Introduction
As predicted in our H1 Newsletter, FinTech in Canada has remained strong in the latter half of 2021. Our team has continued to keep up with activity and developments in the industry. This bulletin highlights some key developments in the FinTech sector in 2021, as well as items to continue to watch out for in 2022.
FinTech Sees Record Funding in 2021
The second half of 2021 in FinTech continued to see record funding with a total of 77 venture capital-backed deals over 72 companies for a total of $1.7 billion in disclosed funding. This includes all rounds of venture capital-based financing, angel investments and accelerator and incubator investments across FinTech in Canada. When compared to the first half of 2021, we did see a slight drop in financing rounds due to slower periods in October and November of 2021. Despite this, however, 2021 proved to be a record year for FinTech investment in Canada.
In the second half of 2021, August 2021 and September 2021 saw some larger, later-stage Canadian FinTechs, including Blockstream, Freshbooks, Flinks and NEO to name a few, raise decent funding. These later-stage deals illustrate that Canadian FinTechs are beginning to hit maturity, and we will hopefully see some sizable exits in 2022.
Although we saw some later-stage financing rounds of larger numbers, the majority of funding went into early-stage companies with 59 deals over 55 companies. Similar to the first half of the year, the second half remained a 'founder's market' in the FinTech sector. Previously, it was believed that many of these early-stage deals were due to the pandemic and people delaying financing, however, we are now seeing new companies being created in this sector. This growth could be due to various factors. For example, the pandemic could still be playing a role, with early-stage founders recognizing gaps in the market and deciding to create new ventures to fill those gaps. Other rationales may include Canada's recent decision around Open Banking, which has pushed teams to proceed to raise funds in anticipation of what could be coming down the pike, and the continuance of the non-fungible token (NFT) boom. Whatever the reason, we can predict that we will continue to watch this sector grow in Canada.
Open Banking
On August 4, 2021, the Department of Finance released the final report from the Advisory Committee on Open Banking (the "Report"). The Report recommends that Canada should push forward with open banking and proposes an 18-month roadmap with a view to implementing phase one of open banking by January 2023. To learn more about this report, please refer to our bulletin titled "Advisory Committee on Open Banking Releases Final Report".
Earlier this year we hosted a panel on Open Banking in Canada, where we led a discussion with Sen. Colin Deacon (Senate of Canada), Ben Harrison (Portag3) and Peggy Van de Plassche (Roar Growth) about how we can make Open Banking in Canada a reality and what the path to success might be. In case you missed it, you can watch the recorded event to learn more.
Cryptocurrencies and Digital Assets
Securities law regulators continue to monitor activity and new developments in the cryptocurrencies and digital assets space. The Canadian Securities Administrators (the "CSA") published three staff notices in 2021 providing guidance for crypto asset reporting issuers and crypto-trading platforms on their reporting and marketing obligations under securities laws.
On March 11, 2021, the CSA published Staff Notice 51-363 – Observations on Disclosure by Crypto Assets Reporting ("Notice 51-363"), which outlined the CSA's expectation for public disclosure by crypto asset reporting issuers. The CSA observed that disclosure made by current reporting issuers was insufficient and re-emphasized that crypto-asset reporting issuers have the same obligations as other public companies in disclosing material information and material changes, including those issues that are unique to crypto-assets. This notice highlighted a number of areas issuers should improve their level of disclosure, which include but are not limited to: control and safeguarding measures on the crypto-assets; the use of third-party custodian services; the use of third-party crypto-asset trading platforms ("CTP"); unique business risks associated with crypto mining operations and volatility of crypto assets prices; and investing in crypto assets as a main operation. To learn more about the disclosure guidance, please refer to our bulletin titled "CSA urging crypto asset reporting issuers to improve disclosure quality".
The CSA and the Investment Industry Regulatory Organization of Canada ("IIROC") also jointly published subsequent notices providing guidance for and urging CTPs to comply with various aspects of securities laws.
In their notice titled "Staff Notice 21-329 – Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements" ("Notice 21-329"), the regulators targeted three types of CTPs: 1) those operating in a similar manner to securities dealers; 2) those operating in a similar manner to "marketplaces"; and 3) those operating in a similar manner to stock exchanges. Notice 21-329 reiterated the regulators' earlier positions that CTPs will be subject to securities legislation if they deal with either crypto-assets that are securities or derivatives, or crypto-assets that, while not securities or derivatives themselves, are held on behalf of customers, thereby creating a security. It is worth noting that, different from previous notices that simply remind participants that securities laws may apply, Notice 21-329 provided some clarity as to how the regulators would like CTPs to proceed in order to become compliant, setting out specific paths forward. In Notice 21-329, the CSA introduced a two-year interim approach to ensure CTPs operate within a regulated environment, while also providing some flexibility. To learn more about these compliance requirements, please refer to our bulletin titled "CSA and IIROC publish updated guidance on cryptocurrency regulatory issues".
In their notice titled "Staff Notice 21-330 – Guidance for Crypto-Asset Trading Platforms: Requirements Relating to Advertising, Marketing and Social Media Use, ("Notice 21-330), the regulators focused on the marketing materials and advertising schemes adopted by players in the crypto industry, and warn CTPs against: 1) making misleading or false representations in their marketing materials, especially with regards to the CTPs credential and compliance status; 2) making overly promotional statements; 3) a lack of transparency in pricing, commissions and compensation information; and 4) using gambling-style or time-limited contests that encourage investors to act out of a fear of missing out. For each of these categories, the notice contains detailed examples of statements that the regulators consider problematic, as well as reasons why such statements are so characterized. To learn more about this guidance, please refer to our bulletin titled "CSA & IIROC Warn Crypto-Trading Platforms Against Misleading Marketing Activities".
Other Regulatory Updates
New AML Requirements
On June 1, 2021, amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act came into effect (the "Amended AML Regulations"). The Amended AML Regulations, among other things, include rules and definitions concerning virtual currency, prepaid payment products and accounts and others related subjects, and impose various requirements, including record keeping and reporting requirements, on reporting entities that deal with virtual currency and prepaid payment products. In connection with these amendments, FINTRAC has also published a number of new guidelines, and has updated its existing guidelines. Most recently, on December 2, 2021, FINTRAC released a statement related to its expectations around compliance with the Amended AML Regulations.
Payments Canada Updates: Lynx to Replace LVTS and Consultation on New Framework for PADs
On August 18, 2021, the Canadian Payments Association By-law No. 9 - Lynx, made under the Canadian Payments Act, was published in the Canada Gazette. This by-law provides the legal foundation for Lynx - the new electronic funds transfer system that is owned and operated by the Canadian Payments Association ("Payments Canada"). Lynx is replacing Canada's existing Large Value Transfer System, which has been in place since 1999. To learn more about this development, please refer to our bulletin titled "Payments Canada By-law Regarding Lynx Released".
On November 17, 2021, Payments Canada released a consultation paper titled "A Proposed Revised Framework for Pre-Authorized Debits", outlining and seeking feedback on proposed revisions to the existing rule regarding Pre-Authorized Debits ("PADs"). The objective of the revisions include to: (1) embrace technological advancements and evolving marketplace; (2) enhance consumer protection and convenience; and (3) improve operational efficiency. Comments on the consultation paper were due by January 14, 2022.
RPAA
Earlier this year, in Bill C-30, the federal government introduced the long anticipated Retail Payment Activities Act ("RPAA"), which establishes an oversight framework for retail payment activities – the first of its kind in Canada. The RPAA, which was discussed in our earlier bulletin titled "Federal Government Releases Draft Legislation to Regulate Retail Payments", is a response to emerging payment service providers and evolving technologies that are changing how Canadians make payments. The federal government has determined that it is in the national interest to regulate such activities in order to safeguard end-user funds and to foster competition and innovation among payment service providers by building confidence in the retail payment sector.
Additional details and guidance are still to be addressed through regulations and guidance from the Bank of Canada, however certain aspects of the RPAA are now clear, including, for example, that "payment service providers" will need to meet certain operational requirements related to risk management and safeguarding end-user funds, as well prescribed registration and reporting requirements.
Payments Trends
We have continued to see trends in consumer behaviour in the payments space, including the move away from the use of cash and toward digital/contactless payment methods, increased prevalence of e-commerce and an increase in point-of-sale lending (i.e. "buy-now, pay later"), and increased interest and knowledge around digital currency. To learn more about payment trends in Canada, please refer to our bulletin summarizing Payments Canada's 2021 Canadian Payment Methods and Trends Report.
Concluding Thoughts
Our cross-country FinTech team has experience in financial services, emerging technology and information technology, and is committed to working with the industry to provide insight, thought leadership and guidance on all FinTech related matters.
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.
