, and to apply to entities dealing in the business of ‘virtual currencies'. However, these amendments were delayed, and did not come into force, pending the development of updated regulations. On July 10, 2019, these long-awaited regulations were published. The obligations under the amendments will apply to both dealers in Canada, and those that do not have offices in Canada but provide services to Canadian customers.
The regulations include final definitions of, and distinctions between, "fiat currency" and "virtual currency." Notably, the disclosure and registration requirements will apply to any dealer in:
"(a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or
(b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a)."
This definition will not apply to transfers of virtual currency that compensate the validation of a transaction in a distributed ledger, or transfers made for the exclusive purpose of validating another transaction.
The New Mandatory Requirements
All virtual currency dealers offering services to Canadians will need to register with the anti-money laundering authority, FINTRAC. The application will need to include information about the dealer's agents, branches, and activities. Organizations subject to domestic or United Nations sanctions, or that have been convicted of money laundering, cannot register.
The registration will need to be renewed every two years, and any changes to the information provided in the application will need to be updated in the month the change happens.
Virtual currency dealers will need to keep records of important information for at least five years. Records need to be kept for account application forms, signature cards, forms relating to closing an account, corporate filings, and any suspicious transaction that was reviewed.
The records will need to be in paper format, or they can be stored electronically if a physical copy can easily be produced. If FINTRAC requests a record from a virtual currency dealer, the dealer must provide it within 30 days of the date of the request.
Virtual currency dealers must confirm a client's identity before providing any services. The client must produce a piece of identification issued by a federal or provincial government with both their name and photograph, such as a passport or driver's license. If someone has been a client for at least three years, the dealer will be required to verify that the client's name, address, and date of birth match its records.
Reporting of Suspicious Transactions
Any transactions of $10,000 or more must be reported to FINTRAC within five business days for electronic transactions, except where it comes from another financial institution or government. The dealer must keep an internal record of this transaction.
The report must include the following information: where the transaction happened, if the transaction was completed or not, a description of any suspicious activity, account numbers, and personal details on the account holders, including their names, addresses, and personal telephone numbers.
These regulations will likely bring more transparency to a sector that favours anonymity and decentralization. They also confirm the federal government's apparent unwillingness to establish a separate regulatory regime for crypto-assets such as Bitcoin, favouring the expansion of existing regimes to encompass new forms of virtual currency. It remains to be seen if the changes represent an appropriate balance between protecting the integrity of the financial system and innovation, or if these enhanced regulations will simply push crypto-business out of Canada and into more lenient jurisdictions.