Canada: British Columbia Securities Commission Releases Fintech Request For Comment

Last Updated: February 27 2018
Article by SnIP/ITs Blog, Maureen Gillis, Arie van Wijngaarden and Bosa Kosoric

Most Read Contributor in Canada, September 2018

On February 14, 2018, the British Columbia Securities Commission (BCSC) published a notice and request for comment (the "Notice") on the securities law framework for Fintech regulation in the province. The Notice summarizes the results of consultations the BCSC has undertaken in the Fintech space and poses related questions to stakeholders. The Notice provides useful information—and an important opportunity to provide input—for businesses with an interest in how regulatory rules for Fintech may change in the future.

The BCSC has actively monitored Fintech developments over the past 18 months. In January 2017, the BCSC established a dedicated support group, the Tech Team, for the Fintech sector and conducted a survey of Fintech stakeholders. The continued dialogue between the BCSC and stakeholders in the Fintech sector has led the BCSC to request comments on Crowdfunding, Online Advising, Cryptocurrency Funds, and Initial Coin Offerings/Initial Token Offerings (ICOs).

Crowdfunding and Online Lending

The current Canadian legislative framework for crowdfunding and online lending is a patchwork quilt between different provinces. In 2015, securities regulators in six provinces (British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia) adopted harmonized registration and prospectus exemptions aimed at helping start-up and early stage companies to raise capital without having to comply with the prospectus requirement (see our blog post summarizing the development here). In 2016, a different set of provincial securities regulators (in Ontario, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia, but not British Columbia) adopted Multilateral Instrument 45-108 Crowdfunding (45-108 exemption), which was available to both reporting and non-reporting issuers (see our blog post summarizing the development here). The Alberta Securities Commission has also adopted a similar prospectus exemption for start-up crowdfunding (ASC Rule 45-517 Prospectus Exemption for Start-up Businesses).

Crowdfunding exemptions have not been utilized as frequently as was originally anticipated. The BCSC's consultations regarding crowdfunding portals highlighted the need for regulatory harmony as well as challenges to crowdfunding profitability such as investment limits, Know Your Customer (KYC) requirements, and costs of compliance. The consensus among stakeholders is that start-up crowdfunding  could be spurred on via increased investor limits, fewer restrictions on the types of securities that can be issued and number of distributions that can be made per year, harmonized provincial rules, and expanded outreach and support from provincial securities regulators.

The Notice mentions several potential changes to crowdfunding rules, including the following:

  1. removing the offering limit and instead having a lifetime cap of $1 million that could be raised by issuers; and
  2. removing the "eligible securities" requirement for start-up crowdfunding.

The challenge of changing the rules is that doing so may mean British Columbia falls further out of harmony with other provinces. Provincial securities regulators have a delicate balancing act to perform to ensure both regulatory harmony and easier-to-use crowdfunding rules.

Online Advisors

The development of online portfolio managers that use computer algorithms to manage investments, known as online advisors, is one of the biggest recent developments in the Financial Services sector. Currently portfolio managers are regulated by NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). These requirements are the same for traditional portfolio managers and online advisors.

The Notice notes that online advisors are increasingly accepted in the Canadian market and that their use has raised concerns about KYC requirements, outsourcing, and automation of portfolio manager duties. The Notice asks whether online advising should have different regulatory requirements from traditional portfolio management.

Currently, online advisors and traditional portfolio managers are required to obtain KYC information directly from the customer. However, new regtech solutions offer the potential for third parties to gather this information and automate the KYC process. The BCSC is interested in feedback on what elements of the KYC process could be sourced to third parties or automated, as well as the potential verification processes for third-party information and associated risks. The Notice also asks how an artificial intelligence system could conduct KYC processes without human intervention, and what safeguards would need to be in place for such a process.

The Notice also indicates interest in partnership arrangements between online advisors and traditional portfolio managers. Increasingly, traditional portfolio managers are considering referral arrangements, licensing online advisor software, and outsourcing portfolio advice to online advisors.  Currently, in order to avoid conflicts of interest, an individual cannot act as a registered advising representative for two unaffiliated firms. The BCSC is interested in whether outsourcing arrangements between traditional portfolio managers and online advisors can meet this underlying policy objective. Further, the Notice seeks comment on ways in which regulatory and administrative requirements result in inefficient flow of capital and burdensome costs when implemented with online business models.

Cryptocurrency Funds

The BCSC expects fund managers to continue with their interest in investing in cryptocurrencies. This raises several risk management considerations. Cryptocurrency exchanges and wallets often operate in an unregulated environment, which raises cybersecurity and anti-money laundering concerns about the security of the funds transacted. These concerns are particularly relevant because additional NI 31-103 requirements for external custodians regarding custody of client cash and securities are expected to come into effect in June 2018.

The Notice asks the market for current best practices for securing cryptocurrency investments and whether regulators have a role to play in this context. The Notice also asks whether uncertainty over whether a cryptocurrency or token is a security requires additional measures from securities regulators.  The BCSC is also considering whether the operational requirements for cryptocurrency investment funds should differ from requirements for other types of funds.

ICOs & Cryptocurrencies

Interest in ICOs has led the Canadian Securities Administrators (CSA) to issue Staff Notice 46-307 Cryptocurrency Offerings. The Staff Notice is meant to clarify the situations in which ICOs are subject to securities regulation.  However, stakeholders in the Fintech community continue to have questions about factors such as the presence of a secondary market for a coin or token, the availability of coin or token utility functions at sale, and whether there are parallels to non-securities crowdfunding. The market is also interested in the circumstances under which securities regulators will grant exemptive relief to businesses planning to conduct ICOs. The Notice invites comments from stakeholders on  the relevance of these factors and the effectiveness of recent exemptive relief granted for ICOs.

The Notice also seeks input on the ongoing debate as to whether issuances of cryptocurrencies are investment contracts for purposes of securities regulation. There may be a grey area when there is no central governance for the coin, no central issuer, and no central counterparty regulating the exchange of coins. The BCSC is interested in whether these factors create conceptual distinctions between cryptocurrencies and securities.

The Notice also notes different models of ICOs, which securities regulators are monitoring.  The most common of which is a business that raises capital by selling non-functional tokens and uses those proceeds to develop the advertised functionalities for that token. An ICO could also be structured with different types of tokens: for example, one token could be a security used for capital raising while a further utility token could be used for deployment once the platform is operational. In addition, developers could delay the release of the token to a later time period or engage in a multi-step process where purchasers first enter an agreement for the right to a functional token and then fulfill the agreement once the platform is built. The BCSC is interested in whether the Fintech community is considering these ICO models and whether securities regulators need to consider any additional models.

Takeaways

Like all regulators, the BCSC is endeavouring to make sure that regulation keeps pace with innovation to ensure investors are protected and capital markets are facilitated. At the same time, the BCSC does not want to impede important innovation and recognizes it may need to grant exemptions to Fintech startups. For example, the Notice asks whether British Columbia should have a Fintech licensing exemption similar to the 12-month exemption adopted by the Australian Securities and Investments Commission (ASIC). The key takeaway is that securities regulation of Fintech entities remains subject to change. Stakeholders with interests in Fintech regulation should consider engaging counsel to help them draft an appropriate response and ensure their voice is heard.

To view the original article please click here.

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
 
In association with
Related Topics
 
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