Co-authored by Natasha Vlajnic, 2019 Summer Student
Expected changes to cryptocurrency regulations in Canada
With the release of updated anti-money laundering regulations set for mid 2020, businesses engaged in the cryptocurrency & blockchain world will want to familiarize themselves with the proposed changes. The Canadian government recently published amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), directly affecting cryptocurrency exchanges and operators.
As of June 1, 2020, all cryptocurrency exchanges in Canada will be required to register with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), according to a notice published on July 10, 2019, by the Department of Finance. Amendments to regulations made under the PCMLTFA will apply to dealers in virtual currency and foreign Money Services Businesses (MSBs) that service Canadian customers.
All dealers in virtual currency that offer services to Canadian clients will now be classified as MSBs and will therefore be subject to similar due diligence, recordkeeping, monitoring and reporting requirements as other reporting entities. However, as further discussed below, cryptocurrency exchanges will only have to report transfers of more than CA$10,000, a relaxation of the previously proposed Anti-Money Laundering suggestions from 2018.
Changes related to FinTRAC
As of June 1, 2020, foreign cryptocurrency exchanges will need to register with FinTRAC in order to continue to direct their services to Canadian clients. Registration will subject exchanges to the same compliance requirements as domestic MSBs, only with slightly less onerous recordkeeping. Some of these informational requirements will include:
- identifying all clients;
- appointing a compliance officer; and
- maintaining records of clients and transactions.
In addition to the above, any "reporting entity" that receives CA$10,000 (US$7,667) or more in cryptocurrency – whether in the form of a payment or a deposit – must now identify the sender, record details of the transaction, and report the receipt of funds to FinTRAC. To ensure the adoption of the new regulatory framework, FinTRAC is further authorized to levy Administrative Monetary Penalties (AMPs) on MSBs that are non-compliant, and to revoke registration of those that fail to pay any lodged penalties. Collectively, this means all existing and future currency exchanges are now required to comply with Canadian securities law — an onerous requirement in the least.
Cryptocurrency exchanges will also be required to develop a compliance program, observe Know Your Customer (KYC) policies and report any suspicious transactions to FinTRAC; including:
- keeping records of their clients; and
- hiring a compliance officer for their platform.
Previously, such compliance was on a voluntary basis, with some exchanges like Quadriga complying of their own accord. As of June 1, 2020, KYC compliance will be mandatory, and will encompass ongoing monitoring of business relationships, the determination of politically exposed persons or heads of international organizations, beneficial ownership, and third parties.
Changes to PCMLTFA:
In addition to the big changes taking place at the FinTRAC level, smaller amendments to the PCMLTFA have been finalized and are certainly worth reviewing.
One significant change is the deadline for filing suspicious transaction reports (STRs), which has been updated from three days after the MSB has taken measure to establish reasonable grounds of suspicion, to as soon as possible. This is a more flexible approach from the 2018 Draft suggestion which will affect all categories of reporting entities under the PCMLTFA; an important change for anyone in this regulatory space.
Secondly, the requirement for virtual currency transaction records to include "every reference number that is connected to the transaction" has been limited to reference numbers that "have a function equivalent to that of an account number." Alongside this, certain other sections of the regulation have been replaced or repealed. It is useful for those in the crypto space to familiarize themselves with the amendments to make the upcoming transition next June as smooth as possible.
It may be helpful to engage a lawyer to help you navigate the complex regulatory framework and ensure you have all the information you need to maintain a competitive position in the industry.
The above is a simplification of the process – obtaining legal advice is always recommended.
August 16th, 2019
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.