Canada: Cryptocurrencies: Further Legal Developments

Summary

On August 30, we published an Update ("Initial Coin Offerings in Canada: The CSA Weighs In") summarizing guidance from the Canadian Securities Administrators (CSA) with respect to the potential application of Canadian securities laws to initial coin offerings (ICO). Given the ongoing explosive growth in cryptocurrencies, it is not surprising that in less than two weeks since our Update we have seen a number of additional noteworthy regulatory developments related to this emerging asset class.

ICOs: International Developments

In the Update, we observed that greater international regulation of cryptocurrency offerings seemed inevitable. That prediction was quickly validated. On September 4, China's central bank declared ICOs illegal in China and required an immediate halt to all ongoing ICO activity as well as a refund of all money previously raised by way of ICO (although it is not clear how that will actually occur). There have also been reports that China plans to ban trading of cryptocurrencies on domestic exchanges.

On September 5, the day after China banned ICOs, Hong Kong's Securities and Futures Commission weighed in, cautioning (much like the CSA and U.S. Securities and Exchange Commission before them) that certain tokens have characteristics that qualify them as securities and will be regulated as such.

The recent trend toward greater regulatory scrutiny of ICOs, particularly in China, has contributed to a significant decline in the value of cryptocurrencies in recent weeks; since the start of September, the value of Bitcoin has dropped by approximately 20%, including a fall of as much as 11.4% in the immediate aftermath of the announcement of China's ICO ban.

We expect that securities regulators worldwide will continue to closely monitor the rise of cryptocurrency offerings, leading to additional guidance and rules that will help to clarify when existing securities laws will apply and, eventually perhaps, develop a new framework designed specifically for cryptocurrencies.

ICOs: Canadian Developments

In the Update, we also discussed Kik Interactive's pending US$125 million sale of Kin tokens. These tokens will initially be used to access various features on Kik's existing messaging app, but Kik's broader vision is to develop an ecosystem of everyday digital services using Kin as a common digital currency. We observed that Kik's ICO was not structured to comply with Canadian securities laws, which suggested Kik believed Kin tokens do not constitute securities in Canada.

On September 7, Kik's CEO announced Kik decided to exclude Canadians from the Kin ICO due to "weak guidance" from the Ontario Securities Commission (OSC) as to whether Canadian securities law will apply to the offering. While few details regarding Kik's interactions with the OSC are publicly known, Bloomberg reported an OSC representative had confirmed to it that the OSC views the Kik ICO as an offering of securities and had been discussing options with Kik for allowing the ICO to proceed in Canada with appropriate investor protections.1 Kik was apparently not interested in these options and decided to simply exclude Canadian investors from the offering altogether.

This outcome was no doubt disappointing to Kik, which had taken great pains to characterize Kin as a common currency and its offering not as an ICO but as a "TDE" (token distribution event). While it is now abundantly clear there are no "magic words" that can be used (or avoided) to describe a cryptocurrency that will determine whether it will be characterized as a security, Kik's experience also confirms our earlier observation that the guidance regulators have provided to date (other than China's absolute ban on ICOs) is somewhat vague and offers limited practical assistance in determining whether any particular token offering will be subject to securities law. It also appears that, at least for now, Canadian regulators are inclined to take a conservative approach to coin or token offerings and in most cases companies should assume ICOs will be regulated as securities offerings in Canada and, if interested in pursuing such offerings, should consider engaging with the regulators early to see if relief can be obtained.

Canada's First Registered Cryptocurrency Fund

On September 6, the British Columbia Securities Commission announced that First Block Capital Inc. has been approved as an investment fund manager and exempt market dealer in order to operate a bitcoin investment fund. This represents the first registration in Canada of an investment fund manager dedicated solely to cryptocurrency investments.

The conditions of First Block Capital's registration include a number of terms aimed specifically at the unique risks posed by investing in cryptocurrencies (such as custodial, trading and valuation arrangements) and will presumably serve as a template for registration of other Canadian cryptocurrency funds. The regulatory flexibility evident in this area, which seems to have been at least partly driven by a desire to give Canadian investors access to cryptocurrency investments via a regulated entity, is an interesting contrast to the more restrictive approach to ICOs evidenced by CSA Staff Notice 46-307 – Cryptocurrency Offerings and the OSC's response to Kik's ICO.

Conclusion

Blockchain technology and cryptocurrency offerings continue to create a number of challenging legal questions. The way existing law applies to these new technologies and asset classes is often unclear, and the rapid pace of their evolution and adoption have left regulators scrambling to keep up. For now, we expect that regulatory reactions and pronouncements will continue to err on the side of caution and focus on investor protection.

Footnote

[1] For example, in August 2017, the OSC granted various exemptions from Canadian securities laws to Impak Finance Inc. in connection with a proposed ICO. The exemptions were subject to a number of conditions including (i) delivery of an offering memorandum and certain ongoing information to investors, (ii) implementation of various know-your-client, suitability, anti-money laundering and anti-terrorist financing procedures, (iii) a maximum investment limit of $2,500 for non-accredited investors and (iv) limits on secondary trading of the cryptocurrency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions